Pacific Atlantic Pipeline Construction Ltd v Coastal Gaslink Pipeline Ltd, 2023 ABKB 736
Opinion
Court of King’s Bench of Alberta Citation: Pacific Atlantic Pipeline Construction Ltd v Coastal Gaslink Pipeline Ltd, 2023 ABKB 736 Date: 20231222 Docket: 2303 19140 Registry: Edmonton Between: Pacific Atlantic Pipeline Construction Ltd. and Bonatti S.p.A. Applicants - and - Coastal Gaslink Limited Partnership by its general partner Coastal Gaslink Pipeline Ltd. Respondents _______________________________________________________ Reasons for Judgment of the Honourable Justice N.J. Whitling _______________________________________________________ 1.
Introduction and Overview [ 1 ] These reasons address the merits of an application by the Applicants Pacific Atlantic Pipeline Construction Ltd. (“PAPC”) and Bonatti S.p.A. (“Bonatti”) for an injunction restraining the Respondent, Coastal Gaslink Limited Partnership by its General Partner Coastal GasLink Pipeline Ltd. (“CGL”) from drawing on an irrevocable standby letter of credit dated January 17, 2020, in the amount of C$117,162,384.00 (the “Letter of Credit”). The Letter of Credit was issued by the HSBC Bank Canada (“HSBC”) and names CGL as the beneficiary and PAPC as applicant.
The final expiration date of the Letter of Credit is January 21, 2024. The HSBC is not a party to this
application. [2] In support of their application, the Applicants submit that they and CGL entered into a verbal forbearance agreementpursuant to which CGL agreed not to draw upon the Letter of Credit until after the completion of an arbitration currently pendingbetween the parties.
Alternatively, the Applicants argue that CGL’s right to draw on the Letter of Credit is constrained by the contractualduty of honest performance recognized in such leading cases as Bhasin v Hrynew, 2014 SCC 71 and Wastech Services Ltd. v GreaterVancouver Sewerage and Drainage District, 2021 SCC 7. [3] In response to this application, CGL denies having entered into any verbal forbearance agreement, and argues that, in anyevent, such cases as Bank of Nova Scotia v Angelica-Whitewear Ltd., (SCC), [1987] 1 SCR 59 hold that an injunctionof this nature may only be issued on the basis of a strong prima facie showing of fraud, which the Applicants have neither alleged norproven. [4] Having considered the submissions of the parties, I find that this application must be denied.
Assuming without deciding thatthe beneficiary of a standby letter of credit may be enjoined from calling upon the letter on the basis of a contractual obligation, theApplicants have not raised a strong prima facie case that any such obligation exists in the present case. [5] However, given that the Applicants have requested an interim injunction pending their appeal of this decision, and given thatthis Court and the Court of Appeal are about to close for the holiday season, I grant an interim injunction restraining CGL from drawingon the Letter of Credit until midnight on January 8, 2024, so as to enable the Applicants to bring a more fulsome application for aninjunction pending appeal on or before that date should they wish to do so. 2.
Summary of Facts and Evidence 2.1 The Contract and Letter of Credit [6] In 2012, LNG Canada Development Inc. selected TC Energy Corporation (“TCE”) to design, build and operate a largepipeline project in British Columbia. The Respondent CGL is partially owned by TCE, and is the entity utilized by TCE to construct thepipeline. In July, 2018, CGL contracted with PAPC to construct certain portions of the pipeline at a total cost of some $700 million (the“Contract”).
PAPC is a wholly owned subsidiary of Bonatti. [7] The Contract required PAPC to provide CGL with certain financial assurances, including an irrevocable letter of credit tosecure PAPC’s performance of its obligations. On January 17, 2020, PAPC issued the Letter of Credit to CGL in the amount of$87,289,166.04. By an amendment that occurred October, 2020, that amount was increased to $117,162,384.00.
The Letter of Credit asamended includes the following language: HSBC BANK CANADA (THE “BANK”), HEREBY ISSUES THIS IRREVOCABLE STANDBY LETTER OF CREDIT NO.SDNREI010170 (THE “LETTER OF CREDIT”) IN THE AGGREGATE AMOUNT NOT EXCEEDING [C$117,162,384.00] […], INSUPPORT OF THE OBLIGATIONS OF PACIFIC ATLANTIC PIPELINE CONSTRUCTION LTD. (THE “COUNTERPARTY”) TOCOASTAL GASLINK PIPELINE LIMITED PARTNERSHIP (THE “BENEFICIARY”) RELATED TO A TYING AGREEMENT,AGREEMENT NO. 4600008606, CONTRACT NO. 4600008435 AND CONTRACT NO. 4600008436, EACH DATED JULY 3RD,2018, ENTERED INTO BETWEEN THE COUNTERPARTY AND THE BENEFICIARY, AS MAY BE AMENDED FROM TIME TOTIME (COLLECTIVELY, THE “AGREEMENTS”). […] FUNDS UNDER THE LETTER OF CREDIT ARE AVAILABLE TO THE BENEFICIARY ON OR BEFORE THE EXPIRATIONDATE OR THE FINAL EXPIRATION DATE ON PRESENTATION BY THE BENEFICIARY OF A REQUEST INSUBSTANTIALLY THE FORM ATTACHED HERETO AS EXHIBIT “1”, SIGNED BY AN AUTHORIZED REPRESENTATIVEOF THE BENEFICIARY (THE “DRAWDOWN DOCUMENT”) […]. […] THE BANK HEREBY UNDERTAKES TO HONOUR THE DRAWDOWN DOCUMENT, IF IN COMPLIANCE WITH THE TERMSOF THE LETTER OF CREDIT AT THE BANK’S ADDRESS, WITHOUT INQUIRING WHETHER THE BENEFICIARY HAS ARIGHT, AS BETWEEN THE BENEFICIARY AND THE COUNTERPARTY, TO MAKE SUCH REQUEST AND WITHOUTRECOGNIZING ANY CLAIMS OF THE COUNTERPARTY. […] EXHIBIT “1” […] THE BENEFICIARY HEREBY CERTIFIES TO THE BANK THAT BECAUSE THE COUNTERPARTY HAS FAILED TOPAY THE BENEFICIARY OR PERFORM ITS OBLIGATIONS IN ACCORDANCE WITH THE TERMS AND PROVISIONS OFTHE AGREEMENTS (AS DEFINED IN THE LETTER OF CREDIT) BETWEEN THE BENEFICIARY AND THECOUNTERPARTY, OR THAT THE COUNTERPARTY HAS NOT PROVIDED A REPLACEMENT LETTER OF CREDIT, ORALTERNATIVE SECURITY, ACCEPTABLE TO THE BENEFICIARY AT LEAST THIRTY
(30) CALENDAR DAYS PRIOR TOTHE EXPIRATION DATE OR THE FINAL EXPIRATION DATE (AS DEFINED IN THE LETTER OF CREDIT), THEBENEFICIARY IS DRAWING UPON THE LETTER OF CREDIT IN AN AMOUNT EQUAL TO [C$117,162,384.00]. [8] PAPC’s performance of the Contract was also secured by a guarantee issued by Bonatti.
