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Note: When the government of Canada (Purchaser) contracted with Spiral Aviation (Contractor) to build a flight simulator, within 16 months for US$6,380,461, Contractor provided Purchaser with standby letters of credit, which were "not a performance bond although they [were] a form of security for the performance of the contract." The contract provided that if Contractor defaulted, the Issuer's obligation to pay Purchaser's demand was "irrevocable, absolute and unconditional and [Purchaser's] demand [should] be honored without inquiry as to [Purchaser's] right to make such demand".

After four years of work, the simulator was not complete, but three progress milestones had been reached, and a fourth milestone agreed upon by the parties. Three months before the fourth milestone was to be completed, Purchaser terminated the contract, claiming Contractor had breached the terms of the contract through delay, and drew US$4,344,976.80 on the letters of credit, effectively reclaiming all previously approved payments to Contractor.

Contractor sued Purchaser for damages in the amount of the full value of the contract, or alternatively, for the amount of payments reclaimed by Purchaser. On Contractor's motion for summary judgment, the Ontario Superior Court of Justice, Power, J., denied the motion.

Contractor argued that the LCs were not to be used as performance bonds, but rather as means of enabling Purchaser to reimburse itself in the event of a breach, provided that Purchaser returned the simulator. Contractor further argued that the termination was wrongful because Purchaser did not know how long it would take to complete the simulator when it terminated the contract. Purchaser simply denied any wrongdoing and relied on the terms of the contract.

The Judge admitted the contract was "harsh" and seemed to be "stacked" in favor of Purchaser, but because both parties presented valid arguments, declined to make any judgments on contractual issues, requiring a full trial.

[JEB/jsc]

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