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Note: In connection with a contract to construct a power plant in Poland for Polski Koncerne Naftowy Orlen Spolka Akcyjna (Developer/Beneficiary), SNC-Lavalin Group Inc. and SNC-Lavalin Polska SP Z.O.O. (Contractors/Applicants) applied for two performance guarantees, one for 5% of the value of the contract and the other for 10% of the value of the contract. To do so, Contractors/Applicants approached BNP Paribas Canada (Counter Guarantor) which issued two counter guarantees subject to URDG 758 in favor of BNP Paribas SA (Local Bank), a Polish bank. Local Bank in turn issued its local guarantees in favor of Developer/Beneficiary.

When Local Bank sent a SWIFT message to Counter Guarantor which stated that it had received a complying demand on its local guarantee from the Developer/Beneficiary, it demanded a payment of more than CAD 10,000,000from Counter Guarantor. Contractors/Applicants then sued to enjoin Counter Guarantor from paying, claiming that the demands from Developer/Beneficiary were made in bad faith and constituted an abuse of right tantamount to fraud. The Canadian Superior Court, Province of Quebec, District of Montreal, Gaudet, J.S.C. ruled in favor of the Counter Guarantor and denied the injunction.

Developer/Beneficiary claimed that the injunction should be denied because the court lacked jurisdiction and therefore, since the performance guarantees were issued by Local Bank, the case should be tried in Polish courts instead of in the Quebec courts.

The Judge decided that the court had jurisdiction. The Judge ruled that a Quebec court can issue an injunction based on Art. 3138 of the Quebec Civil Code which specifies that “a Quebec authority may order provisional or conservatory measures even if it has no jurisdiction over the merits of a dispute”. The Judge noted that an injunction is a provisional measure under the Code of Civil Procedure. In addition, the Judge found jurisdiction existed because the guarantee was issued by a Canadian bank under the jurisdiction of the laws of Canada.

Developer/Beneficiary also claimed that Contractors/Applicants failed to make a prima facie case of fraud, as required by the leading Supreme Court of Canada decision in Bank of Nova Scotia v. Angelica-Whitewear Ltd, (1987) 1 SCR 59. The Judge stated that “as a general principle, the bank who has issued such a letter of credit is bound to honor it when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit, irrespective of the disputes that may arise between the parties in relation with the underlying contract.” The exception to this rule, however, is fraud. In Angelica-Whitewear, the Supreme Court ruled that the Contractor/Applicant had to establish a strong prima facie case of fraud to obtain an interlocutory injunction. The Judge found that under Angelica-Whitewear, if a strong prima facie case of fraud is made: “1) there is prima facie right to obtain an injunction; 2) there is irreparable harm (as the credit is drawn upon what strongly appears to be a fraudulent act on the part of the beneficiary, hence the recovery of the sum from such party is certainly very problematic) and 3) the balance of inconvenience in such a situation favors the issuance of the injunction.”The Supreme Court in Angelica-Whitewear found that Contractor/Applicant must also demonstrate that the matter is urgent, and in the current case, the Judge found that, since the letters of credit required payment within five business days and the demands for payment were made on August 4, 2017, the Angelica-Whitewear standard was met.

Contractor/Applicant claimed that the payment demands made by Developer/Beneficiary were abusive in such a manner as being tantamount to fraud. The Contractors/Applicants claim that this demand was ill-founded as there was no default under the contract. The Judge noted that Contractors/Applicant took on risks when asking for the issuance of the counter guarantees. The Judge looked to section 8 of the underlying contract, which provided that Developer/Beneficiary had to specify the grounds for the claim within 5 days of its account being credited. The Judge also noted that the issue of a drawing was invalid because the counter guarantees excluded URDG 758 Article 15(a) “Requirements for Demand” which would otherwise require that an alleged breach be specifically stated.

The Judge found that a disagreement between the parties on the underlying agreement did not constitute a strong prima facie case of fraud. The Judge found that the “issue of whether there has been a failure to abide by the contract is not clear in the present circumstances”. The Judge found that both parties interpreted the contract differently: Contractors/Applicants relied on the spirit and the commercial objectives underlying the contract, while Developer/Beneficiary insisted on the letter of the relevant provisions. The Judge stated that he failed to see how the Developer/Beneficiary’s actions would amount to fraud under the Angelica-Whitewear test or Polish laws.

Comment: It is unfortunate that the Canadian court decided whether there was a prima facie case of LC fraud warranting injunction before deciding whether an applicant for a counter guarantee can enjoin a drawing on a counter guarantee by the Local Bank based on alleged fraud by the Local Beneficiary.

[ACA]

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