Type of Lawsuit: Beneficiary sued issuer for wrongful dishonor.

Parties: Plaintiff/Appellant/Beneficiary- Standard Trust Co. (Counsel: Ronald Noseworthy, Q.C.) Defendant/Appellee/Issuer- The Bank of Nova Scotia (Counsel: Stephen May) Applicant- Regatta Plaza Limited

Underlying Transaction: Construction project financing.

LC: Standby LC for CAD300,000. Silent as to governing rules.101 2001 LC CASE SUMMARIES

Decision: The Newfoundland Court of Appeal, O'Neill, JA, reversed a decision of the Supreme Court of Newfoundland in favor of issuer and entered judgment in favor of the beneficiary.

Rationale: A demand is not deficient for failure to expressly indicate the amount demanded where the amount is apparent from its terminology taken as a whole. An independent guarantee is to be assessed under principles of LC law with respect to not adding conditions not expressly stated in the guarantee and the ability of the issuer to investigate performance of the

Underlying Transaction. Where there is no contention that funds drawn did not represent a debt owed by the applicant and where the documents complied on their face with the terms of the LC, the issuer is required to honor the credit. Factual Summary: Bank issued an independent guarantee to provide required security for owner to obtain financing from Lender for a construction project. Its terms noted that it was issued "in connection with financing of Phase I, II, & III "as referred to a Letter of Offer dated May 17 th , 1990 from beneficiary" required that the beneficiary certify "THAT YOU HAVE REQUESTED PAYMENT OF THE SAID AMOUNT FROM THE applicant AND HAVE NOT RECEIVED PAYMENT." It also contained the following term: "UPON RECEIPT BY THE BANK AT THE SAID BRANCH OF THE SAID DEMAND AND THE OTHER DOCUMENT(S) REFERRED TO ABOVE ON OR BEFORE THE EXPIRY DATE, THE BANK SHALL PAY TO YOU THE AMOUNT STATED IN THE SAID DEMAND TO BE PAYABLE TO YOU BY WAY OF THE BANK'S DRAFT WITHOUT INQUIRING WHETHER YOU HAVE A RIGHT TO SUCH AMOUNT AS BETWEEN YOURSELF AND THE applicant, PROVIDED THAT SUCH AMOUNT, TOGETHER WITH OTHER AMOUNTS BE PAID TO YOU UNDER THIS GUARANTEE, IF ANY, DOES NOT EXCEED IN THE AGGREGATE THE AMOUNT OF THIS GUARANTEE." Applicant failed to make the required payment or renew the guarantee, and the beneficiary made several written and oral demands and finally made a demand to the issuer to extend or pay. When neither payment nor renewal was forthcoming and the applicant was declared insolvent, the beneficiary presented documents the day before expiry that complied on their face with the terms and conditions of the LC. The demand stated: "The undersigned beneficiary hereby makes demand upon you for payment of $300,000.00 Canadian pursuant to the above Letter of Guarantee The undersigned certify that the $300,000.00 is due and payable by the applicant and further certify that payment has been required from the applicant and that payment has not been received." The issuer, however, responded that it was "holding for the moment on paying under the demand" indicating "we were lead (sic) to believe, particularly from the beneficiary letter dated March 1, 1991 and signed by all parties, that a deal had been struck and a Demand would not be called upon the Issuer's Guarantee for $300,000. Additionally, we have reason to believe that no Demand for the $300,000 was issued to the applicant as was one of the conditions of the Letter of Guarantee being issued." Subsequently, Bank wrote to ask if it could "cancel" the guarantee and that it be "provided with a copy of the demand for payment made by the beneficiary to the applicant.". Beneficiary then sued Issuer for wrongful dishonor. Issuer defended, claiming that the "certification was false as no demand was made of the applicant." Issuer also joined and counterclaimed against Applicant, seeking reimbursement. The trial court ruled in favor of Issuer and against Beneficiary. On appeal, reversed and judgment entered in favor of Beneficiary.

Legal Analysis

1. Guarantees: Same Law as

LC: In considering the law applicable to the independent guarantee at issue, the appellate court noted that "it is common ground that the law applicable to the Letter of Guarantee here is the same as for documentary letter of credit."

2. Demand: The issuer argued in the trial court and on appeal "that the demand made by the beneficiary was deficient in that it did not set out the exact amount for which a request for payment had been made." The appellate court agreed with the finding of the trial judge which it described in the following terms: "The trial judge, noting that the beneficiary had certified that $300,000 was due and payable but had not expressly referred to that amount as having been requested, was satisfied "that the only reasonable inference from the language used in the demand letter is that the beneficiary is saying it required payment of $300,000.00."

3. Standard; Compliance: The issuer argued that the demand must be read in light of the principle of strict compliance. The appellate court quoted the trial judge with approval to the effect that "while there must be strict compliance with terms and conditions of 'a letter of guarantee, 'there must be some latitude for minor variations or discrepancies which are not sufficiently material to justify a refusal of payment,'" quoting from Bank of Nova Scotia v. Angelica-Whitewear Limited (1987), 36 D.L.R. (4th) 161, 186 (S.C.C.).