2.2 The Project and the Underlying Dispute [ 9 ] The pipeline construction project experienced significant challenges from such circumstances as the COVID-19 pandemic, and the activities of protestors. Following a five-month suspension of work on the project due to a Public Health Order, CGL and PAPC attempted to agree upon the commercial terms of an accelerated schedule, but were unable to do so. PAPC’s view is that CGL then compelled PAPC to proceed on the basis of a new and unrealistic
schedule that PAPC never accepted. [ 10 ] CGL’s witnesses state that in 2021 and 2022, CGL began to have concerns respecting PAPC’s ability to perform its obligations and began to consider terminating the Contract for cause. Eventually, CGL decided to terminate the Contract in three stages. The entirety of the Contract was terminated by the end of May, 2022. [ 11 ] The pipeline project has since been all but completed. Some of the work originally assigned by the Contract to PAPC was completed by other contractors. [ 12 ] The termination of the Contract has given rise to a litigious dispute between the parties.
CGL is of the view that it was entitled to terminate the Contract due to certain defaults by PAPC. CGL is also of the view that it experienced significant losses as a result of having to shift PAPC’s work to other contractors. PAPC and Bonatti deny that PAPC defaulted on the Contract and deny that CGL was entitled to terminate the Contract for cause.
As might be expected, the amount of CGL’s losses, if any, are also in dispute. 2.3 The Meeting of June 15, 2022 [ 13 ] Following an unsuccessful mediation in April, 2022, representatives of PAPC, Bonatti, and CGL met on June 15, 2022 (the “Meeting”) to discuss various outstanding issues. PAPC’s and Bonatti’s representatives at the Meeting were Mr. Andrea Colombo, Mr. Roberto Castelli, and Mr. Donato Santomauro. CGL’s representatives at the Meeting were Mr. Bevin Wirzba and Mr. Kent Wilfur. All of these persons swore Affidavits in relation to this application. With the exception of Mr.
Santomauro, all of them were questioned on their Affidavits, and the resulting transcripts are in evidence. 2.4 The Evidence of Mr. Andrea Colombo [ 14 ] The evidence relied upon by the Applicants includes that of Mr. Colombo, the Chief Executive Officer of Bonatti. In paragraph 13 of his Affidavit of October 17, 2023, Mr. Colombo states that a verbal forbearance agreement was reached at the Meeting of June 15, 2022: 13. The meeting took between 1 hour and 90 minutes. It was friendly.
We all introduced ourselves and discussed whether the entire dispute could be resolved, and if not, sought assurances from CGL about the letter. I emphasized that calling on the letter would have serious negative repercussions for Bonatti and PAPC. Mr. Wirzba told me “CGL is not in the habit of putting its contractors out of business”, or words to that effect. He said he understood our concerns and agreed that CGL would not call on the letter pending the outcome of dispute resolution. We shook hands on the agreement. I was relieved; this gave Bonatti breathing room to continue through dispute resolution. If Mr.
Wirzba had not agreed, Bonatti would have had to seek urgent relief from a Court to restrain CGL from calling on the letter. [ 15 ] Mr. Colombo’s handwritten notes of the Meeting include a notation which reads “Guarantee letters – Non Tirano le lettere” which means “Guarantee letters – they do not pull the letters”. [ 16 ] Mr. Colombo’s Affidavit also expresses the following view as to the nature of the consideration agreed to by the Applicants in exchange for CGL’s promise to forbear from drawing upon the Letter of Credit: 19.
The combined effect of these meetings, from my perspective, was that we had come to a firm, enforceable agreement between CGL and Bonatti/PAPC in which CGL would forbear calling on the Letter of Credit while the contractual dispute resolution process played out. In return, Bonatti and PAPC would, among other things: a. Continue to renew and keep the Letter of Credit active until the arbitration award; b. Refrain from seeking emergency injunctive relief in Court or at the ICC to stop CGL from calling on the Letter of Credit; c.
Not include damages associated with the Letter of Credit in our ICC damages pleadings; d. Refrain from making alternative financing arrangements for our other work, as we would have had to do if the Letter had been at risk of being called upon. [ 17 ] None of the four points of consideration identified above were reflected in any handwritten notes of the Meeting. During questioning on his Affidavit, Mr. Colombo acknowledged that none of points (b), (c), or (
d) were mentioned during the Meeting. [ 18 ] Following the Meeting, Mr. Colombo prepared an email to the Bonatti board of directors which included the following comment: Wirtzba [ sic ] emphasized several times their desire not to “kill” contractors who are useful to them in Mexico as well, for example. In relation to this, we asked what their intentions were for the letter of credit and they confirmed that they expected it to continue to exist, but that they would not draw on it. [ 19 ] Mr. Colombo acknowledged during questioning that he did not take any steps after the Meeting to confirm the terms or
existence of any agreement with CGL. He did not send any confirmation to CGL in writing, and he did not instruct anyone to draft a formal agreement. [ 20 ] Mr. Colombo also states in his Affidavit that he met again with Mr. Wirzba on November 10, 2022, and May 15, 2023, and that on those occasions Mr. Wirzba reiterated that CGL would not call on the letter of credit pending the outcome of the arbitration. 2.5 The Evidence of Mr. Roberto Castelli [ 21 ] Mr. Castelli is the Director of Commercial and Business Development Senior Advisor to the Chief Executive Officer of Bonatti. Attached as Exhibit “A” to Mr.
Castelli’s Affidavit of November 14, 2023, are his handwritten notes of the Meeting. Those notes include the notation “PB they will not touch”, and he explains that the letters “PB” stood for “performance bond” being his way of referring to the Letter of Credit. The following exchange occurred during the questioning of Mr. Castelli on this aspect of his notes: Q: And there isn't anything in your notes that says that there was an agreement by CGL that it wouldn't touch the letter of credit until the arbitration is resolved? A: Well, you know, when we were there and -- let's say that Mr.
Wirzba said that they don't want to put people out of business and that they were not going to touch the PB, the performance bond, or letter of credit, I ·believe I didn't have to -- to write as much because for me that was already a big problem that was under resolution. So nothing was said that it couldn't be done later on. The only thing that was said was we not going to touch it because we don't want to put contractors out of business. [...] Q: Okay. I'd like to turn back now to the notes, please.
So I'm not -- you know, recognizing that I'm not able to read all of these notes, you're not aware of anything in Mr. Colombo's notes that specifically says that there was an agreement to not call on the letter of credit until after the arbitration? A: It was not said. That it would have been after the arbitration was not said.Was not even said that it was going to be done before the arbitration. Because our
interpretation in that meeting -- and then I was only in that meeting -- was really quite straightforward.· Somebody says I'm not going to pull it because I don't want to put you out of business, this doesn't happen the same day. Happens also the other days. So he could have said, you know, I'm not going to pull it now, but I cannot assure you that I will not pull it later on.·This was not said. 2.6 The Evidence of Mr. Bevin Wirzba [ 22 ] Mr. Wirzba is the Executive Vice-President and Group President, Liquids Pipelines and Coastal GasLink, at TC Energy Corporation. In his responding Affidavit, Mr.
