Veolia Water Technologies, Inc., successor by merger to HPD, LLC Appellant (Plaintiff) v. K+S Potash Canada General, 2019 SKCA 25

Court of Appeal for Saskatchewan Docket: CACV3268 Citation: Veolia Water Technologies, Inc. v K+S Potash CanadaGeneral Partnership, 2019 SKCA 25Date: 2019-03-19Between:Veolia Water Technologies, Inc., successor by merger to HPD, LLCAppellant (Plaintiff)AndK+S Potash Canada General PartnershipRespondent (Defendant)Before: Richards C.J.S., Ottenbreit and Schwann JJ.A. Disposition: Appeal dismissed Written reasons by: The Honourable Chief Justice RichardsIn concurrence: The Honourable Mr.

Justice Ottenbreit The Honourable Madam Justice SchwannOn Appeal From: QBG 1528 of 2018, ReginaAppeal Heard: November 23, 2018Counsel: Duncan Glaholt and Daniel Tapp for the Appellant Shaunt Parthev, Q.C., and Janelle Souter for the Respondent Richards C.J.S. I. Introduction [1] This appeal is about the circumstances in which a beneficiary can be enjoined from drawing on a letter of credit. [2] Veolia Water Technologies, Inc. [Veolia] provided K+S Potash Canada General Partnership [KSPC] with two irrevocablestandby letters of credit for which KSPC was the beneficiary.

KSPC made a demand to draw on one of the letters of credit and gavenotice to Veolia of its intention to draw on the other. [3] Veolia then commenced an action in the Court of Queen’s Bench wherein it alleged various breaches of contract by KSPC. Itsought an interlocutory injunction aimed at preventing KSPC from drawing on the letters of credit until a court or arbitral tribunal haddetermined whether KSPC had a right to do so. [4] A Chambers judge dismissed Veolia’s application.

He invoked the principle that an issuer’s obligation to honour a draft on aletter of credit is independent of the performance of the underlying contract. Relying on authorities such as Bank of Nova Scotia vAngelica-Whitewear Ltd., (SCC), [1987] 1 SCR 59 [Angelica-Whitewear], the Chambers judge held that KSPC’sattempt to draw on the letters of credit could be enjoined only if Veolia established a strong prima facie case of fraud. [5] Veolia appeals from the decision of the Chambers judge.

It argues that KSPC agreed to the conditions on which it would beentitled to draw on the letters of credit, that KSPC is in breach of those conditions and that KSPC should not be allowed to rely on theautonomy of the letters of credit to effectively avoid the conditions to which it has agreed. In making this argument, Veolia seeks toinvoke and build on the principle of good faith explored by the Supreme Court in Bhasin v Hrynew, 2014 SCC 71, [2014] 3 SCR 494[Bhasin]. [6] I am not persuaded that Bhasin should be relied on in the manner suggested by Veolia.

While the law in relation to enjoiningbeneficiaries from drawing on letters of credit is evolving, the Chambers judge made no error in denying the injunction application inthis case. As explained below, Veolia’s appeal must be dismissed. II. factual background [7] KSPC entered into a contract [Contract] with Veolia whereby Veolia agreed to design, supply and commission theevaporation, clarification and crystallization system for KSPC’s potash mine near Bethune, Saskatchewan. [8] The first letter of credit in issue here [Letter of Credit #1] arose out of the Contract. Sections 12(

a) and (

e) of the Contractread as follows: (

a) At the written request of the Owner from time to time, the Contractor shall furnish to the Owner one or more irrevocable stand-byLetters of Credit (each a “Letter of Credit”) in increments of US $100,000.00 up to an aggregate value of 25% of the Equipment SupplyPrice (as such Equipment Supply Price may be amended in accordance with the Contract including by the Owner exercising its purchaseoptions set out in sections 6 and 10 of this Schedule).

Each such Letter of Credit shall be in the form attached as the Letter of CreditSchedule and issued by a financial institution acceptable to the Owner securing the Contractor’s obligations under this Contractincluding, without limitation, the obligation to deliver the Equipment contemplated by the Contract Documents. For purposes of thissection 12, the Societe Generale shall be deemed to be a financial institution acceptable to the Owner. At the Owner’s request and

expense, the Contractor shall arrange for any such Letter of Credit to be confirmed by a financial institution designated by the Owner. … (

e) Without limiting the rights and remedies of the Owner, the Owner may draw upon the Letters of Credit if the Contractor defaults in any of its obligations under this Contract and fails to remedy the default within any applicable cure period provided for in the Contract including, without limitation, the obligation to make the deliveries contemplated by and in accordance with the dates specified in the Contract Documents.

