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BEYOND FRAUD: RETHINKING THE AUTONOMY OF LETTERS OF CREDIT IN CANADA

International Construction Law Review

BEYOND FRAUD: RETHINKING THE AUTONOMY OF LETTERS OF CREDIT IN CANADA MICHAEL VALO Partner, Glaholt LLP MARKUS ROTTERDAM 1 Director of Research, Glaholt LLP 1. EXECUTIVE SUMMARY Are there limits to the autonomy principle? Can a beneficiary agree to conditions to obtain an autonomous letter of credit and then rely on autonomy to avoid those very conditions? In Canada, until recently, the answer to the second question would appear to have been “yes”. The only recognised remedy for an allegedly improper call was against the issuing bank in cases of clear fraud communicated to the issuing bank before payment. In view of the recent Saskatchewan Court of Appeal decision in Veolia Water Technologies Inc v K+S Potash Canada General Partnership , 2 there may now be room for an injunction against a beneficiary to prevent it from violating an express condition agreed between the beneficiary and the customer. A survey of recent case law in England, Australia, Singapore and Malaysia shows that courts in those jurisdictions have taken this step and permitted such injunctions. Whether based upon notions of “unconscionability”, as in Singapore and Malaysia, unnamed equity principles, as in England, or possibly a duty of honest performance in Canada as advocated for here, beneficiaries may not agree to conditions to obtain autonomous standby letters of credit, and then rely upon autonomy to shield themselves from the consequences of non-performance. 2. INTRODUCTION Standby letters of credit play a significant role in the Canadian construction industry 3 and remain the predominant form of security on international 1 Michael Valo is a partner and Markus Rotterdam is Director of Research at Glaholt LLP in Toronto, Canada. 2 2019 SKCA 25. 3 Graham, GB and Geva, B, “Standby Credits in Canada” (1984) 9:2 Canadian Business Law Journal 180 at 184. Pt 1] Beyond Fraud: Rethinking the Autonomy 73

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