Note: To assure payment of a ten-year commercial lease, the tenant/applicant, Lava Systems, Inc., arranged for a standby LC for US$ 850,000 subject to UCP500 to be issued by the Bank of Motreal naming Clarica Life Insurance Company, the landlord, as beneficiary. The lease stipulated that the LC was to be held by the landlord "as security for the faithful performance by the Tenant of all terms, covenants and conditions of this Lease for which the Tenant is responsible. The Landlord may draw upon the Letter of Credit in whole or in part as may be necessary to compensate the Landlord for any loss or damage sustained due to the Tenant's breach of its obligations under the Lease." The tenant having failed to pay two months' rent, the landlord/beneficiary drew on the LC and received proceeds from the issuer. The tenant filed for bankruptcy protection and the court-appointed receiver then formed an agreement with the landlord/.87 2001 LC CASE SUMMARIES beneficiary whereby the receiver agreed to pay the applicant's rent on a per diem basis. The landlord drew on the entire remaining balance under the LC and received the proceeds from the issuer. The receiver as trustee subsequently disclaimed the lease, the landlord subsequently re-rented the premises, and the receiver as trustee subsequently disclaimed the lease and required an accounting from the landlord and return of the proceeds. The landlord refused. The Ontario Superior Court of Justice, Cameron, J., allowed the receiver's claim to recover any proceeds drawn by the beneficiary in excess of the amount allowed on the lease. The court made the following conclusions: "(a) the Letter of Credit was a pre-condition to the payment of...Inducements, the unrecovered amount of which exceeded the balance owing under the Letter of Credit; (b) a Letter of Credit is a stand-alone agreement between the Bank and the Landlord dealing only with the Bank's money, not the property of its customer, and is not dependent on the Lease or the equities between the customer and the beneficiary; and (c) the Letter of Credit was a security for all the Tenant's obligations under the Lease including the covenant to leave in good repair and to repay the Inducements, and not just Rent or indebtedness generally."


The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.