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Note: Recognizing that there was an unsatisfied demand for shrimp in the US, particularly during the Christmas season, Douglas R. Robertson International Inc. (Wholesaler) contracted with Wal-Mart Stores, Inc. (Retailer) for the supply of massive quantities of raw and cooked shrimp to Retailer's Sam's Club division. To obtain the shrimp, Wholesaler contracted with Nareerux Import Co. (Supplier) in Thailand. Supplier required assurance of payment. Wholesaler financed the period between delivery of the shrimp by Supplier and payment by Retailer by establishing a line of credit with Canadian Imperial Bank of Commerce (Lender).

Under the line of credit, Lender issued LCs payable to Wholesaler. The LCs issued in 1993 contained a "Special Condition" which the court explained as providing that "prior to payment the documents evidencing shipment be delivered to [Wholesaler]. [Wholesaler] would then, with the assistance of a customs broker, use the documents to ensure that the shrimp cleared United States Food and Drug Administration inspection. It was only upon delivery of documentary proof from the customs agent that the goods had cleared inspection that payment was made under the Letters of Credit." Bank would draw on the line of credit to effect payment. Because Wholesaler had no assets other than inventory and accounts receivable, Lender demanded and received as collateral, a standby LC issued by Nationsbank for which Retailer applied. The standby was unclear whether a drawing could occur as a result of the failure of Retailer to pay or the failure of Wholesaler to repay the loan without regard to failure by Retailer. During the 1993 season, the drawings on the LCs exceeded the amount for which they were issued, but shipments continued after the LCs had expired. Nonetheless, the Supplier/Applicant was paid.

In addition to payment through LCs, the parties utilized documentary collections on a D/P basis.

During this period, negotiations took place to establish a more comprehensive banking relationship. A special US$15,000,000 credit line was established for LCs issued to supply retailer although the amount was increased to US$25,000,000.

Concerned with the length of time between payment under the LCs and repayment by Retailer, Lender obtained amendments and extensions to the standby in its favor so that the amount was increased to correspond with its Retailer-related credit line.

Nonetheless, Lender sought to reduce the time gap and its exposure. There were discussions regarding Lender's delay in issuing LCs which were of concern to Supplier. To address this problem, Lender issued a US$2,262,900 LC which provided "Payment of drafts or drafts drawn hereunder will be effected when accompanied by required documents and after receipt from the applicant of a signed purchase order(s) issued by [Retailer] and related delivery receipt(s) showing container number(s), number of cartons and evidencing that goods have been received by [Retailer's] Distribution Centre(s)." Under this term, Supplier could not be paid until Retailer issued a purchase order and receipt. The court noted that "The difficulty that this presented for [Supplier] was that, by entering into this arrangement, it ceded control over when it would receive payment to a third-party - [Retailer]. If [Retailer] did not require the shrimp, it would not issue the purchase orders that were a prerequisite for payment. Moreover, by delaying the delivery of the receipts, [Wholesaler] and [Lender] could control the flow of money to [Supplier]."

Supplier understood these arrangements. Its thenpresident testified "that under the arrangements found in the Letters of Credit issued during 1994, the documents specified would be delivered to [Wholesaler], that [Wholesaler] would use the documents to assist in having the shrimp inspected and cleared by the United States Food and Drug Administration and delivered to the third party warehouse utilized by Sam's Club. It would remain there until a purchase order was received from [Retailer]. Only then would [Supplier] be paid." Under this arrangement, payments were made until September 1994 despite discrepancies and continued shipments after the expiration of the LCs.

In October 1994, two LCs were issued by Lender containing the same special condition, each in the amount of US$1,287,975.

During the 1995 Christmas season, Retailer withheld in excess of US$3,000,000 due to quality complaints about the raw shrimp but no action was taken by Wholesaler with respect to Supplier and there was testimony suggesting that the problems may have resulted from shrimp from other suppliers or that too much shrimp had been ordered by Retailer. In any event, Retailer did not deliver purchase orders with the result that Supplier was unable to obtain payment for "substantial amounts of shrimp".

