Article

Note: To assure repayment to the National Bank of Canada (Lender) for financing the production of three bondage pornographic films, "Omega Force (also known as Bound Heat), Forgotten Kingdom (also known as Against Her Will), and Sacred Duty (also known as Final Victim)", Sports Pool Distributors Inc. (Guarantor/ Issuer), a special purpose vehicle for Blair Murdoch, an investor, issued a Guarantee in favor of Lender for US$360,000.00 that was secured by three LCs on behalf of North American Releasing Inc. and its parent, 598721 BC Ltd. (Borrower).

Guarantor/Issuer's right to reimbursement was set forth in a Guarantee Agreement with Borrower. It was expected that revenue from pre-production orders made by established distributors in certain countries, namely Japan, the Benelux Countries, the United Kingdom, the Republic of Ireland, and the Republic of South Africa, would be sufficient to cover the amount due on the LCs. In addition, Guarantor/ Issuer was entitled to a percentage of the revenues on the films. A critical concern of the Guarantor/ Issuer was assurance that the payments from the distributors would be made to Guarantor/Issuer directly.

The Guarantee Agreement provided:

7. Assignment of Contracts

...

7.2 As security for the repayment of the Guarantee, the [Borrower/Applicant] each hereby assigns to the Guarantor all their respective right, title and interest in and to the Assigned Contracts, including without limitation, the right to receive and retain for the Guarantor's own account all amounts payable pursuant to the Assigned Contracts until such time as the Guarantor has received in the aggregate Three Hundred Sixty Thousand U.S. Dollars (US$360,000).

7.3 In addition, promptly following execution of this Guarantee Agreement, the [Borrower/ Applicant] agrees to draft and issue for execution Notices of Assignment and Directions to Pay and to use best efforts after thereafter [sic] to have all of the parties to all of the Assigned Contracts execute and return same to the Guarantor.

Borrower/Applicant, however, failed to issue notices of the assignment to the distributors who made payments totaling US$240,046.70 directly to Borrower, which wrongfully appropriated the funds paid. When the films were completed, Lender drew on the three LCs and was paid. Having discovered that the pre-production funds had been spent and that Borrower was insolvent, Guarantor/Issuer sued its attorney, Kenneth Dangerfield (Solicitor), for negligence in negotiating the Guarantee Agreement. The British Columbia Supreme Court, H. Groberman, J. found Solicitor liable. On appeal, the British Columbia Court of Appeal, P.D. Lowry, J.A., K.J. Smith, J.A., and K.E. Neilson, J.A. granted the appeal.

The trial Judge had concluded that Solicitor had failed to act as a reasonably competent Solicitor in drafting the agreement so as to place on the Borrower/Applicant the burden of giving notice of the acknowledgments without alerting the client as to the need to monitor the situation or providing a workable alternative.

The appellate court concluded that Solicitor was not negligent in structuring the transaction. The appellate court stated "[t]he solicitor was required to advise the client of the inherent risks in the manner that the deal was negotiated and structured, and failed to do so. However, the failure to convey those risks did not cause the client's loss, as the client readily admitted that he never read the solicitor's emails or draft agreements in connection with the transaction and thus would not have read or heeded the advice regarding risks. Causation was not established."

Comment:

1. This letter of credit may give rise to a new letter of credit category of financial standbys, bondage credits.

[JEB/sal/mcb]

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