If any Letters of Credit will expire before the expiry of any such cure period, then the Owner may draw upon the Letters of Credit prior to their expiry without waiting for the expiry of any applicable cure period. (Emphasis added) [ 9 ] Letter of Credit #1 was issued on December 20, 2012. As amended, it provides that KSPC, as the beneficiary, may draw on Société Générale, a financial institution located in France, up to the aggregate amount of $14,600,000 USD.

The essential parts of Letter of Credit #1 say this: We SOCIETE GENERALE hereby authorize you to draw on us in respect of irrevocable standby letter of credit No. 02502-1087236PEE (“Credit”), for the account of the Applicant up to an aggregate amount of [$14,600,000 USD] available by your drafts at sight, accompanied by your signed certificate stating that : “We are entitled to draw on this Credit under the Design Supply and Commissioning Contract dated December 11 th 2012 issued to the Contractor (HPD Project Number 530021#0##).” … This Credit is issued in connection with the Contract between K+S Potash Canada GP (“Beneficiary”) and HPD, LLC (“Applicant/Contractor”) dated 11 th of December 2012.

We agree with you that all drafts drawn under, and in compliance with the terms of this Credit will be duly honored, if presented at the counters of SOCIETE GENERALE - GTPS/GTB/TRA/OPE/GAR – IMMEUBLE CRISTALLIA – 189 RUE D’AUBERVILLIERS 75886 PARIS CEDEX 18 (FRANCE) Attention: International Guarantees Department on or before 5:00 p.m. (ET) on 1 st of December 2013. … This Credit shall be governed by the International Standby Practices - ISP98 published by International Chamber of Commerce. (Emphasis added) [ 10 ] The Second Letter of Credit [Letter of Credit #2] is rooted in the July 2016 collapse at the KSPC mine site of the steel frame supporting a large crystallizer [Incident].

The crystallizer had been designed and supplied by Veolia and KSPC believed Veolia was responsible for the collapse and resulting damages. The amended reservation of rights agreement [Reservation of Rights Agreement] entered into by Veolia and KSPC after the Incident speaks to Letter of Credit #2 in terms that include, most importantly, the following: (

b) Subject to

Section 6(

c) below and without limiting the rights and remedies of KSPC, KSPC may draw upon the Letter of Credit for any losses, costs or damages which are recoverable under the Contract, that are suffered or incurred by KSPC as a result of, or arising out of the Incident or any related impacts of the Incident and exceed the insurance proceeds received or reasonably expected to be received by KSPC pursuant to the Builder’s Risk Policy, if KSPC determines, acting reasonably and in good faith, that the cause of the Incident is attributable to Veolia or its Personnel , in whole or in part, and such losses, damages or costs are not covered under the Builder’s Risk Policy. … (

e) KSPC may also draw upon the Letter of Credit for the full amount then available if, within thirty days after KSPC’s written request from time to time, Veolia does not extend the Letter of Credit for a further one year beyond its then current expiry. (Emphasis added) [ 11 ] Letter of Credit #2 was issued on December 21, 2016. It provides that KSPC, as the beneficiary, may draw on Société Générale up to the aggregate amount of $15,000,000 USD.

Its key terms say this: We SOCIETE GENERALE hereby authorize you to draw on us in respect of irrevocable standby letter of credit No. 02502-1148368PEE (‘‘Credit”), for the account of the Applicant up to an aggregate amount of USD 15,000,000.00 (Fifteen Million United States dollars) available by your drafts at sight, accompanied by your signed certificate stating that : “We are entitled to draw on this Credit under the Reservation of Rights Agreement between K + S Potash Canada GP, Veolia Water Solutions & Technologies North America, Inc. and Veolia Water Solutions & Technologies SA dated December 20 th , 2016.” … This Credit is issued in with the Reservation of Rights Agreement between the Beneficiary, the Applicant and Veolia Water Solutions & Technologies SA dated December 20, 2016.

We irrevocably agree with you that all drafts drawn under, and in compliance with the terms of this Credit will be duly honored, if presented at the counters of SOCIETE GENERALE – GTPS/GPS/OPE/TRA/GAR – Immeuble Cristallia – 189, rue d’Aubervilliers – 75886 Paris Cedex 18 (France) at or before 5:00 p.m. (ET) on June 30, 2018.

This Credit shall be governed by the International Standby Practices – ISP98 published by International Chamber of Commerce. (Emphasis added) [ 12 ] By way of clarification, there is no suggestion that the International Standby Practices – ISP98, referred to in both Letters of Credit #1 and #2, have any direct impact on the issues raised by this appeal. [ 13 ] KSPC made a demand on Letter of Credit #1 on May 14, 2018. KSPC gave notice to Veolia on April 30, 2018, that it intended to make a demand on Letter of Credit #2.

