Eurobank Ergasias S.A. v. Bombardier inc.

Eurobank Ergasias S.A. v. Bombardier inc.
Collection
Supreme Court Judgments
Date
2024-04-05
Neutral citation
2024 SCC 11
Case number
40350
Judges
Wagner, Richard; Karakatsanis, Andromache; Côté, Suzanne; Rowe, Malcolm; Martin, Sheilah; Kasirer, Nicholas; Jamal, Mahmud; O’Bonsawin, Michelle; Moreau, Mary
On appeal from
Quebec
Subjects
Financial institutions
Notes
Case in Brief SCC Case Information
Decision Content
SUPREME COURT OF CANADA
Citation: Eurobank Ergasias S.A. v. Bombardier inc., 2024 SCC 11
Appeal Heard: November 14, 2023 Judgment Rendered: April 5, 2024 Docket: 40350
Between:
Eurobank Ergasias S.A. and General Directorate for Defense Armaments and Investments of the Hellenic Ministry of National Defense Appellants
and
Bombardier inc. and National Bank of Canada Respondents
- and -
Canadian Bankers’ Association Intervener
Coram: Wagner C.J. and Karakatsanis, Côté, Rowe, Martin, Kasirer, Jamal, O’Bonsawin and Moreau JJ.
Reasons for Judgment: (paras. 1 to 151)
Kasirer J. (Wagner C.J. and Rowe, Martin, Jamal, O’Bonsawin and Moreau JJ. concurring)
Dissenting Reasons: (paras. 152 to 299)
Côté J. (Karakatsanis J. concurring)
Note: This document is subject to editorial revision before its reproduction in final form in the Canada Supreme Court Reports.
Eurobank Ergasias S.A. and
General Directorate for Defense Armaments and Investments
of the Hellenic Ministry of National Defense Appellants
v.
Bombardier inc. and
National Bank of Canada Respondents
and
Canadian Bankers’ Association Intervener
Indexed as: Eurobank Ergasias S.A. v. Bombardier inc.
2024 SCC 11
File No.: 40350.
2023: November 14; 2024: April 5.
Present: Wagner C.J. and Karakatsanis, Côté, Rowe, Martin, Kasirer, Jamal, O’Bonsawin and Moreau JJ.
on appeal from the court of appeal for quebec
Financial institutions — Banks — Letters of credit — Bank’s obligation to pay on demand — Fraud exception — Scope and availability of exception when fraud of third party to letter of credit is alleged — Whether fraudulent conduct of stranger to letter of credit can be attributable to letter’s beneficiary as beneficiary’s own fraud, thereby requiring issuing bank to refuse demand for payment under fraud exception.
In 1998, the Hellenic Ministry of National Defense (“HMOD”) entered into a procurement contract with a Canadian company for the purchase of firefighting amphibious aircraft. At the same time, the parties concluded an offsets contract pursuant to which the Canadian company would subcontract some of the work associated with the aircraft procurement to Greek companies. The offsets contract provided that the Canadian company would owe HMOD liquidated damages if it did not fulfil its subcontracting obligations. Payment of these liquidated damages was secured by a letter of credit issued by a Greek bank in favour of HMOD (“Greek Letter of Guarantee”). A second letter of credit was issued by a Canadian bank in favour of the Greek bank to secure payment of the amounts that the latter would be required to pay HMOD under the Greek Letter of Guarantee should HMOD state that the Canadian company failed to perform its obligations under the offsets contract (“Canadian Letter of Counter‑Guarantee”). Disputes under the offsets contract were to be resolved by an arbitral tribunal under the rules of the International Chamber of Commerce (“ICC”).
When the Canadian company determined that it would be unable to meet its subcontracting obligations under the offsets contract, an ICC Arbitral Tribunal was constituted and arbitration hearings took place. HMOD formally undertook not to demand payment under the Greek Letter of Guarantee for as long as the arbitration procedure was ongoing. However, while the issuance of the final award was still pending, HMOD repeatedly demanded payment from the Greek bank. The Canadian company sought and obtained an order from the ICC Arbitral Tribunal preventing HMOD from demanding payment under the Greek Letter of Guarantee until issuance of the final award. It also sought and obtained provisional injunctions from the Superior Court of Quebec to prevent payment under the Greek Letter of Guarantee and the Canadian Letter of Counter‑Guarantee. Despite this, HMOD made a final demand for payment, seven days before the final award was set to be released, and said that the Greek bank would be subject to civil and criminal legal measures if it refused to pay. The Greek bank paid HMOD under the Greek Letter of Guarantee, and the Greek bank then demanded payment from the Canadian bank under the Canadian Letter of Counter‑Guarantee.
