Petrosaudi Oil Services (Venezuela) Ltd v Novo Banco SA & Ors [2016] EWHC 2456 (Comm)

2016] EWHC 2456 (Comm)

Case No CL-2016-000572

Date Date: Wednesday, 5 October 2016

IN THE HIGH COURT OF JUSTICE

QUEENS BENCH DIVISION

COMMERCIAL COURT

Before

HIS HONOUR JUDGE WAKSMAN QC

(sitting as a judge of the High Court)

Between

PETROSAUDI OIL SERVICES (VENEZUELA) LTD (A BODY CORPORATE)Claimant

(1) NOVO BANCO S.ADefendants

(2) PDVSA SERVICOS S.A.Defendant

(3) PDVSA SERVICES B.V.Defendant

Computer Aided Transcript of the Stenograph Notes of

Wordwave International Ltd trading as DTI

165 Fleet Street, London EC4A 2DY

Tel No: 020 7404 1400. Email: casemanagers dtiglobal.eu

(Official Shorthand Writers to the Court)

Michael Bools QC and Joanne Box appeared for Claimant (instructed by Clyde & Co., Solicitors)

Akhil Shah QC appeared for First Defendant (instructed by Addleshaw Goddard LLP, Solicitors)

Luke Parsons QC and Edward Ho appeared for Second and Third Defendants (instructed by Stephenson Harwood LLP, Solicitors)

Hearing Hearing dates: 28 and 29 September 2016

Judgment

HHJ WAKSMAN QC: INTRODUCTION.

[1]The claimant in this action, Petrosaudi Oil Services (Venezuela) Ltd (“POS”), is a Barbados company which supplied oil rig drilling services to the Second Defendant, PDVSA Servicios SA, a Venezuelan company (“PDV”), pursuant to a written International Daywork Drilling Contract dated 30 September, 2010 (“the Contract”). As required by the Contract, a standby Letter of Credit (“the LC”) was issued in favour of POS by the first defendant, Novo Banco SA, a Portuguese bank (the Bank) on 23 August 2011, a security for payment of invoices issued by POS. The LC was opened for the account of the third defendant, PDVSA Services BV, a Dutch company and part of the same group as PDV.

[2]POS has rendered invoices to PDV in the total sum of $129,877,699.54 in respect of drilling services provided between July 2015 and June 2016. None has been paid. The essential issue between the parties is that POS says that the appropriate daily rate is what is known as the operating or standby rate, while PDV says that it is a very much lower daily rate, called the repair rate. The invoices are based on the higher rate, which is about US$17m per month, while the lower rate would give a liability of only about £500,000 per month.

[3]Pursuant to an arbitration Clause in the Contract, an arbitral tribunal consisting of David Owen QC, Simon Rainey QC and Pierre-Yves Tschanz (“the arbitrators”), was established to deal with this dispute. It has already made a number of partial and procedural awards. In particular it has given rulings as to the compatibility with certain principles of Venezuelan law which it is accepted governs the Contract of Clause 803(3) and (4) thereof. These provide as follows. “(3) If PDV for just cause and in good faith disputes an item invoiced, PDV shall within fifteen (15) days after receipt of the invoice notify Contractor of the amount disputed and specify the reason therefore, failing which PDV shall be deemed to have irrevocably accepted the invoice as correct and that the amounts dated therein as due and owing to Contractor. (4) In the event an amount as disputed, notwithstanding such dispute, PDVSA shall pay Contractor the disputed amount within the time limit applicable to the relevant invoice wherein such dispute arose. Contractor shall refund said amount or part thereof with interest, calculated from the date falling thirty (30) days after Contractor's receipt of payment of the invoice relevant to the disputed amount until the date of refund, upon Contractor accepting and agreeing to such disputed amount or part thereof or the mutual agreement of PDVSA and Contractor in respect of such disputed amount or part thereof, or PDVSA proving Contractor is not entitled to the same in accordance with paragraph 1304.”

[4]PDV contends that the result of the first and second partial awards dated 24 March and 16 September 2016, (“the FPA” and “the SPA”) respectively, is that, until the underlying dispute is resolved by substantive arbitration, which will take place in November/December this year, it has no obligation to pay any of the unpaid invoices at all.

[5]However, POS contends that it is nonetheless entitled now to make a presentation under the LC and receive full payment of the sums outstanding from the Bank. To that end it made a presentation upon the Bank on 19 September 2016 (“the Presentation”). The Bank gave notice that it considered that there had been a compliant presentation and stated its intention to pay out to POS on Monday, 26 September.

[6]On Friday 23 September, at an inter partes hearing before me, PDV sought to prevent such payment on the basis that, given the arbitrators' rulings, any demand for such payment was or would be fraudulent on the part of POS and, accordingly, it applied to the court for appropriate injunctive relief. That led the parties to agree a holding position whereby the Bank would not pay out and would not be obliged to pay out under the LC, until I decided the issues following a short trial which took place last week on 28 and 29 September. In the meantime, it was agreed that a total of US$5m should be released to POS from an escrow account which contained funds paid by or on behalf of PDV on account of the drilling services provided. It is common ground that since at least mid-2016 POS was, and continues to be, on the brink of insolvency. These payments were necessary to keep it operating. It should be noted that the drilling services continued to be provided under the Contract.

[7]The trial itself was the result of a Claim Form issued by POS on Sunday 18 September, i.e. day before the Presentation for the full amount of the invoices, i.e. the US$129m. It sought, in particular, declarations that the forthcoming presentation would be compliant, that the Bank was liable to pay that sum to POS and that there was no legal basis on which the Bank could decline payment.

[8]This is my judgment on those and related issues following the trial.

[9]The Bank has attended the trial as well as the other parties. It adduced no evidence but it made some brief submissions at the end. It will abide by whatever order the court makes. THE CONTRACT.

[10]I have already set out Clauses 803 (3) and (4) above. I now cite the other material provisions. (1) By Clause 803(1):

“PDV shall pay to Contractor the amounts invoiced after deduction for applicable withholding taxes as specified in Paragraph 608(b) but without any set-off whatsoever.” (2) By Clause 803(2): “Payments shall be made by PDVSA in sufficient time for receipt by Contractor of the full invoiced amount net of any bank charges by Contractor within thirty (30) days of the date that the relevant invoices received by PDVSA. PDVSA shall be liable to pay interest at the rate specified in Appendix A should there be delay in Contractor receiving any amount due under the invoices before the aforesaid thirty (30) days; whether or not the relevant invoice has been accepted, deemed accepted or disputed by PDVSA. Interest shall be calculated from the date the invoice becomes overdue until date of payment.” (3) By Clause 803(5): “Contractor shall have the right upon three days prior written notice to suspend some or all performance and/or terminate this contract if PDVSA fails or refuses to timely pay Contractor any amount due and owing to the Contractor. If Contractor chooses to suspend this Contract the Operating Rate shall continue to apply and be payable during period of suspension. Exercise of the right of suspension will not preclude Contractor from terminating this Contract for the same reason at any time thereafter.” (4) Clause 805(1) provided that on the effective date PDV would provide the Contractor with a guarantee from Banco Espirito Santo in terms agreed between PDV, POS and the payment guarantor bank as set out in Appendix H in the amount of US$130mto secure payment to POS under the Contract and to guarantee the performance thereof by PDV; (5) By Clause 805(4) “After each drawdown PDV shall ensure the Payment Guarantee or Replacement Payment Guarantee shall be kept topped up at all times and without delay (and in any event no later than the earlier of 10 (ten) business days after draw-down and 15 (fifteen) days prior to the expiry of the Payment Guarantee or Replacement Payment Guarantee in the amount of US$130m, failing which Contractor shall be entitled to suspend or terminate the Contract without further notice and to call on the existing Payment Guarantee or any Replacement Payment Guarantee for all sums due under the Contract, including the Early Termination Fee, without prejudice to contractor's right to claim such amounts under Clause 207.”

