Article

Note: Neste Chemicals (Buyer) purchased several chemical production facilities from Reichhold Ltd. (Seller). The purchase contract provided that Seller would be responsible for certain types of environmental clean-up at Ste. Thér粥, Canada, one of the facilities being purchased by Buyer. Seller would remain liable for removal of all buried drums, and was liable up to US$6,000,000 for additional clean-up. Pursuant to the purchase contract, Seller/ Applicant provided an LC in favor of Buyer/ Beneficiary in the amount of US$10,000,000 to be drawn on in the event that Seller did not perform the environmental clean-up provided for in the contract. The LC also provided that the amount available under it would be discounted by the amount spent by Seller/ Beneficiary for any such clean-up. The LC was issued in March 1992, expired in five years, and required presentation of a certificate stating that Buyer requested performance of contract obligations by Seller sixty days prior to any draw.

Subsequent to the sale, Buyer and Seller disputed the allocation of responsibility for clean-up of environmental hazards at the Ste. Thér粥 site. Inspectors found contaminants, but by September of 1996, it was uncertain whether contaminated ground water had left the site. The problem was important because ground water found escaping the site would require a costly remedy. In January 1997, Buyer/ Beneficiary requested performance by Seller/ Applicant in the form of payment of US$21,725,600, the amount estimated by inspectors for clean-up of the Ste. Thér粥 site in light of a likelihood of ground water contamination escape. Following an extension of the expiry date of the LC to June 1997, Buyer informed Seller of its intention to draw on the LC and Buyer was paid by Issuer. The amount drawn on the LC was US$8,050,000, reflecting a reduction in principal commensurate with Seller's spending up to that date.

Buyer/Beneficiary then sued Seller/Applicant for breach of the purchase contract, seeking additional damages incurred in the environmental clean-up in excess of the proceeds of the LC. Seller/Applicant denied Buyer/Beneficiary's breach of contract claim and counterclaimed against Buyer/Beneficiary for breach of contract, claiming Buyer/Beneficiary was not entitled to draw on the LC and seeking repayment of the proceeds of the LC.

The Ontario Superior Court, Stinson, J., relying on the terms of the underlying purchase contract, determined that Buyer/Beneficiary was entitled to draw only a portion of the amount available under the LC, and ordered Buyer/Beneficiary to repay US$5,933,549.07 to Seller/Applicant, as excessively drawn.

[JEB/ees]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.