Ontario court found that Canadian Imperial Bank of Commerce colluded in dishonor of a letter of credit
In Nareerux Import Co Ltd v Canadian Imperial Bank of Commerce , the Ontario Court of Appeal did not allow an issuer of a letter of credit to refuse payment based on the beneficiary's non-compliance with the letter of credit's terms and conditions when the issuing bank has knowingly contributed to, or acquiesced in, the circumstances that undermined the prospect of strict compliance.
Thai Fisheries Co Ltd accepted letters of credit from Canadian Imperial Bank of Commerce in order to ensure payment for shipments of large quantities of Thai shrimp to Douglas R Robertson International Inc in the United States. Ultimately, the shrimp was to be sold by Robertson to Sam's Club.
Thai Fisheries and the bank agreed to include the following provision in the letters of credit:
"Payment of drafts or drafts drawn hereunder will be effected when accompanied by required documents and after receipt from the applicant of a signed purchase order(s) issued by Sam's Club and related delivery receipt(s) showing container number(s), number of cartons and evidencing that goods have been received by Sam's Club Distribution Centre(s)."
Robertson failed to deliver the receipts from Sam's Club to the bank and as a result Thai Fisheries did not receive payment for substantial amounts of shrimp supplied. However, the proceeds of sale were used by Robertson to reduce his line of credit at the bank. The bank was informed that Robertson may have been withholding the required documents and that there would be no further shipments to Sam's Club. Thai Fisheries was not advised of this information for more than a year thereafter.
The appellate court refused to allow the bank to rely on the defense of non-compliance when its own conducgt contributed to the noncompliance. The appellate court noted that the bank was aware that no receipts were produced for US$6.9 million of shrimp delivered by Robertson to Sam's Club, and that shrimp was being sold to purchasers, other than Sam's Club, that should have been subject to the requirement of producing receipts. The bank failed to bring this information to Thai Fisheries' attention and continued to accept the proceeds of sale to reduce Robertson's line of credit. The court upheld the trial judge's decision and held that the bank's conduct was correctly characterized as a direct breach of the principle of autonomy underpinning letter of credit transactions and as a breach of the bank's implied duty of good faith.
In finding that the bank had breached the guiding principle of autonomy, the court held that:
"Letters of Credit by the issuer and its customer as a tap for payment, depending upon when the Bank and its client wanted to effect such payment - in order to better their own positions vis-à-vis each other as debtor and creditor - nullifies the entire autonomy principle and the independent role required of the Bank under the Letters of Credit."
The court also noted that the bank had violated its implied duty of good faith and and also had failed to give timely notice of its dishonor.
Practice pointer – The beneficiary should never had accepted a letter of credit where it did not control the ability to submit compliant documents.
