Scottish Court of Session Decisions

In this petition the petitioners Cairn Energy plc ("Cairn") seek interdict against the first respondents, the Royal Bank of Scotland ("the Bank") , from making any payment to the second respondents, Texuna International Limited ("Texuna"), in response to, or in settlement or discharge of, a Letter of Credit issued by the Bank on Cairn's instructions in favour of Texuna, (the "Cairn Letter of Credit") which was presented for payment on 11 September 1998 accompanied by a certificate dated 8 September 1998 signed on behalf of Texuna. The background to the petition is that in early 1998 the authorities in Turkmenistan were inviting bids for licences to explore for hydrocarbons in a number of demarcated off-shore areas within their territory. These areas were called "blocks". The relevant authority in Turkmenistan went under the somewhat cumbersome title of The Competent Body for the Use of Hydrocarbon Resources at (sic.) the President of Turkmenistan, ("the competent body"). Cairn were interested in obtaining licences to explore in certain blocks. To that end they were in contact with Texuna who had trading connections in Turkmenistan. Texuna aver that it was their function to bring Cairn to the negotiating table with the Turkmenistan authorities. In pursuit of their interest in obtaining licences representatives of Cairn and Texuna went to Turkmenistan in August 1998 and had meetings with the competent body. Prior to that Cairn and Texuna, in the course of their dealings with one another, agreed the terms of two letters of credit. Of these the first "the Texuna Letter of Credit", was opened on the instructions of Texuna and its terms were that Cairn would be entitled to payment of 1 million US Dollars on presenting certain documents at a bank in Hong Kong between 16 and 27 August 1998. The documents included a statement by Cairn dated no earlier than 16 August 1998 that no negotiations had taken place with the competent body for the intention of including a contract. They also included a copy of a second Letter of Credit, "the Cairn Letter of Credit", with which this petition is concerned. Its terms were that Texuna would be entitled to a payment of 1 million US Dollars, payable at sight and valid for claims arising up to 170 days after the date of the statement by Cairn which was to accompany the Texuna Letter of Credit, and on confirmation by Texuna that during that 170 day period negotiations had taken place with the competent body for the intention of concluding a contract.

Cairn duly received payment under the Texuna Letter of Credit on 3 September 1998, having presented the specified documents at Hong Kong on 26 August 1998. On 11 September 1998 Cairn were notified by the Bank that Texuna had presented the Cairn Letter of Credit for payment along with a document called a "Certificate of Drawing" certifying that in the 170 day period subsequent to 24 August 1998, negotiations had taken place with the competent body. Cairn took the view that the Certificate of Drawing, contained a fraudulent statement and took steps by means of this petition to prevent the bank from paying Texuna. A motion for interim interdict was granted on ex parte statements in the absence of Texuna on 11 September 1998. No motion for recall of interim interdict was made.

The case came before me on the Procedure Roll, when it was argued on behalf of Texuna that Cairn's pleadings were irrelevant in respect that they failed to disclose circumstances in which the Bank's obligation to pay Texuna under the Letter of Credit was overridden, and that accordingly the petition should be dismissed.

Mr Connell for Texuna attacked the whole basis of Cairn's case, so I shall set out the averments on which Cairn rely. They are contained in paragraphs 2, 3, 4 and 5 of the petition.

Cairn go on to aver in paragraph 3 that on 26 August 1998 they presented the Texuna Letter of Credit for payment, along with a copy of the Cairn Letter of Credit, and that payment of 1 million United States Dollars was made to them on 3 September 1998. In paragraph 4 they aver that on 11 September 1998 they received notification from the Bank that Texuna had presented the Cairn Letter of Credit for payment, accompanied by the Certificate for Drawing. In paragraph 5 they aver that, contrary to the assertion made by Texuna in the Certificate, there had been no negotiations since 24 August 1998 with the competent body; that since that date Cairn had neither been present nor represented in Turkmenistan and that there had been no contact between them and the competent body for the purpose of negotiations; that a contract for the exploration of hydrocarbons could not have been negotiated in accordance with the agreement and understanding reached between Cairn and Texuna and as envisaged in the Letters of Credit without the participation of Cairn. Finally, they aver that the Certificate presented by Texuna to the Bank was fraudulent in respect that it contained assertions about factual matters which Texuna knew to be false.