The ICC Arbitral Tribunal’s final award decided that the offsets contract violated European Union law such that it was null and void ab initio and that no liquidated damages were due by the Canadian company to HMOD. In response to the final award, the Greek bank commenced proceedings before Greek courts, where it unsuccessfully sought to recover the money that it had paid to HMOD. The Greek courts decided that the conduct of HMOD under the Greek Letter of Guarantee was not fraudulent under Greek law. In parallel proceedings before Quebec courts, the Canadian company sought a permanent injunction enjoining the Canadian bank from paying the Greek bank under the Canadian Letter of Counter‑Guarantee. It argued that the fraud exception to an issuing bank’s near absolute duty to honour a demand for payment under a letter of credit applied to the Greek bank as beneficiary under the Canadian Letter of Counter‑Guarantee. Given that HMOD’s conduct was fraudulent, the Greek bank’s demand for payment under the Canadian Letter of Counter‑Guarantee was, by extension, also fraudulent. The trial judge held that the manner in which HMOD obtained payment under the Greek Letter of Guarantee was fraudulent, and that the Greek bank’s own conduct was fraudulent because its payment to HMOD was a result of fraud of which it was aware. He thus enjoined the Canadian bank from paying any amount to the Greek bank under the Canadian Letter of Counter‑Guarantee. The Greek bank appealed. The Court of Appeal dismissed its appeal, holding that it was open to the trial judge to conclude that the Canadian bank was not bound to pay the Greek bank as beneficiary under the Canadian Letter of Counter‑Guarantee, since the Greek bank had sufficient knowledge of the fraud prior to paying under the Greek Letter of Guarantee.
Held (Karakatsanis and Côté JJ. dissenting): The appeal should be dismissed.
Per Wagner C.J. and Rowe, Martin, Kasirer, Jamal, O’Bonsawin and Moreau JJ.: The fraud exception applies with respect to the Greek bank’s demand for payment under the Canadian Letter of Counter‑Guarantee. Given that the Greek bank, as the beneficiary of the Canadian Letter of Counter‑Guarantee, knew of and participated in fraud by HMOD, that fraud can be attributed to the Greek bank as its own. The requirement that there be fraud by the beneficiary is therefore met. Moreover, there is no question that the Greek bank’s fraud was brought to the attention of the Canadian bank as issuer of the Canadian Letter of Counter‑Guarantee. On that basis, the Canadian bank was rightly enjoined by the trial judge from paying out any amount under the Canadian Letter of Counter‑Guarantee to the Greek bank and the majority of the Court of Appeal made no error in confirming that conclusion.
A letter of credit is an instrument understood to be autonomous from the underlying contract to which it speaks that is issued by a financial institution at the behest of its customer. It entitles the beneficiary of the letter to payment on demand from the issuing bank, so long as that demand conforms to the requirements set out in the letter of credit. Commonly relied upon in domestic and international commercial transactions, letters of credit are widely used as a means of managing risk. They are issued in order to ensure that the beneficiary will be paid what they believe they are owed under an underlying contract. A demand for payment will typically arise when there is an allegation of failure of the customer or account party to perform some duty as agreed. The premise is pay now, and argue later if necessary. It is the issuing financial institution who takes on the risk of not being paid by their client.
There are two fundamental principles to the law governing letters of credit: autonomy and strict compliance. Autonomy means that a letter of credit is an independent obligation of the issuing or confirming bank. The obligation of the issuing bank to honour a valid demand for payment is independent of the performance of the underlying contract for which the credit was issued. The bank undertakes to pay the beneficiary provided that specified conditions are met. The bank’s customer may ultimately have a claim against the beneficiary, but that is typically not the financial institution’s concern, since the letter of credit ensures that the beneficiary is paid in the meantime. Strict compliance means that the obligation of the issuing bank must be determined based only on the strict conformity of the presentation (including conformity of the documents presented) with the terms of the letter of credit. It requires not only that the tendered documents conform to the terms and conditions of the letter of credit but that they appear on their face, upon reasonably careful examination, to be consistent with one another. The test does not require perfection. It is possible, in clearly appropriate cases, to overlook immaterial discrepancies.
