Universal Stainless Steel & Alloys Inc. v. JP Morgan Chase Bank, 2009 ONCA 801

CITATION: Universal Stainless Steel & Alloys Inc. v. JP Morgan Chase Bank, 2009 ONCA 801

DATE: 20091113

DOCKET: C49577

COURT OF APPEAL FOR ONTARIO

Weiler, Sharpe and Rouleau JJ.A.

BETWEEN

Universal Stainless Steel & Alloys Inc.

Plaintiff (Respondent)

and

JP Morgan Chase Bank, National Association, formerly Bank One, NA and Comerica Bank

Defendants (Appellant)

J. Brian Casey and Matthew J. Latella, for the appellant JP Morgan Chase Bank, National Association, formerly Bank One, NA

Ronald J. Walker and Ian D. Collins, for the respondent Universal Stainless & Alloys Inc.

Myron W. Shulgan, Q.C., for the respondent Comerica Bank

Heard: May 20, 2009

On appeal from the orders of Justice Alexandra Hoy of the Superior Court of Justice, dated October 2, 2008 and reported at 2008 49587 (ON S.C.), and dated December 9, 2008.

Rouleau J.A.:

[1] The appellant, JP Morgan Chase Bank, N.A., appeals the order of Hoy J. which granted summary judgment in favour of the respondent, Universal Stainless & Alloys Inc. (“Universal”). The appellant was held liable for payment under an irrevocable and transferable letter of credit issued by it for the benefit of Johnston Steel Services Inc. (“Johnston Steel”) which the motions judge found had been validly transferred to Universal. Johnston Steel is not a party to these proceedings.

[2] The appellant appeals the motions judge’s determination that the letter of credit was properly transferred to Universal and that Universal had standing to bring a claim against it directly. It also appeals the motions judge’s conclusion that the discrepancies in the documents presented to the appellant for payment under the letter of credit were not material and did not justify the appellant’s refusal to pay.

[3] Further, the appellant seeks leave to appeal the motions judge’s costs order, dated December 9, 2008, whereby she ordered the appellant to pay the following amounts: (1) $175,000.00 to Universal; and (2) $117,996.21 to Comerica Bank (“Comerica”), its co-defendant on the motion for summary judgment, by way of a Sanderson order.

[4] Comerica is a respondent on this appeal on the costs issue alone. Both Comerica and Universal oppose the appellant’s application for leave to appeal from the motions judge’s costs order.

[5] For the reasons that follow, I would dismiss the appeal, grant leave to appeal from the costs order but dismiss the costs appeal.

FACTS

[6] Universal is a corporation headquartered in Mississauga, Ontario. It is incorporated pursuant to the laws of Ontario and is engaged in the business of importing manufactured goods. At the time the dispute arose between the parties, the appellant operated under the name of Bank One, N.A. As a result of a subsequent merger, the appellant now operates as JP Morgan Chase Bank, N.A.

[7] In early 2004, Johnston Steel agreed to sell a large quantity of steel to Menard Inc. (“Menard”). Johnston, in turn, entered into a contract with Universal for the purchase of that steel. As a requirement of the sale to Johnston, Universal insisted on receiving a letter of credit in its favour to secure payment.

[8] A letter of credit involves an arrangement whereby a purchaser directs its bank (the “issuing bank”) to make a specified payment to a third party (the “beneficiary”) or a third party’s bank provided that the terms of the letter of credit are complied with. In the case of a documentary letter of credit, an issuing bank will pay the beneficiary upon receipt of the documentation outlined in the letter of credit. Letters of credit are intended to provide certainty in commercial transactions and to divorce the underlying commercial transaction from the payment. Obtaining a letter of credit would thus provide certainty to Universal that once it delivered the appropriate documentation, it would be promptly paid.

[9] At the request of Johnston Steel, Menard arranged for the appellant to issue an irrevocable and transferable letter of credit in the amount of US $5,426,630.00 in favour of Johnston Steel. The letter of credit stipulated that it was subject to the terms of the International Chamber of Commerce Uniform Customs and Practice for Documentary Credits (1993 revision, ICC Publication No. 500) (the “UCP 500”). The UCP 500 is an internationally accepted set of rules and standards to which letters of credit are commonly subject, particularly in the context of large international transactions.

