Letter of Credit or Line of Credit

COURT FILE NO. O2-CV-232398CM3

DATE: 20050927



ONTARIO

SUPERIOR COURT OF JUSTICE



BETWEEN:



ASDA HOLDINGS LTD. and TORWAY COMPANY LIMITED

Plaintiffs

- and -



ROYAL BANK OF CANADA

Defendant





COUNSEL:

Douglas G. Loucks, for the plaintiffs

Martin Greenglass, for the defendant



HEARING DATES: September 12-15, 2005





REASONS FOR JUDGMENT



PERELL, J.



Introduction

[1] Alleging breach of contract, breach of duty, or negligent misrepresentation, the plaintiffs, ASDA Holdings Ltd. (“ASDA”), a company incorporated under the laws of Ontario, and Torway Company Limited (“Torway”), a company incorporated under the laws of the Commonwealth of the Bahamas, sue the defendant Royal Bank of Canada (“Royal Bank”) for $209,591.17 (U.S.).

[2] ASDA and Torway are companies that are members of a group of companies known as the Davis Group that are controlled by Mr. Larry Davis. Their claims arise from events concerning a $400,000 (U.S.) standby letter of credit issued by the Canadian Imperial Bank of Commerce (“CIBC”). The named beneficiary of the letter of credit is the Royal Bank.

[3] Although there are several disputed issues, the most critical and contentious ingredients of ASDA’s and Torway’s claims concern the nature of the responsibility that the Royal Bank undertook when it accepted the letter of credit as security for a line of credit for Torway and the nature of the responsibility that the Royal Bank had when it made a demand on the CIBC to enforce payment of the letter of credit.

[4] The letter of credit was issued at the expense and ultimate liability of Carl G. Treco Contractors Ltd. (“Treco”), a customer of the CIBC. Treco was the general contractor of a construction project to expand the Marathon Mall in Nassau, Bahamas. Torway was the structural steel subcontractor for the project, and ASDA acted as Torway’s “back office” in Canada to arrange for goods and materials to be shipped to the Bahamas, including making payment to the supplier. Treco offered to provide a letter of credit to be used by Torway as collateral so that Torway (actually ASDA) could pay suppliers in Canada. The letter of credit was obtained, and it named the Royal Bank as the beneficiary.

[5] Although the named beneficiary in the letter of credit is neither ASDA nor Torway, the essence of their claims is that the Royal Bank was only the notional beneficiary and they were or ought to have been the genuine beneficiary. They complain that as a consequence of the Royal Bank’s breaches of duty, including the manner in which the Royal Bank made demand on the letter of credit, they did not receive the full benefit of the letter of credit and the Royal Bank is responsible for this loss.

[6] ASDA and Torway submit that the Royal Bank mishandled the enforcement of the letter of credit and that had it acted appropriately the Royal Bank would not have returned $209,591.17 (U.S.) to the CIBC. Torway and ASDA submit that they should have received the benefit of this money.

[7] In its defence, the Royal Bank asserts that it was the genuine beneficiary of the letter of credit and that it made no misrepresentations and did not breach any duties owed to the plaintiffs. The Royal Bank asserts that it was the lender in a loan transaction for a line of credit in which the letter of credit was security for the Royal Bank. The Royal Bank also argues that Torway’s claims are barred by the doctrine of res judicata and that neither ASDA nor Torway have proven any damages consequent on any breach of duty associated with the Bank’s handling of the letter of credit.

[8] Based on my findings of fact, which I will set out below, it is my conclusion that the plaintiffs have failed to prove a cause of action against the Royal Bank. Further, I conclude that the plaintiffs have failed to prove any damages consequent on the Royal Bank’s enforcement of the letter of credit. Therefore, the plaintiffs’ action is dismissed with costs on a partial indemnity scale. In light of these conclusions, it is not necessary to rule on the Bank’s res judicata defence.

[9] My findings of fact and my reasons for the above conclusions follow. I will divide the following discussion into four parts.

[10] First, I will discuss the witnesses who testified at the trial and describe the events from around August 1999 to around the end of March 2000, by which time the letter of credit had been delivered and a line of credit established for Torway. In this section of my Reasons, I will explain why ASDA and Torway have no viable claim arising from the Royal Bank agreeing to accept a letter of credit as security for a line of credit.

[11] Second, I will describe what happened between April 2000, when the Royal Bank learned that the letter of credit was not going to be renewed, and June 15, 2000, which was the scheduled expiry date of the letter of credit. In this section, I will explain why ASDA and Torway have no viable claim about the enforcement of the letter of credit.

[12] Third, I will describe some of what occurred between June 15, 2000 and February 2002, including the Royal Bank’s repayment in January 2002 of moneys drawn from the letter of credit. In this section, I will explain why Torway and ASDA failed to prove that they suffered damages.

[13] Fourth, I will describe the status of matters between January 2002 and before the issuance of the statement of claim in July 2002.

The Issuance of the Letter of Credit

[14] Mr. Larry Davis, Mr. Philip Lalonde, and Mr. John Santos were the plaintiffs’ witnesses at the trial. They are all professional engineers. Mr. Davis is the principal of a conglomerate of corporations known as the Davis Group of which ASDA and Torway are members. Mr. Lalonde is a senior executive with the Davis Group, and he was charged with overseeing from the Toronto headquarters Torway’s contract for the supply, delivery, and installation of structural steel for the Marathon Mall extension project in Nassau, Bahamas. Mr. Santos was the project manager at the construction sites in Nassau.