Fraud is the only exception recognized in Canadian law to the issuing bank’s obligation to pay the beneficiary on demand. When there is fraud by the beneficiary of the credit which has been sufficiently brought to the knowledge of the bank before payment or demonstrated to a court called on by the customer of the bank to issue an interlocutory injunction, the issuing bank need not honour the draft. The potential scope of the fraud exception must be properly circumscribed. It should be sufficiently inclusive to capture most conduct that should not be facilitated through letters of credit, yet at the same time, if it is too inclusive, letters of credit could become much less reliable. To achieve a balance, the standard set for fraud is high. “Fraud” in this context must import some aspect of impropriety, dishonesty or deceit. A key feature of civil or commercial fraud is its effect on the demand for payment by the beneficiary. If a beneficiary demands payment while knowing that they have no right to be paid under the underlying contract, that conduct may amount to fraud. Whether it does is an issue of mixed fact and law for which deference is owed on appeal.
The fraud exception is no less applicable when a second letter of credit is issued by a financial institution that requires it to pay when presented with an attestation that a first letter of credit has been called upon. Indeed, the conduct of a beneficiary under a counter‑guarantee may serve to make the fraud of a third party its own. In such a case, the fraud exception applies directly to the demand of the beneficiary. However, the fraud of a third party to a letter of credit does not engage the fraud exception where the beneficiary to the letter is innocent of that fraud. To accept otherwise would unduly expand the fraud exception at the expense of the reliability of letters of credit.
A beneficiary ceases to be innocent when they have knowledge of the fraud of a third party and participate in that fraud. When there is both knowledge and participation, the third party’s fraud can fairly be attributed to the beneficiary as the beneficiary’s own. This is not indirect or vicarious liability but is merely an application of the fraud exception to the beneficiary of the relevant letter of credit.
In the instant case, the trial judge’s finding that HMOD engaged in fraud is entitled to deference. His determination that HMOD engaged in some measure of impropriety that could amount to fraud is amply supported by the evidence. The evidence supports a finding that HMOD engaged in a fraudulent attempt to circumvent the ICC Arbitral Tribunal’s interim order and final award by repeating its demand for payment around one week before the final award was released and, after the final award was issued and it became clear that HMOD had not right under the offsets contract to the money that it received, by not returning the money. In addition, there is no basis to interfere with the trial judge’s conclusion that the Greek bank had clear knowledge of HMOD’s fraud and that it actively participated in HMOD’s fraud by paying HMOD in improper circumstances. The Greek bank’s employees who made the decision to pay HMOD knew that HMOD was enjoined from demanding payment under the Greek Letter of Guarantee and that the issuance of the final arbitral award was imminent. The Greek bank was not merely suspicious that HMOD demanded payment contrary to the interim order; it clearly knew that this was happening. At the very least, this suggests that the Greek bank knew that the demand for payment was made in contravention of at least one order, which, in the circumstances, amounts to clear knowledge of the fraudulent conduct of HMOD. Because it knew of and participated in HMOD’s fraud, the Greek bank became the co‑author of that fraud and must, for the purposes of the fraud exception, bear responsibility for it. As the beneficiary of the Canadian Letter of Counter‑Guarantee, it is the Greek bank’s fraud that is actionable before Quebec courts.
As for the judgments of the Greek courts, they have no decisive relevance in measuring the conduct of HMOD and the Greek bank. Absent a successful application for recognition and enforcement, foreign judgments are merely evidence and the weight given to them is an issue of fact to which deference is owed on appeal. A decision to place little or no weight on an unenforceable foreign judgment can be justified if that decision does not give proper consideration to relevant Canadian judgments or raises other public order concerns. Here, the foreign courts concluded that a party can disregard an order of an arbitral tribunal to which it had agreed to be subject. In the circumstances, both the trial judge and the Court of Appeal expressly opted to give no weight to the decisions of the Greek courts. No reviewable error has been shown.