Attachment H contained the form of the security which was the LC and the bank concerned is in fact the Bank. Accordingly, if the Bank did pay up PDV had ten days to replenish the LC funding; (6) Clause 1304 provided for arbitration in relation to any disputes arising out of or relating to the Contract, which would be conducted in accordance UNCITRAL Rules; (7) Clause 1305, headed "Local Laws", provided in the first part as follows:

“Each Party hereto agrees that all laws, rules and regulations of any federal state or local government authority having jurisdiction over the Operating Area, which are now or may become effective, will apply to the performance of this contract in such jurisdiction. In the event any provision of this contract is inconsistent with or contrary to any applicable federal, state or local law, rule or regulation, said provision shall be deemed to be modified to the extent required to be consistent with said law, rule or regulation, and as so modified, said provision and this Contract shall continue in full force and effect provided that PDVSA shall indemnify and hold harmless Contractor on demand against any cost, expense, liability or loss of right revenue or benefit arising as a result of such modification or change of law, or regulation. If any act or omission by contractor in response to PDV's explicit instruction violates such law PDV shall indemnify contractor on demand for any consequences thereof.”

[11]The LC is governed by English law. Clause 3 sets out the documents required for a valid presentation.

(A) :

“The beneficiaries written demand in the form of attachment A to this SBLC written demand duly completed and purportedly signed by the beneficiary.”

[12]The text of that demand, set out at attachment A, reads, amongst other things:

“We the beneficiaries of the SBLC hereby demand payment of USD... not exceeding US$ 130m. We certify that the applicant is obligated to the beneficiary to pay the amount demanded under the drilling contract executed among the beneficiary and PDVSA.”

[13]A copy of the actual demand has now been provided and it follows that wording. THE ISSUES.

[14]PDV contends as follows:(1) The true effect of the FPA and SPA is that under the Contract, PDV is not presently obliged or obligated to make payment of the invoices at all;

(2) Neither Clause 803(3) or (4) alter the position since the arbitrators have found them to be null and void as a matter of Venezuelan law;

(3) Accordingly POS could not have honestly certified in the presentation that PDV was “obligated”;

(4) The Bank by now, on any view, is aware of that;

(5) Accordingly, to have made the Presentation and/or to continue to seek payment of the LC thereunder, POS was and is fraudulent within the meaning of the so-called “fraudexception” (“the Fraud Exception”) to the “autonomy principle” of the law of documentary credits; that principle of course provides for payment to be made pursuant to a documentary credit following a compliant presentation as a separate contract, unaffected by any dispute between the parties to the underlying contract;

(6) Alternatively POS is constrained by the Contract itself from making the Presentation and/or taking payment thereunder by reference to a Good Faith principle enshrined in Venezuelan law;

(7) Therefore POS is not entitled to any payment under the Letter of Credit at this stage and the Bank is not entitled to make such payment."

[15]For its part POS contends as follows:(1) Whatever the arbitrators decided (as to which there is a dispute), the invoices have fallen “due” or “due and payable”, which means that PDV is obligated to pay them and accordingly the Presentation is compliant;

(2) Even if PDV was not "obligated" there has not been and is not any fraud on the part of PDV or the Bank;

(3) Nor is there any separate argument that in the events which have happened the Contract itself prevented POS from making demand under the LC or receiving payment thereunder due to the operation of the Good Faith principle;

(4) If POS is right, then the Bank must now pay out to it under the LC. THE EVIDENCE.

[16]At trial and on behalf of POS, I heard live evidence from Mr Timothy Buckland, a director of and general counsel to POS, who made a witness statement on 26 September, 2016. I also heard from Professor Henrique Iribaren Monteverde, who has been referred to as Professor Iribaren, PDV's Venezuelan law expert, and I heard that evidence by videolink. He provided a report also dated 26 September, 2016.

WHAT DID THE ARBITRATORS DECIDE UNDER THE FPA AND SPA?

[17]The resolution of this issue is the necessary starting point. (A). Clause 803(4) and Article 141.

[18]While Clause 803(2) provided that invoices were due for payment after 30 days, given that there was a dispute over them, POS relied specifically on Clause 803(4) as a "pay now, argue later" Clause. However, PDV argued that this provision was contrary to Article 141 of the Venezuelan Public Contracting Law of 19 November 2014 (“the LCP”), PDV being a state entity for these purposes. The effect of that was that Clause 803(4) was not only itself null and void but the provisions of Article 141 had to be complied with before payment could be made or required.

[19]In response POS argued that Article 141 did not govern the Contract, that in any event it was not mandatory and further there was no conflict between Clause 803(4) and Article 141.

[20]The relevant parts of Article 141 are as follows:

“Conditions for Payment. Article 141. The principal shall pay the obligations assumed under the agreement in compliance with the following: 1. Verification of the compliance and the supply of the good, rendering of the services, performance of the work or any part thereof. 2. Receipt and review of the invoices presented by the contractor.”

[21]The arbitrators concluded, in paragraph 94 of the FPA, that Article 141 was mandatory and bound PDV as contractor. They held in particular as follows:

“94. We accordingly conclude that Article 141 mandatorily requires a state entity to ascertain that invoices for services rendered are correct before paying them… 96. Clause 803(4), combined with the Standby Letter of Credit established under the Contract, requiring only proof of receipt of the invoices is designed precisely to secure payment without PDV being able to withhold payment before ascertaining the correctness of the invoices and to withhold payment if it finds that an invoice is correct. Clause 803(4) is thus designed to circumvent the procedures mandatory prescribed by Article 141. 100. The Tribunal has accordingly concluded that Article 141 has mandatory effect and Clause 803(4) is designed to achieve what Article 141 prohibits, i.e. payment without verification and approval of invoices. The Tribunal leaves open all issues as to the implications of these conclusions including any issues modification of Clause 803. 101. However, without prejudging any issues that might arise subsequently, it might be helpful to indicate that the Tribunal's present view is that Clause 803(4) would only be consistent with the Article 141 to the extent that an invoice is disputed for just cause and good faith within 15 days as provided by Clause 803(3). Thus, the payment mechanisms under Clause 803 in the Contract generally could operate if an invoice is disputed in part and the Respondent subsequently re-invoiced for the undisputed part of the original invoice.”

[22]In their order the Tribunal declared at paragraph 1 that Article 141 mandatorily required a state entity to ascertain that invoices for services rendered were correct before paying them and at paragraph 2 that Clause 803(4) of the Contract was inconsistent with Article 141 and consequently null and void. By paragraphs 3 and 4 they ordered POS to pay PDV's legal costs and the arbitrators' costs in relation to that award.

[23]It is important to note the arbitrators' reasoning which includes the following: at paragraph 74 they said that if the state entity did not authorise payment pursuant to Article 141 then that article was silent as to what would happen next. In paragraph 75 they said that the consequence was that there was a dispute about the invoice in question so that a determination was in order, i.e. a determination by an arbitral tribunal in accordance with Clause 1304 of the Contract. Payment of the disputed invoice would then at least be possible to the extent that an arbitral award determines that the invoice was correct. At 76 they noted that Article 141 did not deal with the issue of what happens in the meantime, i.e. whether payment can and should be made upon a disputed invoice pending an arbitral determination. In the instant case, it was not disputed that the Contract validly provided for arbitration at Clause 1304, but the latter did not deal with the question of whether the payment may be authorised before an arbitration award determined whether the invoice was correct or not. Anyway, it would then be a provision about interim relief pending arbitration, whereas the preliminary issue was framed under Venezuelan substantive law not the French law of arbitration.

[24]In paragraph 77, they said that the question thus became whether the silence of the LCP particularly Article 141 was a statutory gap to be filled because the lawmaker failed to envisage a situation or rather the lawmaker implicitly decreed that no payment should be paid until and unless an invoice was approved under Article141 or was found to be correct in arbitration (through Clause 1304). The issue had be resolved by statutory interpretation under Venezuelan law. In their arguments the parties focused on literal, historical, systematic and teleological methods of interpretation. At paragraph 78 the arbitrators said that the wording of the LCP was in favour of a binary system ie payment only upon approval or award, thus ruling out the unmentioned third possibility of a payment pending a dispute. And then, towards the end of paragraph 79, that Article 141 implicitly rules out a payment pending a dispute and this is why Article 141 did not deal with security to guarantee a payment pending a dispute; if such a payment were not implicitly ruled out the law maker would have provided for appropriate security for the same reasons it did at Articles 128 and 122 of the LCP.

[25]Accordingly, the arbitrators did not merely say that Clause 803(4) was inconsistent or incompatible with Article 141, they said that it was null and void. In other words, as it seems to me, if POS needed to rely upon Clause 803(4) to compel payment immediately from PDV of invoices which it disputed, it could not do so. Moreover, such invoices would only be payable once the Article 141 procedure had been gone through, and either PDV itself had formally resolved to pay them or an arbitral tribunal so found.

