Elmford Construction Co. Ltd. v. South Winston Properties Inc.

No. 95-QC-60205, 1999 Ont. Sup. C.J. LEXIS 1049 (Ont. Sup. C.J. 1999) [Canada]

The obligation of an issuer runs only to the named beneficiary.

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Defendant/Applicant/Developer/Owner:     South Winston Properties Inc.

Issuer:                                                           Bank of Nova Scotia  

Defendants/Beneficiaries:                            Town of Oakville and Regional Municipality of Halton  

Transaction:                                                   Commercial real estate development project.

LC:                                                                  Standby LCs subject to UCP500.

Decision:

The Ontario Superior Court, Dunnet, J., granted summary judgment in favor of the issuer.

Justification:

The obligation of an issuer runs only to the named beneficiary.

History:  

To assure completion of public improvements to a real estate development, the developer obtained issuance of standby LCs by the bank that had provided financing to the project that was payable to governmental entities. A drawing was made by one of the beneficiaries for uncompleted work but a balance remained on one of the LCs. The developer had contracted with subcontractor to complete the required work. When it failed to pay for the work, the subcontractor sued the contractor, the issuer, and beneficiaries, seeking application of the funds due on the LC to the debt.

Briefing:

1. Issuer's Obligation: Noting that the subcontractor was not the named beneficiary of the LCs, the court ruled that it had no right to draw on them.

2. Proceeds: Third Party Rights: The subcontractor argued that the beneficiaries had a right to application of the funds paid under the LCs on a theory of trust or unjust enrichment. The court rejected this claim, noting that "the obligations relating to the use of the funds drawn from the letters of credit arise from the terms of the letters themselves. There is nothing in the terms of the letters of credit which obliges [the beneficiary] to use any proceeds so drawn to pay [the applicant's] liabilities to third parties such as [the subcontractor]."