III. the queen’s bench and other proceedings [ 14 ] On August 18, 2017, Veolia commenced an arbitral proceeding against KSPC through the ADR Institute of Canada asking for compensation for certain work that it had performed following the Incident. [ 15 ] On April 6, 2018, KSPC filed a statement of claim in the Court of Queen’s Bench seeking an amount exceeding $180,000,000 CAD in damages against Veolia in connection with the Incident. [ 16 ] Veolia filed a statement of claim in the Court of Queen’s Bench on May 23, 2018.

In it, Veolia alleged that KSPC had not satisfied the conditions necessary for it to make draws on either Letter of Credit #1 or Letter of Credit #2. IV. the decision under appeal [ 17 ] After filing its statement of claim, Veolia proceeded with a notice of application seeking an injunction prohibiting KSPC from drawing on either of the Letters of Credit. More specifically, Veolia claimed that, in relation to Letter of Credit #1, KSPC had failed to provide it with an opportunity to cure alleged defaults under the Contract.

In relation to Letter of Credit #2, Veolia contended KSPC had proceeded without having a court or arbitral tribunal first determine whether its losses were recoverable under the Contract. On these grounds, Veolia sought an order preventing KSPC from drawing on the Letters of Credit until such time as the Court of Queen’s Bench or an arbitral tribunal had determined that KSPC was entitled to draw on them. [ 18 ] The Chambers judge began his analysis by outlining the legal framework governing interlocutory injunctive relief and by making specific reference to the three essential elements of that framework: (

a) the strength of the plaintiff’s case; (

b) irreparable harm; and (

c) the balance of convenience. [ 19 ] With respect to the strength of the plaintiff’s case, the Chambers judge noted this Court’s decision in Mosaic Potash Esterhazy Limited Partnership v Potash Corporation of Saskatchewan Inc. , 2011 SKCA 120 , 341 DLR (4th) 407 [ Mosaic ], to the effect that the “serious issue to be tried” standard is generally applicable.

However, he also pointed out that, in Mosaic , the Court had said there might be limited circumstances where a higher threshold was appropriate. [ 20 ] This led the Chambers judge to consider Angelica-Whitewear where the Supreme Court had held that, in order to enjoin an issuer from paying out on an irrevocable letter of credit, the party seeking the injunction was required to demonstrate a strong prima facie case of fraud.

The Chambers judge rejected an argument by Veolia to the effect that Angelica-Whitewear was inapplicable because Veolia was not seeking to enjoin a financial institution from honouring a demand on a letter of credit but, rather, was seeking to prevent a beneficiary from making a demand in the first place.

At paragraph 21 of his decision, the Chambers judge said, “If it is inappropriate to prevent the issuing institution from paying out on the letter of credit on anything less than a strong prima facie case of fraud, it should be the same for the party attempting to draw on it”. [ 21 ] Given that Veolia had not alleged fraud, the Chambers judge concluded its application to enjoin KSPC from drawing on the Letters of Credit must fail.

He then went on, briefly, to reject Veolia’s argument that it was seeking to do no more than oblige KSPC to comply with the contractual preconditions for making a demand on the Letters of Credit. The Chambers judge found that Veolia was attempting to draw a false distinction between (

a) a dispute about whether there had been a breach in performance under the Contract and (

b) a dispute about whether KSPC had satisfied conditions specified in the Contract and the Reservation of Rights Agreement in relation to when the Letters of Credit could be accessed. [ 22 ] In the end, the Chambers judge dismissed Veolia’s application with costs. V. analysis [ 23 ] As noted, Veolia argues that KSPC should be enjoined from drawing on the Letters of Credit until a court or arbitral tribunal has determined that it has a right to do so. [ 24 ] The analysis bearing on this argument is, of necessity, rooted in the principles governing the grant of interlocutory injunctive relief.

As explained in Mosaic , a court deciding whether to grant an interlocutory injunction is required to consider the strength of the plaintiff’s case, the question of whether the plaintiff would suffer irreparable harm if the injunction is not granted and the balance of convenience between the plaintiff and the defendant.

[25] The “strength of the case” element of this framework normally involves asking whether the plaintiff has advanced a seriousissue to be tried, as opposed to whether it has established a strong prima facie case. But, as recognized in Mosaic itself at paragraph 48, athreshold higher than the serious issue to be tried standard will sometimes be appropriate. Letters of credit is a subject matter that hasattracted a higher standard of this sort. I will deal first with that point and then turn to the arguments advanced by Veolia. A.

Letters of credit and injunctive relief [26] A letter of credit is a written undertaking addressed by an issuer to a beneficiary setting out an undertaking to honour aspecified demand for payment made by the beneficiary. See: Lazar Sarna, Letters of Credit: The Law and Current Practice, loose-leaf(2015-Rel 1) 3d ed (Scarborough, Ont: Carswell, 1992) at 1-1. Letters of credit were traditionally used as a payment mechanism in theinternational sale of goods.

