Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce,

• Jurisdiction: Ontario
• Judge: Rosenberg, Simmons and Blair, JJ.A.
• Neutral Citation: 2009 ONCA 764
• Citation: 2009 ONCA 764,(2009), 255 O.A.C. 83 (CA),97 OR (3d) 481,312 DLR (4th) 678,62 BLR (4th) 1,[2009] OJ No 4553 (QL),255 OAC 83,(2009), 255 OAC 83 (CA),255 O.A.C. 83,312 D.L.R. (4th) 678,97 O.R. (3d) 481,[2009] O.J. No 4553 (QL)
• Date: 04 November 2009
• Court: Court of Appeal (Ontario)

Nareerux Import Co. v. CIBC (2009), 255 O.A.C. 83 (CA)

MLB headnote and full text

Temp. Cite: [2009] O.A.C. TBEd. NO.023

Nareerux Import Co. Ltd. (plaintiff/respondent) v. Canadian Imperial Bank of Commerce (defendant/appellant)

(C47914; 2009 ONCA 764)

Indexed As: Nareerux Import Co. v. Canadian Imperial Bank of Commerce

Ontario Court of Appeal

Rosenberg, Simmons and Blair, JJ.A.

November 4, 2009.

Summary:

Robertson purchased shrimp from the plaintiff, warehousing the shrimp until resold, primarily under a contract with Wal-Mart to supply its Sam's Club outlets. The plaintiff needed assurances of payment and Robertson did not want to pay upon delivery, as it was not paid until the shrimp was accepted and paid for by the Sam's Club outlets. To facilitate the deal, Robertson obtained a $20 Million line of credit from CIBC and CIBC issued letters of credit to facilitate payment to the plaintiff. Payment to the plaintiff from Robertson's line of credit was delayed, by agreement, until a purchase order had been delivered by Sam's Club along with a delivery receipt (rather than the standard payment upon delivery of title documents to CIBC). The system worked initially, but eventually Robertson sold all of the delivered shrimp to Sam's Club outlets without delivering receipts to CIBC, and to non-Sam's Club customers, which meant that the plaintiff did not get paid. The balance owing under the letters of credit was $10,381,035. The proceeds were used by Robertson and CIBC to pay down Robertson's line of credit, without any reciprocal payment under the letters of credit. CIBC knew Robertson was selling shrimp to Sam's Club outlets without delivering receipts and also selling to third parties, yet did nothing to stop that practice, as CIBC's concern was solely with paying down the line of credit. CIBC waited a year before advising the plaintiff that the letters of credit had expired, which precluded the plaintiff from any legal action to recover the unpaid for shrimp. The plaintiff sued CIBC for the $10,381.035.

The Ontario Superior Court, in a judgment reported [2007] O.T.C. Uned. K60, allowed the action. CIBC breached its duty as the issuer of the letters of credit. To hold otherwise would allow CIBC to act with Robertson to bypass the letters of credit and use the money to pay down the debt owed to CIBC rather than the plaintiff. CIBC also breached its implied duty of good faith to the plaintiff. In its role as a lender, CIBC applied purchase monies to pay down its loans, rather than holding the funds on account for the plaintiff. CIBC acted to defeat the purpose of the letters of credit, violating its duty to consider the plaintiff's draw on the credit independently, in accordance with the principle of autonomy of letters of credit. CIBC appealed, submitting that the plaintiff accepted the risk of nonpayment if the condition of the letters of credit respecting delivery of receipts to CIBC were not met. Since that condition was not met, a strict interpretation of the letters of credit precluded entitlement to payment.

The Ontario Court of Appeal dismissed the appeal.

Banks and Banking - Topic 703

Duties of bank - General - Duty of good faith - [See Banks and Banking - Topic 714 ].