Per Karakatsanis and Côté JJ. (dissenting): The appeal should be allowed and the action instituted by the Canadian company against the Greek and Canadian banks should be dismissed. To conclude otherwise would dismiss as irrelevant the decisions of the Greek courts, which cannot be ignored. International comity is an essential guiding principle when considering or enforcing foreign judgments. In the instant case, there is no public policy rationale for not giving weight to the judgments of the Greek courts. Taking them into account, HMOD’s demand for payment under the Greek Letter of Guarantee was neither fraudulent nor tantamount to fraud; and, even if it were, the Greek bank would be innocent of that fraud. There is an inherent contradiction in the requirement that a reviewing court place itself in the position of the issuing bank at the time of payment to assess whether it had sufficient knowledge of any fraud, but at the exact same time discard the decisions of the courts of competent jurisdiction that were binding on that bank. Thus, the trial judge’s conclusion that the fraud exception applies cannot stand.
The Greek Letter of Guarantee and the Canadian Letter of Counter‑Guarantee in this case are best referred to as demand guarantees. Demand guarantees, like letters of credit, are contracts established at the request of a principal whereby the guarantor, usually a bank, irrevocably promises to pay the beneficiary on demand, irrespective of any ongoing dispute between the principal and the beneficiary. While the terms and conditions for payment of a demand guarantee reflect the underlying contract, the guarantor undertakes to pay regardless of external facts or events. In this sense, the demand guarantee is independent from the underlying contract; it is autonomous in nature. When parties to a commercial transaction agree to use demand guarantees to secure the performance of their obligations, they express their intention to be bound by a “pay now, argue later” structure. The guarantor’s obligation to pay is triggered solely on the terms and conditions specified by the principal. Once the terms and conditions are set, the only control that the bank may exercise is over the regularity of the documents tendered by the beneficiary. The fundamental rule is that the documents must appear on their face, upon reasonably careful examination, to be in accordance with the terms and conditions of the letter of credit. The bank’s role as a guarantor is thus simple. It must pay when presented with a compliant demand, and cannot investigate the circumstances of the underlying contract to determine whether the obligation secured by the demand guarantee was performed. The bank does not have the specialized skill and experience to be a referee on matters that divide the parties to the secured contract, and it should not and is not expected to enter into controversies between the parties to the underlying contract.
The guarantor’s obligation to pay when presented with a compliant demand is subject to one exception — fraud. The principal has two options to prevent payment under a demand guarantee: it can seek an interlocutory injunction from a court of competent jurisdiction to restrain the bank from honouring the demand by establishing a strong prima facie case of fraud, or it can present sufficient evidence of fraud to the guarantor before payment is made. Payment should be refused only in the rare cases where the guarantor has clear or obvious knowledge of the fraud. “Clear or obvious knowledge” is a high standard in that the fraud must be blatantly apparent. What is “clear or obvious” fraud in a legal sense is not necessarily “clear or obvious” in a commercial sense. That is why, when a court is asked to review the legality of a bank’s decision to honour its obligation to pay pursuant to a demand guarantee, it must place itself in the exact same situation that the bank was in at that time, without resorting to ex post facto reasoning. The exception must be kept narrow: the potential scope of the fraud exception must not be a means of creating serious uncertainty and a lack of confidence in the operation of demand guarantees; at the same time the application of the principle of autonomy must not serve to encourage or facilitate fraud in such transactions.
Courts can look to either the tendered documents or the underlying contract to detect fraud. However, an allegation of fraud is not an invitation for courts to allow sophisticated commercial parties to refashion their agreement to an “argue now, pay later” structure when the bar is not met. Fraud is a high bar, and the exception will not apply where the principal can only prove conduct amounting to something less than fraud. Fraud in this context involves some aspect of public order — bad faith alone is not enough — and it has to be tailored to the specific context of demand guarantees. The case must be one where the demand on the guarantee is utterly without justification or where it is apparent there is no right to payment.
Fraud committed by a third party should not prevent an innocent beneficiary from demanding payment on a demand guarantee. In the context of a letter of guarantee backed by a counter‑guarantee, fraud committed by the beneficiary of the guarantee will always be third‑party fraud for the purposes of the counter‑guarantee. Where the guarantor has clear or obvious knowledge of the beneficiary’s fraud under the letter of guarantee but decides to pay nonetheless, that fraud can be attributed to the guarantor. What triggers the demand for payment under a counter‑guarantee is payment under the guarantee. To determine whether a beneficiary’s demand for payment under a counter‑guarantee was fraudulent, a court must look past the clear line of separation between the guarantee and the counter‑guarantee. This inquiry must not be transformed, however, into a dispute over the underlying contract.
