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10 Nov 09

Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764 (CanLII)

Contracts in which performance is dependent upon the exercise of discretion on the part of one of the parties are contracts that are particularly characterized by the implied duty of good faith performance.

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Law contract letter-of-credit

letters of credit are an important mechanism for ensuring that international
commerce flows smoothly, effectively, and with some degree of assurance.
As one American authority has put it, albeit colourfully, letters of
credit are intended “to grease the wheels of trade and commerce”: Alaska
Textile Co., Inc. v. Chase Manhattan Bank, N.A., 982 F.2d 813 (2d Cir.
1992), at p. 824. Care is required, therefore, to ensure that they are not
interpreted and enforced in a way that might jeopardize their uniqueness and
commercial efficacy or the relative certainty that must surround their
use. Hence the doctrines of autonomy, strict compliance and strict
construction that will be discussed below
At the same time, however, letters of credit are not completely divorced from
the general rules and principles of contract law, including those invoking
notions of fairness and equity
6 more annotations...
- also Sarna at p. 5-1.
  
  [55]
  The corollary of the issuer’s obligation to pay, however, is another
  fundamental concept relating to letters of credit: the beneficiary’s obligation
  of strict compliance with the terms and conditions of the credit. This
  includes the responsibility of the beneficiary to inspect the terms of the
  credit before accepting it in order to determine whether it meets the needs of
  the underlying commercial transaction, and to request any changes if the terms
  of the credit cannot be strictly adhered to
- the equitable doctrines of waiver and estoppel apply in letter of credit cases:
- Although Canadian law
  has not yet recognized a stand-alone “duty of good faith” in the performance of
  a contract that is independent from the terms of the contract, as the United
  States has done, the jurisprudence establishes that there is an implied
  contractual duty of good faith not to act in a way that defeats or eviscerates
  the very purpose and objective of the agreement
- In such circumstances, the discretion must be exercised reasonably and in good
  faith
- The issuer of a letter of credit has an obligation to give timely notice that
  it is refusing to pay when it is asserting non-compliance
- Both custom and the provisions of the UCP 500 impose on the issuer of a letter
  of credit a duty to give timely notice of dishonour. This duty is the flip
  side of the strict compliance coin

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Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce, 2009 ONCA 764 (CanLII)

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