The First Hall of the Civil Court, presided over by Mr Justice Mark Chetcuti, on October 17, 2011, in the case “Azrow International Trading Company Limited vs Fimbank plc” held, among other things, that a beneficiary under an irrevocable standby letter of credit was entitled to take legal action against the confirming bank, for payment under the letter of credit, independently of any finance agreement which it might have with the confirming bank and without having to make a separate request to ask the court to declare that it had complied with all the conditions in the letter of credit.

In these proceedings, the court had to decide whether the beneficiary under an irrevocable standby letter of credit could take legal action against the confirming bank, without making a separate request for a declaration that it had met all the conditions in the letter of credit.

A standby letter of credit was a secondary method of payment... a form of guarantee to facilitate cross-border transactions- Karl Grech Orr

The court limited this decision to decide whether Azrow International could present such a claim against Fimbank, exclusively on the basis of the letter of credit, without regard to its facility agreements with the bank.

The facts in this case were as follows:

The Maltese company Azrow International Trading Company Limited was engaged by Alem Aletkon Recycling Co. to establish a Motor Vehicle Recycling Plant in Tripoli, Libya. As security for payment, Alem Aletkon gave Azrow International an irrevocable standby letter of credit No. 51/2010 for the amount of €29 million, issued by the National Commercial Bank of Tripoli, valid up to May 2, 2011. This irrevocable standby letter of credit was sent by the Libyan Bank to Fimbank plc, as the confirming bank.

Eventually, Azrow International proceeded to make a claim of €6,507,750.00, on the letter of credit, which claim was honoured by Fimbank plc.

However, on August 2, 2010, Azrow International made another claim of €10 million, which claim was not honoured, owing to an allegation made by the National Commercial Bank of Tripoli that the letter of credit was false and that it was being cancelled.

On October 11, 2010, Azrow International made another claim, which was also not honoured.

Azrow International demanded payment from Fimbank plc, intimating it by judicial letter. Fimbank plc, however, refused to pay.

Faced with this situation Azrow International proceeded by filing legal proceedings against Fimbank plc asking the Court:

• To declare that Fimbank plc was obliged to pay under the letter of credit, in its capacity as the confirming bank;

• To order it to pay the amount, stated to be due under the letter of credit;

• To declare that it suffered damages, by Fimbank’s failure to honour its obligation under the irrevocable standby letter of credit; t

• To liquidate the damages and to condemn Fimbank plc to pay damages.

Fimbank plc, in reply, contested Azrow Internationsl’s claims. It pleaded in defence that it should be freed from the proceedings.

It said that its relations with Azrow International was regulated by separate agreements, which were not mentioned by Azrow International: in particular by a facility letter dated June 24, 2010; a facility and guarantee indemnity agreement dated June 24, 2010; a pledge of bank account agreement; and a pledge of goods, documents and receivable, terms and conditions.

Fimbank put forward the argument that it was released from its obligations, when the letter of credit was declared to be false by the Libyan bank. Otherwise it would be accepting to become an accomplice in fraud.

Fimbank maintained that Azrow International had to repay the loan from the proceeds of the letter of credit, which proceeds were assigned to it.

The First Hall of the Civil Court considered the nature of a letter of credit.

In the book Finance of International Trade (Cowdell/Hyde/Watson 7th edition), commercial letters of credit were defined as “a conditional guarantee of payment made by a bank to a named beneficiary, guaranteeing that payment will be made, provided that the terms of the credit are met. These terms will state that the beneficiary must submit specified documents, to a certain bank by a certain date.

“In simpler words, letters of credit in international trade involve the following: The importer that is located in one particular jurisdiction contracts his bank to issue a letter of credit to the benefit of the letter who is located in another jurisdiction. After presentation of correct documents and compliance of the terms and condition of the letter of credit with the documents, the issuing bank pays the amount agreed upon, thus ensuring security of the goods being bought in the transaction.”

It noted that Azrow International claimed that there existed legal relations with Fimbank plc, when it accepted to act as the confirming bank

In the Law and Practice of International Bank (Penn, Shea and Aora 1987 Vol II) it is stated that:

“The contractual obligations between the creditor and the issuing and confirming banks arise from the terms of the letter of credit. The issuing and confirming bank, are, therefore, under a duty to the beneficiary to honour the credit, namely to accept bills presented to it by the beneficiary, either on demand if the letter is an open one, or if, as is more usually the case, the credit is a documentary letter of credit on fulfilment of the conditions set out in the letter of credit. The duty to honour is unilateral and so the bank is bound to honour the credit if it is strictly complied with. There is no duty or obligation on the beneficiary to fulfil the terms of the credit, but if he wishes to benefit under it, he must conform to the terms of the credit as a condition precedent to insisting on performance of the bank’s obligations”.

The court had no doubt that Fimbank plc accepted to act as the confirming bank. It was clear, noted the court, that Fimbank plc assumed the role of the confirming bank. Effectively this meant that Azrow International had two banks guaranteeing payment in solidum.

Nor was there any agreement in the circumstances to subordinate the letter of credit to the facility agreement, between Azrow International and the bank.

The fact that Azrow International agreed to assign the receivables under the letter of credit to the bank did not mean that Azrow International assigned or renounced its rights under the letter of credit, pointed the court. The court said that, once Fimbank plc confirmed the letter of credit, it assumed responsibility regardless of any separate agreement, which it had with Azrow International, even if these other agreements were inter-related with the letter of credit.

The court noted the distinction between an irrevocable letter of credit from a standby letter of credit. A standby letter of credit was a secondary method of payment. It was a form of a guarantee to facilitate cross-border transactions.

Insofar as the debtor made payment, a standby letter of credit could not be utilised. If a debtor failed to pay, however, a creditor could claim under a standby letter of credit. A creditor had to prove that it had first called upon the debtor to pay.

Azrow International had made three requests for payment from Fimbank under the letter of credit.

In its writ of summons, Azrow International did not request the court to declare whether it complied with the conditions of the standby letter of credit. This raised the question whether Azrow International’s claims, as formulated, were inadmissible.

On October 17, 2011 the court of first instance dismissed Fimbank’s plea that Azrow International’s claim were inadmissible in the manner as formulated.

In order for the court to decide whether Fimbank plc was obliged to honour the standby letter of credit, it also had to determine whether Azrow International complied with the strict terms of the letter of credit.

By requesting the court to hold Fimbank plc to be liable under the letter of credit, it was implicitly asking the court to declare that it has complied with the terms of the standby letter of credit. There was no need for a separate claim in the writ, (vol XLI-PN-PG 688)

Reference was made case-law.

There was no need for a plaintiff to request a separate declaration. It was sufficient if the plaintiff requested the court to give any declaration required according to the practice of the Maltese courts (vol 33 – PI – PG 666)

In the case of eviction, for instance, there was no need to request a separate declaration from the courts that a defendant occupied without valid title; re: “Dr. J. Vassallo et vs. J. Sammut” dated March 13, 1990, as this was implicit in the request for eviction.

Dr Grech Orr is a partner at Ganado & Associates.