However, they also came to be employed as a device in transactions such as construction contracts to securethe performance of non-monetary obligations owed to the beneficiary. In this context, they are known as “standby” letters of credit. See:Gordon B. Graham & Benjamin Geva, “Standby Credits in Canada” (1984) 9 Canadian Business Law Journal 180 at 182–184. [27] An essential characteristic of letters of credit is that the obligation of the issuer to pay exists independently of any disputeabout the performance of the underlying contract.

The issuer is obliged to honour a draft on a letter of credit when the draft isaccompanied by documents which, on their face, appear to be in accordance with the terms and conditions of the credit itself.

This wasexplained as follows by Le Dain J. in Angelica-Whitewear at page 70: The fundamental principle governing documentary letters of credit and the characteristic which gives them their international commercialutility and efficacy is that the obligation of the issuing bank to honour a draft on a credit when it is accompanied by documents whichappear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlyingcontract for which the credit was issued.

Disputes between the parties to the underlying contract concerning its performance cannot as ageneral rule justify a refusal by an issuing bank to honour a draft which is accompanied by apparently conforming documents. Thisprinciple is referred to as the autonomy of documentary credits. … [28] Nonetheless, there is a well-established exception to the autonomous nature of an issuer’s obligations to a beneficiary. It isthat an issuer is not obliged to honour a beneficiary’s draft if there has been fraud by the beneficiary.

Justice Le Dain also explained thisin Angelica-Whitewear at page 71: 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. … [29] In Angelica-Whitewear, the Supreme Court went on to hold that, in order to restrain payment under a letter of credit, the partyseeking the interlocutory injunction is required to prove a strong prima facie case of fraud (at 84).

B. Enjoining the beneficiary rather than the issuer [30] In its argument to the Chambers judge and in its factum, Veolia urged that the Angelica-Whitewear requirement of a strongprima facie case of fraud does not, or should not, apply when (as here) the subject of the injunction is the beneficiary of a letter of credit,rather than the issuer. Veolia did not press this same argument in its oral submissions. However, it did not abandon it either.

As aconsequence, this line of attack requires some consideration. [31] There is little helpful Canadian authority on the specific question of whether a party in KSPC’s position (a beneficiary) can beenjoined by a party in Veolia’s position (an applicant) from drawing upon a letter of credit because the draw would breach an agreementbetween the beneficiary and the applicant as to the circumstances in which a draw can be made. [32] Aspen Planners Ltd. v Commerce Masonry & Forming Ltd. (1979), (ON SC), 100 DLR (3d) 546 (Ont H CtJ) [Aspen Planners], is the most helpful Canadian authority.

There, the plaintiff landowner entered into an agreement with a contractorwith respect to the erection of a building. To secure its progress payments, the plaintiff instructed its bank to issue several irrevocableletters of credit with the contractor as beneficiary. The building collapsed while it was under construction and the plaintiff claimeddamages against the contractor. The plaintiff then brought an application for an interim injunction restraining both the contractor frommaking further drawings under the letters of credit and restraining the bank from paying such draws.

Justice Henry held that the bankcould not be enjoined because it was required “to pay the contractor under the letter of credit against a certificate that [was] notfraudulent to its knowledge” (at 551). He also held that the plaintiff could not enjoin the contractor, the beneficiary, from making drawson the letters of credit because, in the circumstances, such an injunction would amount to “freezing a potential asset of the contractor assecurity to satisfy a potential judgment” (at 552).

While expressing sympathy for the plaintiff given the possibility that it mightultimately obtain an unenforceable judgment, Henry J. said this was the risk the plaintiff had taken when it had arranged the letters ofcredit. [33] 1061590 Ontario Ltd. v Ontario Jockey Club, 1994 CarswellOnt 4552 (Ct J (Gen Div (Comm List))), should also be noted. Inthat case, Feldman J. (as she then was) considered an application for an interim injunction to restrain the defendant from calling on aletter of credit securing certain deposits.

The underlying agreement between the plaintiff and defendant gave the plaintiff the right toterminate the agreement and provided that the letter of credit would be returned to the plaintiff upon termination.

