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Note: In 2004, Creview Developments Inc. (Seller/Beneficiary) sold 64 building lots to Nicholas Developments Inc. (Buyer/Applicant). As required by the Agreement of Purchase and Sale (APS), Buyer/Applicant provided a CAD 64,000 standby LC as a security deposit. The APS provided that the standby LC could be drawn on at any time for any damage to the property caused by Buyer/Applicant and that Buyer/Applicant was to keep the standby LC at its full amount until completion of the contracted work. Section 11.04 of the APS provided:

"Subject to the provisions of this Article XI, the Security Deposit or the balance thereof remaining shall be returned to [Buyer/Applicant] as follows:

(a) fifty (50%) per cent to be returned upon [Buyer/Applicant] obtaining final grading certificates for its lots from the Consulting Engineer and the local authorities; and

(b) fifty (50%) per cent when top coat asphalt on roads has been completed."

In May 2009, Buyer/Applicant received its grading certificates from the engineer. Buyer/Applicant asked Seller/Beneficiary to reduce the LC by 50% as required by section 11.04(a) of the APS. In September 2009, Seller/Beneficiary reduced the LC to CAD 32,000 and returned the other CAD 32,000 to Buyer/Applicant. In October 2010, the top coat of asphalt was applied, completing the Applicant's work, and Seller/Beneficiary was to return the remaining amount on the LC. However, Seller/Beneficiary refused to return the LC and drew it completely down, claiming that Buyer/Applicant was under an obligation to maintain an LC in the amount of CAD 32,000.

In the instant action, Seller/Beneficiary sued Buyer/Applicant for an order requiring Buyer/Applicant to provide another standby LC in the amount of CAD 64,000. Seller/Beneficiary relied on Section 11.01 of the contract:

"[Buyer/Applicant] agrees to maintain such Letter of Credit in good standing, and renew the same from time to time, as may be required by [Seller/Beneficiary], until such time as set out in Section 11.04 hereof. Notwithstanding the foregoing, [Seller/Beneficiary] shall have the right, at any time or times, to require that [Buyer/Applicant] issue or reissue such Letter of Credit to the order of [Seller/Beneficiary] or the Municipality, or to assign such Letter of Credit to the Municipality, in replacement of any letter of credit previously given by [Seller/Beneficiary] to the Municipality."

The Ontario Superior Court of Justice, Belobaba, J., dismissed the action, ruling that "it was not the intention of the parties that the security deposit should stay in place indefinitely"; therefore, Buyer/Applicant's obligation to maintain the standby LC had ended when its work was completed. The court ruled:

"In my view, the last two sentences in Section 11.01 are intended to make clear that [Seller/Beneficiary]'s right to require further L/C's is not limited to ensuring that the [CAD] 64,000 level is always maintained, but also extends to situations where the L/C has to be issued or reissued "to the order of the municipality" or assigned to the municipality "in replacement of any letter of credit previously given by [Seller/Beneficiary] to the municipality." Subject always, I would add, to the triggering events in section 11.04."

In a separate action, Buyer/Applicant sued Seller/Beneficiary to recover the proceeds of the LC, the result of which was still pending at the time of the instant decision.

[JEB/cmh]

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