In Veolia Water Technologies, Inc. v. K+S Potash Canada General Partnership, 2019 SKCA 25, Saskatchewan’s Court of Appeal expressly signalled its willingness to grant an injunction against a beneficiary attempting to draw on a letter of credit if the draw breached an express contractual restriction in the main contract. Having commenced arbitration, applicant sought the injunction until a court or an arbitral tribunal had determined the beneficiary’s right to draw on the letter. The Court recognized the autonomy of the letter of credit from the main contract and acknowledged a financial institution’s limited concern regarding whether to pay out on the draw made under its letter of credit.
By December 11, 2012 Design Supply and Commissioning Contract (“Contract”), Veolia Water Technologies, Inc. (“Veolia”) contracted with K+S Potash Canada General Partnership (“KSPC”) to design, supply and commission for KSPC an evaporation, clarification and crystallization system at KSPC’s potash mine in Saskatchewan.
Under the terms of the Contract, reproduced at para. 8 of the reasons, Veolia issued a December 20, 2012 irrevocable letter of credit, benefitting KSPC, to be drawn on a financial institution located in France, up to an aggregate amount of $14.6 million USD (“Letter of Credit #1”).
Some time later, a steel frame, supporting a large crystallizer at the mine site, collapsed (“Incident”). KSPC alleged that Veolia was responsible for the collapse and resulting damages. Veolia and KSPC negotiated a December 20, 2016 reservation of rights agreement (“Reservation of Rights Agreement”) which provided for a second letter of credit benefiting KSPC. That second letter of credit issued December 21, 2016, also to be drawn on the same financial institution, up to an aggregate amount of $15.0 million USD (“Letter of Credit #2”).
The key terms in each letter of credit are reproduced at paras 9-11 of the reasons.
Veolia initiated arbitration against KSPC on August 18, 2017 seeking compensation for work performed following the Incident. Eight (8) months later, KSPC initiated litigation against Veolia on April 6, 2018 in Saskatchewan’s Court of Queen’s Bench seeking $180 million CAD as damages regarding the Incident.
KSPC made a May 14, 2018 demand on Letter of Credit #1. KSPC had also given notice earlier, on April 30, 2018, that it intended to make a demand on Letter of Credit #2.
Veolia followed on May 23, 2018 by initiating litigation against KSPC in Saskatchewan’s Court of Queen’s Bench alleging that KSPC had not satisfied the conditions necessary for it to draw on either letter of credit. As part of its litigation, Veolia applied to enjoin KSPC from drawing on:
(i) Letter of Credit #1 because KSPC had allegedly failed to provide Veolia with an opportunity to cure the alleged defaults under the Contract; and,
(ii) Letter of Credit #2 because KSPC had allegedly proceeded without having a court or arbitral tribunal first determine whether KSPC’s losses were recoverable under the Contract.
Veolia’s application sought to enjoin KSPC from drawing on the letters until the court or an arbitral tribunal determined that KSPC was entitled to do so.
The Chambers judge dismissed Veolia’s application. His reasons are summarized at paras 18-21. The judge relied on the principle that the issuer’s obligation to honour a draft on a letter of credit is independent of the performance of the underlying contract. The judge relied on cases such as Bank of Nova Scotia v. Angelica-Whitewear Ltd., [1987] 1 SCR 59, 1987 CanLII 78 (SCC) (“Angelica-Whitewear”) to determine that KSPC could be enjoined only if Veolia established a strong prima facie case of fraud. Veolia had not alleged fraud.
Veolia argued unsuccessfully that it sought not to enjoin the financial institution from honouring a demand on a letter of credit but, instead, sought to prevent KSPC as beneficiary from making its demand in the first place.
Veolia was equally unsuccessful arguing that it sought only to require KSPC to comply with the preconditions for making the demands. The Chambers judge characterized this argument as drawing a ‘false distinction’ between a dispute about whether the Contract had been breached and a dispute about whether KSPC had satisfied conditions in the Contract and Reservation of Rights regarding when KSPC could draw on the letters of credit.
Veolia appealed. The Court of Appeal dismissed the appeal. (See urbitral note below.)
Though the Chambers judge had structured his analysis with reference to the three (3) legal elements governing interlocutory injunctions – (i) strength of applicant’s case; (ii) irreparable harm; and, (iii) balance of convenience – the Court of Appeal determined that Veolia failed to establish it had a sufficiently strong prima facie case to merit an injunction and found it unnecessary to consider irreparable harm or balance of convenience.
The Court acknowledged that letters of credit were traditionally used in international sales of goods but also served in construction contracts to secure performance of non-monetary obligations owed to the beneficiary, thereby being qualified as standby.
