Bank of Nova Scotia v. Angelica-Whitewear Ltd. and Angelica Corporation, (1987) 73 N.R. 158 (SCC)

• Judge: Beetz, Estey, Chouinard, Le Dain and La Forest, JJ.
• Court: Supreme Court (Canada)
• Case Date: March 05, 1987
• Jurisdiction: Canada (Federal)
• Citations: (1987), 73 N.R. 158 (SCC);36 DLR (4th) 161;[1987] 1 SCR 158;[1987] SCJ No 4 (QL);73 NR 158;6 QAC 1;36 BLR 140;1987 CanLII 78 (SCC);[1987] 1 SCR 59;1987 CanLII 80 (SCC)

BNS v. Angelica-Whitewear Ltd. (1987), 73 N.R. 158 (SCC)

MLB headnote and full text

[French language version follows English language version]

[La version française vient à la suite de la version anglaise]

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Bank of Nova Scotia v. Angelica-Whitewear Ltd. and Angelica Corporation

(No. 17632)

Indexed As: Bank of Nova Scotia v. Angelica-Whitewear Ltd. and Angelica Corporation

Supreme Court of Canada

Beetz, Estey, Chouinard, Le Dain and La Forest, JJ.

March 5, 1987.

Summary:

Whitewear opened an irrevocable letter of credit in favour of Protective (a Hong Kong company) to cover the purchase of uniforms from Protective. Drafts under the letter of credit were to be accompanied by specified documents. The letter of credit was a negotiation credit that included an undertaking to honour drafts presented with conforming documents by a negotiating bank. The parties agreed that the Uniform Customs and Practice for Documentary Credits applied. Whitewear disputed the bank's decision to pay two drafts presented for payment by the negotiating bank (Protective's bank). The draft accompanying invoice SS/3 for $107,061.60 was paid by the bank before Whitewear became aware of and informed the bank of a forged signature on the invoice. Before the draft accompanying invoice 0014 was paid, Whitewear advised the bank that there were certain discrepancies on the face of the documents tendered with the draft. In spite of Whitewear's representations the bank paid the draft. The bank sued Whitewear and another for monies owing under a promissory note. Whitewear made a cross-demand for $126,106.17, being the total of the drafts for the two invoices. Whitewear claimed the bank improperly paid the drafts where it had knowledge of the fraud by the beneficiary of the credit.

The Quebec Superior Court allowed the bank's action and dismissed Whitewear's cross-demand. Whitewear appealed the dismissal of its cross-demand respecting the amount of $19,045.57 for the alleged inflation of price in invoice 0014.

The Quebec Court of Appeal, in a judgment reported [1985] C.A. 718; 31 B.L.R. 155, allowed the appeal. The court upheld Whitewear's claim that payment of the draft was improper where the bank had prior knowledge of the fraud. The court did not deal with Whitewear's claim that there was documentary noncompliance with the terms and conditions of the letter of credit. The bank appealed.

The Supreme Court of Canada dismissed the appeal. The court held that the evidence did not support a finding that the alleged fraud respecting the invoice price was sufficiently established to the knowledge of the bank before payment of the draft, therefore the fraud exception to the autonomy of a documentary credit was not proved. However, the court held that a discrepancy on the face of the bills of lading respecting prepaid freight and continuous documentary cover to destination constituted documentary noncompliance with the terms and conditions of the letter of credit, therefore payment of the draft was improper.

Banks and Banking - Topic 4523

Letters of credit - Payment by bank - Autonomy of documentary letters of credit - The Supreme Court of Canada stated that "the fundamental principle governing documentary letters of credit and the characteristic which gives them their international commercial utility and efficacy is that the obligation of the issuing bank to honour a draft on a credit when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlying contract for which the credit was issued. Disputes between the parties to the underlying contract concerning its performance cannot as a general rule justify a refusal by an issuing bank to honour a draft which is accompanied by apparently conforming documents. This principle is referred to as the autonomy of documentary credits" - See paragraph 10.