In the instant case, the trial judge and the majority of the Court of Appeal erred by not giving any weight to the judgments of the Greek courts. Had these judgments been considered as facts informing the conduct of HMOD and of the Greek bank for the purposes of assessing whether the fraud exception applies to the Canadian Letter of Counter‑Guarantee, the only possible conclusion would have been that HMOD’s demand under the Greek Letter of Guarantee and the Greek bank’s decision to pay were valid. It is irrelevant that the Greek judgments were not formally recognized and therefore not enforceable in Quebec, since the Greek Letter of Guarantee was governed by Greek law and the parties to this letter were not domiciled in Quebec. There would have been no reason to seek the recognition and enforcement of the Greek judgments because there was simply nothing in these decisions to be enforced in Quebec.
Furthermore, while the Greek judgments are not binding on the Quebec courts, the principle of comity must guide any determination regarding the weight to be given to them. When foreign judgments are received in evidence without being formally recognized in Quebec, they are still prima facie proof of the reported facts, of the proper application of the foreign law and of the foreign court’s jurisdiction over the matter, under art. 2822 C.C.Q. They cannot simply be ignored by Quebec courts, who must recognize the factual effect of those decisions. A foreign decision introduced as evidence is a factual constraint on the Quebec courts and should be treated as such. Although a trial judge is free to determine the appropriate weight to be given to a foreign decision in light of all the evidence, they cannot second-guess the reported facts or the proper application of the foreign law by the foreign court. This is precisely what the trial judge failed to do. Further, the public order exception in arts. 3081 and 3155(5) C.C.Q. cannot serve as a basis for disregarding the factual effect of the Greek judgments. Giving a factual effect to a foreign decision is very different from a Quebec court applying foreign law, recognizing that decision, or incorporating its solution into Quebec’s legal order.
In light of all of the evidence, which includes the Greek judgments, the trial judge’s ultimate conclusion that the requirements for the fraud exception were met cannot stand. The trial judge failed to interpret as a whole HMOD’s undertaking not to demand payment under the Greek Letter of Guarantee as long as the arbitration procedure was ongoing and until the final award was rendered. HMOD could validly withdraw its undertaking, and it was no longer in effect when HMOD demanded payment. Drawing on the Greek Letter of Guarantee in this context thus cannot be a basis for a finding of fraud. It was also an error for the trial judge to conclude that HMOD’s conduct was fraudulent on the basis of either the ICC Arbitral Tribunal’s interim order or one of the Superior Court’s provisional injunctions, which were not enforceable in Greece. As to the timing of HMOD’s demand for payment, although it may be tempting to look at HMOD’s conduct after the fact, doing so would constitute impermissible reasoning. On the face of the Greek Letter of Guarantee, HMOD could validly demand payment when it did.
Finally, even if HMOD’s conduct was fraudulent or tantamount to fraud for the purposes of the Canadian Letter of Counter‑Guarantee, in light of all the evidence, the Greek bank (the beneficiary) must be considered innocent of HMOD’s (the third party) alleged fraud for the purposes of that letter. In assessing whether the Greek bank had clear or obvious knowledge of the alleged fraud, the Court must place itself in the exact same situation that the Greek bank was in by standing in its shoes, and therefore confine itself to the facts as the Greek bank knew them on the date when payment to HMOD was made. The Greek bank was faced with a judgment from a court of competent jurisdiction — the only court of competent jurisdiction for the purposes of the Greek Letter of Guarantee — which found that HMOD could validly draw on the Greek Letter of Guarantee. This decision, as a factual constraint, is a determinative element in the analysis of the Greek bank’s clear or obvious knowledge. In reality, only one decision was enforceable against the Greek bank at the time, and this decision did not enjoin it from paying HMOD. Given the autonomous nature of the guarantee and lack of an operative injunction, the Greek bank had no choice but to pay. The conduct of the Greek bank was that of an innocent beneficiary under the Canadian Letter of Counter‑Guarantee. It did not participate in any fraud, nor did it have clear or obvious knowledge of alleged fraud at the time of payment. The requirements for the fraud exception were not met, and in consequence, the autonomy of the Canadian Letter of Counter‑Guarantee had to prevail.