[10] The appellant appointed Johnston Steel’s bank, Comerica, the transferring bank under the terms of the letter of credit. To satisfy its agreement with Universal, Johnston Steel directed Comerica to transfer a portion of the letter of credit to Universal as the second beneficiary, in the amount of US $4,955,500.00.

[11] Universal delivered the steel and delivered its invoice and bills of lading to Comerica. Comerica then substituted Johnston Steel’s invoice for Universal’s, delivered these documents to the appellant, and requested payment. Menard was unhappy with the quality of the steel and did not take possession of the shipment. It therefore instituted proceedings seeking to enjoin the appellant from paying pursuant the letter of credit. These proceedings were later voluntarily dismissed. However, the appellant, on its own review of the documents submitted by Comerica, declined to pay, citing various documentary discrepancies.

[12] As a result, Universal did not get paid. Instead, it re-sold the steel for a lower price and brought an action for damages against the appellant and Comerica. Universal subsequently brought a motion for summary judgment, seeking judgment against the appellant and Comerica. At the same time, the appellant and Comerica each brought motions for summary judgment seeking to have Universal’s action against them dismissed.

DECISION OF THE MOTIONS JUDGE

[13] The parties agreed that Ontario law applied and that there were no issues of material fact requiring a trial, with the exception of the determination of damages in the event that the appellant was held liable for payment under the letter of credit. The only genuine issues to be determined by the motions judge were questions of law regarding whether Universal had standing to bring an action against the appellant under the letter of credit, and whether any of the documentary discrepancies relied upon by the appellant to decline payment under the letter of credit were sufficient to justify its refusal to pay.

[14] On the first issue, the motions judge found that Universal had standing to bring a claim against the appellant on two alternative grounds. First, the letter of credit had been validly transferred by Johnston Steel to Universal and, as a result, Universal had standing to bring the action against the appellant as a beneficiary. With respect to the appellant’s argument that the transfer was invalid because they had not received notice, she found that, in accordance with a general practice, the appellant would not have expected to receive such notice and could not therefore rely on Comerica’s failure to provide it as a basis to refuse payment. In the alternative, the motions judge accepted Universal’s argument that the document purporting to effect the transfer of the letter of credit amounted to, at minimum, a valid assignment of Johnston Steel’s rights under the letter of credit (a chose in action) to Universal.

[15] On the second issue, the appellant raised three discrepancies in the documentation to justify its refusal to pay. First, the invoice from Johnston Steel omitted the words “merchandise described on purchase order,” which had been included in the letter of credit. Second, the bills of lading did not indicate how many originals had been made, despite the fact that the letter of credit required that 2 of 3 originals be presented to the appellant. Third, the agent for the carrier that signed the bill of lading failed to indicate the name and capacity of the party on whose behalf it was signing.

[16] The motions judge, having referred to the Supreme Court of Canada’s decision in Bank of Nova Scotia v. Angelica-Whitewear Ltd. et. Al., 1987 78 (SCC), [1987] 1 S.C.R. 59, and this court’s decision in Gan General Insurance Co. v. National Bank of Canada, [1999], O.J. No. 206, rejected the appellant’s arguments on all three discrepancies. On the first discrepancy, she held that the omission of the words “merchandise described on purchase order” was immaterial. On the second, the motions judge held, citing Art. 28 (b) of the UCP 500, that in the absence of any indication as to the number of original transport documents issued, the documents should have been accepted as constituting a full set. On the third discrepancy, the motions judge found that the signature below the name “American Commercial Barge Line (Carrier)” made it clear that American Commercial Barge Line was the carrier and that C-River was acting as its agent. As such, none of these alleged discrepancies justified the appellant’s refusal to pay under the letter of credit.

[17] The motions judge thus granted Universal’s motion for summary judgment as to liability against the appellant and dismissed the appellant’s motion for summary judgment against Universal. Having ruled on these two motions, she granted Comerica’s motion for summary judgment as to liability against Universal and dismissed Universal’s motion for summary judgment against Comerica.

[18] Following written submissions from the parties, the motions judge ordered the appellant to pay costs to both Universal and Comerica. Although a trial to determine damages was still pending, she held that it was not premature to fix Universal’s costs of the proceeding and that, if necessary, the judge fixing costs at the conclusion of the damages hearing could be made aware of her costs order and would have leeway in the award of costs at that stage to ensure the overall costs award was fair. Additionally, it was inappropriate to make Comerica wait until the damages determination to have its costs on the summary judgment motions fixed.