[15] Mr. Jim Scott is now retired. He was the Royal Bank’s sole witness at the trial, and at the time of the events giving rise to this action, he was a senior account manager at the Rexdale and Kipling branch of the Royal Bank.

[16] In the summer of 1999, Treco placed a subcontract with “Torway Construction Co. Ltd.” to provide the structural steel for the Marathon Mall extension. As evidence of the sloppiness that will mark the actions of all of ASDA, Torway, and the Royal Bank in the months and years that follow, it should be noted that “Torway Construction Co. Ltd.” does not exist, the only incorporated entity being “Torway Company Limited”.

[17] Ultimately, nothing turns on this misnomer because the parties and the non-party participants throughout dealt with the legally recognized entity that is the plaintiff Torway in this action, whatever name it might be using from time to time. If mistakes in nomenclature were made from time to time, they were mutual mistakes.

[18] As between Treco and Torway, the original plan was that Torway would perform the bulk of its contract work in the Bahamas, but this did not prove feasible and to advance the project, it was decided that parts of the steel structure would be prefabricated in Canada and shipped to the Bahamas. This change of plan posed cash flow problems for Torway, and sometime in the fall of 1999 or later part of that year, Mr. Lalonde met with Larry Treco of Treco. Mr. Treco suggested how the cash flow problems could be solved. He indicated that Treco would be prepared to provide a letter of credit that Torway could use to finance its purchases in Canada.

[19] At the time of his discussions with Mr. Treco, what Mr. Lalonde knew about letters of credit was negligible, and here it may be noted that nobody else at the Davis Group was called in to help or educate him. Mr. Davis, who did not recall seeing the letter of credit that was eventually issued, testified that he did not get involved, and it was left for Mr. Lalonde to make the arrangements for the letter of credit.

[20] With only rudimentary knowledge about letters of credit, Mr. Lalonde understood that the arrangements for the letter of credit would involve Treco obtaining a letter of credit from the CIBC and then Torway would utilize that letter of credit in some way to obtain funds from the Royal Bank. To implement the plan of using a letter of credit, there had to be agreements about the form of the letter of credit between Treco and Torway, between Treco and the CIBC, between Torway and the Royal Bank, and between the Royal Bank and the CIBC.

[21] In making arrangements, Mr. Lalonde had only a general goal, which was to solve Torway’s cash flow problem, and his conduct on behalf of the plaintiffs indicates that he appreciated that he was not in a position to control the precise manner in which this goal would be achieved.

[22] In or around February 1, 2000, Torway established a bank account at the Royal Bank. Although I cannot determine precisely when the Royal Bank knew about the role of ASDA, I find as a fact that in early to mid-February, 2000, the Royal Bank did know that ASDA would act as the “back office” for Torway. The Bank appreciated that ASDA would be making payments on behalf of Torway and that Torway would reimburse ASDA. The arrangements between Torway and ASDA were not formalized in writing; nevertheless, I find that ASDA was the administrator and paymaster for Torway.

[23] Around February 8, 2000, there were discussions and communications between Mr. Lalonde for ASDA and for Torway and Mr. Scott for the Royal Bank about the letter of credit and about making borrowing arrangements for Torway. Mr. Scott says that he met with Mr. Lalonde during this time. Mr. Lalonde denies every seeing Mr. Scott face-to-face until Mr. Scott was in the witness box.

[24] Mr. Lalonde’s evidence about never having meet Mr. Scott before the trial was advanced to undermine Mr. Scott’s credibility. For different reasons, I was not impressed with Mr. Scott’s credibility and, for that matter, I was not impressed with the reliability of any of the witnesses, with the exception of Mr. Santos, who had no reason to slant or spin his testimony and whose involvement was peripheral to the crucial matters of the creation and enforcement of the letter of credit.

[25] In giving testimony, Mr. Davis and Mr. Lalonde obviously had not prepared for the trial and did not know or recall many details that I would have expected them to know readily. Their recall was sketchy and their testimony vague. For his part, Mr. Scott was embarrassed or ought to have been embarrassed by the mistakes he made in his handling of this whole matter, which I will come to, and about his own ignorance about the intricacies of letters of credit.

[26] I would be guessing to make a finding about whether Mr. Lalonde and Mr. Scott actually met before the trial. However, in the end result, many of the frailties(A fault, especially a moral weakness.) in the testimony of all the witnesses do not matter because a clear-enough picture emerges of the events from the documents, from the admissions, from the points of convergence, and from the points of actual consensus. For example, it is a fact that Mr. Lalonde and Mr. Scott had communications by telephone, fax, and letter, and it does not matter whether or not Mr. Scott only imagined that he meet Mr. Lalonde face-to-face. There is reliable evidence from the documents, and there is enough reliable and credible evidence from all of the witnesses for me to make findings of facts about what the parties discussed, about what they did, about what they said, and, when it matters, about what they thought.

[27] I find as a fact that in February 2000, Mr. Scott was told by Mr. Lalonde, probably by telephone conversation, that Torway had a construction contract in Nassau and that it needed to pay for goods and services in Canada. Mr. Scott was told that Torway was a recently incorporated Bahamian corporation and that it had no financial statements, no track record, and no meaningful assets other than the construction contract and a letter of credit that the CIBC would be prepared to issue at the request of its customer Treco. Mr. Scott was told that a (Mrs.) Sonia Rutherford would be acting for the CIBC in arranging the letter of credit.