Wirzba denies that he ever agreed on behalf of CGL not to draw upon the Letter of Credit. His Affidavit of October 18, 2023, includes the following: 4. I have reviewed the First Affidavit of Mr. Andrea Colombo of Bonatti S.p.A. (“Bonatti”) in some detail. In response to the entire First Affidavit, I categorically deny that I ever agreed with or represented to Mr. Colombo, Bonatti, or Pacific Atlantic Pipeline Construction Ltd. (“PAPC”) that CGL would “never” draw on the Letter of Credit provided by PAPC. [...] 7.
I recall making a comment at the meeting to the effect that TCE and CGL did not want to put Bonatti or PAPC out of business. However, I did not say or promise that CGL would never draw on the Letter of Credit at any time prior to the conclusion of the Arbitration. Rather, I indicated that CGL would work through matters in due course, by which I meant we would develop a robust and informed view of the case as it progressed and assess and act accordingly. [...] 21. I respectfully suggest that Mr.
Colombo is mistaken about his recollections of our discussions at the meetings held on June 15, 2022, November 10, 2022, and May 15,2023. My recollection is that I consistently maintained to Mr. Colombo that drawing on the Letter of Credit was an option and that I never took that option off the table as a tool to help complete the Project. 2.7 The Evidence of Mr. Kent Wilfur [ 23 ] Mr. Wilfur was a Vice President of CGL until September 9, 2022, and swore an Affidavit on November 6, 2023. Mr. Wilfur took some handwritten notes of the Meeting.
These include notations to the effect of “(2) want to maintain relationship” and “LOC – asked about the status – not our focus / will sink company”. Mr. Wilfur states his own recollection of what occurred at the Meeting as follows: 28. I recall Mr. Wirzba responding by saying that the Letter of Credit was “not our focus” and that CGL did not intend at the time of the Meeting to draw on the Letter of Credit. This was consistent with our briefing and preparation for the Meeting. Mr.
Wirzba did not say that CGL would “never” draw on the Letter of Credit or that CGL would not draw on the Letter of Credit until after the arbitration between CGL and PAPC had concluded. Had Mr. Wirzba said any of those things, it would have been wholly inconsistent with our briefing and preparation for the Meeting. 29. As a result, I was surprised to read in the First Affidavit of Mr. Colombo that Mr. Colombo believed that we had reached an
agreement at the Meeting pursuant to which CGL had apparently agreed to forbear on drawing on the Letter of Credit. I was surprised to read this because, as I mentioned above, CGL had consistently been asking PAPC and Bonatti to give CGL additional financial assurances, not fewer ones. PAPC and Bonatti refused to do so in March 2022 at our in person meeting, and PAPC refused to do so in April 2022 at the mediation. Given that context, Mr.
Wirzba and I would not have compromised the ability of CGL to draw on the Letter of Credit, given that the Letter of Credit was one of the strongest - if not the strongest - financial assurance that CGL had in hand from PAPC and Bonatti. 30. While I shook hands with Messrs. Colombo, Santomauro, and Castelli at the beginning and at the end of the Meeting, I did so as a social courtesy and not to consummate some sort of “handshake” agreement with Bonatti or PAPC, Contrary to what Mr.
Colombo says in his First Affidavit, I can definitively state there was no agreement at the Meeting about CGL “forbearing” on drawing on the Letter of Credit. There was also no agreement at the Meeting about the points outlined by Mr. Colombo in paragraph 19 of his First Affidavit. 2.8 Evidence Respecting the Parties’ Policies and Practices [ 24 ] The evidence on this application confirms that the parties and their related entities are highly sophisticated and experienced.
As might be expected of such entities, their internal policies require that their contractual obligations be adequately documented. [ 25 ] In his Affidavit of November 6, 2023, Mr. Wilfur states: 31. If there had been some sort of agreement at the Meeting about the Letter of Credit, then, pursuant to the decision making policies and processes of TCE and CGL, such an agreement would need to have been formally documented in writing and signed by two executives of TCE or CGL. That did not happen.
Further, other internal parties at TCE and CGL would have been updated to that effect, and that did not happen. [ 26 ] Similarly, the Code of Ethics of Bonatti S.p.A. includes the following: 3.7. Transparency […] All operations and transactions, understood in the broadest possible sense, must be lawful, authorized, coherent, congruous, documented, recorded and verifiable . Specifically, each operation and transaction must have an adequate record and must allow for the verification of the relevant decision, authorization and implementation process .
Each operation must also be accompanied by adequate supporting documents in order to be able to carry out, at any time, checks that can assess the characteristics of and reasons for the operation and identify who authorized, executed, recorded and verified the operation. [Emphasis added] 2.9 Bonatti’s Annual Report, 2021 [ 27 ] Bonatti’s Annual Report for the year 2021 (which was prepared after the Meeting of June 15, 2022) contained a brief statement respecting its stated understanding of CGL’s intention to forbear in drawing upon the Letter of Credit. That report contained a
summary of the project with CGL and the pending arbitration. That description concludes with this sentence: “The customer has confirmed that it will not enforce the letters of credit and guarantees issued by the parent.” [ 28 ] Email correspondence confirms that at least one person at TCE received and reviewed Bonatti’s 2021 Annual Report as part of TCE’s periodic reviews of Bonatti’s financial position. 2.10 The Arbitration [ 29 ] PAPC commenced an arbitration against CGL on August 9, 2022, pursuant to the terms of the Contract.
By its Answer and Counterclaim of September 16, 2022, CGL counterclaimed for more than $700 million, and added Bonatti as a party pursuant to its guarantee. The issues which arise in the arbitration include whether PAPC failed to perform its obligations under the Contract, and whether CGL was justified in terminating the Contract for cause.
The issues may also include whether CGL’s claim is subject to a limitation of liability clause in the Contract. [ 30 ] It is unnecessary for the purposes of the present application to conduct any further review or assessment of the merits of the parties’ respective positions regarding the issues submitted to arbitration.
It suffices to say that there exists a bona fide dispute, and that very large sums of money are at stake. [ 31 ] The arbitration hearing is currently scheduled to commence in November, 2024, and a decision is anticipated sometime in 2025. 2.11 The Draw on the Letter of Credit [ 32 ] The arbitration timetable required PAPC and CGL to exchange their first round of witness statements, expert reports, and memorials on November 3, 2023. Working towards that deadline, CGL received a Memorandum on October 6, 2023, from its expert, Mr.
Neil Gaudion of Secretariat Advisors LLC, setting out a preliminary assessment of the damages sustained by CGL in completing
PAPC’s scope of work (the “Secretariat Memorandum”).
At its conclusion, that Memorandum opines as follows: ...Even if the limitation of liability clause applies, which I understand is an issue in dispute between CGL and PAPC in the Arbitration, the damages claimed by CGL in the Arbitration are in excess of $117,162,384, which I have been advised is the amount of an irrevocable standby letter of credit issued by HSBC Bank Canada in favour of CGL as beneficiary. [ 33 ] Ten days after the date of the Secretariat Memorandum, on October 16, 2023, CGL executed a drawdown document on the Letter of Credit (the “Drawdown Document”).
