ALBERTA – Injunction – There are limited circumstances in which an injunction can be used to stop a beneficiary from drawing on an Irrevocable Letter of Credit. A strong prima facie case is required.

ALBERTA – Duty of Good Faith – The contractual duty of good faith does not extend to an alleged oral forbearance agreement.

Pacific Atlantic Pipeline Construction Ltd. And Bonatti S.p.A v. Coastal Gaslink Pipeline Ltd.
2023 ABKB 735 (December 12, 2023)
Alberta King’s Bench (Whitling J.)

Background

Coastal Gaslink Pipeline (CGL) and Pacific Atlantic Pipeline Construction Ltd. (PAPC) entered a contract to construct portions of a pipeline. Disputes arose with PAPC’s performance. CGL terminated the contract and commenced an arbitration.

The contract required PAPC to provide an Irrevocable Letter of Credit (LC) in the amount of $117,162,384.00. One of the terms of the LC was that the issuing Bank agreed to honour a drawdown document if it followed the terms of the LC, without inquiry into whether the beneficiary had a right to request a drawdown. (para. 7)

On October 16, 2023, CGL sent its drawdown document to the Bank for the full amount of the LC. (para. 33). On October 18, 2023, the Applicants wrote to the Bank requesting 7 days to demonstrate that the LC should be dishonoured because of fraud. (para. 37)

PAPC applied to the court for an interim injunction to stop CGL from drawing on the LC until the conclusion of the arbitration. (paras.1, 32–36)

The parties went to mediation, which was unsuccessful. After the mediation they met at which time the representative of CGL said “CGL is not in the business of putting its contractors out of business”. (para.14). PAPC interpreted this statement as meaning that the LC would not be called upon. (para.21)

PAPC argued that it had an oral forbearance with CGL, in which CGL agreed not to draw on the LC and that CGL had created an unenforceable oral contract by making statements about PAPC and not wanting to put it out of business. PAPC also argued that drawing on the LC constituted a breach of CGL’ s duty of honest performance. (para. 2)

CGL denied the existence of the oral forbearance agreement (FA) (para.22) and argued that an injunction of the nature sought could only be obtained based on a strong prima facie case showing fraud. (para. 3)

Analysis

The Court noted that Standby Letters of Credit play a significant role in the Canadian construction industry and are the usual form of security on international construction projects. The LC secures the contractors performance of the contract. The LC is also autonomous from the underlying contract. This means that disputes between the parties to the underlying contract concerning performance cannot as a general rule justify the issuing bank from not honouring a drawdown if the supporting documentation conforms to the LC as set out in BNS v Angelica Whitewear Ltd, 1987 CanLII 87 SCC. (para. 38)

The Court referred to the UK case Salam Air SAOC v Latam Airlines SA [2020] EWHC 2414 (COMM), which stands for the proposition that courts will only intervene by injunctive relief in the operation of an irrevocable LC and similar instruments in exceptional cases. (para. 39)

In Canada, the only situation in which a court has granted an injunction against the drawdown of an LC is where there has been fraud. (para.42) The Court did reference case law from the UK and Australia where the autonomy principle related to LC’s may be impaired by an agreement between the parties not to call upon the LC. “The autonomy principle requires that the obligations of the issuing or accepting bank under the bond not to be read as qualified by reference to the terms of the underlying contract. That said it does not prevent a party to a contract who procures the issue of a performance bond claiming against the beneficiary that a beneficiary’s actions in calling the bond is fraudulent or unconscionable or in breach of a contractual promise not ot do something if certain conditions are satisfied(para.43)

The Court considered the three-part test in RJR MacDonald Inc. v. Canada  for an interim injunction and held that the applicable proof to restrain a Bank from paying out a LC would be a strong prima facie case of fraud, strong prima facie meaning somewhere between serious issue to be tried and actual proof of fraud (paras. 44 and 45)

The Court referred to Veolia Water Technologies v. K+S Potash Canada General Partnership 2019 SKCA 25 in which the Saskatchewan Court held that the 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 be granted. (para. 46)

Absent clear contractual provisions, the Alberta Court was reluctant to interfere with a beneficiary’s right to draw on a LC. The interim injunction application was denied, except for the limited extent of a 10-day injunction while PAPC pursued an appeal.( para.48)

The Court then reviewed the principles of contract formation as set out in Ethiopian Orthodox Tewahedo Church of Canada St Mary Cathedral v Aga, 2021 SCC 22. (para. 49)

The Court held that the Applicants failed to raise a strong prima facie case that CGL promised or represented an intention not to draw on the LC until after the arbitration. No such intention could be objectively inferred from the surrounding circumstances. Given the sophistication of the parties and their policies regarding documenting agreements, the fact that the alleged Forbearance Agreement was not reduced to writing would cause a reasonable observer to conclude that the parties did not intend to be legally bound by the comments made by the CGL representative at the above noted meeting. (paras. 57-58)

There was no meeting of the minds regarding the essential terms of any FA. (para. 59) Further even if there was strong prima facie evidence of a FA, the agreement would be unenforceable pursuant to the Statute of Frauds (1677), 29 Cha 11c.3 (Eng.) because it was not reduced to writing and not performed within one year. (para. 61)

The Court was reluctant to extend the duty of honest performance in these circumstances. The Court referred to Bhasin v Hrynew, where the SCC was not persuaded that the principle of good faith can be relied upon as a general purpose tool for reshaping the common law, but rather is a standard that underpins and is manifested in specific legal doctrines. (para. 47).

The Court also reviewed the trilogy of well-known cases on the common law duty of honest performance starting with Cromwell J’s statement in Bhasin that there is a general duty of honesty in contractual performance which means “that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other part about one’s contractual performance.” (para. 50)

The Court held that the Applicants did not raise a strong prima facie case that drawing on the LC would constitute a breach of CGL’s duty to perform the pipeline contract honestly and in good faith. (para. 65) The Court also held that the Applicant’s argument that an email from a CGL representative to the Applicants, indicating that CGL would consider a brief pause in drawing on the LC to negotiate, was not evidence of dishonest performance by CGL. By offering a window for negotiations, CGL was pursuing its own self-interest, which is not a breach of the duty of good faith and honest performance as the email did not raise a prima facie case the CGL lied or intentionally deceived the applicants as set out in CM Callow Inc. v Zollinger ,2020 SCC 45 (para .66–67) & 68)

As the first prong (strong prima facie case) of the injunction test was not met, it was not necessary for the court to consider the balance of the test.