Cases Cited
By Kasirer J.
Applied: Bank of Nova Scotia v. Angelica‑Whitewear Ltd., [1987] 1 S.C.R. 59; referred to: Palmer v. The Queen, [1980] 1 S.C.R. 759; Barendregt v. Grebliunas, 2022 SCC 22; Groupe SM (International) Construction inc. v. Banque Nationale du Canada, 2013 QCCA 1118; Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813 (1992); Sztejn v. J. Henry Schroder Banking Corp., 31 N.Y.S.2d 631 (1941); Bolivinter Oil S.A. v. Chase Manhattan Bank, [1984] 1 Lloyd’s Rep. 251; OMERS Realty Corp. v. 7636156 Canada Inc. (Trustee in Bankruptcy of), 2020 ONCA 681, 153 O.R. (3d) 271; Universal Stainless Steel & Alloys Inc. v. JP Morgan Chase Bank, 2009 ONCA 801, 256 O.A.C. 109; Beam Technology (Mfg) Pte Ltd v. Standard Chartered Bank, [2002] SGCA 53, [2003] 1 S.L.R. 597; Xing Fa (Hong Kong) Imp. & Exp. Ltd. v. Sungsan International Co., [2018] HKCFI 2743; Westpac New Zealand Ltd. v. MAP and Associates Ltd., [2011] NZSC 89, [2011] 3 N.Z.L.R. 751; Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235; United City Merchants (Investments) Ltd. v. Royal Bank of Canada, [1983] 1 A.C. 168; Kuwait Airways Corp. v. Iraq, 2010 SCC 40, [2010] 2 S.C.R. 571; Barer v. Knight Brothers LLC, 2019 SCC 13, [2019] 1 S.C.R. 573; R.S. v. P.R., 2019 SCC 49, [2019] 3 S.C.R. 643; Beals v. Saldanha, 2003 SCC 72, [2003] 3 S.C.R. 416; Canadian Forest Navigation Co. v. R., 2017 FCA 39, [2017] 4 C.T.C. 63; Digiulian v. Succession de Digiulian, 2022 QCCA 531; Spar Aerospace Ltd. v. American Mobile Satellite Corp., 2002 SCC 78, [2002] 4 S.C.R. 205; Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612; Cineplex Odeon Corp. v. 100 Bloor West General Partner Inc., [1993] O.J. No. 112 (Lexis), 1993 CarswellOnt 2358 (WL); Fiberex Technologies Inc. v. Bank of Montreal, 2015 ABQB 496, [2016] 4 W.W.R. 547; Standard Trust Co. (Liquidation) v. Bank of Nova Scotia, 2001 NFCA 27, 201 Nfld. & P.E.I.R. 8; DBS Bank (Hong Kong) Ltd. v. New Harvest International Development Ltd., [2017] HKCFI 30; SNC‑Lavalin Polska SP. ZOO v. BNP Paris Canada, 2017 QCCS 3694; Bombardier Inc. v. Hermes Aero, 2004 CanLII 7014; SNC‑Lavalin Constructeurs international inc. v. Shariket Kahraba Skikda.spa, 2010 QCCS 3236; Banque Nationale du Canada v. CGU Cie d’assurance du Canada, 2004 CanLII 49434; Royal Bank v. Gentra Canada Investments Inc. (2001), 15 B.L.R. (3d) 25, aff’g (2000), 1 B.L.R. (3d) 170; Alessandra Yarns, l.l.c. v. Tongxiang Baoding Textile Co., 2015 QCCS 346; Nevsun Resources Ltd. v. Araya, 2020 SCC 5, [2020] 1 S.C.R. 166; Royal Bank v. Darlington, 1995 CarswellOnt 2661 (WL), [1995] O.J. No. 1044 (Lexis); Global Steel Ltd. v. Bank of Montreal, 1999 ABCA 311, 244 A.R. 341; Crédit Lyonnais Canada v. First Mercantile Investment Corp., 1996 CarswellOnt 4711 (WL), [1996] O.J. No. 4309 (Lexis); 6362222 Canada inc. v. Prelco inc., 2021 SCC 39.