[19] The motions judge further considered whether a Sanderson order, which requires an unsuccessful defendant to pay the successful defendant’s costs, was justified. After reviewing this court’s decision in Moore v. Wienecke (2008), 2008 ONCA 162, 90 O.R. (3d) 463, the motions judge concluded that the two-step test for a Sanderson order had been met. In the result, she ordered the appellant to pay costs to Universal in the amount of $175,000.00 and to Comerica in the amount of $117,996.21.

ISSUES

[20] The appellant raises the following issues:

On the appeal:

1. Did the motions judge err in finding that Universal has a cause of action against the appellant?

4. Did the motions judge err in finding that the discrepancies in the documents presented by Comerica were insufficient to justify the appellant’s refusal to pay under the letter of credit?

On the application for leave to appeal and the appeal of the costs order:

3. Did the motions judge err in awarding costs to Universal before the amount of damages was determined at trial?

4 Did the motions judge err in making a Sanderson order and requiring the appellant to pay costs to Comerica?

ANALYSIS

4) Does Universal have the right to sue the appellant?

[21] The motions judge found that the letter of credit had been validly transferred to Universal, entitling it to bring the action that is the subject of the present appeal. She went on to find that, assuming that the transfer was not effective, Johnston Steel had assigned its right of action to Universal.

[22] The appellant maintains that the letter of credit was not transferred and, as a result Universal has no direct cause of action against them. In the applicant’s submission, for the transfer to be effective, Comerica had to give notice of the transfer to the appellant before the letter of credit expired. This was not done. As a result, the appellant asserts that there was no valid transfer of the letter of credit and Universal has no status to bring an action against the appellant for payment.

[23] Further, in response to Universal’s alternate submission, the appellant submits that, in order to bring the action as the assignee of a chose in action, the beneficiary, Johnston Steel, must be made a party to the action. Because Johnston Steel was not made a party and because, in the appellant’s submission, limitation issues prevent Johnston Steel from being added at this late date, Universal is precluded from pursuing a claim based on an assignment of Johnston Steel’s right of action.

[24] Dealing first with the validity of the transfer, the appellant submits that absent notice, there could be no valid transfer of the letter of credit. In support of this notice requirement, the appellant relies on paragraphs (a) and (h) of Article 48 of UCP 500 and the terms of the letter of credit.

[25] Article 48 of the UCP deals with transferable letters of credit. Paragraphs (a) and (h) read as follows:

4. A transferable Credit is a Credit under which the Beneficiary (First Beneficiary) may request the bank authorized to pay, incur a deferred payment undertaking, accept or negotiate (the “Transferring Bank”) or in the case of a freely negotiable Credit, the bank specifically authorized in the Credit as a Transferring Bank, to make the Credit available in whole or in part to one or more Beneficiary(ies) (Second Beneficiary(ies)).

(h) The Credit can be transferred only on the terms and conditions specified in the original Credit, with the exception of:

• the amount of the Credit,

• any unit price stated therein,

• the expiry date,

• the last date for presentation of documents in accordance with Article 43,

• the period for shipment,

any or all of which may be reduced or curtailed.

[26] The appellant makes two submissions with respect to these provisions. First, they interpret paragraph (a) as providing that the first beneficiary, Johnston Steel was to direct any request for transfer of a letter of credit to the appellant.

[27] Second, in reference to paragraph (h), the appellant submits that the transfer did not comply with the terms and conditions specified in the original letter of credit. In the appellant’s submission, the transferability provision in the letter of credit provided that Comerica had to give the appellant notice of any transfer before expiry of the letter of credit. Because notice was only given after the expiry, the appellant submits that the motions judge erred in concluding that the letter of credit had been validly transferred.

[28] I would not give effect to the appellant’s submissions. With respect to the first, contrary to the interpretation put forward by the appellant, Article 48(a) does not provide that a request for transfer of a letter of credit was to be made to the appellant. Rather, Article 48(a) requires that the request be made to “the bank authorized to pay” later defined as the “Transferring Bank.” By incorporating the UCP 500 into the letter of credit and designating Comerica as the transferring bank, the appellant vested Comerica with the authority to accept and execute requests for transfers from the beneficiary, Johnston Steel. The request therefore was to be made by Johnston Steel to Comerica and not to the appellant. Paragraph 48(a) of the UCP 500 was therefore complied with. Pursuant to Johnston Steel’s request, Comerica issued a “transfer of a documentary credit” to Universal’s bank by which it transferred $4,955,500 of the original letter of credit.

