Irish High Court refuses injunction restraining a bank from paying out under a letter of credit in aid of an intended arbitration in Nigeria – First Modular Gas Systems Ltd –V– Citibank Europe Plc & Ors ¹

In this case, First Modular, a Nigerian gas company, sought an order restraining Citibank Europe Plc from paying out under a letter of credit to the third respondent, a Chinese equipment manufacturer, in aid of an intended arbitration in Nigeria against the second and third respondents. An interim injunction had been granted ex parte on 7 January, which remained in force. The application was resisted by Citibank and the second and third respondents.

Citibank and the other participating respondents argued that the applicant had failed to meet the test required for restraining banks from paying out under letters of credit, which required a “seriously arguable case that the only inference to be drawn is one of fraud”.² The applicant disputed this, and argued, alternatively, that in the circumstances of this case the higher test did not apply.

The second and third respondents also challenged the application on jurisdictional grounds as the third respondent, Bosai, the party to whom payment was to be made under the letter of credit, was not a party to the arbitration agreement. The applicant argued that Bosai was captured by the arbitration agreement as the agreement referred to the letter of credit in favour of Bosai and that Bosai was stopped from arguing it was not bound by the arbitration agreement.

The Court found it did not have jurisdiction to grant the injunction as the applicant failed to establish that the injunction was in aid of an arbitration. The Court found that the test was that the Court must be satisfied that the dispute was the subject of an arbitration agreement and not just that a prima facie case had been established that an arbitration agreement existed. Here the Court applied the reasoning from the line of authority in relation to the jurisdiction of the Irish court to stay proceedings pending arbitration pursuant to Article 8 of the Model Law.³ Even if a lower test were to apply, the Court found that no prima facie case had been made that Bosai was bound by the arbitration agreement. 

The Court found that, even if it were wrong about the question of jurisdiction, the applicant failed to meet the threshold for an injunction. Following the line of authority in Construgomes & Carlos Gomes SA [2021] IEHC 79, the Court confirmed that in such cases the ordinary “Campus Oil” test does not apply and that “if the application is to restrain the operation of a letter of credit, a far higher threshold is required to be met: it is necessary for the applicant to show that it is seriously arguable that the only reasonable inference is that the attempt to secure payment on foot of the letter of credit is fraudulent”. The Court held that this test had not been met here.

The rationale for the higher test is down to the importance afforded to the letter of credit in international commerce as an independent undertaking provided by a bank that it will honour payment subject to the conditions of the letter of credit being fulfilled. An often-cited phrase from a UK decision⁴ is that letters of credit are the “lifeblood of commerce”. It has been said that to restrain payment under a letter of credit would “disturb the mercantile practice of treating rights thereunder as being equivalent of cash in hand”.⁵

The Irish High Court has provided clarity that the test is for an ‘intended arbitration’ under the Model law and reaffirmed the law in relation to the higher test to be applied to injunctions seeking to restrain payment under letters of credit. This provides a clear view on how the Irish Court interprets and deals with letters of credit.

1. Unreported, High Court, 5 September 2023↩
2. Construgomes & Carlos Gomes SA [2021] IEHC 79↩
3. K&J Townmore Construction Limited v Kildare and Wicklow Education and Training Board [2019] IEHC 666↩
4. Intraco Limited v Notis Shipping Corporation of Liberia [1981] 2 Lloyd’s Rep 256↩
5. Intraco Limited v Notis Shipping Corporation of Liberia [1981] 2 Lloyd’s Rep 257↩