Banks and Banking - Topic 714

Duties of bank - General - Duties as issuer of letter of credit - Robertson purchased shrimp from the plaintiff, warehousing the shrimp until resold, primarily to Wal-Mart to supply its Sam's Club outlets - The plaintiff needed assurances of payment and Robertson did not want to pay upon delivery, as it was not paid until the shrimp was accepted and paid for by a Sam's Club - Robertson obtained a $20 Million line of credit from CIBC and CIBC issued letters of credit to the plaintiff for each purchase - Payment to the plaintiff was not made until a purchase order had been delivered by Sam's Club along with a delivery receipt - The system worked initially, but then Robertson sold shrimp to Sam's Club outlets without delivering receipts to CIBC, and also to third parties, resulting in the plaintiff not being paid - The balance owing under the letters of credit was $10,381,035 - The proceeds were used by Robertson and CIBC to pay down Robertson's line of credit - CIBC knew Robertson was selling shrimp without delivering receipts and to third parties, yet allowed the practice since CIBC's concern was paying down the line of credit to reduce its exposure - CIBC waited a year before advising the plaintiff that the letters of credit had expired, which precluded the plaintiff from any legal recourse to the unpaid for shrimp - The trial judge granted judgment for the full amount - CIBC appealed, submitting that the plaintiff accepted the risk of nonpayment if the condition of the letters of credit respecting delivery of receipts to CIBC were not met (i.e., strict construction, strict compliance) - The Ontario Court of Appeal dismissed the appeal, stating that "CIBC is disentitled to rely upon the defence of non-compliance because, ..., it knowingly contributed to, or acquiesced in, the circumstances that undermined the prospect of strict compliance, then used that non-compliance to justify the refusal of payment. It did so in collaboration with its customer, Robertson, in order to ensure that the proceeds of sale of the shrimp sold under the letters of credit were used to reduce the bank's significant exposure on the Robertson line of credit without corresponding payments being made to [the plaintiff] under the letters of credit. Whether this conduct is characterized as a direct breach of the principle of autonomy underpinning letter of credit transactions or as a breach of CIBC's implied duty of good faith not to act in a fashion meant to defeat or eviscerate the purpose of the letters of credit, matters little ... On either scenario - both of which were justifiably found by the trial judge to exist on the facts - CIBC, as issuer of the letters of credit, is precluded from raising the defence of non-compliance. Equity will not permit it to do so. There is a further basis for concluding that CIBC may not rely on the defence of non-compliance. The bank failed in its obligation to give timely notice of dishonour to [the plaintiff] when it held back on notifying the seller for more than a year that no receipts would be forthcoming and that the letters of credit would be cancelled." - See paragraphs 44 to 45.

Banks and Banking - Topic 4502

Letters of credit - General - Interpretation - [See Banks and Banking - Topic 714 ].

Banks and Banking - Topic 4510

Letters of credit - General - Notice of dishonour - [See Banks and Banking - Topic 714 ].

Banks and Banking - Topic 4523

Letters of credit - Payment by bank - Autonomy of documentary letters of credit - [See Banks and Banking - Topic 714 ].

Banks and Banking - Topic 4526

Letters of credit - Payment by bank - Documentary noncompliance with terms of letter of credit - [See Banks and Banking - Topic 714 ].

Banks and Banking - Topic 4530

Letters of credit - Payment by bank - Rule of strict documentary compliance - The Ontario Court of Appeal stated that "the issuer of a letter of credit may be precluded from relying on the doctrine of strict compliance in certain situations. Examples of circumstances in which an issue of a letter of credit has disentitled itself to do so include those in which the issue (i) has waived strict compliance, either expressly or by its conduct; (ii) has delegated its duty to evaluate a beneficiary's documentary presentation independently; (iii) has been unjustly enriched by the credit transaction; (iv) has engaged in improper consultations with its customer concerning whether to accept or refuse the documents tendered; (v) has induced the beneficiary to believe the credit would be honoured until after its expiry date, when it was too late for the beneficiary to correct the situation; and (vi) has failed to provide prompt notice of dishonour to the beneficiary" - See paragraph 58.

Banks and Banking - Topic 4531

Letters of credit - Payment by bank - Rule of strict documentary compliance - Waiver - [See Banks and Banking - Topic 4530 ].

Cases Noticed:

Alaska Textile Co. v. Chase Manhattan Bank (1992), 982 F.2d 813 (2nd Cir.), refd to. [para. 49].

Mutual Export Corp. v. Westpac Banking Corp. (1993), 983 F.2d 420 (U.S.C.A., 2nd Cir.), refd to. [para. 50].

Exxon Co. v. Banque de Paris et des Paysbas (1989), 889 F.2d 674 (5th Cir.), cert. denied (1990), 496 U.S. 943, refd to. [para. 50].

Timber Falling Consultants Inc. v. General Bank (1990), 751 F. Supp. 179 (D. Or.), refd to. [para. 50].

Karpassia Shipping Co., S.A. v. Chase Manhattan Bank, World Trade Center Branch No. 232 (1993), 1980 U.S. Dist. LEXIS 17285 (S.D.N.Y., 2nd Cir.), refd to. [para. 50].

Voest-Alpine International Corp. v. Chase Manhattan Bank N.A. (1983), 707 F.2d 680 (2nd Cir.), refd to. [para. 52].

Tradax Petroleum American Inc. v. Coral Petroleum Inc. (1989), 878 F.2d 830 (5th Cir.), refd to. [para. 55].