The plaintiff purportedto terminate the agreement and the defendant disputed the propriety of the termination, keeping the letter of credit. [34] To defend against the injunction application, the defendant relied on the principle of autonomy, citing Edward OwenEngineering Ltd. v Barclays Bank International Ltd., [1978] 1 All ER 976 (CA); Aspen Planners; Rosen v Pullen (1981), (ON SC), 126 DLR (3d) 62 (Ont SC (H Ct J)); and Angelica-Whitewear. Justice Feldman noted that only Aspen Planners

considered the issue of enjoining the holder of a letter from presenting it pending resolution of the dispute, and then distinguished that case as follows: 7 In my view the Aspen case is distinguishable from the facts before me. In essence, this court is being asked to enforce the specific terms of an agreement between the parties. They agreed that the deposits would be returned as would the letter of credit if the agreement was terminated under

Section 9. On an interim basis it seems to me that the status quo ought to be maintained pending resolution of the dispute as to the compliance with

Section 9 in order to allow the agreement to be able to be carried out depending on the result of the dispute. It cannot have been the intention of the parties that the letter of credit be negotiated by the vendor in the face of a termination notice by the purchaser under

Section 9 pending resolution of any dispute in light of the clear language of sections 4(

c) and 9. The fact that the letter of credit is good to March 1995 and is renewable supports, if anything, the concept that it be kept available pending a resolution of any dispute although counsel could point to nothing in the agreement which addresses disputes or interim arrangements pending resolution. The agreement speaks only of returning the letter of credit .

In the Aspen case no reference is made in the judgment to anything in the agreement dealing with the return of the letter of credit in the event of a negligence claim. (Emphasis added) Justice Feldman went on to grant an interim injunction, finding that one was appropriate in all of the circumstances. [ 35 ] I note, as well, Cineplex Odeon Corp. v 100 Bloor West General Partner Inc. , [1993] OJ No 112, 37 ACWS (3d) 1132 . There, Cineplex delivered a letter of credit to secure an obligation to pay amounts owing by it under a development agreement.

Bloor West ultimately took the position that Cineplex was in default of the agreement and demanded payment of the money under the letter of credit. At that point, Cineplex moved to enjoin Bloor West on the basis that there were no defaults triggering Bloor West’s right to call on the letter of credit.

Justice Blair dismissed the application on the basis that the only admitted exception to the autonomy principle in relation to letters of credit was fraud and Cineplex had failed to make out a strong prima facie case that Bloor West was acting fraudulently. [ 36 ] A few other Canadian decisions have touched on the issue of enjoining a beneficiary, but not in any way that is useful for present purposes.

See: Interphase Technologies, Inc. v American Microsystems, Inc. , 1984 CarswellBC 1456 (SC) ; Fire-Matics Canada Ltd. v Firetek Corp. , 1986 CarswellOnt 2960 (SC (H Ct J)); IMC Canada Ltd. v Enron Canada Corp. , 2001 ABQB 1121 , 318 AR 62; Caf é Can Cun Co Inc. v Halcor Development Corp. , 2018 ABQB 303 , 59 CBR (6th) 225. [ 37 ] The more directly instructive authorities come from England. Historically, the courts there declined to treat applications to restrain beneficiaries from drawing upon letters of credit any differently than applications to restrain issuers from paying on such letters.

See, for example: Hamzeh Malas & Sons v British Imex Industries Ltd. , [1958] 2 QB 127 (CA) ; Deutsche R ückversicherung A.G. v Walbrook Insurance Co. Ltd. , [1995] 1 WLR 1017 (QB) at 1027 and 1030 , aff’d Group Josi Re v Walbrook Insurance Co. Ltd. , [1996] 1 WLR 1152 (CA) . [ 38 ] However, in 2003, the Court of Appeal took a different approach in Sirius International Insurance Co (Publ) v FAI General Insurance Ltd. , [2003] EWCA Civ 470, [2003] 1 WLR 2214 [ Sirius International ] , rev’d on other grounds [2004] UKHL 54, [2004] 1 WLR 3251 .

The issue in that appeal was whether Sirius or FAI’s liquidator was entitled to certain amounts held in escrow. Those funds had come from a letter of credit established by FAI for the benefit of Sirius and had been drawn down into the escrow account pending the determination of the case. In surveying the governing legal principles, May L.J., writing for the Court of Appeal, stated as follows: [26] Letters of credit are an important commercial means of providing cash or security for those who in return provide goods or services. Typically a seller agrees to sell goods to a buyer.

The buyer establishes a letter of credit with a confirming bank in favour of the seller. The terms of the letter of credit spell out the circumstances in which the beneficiary – the seller – is entitled to draw it down. The terms will typically include presentation to the bank of specified shipping and insurance documents and the like. The bank's concern is to be satisfied that the terms of the letter of credit are fulfilled, whereupon the bank is obliged to pay the beneficiary.

Because the letter of credit is, subject to its terms, the equivalent of cash, the bank is not concerned with any disputed question, not within the terms of the letter of credit itself, which may arise under the underlying sale contract between the seller and the buyer , as for instance, if the goods were said to be defective or to have arrived late: see generally United City Merchants (Investments) Ltd v Royal Bank of Canada [1983] 1 AC 168 , 183. This is also the effect of

article 3(

a) of the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits (1993 revision) which was incorporated in the letter of credit in this case. Absent fraud by the seller presenting documents to the confirming bank seeking payment, the court will not restrain a bank from paying a letter of credit which is payable according to its terms, nor a beneficiary from seeking payment : see Group Josi Re (formerly Groupe Josi R é assurance SA) v Walbrook Insurance Co Ltd [1996] 1 WLR 1152 , 1160–1162.