“An essential characteristic of letters of credit is that the obligation of the issuer to pay exists independently of any dispute about the performance of the underlying contract. The issuer is obliged to honour a draft on a letter of credit when the draft is accompanied by documents which, on their face, appear to be in accordance with the terms and conditions of the credit itself.”
The Court added that fraud by the beneficiary was recognized as “a well-established exception to the autonomous nature of an issuer’s obligations to a beneficiary”.
Veolia had urged in first instance that the strong prima facie case of fraud did not apply when one sought to enjoin the beneficiary and not the issuer. Veolia included that argument in its factum on appeal but did not pursue the argument in its oral submissions before the Court of Appeal. Because Veolia did not abandon the argument, the Court commented that “this line of attack requires some consideration”. The Court devoted paras 30-52 of its reasons to this issue.
It began its analysis observing that there is “little helpful Canadian authority on the specific question” of whether the beneficiary can be enjoined from drawing on a letter of credit because doing so would breach the main contract between the beneficiary and the party which requested the financial institution to issue the letter.
The Court considered Aspen Planners Ltd. v. Commerce Masonry & Forming Ltd. (1979), 1979 CanLII 1965 (ON SC), 100 DLR (3d) 546 (Ont. H Ct J), 1061590 Ontario Ltd. v. Ontario Jockey Club, 1994 CarswellOnt 4552 (Ct J Gen. Div. (Comm List)) and Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., [1978] 1 All ER 976 (CA); Aspen Planners; Rosen v Pullen (1981), 1981 CanLII 2889 (ON SC), 126 DLR (3d) 62 (Ont. SC (H Ct J)) as potential sources of authority and, at para. 36, listed a further four (4) cases which it characterized as ‘touching’ on the issue but “not in any way that is useful for present purposes.” The Court then turned to English cases as offering “more directly instructive authorities”, canvassing them at paras 37-41.
Up until 2003, the English cases considered by the Court disclosed to it an uncontroversial approach, favouring the autonomy of the letter of credit from the main contract. In 2003, 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 presented a different approach. Though the Court of Appeal in Sirius International readily held that a bank’s concern is to satisfy itself that the terms of the letter of credit had been fulfilled, the English Court of Appeal noted in obiter that it would have been prepared to grant an injunction if drawing on it breached conditions in the main contract.
Subsequent English cases also followed the reasoning introduced in Sirius International, agreeing that a court might enjoin a beneficiary where the main contract contains terms restricting the circumstances in which a draw may be made. See 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); 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); and, Themehelp Ltd. v. West, [1996] QB 84 (CA).
Canvassing that case law lead the Court of Appeal to conclude that “[t]here appears to be merit” in enjoining the beneficiary from drawing on a letter of credit where: (i) doing so would violate an express agreement between the beneficiary and the other party; and, (ii) the conditions of that agreement are distinct from the beneficiary’s obligations regarding performance of the main contract.
The Court suggested the conditions on which a court might be
willing to grant such an injunction.
“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.”
Having shown its openness to the argument, the Court of Appeal promptly withdrew it as an option in the case before it. The Court determined that the actual wording of the Contract did not support Veolia’s argument that the Contract imposed conditions over and above those in either letter of credit or otherwise altered access to drawing on them. The conclusion relies on the actual wording of the Contract and the letters of credit along with additional affidavit material given to the court which provided context for KSPC’s reasonable and good faith determination that Veolia was the cause of the Incident. The result guides parties as to what courts will require to consider an application for injunction: express wording and, potentially, evidence regarding the decision to draw. Those facts lead the Court to conclude that Veolia could not establish a strong prima facie case that KSPC was not entitled to draw on either letter of credit.
“[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.”
The Court did leave the door open, subject to the wording of the contracts between the parties and additional evidence.
“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.”
In issuing its reasons, the Court of Appeal has identified elements of interest to courts in such injunctions and created a ‘helpful Canadian authority on the specific question’.
urbitral note – Despite the result, Veolia applied for and obtained an order from a judge in Chambers for the Court of Appeal to enjoin KSPC from drawing on the letter pending its announced intention to seek leave to appeal the Court’s decision to Supreme Court. KSPC applied to review and overturn that Chambers judge’s order but was unsuccessful. See Veolia Water Technologies Inc. v K+S Potash Canada General Partnership, 2019 SKCA 73. On October 10, 2019, the Supreme Court denied leave to appeal, file no. 38640.
Despite recognizing the autonomy of the letter of credit from the main contract and acknowledging a financial institution’s limited concern regarding whether to pay out on the draw made under its letter of credit, the Court acknowledged that the parties may agree to express restrictions in the main contract and that Court ought to consider such wording when deciding if a party has a strong prima facie case for the injunction.