[26]In legal terms, this must mean that under Venezuelan law if POS tried to claim the monies due on such disputed invoices prior to the completion of the Article 141 procedure, ending either with an agreement by PDV or an arbitral award, it could not obtain a judgment for payment in the Venezuelan court.

[27]One might, as a matter of language, say that the debt claimed in the invoices had still fallen “due” because(a) the invoice had been issued and

(b) the agreed credit period of 30 days had elapsed, but that is a sterile and irrelevant conclusion if as a result of the dispute, the FPA meant that PDV had no present legal obligation to pay.

[28]In paragraph 24 of its written submissions, and in oral argument, POC submitted that the position was more nuanced, ending up with the submission that the arbitrators had not held that PDV had no obligation to pay the invoices, it was just that PDV could not be required to make payment pursuant to 803(4).

[29]In my judgment this is clearly wrong. First, of course the arbitrators were not holding that in due course some or all of the invoices would not be found to be payable, either because PDV authorised payment or the arbitrators made an appropriate award. But that was not the issue before them, which was whether PDV could be compelled to pay now. If that was not the issue it is hard to see what the parties were arguing about. This confusion is also apparent from paragraph 26 of POS's written submissions which states as follows:

“It is therefore abundantly clear that while the tribunal held that Article 141 prohibited PDVSA from paying or being required to pay invoices which it disputed, it made no findings to any of the consequences that flowed from the decision. It did not, as PDVSA alleges, determine that PDVSA was under no obligation to pay the invoices rendered by Petrosaudi under the drilling contract; that after all is the very issue before the tribunal for determination at the substantive hearing in November 2016.”

[30]Again the issue is whether any presently enforceable debt had arisen. The arbitrators said, "No". They did not say that there might never be a debt, rather they said there was no such debt now.

[31]The next point as to what the arbitrators did or did not decide is whether they were saying that no present debt fell due under the Contract, as opposed to under Article 141. Mr Bools QC for POS sought to argue that the Contract was effectively unaltered as a result of the FPA.

[32]In this regard, I turn first to the evidence of Professor Iribaren. He concluded that under Venezuelan law the arbitrators had concluded that the sums invoiced were not at that time payable due to the nullity of Clause 803(3) and (4) and Article 141. There might be a question as to whether his evidence was necessary or even relevant given that the ultimate question as to what the arbitrators decided is a matter for me. Indeed, I have and would have concluded, as I do, without the opinion of Professor Iribaren.

[33]Nonetheless, his evidence has some value. Much time in cross-examination was spent on the issue of whether, as he had said in paragraph 10.5 of his report, the arbitrators had "expressly modified" the Contract or not. I regard this as a somewhat barren point. Having found that Clause 803 (3) and (4) were null and void and that Article 141 applied to the Contract, it is plain that the result of their declarations or their logical consequence, as Professor Iribaren put it, was to change the effective terms of the Contract.

[34]The following part of the arbitrators' decision in P08 illustrates this. At paragraph 5, they noted that PDV requested that Clause 803 (2) - (4) of the Contract be modified so that in Clause 803(2) "deemed accepted" was removed, the last part of Clause 803(3) was removed and the whole of Clause 803(4) was removed, and adding the requirements of Article 141. In paragraph 6 the arbitrators said as to Clause 803(4):

“This provision having been held invalid and void, there is no longer any dispute in this regard.”

Then at paragraph 7: “Regarding the new wording that the claimant seeks to add in Clause 803(4), the Tribunal sees no need at this stage to repeat the statutory language of Article 141 LCP in the Contract as the FPA found that this provision applies as a matter of mandatory law."

[35]In short, there was no need to subtract or add words into the Contract where its effect, due to the nullity of Clause 803(3) and (4) and as modified by Article 141, was plain. Further, and although hardly determinative, it is noteworthy that the arbitrators themselves made informal references to the "rewritten" contract in the oral hearing on 23 July, 2016. See pages 103 and 108 of the transcript.

[36]Once the Contract had been modified in this way, it must follow, as Professor Iribaren opined, that the contractual position as to when invoiced sums fall due had now been changed. In the case of a dispute they fall due when payment was approved or an arbitral tribunal so awarded.

[37]Moreover, Clause 1305 of the Contract, which I set out in paragraph 10(7) above, itself directly makes it subject to Venezuelan law and deems it to be modified accordingly. If a contract has its effect changed by local law, be it Venezuelan, English or the law of anywhere else, it will alter what can and cannot be claimed under that contract.

[38]Accordingly and to the extent necessary (see the discussion below as to what the certificate in the Demand), no debt was due under the Contract until and unless it was authorised by PDV or awarded in arbitration. I reject as wholly untenable and unrealistic that there is a distinction between what is due and not due under the Contract and what is due and not due under Article 141, in terms of what the arbitrators decided. (B). Clause 803(3) and Article 141.

[39]The FPA and the arbitrators' reference to Clause 803(3) then gave rise to the next issue. As set out in paragraph 3 above, Clause 803(3) contained a deeming provision, such that unless PDV had for just cause and in good faith disputed the invoice and notified the amount of and the reason for the disputed invoice within 15 days, it would be held to have accepted the invoice as correct and due and owing in the amounts stated. If that provision was valid, then the fact of PDV's lack of timely protest at the invoices would have the effect of removing the existence of any dispute in relation thereto which would then suggest that they should be regarded as due and payable after all and allow for immediate payment to POS. Once again, PDV argued that this contravened Article 141 and should be struck down as null and void. POS denied this. This was the issue for determination in the SPA.

[40]In the SPA the arbitrators first summarised what they had already decided. In paragraph 68, they noted that in the FPA they had held that Article 141 applies to the PDV/POS relationship, that it was mandatory and that a contrary agreement was null ab initio. Regarding the meaning of Article 141, the FPA had held it prohibited PDV from making a voluntary payment unless it approved an invoice following internal verification and the approval process prescribed in Article 141. In paragraph 69, that applying Article 141 to Clause 803(4) the FPA held that the latter contravened the former, because in the former PDV committed to pay invoices even if it disputed them. Thus, in effect, purporting to contract away the Article 141 approval requirement before a voluntary payment may be made. They said that Article 141 prohibits such an interim payment even though a refund could be secured through a subsequent arbitration of the disputed invoice, and consequently the obligation provided by Clause 803(4) to make such interim payment is null.

[41]By paragraph 70, the issue now was whether Article 141 also prohibited a voluntary payment of an invoice that was neither expressly disputed nor approved within 15 days on the ground that it is deemed approved. The arbitrators said that PDV could pay an invoice only if it had affirmatively approved it, i.e. has expressly approved it, after receipt of invoice. A payment without express approval contravened Article 141. Consequently, the agreement made in advance in Clause 803(3) that invoices shall be deemed irrevocably agreed after 15 days of silence enabling a final payment, was null.

[42]In paragraph 74, the arbitrators said while Clause 803(3) was null, it did not mean that the entire Contract was null and neither party had suggested that. Failing an affirmative approval POS's recourse to obtain payment of an invoice was to obtain an arbitral determination that the invoice issued was due which assumes a dispute. PDV's silence during 15 days after an invoice is issued could not result in the irrevocable approval of the invoice. Rather, it must result in the invoice being treated as disputed so that POS can commence arbitration. One could not say that arbitration was the solution without also accepting that doing nothing implied a dispute after a certain time. The parties’ intention to have a steady stream of payments could not be achieved through Clauses 803 (4) and (3), but it must still be respected as much as possible, in its second prong of having a prompt recourse to arbitration. Therefore, after 15 days, there was no deemed approval but a deemed dispute enabling POS to commence arbitration then to obtain payment if it was due and to obtain any remedy for late payment if any arose which was not decided at that stage.

[43]The arbitrators then formally declared that the deeming provision in Clause 803(3) was inconsistent with Article 141 and was null, and that POS could not rely on that Clause to obtain payment of the July-September 2015 invoices. POS was or ordered to pay 80 per cent of PDV's costs.

[44]By declaring Clause 803(3) to be null and void the arbitrators, in my view, were making it plain that the only legal recourse available to POS to obtain payment of an invoice which had been disputed, in the absence of agreement of PDV, was to go to arbitration and obtain an order. The primacy of Article 141 was thus reaffirmed.

