Article

Note: Tenant Belladonna executed an offer to sublease its premises by potential Subtenant, Hal Roback, that was conditional, among other matters, on approval by Landlord, 939 G.P. Inc. In the event that the property was subleased, Subtenant was required to provide a standby LC in the amount of CD$86,654.88. In the process of preparing to enter the sublease, Subtenant obtained a standby in the required amount from TD Canada Trust (Issuer), the original of which was delivered to Subtenant (Applicant). The standby provided that Issuer was obligated "without inquiring whether you have a right between yourself and our customer to make such demand and without recognizing any claim of our customer."

At the suggestion of leasing agent, Subtenant/ Applicant telefaxed the standby to it but "deliberately did not send the original because he felt there was no binding agreement at that point as the condition respecting the Landlord's consent had not been fulfilled." No sublease was executed by the deadline in the offer and the parties disputed whether or not Subtenant/Applicant was in breach of executed offer. Taking the position that various conditions precedent had not been timely fulfilled, Subtenant/Applicant returned the standby to the Issuer, which then informed the Tenant (Beneficiary) that it was cancelled "effective immediately."

Tenant/Beneficiary requested Issuer to indicate whether it could draw and received no reply. Approximately one month later it drew the full amount available under the standby and Issuer paid. Tenant/ Beneficiary then sued Subtenant/Applicant for damages due to breach of the contract to sublease and in a separate action Subtenant sued Tenant for a declaration that the agreement to sublease is void and for the return of a deposit and the proceeds of the standby. A preliminary application was made by Subtenant for return of the deposit and standby proceeds. Application was denied on the ground that there were factual issues requiring trial. Certain funds, however, were deposited with the court which may have included proceeds of the standby drawing. After a consolidated trial on the two suits, the Ontario Superior Court of Justice, H.T. Spiegel, J., granted judgment to the Subtenant on both suits and, among other things, ordered repayment of the standby proceeds.

The court found that the Tenant/Beneficiary had failed to give a required notice of its intent to proceed with the transaction and that certain actions of the Subtenant/Applicant including providing leasing agent with a telefax copy of the standby LC did not constitute a clear and unambiguous promise on which the Tenant could rely to its detriment. The court stated that it found Subtenant's explanation for telefaxing the standby to have "the ring of truth to it and [to support] the conclusion that he felt he was not bound by the agreement to sublease at that point."

Comment:

Although not an LC case as such, the facts of this case raise interesting LC questions regarding standby and independent guarantee practice:

- Should an issuer/guarantor deliver an original standby or independent guarantee to the applicant/principal?

- Is a standby/independent guarantee effective when issued or when delivered to the beneficiary?

- What is the effect of delivering where the standby/independent guarantee does or does not require presentation of the operative instrument?

- Should the applicant/principal be advised regarding the operative effect of the standby/ independent guarantee at the time of issuance regardless of delivery to the beneficiary when the operative instrument is not required to be presented?

- When should standbys or independent guarantees be required documents?

- Should a bank cancel its undertaking on return of the operative instrument? In this respect does it make any difference whether the operative instrument was delivered to the applicant/principal or to the beneficiary or whether it was returned by the applicant/principal or the beneficiary?

- What is the significance of a letter to the beneficiary stating that an LC that has not expired is cancelled? In such a situation where the beneficiary has not consented to the cancellation, does such a letter constitute anticipatory repudiation of the standby/independent guarantee obligation?

The behavior of the issuer indicates its opinion regarding the answer to some of these questions. It was prepared to deliver the operative standby instrument to the applicant, to cancel the standby on the return of the operative instrument, and to honor a compliant drawing notwithstanding its notice of cancellation. Whether these actions were advisable is a matter for reflection.

[JEB/adk]

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