Eurobank Ergasias S.A. v. Bombardier Inc. [2024]

Factual Summary:

In this 154-page 7-2 split decision, the Supreme Court of Canada grappled with fundamental principles underlying international trade finance.  The primary issue is the independence principle (referred to by the Court as autonomy) and the fraud exception to it.  Both the majority opinion and the dissent acknowledge that the independence principle is foundational to the integrity of LCs (or in this case Demand Guarantees), upon which beneficiaries rely. 

They also acknowledge the necessity of a countervailing fraud exception to independence, upon which applicants rely.  The gravamen of this case involved striking a proper balance between these competing reliance interests under the unique circumstances presented, with the majority and the dissent arriving at different conclusions.  The case also highlights the legal risk inherent in linked back-to-back undertakings governed by the laws of different countries.

The underlying transaction was a contract, entered into in 1998, under which Bombardier agreed to manufacture and sell amphibious firefighting aircraft to the Hellenic (Greek) Ministry of Defense (HMOD), a sovereign governmental body.  The transaction included an Offsets Contract under which Bombardier agreed to subcontract a specified level of procurement to Greek companies, failing which Bombardier would owe liquidated damages to HMOD.  Bombardier’s contingent liquidated damages obligation was backed up by a Demand Guarantee (governed by URDG458 and Greek law) issued by Eurobank Ergasias S.A. (Eurobank, a Greek bank) to HMOD. 

This local Demand Guarantee, in turn, was backed up by a Counter-Guarantee (governed by URDG458 and Quebec law) issued by National Bank of Canada (NBC) for its customer, Bombardier, to Eurobank as Counter-Guarantee Beneficiary.  In classic back-to-back fashion, if HMOD drew on the Eurobank Guarantee, Eurobank in turn could draw on the NBC Counter-Guarantee, for which Bombardier would be obligated to reimburse NBC.

The plot thickened when Bombardier could not fulfill its Greek procurement obligation under the Offsets Contract.  Bombardier disputed the enforceability of the Greek set-asides under EU law.  Bombardier and HMOD submitted that dispute to an ICC Arbitral Tribunal.  Upon commencement of the proceedings, HMOD agreed that it would not draw on the Eurobank Guarantee pending a decision.

Nearly five years after commencement of the arbitration, HMOD drew on the Eurobank Guarantee.  Bombardier obtained an order from the Arbitral Tribunal against payment.  Bombardier also obtained a provisional injunction from the Quebec Superior Court preventing HMOD from demanding payment, preventing Eurobank from paying a draw by HMOD, and preventing NBC from honoring a draw by Eurobank under the Counter-Guarantee.

Additionally, in Greece, Eurobank obtained an order from a Greek Court of First Instance in Athens preventing HMOD from demanding payment, which order was appealed by HMOD.  The Court of Appeals of Athens reversed the trial court and dismissed Eurobank’s petition.  Two days later, HMOD made a facially complying draw on the Eurobank Guarantee.

Bombardier then returned to the Quebec Superior Court and obtained a second provisional injunction on the same terms as the first (then expired) injunction.  Important fact: at the time of these legal proceedings in Quebec and Greece, the ICC Arbitral Tribunal indicated it would issue a decision within ten days.

HMOD did not wait.  Instead, it served an Extrajudicial Invitation Protest upon Eurobank, giving notice to Eurobank that it would be subject to severe consequences, including possible freezing of assets and criminal indictment, if it did not pay.  The next day, Eurobank paid HMOD and demanded payment from NBC under the Counter-Guarantee.  A few days after that, the Arbitral Tribunal issued its decision in favor of Bombardier, ruling that the Greek set-asides in the Offsets Contract were unenforceable (the contestation of which was later dismissed by the Cour d’Appel de Paris).  Thus, HMOD had been paid on an obligation determined to be legally null and void.

Bombardier returned once again to the Quebec Superior Court, where it obtained an interim injunction restraining NBC from making payment to Eurobank under the Counter-Guarantee.  After trial, the Court permanently enjoined NBC from paying Eurobank’s demand under the Counter-Guarantee.  Eurobank appealed to the Quebec Court of Appeal, which affirmed the trial court.  Eurobank further appealed to the Supreme Court of Canada, resulting in the decision in question affirming the decisions of the Quebec courts below.

