This case addressed, amongst other things, the question of whether a right of set-off in respect of sums owed under an ISDA agreement could be exercised against sums due under an unrelated letter of credit.

The defendant, Calyon1 issued an English law governed letter of credit (L/C) in connection with a derivatives trading contract in favour of LBCS which, when drawn upon, was for the sum of €50 million. One year prior to issue of the L/C, LBCS and Calyon entered into a wholly separate contractual relationship governed by a distinct ISDA Master Agreement (IMA) which was subject to New York law.

Section 6(f) of the IMA provided that in the event of a default, there would be a right to set-off "any obligation" of Calyon owed to [LBCS] against "any obligation" of [LBCS] owed to Calyon whether or not arising under the IMA.

An event of default under the IMA arose upon the filing by an LBCS group holding company under Chapter 11 of the US Bankruptcy Code. This in turn gave rise to a debt on the part of LBCS of US$15,030,239 under the IMA. Consequently, once LBCS sought to draw down on the L/C, Calyon set-off an equivalent sum to that owed under the IMA and paid a balance to LBCS of only €38,377,190.69 under the L/C.


A number of preliminary issues were ordered to be tried most of which turned upon questions of US law and the impact, if any, of the applicable bankruptcy law in New York. These were readily disposed of leaving, as the key issue, the question of whether on a proper construction of the IMA, Calyon was entitled to set-off sums owed to it under the IMA against the amount payable to LBCS under the L/C.


There is little authority on this area, primarily because in most cases it is relatively unusual for there to be a pre-existing contractual relationship between the paying bank and a beneficiary under a letter of credit such as to enable the bank to raise a claim for set-off. Of the authorities where there has been an underlying commercial relationship, set-off has usually been possible because the letter of credit arose from the same underlying transactions in respect of which there was a liquidated debt2. In a leading judgment on this point, which arose out of a summary judgment application, the Court of Appeal took the view that it would be unjust for a bank to have to pay under a letter of credit where it had a real prospect of succeeding on a claim on the underlying transaction, particularly in the case of a liquidated claim3.

In LBCS and Calyon, expert evidence on New York law was adduced to the effect that the words "any obligation" in section 6(f) of the IMA were said to be broad, unambiguous and included obligations owed under an L/C. It was argued that, had the intention been otherwise, it would have been easy for the parties to have made this clear in section 6(f). However, LBCS contended amongst other things that as the L/C came after the IMA, it had curtailed any right of set-off conferred by section 6(f).


Field J in the Commercial Court found in favour of Calyon. It was noted that the right of set-off conferred under the IMA was an important right and Calyon was entitled to assume that the wording of section 6(f) meant what it said. In the same vein, the Court said it was important also to note that the L/C did not contain any express provision excluding any right of set-off. While some emphasis was placed by LBCS on the nature of Calyon's irrevocable undertaking to pay as per LBCS' instructions under the L/C (ie, arguably, without deduction), the Court refused to accept that by this alone either: (i) Calyon was in some way agreeing to give up a pre-existing and important right of set-off; or (ii) that the undertaking to comply with a beneficiary's instructions is directed at anything other than situations in which there may be multiple drawings or where particular bank accounts are identified for the purposes of payment.

In short, this decision underlines the principle4 that letters of credit must be treated as cash and are therefore, in the absence of any express provision to the contrary, subject to rights of set-off in the ordinary way.


1 Lehman Brothers Commodity Services Inc (LBCS) v Credit Agricole Corporate and Investment Bank (formerly Calyon) (2011)
2 HSBC v Kloeckner & Co Ag (1989)
3 SAFA Ltd v Banque du Caire (2000)
4 See SAFA Ltd (supra)

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