The Drawdown Document was executed by two of CGL’s Vice Presidents, Mr. Blaine Trout and Mr. Agustin Barrenechea. Prior to doing so, both Mr. Trout and Mr. Barrenechea reviewed a number of documents, including the Secretariat Memorandum. In questioning, Mr. Barrenechea described the decision-making process to draw on the Letter of Credit: Q: So you understood that in signing this drawdown, you were telling the bank that PAPC had defaulted on its obligations under the contracts?
A: Based on the information provided to me to review and assess including, but not limited to, the Secretariat report, which is an independent third-party report. One which is quite robust. And I’m familiar with third-party reports, given my exposure with a different contractor. But the level of effort that’s required to develop such a report is robust in itself. So that did inform part of my decision- making process. And that in addition to, as noted earlier, my previous exposure and familiar with the performance and/or nonperformance of PAPC dating back to Q4 of 2020. [ 34 ] Mr.
Wirzba was also given the opportunity to comment upon the decision-making process leading up to the execution of the Drawdown Document during his questioning: Q: Were you involved, sir, in the decision to draw down on PAPC’s letter of credit? A: I was involved as in the same process that I identified earlier. The team did a thorough review, presented a recommendation to the governance committee. As part of that committee, I supported the recommendation. Q: Did a thorough review of what? A: A thorough review of the decision to draw on the letter of credit.
We use a very formal process called “decision quality”, which reviews all the elements of a decision ensuring that we have the right, meaningful, and reliable information, the correct logical reasoning, understand the trade-offs and implications to ensure that we make a high-quality decision in going forward. It’s part of our standard processes within Canada gas and in Coastal Gaslink. [ 35 ] The Drawdown Document executed by Mr. Trout and Mr.
Barrenechea on October 16, 2023, states in relevant part as follows: The Beneficiary [CGL] hereby certifies to the Bank [HSBC] that because the Counterparty [PAPC] has failed to pay the Beneficiary or perform its obligations in accordance with the terms and provisions of the Agreements (as defined in the Letter of Credit) between the Beneficiary and the Counterparty [the Contract] […], the Beneficiary is drawing upon the Letter of Credit in an amount equal to CAD $117,162,384.00. [ 36 ] The Drawdown Document was presented to the HSBC on the same day it was executed.
CGL provided notice to the Applicants of the Drawdown Document after it had been presented to HSBC. On the morning of October 18, 2023, Mr. Wirzba sent an email to Mr. Colombo stating as follows: Andrea, I understand that our legal counsel spoke this evening. We are willing to consider a brief pause [in] the draw on the letter of credit to allow the parties to negotiate for a short period of time; however, that solution would require settlement of the broader dispute between the parties with a significant payment to CGL. The structure and timing of that payment is open for discussion.
With regard to our prior discussions, I do not agree that I provided assurances that CGL would not draw on the Letter of Credit. Blaine is available to meet (cc’d), including in person if preferable, if you think discussions along the lines of what our counsel outlined would be productive. We look forward to hearing from you.
Bevin [ 37 ] Shortly following notification to the Applicants that the Drawdown Document had been delivered to the Bank, counsel for the Applicants wrote to the HSBC on October 18, 2023, requesting 7 days to demonstrate that the Letter of Credit should be dishonoured on the basis of fraud and other grounds. By letter dated October 18, 2023, HSBC responded in relevant part as follows: HSBC Canada (the “Bank”) is in receipt of a complying demand from the Beneficiary under the above-captioned standby letter of credit.
Standby letters of credit constitute autonomous instruments independent of the transaction underlying their issuance. As such, the Bank is unable to withhold or delay payment on the basis of a dispute in the underlying transaction. Further, on the basis of information presently available to the Bank, the Bank is unable to arrive at any conclusion that the demand is the subject of fraud. Consequently, the Bank is unable to pause the processing of the demand absent a withdrawal of the demand by the Beneficiary or an instruction from the Beneficiary to delay payment pending further direction from the Beneficiary.
3. Legal Principles 3.1 Legal Principles Respecting Letters of Credit and Interim Injunctions [38] Standby letters of credit play a significant role in the Canadian construction industry and remain the predominant for ofsecurity on international construction projects. Their purpose is to secure the performance of a contractor’s obligations. The essentialcharacteristic of letters of credit which ensures their commercial value is their autonomy from the underlying contract.
In the leadingCanadian case of Bank of Nova Scotia v Angelica-Whitewear Ltd., (SCC), [1987] 1 SCR 59, Le Dain J. addressed theprinciple of autonomy in the following terms: 10 The fundamental principle governing documentary letters of credit and the characteristic which gives them their internationalcommercial utility and efficacy is that the obligation of the issuing bank to honour a draft on a credit when it is accompanied bydocuments which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performanceof the underlying contract for which the credit was issued.
Disputes between the parties to the underlying contract concerning itsperformance cannot as a general rule justify a refusal by an issuing bank to honour a draft which is accompanied by apparentlyconforming documents. This principle is referred to as the autonomy of documentary credits… [39] Le Dain J.’s analysis in Angelica-Whitewear was informed by a review of the applicable authorities from the UnitedKingdom. A more recent
summary of those authorities was provided by Foxton J. in in Salam Air SAOC v Latam Airlines Group SA,[2020] EWHC 2414 (Comm) who wrote: 23. It has long been a cardinal principle of English commercial law that the court will only intervene by injunctive relief in the operationof irrevocable letters of credit and similar instruments (such as performance bonds) in exceptional circumstances.
Credits of this kind areintended to operate autonomously from the underlying commercial transaction in connection with which they are established, andgenerally involve an irrevocable promise by a financially strong third party (such as a bank or insurance company) to pay if certainconditions are met, the payer then enjoying a right of indemnity against the applicant who established the credit. [40] In Lazar Sarna, Letters of Credit: The Law and Current Practice, at p. 5-1, the author explains the “notion of autonomy” asfollows: The obligation of the issuer to pay must be executed as long as the conditions set out in the credit are met by the beneficiary.
Theobligation stands irrespective of any dispute between the customer and beneficiary as to partial or full execution of the underlyingcontract, or between the bank and the customer. […] The notion of autonomy has long been accepted as the very basis of the letter of credit system, permitting both assurance and immediacyof payment. [41] Le Dain J. went on in Angelica-Whitewear to explain that the principle of autonomy is subject to one recognized exception,fraud: 11 An exception to the general rule that an issuing bank is obliged to honour a draft under a documentary credit when the tendereddocuments appear on their face to be regular and in conformity with the terms and conditions of the credit has been recognized for thecase of fraud by the beneficiary of the credit which has been sufficiently brought to the knowledge of the bank before payment of thedraft or demonstrated to a court called on by the customer of the bank to issue an interlocutory injunction to restrain the bank fromhonouring the draft. [42] Although Angelica-Whitewear does not foreclose the possibility of new exceptions to the autonomy principle, the courts ofCanada have yet to grant an injunction against a draw on a letter of credit on any other basis.
