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Sanctity of Letter of Credit Maintained
Published in the November 2009 issue of Litigation Notes - View Article
The Ontario Court of Appeal dismisses defence based on documentary discrepancies in a letter of credit and on the fact that the letter of credit was not validly transferred
Johnston Steel Services Inc. (“Johnston Steel”) entered into a contract to sell a quantity of steel to Menard Inc. (“Menard”) for approximately $5.4 million. Johnston Steel was acquiring the steel from Universal Stainless Steel & Alloys Inc. (“Universal”) for approximately $4.9 million. Universal requested payment by means of a letter of credit.
Menard arranged for an irrevocable and transferable letter of credit in the amount of approximately US $5.4 million to be issued by JP Morgan Chase Bank N.A. (“JP Morgan”) in favour of Johnston Steel. Johnston Steel directed its bank, Comerica Bank (“Comerica”) to transfer a portion of the letter of credit to Universal as second beneficiary in the amount of approximately $4.9 million.
Universal delivered the steel to Menard and provided its invoice and bills of lading to Comerica. Comerica substituted an invoice from Johnston Steel for Universal’s invoice and delivered it together with the bills of lading to JP Morgan and requested payment. Menard was unhappy with the quality of the steel and did not accept it. JP Morgan, alleging various documentary discrepancies, declined to pay on the letter of credit.
Universal resold the steel for a lower price and brought a damages suit against JP Morgan and Comerica. It then brought a motion for summary judgment against both defendants. On the motion, the defendants argued that Universal had no standing to bring a claim because the letter of credit had not been validly transferred by Johnston Steel to Universal. They also cited three discrepancies in the documentation. Firstly, they said that the invoice from Johnston Steel had omitted the words “merchandise described on the purchase order” which had been included in the letter of credit. Secondly, they said that the bills of lading did not indicate how many originals had been made, despite the fact that the letter of credit required that two of three originals be presented. Finally, the agent for the carrier that signed the bill of lading failed to indicate the name and capacity of the party on whose behalf it was signing. The motions judge dismissed all arguments and granted summary judgment in favour of Universal against JP Morgan. She dismissed the action as against Comerica and issued a Sanderson order, granting costs to Comerica, payable by JP Morgan.
JP Morgan appealed to the Ontario Court of Appeal, which upheld the decision of the motions judge. On the subject of the transfer, the Court of Appeal considered the relevant provisions of the International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits , which governed the letter of credit in this case. The letter of credit had been validly transferred to Universal, which had complied with its obligation set out therein.
On the subject of the discrepancies, the Court referred to the fact that “the cardinal rule concerning letters of credit is the autonomy principle, sometimes referred to as the independence principle: ‘Letters of credit are to be entirely autonomous and divorced from the underlying transactions to which they relate.As alluded to above, letters of credit are obtained to provide the beneficiary with a secure source of payment that cannot be held up or otherwise delayed because of disputes concerning the underlying subject matter of the transaction.If a demand for payment is made that complies with the terms of the letter of credit, the issuing bank is, subject to limited exceptions, required to honour the credit.’
Because payment is based totally on the presentation of agreed-upon documents, the documents presented must strictly comply with the terms and conditions of the letter of credit. However, the Court cited the decision of the Supreme Court of Canada in Bank of Nova Scotia v. Angelica-Whitewear, where it was held that, in applying the rule of strict documentary compliance, there “must be some latitude for minor variations or discrepancies that are not sufficiently material to justify a refusal of payment.”The court considered that all of the discrepancies in this case were minor in nature and granted summary judgment in favour of Universal. It also upheld the Sanderson order.
Universal Stainless Steel & Alloys v. J.P. Morgan Chase Bank, 2009 ONCA 801 (CanLII)