[29] I turn now to the appellant’s submission that the transfer did not comply with the terms of the letter of credit and therefore contravened Article 48(h) of the UCP 500. Specifically, it is argued that the transfer provisions required that notice of the transfer be given to the appellant before the expiry date of the letter of credit. The relevant provision reads as follows:

THIS LETTER OF CREDIT IS TRANSFERABLE. TRANSFER REQUEST(S), IF ANY, ARE RESTRICTED TO THE ADVISING BANK HEREIN DESIGNATED THE TRANSFERRING BANK AND ANY TRANSFER REQUEST(S) MUST BE ACCOMPANIED BY THE ORIGINAL CREDIT, AND A NOTATION OF THE TRANSFER MUST BE DULY MADE ON THE REVERSE OF THE ORIGINAL CREDIT BY THE TRANSFERRING BANK. NOTICE OF ANY TRANSFER, INCLUDING THE NAME AND COUNTRY OF THE TRANSFERREE, MUST BE SENT TO US BY EITHER THE TRANSFERRING BANK AT THE TIME OF TRANSFER OR THE NEGOTIATING/PRESENTING BANK MUST CERTIFY THAT DOCUMENTS PRESENTED ARE FROM THE TRANSERREE AND NO SUBSTITUTION OF DOCUMENTS FROM THE FIRST BENEFICIARY IS REQUIRED. UNTIL SUCH NOTIFICATION IS RECEIVED BY US, WE WILL NOT PAY AGAINST ANY DRAFT(S)/INVOICE(S) ISSUED BY A PARTY OTHER THAN THE NAMED BENEFICIARY OF THE CREDIT.

[30] The transferability provision in the letter of credit relied on by the appellant for its submission does not, in my view, impose as a condition on the transfer of the letter of credit that Comerica give notice to the appellant before a transfer of the letter of credit becomes effective. Rather, properly read, the provision in the letter of credit relied on by the appellant can be broken down as follows:

(a) the letter of credit is transferable;

(b) transfer requests are restricted to Comerica (the transferring bank);

I the requests must be accompanied by the original credit;

(d) a notation of the transfer must be made by Comerica on the original credit; and,

(e) the appellant will not pay against any draft/invoice issued by a party other than Johnston Steel unless,

(i) notice of transfer was sent to the appellant by Comerica at the time the transfer was made; or

(ii) the presenting bank certifies that the documents presented are from the transferee and no substitution of documents from Johnston Steel is required.

In other words, the last portion of the condition, the portion requiring notice of the transfer, is not a prerequisite to making the transfer effective. Notice (or the specified certification by the presenting bank) is required only if the appellant is being called upon to pay on presentation of a draft or invoice other than an invoice from Johnston Steel. Because the arrangement between Comerica and Universal was that Comerica would present the Johnston Steel invoices to the appellant for payment, notice of the transfer was not required.

[31] The expert retained by the appellant did not address the issue of notice. The experts retained by Comerica and Universal did. Comerica’s expert, Donald R. Smith, described how a transfer was to be made in accordance with the provisions of the letter of credit. According to Smith, in order to effect the transfer of a letter of credit, the First Beneficiary contacts the Transferring Bank, who transfers the letter of credit to the Second Beneficiary through their bank (sometimes referred to as an “Advising Bank”). There is no requirement to involve or give notice to the Issuing Bank. Accordingly, Johnston Steel contacted and instructed Comerica, who then transferred the letter of credit to Universal through its bank, the Royal Bank of Canada. In cross-examination Mr. Smith, responding to questioning from counsel for Universal, stated that notice of transfer was required, “[o]nly to the extent as reflected in the transfer clauses of the [appellant’s] letter of credit, that drafts would be presented in a name other than Johnston Steel Services.” Because the documents presented by Comerica were in the name of Johnston Steel, Mr. Smith was of the opinion that the transfer was valid.

[32] Universal’s expert, Kenneth W. Oldfield refuted the contention that the appellant required notice of the transfer. This was because: “Comerica substituted the commercial invoice and draft of Universal and presented to [the appellant] the commercial invoice and draft issued by the first (named) beneficiary Johnston Steel as is permitted by Article 48 of the UCP.”

