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Financial Institutions - Letters of Credit. Eurobank Ergasias S.A. v. Bombardier inc. [fraud exception]
In Eurobank Ergasias S.A. v. Bombardier inc. (SCC, 2024) the Supreme Court of Canada considers the Canadian law of letters of credit, here the "fraud exception" whereby "an issuing bank must refuse to honour a demand for payment" if adequate fraud is found:(2) The Fraud Exception to the Autonomy of Letters of Credit
[80] As noted, the issuing financial institution’s obligation to pay the beneficiary on demand is nearly absolute. There is only one recognized exception: when there is “fraud by the beneficiary of the credit which has been sufficiently brought to the knowledge of the bank before payment of the draft or demonstrated to a court called on by the customer of the bank to issue an interlocutory injunction to restrain the bank from honouring the draft” (Angelica-Whitewear, at p. 71).
[81] Le Dain J. took care to note that “[t]he potential scope of the fraud exception must not be a means of creating serious uncertainty and lack of confidence in the operation of letter of credit transactions; at the same time the application of the principle of autonomy must not serve to encourage or facilitate fraud in such transactions” (p. 72). To achieve this balance, the standard set in Angelica-Whitewear for fraud is high in order to attain, as the intervener helpfully stated, a “proper apportionment of risk between [the] issuers of letters of guarantee . . . and the participating business parties to the underlying transaction” (I.F., at para. 31).
[82] 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 the first letter of credit has been called upon. As Professors L’Heureux and Lacoursière observe, the bank issuing the counter-guarantee must make the payment to the beneficiary when it attests that it has received a demand for payment under the first letter of credit. They explain that the obligation of the issuer of a counter-guarantee should however be subject to the exception of fraud by the beneficiary: [translation] “Only obvious fraud or clear abuse constitutes an obstacle to payment of the guarantee by the bank that must make the decision to pay or not to pay” (p. 433).
[83] The intervener says that in instances of a counter-guarantee, a third party will sometimes engage in fraudulent conduct. The fraud by a third party in a counter-guarantee does not preclude the application of the fraud exception to the counter-guarantee itself “where the beneficiary of a letter of counter-guarantee would be a perpetrator of a clear and obvious fraud” (I.F., at para. 26, fn. 32). I agree that 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.
[84] While Angelica-Whitewear spoke first to Quebec law, Le Dain J. emphasized that the fraud exception to the autonomy of letters of credit is identical in both the Canadian common and civil law systems. It rests on a shared idea that is “expressed in the civil law by the maxim fraus omnia corrumpit and in the common law by the maxim ex turpi causa non oritur actio” (p. 82). Le Dain J. observed that this shared foundation for the fraud exception underscores “the desirability of as much uniformity as possible in the law with respect to these vital instruments of international commerce” (p. 83). Indeed, courts across Canada have applied the test developed in Angelica-Whitewear (Deschamps, at p. 256; see also OMERS Realty, at para. 43), and common law courts outside of Canada have turned to Angelica-Whitewear as a helpful resource (see, e.g., Alaska Textile (United States); Xing Fa (Hong Kong) Imp. & Exp. Ltd. v. Sungsan International Co., [2018] HKCFI 2743 (Hong Kong); Westpac New Zealand Ltd. v. MAP and Associates Ltd., [2011] NZSC 89, [2011] 3 N.Z.L.R. 751 (New Zealand)).
[85] I share Le Dain J.’s sense of the importance of a right balance between the need to protect the autonomy of letters of credit with the need to discourage fraud. The exception should be sufficiently inclusive to capture most fraudulent conduct that should not be facilitated through letters of credit. At the same time, if the fraud exception is too inclusive, letters of credit could become much less reliable. Balancing these two concerns requires this Court to set a high bar for fraud, which should be obvious before an issuing bank refuses to honour payment under a letter of credit.
[86] Le Dain J. was right to say that, generally speaking, the fraud of a third party to a letter of credit does not engage the fraud exception where the beneficiary of the letter is innocent of that fraud. To accept that the fraud of a third party requires the issuer to refuse to honour a demand for payment in all circumstances would expand the fraud exception at the expense of the reliability of letters of credit. But Le Dain J. was equally careful to leave open the possibility that the beneficiary might not be “innocent” of the third party’s misconduct. At a minimum, the beneficiary will likely be innocent of the third party’s fraud if it demands payment in circumstances in which it is unaware of the fraud (see L. Sarna, Letters of Credit: The Law and Current Practice (3rd ed. (loose-leaf)), at pp. 5-56 and 5-57). But where the beneficiary has knowledge of fraud and proceeds to call for payment when it knows that the conditions of payment are not met, the beneficiary has, in a manner of speaking, made the fraud their own. This can occur in situations, like the present appeal, where the third party is itself a party to a letter of guarantee which interlocks with a letter of counter-guarantee. As the intervener wrote, “in cases where it is established to the knowledge of the issuer of the letter of counter-guarantee that its beneficiary had clear and obvious knowledge of the fraud (perpetrated by the beneficiary of the primary letter of guarantee), that said issuer could refuse payment thereunder” (I.F., at para. 26).
