EUROBANK ERGASIAS SA V BOMBARDIER INC:EUROBANK ERGASIAS SA V BOMBARDIER INC

THE FRAUD EXCEPTION EXTENDS TO THE FRAUD OF A THIRD-PARTY OF WHICH THE BENEFICARY IS NOT INNOCENT

Abstract

The recent decision of the Supreme Court of Canada in Eurobank Ergasias SA v Bombardier Inc usefully complements the letter of credit law principles laid down in its seminal decision almost forty years ago in Bank of Nova Scotia v Angelica-Whitewear Ltd.

The decision brings clarity to the notion of “fraud” in letter of credit law. A demand made in breach of an undertaking not to demand payment and a provisional arbitral order not to demand payment, one week before the release of an arbitral award dispositive of the existence of an underlying debt, sufficed to establish the fraud exception to the principle of autonomy and stop the payment of a documentary credit.

The decision also extends the fraud exception to the fraud of parties other than the beneficiary, where the beneficiary has knowledge of the fraud and participates in it. Thus, the issuer of a guarantee supported by a counter-guarantee must be prevented from obtaining payment under the counter-guarantee where it knew that the beneficiary’s draw under the guarantee was fraudulent and nevertheless paid such draw.

The judgments of the Supreme Court of Canada and Quebec courts reached conclusions opposite to those reached by Greek courts in related legal proceedings regarding fraud. The Supreme Court of Canada stressed the importance of judicial comity generally in letter of credit law and explained the reasons why comity could not play a role in the case at hand.