[45]Just as with the FPA, there is nothing surprising in this conclusion in the SPA. It simply meant that POS could not take advantage of certain provisions which would have made sums payable at once, even if disputed. And if the arbitration went in POS's favour then of course it would recover the payment; if it went against it, then of course it was not prejudiced by having to wait for the payment in the meantime.

[46]For the sake of completeness, I reject any suggestion that in truth all that POS had to do was rely on Clause 803(2), providing for payment in 30 days, so as to secure a declaration of sums now due and payable. Had that been the position there would have been no need for Clause 803(4) and no need for the FPA or the SPA. On that footing, the effect of Article 141 was not merely to impose certain obligations on PDV regardless of whether the monies had fallen due under the Contract, it prevented them falling due in any real sense at all at this stage.

[47]Although it is ultimately a matter for me and not him, I note that Mr Buckland accepted in evidence that what the arbitrators did was to declare that the sums claimed in the invoices were not due immediately.

[48]In closing Mr Bools QC suggested that what Mr Buckland was really saying was that there were no sums immediately due by reason of Article 141, as opposed to no sums due under the Contract. I reject that. When accepting, as he did, on several occasions, that no sums were immediately due, Mr Buckland drew no such distinction. It is not a point that he was asked to clarify or re-visit in re-examination and the distinction is itself baseless anyway for the reasons already given. (C). PO16.

[49]Prior to the SPA the arbitrators had, on 11 May, that POS should give 7 days' notice of reliance on Clause 803(3) (whose validity had not yet been decided), and that if it wished so to rely it could not take any step to obtain payment of the invoices pending the arbitrators' determination of that issue. See paragraph 4 of PO8. Following the giving of the SPA, POS sought to discharge PO8 insofar as it restrained the obtaining of payment under the LC, since this was a separate contract governed by English law and unaffected by Article 141. For its part PDV wished the prohibition, in seeking payment inter alia under the LC, to continue. The arbitrators decided that question in PO16.

[50]At paragraph 33, the arbitrators said that they had decided that the injunction was the logical consequence of the FPA only as a temporary measure, because the Tribunal still had to decide whether the deeming provision in Clause 803(3) was consistent with Article 141 and order 4 of PO8 was designed to address the uncertainty regarding the validity of Clause 803(3). However, they had now decided that issue in favour of PDV. There was no longer uncertainty as to whether PDV could agree in the Clause that its silence would amount to approval of invoices.

[51]In paragraph 34 they said that while it was common ground that POS had a reasonable possibility of succeeding on the applicable day rate, it was now clear that one of the consequences of the FPA and the SPA was that there is no longer a reasonable possibility for POS to succeed on the claimed contractual right to advance payments of not expressly approved invoices pending an arbitral adjudication of them (Clause 803(4)), or to payments based on a deemed acceptance of invoices (Clause 803(3)). Thus far this is again a very clear statement by the arbitrators that POS had no immediate payment rights in relation to the disputed invoices as a result of Article 141.

[52]As to PDV's application for continued restraint upon POS to seek payment pending the arbitration, including by means of a presentation under the Letter of Credit, while the arbitrators accepted that they had jurisdiction to deal with this matter, they said as follows at paragraph 42:

“It is said that POS was given independent payment rights under the LC and PDV itself agreed to that independent payment mechanism. A presentation under the LC does not directly engage the parties' substantive rights to be adjudicated by the Tribunal. It is the Bank, not POS, which is required to make payment under the terms of an independent contract. Furthermore, the basis on which that freestanding arrangement can be said to be prohibited in Venezuelan law under the provisions of that law so far debated was not canvassed before the Tribunal by PDV.”

[53]Then in paragraph 41:

“The Tribunal's role was not to decide whether a payment claim meets the requirements of the LC, which will depend on whether POS has made a valid demand under the LC and whether it otherwise satisfied the terms of the LC, which is for the English High Court to decide. Therefore as a matter of the Tribunal's discretion in exercising its procedural authorities, it is appropriate to leave to the English Court to whose jurisdiction PDV has agreed in setting up the LC in the first place to deal with the circumstances in which a presentation could be made and payment could be obtained. In particular circumstances where invoices had not been approved nor been the subject of an award, with the court applying the relevant law of the LC and taking account of the Tribunal's findings in these proceedings insofar as relevant to do so and leaving any decision upon a presentation under the LC to the English Court the Tribunal leaves intact PDV's right to obtain any remedy available to it under the LC mechanism to which it agreed.”

[54]So PDV's application was dismissed and order for a P08 was revoked.

[55]I have read a transcript of the submissions made orally to the Tribunal on this final point, and although there were various discussions about whether the LC should be treated as an autonomous contract for these purposes and whether a demand thereunder would or would not circumvent the mandatory effect of Article 141 and so on, the fact is that the arbitrators ultimately decided that this was a matter for another day and another tribunal, i.e. this court. Nothing of any real assistance to me can therefore be gleaned from the fact of discharge of PO8 by the arbitrators. Nor can that discharge in any way affect the very clear substantive conclusions of the arbitrators that pending compliance of the Article 141 procedure, or an arbitral award, there was not in any real legal sense, any obligation on the part of POS to pay any of the disputed invoices.

WHAT DID POS HAVE TO CERTIFY UNDER THE DEMAND TO BE PRESENTEDPURSUANT TO THE LC?

[56]Although the phrase, "We certify that the applicant is obligated to the beneficiary to pay the amount demanded under the drilling contract", has been subjected to considerable textual and linguistic analysis, the meaning is plain in my view. POS had to certify that the amount demanded under the LC was indeed due and owing by PDV to POS under the Contract. To take an obvious example, POS could not demand or certify £100 under the LC if only £80 had fallen due under the Contract. There is a timing element to this as well. As Mr Bools QC accepted in argument, POS could not demand payment of a sum under the LC if less than the 30 day credit period had elapsed at the time of demand. Again, such a sum had not fallen due.

[57]The notion of PDV being obligated must be understood in the same way. Accordingly, if invoices had been rendered, PDV would not be obligated to pay them for the purpose of the certificate if the time for payment had not arrived. In other words, at the time of the Presentation, the sums demanded had to be due for payment immediately, not at some defined or undefined point in the future. That common sense view is reinforced by the fact that the LC was provided as security for PDV's payment obligations under the Contract. If, as I have found, no present debt had yet fallen due under the Contract, it would be very odd if the LC required something less.

[58]In POS's written submissions, at paragraph 47, it was submitted that all that was required was an honest belief that PDV was obliged to pay on the basis that at the end of the day POS would succeed in the ultimate arbitration. In support of that, reference was made to paragraph 34 of PO16, which I have quoted, where the arbitrators said that POS had a reasonable chance of succeeding on the daily rate. Just as it had also said that PDV had a reasonable chance on its contention. But that disregards the remainder of paragraph 34 which I repeat:

“it is now clear that one of the consequences of the FPA and SPA is there is no longer a reasonable possibility for POS to succeed on the claimed contractual right to advanced payments of not expressly approved invoices pending an arbitral adjudication on them or to payments based on a deemed acceptance of invoices.”

[59]In his oral submissions, Mr Bools QC put the matter slightly differently. He was disposed at some points to accept that obligated meant not only “due” but “due and payable”, but said that this was satisfied here provided that “due and payable” was by reference to what was due and payable "under the Contract" and not by reference to Article 141; but for the reasons already given, that is a distinction without a difference.

[60]Mr Bools QC submitted that all that was needed was proof of the delivery of the invoices and that they had been unpaid for 30 days. A subsequent dispute between buyer and seller over the quality of the goods, for example, would not matter for the purpose of a letter of credit. I see that, but the critical difference here is that the arbitrators found that at this stage there was no enforceable debt, i.e. no sum immediately due and payable, at all. Any attempt to seek justification for immediate payment would fall at the first hurdle, not per se because of some underlying dispute between the parties but because of the effect of Clause 141 upon the Contract where a dispute had arisen.

