Factual Summary:

As a prerequisite for the subdivision of property owned by the applicant, a developer, in British Columbia, the British Columbia Minister of Transportation and Highways (The Ministry) required that certain roads and services be installed. The applicant contracted with The Ministry to complete the required construction. In compliance with The Ministry's requirements, an LC was issued in the amount of CAD560,750 its favor. To obtain the LC, the applicant provided the issuer with an indemnity agreement that stated, "[i]t is understood and agreed that any demand or request made upon you for payment under this credit by the beneficiary will be your sufficient authority to pay thereunder and you shall not be required to determine the validity or sufficiency of such demand or request." Upon receipt of the indemnity agreement, the issuer provided an irrevocable letter of credit in favor of the "Minister of Finance and Corporate Relations of the Province of British Columbia as represented by: The District Highways Manager of the Ministry of Transportation and Highways, District located at 213-1911 Fourth Avenue, Prince George, B.C. V2L 3H9". The LC also required that the number and date of the LC be referred to in any demand. The LC was based on a form that was provided to the applicant by the beneficiary, and then forwarded to the issuer by the applicant.

As a result of disputes regarding the project, the applicant instructed the issuer to notify the beneficiary that the LC would not be renewed. In response, the beneficiary notified the applicant that unless he agreed to renew the LC and complete the works laid out in the contract, it would draw on the LC. The applicant failed to respond, and the beneficiary notified the issuer of its intention to draw.The issuer advised the applicant of the beneficiary's intention, and the applicant acknowledged receipt of that advice in a letter stating, "[The Ministry] will now be in the position of having to do all of those things which we wanted to do but didn't have their permission to proceed. They will have to account for everything spent in great detail."

A demand was made on the issuer that referred to the number of the LC and stated, "[s]ince the required works have not been completed and the developer does not wish to extend the irrevocable letter of credit, let this letter be our demand for payment in the amount of CAD560,750." The demand was signed by the District Highways Manager for the North Caribou District. The demand did not mention the date of the LC, and beneficiary's address in the LC did not match the address of the beneficiary in the demand. Despite these deficiencies, the issuer paid on the LC. Once paid, the beneficiary completed the work for the subdivision, although the applicant disputed that the work that it had agreed to was not complete.

Applicant initiated litigation against the beneficiary for breach of contract, and against the issuer for wrongful honor. The claims against the beneficiary were settled out of court. Without regard to this settlement, the applicant continued to pursue its claim against the issuer. The Supreme Court of British Columbia dismissed the action.

Legal Analysis:

1. Compliance: Standard: The applicant claimed that the demand made on the issuer "was not in accordance with the terms of the letter of credit ... in that it: (a) was not made by the named beneficiary; and (b) did not make reference to the date of the letter of credit." It further contended that, because the demand did not comply with the LC, the issuer was obligated to refuse payment.

The court noted that, "[i]n Canada the rule of strict documentary compliance was expressly affirmed in Davis O'Brien Lumber Co. Ltd. v. Bank of Montreal, [1951] 3 D.L.R. 536, 28 M.P.R. 22." The court further stated that, "[w]hile the English and Canadian courts have not adopted a rule of substantial documentary compliance there has apparently been recognition that there must be some latitude for minor variations or discrepancies that are not sufficiently material to justify a refusal of payment."

2. Compliance: Draft Date of LC: Concluding that the omission of the date of the letter of credit from the demand was only a minor deviation from the terms of the LC, the Supreme Court stated that "[t]he demand included the number of the letter of credit and there [was] no suggestion that there [was] any confusion as to which letter of credit was referred to."

3. Compliance: Named Beneficiary; Typographical Error: The applicant contended that the demand "was not made by the named beneficiary", referring to the LC which named the beneficiary "as represented by The District Highways Manager of the Ministry of Transportation and Highways, District located at 213-1911 Fourth Avenue, Prince George ... ." The Provincial Approving Officer for the beneficiary testified that the address on the letter of credit was incorrect, and that there was no reason for the Prince George District Highways Manager to be named in the LC because he did not have any involvement with or knowledge of this LC. The demand on the LC was, instead, made on behalf of the beneficiary by a District Highways Manager from the North Caribou District, who was located at an address different from the one specified in the LC. The beneficiary testified that the address list on the LC for the District Highways Manager as, "213-1911 Fourth Avenue ... [was] an incorrect address. The address of [beneficiary] in Prince George is 213-1011 Fourth Avenue ... ." The court noted that "[t]he error in the address is probably a typographical error and is only one number off of the address of [the Provincial Approving Office for the Beneficiary]."

4. Compliance: Named Beneficiary; Surplusage:Noting that "The District Highways Manager that does have an office in Prince George has no involvement and would have no knowledge of the relationship between the [applicant] and [beneficiary]," the court concluded that, "the address is really surplusage and provides an address for communication but does not describe any particular District Highways Manager. It noted that, "the address was not a material portion of the letter of credit and it was not necessary for the letter of demand to be signed by a particular District Highways Manager."

5. Indemnity Agreement: The issuer argued that, even if the demand had been improperly made, the Indemnity Agreement which was signed by the applicant when it requested the LC acted as a "full defence to any defects in the demand for payment." Issuer referred specifically to the passage that read, "[i]t is understood and agreed that any demand or request made upon [issuer] for payment under the credit by the beneficiary will be [issuer's] sufficient authority to pay thereunder and [issuer] shall not be required to determine the validity or sufficiency of such demand or request." The court, however, agreed with the applicant, stating that the term "any demand" must refer to a demand made in compliance with the LC and presented by the beneficiary. If the court had found that the issuer was wrong in honoring beneficiary's demand, it would not have dismissed the case based on the indemnity agreement.

6. Reimbursement: Damages: The applicant claimed that it was entitled to reimbursement of the full amount debited from its account by the issuer. The issuer argued that "if [applicant] is entitled to anything it is merely the actual loss the [applicant] has suffered ... ." The issuer further contended that, "by settling its dispute with [beneficiary] the [applicant] had in effect been made whole and suffered no loss." The court, however, agreed with the applicant that, "the settlement of the action did not prove that [applicant] had suffered no loss or prevent [applicant] from proving a loss if there was one." However the court disagreed with applicant's contention that, "it was not necessary for [applicant] to prove any loss." The court also disagreed with the issuer's argument that, because the applicant "failed to prove its damages ... its claim should be dismissed, even if there was liability." The court declared that if it was wrong in its determination that the issuance was made in compliance with the LC, it would be inappropriate for the court to dismiss the case based solely on lack of evidence on damages.



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.