4. Compliance, "Demand"; "Request": Issuer argued that Beneficiary had failed to make a "proper request" as required by the LC. It also suggested that "the form of words used on the statements was insufficient to be viewed as a 'demand' for payment as contemplated by the letter of guarantee, in the statements could not put the applicant on notice that the beneficiary was about to make a demand under the letter of guarantee." The trial judge ruled that the statements made to Applicant by Beneficiary did not constitute the required requests for payment. Looking at the underlying mortgage, he concluded that "the parties contemplated the request for payment would be in a form sufficient to put the applicant on notice that, unless payment was forthcoming, the beneficiary would draw on the letter of guarantee", drawing by analogy on "the requirement in other commercial situations that a payment demand be made in a manner which constitutes something more than a notice of possible future demand." The appellate court disagreed, respectfully noting that the trial judge "seems to be adding to the conditions in a very straightforward Letter of Guarantee further obligations on the part of the beneficiary when making a demand."

5. Compliance: Issuer argued that the guarantee required that the request from the beneficiary to the applicant be in writing. The trial court did not make a finding on this point, but found the evidence of verbal request insufficient. The appellate court noted "If the Bank's position is that the request for payment from its customer be in writing, then one would expect that the Bank would have added the words "in writing" or a similar phrase after words "requested payment" in the Letter of Guarantee form. The Bank could also have required that a copy of the written request for payment be included with the beneficiary's demand under the Letter of Guarantee.

6. Compliance: The issuer had demanded that the beneficiary provide "a copy of the demands for payment made by the beneficiary to the applicant." It argued that it was "entitled to draw the adverse inference that the beneficiary had not made a demand and that the demand letter stating the opposite was false." The appellate court, however 2001 LC CASE SUMMARIES stated that "nothing in the Letter of Guarantee would give the right to the Bank to demand a copy of the request made by the beneficiary for payment by the applicant nor did the failure of the beneficiary to supply the Bank with a copy of any such request entitle the Bank to draw the "adverse inference" that the beneficiary had not made a request for the funds".

7. Fraud; Independence: The appellate court, noting the independence of the LC from the

Underlying Transaction, stated that "in the absence of fraud, 'clear or obvious to the bank', the trial judge was not entitled to consider the contractual arguments which had been made between the beneficiary and the applicant in his interpretation of the Law of Guarantee"

8. Fraud; LC Fraud: The appellate court noted a point that it suggested may be lost in times of economic distress, namely that "the exception is 'fraud', not something less than fraud. In the eyes of the parties seeking to prevent payment on the letter of credit, almost any conduct or position of the beneficiary which does not accord with the aggrieved party's view of the universe may appear to be fraud, and therefore justify non-payment. Such, of course, cannot be the case, given the recognized characteristics of the letter of credit. One may be sympathetic towards the plaintiff's position, and the operation of the principle of autonomy may even appear unfair at times. The question, however, is not whether the applicant has the better of the argument on the facts or at law. The question is whether there is a strong prima facie case of fraud in what the beneficiary of the letter of credit has done or is seeking to do." It continued, "fraud is a straightforward five-letter word, meaning just what it says: 'fraud.' Fraud is not simply a legitimate dispute or disagreement over the interpretation of a contract, however one-sided that dispute may appear. While the notion of fraud may elude precise definition, it is a concept well known to the law, and it must, in my view, import some aspect of impropriety, dishonesty or deceit."

9. Fraud: The appellate court indicated that the proper question to be considered was "whether there was any fraud on the part of the beneficiary." It stated that "cases where the demand on the letter of credit can be said to be clearly untrue or false, or utterly without justification, or where it is apparent there is no right to payment, all fall within the foregoing principles and must be read in the context of those "fraud" principles." The appellate court then noted that while the issuer raised the question of whether the presentation was "false", its arguments seem "directed solely at the alleged failure of the beneficiary to comply with the formalities of the demand for payment in not setting forth the amount requested." Noting that although the averment was of falsehood, "the averment was with respect to the form of the request for payment. There is no allegation by the Bank of fraud on the part of the beneficiary in makings its demand for payment by the Bank following its request for payment to the applicant." The appellate court noted that "although the trial judge referred specifically to the law with respect to fraud in commercial documents and transactions such as we have here, he made no finding of fraud on the part of the beneficiary." The appellate court also noted that at no time was there any suggestion that the amount drawn was not owed by the applicant to the beneficiary.

10. Fraud; Contract Dispute: The appellate court indicated that the trial judge ruled "seemingly in the belief that something less than fraud would be sufficient to justify the Bank's refusal." "Having stated that, in most cases, this inference, that a statement in the demand letter was false, would lead to the conclusion that the demand letter amounted to a fraud, the trial judge said: "In the unusual circumstance of this case, fraud is not the only explanation. It is possible the beneficiary's officials made an honest mistake as to the effect of earlier requests for payment contained in the periodic statements ...." Rejecting this conclusion, the appellate judge stated that "I can find nothing in the authorities to indicate that anything less than fraud on. the part of Standard would justify, in law, the Bank's refusal to honour [sic] its obligation to pay under the Letter of Guarantee upon its receiving the beneficiary's demand." Noting that the term's "false" and "falsely" were susceptible of various uses, the appellate court stated that "the test of it being clear and obvious to the bank is a right high one, implicitly I would higher than a court being satisfied of being a strong prima facie case of fraud. Clearly a financial institution should not reach its conclusion merely as an accommodation to its customer."

Comment: The decision is to be applauded. In a balanced manner, it navigates between levels of alleged falsity, demanding exacting proof before permitting an obligation under the LC to be excused.


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.