[28] I find as a fact that Mr. Lalonde was told by Mr. Scott and understood that the letter of credit would be used as security for a bank line of credit of around $350,000 (U.S.). If he did anything, Mr. Scott made it clear to Mr. Lalonde that the form of the letter of credit would have to be approved by other officials at the Royal Bank and that the fundamental nature of the transaction was a business loan of a short duration. The plaintiffs through Mr. Lalonde knew that the letter of credit was security for a loan from the Royal Bank.

[29] Mr. Lalonde knew that it was somebody other than Mr. Scott who would decide how the letter of credit should be structured, and he also understood that there would have to be negotiations and agreement between the Royal Bank and the CIBC to settle the form of the letter of credit. He also would have understood that Treco would have to agree with the form of the letter.

[30] On February 10, 2000 Mr. Lalonde faxed Mr. Scott a rough draft of a letter of credit that he had prepared on the CIBC’s application form for an irrevocable documentary credit, which is a kind of letter of credit used for the shipment of goods. This was not the type of letter of credit called for in the circumstances and what was required was a standby letter of credit.

[31] On February 14, 2000, Mr. Scott faxed a copy of the draft letter of credit to Mr. Harry Htut, who was at the Royal Bank’s International Trade Centre in downtown Toronto. Mr. Htut had expertise in letters of credit.

[32] The subject matter line of Mr. Scott’s fax refers to “Torway Construction Co. Ltd.” and the body of the fax contains the following handwritten note: “Copy of proposed Letter of Credit to secure a line of credit for $375,000 (U.S.) I/N/O [in favour of] Torway or ASDA Holdings Ltd – both my clients. Please review L/C and advise if we can take it or make amendment to make it work. Torway is a new startup company.”

[33] Mr. Scott’s fax is informative. There is the sloppiness of referring to Torway as Torway Construction Co. Ltd. There is the sloppiness of a reference to a $375,000 (U.S.) line of credit when the discussions were for a $350,000 (U.S.) line of credit. There is the ambiguity of whether it is the letter of credit or the line of credit or both that is “in favour of” Torway or ASDA. There is, however, the indication that the letter of credit was to be offered as security for the line of credit from the Royal Bank. There is the indication that, in any event, Mr. Scott was not making the decision about the form of the letter of credit but was seeking approval and direction from Mr. Htut.

[34] On February 16, 2000, Mr. Htut faxed a new draft of a letter of credit to Mr. Scott with the following remark: “Draft Standby Letter of Credit in favour of your branch to secure loan facilities to Torway Construction Co. Ltd.” In turn, Scott sent a fax to Mr. Lalonde with the new draft.

[35] The handwritten note on the February 16, 2000 fax to Mr. Lalonde states: “Draft copy of letter of credit that we require the CIBC to provide.” The attached draft letter of credit indicates that the beneficiary of the letter of credit is the Royal Bank.

[36] What happened next is that: the Royal Bank’s draft letter of credit found its way to Halifax, where a department of the CIBC that issued letters of credit was situated; the Halifax office apparently rejected the Royal Bank’s draft and offered up its own standard form; and this new attempt at a letter of credit found its way back to Mr. Scott. On February 21, 2000, Mr. Scott sent another fax to Mr. Htut with the following handwritten note: “Subject client has presented revised L/C from CIBC-Halifax who are to issue L/C. Please review their format and liase (sic) with them . . . if they must correct to meet our assignment requirements. Anything else you could suggest to protect out interests, etc.”

[37] During Mr. Scott’s cross-examination and later during argument much was made of Mr. Scott’s statement in his fax “our assignment requirements.” Mr. Scott squirmed(To feel or exhibit signs of humiliation or embarrassment.) at the suggestion that this language proved that the Bank had agreed to a transaction in which there would be a letter of credit in which the named beneficiary would be Torway and that Torway would execute an assignment of the letter of credit to the Royal Bank. In my view, all this proves, once again, is that Mr. Scott was sloppy in his handling of this manner and was relying on others to be precise. More to the point, whatever the befuddled(To stupefy with or as if with alcoholic drink.) thinking or inept articulation that Mr. Scott may have manifested internally at the Bank, other facts were manifest externally and known by Mr. Lalonde, who himself had limited knowledge about letters of credit and only the general goal of solving Torway’s cash flow problems. He certainly was not giving any specific instructions about how that should be accomplished.

[38] Given his lack of knowledge about letters of credit, Mr. Lalonde was largely passive. Around February 22, 2000, he learned from Mr. Scott that the Royal Bank was prepared to use the CIBC form with some modifications. Thereafter, it appears that there were communications between Mr. Scott and Mrs. Rutherford and communications between the CIBC and the Royal Bank’s International Centre to settle the form of the letter. Mr. Lalonde remained passive.

[39] The culmination of all this was that the CIBC issued a standby letter of credit on March 7, 2000 in which the Royal Bank was the beneficiary, and the very next day, on March 8, Mr. A.F. Patterson, a signing officer for Torway, attended at the Royal Bank and signed a revolving loan demand agreement for $350,000 (U.S.) and a general security agreement.

[40] What follows are the pertinent details of the letter of credit, which is the centerpiece of the immediate action:

(a) The applicant was CIBC Bahamas Ltd.

(b) The beneficiary was the Royal Bank of Canada, Rexdale and Kipling Business Banking Centre.

(c) The amount was $400,000 (U.S.).

