Article

Notes: In connection with a three-stage construction project, the Town of Lamont, Alberta, Canada (Town) required that Jabneel Development, Inc. (Contractor) post security assuring performance. The agreement with Town provided that in the event of default, “all monies paid by the Developer hereunder shall be forfeited to the Town.” With the assistance of a third person, Contractor obtained a standby letter of credit for CAN 406,500 in favor of Town. When Contractor failed to complete the first stage, Town declared the contract in default, drew on the standby and held the funds in an interest bearing account since Fall 2008. Contractor/Applicant applied for return of the standby proceeds. The Alberta Court of Queen’s Bench, Schlosser, J., ordered that a portion of the proceeds be returned to Contractor minus various costs and remedial expenses that were incurred.

Town argued that the proceeds were drawn pursuant to a forfeiture clause in the contract. The judge treated the clause as a liquidated damage clause and ruled that the amount “grossly disproportionate to any conceivable loss or exposure” and constituted an impermissible penalty.

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.