In Fiberex Technologies Inc v Bank ofMontreal, 2015 ABQB 496 at para. 22, which addressed an application for an injunction against both the bank and the beneficiary of aletter of credit, Topolniski J. wrote that “[t]he sole exception to this mandate is the existence of fraud”. [43] Despite the common law’s traditional reluctance, relatively recent case law from the United Kingdom, Australia, andelsewhere holds that, at least as between the applicant and the beneficiary, the autonomy principle may be effectively impaired by theterms of an agreement between those parties: Sirius International Insurance Company v FAI General Insurance Ltd. [2003] EWCACiv 470, rev’d on other grounds [2004] UKHL 54; Simon Carves Ltd. v Ensus UK Ltd., [2011] EWHC 657 (QBD (TCC)); DoosanBabcock Ltd. v Comercializadora de Equipos y Materiales Mabe Limitada, [2013] EWHC 3201 (QBD (TCC)); Simic v New SouthWales Land and Housing Corporation, [2016] HCA 47.
In Simic, French C.J. wrote as follows at para. 8: The autonomy principle requires that the obligations of the issuing or accepting bank under the bond not be read as qualified by referenceto the terms of the underlying contract.
That said, it does not prevent a party to a contract who procures the issue of a performance bondclaiming as against the beneficiary that the beneficiary’s action in calling upon the bond is fraudulent or unconscionable or in breach of acontractual promise not to do so unless certain conditions are satisfied. [Emphasis added, footnotes omitted] [44] In terms of the standard of proof applicable to an application for an interim injunction to restrain a bank from paying out on aletter of credit, the usual standard of “a serious question to be tried” in RJR MacDonald Inc. v Canada (Attorney General), (SCC), [1994] 1 SCR 311 has been found to be insufficient.
As Le Dain J. stated in Angelica-Whitewear, “[a] strong prima faciecase of fraud would appear to be a sufficient test on an application for an interlocutory injunction.” The standard of a strong prima faciecase has been applied in numerous subsequent cases addressing injunctions against draws on letters of credit, including Fiberex at paras13-14, where Topolniski J. wrote:
14 A strong prima facie case falls somewhere between the “serious issue” required for a restrictive injunction and actual proof of success. This has been interpreted to mean: “a strong case with a high, although not absolutely assured, likelihood of success based on the material presently before the Court”: Quizno’s [ Canada Restaurant Corp. v 1450987 Ontario Corp., [2009] OJ No 1743 (Ont Sup Ct J) ] at para 42. [ 45 ] Those cases which recognize that an anti-beneficiary injunction may be issued on grounds other than fraud agree that the applicable standard of proof remains that of a strong prima facie case.
This subject was addressed by Foxton J. in Salam Air : 41. As Themehelp [ v West [1996] QB 84] does not itself address this issue, I approach it as a matter of principle. In my view there is a very powerful case that an anti-beneficiary injunction should have to meet the same enhanced merits test as an injunction against the credit-provider.
As I have noted, the enhanced merits requirement is a concomitant of the decision to treat irrevocable credits and similar instruments as equivalent to cash, a consideration which weighs as much in favour of its application to injunctions against the beneficiary which (if granted) would make the instrument very inferior to cash, as to injunctions against the credit provider preventing payment. 42.
For that reason, the enhanced merits test is not limited to cases in which the fraud exception is relied upon, but also extends to applications to injunct payment on the basis that the pre-conditions to a call on the instrument have not been satisfied. [ 46 ] The most recent and important Canadian decision in this subject area is Veolia Water Technologies, Inc. v K+S Potash Canada General Partnership , 2019 SKCA 25 .
In Veolia , Richards C.J.S. reviewed many of the above authorities and others, and provided the following assessment of the law: 43 There appears to be merit, as per Chief Justice French in Simic and the more recent English cases, in allowing an applicant to enjoin a beneficiary from drawing on a letter of credit in circumstances where the draw would be a violation of an express agreement between the beneficiary and the applicant, at least when the conditions limiting the beneficiary’s right to draw on the letter of credit are distinct from its obligations with respect to the performance of the substance of the underlying contract.
Simply put, I do not see the legal or commercial logic in allowing a beneficiary to clearly agree to the conditions on which it can have resort to a letter of credit and to then permit the beneficiary to immediately avoid those very same conditions by invoking the autonomy principle. However, given the importance of letters of credit in the commercial world, and the weight of the English authorities, it would seem an applicant should be obliged to establish a strong prima facie case that the beneficiary is expressly disentitled from making a draw before an injunction will issue.
The rationale for this approach, expressed in the context of performance bonds, was explained by Popplewell J. in Ouais Group [ Engineering & Contracting v Saipem SpA , [2013] EWHC 990]: 45. In my view the court must have a high degree of assurance that the beneficiary is not entitled to call on an on demand bond before it will, at an interlocutory stage, restrain payment of the bond. That follows from the very nature of an on demand bond, and the importance which such bonds have in international commerce.
They are the commercial equivalent of cash security for performance of obligations, payable against bona fide assertion of breach. By agreeing to provide a bond which is payable on demand, a party agrees that the bond may be called pending resolution of any dispute with the counterparty beneficiary. He thereby agrees to assume the risk of payment being made notwithstanding that he can subsequently establish in litigation or arbitration that the dispute is to be resolved in his favour. That is so where the dispute is whether he is in breach of the obligations for which the bond stands as security.
It is equally so where the dispute is whether circumstances have arisen which permit the bond to be called or require payment to be made under it. The nature of an on demand bond is that it is payable merely upon an assertion by the beneficiary of his entitlement to payment, without inquiry into the validity of the grounds asserted by the beneficiary as giving rise to that entitlement. The court should be reluctant to interfere unless confident that the grounds asserted do not give rise to the entitlement to payment.
For this reason what is usually required at the interlocutory stage is, at the least, a strong case that there is no such entitlement. 44 All of this said, I do not need to formally decide whether the approach endorsed in Simic should be adopted in Saskatchewan in order to resolve this appeal. This is because, even if that approach were to be adopted, Veolia would still be unable to secure the injunction it seeks.
As explained below, it has not established a strong prima facie case that KSPC is contractually prevented from making the draws in question. [ 47 ] Like the Applicants in the present case, Veolia argued before Richards C.J.S. that an anti-beneficiary injunction ought to be granted on the basis of the contractual duty of honest performance recognized in Bhasin v Hrynew , 2014 SCC 71 . This argument proved unsuccessful in the circumstances of that case: C.
The impact of Bhasin 53 As indicated above, Veolia submitted to the Chambers judge that the strong prima facie case of fraud requirement specified in Angelica-Whitewear did not apply here because, unlike the situation in that case, it was not relying on a failure to perform an underlying contract to prevent a beneficiary from drawing on a letter of credit. In oral argument, Veolia pursued this same broad theme but based its submissions on a substantially different foundation than the one it had relied on before the Chambers judge or in its factum.