(d) Under the additional conditions, the letter of credit stated: “At the request of Carl G. Treco Contractors Limited, Nassau Bahamas (The ‘Applicant’) we, Canadian Imperial Bank of Commerce . . . hereby establish in favour of Royal Bank of Canada . . . this irrevocable standby letter of credit for a maximum aggregate amount of USD 400,000 . . . for banking facilities you may grant or may have granted to Torway Construction Company Limited.”

(e) Under the additional conditions, the letter of credit stated: “This standby letter of credit is to secure the obligations of Torway Construction Company Limited under the above mentioned credit facility.”

(f) Under the additional conditions, the letter of credit stated: “This standby letter of credit will expire on June 15, 2000.

(g) Under the additional conditions, the letter of credit stated: “Claims under this standby letter of credit are available against your demand by authenticated telex or swift to ourselves stating our letter of credit number and amount of claim, and further stating that the amount claimed represents sums due, including interests and charges owing and unpaid under banking facilities granted by Royal Bank of Canada to Torway Construction Limited, and your demand for payment has not been satisfied as of the date of your telex or swift. Upon our receipt of such telex or swift, we shall pay you value two business days later as per your instructions contained therein.

(h) Under the additional conditions, there was a provision for automatic renewal of the letter of credit unless the CIBC give 45 days notice that it would not be renewing the letter of credit.

(i) Under the additional conditions, the letter of credit stated: “Upon receipt by you of such notice of non-renewal, you may draw hereunder by means of your written demand stating that the amount drawn will be retained and used by you to meet obligations incurred or to be incurred in connection with the above agreement and that you will release any amounts not required by you to us.”

[41] Although the point is more relevant to the discussion later about the calculation of damages and about causation, it is important to note what this letter of credit did and what it was designed to do. As between Torway and the Royal Bank, the letter of credit provided security for banking facilities to be provided by the Royal Bank to Torway.

[42] It should be noted and emphasized that as between Torway and Treco, if the Royal Bank drew down on the letter of credit, then this would, in effect, be a payment by Treco to Torway on the construction contract. The underlying logic of the letter of credit arrangement, which was designed to solve Torway’s cash flow problems, was that if a draw was made on the letter of credit, then in an indirect way Treco would be making a payment on the construction contract.

[43] This follows because if the Royal Bank drew down on the letter of credit, Torway would benefit because the draw of funds paid by the CIBC would be used to discharge Torway’s indebtedness under the “banking facilities” with the Royal Bank, but Treco would incur a corresponding liability to indemnity the CIBC for the funds it paid to the Royal Bank. Thus, in an indirect way, Treco would have paid and Torway would have benefited from Treco’s payment. Treco was paying because it was the purchaser of goods and services under a construction contract with Torway. Put simply, if a draw was made it would be treated as a payment on the contract between Treco and Torway.

[44] I find that all the participants understood that the letter of credit was an inchoate(In an initial or early stage; incipient.
Imperfectly formed or developed:) or potential form of payment by Treco for its obligations under the construction contract. Mr. Davis admitted as much during his cross-examination when he admitted that if Treco was not owed money under the construction contract, then it had no claim under the letter of credit. I find as a fact that the agreement between Torway and Treco was that Torway could not benefit from the letter of credit nor Treco suffer any detriment beyond what was owing under the construction contract.

[45] One implication of this understanding was that although the Royal Bank had autonomous rights to draw down on the letter of credit, Torway and Treco were mindful that any draws would eventually have to be taken into account as between Treco and Torway. This awareness explains the conduct of the parties later after a $400,000 (U.S.) draw was made on the letter of credit, which turned out to be a draw that effected an overpayment by Treco.

[46] I find that the letter of credit of March 7, 2000 satisfied Torway’s and ASDA’s plans and expectations. I find that from the exchange of drafts of the letter of credit, Torway and ASDA appreciated that the letter of credit had to be in a form that satisfied the Royal Bank. I find that Mr. Lalonde understood that whatever Mr. Scott may have thought, the decisions about the form of the letter of credit would be made by others at the Royal Bank more knowledgeable about letters of credit and that this letter of credit was the outcome of those decisions. Further, I find that Mr. Lalonde on behalf of Torway and ASDA knew that the Royal Bank had agreed to provide a line of credit and required security and that this letter of credit was the Bank’s security. I find that Mr. Lalonde knew that the Bank was acting in its own interests as a lender and that it was not taking on fiduciary or any other added responsibility to Torway.

[47] I find that the Bank was not asked to give Torway and ASDA legal, business, or financial advice about the letter of credit transaction. Further, Torway and ASDA had only to read the letter of credit and the other documents that they signed to know that the Royal Bank was the direct beneficiary of the letter of credit. The Bank made no representations, negligent or otherwise, that misled Torway or ASDA about the nature of the transaction. Torway and ASDA understood that Torway was a borrower and if Torway did not repay its loan, the Bank, on its own initiative and without needing any permission from Torway or ASDA could draw on the letter of credit. Mr. Lalonde and I believe others at Torway understood that the Bank was not prepared to make a loan to Torway on any other basis

[48] From the Royal Bank’s perspective the letter of credit was much like a guaranty. If Torway, the primary debtor, did not repay the loan, then the Bank could draw on the letter of credit, which being issued by the CIBC, gave the Royal Bank excellent security.

[49] In their statement of claim, Torway and ASDA plead that the Bank orally agreed to structure a series of transactions “that would have the effect of securing payment to the plaintiffs of up to $400,000 (U.S.) of liabilities incurred by the plaintiffs with respect to the [Marathon Mall] Project.” I find that there was no such oral agreement nor could such an agreement be implied from the circumstances.