Nor, again absent fraud, will the court restrain a beneficiary from drawing on a letter of credit which is payable in accordance with its terms on the application of a buyer who is in dispute with the seller as to whether the underlying sale contract has been broken – see for both these propositions the Deutsche R ü ckversicherung case [1995] 1 WLR 1017 , 1030 where Phillips J considered the authorities. This is the autonomous nature of letters of credit. By means of it, banks are protected and the cash nature of letters of credit is maintained.

There is no authority extending this autonomy for the benefit of the beneficiary of a letter of credit so as to entitle him as against the seller to draw the letter of credit when he is expressly not entitled to do so . (Emphasis added) [ 39 ] Turning to the particulars of the appeal before him, May L.J. concluded that the terms of an agreement between FAI and Sirius specifying when Sirius was entitled to draw on the letter of credit had never been fulfilled. Justice May saw this as being determinative.

He also observed that Sirius had never attempted to draw funds in breach of the agreement and, as a result, the question of whether an injunction should be granted had not arisen.

Nonetheless, he went on to observe that he would have been prepared to grant injunctive relief if that had been necessary: [29] I should add that, had it been necessary to do so, I should have been very strongly inclined to agree with the judge’s implicit finding that, had the question arisen out of the facts in the present case, the court would have granted an injunction restraining Sirius from drawing on the letter of credit in breach of conditions of the 3 September 1999 agreement: see Doherty v Allman (1878) 3 App Cas 709 , 719–20, modified perhaps as explained in Insurance Co v Lloyd’s Syndicate [1995] 1 Lloyd’s Rep 272 , 277 and see also Meagher,

Gummow & Lehane, Equity: Doctrines and Remedies, 3rd ed (1992). . [30] This analysis accords with the judgment of Phillips J in the Deutsche Ruckversicherung case [1995] 1 WLR 1017 , 1030. He was concerned that the commercial effectiveness of letters of credit would be eroded if a claimant could prevent a beneficiary from drawing on the letter of credit by doing no more than to persuade the court that there was a seriously arguable case that the claim under the underlying contract was invalid.

He did not consider that it was correct to imply a term into the underlying contract that the beneficiary would not draw on the letter of credit unless payment under the underlying contract was due. In the present case there is an unusual underlying contract and a express term restricting the circumstances in which Sirius were entitled to draw on the letter of credit. There is no need for implication. Further, FAI did not have only a seriously arguable case.

They have, in my judgment, positively established that Sirius were not entitled to draw on the letter of credit when its proceeds were placed in the escrow account. (Emphasis added) [ 40 ] Since the decision in Sirius International , other English judges have also recognized that a court may enjoin a beneficiary from drawing on a letter of credit where there is a term in the underlying agreement that restricts the circumstances in which the beneficiary can make a draw.

See, for example: Permasteelisa Japan KK v Bouyguesstroi and Banka Intesa SpA , [2007] EWHC 3508 (TCC); Simon Carves Limited v Ensus UK Limited , [2011] EWHC 657 (TCC) [ Simon Carves ]; Ouais Group Engineering & Contracting Limited v Saipem Spa & ORS , [2013] EWHC 990 (Comm) [ Ouais Group ]; MW High Tech Projects UK Limited v Biffa Waste Services Limited , [2015] EWHC 949 (TCC); Doosan Babcock Limited v Comercializadora de Equipos y Materiales Mabe Limiteda , [2013] EWHC 3201 (TCC) [ Doosan Babcock ]; Themehelp Ltd. v West , [1996] QB 84 (CA). [ 41 ] Simon Carves is perhaps worthy of more detailed consideration.

There, a contractor provided an on demand performance bond, an instrument conceptually very similar to a letter of credit, pursuant to a construction contract that contained express conditions as to when a call on the bond could be made. In continuing an injunction to prevent such a call, Akenhead J. summarized the governing legal principles as follows at paragraph 33: (

a) Unless material fraud is established at a final trial or there is clear evidence of fraud at the without notice or interim injunction stage, the Court will not act to prevent a bank from paying out on an on demand bond provided that the conditions of the bond itself have been complied with (such as formal notice in writing). However, fraud is not the only ground upon which a call on the bond can be restrained by injunction. (

b) The same applies in relation to a beneficiary seeking payment under the bond. (

c) There is no legal authority which permits the beneficiary to make a call on the bond when it is expressly disentitled from doing so. (

d) In principle, if the underlying contract, in relation to which the bond has been provided by way of security, clearly and expressly prevents the beneficiary party to the contract from making a demand under the bond, it can be restrained by the Court from making a demand under the bond. (

e) The Court when considering the case at a final trial will be able to determine finally what the underlying contract provides by way of restriction on the beneficiary party in calling on the bond. The position is necessarily different at the without notice or interim injunction stage because the Court can only very rarely form a final view as to what the contract means.