When Supplier inquired, there were negotiations and various solutions were proposed including picking up excess quantities in Retailer's warehouse, cooking the raw shrimp, and, with Supplier's knowledge, selling the shrimp to other buyers. Lender agreed to payment for the cooked shrimp although the LCs did not so provide. Other payments under the LCs and documentary collections were also made. Supplier continued to deliver shrimp under the LCs through December 1994 and under documentary collections through June 1995. Meanwhile, Retailer "continued to draw on the shrimp which had been delivered to the warehouse".

Delivery occurred in the amount of US$6,964,417.30. The court observed that "in the normal course, this would have resulted in the delivery by [Retailer] to [Wholesaler] of purchase orders and delivery receipts. These would have been delivered to [Lender] which would then have released the payments to Supplier. No purchase orders were forthcoming." Wholesaler, however, advised Lender that "there were no outstanding delivery receipts and there would be no further shipments to [Retailer]".

Wholesaler then wrote Supplier informing it of a draft letter to it from Lender stating that "Due to the passage of time and the fact that all of the conditions for payment will not be met, we advise that the letters of credit have expired and are no longer of any force." Wholesaler suggested that Supplier release its claims which it refused to do and it formally demanded payment. Supplier had shipped shrimp valued at US$39,833,42, had been paid US$29.452.366, leaving US$10,381,035 outstanding under the LCs.

Subsequently, Lender wrote Supplier "A requirement of payment is that we receive a signed purchase order issued by [Retailer] and related delivery receipts showing the container numbers, number of cartons and evidencing that goods have been received by [Retailer's] Distribution Centers. We have been advised by the applicant that no such documents will be forthcoming for your outstanding presentations. Over eighteen months have passed since your documents were presented, however, as mentioned, drawings are incomplete because of the lack of the signed purchase orders and delivery receipts. Due to the passage of time and the fact that all of the conditions for payment will reportedly not be met, we advise that the letters of credit have expired and are no longer of any force."

During this time, the amount owed Lender by Wholesaler under the line of credit had been reduced from a debt of US$15,000,000 to US$6 in less than a year. The court stated that "[t]he question is how this happened in a period when [Wholesaler] was advising [Lender] that no purchase orders or receipts were forthcoming from [Retailer] and no payments were apparently being made pursuant to the Letters of Credit."

The court noted that Lender would have known the payments made to Supplier and the amount of shrimp for which Retailer took delivery and have been aware of an inconsistency, although it did not make any inquiry and, as its employee testified, "recognized that it was surprising that [Supplier] continued to ship product when no payments were being made." Nor did Lender advise Supplier that no further purchase orders would be presented during this period.

The court concluded that "It is reasonable to suggest that [Supplier] was, thus, misled into believing that the receipts and purchase orders might still be forthcoming." It stated "[Lender], in conjunction with [Wholesaler], allowed for the selling of inventory, including product delivered to [Wholesaler] for sale to [Retailer] under the Letters of Credit... By proceeding in this way, [Lender] was a party to an arrangement that ensured that the beneficiary to the Letters of Credit it had issued would not be paid." The court asked "[i]f the issuing bank is free to look after its own interests, to the detriment of the beneficiary, how can the beneficiary be confident in its reliance on these instruments as a means for completing these transactions?"

In reflecting on the legal obligation of Lender, the court stated "[Lender] was both a lender with a desire to see the loans it has made satisfied and the issuer of the Letters of Credit with the obligations that that entails. As a result of the latter, [Lender] is not free to act without concern for the interests of the seller [Supplier]."

The Ontario Court of Justice, Lederer, J., ruled in favor of Supplier, awarding it US$10,381,035. It observed:

"The issue is not the failure of [Lender] to pay. The issue is whether it failed in its duty to the seller when it closed its eyes to the prospect that such receipts and purchase orders ought to exist and then accepted from the buyer in payment of its debt, money that might otherwise be owing to the seller.