For Texuna Mr Connell argued that the credit contract was autonomous and separate from the commercial contract between Cairn and Texuna. The Bank's obligation to pay under the Letter of Credit was entirely independent of any commercial arrangement or dispute between the commercial parties. Accordingly, any difficulty envisaged by a party to the commercial contract in making recovery or obtaining any other remedy was irrelevant. The Letter of Credit was governed clearly and precisely by its own terms. Any interference by the court with its operation was confined to a very limited situation in which a fraud by the beneficiary had been clearly established. In the present case, the averments relating to the alleged arrangements for negotiations with the competent body and the negotiations or lack of them, could be characterised as averments of a dispute between the parties to the commercial contract, and could not prevent the Bank from making payment under the Cairn Letter of Credit. Those averments amounted to an attempt to add conditions amplifying or amending the terms of the credit, and were irrelevant. There being no legal impediment to payment by the Bank under the Cairn Letter of Credit, the action should be dismissed. Reference was made to R D Harbottle (Mercantile) Limited v National Westminster Bank Limited [1978] 1 Q.B. 146, Edward Owen Engineering Limited v Barclays Bank [1978] 1 Q.B. 159, United City Merchants (Investments) v Royal Bank of Canada [1983] A.C. 168 per Lord Diplock at p.182G and following, and Czarnikow-Rionda Sugar Trading Inc. v Standard Bank London Limited and Others [1999] 2 Ll.L.R 182.

Counsel for Cairn submitted that the Certificate of Drawing tendered by Texuna contained an assertion of fact that negotiations had taken place within the material period. If that assertion was false and known to the maker of it to be false, that constituted fraud. Counsel accepted that when a Letter of Credit has been issued and confirmed by a Bank, the Bank must pay if the documents are in order and the terms of the credit are satisfied, but, it was submitted, there was an exception to that strict rule when the Bank knew that the request for payment was made fraudulently in circumstances where there was no right to payment. It was in the nature of fraud that it was extrinsic to the documents tendered. The veracity of the assertion that negotiations had taken place could only be judged by reference to external circumstances. Negotiations, in the context in which the Cairn Letter of Credit and the Certificate of Drawing were framed, could only mean negotiations on the conditions set out in paragraph 2, namely, that the bid was a collective one for all six blocks, that Cairn would take the lead in negotiations, and that for negotiations to take place representatives of Cairn required to be Turkmenistan. In these circumstances Cairn had relevantly averred that the request for payment has been made fraudulently in circumstances where there was no right to payment.

It is important to note at the outset that I am not concerned with the relevancy of the pursuers' pleadings in relation to interim interdict. That stage has passed. Interim interdict was granted on the basis of ex parte statements. Texuna had the opportunity to move for recall of interim interdict after service of the petition but they did not do so. I mention this because many, if not all, of the authorities cited to me were concerned with the requirements for a grant of interim interdict or its equivalent in other jurisdictions.

The question with which I am concerned is whether Cairn have pled a case which, if proved, would entitle them to permanent interdict preventing payment by the Bank to Texuna under the Cairn Letter of Credit. The parties were agreed that the law is as stated by Lord Diplock in United City Merchants (Investments) Limited v Royal Bank of Canada, at page 183D of the report. In quoting the following passage, I should explain that "the seller" is the beneficiary of the Letter of Credit, in the same position as Texuna, and "the buyer" is the party who instructed the credit, in the same position as Cairn:

Cairn say that their averments disclose a set of factual circumstances which fall within the exception identified by Lord Diplock, and that if their averments were proved they would be entitled to permanent interdict. Texuna's position is that even if the averments were proved they would not disclose a set of circumstances in which the Bank would be relieved of their obligation to pay.

In order to accede to the respondents' motion for dismissal, I require to be satisfied that the petitioners' case must necessarily fail even if they are able to prove their averment, see Jamieson v Jamieson 1952 S.C. (H.L.) 44. The arguments advanced on behalf of Texuna do not satisfy me that that is so. Cairn aver that the statement in the Certificate of Drawing was fraudulent, and they set out facts and circumstances from which they say that the inference that it was fraudulent can be drawn. I consider that those facts and circumstances which are necessarily extrinsic to the document itself are capable of yielding that inference. If their averments are proved, I consider that Cairn will establish the existence of a factual situation in which the Bank may be relieved from the obligation to pay under the Cairn Letter of Credit, because it falls within the exception identified by Lord Diplock.

It seems to me however that, even if Cairn prove all their averments, there may be an argument that the equitable remedy of interdict should be withheld so long as the documents which required to be presented for payment under the Cairn Letter of Credit have been presented, are complete and in accordance with the terms of the Letter of Credit, and remain ex facie valid. In these circumstances I shall allow proof before answer in accordance with the alternative motion of both parties.