[61]I take the point that it cannot be said that there was no debt due in some sense because otherwise there would be nothing to arbitrate about later. But all of this has to be read in the context of the Article 141 procedure as laid down by the arbitrators. Absent authorisation, the debt had to be claimed and adjudicated upon in an arbitration; until and unless that happens there was no present debt due or payable at all. Any debt which, but for Article 141 would have fallen due now, has to be claimed in an arbitration if not agreed. Equally, while it may be that to the extent that POS would succeed at arbitration in relation to the invoices claimed, the arbitrators might award interest starting from some earlier point(a) that is speculation at this stage,

(b) it still cannot dislodge the fact has because of the effect of Article 141 on the Contract and the arbitrators ruling, there is still no present debt due and payable. The arbitrators in fact only referred to this possibility (by reference to late payment) at the end of paragraph 74 of the SPA set out above, which hardly takes the matter any further.

[62]Another point relied upon POS was that Article 141 itself refers to the “principal shall pay the obligations assumed under the agreement in compliance with”. Accordingly, it is said, Article 141 assumed some pre-existing debt. First, I am not even sure that that is what “obligations” mean as opposed to the principal paying for the obligations assumed by the other parties, for example, to deliver goods or services. But, second, even if does refer to some debt otherwise arising, yet again Article 141 then alters the position as the arbitrators had found, so that does not assist POS.

[63]At the end of the day, there is no linguistic or commercial reason why the certificate should be construed so that PDV is obliged to pay for the purposes of the certificate and yet not for the purpose of the Contract. That simply makes no sense. I accept that the existence or effect of Article 141 may not have been in the contemplation of the parties at the time of the drafting of the LC, but I fail to see that this alters the proper construction of the certificate.

[64]Accordingly, I am quite clear that what had to be certified was that the amount now sought under the LC was due and payable in the sense of being due and payable now. I would be happy add to the words "due and payable now under the Contract", because for the reasons given above, the excision of Article 803(3) and (4) and the application of Article 141 meant that, as a matter of contract, no sum which was disputed was payable thereunder until the Article 141 procedure or an award had been completed.

THE ACCURACY OF THE CERTIFICATE

[65]It follows from what I have found thus far that the certificate that PDV was obligated to POS for the sums claimed in the presentation under the LC under the Contract was false. No such sum was due and payable as at 19 September, 2016 for the reasons given. APPLICATION OF THE FRAUD EXCEPTION Introduction

APPLICATION OF THE FRAUD EXCEPTION

[66]Against that background PDV says that the Fraud Exception to the autonomy principle applies because POS through Mr Buckland, who signed the Demand, knew that the certificate was false, alternatively was reckless as to whether it was true or false. Many of the cases dealing with the Fraud Exception are not relevant here because they concern what needs to be shown at the injunction stage where the buyer wishes to restrain presentation or payment by the issuing bank, or at the summary judgment stage. But this is the trial and final findings as to fraud can and will be made.

[67]PDV has to show that POS, acting through Mr Buckland, had no honest belief in the statement that PDV was "obligated" or that he made it, not caring whether it was true or false. Since Mr Buckland accepted in evidence that there was no debt immediately payable, because of the FPA and SPA, the focus has to be on his claimed understanding of what obligated meant.

[68]In considering his honesty in that context I remind myself that it is a serious allegation to say that there was no honest belief and also of the fact that Mr Buckland is a qualified solicitor here and in New Zealand, and a barrister in New Zealand also. The evidence of Mr Buckland.

[69]Prior to his present role as General Counsel to and director of (but not shareholder in) all the Petrosaudi Group companies, being those located in Barbados, UK, Holland and Singapore, Mr Buckland had been employed by Freshfields from 2000 to 2007 and by White & Case from 2007 to 2010 as a corporate lawyer.

[70]At the relevant times, the main income for the Petrosaudi Group was in fact coming through POS and under the Contract. Subject to taking external legal advice from POS's solicitor and counsel, Mr Buckland has overseen all aspects of the present dispute from its inception. The key parts of his evidence, for present purposes, are those dealing with his state of mind at the time he signed the certificate within the demand.

[71]In paragraph 12, he says this:

“I have been asked what I understand by such phrase [that is, “obligated”]. I interpret the phrase “obligation to pay” in the SBLC certificate to mean that a debt has arisen from PDVSA to Petrosaudi in respect of a given invoice or invoices. I believe that this debt arises upon the performance of the services under the terms of the Contract. I do not believe that Article 141 of the public Contracting Law affects the “obligation to pay” of PDVS. Rather I understand that it places an obligation on PDVSA to carry out certain steps before they discharge their pre-existing obligation to pay”.”

[72]And in paragraph 13:

“This view is entirely consistent with the natural meaning of the words of Article141, which read “..the principal shall pay the obligations assumed under the agreement in compliance with the following”... To the best of my knowledge and belief the wording of Article 141 recognises a pre-existing obligation to pay, the discharge of which requires PDVSA to go through certain steps laid down by Venezuelan law. I believe this is also consistent with the ability of the Tribunal to determine that an invoice is payable even if Article 141 has not been complied with (which is common ground). I believe my view is also consistent with FPA1, FPA2 and PO16, none of which preclude such a view. Rather the tribunal's careful choice of language would appear to support it.”

[73]And then at paragraph 14:

“In coming to this conclusion, prior to the execution of the most recent SBLC draw, I considered a number of factors including (a) Article 141. (b) the submissions of each of the parties and their counsel in connection with each of the arbitral hearings insofar as they pertain to Article 141 and the SBLC. I attended each of these hearings in person. (c) The First Partial Award, the Second Partial Award and Procedural Order No. 16; (d) The oral submissions of Richard Southern QC on 23 July 2016. At that hearing he explained the Article 141 process had no effect on whether a sum is due in response to arguments by PDVSA's counsel, Duncan Matthews QC, which seemed to me to be founded on the same basis as the case now put by PDVSA before the High Court. The reference for these submissions is page 99 to 113 of the transcript; (e) The fact that despite those submissions of Mr Matthews QC, the post-hearing application of PDVSA, to which Petrosaudi objected and the findings in the Second Partial Award, the Tribunal nonetheless rejected the claimant's application and instead lifted the injunction on an unrestricted basis. (f) Discussions with the other board members of the POSOVL, following the issue of Procedural Order No. 16. Having discussed the position across the weekend with the benefit of the documents the board agreed that a draw should proceed. (g) Lengthy discussions with Tim Myers, President of Petrosaudi Oil Services, and Dan Stover, Head of projects, as to the merits of the invoices underlying the SBLC claim and lack of merit in the PDVSA's objections. (h) The various claim defence and counterclaim, reply document and submissions in the arbitrations.” (a) Article 141. (b) the submissions of each of the parties and their counsel in connection with each of the arbitral hearings insofar as they pertain to Article 141 and the SBLC. I attended each of these hearings in person. (c) The First Partial Award, the Second Partial Award and Procedural Order No. 16; (d) The oral submissions of Richard Southern QC on 23 July 2016. At that hearing he explained the Article 141 process had no effect on whether a sum is due in response to arguments by PDVSA's counsel, Duncan Matthews QC, which seemed to me to be founded on the same basis as the case now put by PDVSA before the High Court. The reference for these submissions is page 99 to 113 of the transcript; (e) The fact that despite those submissions of Mr Matthews QC, the post-hearing application of PDVSA, to which Petrosaudi objected and the findings in the Second Partial Award, the Tribunal nonetheless rejected the claimant's application and instead lifted the injunction on an unrestricted basis. (f) Discussions with the other board members of the POSOVL, following the issue of Procedural Order No. 16. Having discussed the position across the weekend with the benefit of the documents the board agreed that a draw should proceed. (g) Lengthy discussions with Tim Myers, President of Petrosaudi Oil Services, and Dan Stover, Head of projects, as to the merits of the invoices underlying the SBLC claim and lack of merit in the PDVSA's objections. (h) The various claim defence and counterclaim, reply document and submissions in the arbitrations.”

[74]Then finally in in paragraph 19: "My view that PDVSA was obligated to pay for the purposes of certification of the SBLC was honestly held at the time of the execution of the recent SBLC demand and remains honestly held, notwithstanding the speculative and baseless claims of fraud made in the witness statement of Harris Zografakis [ie on behalf of PDV].”

[75]Accordingly, Mr Buckland has assumed a particular interpretation of the phrase "obligated". In cross-examination he accepted on numerous occasions that as a result of the nullity of Clause 803(3) and (4) and the application of Article 141, PDV was not obligated now to pay the sums claimed, i.e. at the time of the certificate. However, he said he focused on the fact, as he saw it, that the invoices were "due" for payment once issued and, because they related to work which had been done; he also laid stress on the reference to “obligations” in the wording of Article 141 as dealt with above.

