In Eurobank Ergasias S.A. v. Bombardier inc., 2024 SCC 11, the Court held that a call on a bank guarantee in contravention of an order of an arbitral tribunal in a pending ICC arbitration amounted to fraud under Canadian law, such that the bank that issued a related counter-guarantee was required to refuse payment.
The dispute – The dispute arose from an arbitration between Bombardier and the Hellenic Ministry of National Defense (“HMOD”) over obligations relating to contracts for the procurement of fire fighting amphibious aircraft and related bank guarantees. HMOD made a call on the bank guarantee issued by Greek bank Eurobank (“Letter of Guarantee”) on the eve of the final arbitration award and in contravention to a procedural order from the ICC arbitral tribunal hearing the dispute. Eurobank initiated proceedings before the Greek courts seeking injunctive relief not to pay under the Letter of Guarantee. The Greek courts ultimately dismissed Eurobank’s application for injunctive relief, and Eurobank paid on the Letter of Guarantee.
In parallel, Bombardier initiated proceedings before the Québec Superior Court seeking injunctive relief to prevent the National Bank of Canada from paying Eurobank on the related letter of counter-guarantee (“Letter of Counter-Guarantee”).
Background – In 1998, HMOD entered into a procurement contract with Bombardier. A dispute arose when Bombardier determined that it would not be able to meet its obligations under a related offsets contract (regarding subcontracting to Greek companies). These contracts required Bombardier to secure a Letter of Guarantee from a Greek bank for potential liquidated damages if it did not fulfil its obligations. The Greek bank’s obligation to pay HMOD on demand was itself subject to a letter of counter-guarantee issued in Québec by the National Bank of Canada (“Letter of Counter-Guarantee”).
The Arbitration – Because it was unable to fulfill its contractual obligations to subcontract to Greek companies, Bombardier initiated arbitration proceedings against HMOD before the ICC to determine whether it was in breach of the offsets contract, as provided by the arbitration clause.
During the arbitration, HMOD formally undertook to Bombardier and the ICC arbitral tribunal not to demand payment under the Letter of Guarantee before the final award was issued. Nonetheless, HMOD demanded payment from Eurobank Ergasias S.A. (“Eurobank”) ̶ the Greek bank holding the Letter of Guarantee ̶ while the issuance of the final award was still pending. This led the ICC arbitral tribunal to issue a procedural order in August 2013 which enjoined HMOD from demanding payment under the Letter of Guarantee.
In December 2013, on the very day the ICC arbitral tribunal informed the parties that the final award would be released shortly, HMOD made a call on Eurobank for payment under the Letter of Guarantee. Believing that it would be exposing itself to serious liability under Greek law if it did not comply with HMOD’s demand, Eurobank made the payment. Eurobank then demanded payment of the full amount paid from National Bank of Canada under the Letter of Counter-Guarantee.
In response, Bombardier sought a permanent injunction from the Superior Court of Québec enjoining the National Bank of Canada from paying Eurobank under the Letter of Counter-Guarantee. Bombardier also sought the homologation of the ICC arbitral tribunal’s final award, which declared the offsets contract null and void ab initio, such that Bombardier did not owe HMOD any amounts.
The Québec courts granted Bombardier’s request for injunctive relief and homologated the ICC arbitral tribunal’s final award. Eurobank appealed the decision to the Supreme Court of Canada on the ground that the lower courts had erred in finding that the fraud exception applied to Eurobank.
The Supreme Court of Canada decision – The key issue before the SCC was whether the fraud exception applied. This is the only recognized exception to a bank’s obligation to pay the beneficiary of a letter of credit on demand. To answer this question, the Court elaborated in depth on the principles applying to the payment of on-demand letters of credit, which are beyond the scope of this article.
Justice Kasirer, writing for the majority, concluded that HMOD’s demands for payment in contravention of the ICC arbitral tribunal’s order amounted to fraud. And because it knew of and participated in HMOD’s fraud, Eurobank could not demand to be paid under the Letter of Counter-Guarantee.
In the course of its analysis of the conduct of HMOD and Eurobank, the SCC had to consider whether the judgments of the Greek courts concluding that HMOD did not commit fraud had any decisive relevance. It held that while foreign judgments not formally recognized in Québec provide prima facie proof of the reported facts and foreign law, the weight to be given to them is a matter for the trier of fact to decide in light of all of the evidence put before them. The SCC agreed with the lower courts that little or no weight ought to be given to an unenforceable foreign judgment that ignored relevant Canadian decisions or raises public order concerns. Here, the concern was the Greek court’s decision that a party can disregard an order of an arbitral tribunal.
The SCC further observed that had Eurobank or HMOD sought to recognize and enforce the Greek judgments in Québec, the inconsistency of these judgments with the ICC arbitral tribunal’s order and award might have been sufficient to deny their recognition and enforcement in Québec on the ground that they were “manifestly inconsistent with public order as understood in international relations” (art. 3155(5) of the Civil Code of Quebec).
Justices Karakatsanis and Côté dissented and would have dismissed Bombardier’s action. They placed a greater weight than the majority on the foreign Greek decisions, holding that “[i]nternational comity is an essential guiding principle when giving a factual effect to or enforcing a foreign decision”. They found that in this case, no public policy rationale justified not giving weight to the Greek court decisions according to which HMOD’s conduct did not amount to fraud. In particular, they found that HMOD’s disregard of the ICC arbitral order did not amount to fraud because that order was not enforceable in Greece. They further found that even if HMOD’s conduct had been fraudulent, Eurobank could not have been faulted for paying the bank guarantee in circumstances where a Greek court found that HMOD could validly draw upon it.
Contributor’s Notes:
A previous case note covered the decision of the Québec Court of Appeal: Arbitration Matters Case Note #634: Québec – Court prevents “improper attempt to circumvent” final ICC award.
The Supreme Court’s decision is a significant decision on the law of bank guarantees in Canada, which are often provided for in international contracts with arbitration clauses, especially in the field of construction. The decision expands on the principles applying to the sole exception to the obligation of banks to pay a beneficiary of a letter of credit on demand: fraud. While the SCC clearly stated that banks are not required to inquire into the performance of the underlying contract before honouring a payment demand under a letter of credit, an increased level of scrutiny from banks is warranted.
On the arbitration front, the majority’s ruling that a party’s attempt to circumvent an order from an arbitral tribunal may constitute fraud under Canadian law confirms the pro-arbitration stance of Canadian case law and demonstrates that Canadian courts will uphold and support the integrity of the international commercial arbitration system when necessary.
In this case, it is notable that the Supreme Court upheld the arbitral order even in the face of contrary foreign court decisions. The majority of the Supreme Court agreed with the observation of the majority of the Québec Court of Appeal that the Greek court decisions “essentially stand for the proposition that the Greek State may ignore with impunity both the Interim Order and the Final Award of the ICC Arbitral Tribunal even if it formally undertook to abide by the arbitration process”. According to the Supreme Court, those decisions thus raised public order concerns which justified giving them no evidentiary weight, despite comity principles.