Third party tries (and fails) to enforce the benefit of a contractual jurisdiction clause

Petrologic Capital SA v Banque Cantonale de Geneve and another [2012] EWHC 453 (Comm)  

Summary

The Commercial Court has rejected arguments that it had jurisdiction to prevent Banque Cantonale de Geneve ("BCG") from paying out to a third party under a letter of credit, where the letter of credit contained an English jurisdiction clause but the contractual agreements between Petrologic and BCG were governed by Swiss law and the jurisdiction of the Geneva courts.

Background

In March 2011, Petrologic and BCG entered into an agreement to govern "the basis of all business relations" between the parties. The general conditions of this agreement made clear that "all legal relations between [Petrologic] and the Bank are subject to Swiss Law" and also noted that "the sole place of jurisdiction for any proceedings of any nature whatsoever is Geneva" (the "Agreement").

In April 2011, Petrologic entered into a contract to buy oil products from an Austrian company, MIC Petrochemische ("MIC") with payment to be made by letter of credit. Accordingly, Petrologic requested BCG to open a letter of credit for approximately EUR 2.4m. The letter of credit issued by BCG was governed by English law and subject to the jurisdiction of the English courts.

MIC claimed payment under the letter of credit but Petrologic argued that the goods had been disposed of to a third party and that it was the victim of a fraud. In addition to commencing proceedings in Geneva, Petrologic brought injunctive proceedings in the High Court to prevent BCG from paying out under the letter of credit.

Petrologic argued that the mandate contained an English law and exclusive jurisdiction clause which was intended to govern the relationship between Petrologic and BCG or should be taken to apply to the relationship. Alternatively, Petrologic was entitled to rely on the Contract Rights of Third Parties Act 1999 (the "Act") on the basis that it allowed a non-party to enforce an English law governed contract to which it was not privy, but which was made for its benefit.  

Decision

Stephen Males QC (sitting as the Deputy High Court judge) dismissed Petrologic's applications and rejected all arguments in which it sought to establish jurisdiction.

The established test was that Petrologic had to show clearly and precisely that the clause relied on as conferring jurisdiction on the English court was in fact the subject of consensus between the parties. In this instance, it was clear that the Agreement governed the relationship between the parties and that letters of credit were part of "business relations". The judge noted that it was not commercially absurd for Petrologic and BCG to have agreed that their relationship would be governed by a different jurisdiction from that which applied to the letter of credit.

With regards to the Act, the judge determined that Petrologic was not seeking to enforce a term of a contract to which it was not party (i.e. the letter of credit). The jurisdiction clause applied to disputes between the contracting parties, being BCG and MIC, but there was no dispute between them. Rather, what Petrologic was trying to do was to take the benefit of the jurisdiction clause for itself in an action to prevent BCG from performing its obligation under the letter of credit, in order to avoid the terms of the Swiss law and jurisdiction clause in the Agreement.

In addition, the judge noted that the letter of credit did not purport to confer the benefit of the jurisdiction clause on Petrologic; as a matter of construction there was nothing in the letter of credit to suggest this was the case. It would be highly unusual for an applicant for a letter of credit to have any rights to enforce the credit, as this would undermine the principle of autonomy of letters of credit.

Conclusion

This case highlights the difficulties that can arise where different jurisdiction clauses and governing law provisions are used in interconnected contracts. This case also serves as a reminder of the autonomy of letters of credit and that any third party rights issues should be carefully thought through and dealt with expressly in the contract rather than left to chance.