In
What is a SLOC and why are they important?
A SLOC is a form of security pursuant to which an issuer (typically a bank) guarantees payment to a third-party beneficiary in the event that the issuer's customer (the applicant) defaults under its agreement with the beneficiary. SLOCs typically entitle a beneficiary to demand immediate payment from the issuer if it has a bona fide belief that the applicant has defaulted under its agreement or otherwise breached the terms of the SLOC.1
As stated by
The fundamental principle governing SLOCs - and the characteristic that gives them their utility - is that they operate as autonomous instruments that are independent from and generally unaffected by disputes about performance of the underlying contract between the applicant and beneficiary. SLOCs therefore provide beneficiaries with a guaranteed means of obtaining timely payment by presenting "drawdown documents" to the issuer confirming the beneficiary's bona fide belief that the beneficiary is entitled to demand payment pursuant to the SLOC's terms. In
Background
In Coastal Gaslink, the respondent,
Following an unsuccessful mediation, the parties met for negotiations in
PAPC made three arguments in support of its application for injunctive relief:
-
The parties had reached a verbal forbearance agreement at the
- CGL breached its duty of honest contractual performance in drawing on the SLOC after stating that it did not intend to do so; and,
- CGL should not be entitled to draw on the SLOC for any purpose other than paying for completion of the project.
- the duty of honest performance does not prohibit a beneficiary from leveraging its rights under a SLOC into a negotiated settlement with an applicant; and
- the only pre-conditions to drawing on a SLOC are those listed in the SLOC itself. So long as those conditions are satisfied, the beneficiary's intentions with respect to the use of the funds (including to pay for the completion of a project) are irrelevant.
What is the standard of proof for a verbal forbearance agreement?
PAPC argued that the comments made by the CGL representative at the
On appeal, PAPC argued that
Did CGL breach its duty of honest contractual performance?
PAPC's second argument was that CGL had breached its duties of honest contractual performance and good faith. PAPC argued that CGL had knowingly deceived and misled it at the
On appeal, PAPC argued that
Should reliance on a SLOC be restricted to obtaining funds to complete a project?
PAPC asserted that the purpose of a SLOC is to secure performance obligations.16 CGL had already hired other contractors to perform PAPC's work, and, by the time the motion was heard in
PAPC's argument was summarily rejected both by
Key Takeaways
Coastal Gaslink signals that
-
If and when Canadian courts determine that a contractual obligation may be grounds for an injunction to prevent a party from drawing on a SLOC, the party seeking an injunction will likely have to prove they have a "strong prima facie case" that the beneficiary is contractually prohibited from executing a drawdown;
Footnotes
1.
2. Coastal Gaslink - KB at para 38.
3. Coastal Gaslink - KB at para 41, referring to
4. Coastal Gaslink - KB at paras 1 and 7.
5. Coastal Gaslink - KB at paras 9-11.
6.
7. Coastal Gaslink - KB at paras 14, 56.
8. Coastal Gaslink - KB at paras 32-33.
9. Coastal Gaslink - KB at para 4.
10. Coastal Gaslink - KB at para 48.
11. Coastal Gaslink - KB at para 62.
12. Coastal Gaslink at para 5 - referring to
13. Coastal Gaslink - KB at paras 67-68.
14. Coastal Gaslink - KB at para 66.
15. Coastal Gaslink at para 19.
16. Coastal Gaslink at para 13.
17. Coastal Gaslink - KB at para 63.
18. Coastal Gaslink at para 13..
19. Coastal Gaslink - KB at para 69.
20. Coastal Gaslink - KB at para 7.
21. Coastal Gaslink - KB at para 69.
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