Irish High Court affirms high threshold for injunctions to restrain letter of credit payment

The decision serves as a reminder of the "high threshold that must be met to successfully obtain an injunction to restrain payment under a letter of credit,” said contractual disputes expert Sarah Twohig of Pinsent Masons, with businesses that rely on letters of credit advised to take note of the judgment.

The case (16 pages / 226 KB) arose from a transaction for the development of a gas processing plant in Nigeria. First Modular Gas Systems Limited (First Modular), a Nigerian infrastructure fund, had entered into a contract with Ennovate Consultants Incorporated (Ennovate), a Canadian company, for the supply and installation of a gas plant in Nigeria. Ennovate subcontracted Bosai Energy Technology Corporation (Bosai), a Chinese company, to supply the gas plant.

First Modular provided a letter of credit in favour of Bosai with Citibank and Access Bank Plc acting as the “confirming bank” and “issuing bank” respectively. A letter of credit is a payment mechanism that operates independently of any underlying contract with the function of replacing the uncertain credit of an unfamiliar purchaser with the more certain credit of a bank, acting as a guarantee from a creditworthy firm to an exporter of goods. It meant that Citibank assumed responsibility to the seller, Bosai, for payment on the satisfaction by Bosai of the terms of the letter of credit. On the foot of the letter of credit, Bosai was required to produce documentation demonstrating that it had shipped the required goods to Nigeria.

However, First Modular alleged that Bosai’s claim for payment was a sham and that Bosai had not dispatched the goods at all. First Modular then sought an injunction to prevent the payment of $1.65million to Bosai on foot of the letter of credit. The High Court refused the injunction, finding that First Modular had failed to satisfy the necessary threshold for injunctive relief where letters of credit are concerned. The decision emphasises that the threshold for restraining payment under a letter of credit is high, requiring a seriously arguable case of fraud. This means there must be clear enough evidence for the alleged fraud to be considered by the court. First Modular had previously failed in an application to the Irish High Court for a near identical injunction in aid of a Nigerian arbitration preventing payment out on foot of the letter of credit.

In considering whether the circumstances in this case were appropriate to grant an injunction, the court considered the relevant threshold for fraud in cases concerning letters of credit. In line with decisions in previous cases, the court held that it may only intervene to restrain payment under an agreement in limited instances of fraud which are “clear, obvious and established.”

The decision also reinforces the principle that a letter of credit is a separate transaction from the contract on which it may be based, as in this case where the letter was considered separate from the contract to supply the gas plant.