Banks and Banking - Topic 4525

Letters of credit - Payment by bank - Fraud by beneficiary of credit - The Supreme Court of Canada discussed the fraud exception to the principle of autonomy of documentary letters of credit - The court stated that the fraud exception should not be confined to cases of fraud in the tendered documents, but should include fraud in the underlying transaction of such a character as to make the demand for payment under the credit a fraudulent one - The fraud exception should extend to any act of the beneficiary of a credit that would permit the beneficiary to obtain the benefit of the credit as a result of fraud - The exception does not extend to fraud by a third party of which the beneficiary is innocent and does not apply to the holder in due course of a draft on a letter of credit - See paragraphs 17 to 18.

Banks and Banking - Topic 4525

Letters of credit - Payment by bank - Fraud by beneficiary of credit - The Supreme Court of Canada stated that a person seeking an interlocutory injunction to restrain a bank from honouring a draft on a letter of credit must show a strong prima facie case of fraud - If the bank has already paid the draft, and payment is challenged as being improper or unauthorized, the test is was the fraud so established to the knowledge of the issuing bank before payment of the draft as to make the fraud clear or obvious to the bank - See paragraph 19.

Banks and Banking - Topic 4525

Letters of credit - Payment by bank - Fraud by beneficiary of credit - A bank paid a draft accompanying invoice 0014 - The invoice fraudulently inflated the price - The bank had knowledge of inflated prices for a previous invoice, but was not advised of fraud relating to invoice 0014 - The Supreme Court of Canada held that only when fraud appears on the face of the document or when fraud has been brought to its attention must the bank decide whether fraud has been so established as to require it to refuse payment - The Supreme Court of Canada held that since the fraud was not apparent on the face of the documents and the bank was not advised of any fraud, the fraud exception to the autonomy of documentary credits was not proved - See paragraphs 20 to 31.

Banks and Banking - Topic 4526

Letters of credit - Payment by bank - Documentary noncompliance with terms of letter of credit - The Supreme Court of Canada stated that the rule of documentary compliance required not only that the tendered documents conform to the terms and conditions of the letter of credit, but that the documents appear on their face to be consistent with each other - The court stated that the rule did not extend to minor variations or discrepancies that are not sufficiently material to justify a refusal of payment and that documentary noncompliance could not be cured by actual performance of the underlying contract - The court also stated that whether prejudice was caused by documentary noncompliance was irrelevant - See paragraphs 32 to 47.

Banks and Banking - Topic 4526

Letters of credit - Payment by bank - Documentary noncompliance with terms of letter of credit - A letter of credit provided that the seller would ship goods prepaid to Montreal - Bills of lading respecting one shipment provided different terms respecting transportation - The Supreme Court of Canada held that since the bills of lading and letter of credit were inconsistent on the face of the documents, there was documentary noncompliance with the terms and conditions of the letter of credit - The court held that the bank was therefore required to refuse acceptance of the documents and payment of the draft at the time they were tendered - The court held that the noncompliance could not be cured by shipment to Montreal at the cost of the seller - See paragraphs 32 to 47.

Contracts - Topic 2120

Terms - Express terms - Exclusionary clauses - Whitewear opened an irrevocable letter of credit in favour of Protective - A clause in the agreement between the bank and Whitewear purported to exclude the bank from liability for, inter alia, negligence or fraud by Protective - The Supreme Court of Canada opined that the clause would not exclude liability where the bank paid a draft that was accompanied by documents that were not in accordance with the terms and conditions of the letter of credit - The court opined that such an intention would have to be clearly expressed - See paragraph 48.

Cases Noticed:

Sztejn v. J. Henry Schroder Banking Corporation (1941), 31 N.Y.S. 2d 631 (S.C.), consd. [para. 12].

Intraworld Industries Inc. v. Girard Trust Bank (1975), 336 A. 2d 316 (Pa. S.C.), refd to. [para. 13].

New York Life Insurance Company v. Hartford National Bank & Trust Company (1977), 378 A. 2d 562 (Conn. S.C.), refd to. [para. 13].

First Arlington National Bank v. Stat his (1980), 413 N.E. 2d 1288 (Ill. App.), refd to. [para. 13].

Foreign Venture Limited Partnership v. Chemical Bank (1977), 399 N.Y.S. 2d 114 (App.Div.), refd to. [para. 13].

Dynamics Corporation of America v. Citizens & Southern National Bank (1973), 356 F. Supp. 991 (N.D.Ga.), refd to. [para. 13].