There were further legal proceedings in Greece as well.  Eurobank brought an action in the Court of First Instance in Athens seeking to recover the payment it had made to HMOD under the Local Guarantee.  It was initially successful, but HMOD appealed to the Court of Appeals of Athens, which reversed the trial court.  Eurobank further appealed to the Hellenic Supreme Court, which upheld the Court of Appeals decision denying Eurobank’s attempted recovery of the payment it had made to HMOD under the Guarantee.  Thus, Eurobank was out the money (USD 13,868,354.60).

While the procedural history of this dispute is long and complex, the central legal issue was relatively straightforward: was Eurobank’s draw on the Counter-Guarantee fraudulent, so as to justify non-payment?  Because HMOD had agreed at the inception of the arbitral proceedings not to draw pending a decision, the majority concluded that HMOD’s draw on Eurobank five years later was fraudulent.  The further question was whether the resulting draw by Eurobank on the Counter-Guarantee was also fraudulent, justifying non-payment of its facially complying demand.

The majority took pains to clarify that this was not a question of “vicarious fraud”.  That would have been problematic because the independence of undertakings is applicable even as between those linked back-to-back, as with the Guarantee and Counter-Guarantee in this case (even though the Counter-Guarantee quoted the Guarantee verbatim, as is common).  Rather, for Eurobank’s draw to be wrongful under the fraud exception, the Supreme Court reasoned that, if Eurobank had knowledge that HMOD’s draw was fraudulent and by an act of its own participated in that fraud, then Eurobank had independently engaged in fraud, making the fraud exception applicable to its demand.  Knowledge plus participation is the linchpin of the Supreme Court’s ruling against Eurobank.  The Court recognized that Eurobank was under extreme pressure and had a difficult decision to make, but its decision to honor HMOD’s demand effectively made HMOD’s fraud its own fraud, thereby dooming its legal fate in Canada.

The dissent saw it otherwise, cautioning that the Court must examine Eurobank’s decision to pay HMOD through the lens of the legal circumstances that were applicable to Eurobank in Greece at the moment that it honored HMOD’s demand.  This introduces principles of comity.  The judgments of Greek courts are not binding on Quebec courts, but they can be adduced as factual evidence of the Greek legal landscape in which Eurobank acted.  The Greek judgments, based as they are on the law of Greece (as provided in the Guarantee), are not susceptible of review on the merits by Quebec courts, but should be given such factual weight as Quebec courts may deem appropriate.  According factual weight to a foreign judgment is different from applying foreign law.

So viewed, the dissent opined that Eurobank’s draw on the Counter-Guarantee was not fraudulent.  Greek courts determined that HMOD could not be restrained from draw, and had a right to withdraw its prior agreement not to draw, which it made at the inception of the Arbitral Tribunal proceedings five years earlier.  Because Greek courts determined that HMOD’s prior agreement not to draw was no longer binding, HMOD had a right to draw, and Eurobank had an obligation to honor it.  Hence, according to the dissent, Eurobank’s draw on the Counter-Guarantee was not fraudulent.

Comment:

Clearly, with Canadian courts finding fraud and Greek courts finding no fraud, Eurobank got whipsawed between them and was left holding the proverbial bag.  In this sense, the case is a cautionary tale.  Linked undertakings governed by the laws of different countries present an inherent risk of inconsistent results.  Eurobank learned that lesson the hard way.

Finally, while the facts of this case are unique, the case illustrates a common dilemma for issuers of LCs and other independent undertakings: what constitutes fraud?  Disputes in underlying transactions happen all the time.  In such circumstances, it is not uncommon for an LC applicant, frequently through legal counsel, to pressure LC issuing bank staff in an attempt to prevent honor of an anticipated draw on the basis that the beneficiary has no right to draw.  LC professionals understand they must examine a draw for facial compliance with the LC and, under the independence principle, they should not delve into the underlying transaction to determine whether the beneficiary has a right to draw.  LC professionals are bankers after all, not sub rosa courts.

But fraud is an exception to the independence principle, to which LC professionals need not cast a blind eye, so under what circumstances might a breach in the underlying transaction actually constitute a fraud?  While that can be a difficult question, the practical answer is very rarely.

Because a finding of fraud was essential to its decision, the Supreme Court of Canada considered this issue as well.  It observed that a breach of contract without more is not fraud.  There must be some additional element of dishonesty or deceit, which the majority found but the dissent did not.  This presents a mixed question of law and fact with which, like the Supreme Court of Canada, LC professionals must confront on a case-by-case basis.  Because these decisions are fraught with legal risk, LC professionals may wish to navigate them with the assistance of legal counsel well-versed in LC law.

LC Rules & Laws

All the applicable international rules and laws for standbys, guarantees and trade in one place

Buy Now