[50] The immediate case is not similar to Standard Investments Ltd. v. CIBC 1985 CanLII 164 (ON C.A.), (1985), 52 O.R. (2d) 473 (C.A.), where the relationship between the Bank and its customer, which is normally a mere debtor-creditor relationship, (See: Foley v. Hill (1848), 2 H.L.C. 28; Thermo King Corp. v. Provincial Bank of Canada (1981), 34 O.R. (2d) 369 (C.A.).) crossed the line and became a fiduciary relationship. Nor is it a case in which the Royal Bank was asked to provide advice or services and did so negligently.

The Draw on the Letter of Credit

[51] On April 7, 2000, the letter of credit was now one month old, and on that day, Mr. Htut advised Mr. Scott that CIBC had given notice that it was not going to renew the letter beyond its expiry of June 15, 2000. Mr. Scott, in turn, advised Mr. Lalonde.

[52] At this point of time, Mr. Lalonde seemed to be operating under the understanding that it was Torway’s decision about whether or not to make a demand under the letter of credit. Initially, Mr. Lalonde asked Mr. Scott to hold off doing anything, but then later, Mr. Lalonde said that there should be a demand made on the letter of credit.

[53] It is far from clear what Mr. Scott was thinking at this time. His evidence at the trial was that he told Mr. Lalonde that the Bank’s position had to be protected and that it would be making a draw on the letter of credit. Since Mr. Lalonde wanted a draw to be made, it may be that he thought that the Royal Bank was following his instructions rather than acting under its own will. Further, Mr. Scott admitted that he was having conversations with Mr. Lalonde about the state of accounts between Treco and Torway, and this may have encouraged Mr. Lalonde to believe that Torway was in the driver’s seat in enforcing the letter of credit and not just an interested passenger.

[54] In my view, whatever Mr. Lalonde thought, the legal reality was that the Royal Bank was the beneficiary of the letter of credit and entitled to decide how it would be enforced.

[55] Some indication, however, that Mr. Scott may have been confused and was perhaps confusing others is available from an e-mail message on June 5, 2000 from Mr. Scott to Ms. Bernice Hughes, which message was copied to Mr. Htut.

[56] Ms Hughes was at the Royal Bank’s International Trade Centre, and she was charged with the task of making the demand on the CIBC to pay the letter of credit. In his e-mail message to her, Mr. Scott writes:

Mr. Harry Htut of our International Trade Centre received advice that CIBC would not be renewing the L/C at maturity. Under the terms and conditions of drawing our loan would have to be in arrears which now is the case as the creditor is not paying our client and they want our client to draw on the L/C to receive payment.

[57] As I read this message, “our client” must be a reference to Torway and “the creditor” would appear to be a reference to Treco, but Treco would have been better described as a “client” or “customer” or “debtor” and it is hard to see how it was a “creditor”. Then there is the perplexing sentence “they want our client to draw on the L/C to receive payment.” In this sentence, the antecedent(Going before; preceding.) to the pronoun “they” is the “creditor” that is, Treco, and if this is so, then Mr. Scott is telling Ms. Hughes that Treco wants Torway to draw on the letter of credit as a way to pay Torway for the construction contract. This is at least consistent with the idea that the letter of credit was an indirect way to pay for the construction contract. However, the phrase “our client to draw on the L/C” again suggests that the decision maker about enforcing the letter of credit is Torway and not the Royal Bank.

[58] I pause here to say that the plaintiff’s claims are not saved or revived by what they took to be the case from Mr. Scott’s conduct, some of which they only became aware of as a result of the discovery process in this action. Mr. Scott’s words and deeds come after the fact of the agreements reached about the terms and role of the letter of credit. I have found that Torway and ASDA knew that the letter of credit was part of a line of credit or loan transaction and that the letter of credit was the Bank’s security for that transaction. It was the Bank’s security to enforce.

[59] In the e-mail message, Mr. Scott gave directions that the letter of credit be enforced. He writes:

Accordingly, please without delay make a drawing under the L/C for $400,000 (U.S.) and credit our clients account 400-198-8 (06342) with the proceeds so that we are not faced with an expired L/C. The funds when received will be used to pay off the clients (sic: client’s? clients’?) line of credit and it will than (sic) be cancelled in full.

[60] On June 6, 2000, the Royal Bank sent the following message to the Letter of Credit Department of the CIBC:

We hereby demand payment of USD $400,000.00 under yr stb credit No. SBGH71446 dated 03/07/00. We state that the amount claimed represents sums due, including interest and charges owing and unpaid under banking facilities granted by Royal Bank of Canada to Torway Constrution Company Limited. Our demand for payment has not been satisfied as of 06/06/00. Remit proceeds . . . .

[61] Several findings must now be made about the Royal Bank’s demand made pursuant to the letter of credit, and I must address the plaintiffs’ argument that the Bank is liable to them because of how it enforced the letter of credit.

[62] The line of credit was for $350,000 (U.S.) and therefore the Royal Bank made a mistake in demanding a draw of $400,000 (U.S.). It was not true for it to say in its communication with the CIBC that “USD 400,000.00 . . . represents sums due, including interest and charges owing and unpaid under banking facilities.”

[63] It was also not true for the Royal Bank to say that “our demand for payment has not been satisfied as of 06/06/00.” There is no evidence that the Royal Bank made a written demand on Torway. Mr. Scott says he made the demand orally. Mr. Lalonde says there was no demand. On this point, I believe Mr. Lalonde, and I do not believe Mr. Scott, who was the source of the misinformation to Ms. Hughes about the amount of the draw. His feeble evidence on cross-examination was that he got the figures confused.