More specifically, Veolia relied heavily on the principle of good faith analyzed by the Supreme Court in Bhasin .
It argued this principle should be called into play here to prevent KSPC from using the autonomy of the Letters of Credit as a shield behind which, according to Veolia, KSPC can ignore contractual terms prescribing when it was entitled to draw on those Letters. 54 I am not persuaded by Veolia’s root submission on this point, i.e., I am not persuaded that the principle of good faith can somehow be relied on here to prevent KSPC from drawing on the Letters of Credit until all of the disputes about its entitlements to make such draws have been resolved by a court or an arbitral tribunal.
This is simply a bridge too far. 55 In Bhasin , the Supreme Court recognized what Cromwell J., writing for the Court, called “the organizing principle of good faith” in the law of contract. This was seen as “a requirement of justice from which more specific legal doctrines may be derived” (at para 64). Justice Cromwell then went on to recognize a new common law duty of honest performance as a specific manifestation of the principle of good faith.
That duty requires parties to be honest with each other in the performance of their contractual obligations. 56 In doing all of this, the Supreme Court was nonetheless careful to counsel against seeing good faith as a general purpose tool for
reshaping the common law. Justice Cromwell expressly indicated that the principle was “not a free-standing rule, but rather a standardthat underpins and is manifested in more specific legal doctrines” (at para 64).
While indicating that the list of doctrines reflecting theprinciple of good faith was not necessarily closed, Cromwell J. also clearly acknowledged the importance of maintaining thepredictability of the law and the certainty of commercial relations (at paras 66, 70 and 71). 57 Veolia has not explained what doctrine of contract supported or informed by the principle of good faith would operate so as toyield the result it seeks in this case. Rather, as I understand its argument, Veolia is pointing to good faith as a kind of generic cure-all.
Inmy respectful view, this is not how the Supreme Court intended Bhasin to be applied. [48] In
summary, the courts of Canada have been reluctant to grant injunctions which impair the operation of irrevocable letters ofcredit. A more generous attitude would compromise the liquidity and utility of those instruments. Although the traditional rule is thatsuch injunctions are only available upon a showing of fraud, recent case law supports the view that injunctions may be issued against abeneficiary in circumstances where the draw would violate a contractual obligation owed by that party.
In determining such anapplication, the standard of proof arising at the first stage of the tripartite test is that of a strong prima facie case. 3.2 Principles of Contract Formation [49] The Applicants’ submission that an enforceable contract was entered into at the Meeting of June 15, 2022, necessitates areview of the basic principles of contract formation. A
summary of those principles was provided by Rowe J. in Ethiopian OrthodoxTewahedo Church of Canada St. Mary Cathedral v Aga, 2021 SCC 22: 35 A contract is formed where there is “an offer by one party accepted by the other with the intention of creating a legal relationship,and supported by consideration”: Scotsburn Co-operative Services Ltd. v. W. T. Goodwin Ltd., (SCC), [1985] 1 S.C.R.54, at p. 63. The common law holds to an objective theory of contract formation.
This means that, in determining whether the parties’conduct met the conditions for contract formation, the court is to examine “how each party’s conduct would appear to a reasonableperson in the position of the other party”: Owners, Strata Plan LMS 3905 v. Crystal Square Parking Corp., 2020 SCC 29, at para. 33. 36 For present purposes, it will suffice to focus on the requirement of intention to create legal relations. As G. H. L.
Fridman explains,“the test of agreement for legal purposes is whether parties have indicated to the outside world, in the form of the objective reasonable bystander, their intention to contract and the terms of such contract”: The Law of Contract in Canada (6th ed. 2011), at p. 15; see also S. M. Waddams” The Law of Contracts (7th ed. 2017), at p. 105.
This requirement can be understood as an aspect of valid offer andacceptance, in the sense that a valid offer and acceptance must objectively manifest an intention to be legally bound: Crystal Square, atparas. 49-50. 37 The test for an intention to create legal relations is objective. The question is not what the parties subjectively had in mind butwhether their conduct was such that a reasonable person would conclude that they intended to be bound: Kernwood Ltd. v. RenegadeCapital Corp. (1997), (ON CA), 97 O.A.C. 3; Smith v. Hughes (1871), L.R. 6 Q.B. 597, at p. 607.
In answering thisquestion, courts are not limited to the four corners of the purported agreement, but may consider the surrounding circumstances: Leemhuis v. Kardash Plumbing Ltd., 2020 BCCA 99, 34 B.C.L.R. (6th) 248, at para. 17; Crystal Square, at para. 37. 38 Under the objective test, the nature of the relationship among the parties and the interests at stake may be relevant to the existence ofan intention to create legal relations. For example, courts will often assume that such an intention is absent from an informal agreementamong spouses or friends: Balfour v. Balfour, [1919] 2 K.B. 571 (C.A.); Eng v.
Evans (1991), (AB KB), 83 Alta. L.R.(2d) 107 (Q.B.). The question in every case is what intention Is objectively manifest in the parties' conduct. 3.3 The Duty of Honest Performance [50] The Applicants’ alternative submission that CGL is prohibited from drawing on the Letter of Credit by the common law dutyof honest performance necessitates a brief review of certain aspects of the “organizing principle of good faith” and the related “generalduty of honesty in contractual performance” recognized in Bhasin.
In recognizing these new principles, Cromwell J. emphasized thatcontracting parties generally remain free to pursue their own self interest: [70] The principle of good faith must be applied in a manner that is consistent with the fundamental commitments of the common lawof contract which generally places great weight on the freedom of contracting parties to pursue their individual self-interest. Incommerce, a party may sometimes cause loss to another — even intentionally — in the legitimate pursuit of economic self-interest: A.I.Enterprises Ltd. v.
Bram Enterprises Ltd., 2014 SCC 12, [2014] 1 S.C.R. 177, at para. 31. Doing so is not necessarily contrary to goodfaith and in some cases has actually been encouraged by the courts on the basis of economic efficiency: Bank of America Canada v.Mutual Trust Co., 2002 SCC 43, [2002] 2 S.C.R. 601, at para. 31. The development of the principle of good faith must be clear not toveer into a form of ad hoc judicial moralism or “palm treeˮ justice.
In particular, the organizing principle of good faith should not be usedas a pretext for scrutinizing the motives of contracting parties. [51] Cromwell J. went on to recognize and define the “general duty of honesty in contractual performance”: [72] …The key question before the Court, therefore, is whether we ought to create a new common law duty under the broad umbrella ofthe organizing principle of good faith performance of contracts. [73] In my view, we should. I would hold that there is a general duty of honesty in contractual performance.
This means simply thatparties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This doesnot impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirementnot to lie or mislead the other party about one’s contractual performance. Recognizing a duty of honest performance flowing directlyfrom the common law organizing principle of good faith is a modest, incremental step. The requirement to act honestly is one of the most
widely recognized aspects of the organizing principle of good faith… [Emphasis added] [52] Bhasin’s duty of honesty in contractual performance was refined in the subsequent case of Wastech Services Ltd. v GreaterVancouver Sewerage and Drainage District, 2021 SCC 7 where Kasirer J. held that a contracting party may be required to exercisecontractual discretion in a manner consistent with the purposes identified by the contract: [75] To this end, it is helpful to keep in mind that, generally speaking, a range of outcomes flows from the choices that may beconsidered a reasonable exercise of discretion when considered in light of the purposes identified by the contract.
