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Court of Appeal overturns finding of fraud in $129 million letter of credit dispute


The Court of Appeal has given judgment in Petrosaudi Oil Services (Venezuela) Ltd v (1) Novo Banco SA; (2) PDVSA Servicios SA; (3) PDVSA Services BV.  Christopher Clarke LJ and Lewison LJ allowed the appeal, holding that the Claimant’s construction of the standby letter of credit was correct and that the Claimant was entitled to payment of $129 million demanded in September 2016.

Petrosaudi Oil Services (Venezuela) Ltd (“POS”) and PDVSA are engaged in long-running arbitration proceedings concerning sums alleged to be due under a drilling contract for a rig in Venezuela.  POS made a demand for payment of outstanding invoices in the sums of $129 million under a standby letter of credit.  PDVSA sought an injunction inter alia on the ground that the certification of the letter of credit by the Claimant’s General Counsel was fraudulent.  PDVSA argued that it was not “obligated to pay” the sums demanded because the conditions for payment under Article 141 of the Venezuelan Public Contracting Law had not been met.

Following an expedited trial in October 2016, HHJ Waksman QC, sitting as a Commercial Court judge, held that POS’s certification of the demand was fraudulent.  The judge found that, in light of various decisions of the arbitral tribunal, no debt was due and payable under the drilling contract and there was no obligation to pay.  Further, he held that POS’s General Counsel could not honestly have believed that there was any such obligation.

Following an expedited appeal, the Court of Appeal held that the debt was due and payable, albeit that PDVSA could not be compelled to discharge that obligation under Venezuelan law.  This construction accorded with commercial good sense, was not inconsistent with any finding of the arbitral tribunal, and was therefore to be preferred to the rival construction. In view of the Court’s finding as to the proper construction of the certificate, it followed that POS’s General Counsel had not been dishonest in signing the certification and was entitled to do so.

In relation to the finding of fraud by the judge at first instance, the Court noted that whilst there is only one true construction of an instrument such as the certificate in the letter of credit, different legal minds may take different views on such a question. If the Court had found otherwise on the point of construction, then it suggested that it would have given anxious consideration to the question whether POS’s General Counsel was fraudulent in holding a view on construction which was in essence a representation of law.

The Court of Appeal also granted POS injunctive relief, restraining PDVSA from pursuing any application to the arbitral tribunal or the French Courts to restrain POS from receiving payment of the $129 million demanded.

The two judgments may be found here and here.

Michael Bools QC and Joanne Box represented Petrosaudi Oil Services (Venezuela) Ltd, instructed by Clyde & Co LLP.

Mark Howard QC, Richard Eschwege and Edward Ho represented PDVSA, instructed by Stephenson Harwood LLP.