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[94] Although a letter of credit is autonomous from other contracts involved in a transaction, Angelica-Whitewear makes it plain that the fraud exception can apply if there is fraud in the transaction, even if the fraud affects the letter of credit only indirectly (pp. 72 and 84). This can include fraud by a third party. A third party may, for example, be a person other than the issuer or the beneficiary who forged documents that were given to the beneficiary (see generally United City Merchants (Investments) Ltd. v. Royal Bank of Canada, [1983] 1 A.C. 168 (H.L.)).
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(1) HMOD Engaged in Fraud as a Third Party to the Letter of Counter-Guarantee
[112] In this case, HMOD is alleged to have engaged in fraud in the transaction rather than fraud in the tendered documents. Le Dain J. emphasized that “fraud in the underlying transaction of such a character as to make the demand for payment under the credit a fraudulent one” may include “any act of the beneficiary of a credit the effect of which would be to permit the beneficiary to obtain the benefit of the credit as a result of fraud” (Angelica-Whitewear, at p. 83; see also L’Heureux and Lacoursière, at pp. 409-10; M. Lemieux, “Les décisions Bombardier Inc. c. Hermes Aero LLC et l’autonomie des crédits standby” (2003), 63 R. du B. 427, at p. 428).
[113] In the years since Angelica-Whitewear, Canadian courts have emphasized that, in the context of letters of credit, “[f]raud is not simply a legitimate dispute or disagreement over the interpretation of a contract, however one-sided that dispute may appear” (Cineplex Odeon Corp. v. 100 Bloor West General Partner Inc., [1993] O.J. No. 112 (Lexis), 1993 CarswellOnt 2358 (WL) (C.J. (Gen. Div.)), at para. 31 (WL); see also Fiberex Technologies Inc. v. Bank of Montreal, 2015 ABQB 496, [2016] 4 W.W.R. 547, at para. 23; Standard Trust Co. (Liquidation) v. Bank of Nova Scotia, 2001 NFCA 27, 201 Nfld. & P.E.I.R. 8, at para. 59). As a Hong Kong court similarly noted, it is well established that “[d]ue to autonomy of the credit, operation of the fraud exception is strictly policed so [that] it . . . is not extended to disputes on the underlying contract” (DBS Bank (Hong Kong) Ltd. v. New Harvest International Development Ltd., [2017] HKCFI 30, at para. 62 (HKLII)). Quebec courts have also recognized that a dispute concerning the underlying contract is not necessarily indicative of fraud (SNC-Lavalin Polska SP. ZOO v. BNP Paris Canada, 2017 QCCS 3694, at para. 40 (CanLII); Bombardier Inc. v. Hermes Aero, 2004 CanLII 7014 (Sup. Ct.), at para. 35; SNC-Lavalin Constructeurs international inc. v. Shariket Kahraba Skikda.spa, 2010 QCCS 3236, at para. 27 (CanLII); Banque Nationale du Canada v. CGU Cie d’assurance du Canada, 2004 CanLII 49434 (Sup. Ct.), at para. 49).
[114] “Fraud” in this context does not refer to fraud in the criminal sense and carries with it a different connotation. Generally, civil or commercial fraud is broader than its criminal counterpart (McGuinness, at §17.342). A key feature of fraud in this context is its effect on the demand for payment by the beneficiary. As authors L’Heureux and Lacoursière observed, [translation] “the subject matter of the fraud may be either the documents or the underlying transactions (that is, the commercial contract) of such a character as to make the demand for payment under the letter of credit a fraudulent one” (p. 410). 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 (McGuinness, at §17.338). Whether it does is an issue of mixed fact and law for which deference is owed on appeal. In this case, the essence of HMOD’s fraudulent conduct is that it demanded payment under the Letter of Guarantee when it knew it had no right to do so.