Some of these choicesmay properly be thought of as connected to the purposes of the discretion. Others will be demonstrably unconnected to the contemplatedpurposes. Wherever a party is granted discretion, there may be differing yet legitimate ways in which that party can exercise its powerthat is itself part of the bargain. In a contractual context, these choices are ascertained principally by reference to the contract, interpretedas a whole — the first source of justice between the parties. Good faith does not eliminate the discretion-exercising party’s power ofchoice.
Rather, it simply limits the range of legitimate ways in which a discretionary power may be exercised in light of the relevantpurposes (S. J. Burton, “Breach of Contract and the Common Law Duty to Perform in Good Faith” (1980), 94 Harv. L. Rev. 369, atpp. 385-86). Where discretion is exercised for an improper purpose, as against that which was intended by the parties, one that is“ulterior or extraneous” to their intentions, it is exercised in bad faith (J. D.
McCamus, “The New General ‘Principle’ of Good FaithPerformance and the New ‘Rule’ of Honesty in Performance in Canadian Contract Law” (2015), 32 J.C.L. 103, at p. 115). [53] The Applicants submit that the circumstances of the present case are similar to those addressed in C.M. CallowInc. v Zollinger, 2020 SCC 45. In that case, the Defendant was comprised of a group of condominium corporations who had entered intoa maintenance contract with the Plaintiff.
The Court found that the Defendant breached its duty to perform the contract in good faithsince it knowingly deceived and misled the Defendant into believing that the maintenance contract would not be terminated, and sincethe Plaintiff provided services over and above those required by the contract in reliance upon the Defendant’s false representations.Following his review of Bhasin and related authorities, Brown J. identified the facts amounting to the breach at paragraph 134: [134] In light of these principles ⸺ which, again, are well established and require nothing more than a statement by this Court of theirapplication to the duty of honest performance ⸺ I cannot accept Baycrest’s argument that its conduct fell on the side of innocentnon-disclosure.
Indeed, the trial judge found that “active communications between the parties between March/April and September 12,2013 . . . deceived Callow” (para. 66 ). Based on Baycrest’s conduct and express statements, the trial judge found that Baycresthad represented that the winter service agreement was not in danger of termination (paras. 65 and 76). Further, the trial judge found thatBaycrest knew that its representations were misleading and nonetheless expressed its intention of keeping Callow in the dark (paras. 48and 69).
These findings are sufficient to support the conclusion that Baycrest breached the duty of honest performance… [54] The Applicants also rely upon Canlanka Ventures Ltd v Capital Direct Lending Corp, 2021 ABCA 115. In that case, theDefendant was found to have breached a contract respecting the administration of certain mortgages by actively and intentionallymisleading the Plaintiff regarding the status of certain foreclosure proceedings.
The conduct found to constitute a breach of the duty ofhonest performance was described at paragraph 24: [24] The misrepresentations made here amounted to more than protecting the appellant’s advantages arising from theadministration agreement or failing to disclose so as to subordinate the appellant’s interests to those of the respondent. The trial judgefound, and the appellant does not argue otherwise, that the misrepresentations were intentional.
They actively misled the respondent,regarding the proceedings in relation to the Bastien mortgage, and therefore amounted to a breach of the duty of honesty in contractualperformance. Nothing in Bhasin makes a finding of a breach of the duty of honesty in contractual performance turn on the fact theunderlying misrepresentation was made for personal gain. The misrepresentations in this case were active, intentional and went wellbeyond innocent non-disclosure. 4.
Application of Legal Principles to the Applicants’Application for an Interim Injunction 4.1 The Alleged Verbal Forbearance Agreement [55] Applying the principles identified above to the evidence in this case, I will deal firstly with the Applicants’ submission thattheir evidence raises a strong prima facie case that CGL and PAPC entered into a legally enforceable forbearance agreement pursuant towhich CGL agreed not to draw upon the Letter of Credit until after the arbitration is complete.
I conclude that the Applicants have failedto meet that evidentiary threshold. [56] The Applicants have raised a strong prima facie case that, at the June 15, 2022, Meeting, Mr. Wirzba verbally stated words tothe effect that TCE and CGL did not want to put Bonatti out of business and words to the effect that CGL did not have an intention todraw on the Letter of Credit. Mr. Wirzba repeated words to the effect that CGL did not have an intention of drawing on the Letter ofCredit on at least one subsequent occasion, namely the meeting with Mr. Colombo on November 10, 2022.
I take these facts to havebeen acknowledged by Mr. Wirzba in his Affidavit of October 18, 2023, at paragraphs 7, 8 and 13. [57] However, the Applicants have not raised a strong prima facie case that Mr. Wirzba ever promised, stated, or otherwiserepresented that CGL’s intention not to draw on the Letter of Credit would remain in place until after the arbitration, or until any otherpoint in time. The Applicants’ own witness, Mr.
Castelli, denied that any such representation was made, CGL’s witnesses deny that anysuch representation was made, and no such intention can be objectively inferred from the surrounding circumstances. Hence, there is nota strong prima facie case that CGL promised to forbear from drawing on the Letter of Credit until after the arbitration, or until any otherpoint in time. [58] The evidence also does not raise a strong prima facie case that CGL intended to be legally bound by Mr. Wirzba’s statements.
Given the sophistication of the parties and their internal policies respecting the documentation of agreements, any intention to form a legally enforceable forbearance agreement respecting C$117,162,384.00 would undoubtedly have been reduced to writing. The fact that no such written confirmation was created – even in the form of a brief follow-up email – would cause the reasonable observer to conclude that the parties did not intend to be legally bound by Mr. Wirzba’s comments. [ 59 ] The evidence also does not raise a strong prima facie case that Mr.
Wirzba’s verbal statements achieved the requisite level of certainty necessary for the formation of a contract. In particular, he did not state that CGL would continue to refrain from drawing on the Letter of Credit until any particular point in time. Hence, there was never any meeting of the minds respecting the essential terms of any forbearance agreement. [ 60 ] The evidence also does not raise a strong prima facie case that PAPC or Bonatti provided any consideration to CGL in exchange for a promise to forbear. Although Mr.
Colombo states in his Affidavit that Bonatti and PAPC agreed to certain things in return for CGL’s promise, his answers during questioning confirm that those things were not discussed or agreed upon at the meeting. Hence, the forbearance agreement alleged by the Applicants would fail for a lack of any consideration. [ 61 ] Finally, even if the Applicants had raised a strong prima facie case as to the existence of a verbal forbearance agreement, such an agreement could not be performed within one year and was not reduced to writing and signed by a representative of CGL.
