Article

Factual Summary: To assure performance of its obligation to provide two fibre glass furnaces, Seller obtained two “Guarantees/Letter of Credits” which the opinion also referred to as “bonds” in favor of Buyer/Beneficiary. When Buyer/Beneficiary claimed that the furnaces did not perform properly and that Seller/Applicant had not fulfilled its contractual obligations, Buyer/Beneficiary asserted that it was entitled to CAN 854,000 under the “bonds”. Seller/Applicant then obtained an ex parte interlocutory injunction against Issuer from paying. In this opinion, trial court denied the Seller/Applicant’s motion to maintain the injunction. The Judge refused to hear Seller/Applicant’s claim that the second LC should not be paid due to it having expired.

Seller/Applicant alleged that Buyer/Beneficiary did not pay CAN 854,000 after delivery. Seller/Applicant offered evidence that the Buyer/Beneficiary was insolvent and was attempting to relieve themselves of the required payment by making a fraudulent claim that the furnaces were deficient in quality. Buyer/Beneficiary did not refute the claim that it had not paid but countered the second claim by alleging that Seller/Applicant failed to prove fraud and failed to complete a performance evaluation on the furnaces.

Legal Analysis:

1. Independence Principle: The Judge ruled that independent undertakings fall within the autonomy principle, protecting beneficiaries in the event of disputes arising between the Seller/Applicant and Buyer/Beneficiary. According to the Judge, the purpose of the LC is to communicate “assurance and immediacy of payment” on which both parties can rely.

2. Injunction; Standard; Fraud: Seller/Applicant alleged that Buyer/Beneficiary failed to notify Seller/Applicant of the furnace’s deficient performance, thereby acting fraudulently. The Judge outlined a three-part test for granting interlocutory injunctive relief due to an allegation of fraud. First, Seller/Applicant must “establish a strong prima facie of fraud”. Seller/Applicant needed to demonstrate that the severity of the fraud fell within a range between what constituted a “serious issue” and “actual proof of success [that fraud existed]”. If Seller/Applicant meets this standard, the Judge will consider whether irreparable harm would befall Seller/Applicant without injunctive relief. If yes, the Judge would consider which party would be most affected by an interlocutory injunction.

The Judge found that any alleged fraud must be narrowly construed lest it undermine the independence of LCs. He warned that if fraud were broadly interpreted, misunderstandings or mistakes could impede payment on an LC, limiting its autonomy and making it dependent upon the disputing parties’ arguments.

The Judge noted that “[w]hile there may be grounds for suspicion on [Seller/ Applicant’s] part, that does not equate to unscrupulous or unconscionable conduct, let alone fraudulent conduct.”

Comments:

  1. Name of the Undertaking, Classification; “Bond”, “Standing”; “Guarantee”: The contract refers to the undertakings as “bonds” but the Judge states that they are “Guarantee/Letter of Credits” and treats them as if they were independent undertakings.
  2. Drawing: Is the availability of injunctive relief predicated on there having been a drawing? It is unclear from the opinion whether there was a drawing on the “bond”. If not, it may be asked whether an action for an injunction is appropriate. Absent a drawing, injunctive relief would be inappropriate according to some experts.

[TLA]

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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.