Article

M.D. Slawinsky J.:

Introduction

1      In this commercial tenancy dispute, the Applicant, Café Can Cun Co Incorporated (”Café Can Cun”), seeks an interlocutory injunction preventing the Respondent, Halcor Development Corporation (”Halcor”) from drawing on an Irrevocable Standby Letter of Credit established by the Bank of Montreal (the “Bank”) pending final resolution of the underlying action. Halcor opposes the application and asks that the interim ex parte injunction previously granted be set aside. The Bank did not appear or file materials, and I am advised that it takes no position on the outcome of this application.

2      The sole issue before me is whether Café Can Cun has met the three part test for interlocutory injunctive relief applicable to documentary letters of credit. This requires a strong prima facie case of fraud, irreparable harm to the Applicant if the injunction is not granted, and a finding that the balance of convenience favors the granting of the injunction. For the reasons that follow, I find that the Applicant has failed to meet the test and the application must be dismissed.

Background

3      Café Can Cun was the tenant of commercial space owned by Halcor pursuant to a lease agreement dated December 10, 2014, which was amended on December 7, 2015 and again on February 26, 2017 (collectively, the “Lease”).

4      As required by the Lease, Café Can Cun provided, for the benefit of Halcor, an Irrevocable Standby Letter of Credit established by the Bank on April 29, 2015 in the original amount of $100,000 (the “Letter of Credit”). The Letter of Credit provides that Halcor can draw against it upon providing the Bank with a Certificate stating that Café Can Cun is in default under the Lease, and that the amount drawn is owed by Café Can Cun.

5      The Lease specifies that the Letter of Credit was to be provided by April 1, 2015, and that it was to be in effect for a period of five years. The Lease further states that the Letter of Credit was to be reduced by $20,000 annually on April 1 each year, provided that Café Can Cun was not in default of the terms of the lease at the time of each reduction. The Letter of Credit was to be eliminated completely on April 1, 2020.

6      Halcor consented to a reduction of the Letter of Credit from $100,000 to $80,000 on June 24, 2016. No further reductions to the Letter of Credit occurred, despite a request from Café Can Cun in April 2017 for Halcor’s consent to a subsequent reduction from $80,000 to $60,000. At the time of that request, Café Can Cun had not been notified by Halcor of any Event of Default, as defined in the Lease.

7      Various other events and challenges occurred within the context of the tenancy and the landlord/tenant relationship, both before and after the request by Café Can Cun for the second reduction. These eventually culminated in the tenant notifying the landlord on July 4, 2017 that it was terminating the Lease and vacating the premises. Halcor took the position that such termination was invalid, and thereafter Halcor gave notice of termination to the tenant on August 4, 2017 and notice of default.

8      Prior to giving that notice, Halcor attempted on July 24, 2017 to draw $80,000 against the Letter of Credit, advising the Bank that Café Can Cun was in default under the Lease and that it owed Halcor in excess of $90,000 in unpaid rent, together with further anticipated losses. Halcor takes the position that, on its interpretation of the Lease, no further reduction of the Letter of Credit was warranted. This position was communicated to the Bank in its request for the funds.

9      Before Halcor made its demand to the Bank, Café Can Cun obtained an ex parte interim injunction on July 21, 2017 which prohibited the Bank from paying any funds to Halcor. While that initial order lapsed, further similar orders have since been granted, and the injunction currently remains in place until the release of this decision.

10      Café Can Cun disputes that it was in default or that it owed Halcor any funds whatsoever. It further alleges Halcor owes Café Can Cun the sum of $120,000 for the Tenant Improvement Allowance that was payable under the Lease, together with other losses and damages. The various claims for payment and damages by each of the parties are fully set out in the pleadings and will be litigated in due course.

Discussion

11      The parties acknowledge that in the case of documentary letters of credit, the tripartite test for an interlocutory injunction described in RJR-MacDonald Inc. v. Canada (Attorney General), [1994] 1 S.C.R. 311 (S.C.C.), is modified by the requirement to establish a prima facie case of fraud at the first stage. This requirement, as discussed in some detail by Topolniski J in Fiberex Technologies Inc. v. Bank of Montreal (”Fiberex”), 2015 ABQB 496 (Alta. Q.B.), has been recognized because the autonomy principle ordinarily operates to require the issuing bank to honour a draft on a credit, regardless of any dispute between the parties in the performance of the underlying contract. An exception to this principle exists where the beneficiary of the credit has committed fraud.