When [Lender] decided to accept the money, it received the funds at its risk. It could have inquired of its debtor to ensure that the money it was receiving was not money it was or could be obliged to pay to the seller. Just because the right documents are not presented does not mean [Lender] is free to carelessly, recklessly or knowingly allow the money to be converted by the buyer to its own use to the benefit of the CIBC. The narrow nature of the duty of [Lender] to pay is not so limited as to allow for that result."

As to its obligations under the LC, the court stated

In this case, the words of the Letters of Credits were clear. There was no ambiguity. Payment was not to be made to the seller until a purchase order has been received. In the absence of receipt of the purchase orders, [Lender], as the issuer of those Letters of Credit, could accept the money from the buyer, presumably in anticipation of the purchase orders being presented. There was nothing that allowed it, as lender, to take over those funds to pay down the monies it was owed. To suggest otherwise is to create the sort of commercial absurdity ... It would encourage [Lender] to act with the buyer to sell to someone other than [Retailer], bypass the Letters of Credit under which the product was delivered (since no purchase order could ever be forthcoming), and use the money to pay down the debt rather than pay for the goods. In such circumstances, what security is the seller offered by the Letters of Credit? [Supplier] could have no confidence that it would be paid in preference to [Lender's] concern for the payment of the loans it had made. Unhappily, this is what has happened here. While under the Letters of Credit, [Lender] has no obligation or responsibility and should not involve itself in the contractual relationship between the buyer and the seller, [Lender] did exactly that in its role as lender. Rather than allow the buyer and the seller to deal with the issue of how the product delivered would be paid for (given the problems with [Retailer]), [Lender] entered into the issue and, without advising the seller, acted with the buyer so that the shrimp was sold to others and the money used to pay off the buyer's debt to [Lender]. In so doing, it breached its separate and independent responsibilities to the seller under the Letters of Credit. [Supplier] delivered shrimp. The shrimp was received by [Wholesaler]. It was sold and, yet, [Supplier] was never paid.

The court also concluded that Lender owed and breached an implied duty of good faith to Supplier which had been breached. Noting that Canadian courts have been cautious to imply such an obligation, the court observed that Lender's actions defeated the purpose of the LCs.

Supplier urged the court to rule that Lender violated UCP500 Articles 13(b), 14(d), 14(e) and was precluded from refusing the documents. The LCs provided "This cable is the operative instrument and subject to U.C.P. 1993 revision ICC Publication No. 500 and engages us in accordance with the terms thereof." Nareerux Import Co. v. Canadian Imperial Bank of Commerce. [2007] O.J. No. 3824, 43-44.

The court ruled that, "the words used do not justify the utilization of these provisions with the precision this would mandate". Id. at 44. The court placed special emphasis on the notion of incorporation. The court concluded that "The key words in this case indicate that each Letter of Credit 'engages us in accordance with' the UCP 500. In my view, these words do not serve to incorporate the terms of the UCP 500 as contractual provisions into the Letters of Credit. The Concise Oxford English Dictionary, Eleventh Edition (Revised) 2006 defines 'incorporate' as: 'take in or include as part of a whole.' In the same dictionary, the phrase 'in accordance with' is defined as meaning 'in a manner conforming with.' The words 'engages us in accordance with' suggest that the UCP 500 provides guidance to or presents a general framework to which the Letters of Credit are to conform." Id. at 46.

The court rejected Lender's argument that the shrimp was owned by Wholesaler. The judge stated "in my mind, the better view is that with respect to the 1993 Letters of Credit, the ownership of the shrimp was not to change hands until the time of payment and with respect to the 1994 Letters of Credit, at the time of delivery to [Retailer]. The documents were delivered to facilitate [Wholesaler] assisting the customs broker in having the goods clear United States Food and Drug Administration inspection. If the product failed to pass inspection, [Supplier] would be responsible for dealing with it and [Wholesaler] would not be required to pay for it. When the shrimp successfully passed through the required inspection, it would continue in the ownership of [Supplier] thereby providing the protection it would obtain by maintaining title."

[JEB/mm]

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