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Note: Jabneel Development Inc. (Development Company) entered into three agreements with the Town of Lamont (Beneficiary) for the development of three parcels of land. Each agreement required Development Company to post security for its obligations. One agreement was secured by a standby letter of credit for CAD 406,500 obtained by Pascal Terjanian (Applicant) from the Canadian Imperial Bank of Commerce (Issuer). The LC specified that Beneficiary could draw on the LC “at its option…[and] use any of the security funds thereby obtained in any manner that [Beneficiary] deem[ed] fit to discharge the obligations of [Development Company].” When Issuer notified Beneficiary that the LC would not be extended, Beneficiary drew on the LC for its full value.

Beneficiary subsequently informed Development Company that it was terminating the agreements between the parties and was retaining the proceeds from the LC and the rights to seek further damages for Development Company’s failure to perform on the contract. Evidence presented indicated that Beneficiary’s actual damages and costs may have exceeded the value of the LC, and that Development Company was insolvent.

Development Company sued Beneficiary for breach of contract by wrongfully obtaining and withholding the letter of credit proceeds and falsely accusing Development Company of being in breach of contract. Development Company sought the return of the LC proceeds of CAD 406,500, CAD 120,000,000 in damages, and CAD 5,000,000 in punitive damages. Development Company was granted partial summary judgment in the trial court, and Beneficiary was ordered to withhold only CAD 100,000 of the LC proceeds and return the balance to Development Company. Beneficiary appealed the grant of partial summary judgment. The Alberta Court of Queen’s Bench, Nielsen, J., reversed the trial court’s decision and ruled that Beneficiary should hold all the proceeds from the LC until the rights of the respective parties to the proceeds are determined at trial.

On the question of whether Beneficiary was entitled to draw on the LC, the appellate Judge stated that “[Beneficiary] was entitled to look to the Letter of Credit to recover [costs incurred from lien claims and other encumbrances].” The Judge noted that the rights to the excess proceeds from the LC needed to be considered in the context of the wider case. Beneficiary indicated that it was willing and ready to return excessive funds disbursed under the letter of credit once a court has determined the respective obligations of the parties. The Judge further noted that the return of the proceeds to Development Company before the determination of the rights to the proceeds would be unwise in the context of Development Company’s insolvency. The Judge also stated that the court must first determine whether Development Company or Applicant was entitled to the excess proceeds before they were disbursed.

[CTR]

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