12      In addition to establishing a strong prima facie case of fraud, the Applicant must also establish that it will suffer irreparable harm if the injunction is not granted, and that the balance of convenience favors granting the injunction.

1) Has Café Can Cun established a strong prima facie case of fraud by Halcor?

13      The fraud exception to the autonomy of documentary letters of credit includes both fraud in the tendered documents as well as “fraud in the underlying transaction of such a character as to make the demand for payment under the credit a fraudulent one” (Angelica-Whitewear Ltd. v. Bank of Nova Scotia, [1987] 1 S.C.R. 59 (S.C.C.) at para 17). It extends to any act of the beneficiary which effectively permits the beneficiary to obtain the benefit of the credit as a result of fraud.

14      Does the demand for payment by Halcor under the Letter of Credit constitute fraud? The authorities referred to in Fiberex variously characterize “fraud” as being something in the nature of dishonesty, impropriety or deceit, or being morally wrong, clearly untrue or false, or utterly without justification. Fraud was defined by the Alberta Court of Appeal in Motkoski Holdings Ltd. v. Yellowhead (County), 2010 ABCA 72 (Alta. C.A.), at paragraphs 57-58, as follows:

[57] The legal definition of fraud is well established: Derry v Peek (1889), 14 A.C. 337; BG Checo International Ltd. v British Columbia Hydro and Power Authority, [1993] 1 S.C.R. 12 at pp. 22, 54, 74-5; TWT Enterprises Ltd. v Westgreen Developments (1992), 3 Alta. L.R. (3d) 124, 127 A.R. 353 (C.A.). There are two branches to it. Both branches are built on a finding that a false or inaccurate statement was made. Under the first branch, fraud is established if the defendant “knew” that the statement was false, and made it with the knowledge or intention that the plaintiff would rely on it.

[58] Under the second branch, it is sufficient if the defendant did not actually know the statement was false, so long as the statement was made recklessly. “Recklessly” in this context means that the statement was made “without caring whether it was true or false”. “Recklessly” does not just mean the statement was made with “very great negligence”, nor that it was made in a highly risky context, such that the probability of someone relying on the statement to their detriment was enhanced. As Lord Herschell said in Derry v Peek at p. 375, “making a false statement through want of care falls far short of, and is a very different thing from, fraud, and the same may be said of a false representation honestly believed though on insufficient grounds”. Under neither branch of the test is it sufficient that the defendant “should have known” the truth, or should have been more careful and made further inquiries; actual knowledge or actual indifference to the truth is required.

15      The meaning of a strong prima facie case was described in Fiberex, at paragraph 14, citing Quizno’s Canada Restaurant Corp. v. 1450987 Ontario Corp., [2009] O.J. No. 1743, 176 A.C.W.S. (3d) 1016 (Ont. S.C.J.), at paragraph 42:

A strong prima facie case falls somewhere between the “serious issue” required for a restrictive injunction and actual proof of success. This has been interpreted to mean: “a strong case with a high, although not absolutely assured, likelihood of success based on the material presently before the Court.”

16      Café Can Cun advances the following arguments in support of its assertion that a strong prima facie case of fraud is established against Halcor:

(a) Halcor attempted to draw $80,000 on the Letter of Credit, when a plain reading of the Lease indicates that the Letter of Credit should have been reduced to $60,000. Since Halcor drafted the Lease, Café Can Cun submits that it is fraudulent for Halcor to assert an interpretation that is contrary to the plain and ordinary meaning of the language of the Lease.

(b) Halcor consented to a reduction in the Letter of Credit one year after it was established, which is consistent with the plain and ordinary meaning of the Lease, and inconsistent with Halcor’s interpretative position.

