b'BENCHMARKSTHE SUPREMECOURT OF CANADAIssues Its Decision onLetters of Credit in CanadaBy John Martens and Daryl Chicoine, MLT Aikins LLPOn April 5, 2024, the Supreme Court ofoffset contract were to be resolved byagreed with the trial judge, then to the Canada released reasons for decisioninternational arbitration. Supreme Court of Canada.in Eurobank Ergasias S.A. et al. v.The Canadian company took theTHE SUPREME COURT OF CANADA Bombardier Inc. et al. The decisionposition that it was unable to meetDECISIONprovides important clarity to the lawits subcontracting obligations underIn its reasons for decision, the majority of surrounding letters of credit as securitythe offset contract. The internationalthe Supreme Court of Canada described for contractual obligations and thearbitration process was initiated tothe law relating to letters of credit in limited exceptions available to preventresolve the dispute. Although theCanada as follows:payment to a beneficiary. Ministry undertook not to make demandA letter of credit is an instrument, Although perhaps not as prevalent asunder the Greek letter of credit while the bonds, letters of credit are occasionallyarbitration was ongoing, prior to the finalunderstood to be autonomous from used by owners, stakeholders and inaward, it made demand on the the underlying contract to which court matters to serve as a guarantee forGreek bank.it applies, issued by a financial performance of contractual or statutoryinstitution at the request of its client;obligations. For example, letters of creditThe Canadian company sought and A letter of credit entitles the obtained an order from the arbitral can be used to stand as security fortribunal preventing the demand andbeneficiary of the letter to payment liens (as an alternative to cash or liensought an injunction from the Canadianon demand from the issuing bank, so bonds), or can be used as a method ofcourts to prevent payment under thelong as that demand conforms to the early payout of contractual holdback.letters of credit. Despite this, the Ministryrequirements in the letter of credit;Therefore, it is important to have somemade a final demand for payment andunderstanding of the law relating toTypically, the customer contracts letters of credit in Canada. took the position that the Greek bankwith the financial institution to issue would be subject to civil and criminala letter of credit as a means of THE FACTS OF EUROBANK legal measures if it refused to pay. Theproviding comfort to the beneficiary The Eurobank case involved theGreek bank paid and made demand onthat an underlying agreement will be Hellenic Ministry of National Defencesthe Canadian bank. performed as promised;procurement from a Canadian companyThe arbitral tribunal issued an award that The financial institution has a nearly of firefighting amphibious aircrafts. The arrangement included an offsetsthe offset contract violated Europeanabsolute obligation to pay when contract pursuant to which the CanadianUnion law such that it was null andpresented with a valid demand by a company would subcontract some ofvoid and no liquidated damages werebeneficiary; andthe work associated with the aircraftpayable by the Canadian company The only recognized exception in to the Ministry. The Greek bank procurement to Greek companies.unsuccessfully attempted to recoverCanadian law to payment on demand The offsets contract provided that thethe monies it paid to the Ministry. Itis fraud by the beneficiary, which Canadian company would owe themade demand on the Canadian bank. Inis brought to the attention of the Ministry liquidated damages if it did notproceedings in Canada, the Canadianfinancial institution prior to payment.fulfill its subcontracting obligations. Thecompany sought a permanent injunctionThe Court commented that although payment of the liquidated damages wasenjoining the Canadian bank fromstandby letters of credit are often secured by a letter of credit issued by apaying the Greek bank, arguing that thereferenced when the letter is intended Greek bank in favour of the Ministry. Infraud exception to the near absoluteto guarantee performance of a duty turn, a second letter of credit was issuedduty to honour a demand for paymentor obligation, there is little difference by the National Bank of Canada in favouron a letter of credit was met. The trialbetween instruments referenced as of the Greek bank to secure paymentjudge agreed and issued an injunctiondemand guarantees, letters of credit of any amounts by the Canadianthat the Canadian bank not pay theor standby letters of credit. The strength company demanded under the GreekGreek banks demand. The matter wasof a letter of credit is that a beneficiary letter of credit. Any disputes under theappealed to the Court of Appeal, whichmay have comfort in knowing that they will 32 BUILD MANITOBAwinnipegconstruction.ca'