Thursday, November 12, 2009

Letters of Credit and the Bank's Duty of Good Faith

In the case of Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764 the Court of Appeal held that a Bank owes a duty of good faith to the holders of letters of credit so that the bank cannot act in a manner which would defeat the purpose of the letter of credit.

Robertson was a customer of CIBC, and financed the purchase of shrimp from Thailand Fisheries through a credit facility arranged with the Bank. Upon arrival in the United States, the shrimp were stored in large warehouses where they awaited purchase from various Sam’s Club outlets. Payment was to be made under letters of credit upon presentation to CIBC of purchase orders and receipts showing that the shrimp had been taken down by Sam’s Club.

Although Thai Fisheries had not been paid for all of the shrimp it supplied under the letters of credit, the proceeds of sale from the shrimp were used by Robertson and the Bank to reduce the Robertson line of credit that had been arranged to finance the trade transaction.

Thai Fisheries argued that CIBC and Robertson colluded to reduce Robertson’s line of credit – and therefore CIBC’s exposure – by arranging for shrimp to be sold without documentation from Sam’s Club and then relying on non-compliance with the letters of credit to refuse payments, while at the same time directing the monies received to reduce Robertson’s overdraft instead of ensuring that the monies were used to pay Thai Fisheries under the letters of credit.

CIBC argued that it did nothing improper, that it complied with the provisions of the letters of credit, which were not honoured because the requisite documentation was not presented, and that Thai Fisheries knowingly ran the risk of this eventuality when it accepted the letters of credit.

The trial judge ruled in favour of Thai Fisheries and granted judgment in its favour in the amount of $10,381,035 together with pre-judgment interest and costs. The court of Appeal dismissed the appeal.

CIBC raised one defence only: Thai Fisheries failed to comply with its obligation imposed by the special conditions in the Letters of Credit because receipts from Sam’s Club, through Robertson, were never delivered to CIBC. Since letters of credit must be strictly construed the delivery of the receipts from Sam’s Club was a pre-condition to payment. No receipts were provided for the shrimp in question, and therefore CIBC was not liable to pay.

The Court of Appeal held that CIBC was not entitled to rely upon the defence of non-compliance because:
(a) CIBC knowingly contributed to, or acquiesced in, the circumstances that undermined the prospect of strict compliance with the Letter of Credit, then used that non-compliance to justify the refusal of payment. It did so in collaboration with its customer, Robertson, in order to ensure that the proceeds of sale of the shrimp sold under the Letters of Credit were used to reduce the Bank’s exposure on the Robertson line of credit without corresponding payments being made to Thai Fisheries under the Letters of Credit. This conduct was either a direct breach of the principle of autonomy underlying letter of credit transactions or a breach of CIBC’s implied duty of good faith not to act in a manner meant to defeat or eviscerate the purpose of the Letters of Credit, On either scenario CIBC, as issuer of the Letters of Credit, was precluded from raising the defence of non-compliance.
(b) CIBC failed in its obligation to give timely notice of dishonour to Thai Fisheries when it held back on notifying the seller for more than a year that no receipts would be forthcoming and that the Letters of Credit would be cancelled. In doing so, CIBC placed Thai Fisheries in a position where it reasonably believed that the Letters of Credit would be honoured when the problems with the receipts had been resolved. Consequently, Thai Fisheries took no steps to protect itself by seeking return of the shrimp until it was too late and the shrimp had all been sold.



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