[76]I have to say that I found Mr Buckland's focusing on this aspect only in this way wholly unrealistic. It was irrelevant to the issue before the arbitrators which, as he accepted, was to look to see when the monies claimed in the invoices were payable now as against PDV. Having been shown the arbitrators findings, in particular at paragraph 76 to 78 of the FPA, he agreed that the question was:

“can or must PDV pay now?”

He further agreed that he understood that despite the raising of the invoices POS could not obtain an order or a declaration from the arbitrators that PDV had to pay immediately. He agreed that this was the import of the SPA as well. He further agreed that he could not have certified that PDV was obligated to pay now, if that is what “obligated” meant, but he said this was not what the certificate required.

[77]When it was put to him that if "obligated" meant "obligated now", it would mean that he could not then or now certify honestly, he said that he would need to take legal advice or reflect further on it which I did not find very satisfactory. Nor did I find convincing his explanation that at the time of certificate he did not consider the "temporal" aspect at all, even though this was what the awards were all about. Instead, he looked at what was due, essentially in the abstract.

[78]Indeed, the notion that he did not even consider the temporal aspect at the time is wholly at odds with his witness statement. He said in paragraph 14, that in reaching his view about the meaning of "obligated" he drew on a number of sources to reach his interpretative conclusion. They included a number of submissions in the hearing prior to the awards, discussion with other board members and other documents. In addition, he said that prior to making the demand for payment under the LC he also took the advice of external solicitors and counsel on this issue. He said that POS was not prepared to waive privilege, so I do not know what the advice was. Of course that is POS's right and I do not draw any adverse inference from its failure to produce the advice given.

[79]However, it is absurd to suggest that in all those deliberations and consultations and taking of advice, the question of some competing interpretation of "obligated" was not even canvassed or discussed. If that were the case it is quite unclear what was being discussed and “an”, if not “the”, obvious candidate for a correct interpretation was that “obligated” meant due and payable now.

[80]In addition, quite apart from consulting with others, it is also absurd for Mr Buckland to suggest that he did not himself see and consider that there were other candidates for the correct interpretation, including in a temporal sense. Mr Bools QC suggested that this was plausible because Mr Buckland should be treated simply as a businessman looking at the matter commercially. But that is a hopeless submission given that Mr Buckland is a qualified solicitor and barrister of some years' standing, and also fulfils the present role of general counsel.

[81]I have already rejected the submission that when Mr Buckland accepted in evidence that the arbitrators found no immediate debt he was drawing the (unsuccessful) distinction between the Contract and Article 141.

[82]Then in re-examination Mr Buckland was taken to Articles 803(1) and (2) and asked if he considered these provisions, and he said Article 803(1) influenced him. Quite apart from the fact that this was a obviously leading question and that he made no specific reference to Article 803(1) in his witness statement at all, there are problems with his answer. First, Clause 803(1) is concerned with prohibiting set-off, but this is not a case of set-off on any view; it is a question of whether PDV was overcharged or not because of the wrong rates applied. Secondly, it is not clear why this would influence him in reaching his interpretative conclusion. It might have been thought to support a view that the debt was due now but he accepted that he did not regard this as the correct meaning of "obligated" and did not consider the temporal aspect anyway.

[83]Indeed, quite apart from the deliberations that Mr Buckland said he made, it was obvious from the FPA and SPA, and the submissions behind them, that what POS wanted was an immediate payment and a declaration by the arbitrators to that effect, and it relied upon Article 803(4) and then Article 803(3) to that end. All of this was at a time when POS desperately needed the monies. See, by way of an example, the letter from Clyde & Co on 17 May, 2006. So the whole issue of whether the sums were due and immediately payable was manifest and obvious. That is another reason why to say, as he did, that he did not even consider the temporal aspect when looking at the meaning of the certificate is inherently implausible.

[84]Mr Bools QC suggested that because there had been certain earlier presentations under the LCs permitted by the arbitrators, provided that the proceeds went into an escrow account- see PO2 and PO3 - this showed that the Fraud Exception could not apply to these presentations. I do not agree. The earlier presentations were made prior to the FPA and SPA and where the monies were not going straight out to POS but into an escrow account.

[85]All of the above makes Mr Bucklands' evidence extremely unsatisfactory. I simply do not believe that he did not even consider the temporal aspect, i.e. that "obligated" means due and payable now. This has a direct and negative impact on his credibility as a whole and his assertions as to what he said he honestly believed.

Conclusions

[86]I think the truth of the matter is that Mr Buckland has seized on the notion of this inchoate prior sum due (though not due now), as a way of justifying the certificate and that this became something of a mantra when he was giving evidence. Although he denied it, I consider that he certified as he did because he thought that an interpretation could be placed on the word "obligated" which could somehow stand or be argued to stand with what the obvious effect of the FPA and SPA was, i.e. that no sum was presently due. But I do not believe that he actually and honestly believed it to be the real meaning of the certificate, (which is in fact what was due now), and I reject his evidence to the contrary.

[87]Though he would not accept it in evidence, I also think that he and POS as a whole adopted this alternative interpretation on the basis that it might withstand scrutiny for a time and in any event it could always be put right or reversed by a court later on. That is particularly so when it is plain from recent correspondence and indeed earlier e-mails, for example in May 2016, that POS was and remains very close to insolvency. Although Mr Buckland denied that it formed part of his considerations, I am sure that there was a real pressure on POC and him to get out a demand as soon as possible after PO8 was lifted, if only to set the ball rolling, and prior to a court hearing in the very near future, as was surely contemplated by POC's claim form which had been issued the night before.

[88]I think that the interpretation said to have been honestly believed in by Mr Buckland is something of a lawyer's construct that does not in fact bear serious scrutiny notwithstanding the lengthy and detailed argument upon it which has been advanced before me. I regret to say that I do not accept that Mr Buckland really and honestly believed it. In my judgment he knew in truth that PDV was not obligated in the obvious sense required by the certificate. The fact that he may have thought that an argument or even a strong argument could be put forward to justify the certificate by means of the different interpretation of "obligated" is irrelevant. He himself had to believe in that different interpretation so as to render the certificate true, as Mr Bools QC accepted in argument. But, in my judgment, he did not so believe.

[89]If he did not know that his certificate was false for the reasons given above, then he was certainly reckless as to its falsity, in my judgment. If, contrary to my findings above, he really did not even consider the temporal aspect, then that could only be by wilfully shutting his eyes to the obvious.

[90]Either way, he may well have thought that it did not matter too much since the court would sort it out if necessary, so no harm done, but I regret that this cannot affect my findings as to what he believed at the time.

[91]For all those reasons I find that the Fraud Exception does apply here and, accordingly, the Bank must be restrained from paying out to POS under the LC. That finding is sufficient to conclude this trial in PDV's favour but, in deference to the other arguments raised, I will deal with them briefly on the hypothesis that the certificate was false but not deliberately or recklessly so at the time of presentation. THE POSITION IF THE CERTIFICATE WAS FALSE BUT HONESTLY MADE AT THETIME. Introduction

[92]This is an unusual case. First, there was in the event no application for injunctive relief to restrain the Bank from paying out since by agreement with the other parties it has refrained from so doing pending my decision. Instead the trial of the action has taken place before any payment, although after presentation. Moreover, since, by agreement, the clock has stopped running, the Bank is not yet in breach of its obligation to pay out upon the Presentation.

[93]On the present hypothesis the certificate contained in the Presentation was false but honestly made at the time. Of course, had my ruling on falsity been made before the Presentation any such presentation in the same form would have to have been dishonest because it would be contrary to my decision to the actual knowledge of POS. All of the cases on the Fraud Exception, to which I have been referred, deal with an allegation one way or another that the presentation itself was dishonest. The issues in those cases have covered the standard of proof of such dishonest presentation when the case is only at the injunctive or summary judgment stage or whether the dishonesty must have been that of the beneficiary as opposed to some third party who produced the offending document or certificate knowing it to be false, or variations of those themes. None of those issues arise here.