However, given the importance of bonds and letters of credit in the commercial world, it would be necessary at this early stage for the Court to be satisfied on the arguments and evidence put before it that the party seeking an injunction against the beneficiary had a strong case. It can not be expected that the court at that stage will make in effect what is a final ruling. (Emphasis added) [ 42 ] The situation in Australia also deserves at least brief mention.

The decision in Wood Hall Ltd. v Pipeline Authority , [1979] HCA 21, 141 CLR 443 , has been interpreted in a number of decisions to suggest a beneficiary may be restrained from calling upon a bank to pay on a letter of credit, based on the terms of the underlying agreement. Recently, Chief Justice French of the High Court, writing for himself only but not in dissent, confirmed this approach in Simic v New South Wales Land and Housing Corporation , [2016] HCA 47, 260 CLR 85 [ Simic ] , a case dealing with a performance bond.

The Chief Justice noted that the legal principles governing the effect and operation of performance bonds are similar to those applicable to letters of credit and then observed that the autonomy principle “does not prevent a party to a contract who procures the issue of a performance bond claiming as against the beneficiary that the beneficiary’s action in calling upon the bond is fraudulent or unconscionable or in breach of a contractual promise not to do so unless certain conditions are satisfied”. [ 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 : 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. [ 45 ] With respect to Letter of Credit #1, Veolia points to s. 12(

e) of the Contract, quoted earlier and reproduced below for ease of reference: (

e) Without limiting the rights and remedies of the Owner, the Owner may draw upon the Letters of Credit if the Contractor defaults in any of its obligations under this Contract and fails to remedy the default within any applicable cure period provided for in the Contract including, without limitation, the obligation to make the deliveries contemplated by and in accordance with the dates specified in the Contract Documents.

If any Letters of Credit will expire before the expiry of any such cure period, then the Owner may draw upon the Letters of Credit prior to their expiry without waiting for the expiry of any applicable cure period. (Emphasis added) [ 46 ] In light of s. 12(e), Veolia contends there are two conditions precedent to KSPC being entitled to draw on Letter of Credit #1: (

a) KSPC must give Veolia notice of a default and (

b) KSPC must provide Veolia an opportunity to remedy the default within the applicable cure time. Veolia then goes on to assert that KSPC has met neither of these preconditions. In taking this position, Veolia appears to be referencing s. 19.1 of

Schedule 13 of the Contract.

Section 19.1 provides that, if a party is in breach of the Contract, the other party “may” give the defaulting party a notice specifying both the alleged breach and a reasonable time within which the breach must be rectified. On receipt of such a notice, the defaulting party must provide a program to deal with the breach. If the party that received the notice fails to rectify the breach or fails to take reasonable steps to begin rectifying it within the time specified in the notice, the party that provided the notice may itself take action to remedy the breach.

Any costs reasonably incurred in this regard will be a debt owing by the party that was in breach of the Contract. [ 47 ] In my opinion, the situation with respect to Letter of Credit #1 is considerably less clear than Veolia suggests. To begin, s. 12(

e) of the Contract says KSPC may draw on Letter of Credit #1 “if [Veolia] defaults” rather than providing that KSPC may draw on the Letter only if it gives Veolia “notice of default” as per s. 19.1 of

Schedule 13. Further, on the factual side of the issue of default, Josh Lommer, a KSPC vice-president, avers at paragraph 8 of his affidavit that “[i]t is KSPC’s determination that Veolia is responsible for the Incident, based on the thorough investigation and conclusions of world renowned independent third party investigators”. There can be no doubt here that KSPC believed there had been a major default by Veolia and that Veolia was aware of KSPC’s belief in this regard. What then about the idea of KSPC giving an opportunity to Veolia to deal with the default during the applicable cure period?

It is apparent that, whatever any such period might be in relation to the circumstances flowing out of the Incident, Veolia was not about to rectify any default. Mr. Lommer explained this as follows at paragraph 8 of his affidavit: … In the almost two years since the Incident occurred, Veolia has not accepted responsibility for the Incident, its deficient design of the crystallizer support structures, and the full costs of the remediation or the damages suffered by KSPC. It has also failed to repair building steel components of the roof.