Morguard Trust Co. v. Royal Bank (1988), 88 A.R. 351; 60 Alta. L.R.(2d) 99 (Q.B.), varied (1989), 101 A.R. 254; 70 Alta. L.R.(2d) 242 (C.A.), refd to. [para. 57].

Dibrell Brothers International S.A. v. Banca Nazionale Del Lavoro (1994), 38 F.2d 1571 (11th Cir.), refd to. [para. 57].

Barclays Bank D.C.O. v. Mercantile National Bank (1973), 481 F.2d 1224 (5th Cir.), cert. dismissed (1974), 414 U.S. 1139, refd to. [para. 57].

DBJJJ Inc. v. National City Bank (2004), 123 Cal. App.4th 530 (Ct. App.), refd to. [para. 58, footnote 5].

E & H Partners v. Broadway National Bank (1998), 39 F. Supp.2d 275 (S.D.N.Y.), refd to. [para. 58, footnote 6].

Lectrodryer v. Seoulbank (2000), 77 Cal. App.4th 723 (Ct. App.), refd to. [para. 58, footnote 7].

Amwest Surety Insurance Co. v. Concord Bank (2003), 248 F. Supp.2d 867 (E.D. Mo.), refd to. [para. 58, footnote 10].

Bank of Cochlin Ltd. v. Manufacturers Hanover Trust Co. (1986), 808 F.2d 209 (2nd Cir.), refd to. [para. 58, footnote 10].

Transamerica Life Canada Inc. et al. v. ING Canada Inc., [2003] O.A.C. Uned. 565; 68 O.R.(3d) 457 (C.A.), refd to. [para. 68].

CivicLife.com Inc. v. Canada (Attorney General) (2006), 215 O.A.C. 43 (C.A.), refd to. [para. 69].

GATX Corp. et al. v. Hawker Siddeley Canada Inc. et al. (1996), 1 O.T.C. 322; 27 B.L.R.(2d) 251 (Gen. Div.), refd to. [para. 69].

LeMesurier v. Andrus (1986), 12 O.A.C. 299; 54 O.R.(2d) 1 (C.A.), refd to. [para. 69].

Greenberg v. Montreal Trust Co., Meffert and Melfi (1985), 9 O.A.C. 69; 18 D.L.R.(4th) 548; 50 O.R.(2d) 755 (C.A.), refd to. [para. 69].

Gateway Realty Ltd. v. Arton Holdings Ltd. and LaHave Developments Ltd. (1991), 106 N.S.R.(2d) 180; 288 A.P.R. 180 (T.D.), affd. (1992), 112 N.S.R.(2d) 180; 307 A.P.R. 180 (C.A.), refd to. [para. 69].

Hembruff et al. v. Municipal Employees Retirement Board (Ont.) (2005), 203 O.A.C. 234; 78 O.R.(3d) 561 (C.A.), refd to. [para. 72].

Kentucky Fried Chicken Canada v. Scott Food Services Inc. et al. (1998), 114 O.A.C. 357; 41 B.L.R.(2d) 42 (C.A.), refd to. [para. 78].

Toronto (City) v. W.H. Hotel Ltd., [1966] S.C.R. 434; 56 D.L.R.(2d) 539, refd to. [para. 78].

Plan Group et al. v. Bell Canada (2009), 252 O.A.C. 71; 2009 ONCA 548, refd to. [para. 78].

Ventas Inc. et al. v. Sunrise Senior Living Real Estate Investment Trust et al. (2007), 222 O.A.C. 102; 85 O.R.(3d) 254 (C.A.), refd to. [para. 78].

Paramount Export Co. v. Asia Trust Bank Ltd. (1987), 193 Cal. App.3d 1474 (Ct. App.), refd to. [para. 83].

Authors and Works Noticed:

Baxter, Ian F.G., The Law of Banking (4th Ed. 1992), pp. 158, 159 [para. 53]; 161 [para. 54].

Halsbury's Laws of England (2005) (4th Ed. - Reissue), vol. 41, para. 375 [para. 53].

McCamus, John D., The Law of Contracts (2005), pp. 788 [para. 71]; 792 [para. 69].

Sarna, Lazar, Letters of Credit: The Law and Current Practice (3rd Ed. 1992) (2009 Looseleaf Update), pp. 1-2.1 to 1-3, 1-5 [para. 48]; 2-25, 2-27 [para. 86]; 5-1 [para. 54].

Counsel:

Joel Richler, J.A. Prestage and Marcy McKee, for the appellant;

Jack Berkow and Alexandra Lev-Farrell, for the respondent.

This appeal was heard on June 30, 2009, before Rosenberg, Simmons and Blair, JJ.A., of the Ontario Court of Appeal.

The judgment of the Court was delivered by Blair, J.A., and released on November 4, 2009.