Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco S.A. & Others

Jonathan Gaisman QC

[2017] EWCA Civ 9

This is a case in which the Court of Appeal has reaffirmed the autonomy of a letter of credit, and its independence from the underlying transaction to which it stood as security.

The claimants Petrosaudi entered into a drilling contract with PDVSA for the performance of drilling services in Venezuela. The contract was subject to Venezuelan law and contained a Paris arbitration clause. It was a term of the contract that PDVSA  should furnish a standby letter of credit (”SBLC”) to secure payment and guarantee performance by PDVSA. The SBLC was with a Portuguese bank, and governed by English law.

The drilling contract contained a provision, in the event of dispute, requiring PDVSA to “pay now and argue later” (clause 803(4)). It contained a further provision (clause 803(3)), stipulating that any invoice not disputed within 15 days was deemed accepted.

Disputes arose between the parties to the drilling contract in relation to invoices, and an arbitration was begun. Petrosaudi sought to invoke clause 803, in order to obtain interim payments of sums invoiced ahead of a final award, but the arbitrators in successive partial awards held that Petrosaudi had no right to such advance payments, because of article 141 of the Venezuelan Public Contracting Law, which imposed pre-conditions to payment by a Venezuelan public entity (such as verification and review by that entity). Accordingly, the arbitrators held that PDVSA was not permitted under Venezuelan law to discharge any payment obligation until either the article 141 conditions had been satisfied, or until final award. They declared that clauses 803(3) and (4), were null and void.

Petrosaudi therefore sought to exercise its rights under the SBLC, in advance of any final award. The SBLC required it to certify to the bank that PDVSA was “obligated to pay the amount demanded under the drilling contract”. The amount so demanded was $129.8m.

PDVSA obtained an injunction from the Commercial Court preventing the bank from paying out, saying that the certificate presented by Petrosaudi to the bank was untrue, as PDVSA was not at present obligated to pay any sum under the drilling contract, and the arbitrators had so held.  They further alleged that the certificate had been presented fraudulently. At a speedy trial held in September 2016, HHJ Waksman QC agreed with both points, and therefore held that the bank was not to pay Petrosaudi.

At this point, Jonathan Gaisman QC was instructed on behalf of Petrosaudi. Petrosaudi obtained permission to appeal on both the construction and the fraud points from the Court of Appeal. By its judgment dated 25 January 2017, the Court of Appeal allowed the appeal, holding (i) that the certificate presented to the bank was true, and the judge had been wrong to conclude otherwise; (ii) that the fact that PDVSA was currently prevented by Venezuelan law from discharging its payment obligations under the drilling contract did not mean, in context and bearing in mind the commercial purpose of the SBLC, that PDVSA was not under any present obligation to pay sums properly invoiced under the drilling contract: there were other provisions of that contract, especially clause 803(2), which imposed the basic obligation to pay (and interest in the event of non-payment); the arbitrators had said nothing about these; and (iii) it therefore followed that the certificate was not fraudulently made.

Accordingly, the Court of Appeal ordered that the bank pay the sum of $129.8m to Petrosaudi.

The Court of Appeal further granted an injunction restraining PDVSA from taking any proceedings in the arbitration or the French courts with a view to preventing payment by the bank.

To view the judgment please click here.

Date added: January 26th, 2017


Area of Expertise

Commercial Litigation
Energy & Natural Resources