Article

Note: On being sued, Egg Farmers of Canada (Defendant) obtained an order requiring Highland Produce Ltd. (Plaintiff) to post CAN$ 50,000 under Rule 418 of the Canadian Federal Courts Rules as security for Plaintiff's potential liability for costs in the event that it did not prevail. Although the rule contemplated security in the form of cash or a bond, Plaintiff tendered a standby letter of credit issued by Toronto Dominion Bank (Issuer) which expired after one year but was extended unless notice was given by Issuer. Defendant opposed the tendered standby, arguing that a time-limited standby did not satisfy the order and court rejected the standby LC.

On Plaintiff's subsequent motion to approve another tendered standby and in light of Defendant motion to dismiss the entire proceedings of the Federal Court, Vancouver, British Columbia, due to the failure to post security for costs by the deadline, Prothonotary Lafrenière granted Plaintiff an extension of time in the interest of justice to post the proposed security, although the deadline for posting had passed. At the same time, the Prothonotary granted the Defendant the right to seek better security in the even circumstances so warranted.

Citing a treatise entitled The Law of Guarantee by K.P. McGuinness, the Prothonotary stated that the distinction between a bond and a letter of credit is that the former is made under a seal, but noted that the two instruments are "closely analogous". However, the Prothonotary observed that letters of credit "have a number of advantages" over surety bonds. As the Prothonotary explained, "There are several aspects to the relative simplicity of stand-by letters of credit. For instance, sureties are entitled to a broad range of defenses that arise from dealings between the creditor and principal and from dealings by the creditor with collateral securities. These defenses are not available to the issuers of letters of credit. While the defenses to which a surety is entitled may be excluded by contract, there is no need to rely upon the skillful drafting of a guarantee contract where a stand-by letter of credit can be used as a substitute for a surety bond. A further aspect of the simplicity of letters of credit is that they provide for payment of a liquidated sum, rather than for payment of a loss or damage. As a result, payment under a letter of credit is not dependent upon actual proof of damage, and thus there is no inherent element of dispute between the issuer and the creditor as to the amount owing under the letter of credit." The Prothonotary therefore concluded that if properly drafted, a letter of credit is as secure as if cash was deposited with the court.

The second LC that Plaintiff tendered was an irrevocable LC for CAN$ 50,000 that provided that it "can be cashed and the funds paid into Court in the event the Letter of Credit is not renewed and the judicial review application has not been determined on the merits". The Prothonotary concluded that, although not contemplated in the rules, an LC "from a reputable financial institution provides adequate protection" for Defendant's costs.

Comment:

The decision offers a valuable insight into the difference between an LC and a true guarantee or suretyship undertaking. It also provides an angle into the role of drafting in guarantee production whereby aspects of independence are attempted to be captured in key technical drafts, sometimes making it difficult to discern the legal character of the resulting undertaking.

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