[94]PDV says that even if the Presentation itself was not dishonest, it matters not because (in summary)(a) any further reliance upon it by POS to seek payment would be dishonest since it now knows of the falsity,

(b) equally, any payment out by the Bank would be dishonest since it too now knows of the falsity and

[1983] 1 AC 168

, page 184A to B namely that:

“The exception for fraud on the part of the beneficiary seeking to avail himself of the credit is a clear application of the maxim ex turpi causa non oritur actio or, if plain English is to be preferred, " fraud unravels all," The courts will not allow their process to be used by a dishonest person to carry out a fraud.”

[95]This result would also follow from the fact that the certificate amounts to a continuing representation now known to be false.

[96]POC in response argues that(a) the only relevant date for determining dishonesty is that of the presentation and any later actual or putative dishonesty is material and

(b) that accords with the fact that the Fraud Exception has always been viewed as narrowly drawn, with all attempts to expand it having failed.

The present position

[97]On my primary finding, this certificate is and always has been false. What has changed on this hypothesis is the state of mind of the beneficiary because it now knows of the falsity. The trial, therefore, on this hypothesis, has not established that the beneficiary initially knew of the dishonesty. What it did establish was the falsity of the certificate which turned upon the true analysis of what the arbitrators decided and what the wording of the certificate meant. While, therefore, of course it could be said that any further reliance on the certificate would be dishonest because the beneficiary and the Bank now know that it was false, that would be true of any case where it was demonstrated before payment under the LC that some underlying document or entitlement which formed part of the presentation was false - and whether that falsity was created by the beneficiary or someone else.

[98]It remains the case that in order to succeed here, PDV has to rely upon the Fraud Exception from the point of view of the Bank because the Presentation was on its face compliant and the documents conformed on their face. UCM

[99]There was much debate before me as to the relevance of the actual decision in UCM as opposed to the statements of principle from Lord Diplock referred to above. In my judgment the decision is relevant. First, it was a decision after a trial and where the beneficiary had made the presentation but the bank had not paid, but took the point that it was not bound to pay at this early stage. The court found that the bill of lading was false because it declared a loading date one day earlier than the actual loading date to the knowledge of the broker who procured this endorsement on the bill of lading at the time. The beneficiary at the time of presentation, however, did not know.

[100]The broad argument for the bank there, as stated by Lord Diplock, was that a confirming bank is not under any obligation, legally enforceable against it by the seller/beneficiary of a documentary credit, to pay to him the sum stipulated in the credit against presentation of documents, if the documents presented, although conforming on their face with the terms of the credit nevertheless contained some statement of material fact that is not accurate. Lord Diplock rejected it. He said that if it applied, the Fraud Exception would be superfluous and it would undermine the whole system of financial trade by documentary credits. It would also be contrary to what was then Article 9 of the UCP and a similar provision appears here in Clause 4 of the LC. The breadth of the argument was apparent from Lord Diplock's characterisation of it as meaning that if there was a any such right of refusal, it must depend upon whether the bank, when sued by the seller beneficiary for breach of its contract to honour the credit, is able to prove that one of the documents did in fact contain what was a material misstatement.

[101]Lord Diplock also rejected a narrower argument which the Court of Appeal had accepted, namely that the bank could refuse to pay if any of the documents presented under the credit contained a material misrepresentation of fact that was false to the knowledge of the person who issued the document and intended by him to deceive persons into whose hands the document might come, even though the persons whom the issuer of the document intended to and deceive included the beneficiary himself.

[102]The essential difference between the two formulations is that the narrower one required not only falsity but the dishonesty of at least someone, even if not the beneficiary who had produced the underlying document. That would have been sufficient for the Bank's purposes in UCM since the broker who produced the declaration of loading date was dishonest. But this formulation was rejected too. It is true that Lord Diplock left open the possibility of some defence being available to the Bank if the document was in fact a forgery and worthless, but on any view that is not this case.

[103]On close analysis, PDV's argument here is really just a species of the broad argument advanced in UCM, i.e. there is an underlying document which is false, i.e. here the certificate. It is the broad rather than the narrower one because, on this hypothesis, and unlike UCM, no one was dishonest in producing it when first made in the Presentation.

[104]I quite accept that the nature of the false representation might be said to be more fundamental here since it related not to the date of loading of a cargo but whether the paying party had any present indebtedness to the beneficiary at all. But(a) the point is still that there was a false document and

(b) PDV did not make a case which relied upon a difference in the type, extent or importance of the falsity.

[105]It therefore follows that, in my judgment, UCM would implicitly rule out the argument made here. Proof of falsity at trial in a case where there was an honest belief that the presentation was compliant on its face at the time would not give the bank a defence.

[106]Mr Parsons’ citation of a number of cases which referred to the time for payment as being the latest point at which to assess dishonesty does not help him. In each of those cases the question was still whether the original presentation was itself dishonest. The reference to the payment date was not in order to allow the dishonesty to be found at some date later than presentation - it was for other reasons. So, for example, in Banque Saudi Frasi v Siegler

[2007] 1 ALL ER 72

, in the context of a counter-indemnity claim where a bank had paid out, the question was whether the Bank had knowledge of the false presentation to it. It had to be shown that it had that knowledge by no later than the date of payment and not subsequently. See paragraph 12 of the judgment of Lady Justice Arden. But the thing which had to be shown to be false, and knowingly so, was the presentation.

[107]Again, in Credit Agricole v Generale Bank

[1999] 2 ALL ER 1009

, another reimbursement case, it was alleged, at the eleventh hour on a summary judgment application by the bank seeking reimbursement, that the Fraud Exception applied. But quite apart from the lateness of the allegation, Rix J, as he then was, said there was no evidence of knowledge on the part of the bank of the alleged fraudulent presentation as at the date of payment, which was the last relevant date, because after payment, the benefit of the purpose of the Fraud Exception is spent. That is not authority for the proposition that the Fraud Exception covers not merely a false presentation known by the beneficiary to be false at the time of presentation but one which the court later decides is false, at which point the beneficiary and bank both become aware of that fact.

[108]PDV also relied upon the decision of the Court of Appeal, in GKN v Lloyds Bank

[1985] 30 BLR 48

and the dicta of Parker LJ at page 63, where he said:

“It must be shown before the principal who gave the original instructions can rely upon it that the Bank was clearly aware of the fraud at the time it paid and passed on the demand, or the circumstances were such the only reasonable inference was the original demand was fraudulent. There can, however, clearly be cases where albeit the ultimate beneficiary was not fraudulent, the bank itself may have been fraudulent. The claim presented by the ultimate beneficiary may have been presented in good faith and honesty albeit owing to some mistake was an invalid claim. In such a case if the invalidity of the claim was known to the Bank which received it, it appears to me that if that bank were to pass on the claim as a valid claim and demand payment it would be guilty of fraud which would justify non-payment of the demand notwithstanding that the demand on its face appeared to be valid.”

[109]It is therefore submitted by PDV that if the bank, which paid out on a claim where there was no kind of dishonesty on the part of the beneficiary on presentation to it, then presented it up the line, as it were, with knowledge of the defect, then it would be guilty of fraud. Thus it must follow that knowledge acquired post presentation is relevant and it assists PDV here. I do not accept this. First, the dicta in GKN were obiter because on the facts the Court of Appeal held the Fraud Exception could not apply and the other grounds for seeking an injunction by reference to breach of contract and tort were not upheld, so that the Court of Appeal agreed with the judge's decision not to grant an injunction. Second, I can see that where a bank has to make a presentation of documents to another bank, at the time of its presentation, if it knows that they are materially false then it, like any other presenting party, it may fall within the Fraud Exception. But that does not help PDV here since(a) the issue is whether the Bank is liable now to pay POC under the LC and

(b) even in GKN, the emphasis was still on dishonest presentations.

[110]In argument it was postulated by me that if PDV's argument was wrong a situation could arise where, as perhaps contemplated by GKN if the dicta were correct, there could be a situation where the confirming bank has to pay the beneficiary because there was no dishonest presentation by the beneficiary to it, but it might then be left "holding the baby" if it later made a parallel presentation to the issuing bank, by which time it knew of the falsity, so that the issuing bank could invoke the Fraud Exception against it. While that might seem alarming at first blush it can occur where one presentation is honest and the other is not. But this does not arise here, since I have in fact found that the Fraud Exception does apply to POC's presentation and accordingly the Bank will not be ordered to pay out. Moreover, the position may well be different where, as I believe the case to be here, it is not a question of a further presentation up the line but a right of reimbursement by the Bank from a PDV.

