Article

Factual Summary: CNAR 03-12 (“CNAR”), a non-profit organization created as joint buying association representing its members (school boards and regional colleges), awarded to the Applicant a contract for the supply and delivery of heating oil. A performance guarantee was required in connection with the contract.

The contract provided inter alia that the delivery must be carried out in accordance with the rules of the trade and that the supplier would be liable for any damages to property incurred during delivery. In the event of the Applicant’s failure to comply with any of its contractual obligations, CNAR had the right to provide Applicant with notice of five days to rectify and execute obligations, failing which CNAR was entitled to terminate the contract and to drawn under the guarantee for any losses incurred.

At the request of the Applicant, the performance guarantee was issued, in the form of a standby LC, for an amount of CAD 132 386.74. The LC required presentation of a statement from Beneficiary certifying that a demand for payment has been presented to the Applicant and that such demand remains unpaid.

During a delivery to one of the schools covered by the contract, the employee of the Applicant proceeded to fill what he believed to be the tank despite the pipe being labelled “Do not fill – Observation Well”. Up to 7,560 litres of heating oil were pumped into the ground beneath the school, requiring subsequent demolition of the school and decontamination of the grounds.

A demand letter was presented by the school board to the Issuing Bank requesting payment under the LC and Issuing Bank informed the Beneficiary that payment could not be made as the request was not made by the Beneficiary. Shortly thereafter, a settlement was reached between the Applicant’s insurer and the school providing for the school board’s waiver of any and all further claims against the insurer and the applicant.

The following month, the Beneficiary wrote the Issuing Bank demanding full payment of the LC. Payment was made and the LC proceeds were remitted to the school board by the Beneficiary.

Legal Analysis:

Legal Analysis: Applicant argued that, as CNAR and the school board had been indemnified by the insurers, the receipt of the LC proceeds represents “unjust enrichment”. Applicant further argued that, by paying the LC without previously notifying the Applicant, the Issuing Bank committed misconduct and a breach of its duties toward the Applicant.

The Court reasoned that the Applicant’s contractual obligations were obligations of results and not of means and that the Applicant’s failure to fulfil its obligations provided CNAR with sufficient reason to drawn under the LC. Considering the nature of the Applicant’s error, it would not have been possible to provide the Applicant with the notice required under the contract (i.e. to rectify and execute obligations).

Citing the decisions rendered in both the Angelica-Whitewear and Groupe SM cases, the Court stated that the letter of credit is “an autonomous contract between the issuing bank and the beneficiary and that it is defined by its own conditions, independently and regardless of the terms of the contract between the applicant and the issuing bank or that between the beneficiary and the applicant”. The Court also stressed out that CNAR was not a party to the settlement between the Applicant’s insurer and the school board and that the insurer did not deem necessary to obtain a waiver from CNAR.

As for the Issuing Bank supposedly breaching its duty toward the Applicant, the Court dismissed this argument, reminding that an Issuing Bank is required to pay against documents which appear to comply with the terms of the letter of credit and is not obliged to provide prior notice to the Applicant or to verify the validity of the demand.

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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.