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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1999 LC CASE SUMMARIES No. 95-QC-60205, 1999 Ont. Sup. C.J. LEXIS 1049 (Ont. Sup. C.J. 1999) [Canada]
Topics:
Obligation; Proceeds; Third Party
Type of Lawsuit:
Subcontractor sued contractor/applicant, issuer, and beneficiaries for construction work, seeking payment from LCs issued to assure performance of work subcontracted.
Parties:
Plaintiff/Subcontractor- Elmford Construction Co. Ltd. (Counsel: Gregory D. Hersen)
Defendant/Applicant/Developer/Owner- South Winston Properties Inc.
Issuer- Bank of Nova Scotia (Counsel: Richard A. Conway and David W. Foulds)
Defendants/Beneficiaries- Town of Oakville and Regional Municipality of Halton (Counsel: David Wingfield and Kate Stephenson)
Underlying Transaction:
Commercial real estate development project.
LC:
Standby LCs subject to UCP500.
Decision:
The Ontario Superior Court, Dunnet, J., granted summary judgment in favor of the issuer.
Rationale:
The obligation of an issuer runs only to the named beneficiary.
Article
Factual Summary: To assure completion of public improvements to a real estate development, the developer obtained issuance of standby LCs by the bank that had provided financing to the project that was payable to governmental entities. A drawing was made by one of the beneficiaries for uncompleted work but a balance remained on one of the LCs. The developer had contracted with subcontractor to complete the required work. When it failed to pay for the work, the subcontractor sued the contractor, the issuer, and beneficiaries, seeking application of the funds due on the LC to the debt.
Legal Analysis:
1. Issuer's Obligation: Noting that the subcontractor was not the named beneficiary of the LCs, the court ruled that it had no right to draw on them.
2. Proceeds: Third Party Rights: The subcontractor argued that the beneficiaries had a right to application of the funds paid under the LCs on a theory of trust or unjust enrichment. The court rejected this claim, noting that "the obligations relating to the use of the funds drawn from the letters of credit arise from the terms of the letters themselves. There is nothing in the terms of the letters of credit which obliges [the beneficiary] to use any proceeds so drawn to pay [the applicant's] liabilities to third parties such as [the subcontractor]."
© 2000 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
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.