[64] At its highest, the line of credit was at approximately $352,000 (U.S.) because of interest charges. Thus, demanding $400,000 (U.S.) would yield a surplus of $48,000 (U.S.) over the line of credit.

[65] The excessive demand was then compounded by a somewhat odd occurrence. On June 6, 2000, more or less simultaneously with the Royal Bank demanding payment under the letter of credit, Treco wired a payment of $142,000 (U.S.) to Torway’s account. Thus, when the CIBC paid the $400,000 (U.S.), which it did on June 13, the result was a surplus in Torway’s account.

[66] On June 13th, Treco found out what had happened and to put it mildly it was outraged. On June 13th, Mr. Treco wrote Mr Lalonde and accused Torway of having perpetrated a fraud. On June 14th, Mr. Treco wrote Mr. Scott and enclosed a copy of his letter to Mr. Lalonde and covered it with a letter threatening to initiate proceedings against Torway and the Royal Bank for fraud and misappropriation.

[67] On June 14, 2000, Mrs. Rutherford of the CIBC wrote a formal letter to Mr. Scott advising that the $400,000 (U.S.) draw on the letter of credit was being disputed.

[68] On June 15, 2000, Mr. Scott opened a U.S. dollar term deposit for $194,000 (U.S.). The monies were to be taken from Torway’s account, and Mr. Scott directed that the monies were not to be released without his consent.

[69] As I will recount in the next section of these reasons for judgment, the surplus monies remained in the term deposit, earning interest, from June 2001 until January 2002, when the Royal Bank paid the surplus money into court in the Bahamas.

[70] This brings the discussion to the plaintiffs’ argument that the Royal Bank is liable because of the manner in which it handled the enforcement of the letter of credit. As I understand it, their argument is as follows. The $400,000 (U.S.) letter of credit was the property or for the benefit of Torway. Torway was entitled to a $400,000 (U.S.) benefit. Because of the negligent way, the Royal Bank enforced the letter of credit, the Royal Bank had no choice but to repay the $194,000 (U.S.) surplus, which with interest had grown to $209,591.17 (U.S.). The plaintiffs’ argument continues that had Royal Bank enforced the letter of credit properly, in making a demand on the CIBC, it would have relied on the condition in the letter of credit for draws for non-renewal rather than on the condition for draws after a demand for repayment of the banking facilities. The plaintiffs’ submission is that had the Royal Bank done its duty, it would have been a position to resist payment of the $209,000 (U.S.) of Torway’s money.

[71] In my opinion, this argument does not withstand factual or legal analysis for at least three reasons.

[72] First, as I have already found, the letter of credit was for the benefit of the Royal Bank as its security for a line of credit. This finding undermines the lynchpin premise of the plaintiffs’ argument that the letter of credit was their property and this makes the whole argument unsound.

[73] Second, as I will explain further, the Bank was not obliged to make a draw based on the non-renewal condition, and in the circumstances of this case, it would have been at least immoral and probably illegal to do so.

[74] Third, as I will also explain, had the Bank’s acquisition of the surplus been proper, it would not been lawful for Torway and ASDA to claim that money at the ultimate expense of Treco. Put somewhat differently, and quite simply, the justice of the case is that Torway receive only what it deserves under its construction contract with Treco.

[75] To explain further the second reason for rejecting the plaintiffs’ argument, the Royal Bank made demand on the CIBC pursuant to one condition of the letter of credit and Torway argues that demand should have made using another condition. I will paraphrase the difference between the two conditions. The Royal Bank actually made demand under the condition of the letter of credit under which the amount claimed represented sums due and unpaid under the banking facilities granted to Torway. The plaintiffs say that the Royal Bank ought to have made demand under the condition of the letter of credit whereby the amount drawn would be “retained and used to meet obligations incurred or to be incurred under banking facilities to Torway.” What the plaintiffs are suggesting is that the Royal Bank ought to have drawn down funds not only for “for obligations incurred,” that is, for the outstanding indebtedness, but also for “obligations to be incurred” under the banking facilities.

[76] Under the Revolving Demand Loan Agreement signed by Torway, the Royal Bank was entitled to “withdraw any undrawn portion of the Loan Facility at any time without notice.” In other words, it was under no obligation to make future loans to Torway. The Bank could terminate the line of credit. In my opinion, there was no obligation on the Royal Bank, particularly on its own initiative, to notionally advance monies on the revolving loan agreement thereby to artificially create an obligation “to be incurred” so that the amount of the demand made under the letter of credit could be increased. The Bank would have known that to do so it would increase the amount that Treco would ultimately have to repay the CIBC under the letter of credit. The Bank was entitled to protect itself. It was not entitled to act so as to extract surplus monies at the expense of Treco, especially when the Bank knew that Treco ultimately should pay no more or no less than it owed Torway under the construction contract. It was not the Bank’s place to create bargaining leverage by creating a holdback for Torway.

[77] Although the same holdback result happened unintentionally because of the mistaken demand at $400,000 (U.S.) instead of $350,000 (U.S.) and the circumstance of the wire transfer, in my opinion, Treco was quite correct in being enraged by the draw made on the letter of credit.

[78] The third reason for rejecting the plaintiffs’ argument builds upon the points just made that because of the arrangements with Treco about the letter of credit, ultimately Torway was not entitled to more than it was owed under the construction contract. As I will explain in the next section of these reasons for judgment (which set out my findings of fact for the period after June 15 until January 2002), Torway has not proven that it was owed anything from Treco.

