Executive Summary: Key Legal and Evidentiary Issues

• The Supreme Court confirmed that the fraud exception can apply to a letter of credit when the beneficiary knowingly participates in a third party’s fraud.

• Eurobank, as the beneficiary of the Canadian Letter of Counter-Guarantee, was held not to be "innocent" of HMOD’s fraudulent demand, thereby triggering the fraud exception.

• The Quebec courts were not bound to give weight to unenforced Greek judgments which found no fraud, especially when public order concerns were raised.

• The Court upheld that violating an arbitral tribunal’s binding order and undertaking not to demand payment could constitute fraud in the letter of credit context.

• Fraud in letters of credit must involve dishonesty or deceit that vitiates the demand for payment; mere breach of contract or bad faith is insufficient.

• The majority enjoined National Bank of Canada from paying Eurobank, reinforcing strict scrutiny on fraud in international financial instruments.

Facts and outcome of the case

The international financial dispute involving multiple parties and instruments

This case originated from a complex transaction involving Bombardier Inc. (a Canadian company), the Hellenic Ministry of National Defense (HMOD), Eurobank Ergasias S.A. (a Greek bank), and the National Bank of Canada. The dispute stemmed from a 1998 procurement contract under which Bombardier was to supply amphibious aircraft to HMOD, coupled with an offsets contract requiring Bombardier to subcontract work to Greek companies. To secure potential liquidated damages if Bombardier failed its obligations, a chain of financial guarantees was arranged: a Greek Letter of Guarantee issued by Eurobank in favour of HMOD, backed by a Canadian Letter of Counter-Guarantee issued by National Bank in favour of Eurobank.

The contractual breach and arbitration proceedings

Bombardier, foreseeing its inability to fulfill the offsets contract, initiated arbitration proceedings under ICC rules. HMOD had promised not to draw on the Greek Letter of Guarantee while arbitration was ongoing, but it later reneged and made several payment demands from Eurobank before the arbitration concluded. Despite an ICC order prohibiting this, HMOD persisted and threatened Eurobank with legal consequences in Greece. Eurobank ultimately paid HMOD just before the arbitral award was issued—which later found the offsets contract null and void, and that no damages were owed to HMOD.

Judicial findings in Canada and Greece diverged

Bombardier sought an injunction in Quebec to prevent National Bank from paying Eurobank under the Canadian counter-guarantee, arguing that HMOD’s fraud contaminated the transaction and Eurobank’s participation constituted beneficiary fraud. The trial judge and Quebec Court of Appeal sided with Bombardier, finding that Eurobank knew of and partook in the fraud. This fraud, they ruled, tainted Eurobank’s demand and invoked the fraud exception under Canadian law.

Greek courts, on the other hand, concluded there was no fraud under Greek law and declined to compel HMOD to repay the amount received. However, the Canadian courts declined to give weight to these foreign judgments, as they had not been recognized or enforced in Quebec and appeared contrary to public policy by dismissing binding arbitral decisions.

Supreme Court’s majority upholds Canadian lower courts

The Supreme Court of Canada, in a majority decision, upheld the decisions below. It affirmed that the fraud exception to letters of credit applied because Eurobank was not an innocent beneficiary—it had knowledge of HMOD’s fraudulent conduct and chose to act upon it. The fraud, therefore, became Eurobank’s own for the purposes of the counter-guarantee. The Court emphasized that letters of credit are autonomous but subject to a strict fraud exception when both knowledge and participation are proven.

Dissenting views emphasized international comity and narrow fraud exception

Justices Karakatsanis and Côté dissented. They warned that disregarding foreign judgments undermines international comity. They asserted that the fraud exception was wrongly invoked, given that Eurobank acted under legal compulsion from Greek authorities and had no clear or obvious knowledge of fraud. For them, the autonomous nature of demand guarantees meant Eurobank had a right to payment based on HMOD’s compliant demand under Greek law.

Final outcome

The appeal by Eurobank and HMOD was dismissed. The Supreme Court ruled that National Bank of Canada is not required to honour Eurobank’s demand under the Canadian Letter of Counter-Guarantee due to its involvement in fraud attributable to HMOD’s actions. The case sets a significant precedent for applying the fraud exception to letters of credit in cases involving interlocking financial instruments and international actors.