[33] Reading the condition in this way is, as noted by the motions judge and conceded by the parties, consistent with the practice in the industry where notice of transfer is rarely given to issuing banks. This allows the first beneficiary’s bank to present the first beneficiary`s documents for payment without disclosing the identity of the second beneficiary. The beneficiary of the letter of credit can thus avoid revealing the source and cost of the goods to the purchaser, preventing the purchaser and supplier from doing business directly: John F. Dolan, “What is the Matter With the UCP?” (1999-2000) 15 B.F.L.R. 501 at 507 (WC).

[34] The appellant also argues that even if the transfer was effective, Universal cannot now make a claim. Because notice of the transfer was only given to the appellant after the expiry of the letter of credit, it is now too late for Universal (through its bank RBC) to demand payment.

[35] I would also reject this submission. As I have explained at para. 30, the absence of notice does not affect the validity of the transfer in this case. Notice to the appellant was not required before the documents were to be presented to it for payment. Comerica was to be the presenting bank and Johnston Steel documents were to be presented. Comerica’s presentation of documents for payment complied with its obligation under the letter of credit. The appellant was therefore required to pay Comerica according to the terms. Its refusal to pay was a breach of its obligation to Universal under the transferred letter of credit.

[36] Once the transfer was validly effected, Johnston Steel’s rights under the letter of credit accrued to Universal, to the extent provided in Comerica’s “transfer of a documentary credit.” That document provides that USD 4,955,500.00 of the credit was transferred to Universal. The requirement set out in the “transfer of a documentary credit” was as follows:

This is solely an advice of transfer of Bank One, NA Chicago, IL, Letter of Credit number LCCHMEN00000962 and conveys no engagement or obligation on our part. Due to the substitution of documents by the first beneficiary, the second beneficiary’s must send the required shipping documents to Comerica Bank, 500 Woodword Ave, 24th Floor, Detroit, MI 48226 in one lot via courier service at second beneficiary’s expense. Please note, payment will only be effected to you after receipt of funds by Comerica Bank from Bank One…

[37] Universal complied with its obligation set out therein. Having delivered the steel, Universal submitted its bills of lading and invoice to Comerica. Comerica then substituted Johnston’s invoice for Universal’s (as is contemplated by art. 48(i)[^1] of the UCP 500) and delivered these documents to the appellant. The delivery of compliant documents by Comerica triggered the appellant’s obligation to pay under the letter of credit to its beneficiaries, which (pursuant to the transfer) now included Universal. Universal was not required to present shipping documents or make a demand to the appellant for payment. In fact, its arrangement with Johnston Steel and Comerica prevented it from doing so.

[38] I note that pursuant to the terms of Comerica’s transfer of the letter of credit to Universal, Comerica was not a confirming bank, and thus made no engagement to pay. Comerica simply transferred a portion of the letter of credit to Universal. Had Comerica acted as a confirming bank, the situation with respect to its liability and the proper formulation of Universal’s claim may well have been different. However, aside from substitution of the Johnston Steel invoices, Comerica’s role was simply to forward the documents from Universal to the appellant, and then upon receipt of payment forward the funds from the appellant to Universal. Universal’s expert, Kenneth Oldfield, described the situation succinctly: “Comerica was basically a post office.” In my view, nothing in the letter of credit or the UCP 500 prevents the first beneficiary from making this type of arrangement. On the contrary, such a transaction is contemplated by the UCP 500.

[39] Having concluded that the transfer to Universal was valid and effective and that as transferee, Universal is entitled to claim directly against the appellant, I need not deal with Universal’s submissions respecting Universal’s ability to sue as assignee of a chose in action.

[40] I turn now to the issue of whether the three alleged discrepancies were sufficiently material to justify the appellant’s refusal of payment.

2) The Discrepancies

a) The Law

[41] The cardinal rule concerning letters of credit is the autonomy principle, sometimes referred to as the independence principle: Christopher Leon, “Letters of Credit: A Primer” (1986) 45 Md. L. Rev. 432 at 442. Letters of credit are to be entirely autonomous and divorced from the underlying transactions to which they relate. As alluded to above, letters of credit are obtained to provide the beneficiary with a secure source of payment that cannot be held up or otherwise delayed because of disputes concerning the underlying subject matter of the transaction. If a demand for payment is made that complies with the terms of the letter of credit, the issuing bank is, subject to limited exceptions, required to honour the credit.