By Côté J. (dissenting)
Bank of Nova Scotia v. Angelica‑Whitewear Ltd., [1987] 1 S.C.R. 59; Palmer v. The Queen, [1980] 1 S.C.R. 759; Sztejn v. J. Henry Schroder Banking Corp., 31 N.Y.S.2d 631 (1941); Standard Trust Co. (Liquidation) v. Bank of Nova Scotia, 2001 NFCA 27, 201 Nfld. & P.E.I.R. 8; Northern American Trust Co. v. Hospitality Equity Corp., [1995] A.J. No. 1306 (Lexis), 1995 CarswellAlta 1171 (WL); Johannesen (Re), 2002 ABQB 756, 218 D.L.R. (4th) 148; Cineplex Odeon Corp. v. 100 Bloor West General Partner Inc., [1993] O.J. No. 112 (Lexis), 1993 CarswellOnt 2358 (WL); OMERS Realty Corp. v. 7636156 Canada Inc. (Trustee in Bankruptcy of), 2020 ONCA 681, 153 O.R. (3d) 271; Banco Nacional de Cuba v. Bank of Nova Scotia (1988), 4 O.R. (3d) 100; Bank of Montreal v. Mitchell (1997), 143 D.L.R. (4th) 697, aff’d (1997), 151 D.L.R. (4th) 574; Pacific Atlantic Pipeline Construction Ltd v. Coastal Gaslink Pipeline Ltd, 2024 ABCA 74; Veolia Water Technologies, Inc. v. K+S Potash Canada General Partnership, 2019 SKCA 25, 440 D.L.R. (4th) 129; Ouais Group Engineering & Contracting Ltd. v. Saipem SPA, [2013] EWHC 990; Turkiye Is Bankasi AS v. Bank of China, [1996] 2 Lloyd’s Rep. 611; Bombardier Inc. v. Hermes Aero, 2004 CanLII 7014; Banque Nationale du Canada v. CGU Cie d’assurance du Canada, 2004 CanLII 49434; SNC‑Lavalin Constructeurs international inc. v. Shariket Kahraba Skikda.spa, 2010 QCCS 3236; SNC‑Lavalin Polska SP. ZOO v. BNP Paris Canada, 2017 QCCS 3694; Spar Aerospace Ltd. v. American Mobile Satellite Corp., 2002 SCC 78, [2002] 4 S.C.R. 205; Canadian Forest Navigation Co. v. R., 2017 FCA 39, [2017] 4 C.T.C. 63; Digiulian v. Succession de Digiulian, 2022 QCCA 531; Bauron v. Davis (1897), 6 B.R. 547; Pro Swing Inc. v. Elta Golf Inc., 2006 SCC 52, [2006] 2 S.C.R. 612; Beals v. Saldanha, 2003 SCC 72, [2003] 3 S.C.R. 416; R.S. v. P.R., 2019 SCC 49, [2019] 3 S.C.R. 643; Barer v. Knight Brothers LLC, 2019 SCC 13, [2019] 1 S.C.R. 573; Morguard Investments Ltd. v. De Savoye, [1990] 3 S.C.R. 1077; Pacific Atlantic Pipeline Construction Ltd v. Coastal Gaslink Pipeline Ltd, 2023 ABKB 736; Sirius International Insurance Co. (Publ.) v. FAI General Insurance Ltd., [2003] EWCA Civ 470, [2003] 1 W.L.R. 2214, rev’d [2004] UKHL 54, [2004] 1 W.L.R. 3251; Simic v. New South Wales Land and Housing Corporation, [2016] HCA 47, 260 C.L.R. 85; Royal Bank of Canada v. Darlington, [1995] O.J. No. 1044 (Lexis), 1995 CarswellOnt 2661 (WL); Unicredito Italiano S.P.A., Hong Kong Branch v. Alan Chung Wah Tang, [2002] HKCFI 339; Desputeaux v. Éditions Chouette (1987) inc., 2003 SCC 17, [2003] 1 S.C.R. 178.
Statutes and Regulations Cited
Civil Code of Québec, arts. 1371, 1411, 1422, 1427, 2822, Book Ten, 3081, 3138, Title Four, 3155 et seq.
Code of Civil Procedure, CQLR, c. C‑25, art. 940.4.
Code of Civil Procedure, CQLR, c. C‑25.01, art. 623.