[111]So I see nothing in the case law that would permit me to consider the Fraud Exception by reference to the position now, where, on this hypothesis, there was no dishonest presentation. Moreover, I think it is implicit in UCM itself that the focus of the attention must be on the presentation. As Lord Justice Staughton put it in Group Josi v Walbrook

[1996] 1 WLR 1152

at page 1161, having referred to UCM, he said:

“As the decision in that case shows, it's nothing to the point that at the time of trial the beneficiary knows and the Bank knows that the documents presented under the Letter of Credit were not truthful in a material respect. It is the time of presentation that is critical.”

[112]That observation was cited by with approval by Potter LJ in the case of Montrod v Grundkoller

[2002] 1 WLR 1987

at paragraph 42.

[113]Mr Parsons then raised a separate argument which is that even in this case one is still considering a dishonest presentation as at the date of the trial, because the representation constituted by the certificate was a continuing one which would only terminate upon payment by the Bank, i.e the ultimate date of reliance - and that has not yet happened. He referred in this regard to paragraph 18-18 of the 21st edition of Clerk & Lindsell on Torts:

“Where there was an interval between the time of the representation and the time when it is acted on and the representation relates to an existing state of things, the representation is deemed to be repeated through the interval. If it is false to the maker's knowledge at the time when it is relied on there will deceit at that time. It also follows that if during the time between the making of the representation and the claimant acting upon it the defendant discovers it to be false or circumstances change to his knowledge so that it is now untrue, liability may be incurred.”

[114]I do not accept the analogy. First, this is not a case of a continuing representation which, while originally true, has become false. This was a representation which was always false. It is true that Clerk & Lindsell also refer to the position of a representation which had always been false but which the representor only later discovers is false. If the certificate was a continuing representation, on this hypothesis it could be said to be the situation here. However, it is not clear to me that the Fraud Exception has to be or should be rooted in the tort of misrepresentation; it is essentially a rule of policy, not a cause of action. Moreover, it would be odd for the documents submitted on a presentation to be characterised as continuing representations in a commercial context where the beneficiary should expect payment upon a compliant set of documents, usually in short order - save where his presentation is dishonest at the time. If it were otherwise there could be all sorts of issues as to what does and does not constitute a continuing representation, what level of knowledge of falsity was required and so on and so forth. All of this militates against the Fraud Exception, being a very narrow proviso to the autonomy principle.

[115]I did pause to consider what the position would be if, after presentation but before payment, a buyer paid the seller/beneficiary direct for all or part of the sum claimed under the letter of credit. Would collection of the entire sum demanded under the letter of credit not then be viewed as falling within the Fraud Exception? I do not think that this would be the correct analysis. The truth is that if the beneficiary had a right to collect under the letter of credit it would have the option of returning the buyer's payment to it or simply collecting less under the letter of credit. The reason why it would have to take one of these courses is simply because the seller/beneficiary is not entitled to recover from the buyer directly or indirectly more than the sums owed. So whether he was aware of the buyer's payment, or even if he was not, he could not recover more. He might be dishonest as well, but that is not why he cannot recover more.

[116]Finally, Mr Parsons urged upon me the practical consequences if I rejected his argument. He said that if the trial had taken place before the Presentation, the Bank would be restrained from paying because any later demand would necessarily be dishonest since the parties would be aware of the court's ruling that the certificate was false. Yet if the trial was a few days later, as here, the same consequence would not follow. All of that is true, but that is a consequence of the limits of the Fraud Exception; and it is not as if the time at trial has been wasted because the court has ruled on key issues dividing the parties and in fact, in the event, has found that the Fraud Exception did apply.

[117]So this alternative argument, were it necessary, would not succeed.

GOOD FAITH

[118]Finally I turn to the question of good faith and upon the same hypothesis. I deal with the argument that POC is prohibited from seeking payment under the LC at this stage because to do so would violate Article 1160 of the present Venezuelan Civil Code which is applicable to this contract. In translation it provides thus:

“Contracts must be performed in good faith and bind the parties not only to comply with what they provide but also with all the consequences deriving from such contracts according to equity, usage or law.”

This was the other matter that was dealt with in Professor Iribaren's report. The material parts of his report here are paragraphs 10.10 to 10.12 where he said this: “10.10 If Petrosaudi attempted to enforce the LC in violation of the Contract’s stipulations (as modified by the FPA and the SPA), such conduct on the part of Petrosaudi would be contrary to the principle of good faith in the performance of contract referred to by Article 1160 of the current Venezuelan Civil Code, since Petrosaudi would be intentionally attempting to obtain a payment to which it was not entitled. In particular the principle of good faith imparts a duty of cooperation and a duty of loyalty. The two obligations are, in summary: 10.10.1 Duty of cooperation. This implies a duty that obliges a party to help the other party to achieve his/her interests under the relevant contract and to facilitate the full performance by the other party. 10.10.2 Duty of loyalty. This implies a duty to refrain from intentionally breaching the contract, thus prohibiting the frustration of the legitimate interest of the other party in the Contract's performances. 10.11. PDVSA's mandatory obligations under the Contract in line with the FPA and SPA is to perform the four steps set out in Article 141.., and Petrosaudi’s are to be paid following approval by PDV or arbitral award. Accordingly, Petrosaudi are prevented by these two duties, from the principle of good faith, by obtaining payment under the LC where PDVSA has not approved the invoice in accordance with Article 141… 10.12 Finally, the above referenced conduct on the part of Petrosaudi a) would produce grave harm to the public patrimony of Venezuela since the funds of PDVSA.. are considered public funds, insofar as PDVSA.. is a government-owned company, on account of violating legal norms that comprise Public Policy on account of violating the Contract and violating the principle of good faith and b) it would constitute a disregard to the FPA and SPA." 10.10.1 Duty of cooperation. This implies a duty that obliges a party to help the other party to achieve his/her interests under the relevant contract and to facilitate the full performance by the other party. 10.10.2 Duty of loyalty. This implies a duty to refrain from intentionally breaching the contract, thus prohibiting the frustration of the legitimate interest of the other party in the Contract's performances.

[119]In cross-examination Professor Iribaren accepted that it is all about good faith in the performance of the Contract. However, it was difficult to see how presentation under the LC would itself prevent or impede PDV's performance interests under the Contract. Indeed, he accepted that he could point to no particular obligation in the Contract which was rendered more difficult for PDV to perform as a result of the Presentation. Nor could he identify any term in the Contract which gave a benefit to PDV which would be frustrated by the Presentation. He did say that the Presentation would still be against Article 1160 because the accessory, i.e. the LC, must follow the principal, i.e. the Contract. And now, since there is no due and payable debt under the Contract, the LC had "lost its object". In this context he suggested that Article 141 itself would prevent presentation under an LC, although, as such, that did not feature in his report.

[120]I can see an argument to the effect that it would or might be regarded as wrong as a matter of Venezuelan public policy if POS were able at this stage to obtain through the back door (ie the LC), something it could not get through the front (ie the Contract); but for my part I did not see how this view could be reached through an application of the duty of cooperation limb of Article 1160, which seems to me to be much more focused on the achieving of the interests in and performance of the Contract by the affected party.

[121]As for the duty of loyalty limb and intentional breach, Professor Iribaren agreed in cross-examination that he could not point to any specific term of the Contract itself that was broken by POC's presentation under the LC. And, if so, the question of whether there was any intentional breach thereof does not arise.

[122]In closing Mr Parsons advanced an argument that the Presentation would be contrary to PDV's interest under the Contract, because if the Bank paid out PDV would have to replenish the funding for the LC swiftly under Clause 805(4); in other words, it would be as if it had to pay out under the Contract, which it did not have to do. Failing such replenishment the Contract could be terminated.

[123]I see all of this, but this specific point was not addressed by Professor Iribaren. Accordingly, I can see no clear evidence of breach of one or other of the two limbs of 1160 as identified by Professor Iribaren.

[124]In that context I do not think that it is enough simply to say there was some more general or overarching breach of Article 1160 simply by virtue of the presentation, and in this context it must be remembered that the governing law of the LC is itself English and not Venezuelan. For these brief reasons, had it been necessary, I would not have restrained collection by POC or payment by the Bank under the LC by reason of the good faith arguments. In the event, of course, for the earlier reasons given, there will be no payment out by the Bank under the LC.

[125]That concludes my judgment. I am most grateful to counsel for their very helpful submissions.