[115] The bar is nevertheless high. As author Marc Lemieux has explained, the fraud exception is limited to cases of obvious fraud [translation] “to avoid unduly interfering with the commercial utility and efficacy of letters of credit” (p. 433; see also L’Heureux and Lacoursière, at pp. 409-10). A mere absence of good faith may not be sufficient, even if that might lead to civil liability in other contexts. In this context, fraud goes further: it must “import some aspect of impropriety, dishonesty or deceit” (Cineplex, at para. 31, cited with approval by several courts in Quebec and the common law provinces, including in Royal Bank v. Gentra Canada Investments Inc. (2001), 2001 CanLII 6996 (ON CA), 15 B.L.R. (3d) 25 (Ont. C.A.), at para. 8; OMERS Realty, at para. 45; SNC-Lavalin Polska, at para. 40; Alessandra Yarns, l.l.c. v. Tongxiang Baoding Textile Co., 2015 QCCS 346, at para. 34 (CanLII)). As an Ontario court observed, “a demand for payment is only fraudulent if the claim to the funds is not even colourable as being valid or has absolutely no basis in fact” (Royal Bank v. Gentra Canada Investments Inc. (2000), 2000 CanLII 22796 (ON SC), 1 B.L.R. (3d) 170 (S.C.J.), at para. 56, aff’d (2001), 15 B.L.R. (3d) 25).
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[127] As Le Dain J. wrote, the fraud exception is “confined to fraud by the beneficiary of a credit and should not extend to fraud by a third party of which the beneficiary is innocent” (Angelica-Whitewear, at p. 84). An Ontario court correctly observed that “[i]t is implicit in the foregoing comment that the fraud exception in letter of credit cases might extend to fraud by a third party of which the beneficiary of the letter of credit cannot be said to be innocent” (Royal Bank v. Darlington, 1995 CarswellOnt 2661 (WL), [1995] O.J. No. 1044 (Lexis) (C.J. (Gen. Div.)), at para. 231; see also Global Steel Ltd. v. Bank of Montreal, 1999 ABCA 311, 244 A.R. 341, at para. 21).
[128] The sense given to conduct of a beneficiary that is not “innocent” needs to be circumscribed so as not to upset the autonomous character of letters of credit, even where they are interlocking as is the case here. I am mindful that, while an innocent beneficiary is entitled to expect that the fraud of a third party will not be attributed to them because they are not asked to police the underlying transaction, the issuer and their client are equally entitled to expect that the fraud exception may apply if the beneficiary bears responsibility for that fraud as its own. Therefore, the issue is whether the fraud of the third party can fairly be considered as that of the beneficiary.
[129] A beneficiary ceases to be “innocent” when they have knowledge of the fraud of the third party and participate in that fraud. When there is both knowledge and participation, the third party’s fraud — in this case HMOD — can fairly be attributed to the beneficiary — here, Eurobank, under the Letter of Counter-Guarantee. To be clear, when the fraud of a third party is attributed to the beneficiary, that fraud becomes the beneficiary’s own; this is not indirect or vicarious liability. Attributing the fraud of a third party to the beneficiary is merely an application of the fraud exception to the beneficiary of the relevant letter of credit.
[130] As is always the case, clear knowledge of an obvious fraud prior to payment by the financial institution is required (see L’Heureux and Lacoursière, at p. 411; B. Crawford et al., The Law of Banking and Payment in Canada (loose-leaf), at § 13:171). A beneficiary cannot be responsible, in the commercial or civil sense, for fraud of which it had no knowledge (Sarna, at pp. 5-56 and 5-57; see also R. P. Buckley, “The 1993 Revision of the Uniform Customs and Practice for Documentary Credits” (1995), 28 Geo. Wash. J. Int’l L. & Econ. 265, at p. 308; E. A. Caprioli, Le crédit documentaire: évolution et perspectives (1992), at No. 373). This makes good sense because, unfortunately, parties will at times participate in commercial fraud unwittingly. Author Lazar Sarna gives the example of a “hidden fraudulent act” such as “the falsification of the true boarding date by a carrier without the knowledge of the beneficiary” (pp. 5-56 and 5-57).