[42] In keeping with the autonomy principle, the issuing bank of a documentary letter of credit must accept a demand for payment when it is accompanied by documents which, on their face, conform to the terms and conditions of the credit. The documentary review undertaken by the bank is independent of the performance of the underlying transaction for which the credit was issued.

[43] Because payment is based totally on the presentation of agreed upon documents, the documents presented must strictly comply with the terms and conditions specified in the credit. However, as set out by the Supreme Court of Canada in Angelica, courts have recognized that, in applying the rule of strict documentary compliance, there “must be some latitude for minor variations or discrepancies that are not sufficiently material to justify a refusal of payment.” (See also Gan General Insurance at para. 12.)

[44] The appellant submits that the motions judge erred in her application of the principles outlined by the Supreme Court of Canada in Angelica in that she took too broad a view of the limited exception to the rule of strict documentary compliance. This led her into error in concluding that the three alleged discrepancies were minor and not sufficiently material to justify a refusal of payment.

[45] In my view, the motions judge was correct in concluding that each of the three discrepancies raised by the appellant was minor and came within the limited exception to the rule of strict documentary compliance established by the Supreme Court of Canada. I will deal with each in turn.

b) The failure to include the words “merchandise described on purchase order” on the Johnston invoice

[46] Under the heading description of Goods and/or Services in the letter of credit, the following appears:

(Description of Goods and/or Services)

MERCHANDISE DESCRIBED ON PURCHASE ORDER

STEEL COILS

P.O. NO. AMOUNT

MIDWEST STEEL NO. 411555 USD1, 649,010.00

MIDWEST STEEL NO. 411556 USD3, 777,620.00

[47] The invoice presented by Comerica for payment described the goods as follows:

Description of Goods and/or Services

STEEL COILS

P.O. NO. AMOUNT

MIDWEST STEEL NO. 411555 USD1, 649,010.00

MIDWEST STEEL NO. 411556 USD3, 777,620.00

[48] Article 37c of the UCP 500 stipulates that the “description of the goods in the commercial invoice must correspond with the description in the Credit”. The appellant submits that, because the words “merchandise described on purchase order” that appear in the description of goods section of the letter of credit do not appear in the relevant portion of the invoice submitted by Comerica to the appellant, there was material non-compliance with the terms of the letter of credit. The appellant was, therefore, justified in denying payment.

[49] In my view the motions judge properly rejected this submission. The omitted words do not constitute a part of the description of the goods. Rather, they are mere surplusage. They simply indicate that the merchandise is to be described by reference to purchase orders. What followed in both the letter of credit and the invoices presented by Comerica was the same: “steel coils” as well as the listing of the same two purchase orders and the price.

c) The failure to indicate the number of original transport documents presented to the appellant

[50] When the claim was brought the bills of lading (or copies thereof) actually presented to the appellant were no longer available. The parties agree, however, that at least three copies of these were presented by Comerica to the appellant. Of these at least one was not an original and was marked non-negotiable.

[51] The letter of credit provided that “2/3 set plus one non-negotiable copy…” was to be presented to the appellant. The transport documents presented were inland waterway transport documents. They did not, however, indicate whether the documents were 2 out of 3 originals. In the absence of an indication on inland waterway transport documents, Article 28(b) of the UCP 500 applies. It provides that:

In the absence of any indication on the transport document as to the numbers issued, banks will accept the transport document(s) presented as constituting a full set. Banks will accept as original(s) the transport document(s) whether marked as original(s) or not.

[52] The appellant therefore argues that it was deemed to be receiving a full set of transport documents rather than the 2/3 of a set as stipulated in the letter of credit. This, in its view, constitutes a discrepancy that was sufficiently material to justify refusal of payment. I disagree.

[53] Although I accept that the failure to note that the originals presented were 2/3 of a set constitutes a discrepancy, I do not, on the facts of this case, view it as being material. The concern being addressed by the stipulation in the letter of credit that a specified number of originals is to be presented is that, in some cases, original transport documents can be used to control title to the goods. In such circumstances, it is important for the issuing bank to know, before being called upon to pay, where the originals are and to what uses they have been put.

