Exploring the SCC's ruling on the application of the fraud exception to letters of credit: Insights from Eurobank Ergasias S.A. v. Bombardier inc.

8 minute read
18 April 2024

Gowling WLG is proud to have represented the Canadian Bankers' Association as an intervener before the Supreme Court of Canada (SCC) in a hearing dealing with letters of credit and the application of the fraud exception.

On April 5, 2024, the SCC released its decision in Eurobank Ergasias S.A. v. Bombardier inc. The majority of the SCC dismissed the appeal filed by Eurobank Ergasias S.A. and further clarified the legal principles relating to letters of credit/letters of guarantee. The SCC reiterated but also adequately expanded on the principles that were established in its 1987 internationally recognized decision in Bank of Nova Scotia v. Angelica‑Whitewear Ltd.

This decision confirms that the legal principles applicable to letters of credit/guarantee also apply to letters of counter-guarantee and therefore provides greater clarity for banks and their clients. Congratulations to Mathieu Lévesque, Patrick Cajvan, Jeff Beedell, Alana Scotchmer, Gowling WLG (UK) and the whole team for this greatly positive and beneficial outcome.

Background of the case

In the case under appeal, Bombardier entered into a procurement contract with the Greek government ("HMOD"). There was also an Offsets contract by which Bombardier committed to programs inviting Greek suppliers as subcontractors for the work. This contract was secured by a letter of guarantee issued by Eurobank Ergasias (in Greece) to the benefit of HMOD. Bombardier arranged a corresponding letter of counter-guarantee issued by National Bank of Canada in favour of the appellant, Eurobank. A dispute arose under the Offsets contract and HMOD demanded payment from Eurobank under the letter of guarantee.

Bombardier sought and received interim injunctions preventing payment from Quebec courts and through an Interim Order of the ICC Arbitral Tribunal; and Eurobank 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 Eurobank with an Extrajudicial Invitation Protest, ordering it, under penalty of law and imprisonment, to make payment under the letter of guarantee. Shortly after Eurobank paid HMOD, the Final Award of the ICC Arbitral Tribunal was released, ruling that the Offsets Contract was null and void ab initio. When National Bank refused payment to Eurobank under the letter of counter-guarantee, the latter sought recovery through the courts of Quebec.

The Superior Court of Quebec confirmed its jurisdiction and rejected Eurobank'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, save and except by striking out the conclusions of the trial judgment ordering HMOD to comply with the Final Arbitral Award.

The Canadian Bankers' Association (CBA) sought leave to intervene before the SCC on behalf of the banking industry to advocate for:

  • the SCC to maintain the legal principles established in Angelica-Whitewear;
  • the SCC to set the proper limits of the fraud exception to give greater clarity and predictability for the banking industry for the efficient operation of letters of credit and the practical application of the fraud exception; and
  • the clarification of the application of the fraud exception to letters of counter-guarantee.

The SCC decision in Angelica-Whitewear, rendered 37 years ago, established that the standard of proof must be evaluated differently depending on whether the fraud exception is raised i) by a party seeking to prevent payment under a letter of credit by way of injunctive proceedings, or ii) by an issuing bank in its own evaluation of the circumstances when deciding whether to honour a letter of credit. In the first scenario, a strong prima facie case of fraud must be proven to a court to prevent payment by way of injunction. In the second, it must rather be demonstrated that the fraud is clear and obvious and sufficiently established to the knowledge of the issuing bank.

The SCC's decision

The majority of the SCC ultimately ruled that, given that the Greek bank (Eurobank), as the beneficiary of the Canadian Letter of Counter‑Guarantee, knew of, and participated in the "fraud"(under civil law) perpetrated by the Greek government ("HMOD"), that fraud could also be attributed to the Greek bank, as its own.

Through its lengthy analysis, the SCC took care to reinforce and carefully expand the following key principles established in Angelica-Whitewear:

  • Principle of autonomy: The obligation of the issuing bank to honour a valid demand for payment is independent from the performance of the underlying contract for which the credit was issued. Issuing banks do not need to investigate the circumstances of the underlying commercial transaction opposing the parties.
  • Strict compliance: The obligation of the issuing bank must be solely determined based on the strict conformity of the presentation (including conformity of the documents submitted) with the terms of the letter of credit. A "reasonably careful examination" does not require perfection.
  • Fraud exception: When there is fraud by the beneficiary of the letter of 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 does not need to honour the draft. This is the only exception to the autonomous nature of letters of credit.
  • Standard for fraud: The standard set for fraud is high. The SCC stated that 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. "Bad faith" alone is not sufficient to reach that threshold.
  • Letter of counter-guarantee: The fraud exception is no less applicable to a letter of counter-guarantee, even when its issuing bank is presented with an attestation that the main letter of credit has been honored.
  • Fraud of a third party: 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 (i.e. has no knowledge of said fraud). The SCC affirms that accepting otherwise would unduly expand the fraud exception at the expense of the reliability of letters of credit.
  • Clear and obvious knowledge: Clear knowledge of an obvious fraud prior to payment by the financial institution is required for the fraud exception to apply. A beneficiary cannot be responsible, in the commercial or civil sense, for fraud of which it had no knowledge or did not participate in. Since both knowledge and participation are required, the scope of the fraud exception is maintained narrow.

If you have any questions, please reach out to one of the authors or a member of our Commercial Litigation Group.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.