NMC Enterprises Inc. v. Columbia Broadcasting System Inc. (1974), 14 UCC Rep. 1427 (N.Y.S.C.), refd to. [para. 13].

United Bank Limited v. Cambridge Sporting Goods Corp. (1976), 360 N.E. 2d 943 (N.Y.C.A.), refd to. [para. 13].

Itek Corporation v. First National Bank of Boston (1981), 511 F. Supp. 1341 (D. Mass.), refd to. [para. 13].

Rockwell International Systems Inc. v. Citibank, N.A. (1983), 719 F. 2d 583 (2d Cir.), refd to. [para. 13].

Malas v. British Imex Industries Ltd., [1958] 1 All E.R. 262 (C.A.), refd to. [para. 14].

Discount Records Ltd. v. Barclays Bank Ltd., [1975] 1 All E.R. 1071 (Ch.D.), refd to. [para. 14].

R.D. Harbottle (Mercantile) Ltd. v. National Westminster Bank Ltd., [1977] 2 All E.R. 862 (Q.B.D.), refd to. [para. 14].

Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., [1978] 1 All E.R. 976 (C.A.), consd. [para. 14].

European Asian Bank A.G. v. Punjab and Sind Bank, [1983] 1 Lloyd's Rep. 611 (C.A.), refd to. [para. 14].

United City Merchants (Investments) Ltd. v. Royal Bank of Canada, [1983] A.C. 168, consd. [para. 14].

Lumcorp Ltd. v. Canadian Imperial Bank of Commerce, [1977] Que. S.C. 993, refd to. [para. 15].

Aspen Planners Ltd. v. Commerce Masonry & Forming Ltd. (1979), 100 D.L.R. (3d) 546 (Ont. H.C.), refd to. [para. 15].

C.D.N. Research & Developments Ltd. v. Bank of Nova Scotia (1980), 18 C.P.C. 62 (Ont. H.C.), refd to. [para. 15].

Henderson v. Canadian Imperial Bank of Commerce (1982), 40 B.C.L.R. 318 (S.C.), refd to. [para. 15].

Rosen v. Pullen (1981), 126 D.L.R.(3d) 62, refd to. [para. 15].

Canadian Pioneer Petroleum Inc. v. Federal Deposit Insurance Corp. (1984), 30 Sask.R. 315 (Q.B.), refd to. [para. 15].

Phoenix Conveyer and Belting Systems Inc. v. Speed King Manufacturing Com pany Inc. (1985), 37 Man.R.(2d) 84, refd to. [para. 15].

Etablissement Esefka International An stalt v. Central Bank of Nigeria, [1979] 1 Lloyd's Rep. 445, refd to. [para. 17].

Urquhart Lindsay and Company Limited v. Eastern Bank Limited, [1922] 1 K.B. 318, refd to. [para. 30].

English, Scottish and Australian Bank Ltd. v. Bank of South Africa (1922), 13 L1.L.Rep. 21 (K.B.), refd to. [para. 35].

Equitable Trust Company of New York v. Dawson Partners Ltd. (1926), 27 L1. L.Rep. 49, refd to. [para. 35].

Gian Singh & Co. Ltd. v. Banque de l'Indochine, [1974] 2 All E.R. 754, refd to. [para. 35].

J.H. Rayner and Company Limited v. Hambro's Bank Limited, [1943] K.B. 37, refd to. [para. 35].

Davis O'Brien Lumber Co. Ltd. v. Bank of Montreal, [1951] 3 D.L.R. 536 (N.B.S.C.A.D.), refd to. [para. 35].

Bank of America National Trust & Savings Association v. Liberty National Bank & Trust Co. of Oklahoma City (1953), 116 F. Supp. 233 (W.D.Okl.), refd to. [para. 36].

Moralice (London) Ltd. v. E.D. & F. Man., [1954] 2 Lloyd's Rep. 526 (Q.B.), refd to. [para. 37].

Soproma S.p.A. v. Marine & Animal By-Products Corporation, [1966] 1 Lloyd's Rep. 367 (Q.B.), refd to. [para. 37].

Margaronis Navigation Agency Ltd. v. Henry W. Peabody & Co. of London, [1965] 2 Q.B. 430, refd to. [para. 37].