[54] The fact that this is the concern being addressed is apparent from a review of UCP 500 Articles 23 (Marine/Ocean Bill of Lading), 24 (Non-Negotiable Sea Waybill), 25 (Charter Party Bill of Lading) and 26 (Multimodal Transport Document). When a letter of credit calls for presentation of these types of transport documents, the UCP 500 provides that, unless otherwise stipulated in the credit, the bank must ensure that the transport documents presented consist of a sole original or, if the transport document is issued in more than one original, the full set of transport documents is presented. This requirement to ensure that all original copies are presented is in contrast with the Article 28(b) presumption in the case of inland waterway transport documents.

[55] In the present case, therefore, the concern that all original documents be presented does not exist. Inland waterway transport documents are “straight” bills of lading that are not negotiable and provide that delivery of the goods could only be taken by Johnston Steel or someone authorized by it. Article 28 treats inland waterway transport documents differently than transport documents addressed in Articles 23 to 26. Article 28(b) directs that, absent any indication on the transport documents as to the number of originals in existence, the bank is to accept inland waterway transport documents presented to it as constituting a full set. By assuming that a full set of originals is being presented, the UCP 500 signals a lack of concern as to the potential misuse of one set of originals. In a sense, because the UCP 500 deems Comerica to have presented the full set of originals, Comerica has not only met but in fact exceeded the 2/3 requirement set out in the letter of credit.

[56] The immateriality of this discrepancy is further confirmed by the fact that the appellant’s expert could identify no practical implication of the transport documents being presented as they were.

d) The inland waterway transport document does not indicate on whose behalf the agent C-River Logistics Inc. signed

[57] The bill of lading is on the letterhead of the “American Commercial Barge Line Company LLC”. C-River Logistics Inc. signed it “C-River Logistics Inc. (agent)”, next to the word “per” on the signature line directly below the words “American Commercial Barge Line (carrier)”. The appellant argues that this bill of lading was discrepant because C-River Logistics Inc. signed it but did not indicate on whose behalf it was signing. In support of this argument, they rely on Article 28(a) of the UCP 500, which provides that:

If a credit calls for a road, rail, or inland waterway transport document, the banks will, unless otherwise stipulated in the Credit, accept a document of the type called for, however named, which:

i) appears on its face to indicate the name of the carrier and to have been signed or otherwise authenticated by the carrier for a named agent for or on behalf of the carrier … An agent signing or authenticating for the carrier, must also indicate the name and the capacity of the party, i.e. carrier, on whose behalf the agent is signing.

[58] In my view, the motions judge correctly rejected this submission. From the relative position of the signature below the name of the carrier, it is apparent that the agent, C-River Logistics Inc., was acting as agent on behalf of the carrier named above the signature. Because the word “(carrier)” appears immediately following “American Commercial Barge Line”, it is abundantly clear that American Commercial Barge Line was the carrier. Therefore C-River Logistics Inc. is clearly signing as agent for American Commercial Barge Line Company and American Commercial Barge Line Company is the carrier. The alleged discrepancy does not justify a refusal of payment.

3) Did the motions judge err in awarding costs to Universal before the amount of damages was determined at trial?

[59] The appellant argues that the motions judge committed a reversible error in its award of costs to Universal. In the appellant’s view, the award was premature as the amount of damages, if any, had yet to be determined and would only be determined after the trial of an issue. Without knowing whether Universal would recover substantial damages, it was impossible for the motions judge to properly assess whether its award of $175,000 in costs was reasonable and proportionate to the amount ultimately recovered. Such a consideration is mandated by the rules and the case law.

[60] The appellant also submits that the motions judge erred when she stated that “if Universal ultimately recovers substantially less than the amount claimed [the] judge [fixing costs at the conclusion of the damages hearing] will have sufficient leeway to reflect that in the costs awarded by him or her”. In the appellant’s view, because the award represented 95% of the costs incurred by Universal, the so-called “leeway” was only about $12,000, an amount insufficient should Universal ultimately be unable to prove substantial damages.

[61] I would reject the submissions. Cost awards are discretionary orders and should only be set aside if the judge made an eror in principle or the award is plainly wrong: Hamilton v. Open Window Bakery Ltd., 2004 SCC 9, [2004] 1 S.C.R. 303 at para. 27. The motions judge considered that she was in the best position to determine the appropriate amount of costs for that portion of the case. Because she would likely not be the judge assigned to hear the trial on damages, she decided to fix the costs of the proceeding before her.