Treaties and Other International Instruments
Treaty on the Functioning of the European Union, [2012] O.J. C. 326/47, art. 34.
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APPEAL from a judgment of the Quebec Court of Appeal (Mainville, Hamilton and Baudouin JJ.A.), 2022 QCCA 802, [2022] AZ‑51858542, [2022] Q.J. No. 5189 (Lexis), 2022 CarswellQue 8102 (WL), setting aside in part a decision of Wery J., 2018 QCCS 2127, [2018] AZ‑51505317, [2018] Q.J. No. 5489 (Lexis), 2018 CarswellQue 5279 (WL). Appeal dismissed, Karakatsanis and Côté JJ. dissenting.
Karim Renno, Michael Vathilakis, Geneviève Dickey and Justine Covey, for the appellant Eurobank Ergasias S.A.
Basile Angelopoulos and Ovidiu Rosu, for the appellant the General Directorate for Defense Armaments and Investments of the Hellenic Ministry of National Defense.
Sophie Melchers, Michel G. Sylvestre, Jérémy Boulanger‑Bonnelly and Charles P. Blanchard, for the respondent Bombardier inc.
Eric Bédard, Marie‑Hélène Beaudoin and Arielle Reeves‑Breton, for the respondent the National Bank of Canada.
Mathieu Lévesque, for the intervener.
The judgment of Wagner C.J. and Rowe, Martin, Kasirer, Jamal, O’Bonsawin and Moreau JJ. was delivered by
Kasirer J. —
I. Overview
[1] This appeal invites the Court to determine when, by reason of the fraud exception recognized in Canadian law, an issuing bank must refuse to honour a demand for payment under a letter of credit. The debate in this case has fixed on allegations of fraud brought against a third party to the disputed letter of credit. When will the fraudulent conduct of a stranger to a letter of credit be attributable to that letter’s beneficiary, as the beneficiary’s own fraud, thereby requiring the issuing bank to refuse a demand for payment under the fraud exception?
[2] At the heart of this dispute is a Letter of Counter-Guarantee governed by Quebec law. This letter of credit was issued by the National Bank of Canada at the behest of its customer, Bombardier inc., in favour of a Greek bank, Eurobank Ergasias S.A. By arranging the issuance of this letter of credit, Bombardier sought to facilitate a complex transaction for the supply of aircraft to the Hellenic Ministry of Defense, or “HMOD”. Eurobank issued a distinct Letter of Guarantee in favour of HMOD, again at Bombardier’s request, that is subject to Greek law. The plan for the interlocking letters of credit was straightforward: should HMOD call on Eurobank to honour the Greek Letter of Guarantee, Eurobank would be entitled to call on the National Bank to reimburse it under the Quebec Letter of Counter-Guarantee.
[3] When HMOD demanded payment under the Greek letter of credit, Bombardier sought an injunction before the Quebec Superior Court to stop the National Bank from honouring a subsequent demand for payment by Eurobank as beneficiary under the Quebec Letter of Counter-Guarantee. Bombardier has alleged that HMOD — a third party to the Quebec letter — committed fraud under that instrument and that, by reason of Eurobank’s knowledge and participation in that fraud, the National Bank should be prevented from honouring Eurobank’s demand for payment based on the fraud exception. If the credit is honoured by the National Bank, Bombardier would of course be liable to its bank for that amount. That is unfair, says Bombardier, because an arbitration tribunal to which the parties had submitted their differences decided that Bombardier did not owe the relevant funds to HMOD.
[4] The narrow question on appeal to this Court is whether fraud committed by HMOD under the Greek letter of credit can be attributed to Eurobank as its own as beneficiary of the Quebec letter of credit. In that event, says Bombardier, the fraud exception to the autonomous character of letters of credit should apply to Eurobank. This would mean that the National Bank must refuse the beneficiary’s demand for payment under the Quebec letter as fraudulent. In an alternative argument, Bombardier takes the view that because the underlying contract is null, so too are the letters of credit connected to it, notwithstanding the principle of autonomy that governs such letters.
[5] In Bank of Nova Scotia v. Angelica-Whitewear Ltd., [1987] 1 S.C.R. 59, the Court recognized the fraud exception to an issuing bank’s near absolute duty to honour a demand for payment under a letter of credit. Writing for the Court, Le Dain J. carefully sought to balance two competing policy ob