Injunctions against Swiss banks issuing Letters of Credit
On 29 May 2020, the Commercial Court of the Canton of Zurich (the “Zurich Commercial Court“) rendered an interesting judgment that illustrates how difficult it is to have Zurich courts issue payment interdictions against banks domiciled in this city, which have issued a bank guarantee or, as in the case in question, a letter of credit.
In the matter HE200210-O, which led to the judgment dated 29 May 2020, two companies with registered offices in Singapore had entered into a purchase agreement on 3 April 2020 relating to Ultra Low Sulphur Diesel (“ULSD“). To secure the payment of the purchase price of approximately USD 32m for the ULSD, the purchasing company had arranged for a letter of credit (in German: Akkreditiv) that had been issued by a bank presumably domiciled in Zurich.
On 22 May 2020, the seller of the ULSD has called for payment under the letter of credit. To prevent the bank from making the payment under the letter of credit, the purchasing company filed a request for a temporary injunction with the Zurich Commercial Court, asking this court to prohibit the bank from honoring the letter of credit.
The judgment HE200210-O dated 29 May 2020, which has been published by the Zurich Commercial Court on 28 July 2021, contains a few interesting considerations and illustrates how difficult it is to successfully obtain such temporary injunctions from the courts in Switzerland generally and from the Zurich Commercial Court specifically.
The first interesting consideration of the Zurich Commercial Court is the reference to its published practice regarding requests for temporary injunctions relating to bank guarantees on first demand. Pursuant to various decisions related to bank guarantees on first demand, the Zurich Commercial Court is very reluctant to grant such requests. In the judgment HE200210-O dated 29 May 2020, the Zurich Commercial Court states that its practice relating to bank guarantees on first demand does also apply to letters of credit (see consideration 5).
The next interesting aspect about the judgment at issue is the circumstance that the Zurich Commercial Court did retain that the purchasing company had indeed shown, on a prima facie basis, that the selling company is calling the letter of credit in an abusive manner (in German: rechtsmissbräuchlich) (see consideration 6, at pages 4-5). However, as the Zurich Commercial Court then points out in its judgment at issue, for a request for a temporary injunction to be successful, the further legal condition of a not easily reparable harm to the applicant (in German: nicht leicht wiedergutzumachender Nachteil) is to be met (see Art. 261(1)(b) of the Swiss Code of Civil Procedure) (see consideration 7). Consequently, even if the calling of a letter of credit (or of a bank guarantee on first demand) is abusive, the party asking for a temporary injunction to prevent the bank from honoring the letter of credit (or the bank guarantee on first demand) has to show, additionally, that it would sustain a not easily reparable harm should the bank make the payment under the relevant instrument.
In the judgment HE200210-O dated 29 May 2020, the Zurich Commercial Court found that the purchasing company asking for the temporary injunction had not shown, on a prima facie basis, that it would sustain a not easily reparable harm should the bank not be prevented from making the payment called for under the letter of credit. In this regard, the Zurich Commercial Court essentially stated that the concept of “pay first, sue later”, which applies to both letters of credit and bank guarantees on first demand, requires that the financial impact per se from the honoring of the financial instrument by the guarantor (usually a bank) is not sufficient to reach the level of a not easily reparable harm in the sense of Art. 261(1)(b) of the Swiss Code of Civil Procedure (see consideration 7). More specifically, the threat of having to conduct a litigation against the selling company, in order to recuperate the relevant payment, does generally not qualify as a not easily reparable harm, especially if both parties are domiciled in the same jurisdiction (Id.). A potentially aggravating circumstance, to which the Zurich Commercial Court refers in its judgment at issue, would be an existential threat to the financial viability of the purchasing company should the bank honor the letter of credit (Id.).
As mentioned, this recently published judgment illustrates how difficult it is to have Zurich courts issue payment interdictions, in the form of temporary injunctions, against banks domiciled in this city, which have issued a bank guarantee or, as in the case in question, a letter of credit.
Philipp H. Haberbeck, Zurich, 1 August 2021 (www.haberbeck.ch)
The information contained in this article is for general informational purposes only and is not intended to constitute legal advice. Readers of this article should not take any actions or decisions without seeking specific legal advice. Any mandate is subject to the full execution of an engagement letter.
Rechtsgebiete: Bank- und Finanzmarktrecht