The Return of the Surplus Proceeds

[79] As of June 15, 2000, the surplus funds of $194,000 (U.S.) were being held at Mr. Scott’s direction in a term deposit. Both Treco and the CIBC were demanding the return of all or part of the moneys.

[80] Torway was resisting any payment. On June 16, 2000, Mr. Lalonde wrote Mr. Treco, and a few days later, he provided a copy of his letter to Mr. Scott. Two paragraphs of Mr. Lalonde’s letter are of immediate interest. After disputing that any fraud had been committed, in the penultimate paragraph of the letter, Mr. Lalonde wrote:

The outstanding value of our claim including scope, extras and additional unpriced items . . . will be in excess of the $400,000 value of the Letter of Credit. This Letter of Credit facility was established by mutual consent to cover obligations for payment for the supply of material and labour supplied under this contract. Therefore, it was felt that we had no recourse but to protect our interests by calling upon that financial instrument before its lapse date of June 15, 2000 since the issuing party did not wish to extend the credit facility. The Royal Bank, under the direction of my superior, was instructed to call the Letter of Credit given the circumstances described.

[81] This letter reveals the persistence of Torway’s impression that it was in command with respect of the letter of credit and that it was giving instructions to the Royal Bank. As I have already indicated, in this regard, Torway was mistaken. The letter of credit was the Bank’s security. However, the letter also confirms that Torway appreciated that any entitlement it might have had on the letter of credit depended on the state of accounts between Torway and Treco. Mr. Lalonde’s letter acknowledges that as between Treco and Torway, the letter of credit was designed to cover obligations for payment for the supply of material and labour supplied under the construction contract.

[82] The ultimate paragraph of the letter states:

In consideration of the unresolved nature of our extra claims, we have instructed the Royal Bank to use $205,000 to repay the Royal Bank for a loan outstanding on the project and to deposit the remainder in an interest bearing account pending satisfactory resolution of the matter. We would like to pursue resolution of our claims with the Owner as expeditiously as possible. We trust that we may co-operate with you and your firm to reach a mutually acceptable resolution.

[83] At the trial, the ultimate paragraph of this letter was put forward as further evidence that it was Torway’s and not the Bank’s letter of credit. For all the reasons, set out above, I disagree. In any event, for practical purposes, Torway wanted the Royal Bank to hold onto the monies and the Royal Bank and, in particular, Mr. Scott were content to hold onto to the monies in the hope that the parties would come to a settlement and make all the problems go away.

[84] In the months following June 15, 2000, the correspondence to Mr. Scott indicates that he was being kept advised of meetings between Torway and Treco to settle their differences over the construction contract. In November 2000, notwithstanding these discussions, in a letter dated November 24, 2000, Mr. Lalonde asked Mr. Scott to release the funds to ASDA. Mr. Scott continued to hold onto the funds.

[85] Starting in February 2001, Mr. Scott began to receive a series of probing and demand letters from the CIBC or from its lawyers. These correspondents reasserted the position that the draw on the letter of credit could not have been proper if, for no other reason than, it yielded a surplus. The CIBC demanded payment and threatened action against the Royal Bank. Mr. Scott continued to hold onto to the funds in the term deposit.

[86] Around July 31, 2001, Mr. Scott learned that Treco had sued the CIBC in the Supreme Court of the Commonwealth of the Bahamas. On July 31, 2001, Mr. Scott received a letter from Torway’s lawyers confirming that the Royal Bank was not to return the funds.

[87] In September and throughout the fall of 2001, Mr. Scott received correspondence from the lawyers for CIBC about Treco’s action against the CIBC. These letters sought information about the letter of credit. Mr. Scott passed on the misinformation that the borrower was Torway Construction Company Limited, which led the lawyers to suspect that the whole draw under the letter of credit was suspect. The CIBC’s lawyers threatened to third party the Royal Bank in the proceedings underway in the Bahamas, and in October 2002, the CIBC did so.

[88] On October 22, 2001, Mr. Scott received a letter from Mr. Santos. The letter advised Mr. Scott that a settlement had been reached between Treco and Torway. Mr. Scott was instructed to remit $160,000 (U.S.) plus interest to Treco. Mr. Scott did not act on these instructions.

[89] Mr. Santos was involved in the settlement negotiations and apparently Mr. Lalonde and Mr. Davis were involved at some distance from the Bahamas. I find that no settlement was reached. The present action, in itself, is evidence that the dispute between Treco and Torway was not settled.

[90] The negotiations for a settlement, however, resolved at least tentatively some matters, and based on the testimony of Messrs Santos, Lalonde, and Davis and the documentary evidence, I make the following findings of fact. These findings are important to my conclusion that Torway and ASDA have not proven any damages.

[91] The original contract price between Treco and Torway was $860,000.00 (U.S.), but Torway claimed payment for extras and it sought a change order under the construction contract. The question of the adjustment to the contract price was seriously contested, but Treco and Torway eventually agreed that the contract price should be adjusted to be $1,040,000.00 (U.S.).

[92] Treco had made payments on account of the contract of $774,000 (U.S.) directly and, excluding the $194,000 (U.S.) being held in the term deposit, another $206,000 (U.S.) indirectly by reason of the draw on the letter of credit. These payments total $980,000 (U.S.), leaving a balance owing to Torway under the contract of $60,000 (U.S.).