(c) Halcor attempted to draw on the Letter of Credit in the absence of default by Café Can Cun. Alternatively, if there was default, Halcor was required to give notice of default to the tenant and allow it an opportunity to remedy the default prior to drawing on the Letter of Credit.

(d) Halcor misled Café Can Cun regarding its failure to pay the Tenant Improvement Allowance to Café Can Cun, which the tenant argues is indicia of Halcor’s propensity to behave fraudulently.

(e) Halcor cannot draw on the Letter of Credit, even to the extent of $60,000, because Café Can Cun terminated the Lease and therefore there are no obligations of the tenant to be secured by the Letter of Credit.

17      Dealing with the first three points together, a plain reading of the Lease certainly seems to support the position of Café Can Cun that, in the absence of any existing default, Halcor was required to reduce the Letter of Credit by a further $20,000 on April 1, 2017. Halcor alleges the reduction was not warranted for two reasons. First, Halcor interprets the Lease to mean that the five year term of the Letter of Credit is tied not the dates specified in the Lease, but to the date the tenant actually commenced paying rent under the lease amendments, and that therefore only one annual reduction period had passed. Second, Halcor asserts that the tenant was in default of payment of rent in April 2017 and was thereby not entitled to a reduction.

18      While I am not particularly persuaded by the first argument put forward by Halcor, bearing in mind Halcor’s consent to a reduction in 2016 and the principles of contract interpretation set out in Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 (S.C.C.), issues of interpretation of contested terms of the Lease will need to be resolved at trial.

19      Additionally, the second argument by Halcor also raises significant issues that cannot be determined in this application. In particular, Café Can Cun alleges that it did not pay rent for a period of time because rent abatement was in effect due to certain problems with the building and its construction.

20      Café Can Cun further asserts that Halcor did not give any notice of default or opportunity to remedy an alleged default in April 2017, which is not specifically refuted by Halcor. Halcor does point out that it gave notice of default in July 2017 and that the Lease did not then require the landlord to provide time to remedy default because the tenant had already abandoned the premises.

21      Despite Halcor taking a somewhat questionable position on the interpretation of the Lease regarding the term of the Letter of Credit, there appear to be legitimate issues between the parties relating to the requirement to reduce the Letter of Credit from $80,000 to $60,000 in April, 2017. Does this establish a strong prima facie case that Halcor either knowingly or recklessly made false statements to the Bank that the tenant was in default at the time of the request, that Halcor was not required to reduce the Letter of Credit, and that the tenant owed over $90,000 in rent arrears? In my view it does not, particularly when it is not yet clear whether those statements are, in fact, false. These are issues for trial.

22      The fourth argument advanced by Café Can Cun regarding fraud does not assist in the determination of whether fraud exists with respect to Halcor’s demand to the Bank. Café Can Cun essentially argues that because Halcor has behaved fraudulently in other ways, the court should infer that it has behaved fraudulently again. First of all, the issue before me relates directly to Halcor’s representations to the Bank, not other activities between Halcor and Café Can Cun. Second, this reasoning assumes that Halcor actually behaved fraudulently with respect to the Tenant Improvement Allowance, when no such finding has been made. Café Can Cun asserts that Halcor failed to pay the allowance because of its own financial difficulties, but subsequently took the position the allowance was not payable for different reasons. Whether or not this constitutes fraud is debateable, but again, these are issues for trial.

23      I see no merit to the fifth argument put forward by Café Can Cun regarding fraud. The parties agree that the Letter of Credit was provided to secure the obligations of the tenant to the landlord under the Lease. Clearly the Lease has now been terminated, one way or the other. Just as clearly, the parties have differing views on what if any obligations are still outstanding prior to and arising from that termination. The argument of Café Can Cun that termination of the lease eliminates all obligations under the lease is inconsistent with the advancement of its own claims against the landlord, and contrary to the terms of the Lease itself.

24      As the autonomy of letters of credit is critical for commercial efficacy, the cases tend to take a restrictive view of the fraud exception. As stated by Lederman J at paragraph 56 in Royal Bank v. Gentra Canada Investments Inc. (2000), 1 B.L.R. (3d) 170 (Ont. S.C.J. [Commercial List]):

56 The exception for fraud to the autonomy of letters of credit must be narrowly construed lest it risk depriving the Letter of Credit of its autonomous nature. Thus, a demand for payment is only fraudulent if the claim to the funds is not even colourable as being valid or has absolutely no basis in fact . . .