[131] However, simply knowing about the fraud of a third party is not sufficient. A beneficiary does not engage in fraud unless they participate in it. As L’Heureux and Lacoursière note, [translation] “[i]t is . . . clear in Canadian and Quebec law that only fraud committed by the beneficiary is recognized, including that of a third party when the beneficiary participated in it” (p. 411; see also Crawford et al., at § 13:171; Crédit Lyonnais Canada v. First Mercantile Investment Corp., 1996 CarswellOnt 4711 (WL), [1996] O.J. No. 4309 (Lexis) (C.J. (Gen. Div.)), at para. 44). Participation can, as in this case, take the form of honouring a demand for payment in improper circumstances. It can also take the form of knowingly presenting fraudulent documents to the issuer. All that is required is some action by the beneficiary that involves them in the fraud of the third party. Where, for example, a beneficiary demands payment, for its own advantage, knowing of the third party’s fraud, that is fraud on an independent measure of which the beneficiary is not innocent.
[132] Since both knowledge and participation are required, the scope of the fraud exception will be kept appropriately narrow. Beneficiaries can take comfort in knowing that the fraud of a third party will not be attributed to them unless they have actively taken on responsibility for that fraud. A well-intentioned beneficiary that unwittingly facilitates the fraud of a third party or chooses to not participate in the fraud of a third party need not worry that fraud will be attributed to them. Equally, a beneficiary who demands payment where it did not know of the fraud of the third party will remain innocent. Limiting the scope of the fraud exception in this way will protect the reliability of Canadian letters of credit. However, a beneficiary becomes a co-author of the fraud of a third party by knowingly participating in the misconduct and, as a result, will have that fraud attributed to them; in such a circumstance, the fraud exception may rightly apply so that the letter of credit cannot be used to facilitate a clear case of fraud.
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[139] In sum, because Eurobank knew of and participated in HMOD’s fraud, it became the co-author of that fraud and must, for the purposes of the fraud exception, bear responsibility for it. HMOD’s fraud became Eurobank’s own. As the beneficiary of the Letter of Counter-Guarantee, it is Eurobank’s fraud that is actionable before Quebec courts. . Eurobank Ergasias S.A. v. Bombardier inc. [general]
In Eurobank Ergasias S.A. v. Bombardier inc. (SCC, 2024) the Supreme Court of Canada reviews the Canadian law of letters of credit, including the related principles of 'autonomy' and 'strict compliance':V. Analysis
A. The Law Relating to Letters of Credit in Canada
[67] 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. Typically, the customer contracts with the financial institution to issue the letter of credit as a means of providing comfort to the beneficiary that an underlying agreement will be performed as promised. The financial institution has a nearly absolute obligation to pay when presented with a valid demand. There is only one recognized exception in Canadian law: when there is fraud by the beneficiary that is brought to the financial institution’s attention prior to payment, as explained in Angelica-Whitewear.
[68] Some letters of credit are used to facilitate payment in a transaction “as a means of moving money from one jurisdiction to another” (K. McGuinness, The Law of Guarantee (3rd ed. 2013), at §16.20; see also Crawford and Falconbridge, Banking and Bills of Exchange (8th ed. 1986), by B. Crawford, at p. 838; N. L’Heureux and M. Lacoursière, Droit bancaire (5th ed. 2017), at pp. 399-400). These letters of credit, called often “documentary letters of credit”, are typically the primary method of payment in the transaction. However, it is increasingly common for a different sort of letter of credit that “began [to evolve] only a few decades ago”, called a “standby letter of credit” to be used as a “performance ensuring mechanism” rather than the primary method of payment (McGuinness, at §16.43). L’Heureux and Lacoursière explain that [translation] “[a] standby letter of credit is a letter of credit whose usual function is to serve as a guarantee. Its purpose is therefore different from that of the traditional documentary letter of credit that constitutes a payment instrument” (p. 434).
[69] I note that the parties and the courts below have primarily referred to the Letter of Guarantee and the Letter of Counter-Guarantee simply as “letters of credit”, although they have occasionally used other terms, such as “guarantee” and “counter-standby” (see, e.g., A.R., vol. VI, at p. 83). When a letter of credit is used as a means to secure performance of a contractual obligation, it may be called a “standby letter of credit” (see G. B. Graham and B. Geva, “Standby Credits in Canada” (1984), 9 Can. Bus. L.J. 180, at p. 183). The term “demand guarantee” is used for similar purposes, especially outside of North America (see McGuinness, at §§3.87-3.88 and 16.51‑16.52; see also R. Goode, “Abstract Payment Undertakings in International Transactions” (1996), 22 Brook. J. Int’l L. 1, at p. 15). The difference between demand guarantees and standby letters of credit has been said to be “largely illusory or, perhaps, of a semantic nature” (E. P. Ellinger, “Standby Letters of Credit” (1978), 6 I.B.L. 604, at p. 622). As Professor Roy Goode observed, “from a legal viewpoint demand guarantees and standby credits are indistinguishable, and the latter clearly falls within the definition of a demand guarantee in article 2 [of the Uniform Rules for Demand Guarantees]” (p. 16). With that in mind, it is not unusual for standby letters of credit to be subject to the Uniform Rules for Demand Guarantees, as is the case here (A.R., vol. IV, at p. 118). Whether the Letter of Guarantee and the Letter of Counter-Guarantee are best described as “demand guarantees”, “letters of credit” or “standby letters of credit” is of no consequence to the outcome of this appeal.
