The Supreme Court of Canada rules: a bank can refuse to pay the beneficiary of a letter of credit who knowingly participates in the fraud committed by a third party

In Eurobank Ergasias S.A. v. Bombardier inc., 2024 SCC 11, the Supreme Court of Canada reiterated that fraud is the only exception recognized in Canadian law that can be invoked against the issuing financial institution’s obligation to pay the beneficiary upon receipt of a demand to that effect. It clarified the circumstances in which the beneficiary of a letter of counter-guarantee may be considered not “innocent” and the exception of fraud may be invoked. The Court also confirmed the importance of orders issued by arbitral tribunals in the Canadian legal system by finding that a beneficiary who helps a third party bypass such an order engages in fraud under Quebec law.

Background

In 1998, the Greek Ministry of Defense (MDG) signed a contract with Bombardier, whose obligations were secured by a letter of guarantee issued by a Greek bank, subject to Greek law. A letter of counter-guarantee from a Canadian bank, governed by Quebec law, was provided to reimburse the amounts paid by the Greek bank.

Within the framework of a contractual dispute submitted to arbitration under the rules of the International Chamber of Commerce (ICC), MDG undertook not to present a demand for payment under the first letter of guarantee during the proceedings. The arbitral tribunal issued a provisional order prohibiting MDG from making such a demand for payment, and the Superior Court of Quebec issued its own order in aid of arbitration, to ensure compliance with the arbitral tribunal’s decision. After the arbitral tribunal announced that its final award would be issued within a few days, MDG submitted a demand for payment, which the Greek bank chose to honour with full knowledge of the arbitration and court orders against MDG. It then sought reimbursement of the sum paid under the terms of the letter of counter-guarantee.

Ultimately, the Supreme Court of Canada confirmed that the National Bank of Canada, our client, was justified in invoking the fraud exception and refusing to honour the demand for payment under the letter of counter-guarantee, as the bank was fully cognizant of the circumstances that triggered that exception.

Insights into letters of credit

The Supreme Court of Canada contributed to the development of international letter of credit law with its landmark decision in Bank of Nova Scotia v. Angelica-Whitewear Ltd, [1987] 1 SCR 59.

Nevertheless, a question remained following the Angelica-Whitewear ruling. While it was accepted that the fraud exception does not apply to fraud committed by a third party to a letter of credit when the beneficiary of the letter is innocent of the fraud, the Supreme Court was careful to leave room for the possibility that the beneficiary was not “innocent” of the third party’s reprehensible conduct, and that this conduct could trigger the fraud exception.

The ruling in Eurobank Ergasias S.A. v. Bombardier inc. 2024 SCC 11 clarified the notion of the beneficiary not being “innocent”, applying it to the context where the third party is party to a letter of guarantee that is interdependent with a letter of counter-guarantee. In the majority reasons written by the Honourable Nicholas Kasirer, the Supreme Court concluded that the fraud committed by a third party may be attributed to the guarantor who is aware of the fraud, and therefore not innocent. Consequently, the fraud exception prevents it from obtaining payment under the terms of the counter-guarantee letter.

Eric Bédard, Marie-Hélène Beaudoin and Arielle Reeves-Breton represented National Bank of Canada and worked closely with our client’s legal team to achieve this result.

Sophie Melchers, Jérémy Boulanger-Bonnelly and Michel Sylvestre of Norton Rose Fulbright represented Bombardier Inc.

The Supreme Court of Canada judgment is available here.