(aff’d (2001), 15 B.L.R. (3d) 25 (Ont. C.A.), cited in Fiberex, at paragraph 24).

25      I find that Café Can Cun has failed to establish a strong prima facie case of fraud on the part of the Respondent to meet the first part of the test for an interlocutory injunction. The interim injunction must therefore be set aside and the application dismissed.

2) Does Café Can Cun meet the balance of the test for an injunction?

26      If I am wrong in my assessment on the first step, I would find that that Café Can Cun has also failed to meet the second part of the test for an interlocutory injunction, as it has provided no real evidence of irreparable harm that it would suffer should the injunction not be granted. While Café Can Cun conceded in argument that there is no direct evidence of irreparable harm, it urged me to draw an inference of such harm from the evidence that it was a new corporation, that it had expended money on fixtures and improvements for which it had not been reimbursed, that it closed the restaurant it was operating when it vacated the premises, and that it will incur significant legal fees to litigate this action.

27      However, Café Can Cun refused in questioning on its affidavits to provide any information whatsoever regarding its financial situation. Further, it chose to close its business and vacate the premises prior to Halcor making its request to the Bank on the Letter of Credit. This leaves me unable to conclude that drawing down the Letter of Credit would render Café Can Cun unable to carry on operations, even if I had evidence that it was in a dire financial situation. Café Can Cun was also unable to specify what sort of irreparable harm it would suffer, other than not having the use of the $80,000.

28      Without deciding whether inferences are an appropriate path to the determination of irreparable harm in an application for injunctive relief, in all of the circumstances I am unable to make the inference of irreparable harm suggested by Café Can Cun. All of the circumstances raised by Café Can Cun are matters that can be addressed in monetary terms and will be dealt with in the litigation between the parties. Café Can Cun has presented no evidence that Halcor’s financial position is such that it will be unable to recover the funds if it is ultimately determined that Halcor is not entitled to them.

29      Even if Café Can Cun had made it past the first two inquiries, its application must also fail on the third branch of the test. The parties acknowledged that the real harm to each of them arising from either granting or denying the injunction is the loss of use of $80,000. There is evidence that Café Can Cun is not currently carrying on business, and some evidence that Halcor has experienced financial issues of its own. However, the totality of this evidence falls well short of the information needed for the court to determine what the impact would be on each of the parties from the payment out or withholding of the Letter of Credit funds, and therefore where the balance of convenience would fall.

30      Halcor also alleges that the refusal of Café Can Cun to provide evidence of its financial circumstances renders meaningless the Undertaking in Damages given in support of the ex parte interim injunction. This is a factor which goes to the balance of convenience determination. Having found that Café Can Cun is unable to meet its burden on this part of the test in any event, it is unnecessary for me to decide that issue.

Conclusion

31      The application by Café Can Cun for an interlocutory injunction is dismissed, and the interim injunction is set aside immediately. For clarity, the Bank of Montreal is no longer restrained in any way by the court from dealing with the Letter of Credit according to its terms.

32      Ordinarily, costs of the application would go to Halcor as the successful party. However, there are significant issues yet to be determined between the parties, including whether or not Halcor is actually owed any money by Café Can Cun, and whether it was required to reduce the Letter of Credit from $80,000 to $60,000 in April 2017. The terms of the Lease that contemplate solicitor-client costs and the outcome of the allegations of fraud against Halcor may also factor into the determination of an appropriate award of costs.

33      I therefore exercise my discretion to defer the issue of costs of this application, including any steps with respect to the injunction proceedings for which costs orders have not yet been made, to the trial of the action. The justice making the ultimate determination of the issues between the parties will be in the best position to assess entitlement to and quantum of costs in this particular situation.

34      Halcor is directed to prepare the formal Order arising from this decision, and the Clerk of the Court may sign it if the parties agree on the wording.

Application dismissed.

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