[70] Commonly relied upon in domestic and international commercial transactions, letters of credit are widely used as a means of managing risk. In particular, standby letters of credit are issued in order to ensure that the beneficiary will be paid what they believe they are owed under an underlying contract. The letter of credit does not replace the customer’s obligation to pay the beneficiary under the underlying contract. Instead, the letter of credit is superimposed on the transaction (L’Heureux and Lacoursière, at pp. 399-400). 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” (Crawford and Falconbridge, at p. 838). The premise is “pay now, and argue later if necessary” (McGuinness, at §16.47).
[71] The beneficiary can take comfort in knowing that they will be paid, unless they engage in fraud, and that any disputes relating to the underlying contract will be resolved only after they have been paid. The risk of non-payment by their co-contracting party is allocated away from them. Instead, the issuing financial institution takes on the risk of not being paid by their client. Should the beneficiary make a valid demand for payment because the issuer’s client is in default under the underlying contract, the client is no less responsible for its breach of contract and must reimburse the issuer.
[72] While letters of credit “are only as good as the issuer who stands behind them” (McGuinness, at §16.53), the business community has come to regard autonomous letters of credit issued by reputable banks as a reliable means of ensuring payment for the beneficiary. For this reason, courts are “slow to interfere” with letters of credit, “because interventions by the courts that are too ready or too frequent might seriously impair the reliance which international business places on [them]” (I. F. G. Baxter, The Law of Banking (4th ed. 1992), at p. 172).
(1) Autonomy and Strict Compliance
[73] There are two fundamental principles to the law governing letters of credit: autonomy and strict compliance (L’Heureux and Lacoursière, at p. 403; see also M. Deschamps, “Letters of Credit: The Autonomy Principle and the Fraud Exception” (2022), 38 B.F.L.R. 245, at p. 249).
(a) Autonomy of the Letter of Credit
[74] Autonomy means that “a letter of credit is an independent obligation of the issuing or confirming bank” (Crawford and Falconbridge, at p. 853; see also Angelica-Whitewear, at p. 70; L’Heureux and Lacoursière, at p. 403; Deschamps, at p. 248). As the Quebec Court of Appeal has noted, [translation] “[i]t is well established that a letter of credit is an autonomous contract between the issuing bank and the beneficiary and is defined by its own terms and conditions, independently of the contract between the originator and the issuing bank or between the beneficiary and the originator” (Groupe SM (International) Construction inc. v. Banque Nationale du Canada, 2013 QCCA 1118, at para. 8 (CanLII)). 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” (Angelica-Whitewear, at p. 70).
[75] In an opinion that refers to Angelica-Whitewear, the United States Court of Appeals for the Second Circuit observed that, due to the autonomy principle, “[t]he letter of credit takes on a life of its own” which “infuses the credit transaction with the simplicity and certainty that are its hallmarks” (Alaska Textile Co. v. Chase Manhattan Bank, N.A., 982 F.2d 813 (1992), at p. 815). The autonomy principle gives letters of credit their reliable character; a dispute about performance of the underlying contract generally does not justify a bank’s refusal to honour the credit. A leading American case that was cited by Le Dain J. in Angelica-Whitewear was careful to recall that the autonomy principle should not be lightly set aside: “It would be a most unfortunate interference with business transactions if a bank before honoring drafts drawn upon it was obliged or even allowed to go behind the documents . . . and enter into controversies between the buyer and the seller . . .” (Sztejn v. J. Henry Schroder Banking Corp., 31 N.Y.S.2d 631 (Sup. Ct. 1941), at p. 633).
[76] It follows that “the beneficiary can be completely satisfied that whatever disputes may thereafter arise between him and the bank’s customer in relation to the performance or indeed existence of the underlying contract, the bank is personally undertaking to pay him provided that the specified conditions are met” (Bolivinter Oil S.A. v. Chase Manhattan Bank, [1984] 1 Lloyd’s Rep. 251 (Eng. C.A.), at p. 257). Of course, the bank’s customer may ultimately have a claim against the beneficiary, but that is typically none of the financial institution’s concern since the letter of credit ensures that the beneficiary is paid in the meantime. The financial institution [translation] “is not . . . required to inquire into the performance of the underlying contract” since its obligation is simply to pay the beneficiary when presented with a valid demand (L’Heureux and Lacoursière, at p. 403).