[93] Treco, however, asserted that the $60,000 (U.S.) was not owing by it because Treco submitted that Torway was liable under the construction contract for delays. The delay claim supported a contract claim for liquidated damages of $66,000 (U.S.). Treco also asserted that Torway should indemnify Treco for legal fees it had paid in the proceedings it had brought with respect to the letter of credit. It claimed $57,733.00 (U.S.) for legal fees. Thus, Treco had an overtopping claim of $123,733.00 (U.S.) against the $60,000 (U.S.) owing to Torway. Thus, Treco’s position was that Torway should return the $194,000 (U.S.) being held in the term deposit and also pay Treco $63,733.00 (U.S.).

[94] Recalling that Torway or ASDA as its paymaster cannot claim more under the letter of credit than owed by Treco under the construction contract, for the plaintiffs to establish that they suffered a loss, they must prove that Treco owes Torway money under the construction contract. In my opinion, the plaintiffs have failed to meet the onus. The plaintiffs have proved, at best, that Treco might owe Torway $60,000 (U.S.). However, the evidence establishes that Treco has a tenable counterclaim or overtopping setoff.

[95] Mr. Lalonde and Mr. Davis testified that Treco’s counterclaims were without merit. This evidence was self-serving. Moreover, there apparently was some merit to the liquidated damages claim because it also had been discussed and acknowledged during the settlement negotiations. In those discussions, it had tentatively been agreed that Treco could hold back $26,000 (U.S.) on account of the liquidated damages claim, while reserving the right to claim more. Mr. Santos testified that Treco’s position was that it would not abandon its claim for liquidated damages and that no agreement was ever reached about the maximum amount of the claim.

[96] In my view, Treco’s claim for legal fees also has merit. The demand on the letter of credit was improper and Torway ought to have asked the Royal Bank to return the funds in the letter of credit rather than having them held as leverage for a settlement. Although I have concluded that it was the Bank that was controlling the letter of credit and the term deposit, Torway stood in the way of repayment of the monies and in my view it did expose itself to a claim by Treco.

[97] It is not without moment that Torway never pursued a claim against Treco in the Courts of the Bahamas. Mr. Davis and Mr. Lalonde suggested that a corporation like Torway, which has substantial foreign ownership, would not have received justice in the Courts of the Bahamas. I do not believe this rational. If Torway had a viable claim against Treco, it would have sued. The better explanation is that the plaintiffs realized that it was quite possible that they would lose on the merits.

[98] In any event, the onus is on Torway and ASDA to show that they suffered a loss and I conclude on the balance of probabilities that they have failed to meet this onus.

The Payment of the Surplus into Court

[99] As I have noted above, in July 2001, Treco sued the CIBC in an action commenced in the Supreme Court of the Commonwealth of the Bahamas and in October 2001, the CIBC joined the Royal Bank as a third party to those proceedings. A review of the court documents reveals that the CIBC joined the Royal Bank as the Third Party and Torway as the Fourth Party under a Third Party Notice. This notice indicates that the CIBC required certain questions to be decided not only between Treco and the CIBC but as between either or both of the Royal Bank and Torway.

[100] Among the questions required to be decided were the questions of whether the issuance of the letter of credit was contrary to the agreement between Treco and Torway and whether the draw made by the Royal Bank was in breach of the agreement made between Treco and Torway. The CIBC sought an order, amongst other things, that the draw down of $400,000 (U.S.) was unlawful and was not in accordance with the agreement made between Treco and Torway. It also sought an order that the Royal Bank pay to the CIBC for credit of Treco the sum of $194,000 (U.S.) together with interest, fees and costs.

[101] It does not appear the Torway defended the proceedings in the Bahamas. The Royal Bank did defend, but on January 3, 2002, Mr. Scott wrote Torway to the attention of Mr. Davis and stated that having reviewed the matter, the Royal Bank had determined that the CIBC was entitled to the $194,000 (U.S.) plus interest plus legal costs. Mr. Scott stated that the Bank was giving instructions that the monies be paid into the Bahamian Court. Mr. Scott stated further that pursuant to the Financial Services Agreement it was looking to Torway to reimburse the Bank for all expenses incurred in connection with the matter. He noted that the Bank had already incurred approximately $10,000 U.S. in defending the Bahamian action.

[102] Mr. Davis did not recall receiving the January 3, 2002 letter and also stated that he was not aware of the litigation between the CIBC and the Royal Bank, which I find hard to believe. However, nothing turns on what Mr. Davis knew or did not know or remember about this letter or the litigation in the Bahamas. Correspondence marked as evidence shows that Torway’s lawyers reviewed the January 3, 2002 letter and wrote Mr. Scott on January 14, 2002 and protested the position being taken by the Royal Bank.

[103] It is not clear from the record whether the Royal Bank itself moved to pay the money into court. However, under the order of Justice Small of the Supreme Court of the Commonwealth of the Bahamas dated March 20, 2002, the Royal Bank was ordered to pay the CIBC $194,000 (U.S.) plus interest plus legal costs incurred by the CIBC and by Treco.

[104] The Royal Bank made the payment. Torway has never taken proceedings against Treco but has continued to do business with it in the Bahamas.

[105] On July 8, 2002, ASDA and Torway commenced the present action against the Royal Bank.

Conclusion

[106] For the reasons set out above, I conclude that the present action should be dismissed with costs on a partial indemnity basis.

[107] If the parties cannot agree as to the quantum of the costs, they may make submissions in writing to me within 15 days of the release of this judgment.