Midland Bank Ltd. v. Seymour, [1955] 2 Lloyd's Rep. 147 (Q.B.), refd to. [para. 40].

Banque de l'Indochine et de Suez S.A. v. J.H. Rayner (Mincing Lane) Ltd., [1982] 2 Lloyd's Rep. 476 (Q.B.), [1983] 2 Lloyd's Rep. 228 (C.A.), refd to. [para. 40].

Bank of Montreal v. Recknagel (1888), 109 N.Y. 482 (C.A.), refd to. [para. 41].

Camp v. Corn Exchange National Bank (1926), 132 A. 189 (Pa.S.C.), refd to. [para. 41].

Guaranty Trust of New York v. Van Den Berghs Ltd. (1925), 22 Ll.L. Rep. 447 (C.A.), consd. [para. 41].

Orient Company Limited v. Brekke & Howlid, [1913] 1 K.B. 531, refd to. [para. 41].

Michael Doyle & Associates Ltd. v. Bank of Montreal (1982), 140 D.L.R. (3d) 596 (B.C.S.C.), refd to. [para. 41].

Hansson v. Hamel and Horley Limited, [1922] 2 A.C. 36 (H.L.), refd to. [para. 43].

Holland Colombo Trading Society Ltd. v. Segu Mohamed Khaja Alawdeen, [1954] 2 Lloyd's Rep. 45 (P.C.), refd to. [para. 43].

Statutes Noticed:

Code of Civil Procedure of Quebec, R.S.Q. 1977, c. 25, art. 1073, art. 1074, art. 1075, art. 1140.

Uniform Commercial Code (U.S.A.), sect. 5-114(2).

Uniform Customs and Practice for Documentary Credits (1962), art. 3, art. 7, art. 9.

Uniform Customs and Practice for Documentary Credits (1974), art. 7.

Uniform Customs and Practice for Documentary Credits (1983), art. 15.

Authors and Works Noticed:

Ellinger, E.P., The Tender of Fraudulent Documents Under Documentary Letters of Credit (1965), 7 Malaya Law Rev. 24 [para. 11].

Ellinger, E.P., Fraud in Documentary Credit Transactions, [1981] J.B.L. 258 [para. 11].

Harfield, Henry, Bank Credits and Acceptances (5th Ed. 1974), pp. 82-83 [para. 13].

Harfield, Henry, Letters of Credit (1979), pp. 84-85 [para. 13].

"Fraud in the Transaction": Enjoining Letters of Credit During the Iranian Revolution (1980), 93 Harv. L. Rev. 992 [para. 13].

Van Houten, Letters of Credit and Fraud: A Revisionist View (1984), 62 Can. Bar Rev. 371, pp. 380-381 [para. 13].

Gutteridge and Megrah, The Law of Bankers' Commercial Credits (7th Ed. 1984), p. 183 [para. 14].

Encyclopédie Juridique Dalloz: Répertoire de droit commercial (2ième éd. 1972), t. 2 [para. 16].

Stoufflet, Le crédit documentaire (1957), p. 327 [para. 16].

Pomerleau, La fraude du bénéficiaire du crédit documentaire irrevocable: Etude comparative en droit commercial internationale (1984), 44 R. du B. 113, p. 119 [para. 16].

Kozolchyk, Commercial Letters of Credit in the Americas (1966), pp. 296-297 [para. 16].

Ellinger, E.P., Documentary Letters of Credit (1970) [para. 16].

Sarna, Letters of Credit: The Law and Current Practice (2nd Ed. 1966) [para. 16].

Davis, The Law Relating to Commercial Letters of Credit (2nd Ed. 1954), pp. 165-166 [para. 18].

Chitty on Contracts (25th Ed. 1983), vol. 2, pp. 324 [para. 37]; 605 [para. 41].

Counsel:

Allan R. Hilton, for the appellant;

Mitchell Klein and Josée Gravel, for the respondents.

This appeal was heard on March 11, 1985, before Beetz, Estey, Chouinard, Le Dain and La Forest, JJ., of the Supreme Court of Canada.

On March 5, 1987, Le Dain, J., delivered the following judgment for the Supreme Court of Canada in both official languages.

Chouinard, J., did not take part in the judgment.