Consequently, it would be unenforceable by operation of s. 4 of the Statute of Frauds (1677), 29 Cha II c 3 (Eng.): Stochinsky v Chetner (Estate of) , 2003 ABCA 226 at paras. 23-27 . [ 62 ] In
summary, I conclude that the Applicants have not raised a strong prima facie case that CGL is precluded by the terms of a verbal forbearance agreement from drawing upon the Letter of Credit. 4.2 The Alleged Breach of the Duty of Honest Performance [ 63 ] I turn next to the Applicants’ submission that the requested injunction should be granted on the basis that drawing on the Letter of Credit would constitute a breach of CGL’s duty to perform the Contract (that is, the pipeline construction contract of July, 2018) honestly and in good faith.
The Applicants submit that CGL is required to exercise its discretion to draw upon the Letter of Credit in accordance with the purposes identified in the Contract. Those purposes, they argue, are limited to paying for the completion of the work on the pipeline project which is already substantially complete.
The Applicants argue that further, and in any event, CGL may not exercise its discretion to draw upon the Letter of Credit for the abusive purpose of frustrating the arbitration process that CGL has agreed to follow. [ 64 ] I conclude that the Applicants have not raised a strong prima facie case that CGL’s attempt to draw on the Letter of Credit constituted a breach of the duty of honest performance.
Like Richards C.J.S. in Veolia , I find this argument to be “a bridge too far”. [ 65 ] As an initial matter, I do not find that the evidence raises a strong prima facie case that CGL has acted in an abusive manner by executing and delivering the Drawdown Document on October 16, 2023. The evidence of CGL’s witnesses is that CGL chose to draw on the Letter of Credit at that point in time because they had recently received the Secretariat Memorandum of October 6, 2023, which opines that the damages claimed by CGL in the arbitration exceed the value of the Letter of Credit.
Although I accept the Applicants’ argument that CGL would likely have formed its own belief to that effect at some earlier point in time, the Secretariat Memorandum constituted the opinion of an independent expert which could be submitted as proof in the arbitration. This provided CGL with the assurances it required before drawing on the Letter of Credit. [ 66 ] The Applicants have not raised a strong prima facie case that Mr. Wirzba’s email of October 18, 2023, constitutes dishonest performance by CGL. It is true that that email reflects an attempt by Mr.
Wirzba to leverage CGL’s rights under the Letter of Credit into a negotiated settlement of the arbitration. But the duty of honest performance does not prohibit a contracting party from pursuing their individual self-interest, even if doing so may cause loss to another party. Delivering the Drawdown Document and offering a window for negotiation purposes constituted nothing more than this. [ 67 ] I do not find that the facts alleged by the Applicants on the present application are analogous to those in the Callow or Canlanka cases.
Here, the evidence does not raise a strong prima facie case that CGL lied to or intentionally deceived PAPC or Bonatti in order to achieve a benefit that it was not entitled to. At most, the evidence supports the occurrence of a misunderstanding induced by wishful thinking on the part of Mr. Colombo. [ 68 ] I do not find that the Applicants’ ostensible belief that CGL would not draw on the Letter of Credit, or its supposed reliance upon that belief, raises any barrier to CGL’s ability to draw on the Letter of Credit.
There is not strong prima facie evidence that CGL intentionally induced any such belief through lies or any other dishonest means. Consequently, CGL was not responsible for correcting that mistaken belief, even if CGL was aware of it. Further, the evidence does not raise a strong prima facie case that Bonatti placed significant reliance upon Mr. Wirzba’s informal remarks in conducting its own business. Although Bonatti did enter into many additional contracts after the Meeting of June 15, 2022, respecting very large sums of money, it is at best unclear that Mr.
Wirzba’s remarks are what caused Bonatti to enter into those contracts. [ 69 ] Finally, I do not agree that the duty of honest performance prohibits CGL from drawing on the Letter of Credit for purposes other than paying for the completion of the project.
Rather, I agree with CGL that the “guardrails” applicable to this exercise of discretion are those stated in the language of the Letter of Credit, namely that CGL must certify to the Bank that PAPC (1) has failed to pay the beneficiary; or (2) has failed to perform its obligations in accordance with the terms and provisions of the agreements; or (3) has not provided a replacement letter of credit at least 30 days prior to the expiration of the Letter of Credit. Given that CGL appears to have formed a bona fide belief that two of those conditions were present, it was entitled to draw on the Letter of Credit.
That is what the parties agreed to. Nothing in the language of the Contract or the related Letter of Credit suggests that CGL may only draw on the Letter of Credit to pay for the completion of the project. Further, no such limitation may be derived from the duty of honest performance since there is nothing dishonest about CGL drawing on the Letter of Credit for such purposes as recovering the added costs that CGL honestly believes it incurred to complete the project.
4.3 Conclusions on Interim Injunction [ 70 ] Given my finding that the Applicants have not brought forward a strong prima facie case that CGL is prohibited from drawing upon the Letter of Credit, it is not unnecessary for me to address the remaining two requirements of the tripartite test. [ 71 ] The Applicant’s application for an interim injunction is denied. 5. Request for an Injunction Pending Appeal [ 72 ] After the oral hearing of this application, the Applicants submitted correspondence to me requesting that any decision to deny their application for an interim injunction be “stayed” pending appeal.
Since a stay of a decision to deny an interim injunction would be of no avail to the Applicants, I take their application to be, in substance, an application for an interim injunction pending appeal.
In support of their request, the Applicants point out that since this Court and the Court of Appeal are about to close their doors for the holiday season, the Applicants will be unable to commence an appeal of this decision until after the Courts re-open, by which time the HSBC may have already paid out on the Letter of Credit. [ 73 ] I am not prepared to grant an interim injunction pending the completion of the Applicants’ intended appeal at this time. However, it would not be in the interests of justice to allow the Applicants’ right of appeal to be defeated by court closures during the holidays.
I therefore grant an interim injunction restraining CGL from drawing on the Letter of Credit until January 8, 2024. [ 74 ] Should the Applicants wish for the interim injunction to continue beyond January 8, 2024, they must commence and
schedule a more fulsome application to be heard on or before that date. In considering any such application, I would expect to be advised of what steps the Applicants have taken to expedite their appeal. Alternatively, the Applicants are at liberty to seek further injunctive relief from the Court of Appeal. 6.
Conclusions [ 75 ] The Applicants’ application for an interim injunction pending the arbitration is denied. [ 76 ] An interim injunction restraining CGL from drawing on the Letter of Credit is granted, but said injunction shall expire at midnight, January 8, 2024, unless extended by further Order. [ 77 ] The parties may address costs in writing within 30 days of the date of these reasons. Heard on the 19 th day of December, 2023. Dated at the City of Edmonton, Alberta this 22nd day of December, 2023. N.J. Whitling J.C.K.B.A.
Appearances: Michael Valo, Jessica Gahtan, Amir Ghoreshi Glaholt Bowles LLP for the Applicants Scott Matheson, Ryan Krushelnitzky, Field Law LLP for the Applicants
Keith Marlowe, K.C., Lindsay Rowell, Alyssa Duke, Callin Sereda Blake, Cassels & Graydon LLP for the Respondents Karen O’Keeffe TransCanada Pipelines Limited For the Respondents
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