Sacrificing the Utility of Counter-Guarantees and Counter Standby Letters of Credit for International Infrastructure Projects by Neglecting the Virtues of Strict Adherence to the Independence Principle : American Express Bank Ltd. v. Banco Espanol De Credito

United States District Court for the Southern District of New York's ruling in American Express Bank Ltd. v. Banco Espanol de Credito unduly circumscribed the independence principle by making the ability of local banks to obtain payment under their counter-guarantees/counter-standbys be noticeably sensitive to the status of the underlying construction contract. The district court's reliance on decisions of arbitral tribunals concerning the underlying contract as basis for not enforcing payment obligations under independent guarantees/standbys and counter-guarantees/counter-standbys is not well grounded in contract law, the New York Convention, standard international letter of credit practice and New York case law. Contrary to the independent nature of the relationship between the local undertaking and the counter-guarantee/counter-standby, the district court effectively treated the two undertakings as dependent, thereby conflating them. The district court did not properly observe the case law-developed standard for issuing injunctions when the court effectively upheld (i) the Spanish court's injunction to prevent the counter-guarantor from honoring the local bank's counter-guarantee; and (ii) the ICC arbitral panel's decision directing the beneficiary to cancel the beneficiary's independent guarantees. If widely followed, the district court's construction of the independence principle would negatively impact the commercial vitality of counter-guarantees/counter-standbys by raising the costs of these undertakings as a result of additional litigation and contract investigation and undermining the utility of counter-guarantees/counter standbys as security devices in support of locally-issued independent guarantees/standbys