In short, Veolia has failed to make out a strong prima facie case that KSPC is not entitled to draw on Letter of Credit #1. [ 48 ] With respect to Letter of Credit #2, Veolia relies on s. 6(

b) of the Reservation of Rights Agreement, quoted above, and set out again here: (

b) Subject to

Section 6(

c) below and without limiting the rights and remedies of KSPC, KSPC may draw upon the Letter of Credit for any losses, costs or damages which are recoverable under the Contract, that are suffered or incurred by KSPC as a result of, or arising out of the Incident or any related impacts of the Incident and exceed the insurance proceeds received or reasonably expected to be received by KSPC pursuant to the Builder’s Risk Policy, if KSPC determines, acting reasonably and in good faith, that the cause of the Incident is attributable to Veolia or its Personnel , in whole or in part, and such losses, damages or costs are not covered under the Builder’s Risk Policy. (Emphasis added) [ 49 ] Not insignificantly, Mr.

Lommer avers at paragraph 16 of his affidavit that “KSPC reasonably and in good faith determined that the cause of the Incident is attributable to Veolia and that these losses significantly exceed the amounts of insurance”. However, in its submissions, Veolia points to the connection between the Reservation of Rights Agreement and Change Order 45. These two contracts were executed concurrently on June 16, 2017, and item G of the Introduction of the Reservation of Rights Agreement says the Agreement was entered into, in part, to incorporate Change Order 45 in its terms.

On the strength of this, Veolia emphasizes the following provision in the Change Order: KSPC further agrees that: (

a) its obligation to pay Veolia for the additional Work described in this Change Order shall not be subject to any rights of set-off that KSPC may have under the Contract for other Claims that KSPC has or may have against Veolia and (

b) it will not draw upon the Letter of Credit to recover amounts paid to Veolia under this Change Order, until such time as a final determination of responsibility for the costs under this Change Order has been made pursuant to

Section 9 of the Reservation of Rights Agreement. (Emphasis added)

[ 50 ] In my opinion, none of this establishes a strong prima facie case that KSPC is not entitled to draw on Letter of Credit #2. To begin, there is nothing in the Reservation of Rights Agreement itself that suggests a draw on Letter of Credit #2 must await a formal determination of the cause of the Incident and an assessment of the damages flowing from it by a court or arbitral tribunal. To the contrary, s. 6(

f) of the Reservation of Rights Agreement is entirely inconsistent with the proposition advanced by Veolia. It provides as follows: (

f) KSPC shall reimburse Veolia for all sums which KSPC draws under the Letter of Credit for losses, costs or damages which are subsequently determined in accordance with the Contract not to be Veolia’s legal responsibility. As is apparent, if KSPC could not draw on Letter of Credit #2 until a court or arbitral tribunal had determined Veolia’s liability in relation to the Incident, there would be no need to provide in s. 6(

f) that KSPC would reimburse Veolia for sums drawn that were subsequently determined not to be Veolia’s responsibility. [ 51 ] In any event, the above-quoted language of Change Order 45 indicates that it applies only to amounts paid “under this Change Order”. The amount in issue in that regard, as explained by Mr. Lommer at paragraph 14 of his affidavit, is approximately $7 million. By way of contrast, the total claim by KSPC for non-insured property damages and remediation flowing from the Incident is in excess of $100 million.

Thus, even accepting that Change Order 45 obliges KSPC not to draw on Letter of Credit #2 until determinations of liability and damages in relation to the work contemplated by the Change Order have been made by a court or arbitral tribunal, that would not preclude KSPC from drawing on Letter of Credit #2 in respect of the $100-million-plus balance of the losses, costs and damages it says are owing to it. [ 52 ] In the end, therefore, Veolia’s submission on this point must fail.

It might be arguable, in a different case and on a different record, that a beneficiary may be enjoined from drawing on a letter of credit in the face of an express contractual restriction and a strong prima facie case that the beneficiary is in breach of the restriction. Here, there is no such restriction in either the Contract or the Reservation of Rights Agreement. Nor is there an evidentiary record demonstrating that, by drawing upon either Letter, KSPC would be in breach of any such restriction. 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 standard that underpins and is manifested in more specific legal doctrines” (at para 64).

While indicating that the list of doctrines reflecting the principle of good faith was not necessarily closed, Cromwell J. also clearly acknowledged the importance of maintaining the predictability 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 to yield 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.

In my respectful view, this is not how the Supreme Court intended Bhasin to be applied. D. Irreparable harm and balance of convenience [ 58 ] As just explained, Veolia has not established that its case is sufficiently strong to warrant an injunction being issued to prohibit KSPC from drawing on the Letters of Credit. That is determinative of this appeal. Accordingly, I find it unnecessary to consider the questions of irreparable harm and balance of convenience. VI. conclusion [ 59 ] As explained above, I conclude the Chambers judge did not err in rejecting Veolia’s application for an interlocutory injunction.

Veolia’s appeal is dismissed with costs to KSPC. “Richards C.J.S.” Richards C.J.S. I concur. “Ottenbreit J.A.”

Ottenbreit J.A. I concur. “Schwann J.A.” Schwann J.A.