Article

Factual Summary: To pay two payments associated with a request to Beneficiary to rezone land for commercial construction, 1st and 2nd LCs were issued in favor of Beneficiary with the intention that they be drawn on as payments became due from Applicant to Beneficiary. Issuer required Beneficiary to present written confirmation signed by the City Treasurer that the demand was being made pursuant to obligations incurred by Applicant in connection with its development agreement with Beneficiary. A change in policy resulted in a reduced cost of the first request, so 1st LC was amended to reduce the amount available.

When the second payment became due, Beneficiary drew upon 2nd LC which was not contested in this case. Since the first payment never became due, Beneficiary never drew upon 1st LC. Applicant then filed for bankruptcy and sold the land in question to Buyer, without having Beneficiary return 1st LC to Issuer.

When Buyer sought to develop the land, it claimed entitlement to the 1st LC as security in its dealings with Beneficiary concerning the property since it had factored the availability of 1st LC into its purchase price. Issuer, however, objected and demanded its return on the ground that complying documents could not be presented. Buyer sued Beneficiary for a declaration that it was entitled to use 1st LC towards its expenses, and Issuer cross-claimed, seeking return of 1st LC.

Legal Analysis:

1. Discrepancy: According to Canadian common law, any payments made by Applicant for development costs would serve to credit similar costs incurred by Buyer in order to avoid double payment. Buyer argued that 1st LC was payment for development costs incurred by Applicant while it owned the land. Assuming 1st LC constituted actual payment, Buyer argued that the value of 1st LC should be credited towards any similar costs incurred by Buyer under the Development Charges Act.

The court stated that "the supplying of [1st LC] by [Applicant] did not constitute payment of all or any portion of a charge related to development." The costs the 1st LC was intended to pay never materialized, which is why Beneficiary never drew on 1st LC for payment. According to the underlying transaction between Applicant and Beneficiary, 1st LC was a security for payment, only to be drawn on as payments became due. Since no payments associated with 1st LC ever became due, 1st LC remained a security for payment and as such, Buyer is not entitled to the value of 1st LC as a credit towards development costs.

2. Promissory Estoppel: Buyer argued that prior to purchasing the land from Applicant, Buyer contacted Beneficiary to determine the status of any credits towards development charges. Beneficiary acknowledged 1st LC, but did not determine whether or not 1st LC would be available for any credit. Buyer argued it altered its position in reliance on the value of 1st LC as a credit towards development costs and therefore Beneficiary should be estopped from granting Buyer the full value of 1st LC.

The court stated that Beneficiary's acknowledgement "did not constitute a representation as to the availability of [1st LC]." Beneficiary did not approve of 1st LC's value being credited towards Buyer prior to Buyer's purchase of Applicant's land. No provided evidence suggested that Beneficiary intended to induce Buyer to rely on such a credit.

3. Independence: Issuer argued that it is entitled to the return of 1st LC because Beneficiary cannot provide required documentation for payment because Beneficiary can only draw on obligations incurred by Applicant, who filed for bankruptcy. Since 1st LC can never be drawn upon, Issuer argued that 1st LC should be returned.

The court stated that the efficiency of LCs rests on the autonomy of an issuer's obligation to pay from the underlying transaction. Since an issuer acts independently of the underlying transaction, "until presentation or the return of the [1st LC] by [Beneficiary], [Issuer] has no roll [sic] except to sit tight." The primary dispute in this case laid with the underlying transaction between Applicant and Beneficiary, so the Issuer had "no basis for bringing its cross-application." The court stated that to hold otherwise would "be contrary to the fundamental principle of autonomy, which governs letters of credit."

[JEB/dep]

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