(b) Strict Compliance
[77] 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” (Deschamps, at p. 248). Therefore, the financial institution must ensure that the beneficiary, when it demands payment, presents documents that correspond to the requirements stated in the letter of credit. A letter of credit “is drafted to define the scope and terms of the issuer’s undertaking so that the issuer need only examine the terms of the letter of credit and the documents presented by the beneficiary” (OMERS Realty Corp. v. 7636156 Canada Inc. (Trustee in Bankruptcy of), 2020 ONCA 681, 153 O.R. (3d) 271, at para. 42). As Le Dain J. explained, strict compliance “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 to be consistent with one another” (Angelica-Whitewear, at p. 98).
[78] “Substantial compliance” is not the test. Only documents that strictly conform to the terms in the letter of credit will trigger an obligation to pay (Crawford and Falconbridge, at p. 856; see also Angelica-Whitewear, at p. 96). That said, there is room for a limited qualification to this rule that makes it possible, in clearly appropriate cases, to overlook immaterial discrepancies (Angelica-Whitewear, at pp. 97-98; see also Universal Stainless Steel & Alloys Inc. v. JP Morgan Chase Bank, 2009 ONCA 801, 256 O.A.C. 109).
[79] Le Dain J. wrote that “[t]he 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” (Angelica-Whitewear, at p. 94 (emphasis in original)). A “reasonably careful examination” does not require perfection. The Singapore Court of Appeal, speaking to the same idea, observed that this works “to protect the bank and to ensure the smooth flow of international trade and the avoidance of delay” (Beam Technology (Mfg) Pte Ltd v. Standard Chartered Bank, [2002] SGCA 53, [2003] 1 S.L.R. 597, at para. 32). That said, if the financial institution pays the beneficiary without evaluating the documents presented to ensure that they strictly conform to the requirements set out in the letter of credit, they run the risk of not being reimbursed by their client (L’Heureux and Lacoursière, at p. 404). . Eurobank Ergasias S.A. v. Bombardier inc.
In Eurobank Ergasias S.A. v. Bombardier inc. (SCC, 2024) the Supreme Court of Canada reviews the Canadian law of letters of credit, here in the context of considering the "fraud exception" whereby "an issuing bank must refuse to honour a demand for payment".
Here the court briefly summarizes it's overall conclusion: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?
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[5] In Bank of Nova Scotia v. Angelica-Whitewear Ltd., 1987 CanLII 78 (SCC), [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 objectives that he described as being in “tension” in the law: the importance to international commerce that banks respect the autonomous character of letters of credit and the importance of suppressing fraud in transactions (p. 72). On the one hand, widening the fraud exception might undermine the reliability of letters of credit; on the other hand, turning a blind eye to fraud might encourage misconduct in letter transactions. Le Dain J. concluded that the fraud exception should be confined to cases of obvious fraud of the beneficiary that is so egregious that the legitimacy of the supporting letter of credit can no longer be assumed. The bar for the fraud exception was set high. In keeping with this careful balance and high bar, he wrote, the exception should not extend to the fraud of a third party of which the beneficiary is “innocent” (p. 84).
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[11] To my mind, where fraud by a third party is established on the facts and a beneficiary under a letter of credit governed by Quebec law knows of that fraud and participates in it, the fraud becomes the beneficiary’s own. The fraud exception then applies, and the issuer must be stopped from paying the beneficiary.
[12] Here, the trial judge decided, as a matter of fact, that HMOD acted fraudulently. He found too that Eurobank knew of HMOD’s fraud and nevertheless demanded payment under the Quebec Letter of Counter-Guarantee. In a word, Eurobank was not “innocent” because it was aware of the third-party fraud and participated in it. Like the majority judges in the Court of Appeal, I see no reviewable errors in these findings nor in the trial judge’s ultimate conclusion: HMOD’s fraud is attributable to Eurobank as its own and Eurobank cannot, as beneficiary under the Quebec letter, demand payment.
[13] On this basis, I would dismiss the appeal and confirm the conclusion that the National Bank should be enjoined from honouring Eurobank’s demand for payment under the fraud exception recognized in Angelica-Whitewear. In the circumstances, I find it unnecessary to decide whether the letters of credit are null.
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