Case information

Commercial law — Banks and banking operations — Letters of credit — Bank’s obligation to pay on presentation of letter of guarantee and counter-guarantee — Fraud exception — Scope and availability of exception — Jurisdiction of Quebec courts — What are the proper limits to the fraud exception to the autonomous nature of letters of credit — Could the Quebec courts rule that the appellant’s conduct amounted to bad faith when it abided by the judgments rendered by the court of competent jurisdiction — How is risk to be apportioned between the parties to a complex commercial transaction scheme utilizing letters of credit — Bank of Nova Scotia v. Angelica-Whitewear Ltd., [1987] 1 S.C.R 59.

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Bombardier inc. entered into a procurement contract with the respondent branch of the Greek government (HMOD) for ten firefighting amphibious aircraft. There was also an Offsets contract by which Bombardier committed to offset programs inviting Greek suppliers as subcontractors for the work, for a total credited value of 110% of the main contract. Bombardier was to pay up to 10% of this amount as liquidated damages if the Offsets contract was not fulfilled, which was secured by a letter of guarantee with the appellant. Bombardier arranged a corresponding letter of counter-guarantee issued by National Bank of Canada in favour of the appellant.

A dispute arose under the Offsets contract. Bombardier filed a request for arbitration under the rules of the International Chamber of Commerce (ICC) in Paris. It later amended its request to include the issue of whether the Offsets contract was null and void for violating the principle of the free movement of goods under the laws of the European Union. Although at one point HMOD made an undertaking not to seek payment under the letter of guarantee while arbitration was pending, it later demanded payment of the US $13,868,354 from the appellant under the letter of guarantee. Bombardier sought and received interim injunctions against payment from Quebec courts and through an Interim Order of the ICC Arbitral Tribunal, and the appellant obtained an interim injunction from a Greek court. When a further injunction was denied by a Greek court, and with the imminent release of the ICC Arbitral Tribunal Award, HMOD served the appellant with an Extrajudicial Invitation Protest, ordering it, under penalty of law, to make payment under the letter of guarantee. Shortly after the appellant paid HMOD, the Final Award of the ICC Arbitral Tribunal was released, ruling that the Offsets Contract, including its terms pertaining to the liquidated damages and to a letter of guarantee, violated EU law and was null and void ab initio. When National Bank refused payment to the appellant under the letter of counter-guarantee, the appellant sought recovery through the courts of Quebec.

The Superior Court of Quebec confirmed its jurisdiction and rejected the appellant’s demand for payment under the letter of counter-guarantee on the basis of the fraud exception. It held that the letter of counter-guarantee was unenforceable and enjoined National Bank from paying pursuant to it. The court homologated the ICC Arbitral Tribunal Final Award and ordered the HMOD to comply with it. The Quebec Court of Appeal confirmed the trial court decision, except to strike out that part of the trial judgment ordering HMOD to comply with the Final Arbitral Award.