[62] In the particular circumstances of this case, it was open to the motions judge to make a cost award before the damages trial was held. Liability pursuant to the letter of credit was determined and the only remaining issue was the extent to which Universal’s mitigation efforts succeeded in reducing the appellant’s liability from the full amount of the transferred letter of credit. In the course of the damages trial, substantial additional cost will undoubtedly be incurred by both parties. It follows, therefore, that, as noted by the motions judge, the judge hearing the damages trial will have considerable leeway to compensate the appellant if Universal’s damages award is substantially lower than the amount it now claims. Universal could, conceivably, be denied its costs of the proceeding and might even be called upon to pay part or all of the appellant’s costs incurred at the trial of the damages issue should circumstances so warrant.

4) Did the motions judge err in making a Sanderson order requiring the appellant to pay costs to Comerica?

[63] The motions judge ordered the appellant to pay the costs incurred by its co-defendant, Comerica, in the amount of $117,996.21. The appellant submits that the motions judge misapprehended the facts and incorrectly applied the test set out by this court in Moore v. Wienecke (2008), 2008 ONCA 162, 90 O.R. (3d) 463 for determining whether a Sanderson order should be made.

[64] Moore v. Wienecke established a two-part test. First, the court must ask whether it was reasonable to join the several defendants together in one action. Second, the court, in exercising its discretion, must consider whether a Sanderson order is just and fair in the circumstances. In applying this second branch of the test, four factors must be considered: (1) Did the defendants try to shift responsibility on to each other as opposed to concentrating on meeting the plaintiff’s case?; (2) Did the unsuccessful defendant cause the successful defendant to be added as a party?; (3) Were the two causes of action independent of each other?; and (4) Would the inability of an unsuccessful litigant to pay render the award unfair?

[65] The appellant acknowledges that the first branch of the test has been satisfied as Universal properly included both the appellant and Comerica as defendants. Comerica’s position was that it did all that was required of it and that it was the appellant that should be liable.

[66] With respect to the second branch of the test, the appellant argues that it is neither fair nor reasonable to require it to pay Comerica’s costs as it made no cross-claim against Comerica. The appellant simply alleged that the documents presented were not compliant and notice to it of the transfer of the letter of credit was required. It maintained the alleged deficiencies and the failure to give notice of the transfer were defences against Universal’s claim.

[67] In my view, the absence of a cross-claim and the fact that the appellant did not specifically plead that Comerica was responsible are not determinative. In effect, the appellant’s position was that discrepant documents were presented by Comerica, and that neither Comerica nor anyone else gave the notice of the transfer that the appellant alleged was required. The appellant’s submissions therefore necessarily implied that Comerica, as the transferring bank, was party to errors that justified its refusal to pay Universal. Comerica took a position directly contrary to the appellant, maintaining that it presented compliant documents to the appellant and notice of the transfer of the letter of credit to Universal did not have to be made. This satisfies the requirement of responsibility shifting.

[68] In any event, whether the appellant sought to shift responsibility to Comerica is but one factor to be considered. Given the structure of the letter of credit and its transfer, the appellant’s refusal to pay made it necessary to include Comerica as a party. Universal’s claims against both defendants arose from this transaction in which both played a central role. The claims were therefore interrelated. Factors two and three were thus satisfied.

[69] With respect to the fourth factor, I would reject the appellants submission that, absent any evidence as to Universal’s financial situation, the motions judge ought not to have considered the risk that Universal might be unable to satisfy an order obligating it to pay Comericas costs. Even in the absence of direct evidence of Universal’s financial situation, it was within the discretion of the motions judge to consider the possibility that Universal might be unable to pay. It was clear on the materials filed that Universal is not a large corporation. The inference that it may have been unable to satisfy an order was open to the motions judge.

[70] In my view, therefore, the motions judge did not err in exercising her discretion to make the Sanderson order in the circumstances of this case.

CONCLUSION

[71] For these reasons, I would dismiss the appeal, grant leave to appeal the order on costs, and dismiss the costs appeal. I would award Universal its costs in this appeal fixed at $20,000 and Comerica its costs fixed at $4,000, both inclusive of GST and disbursements.

“Paul Rouleau J.A.”

“I agree K.M. Weiler J.A.”

“I agree Robert J. Sharpe J.A.”

RELEASED: November 13, 2009

[^1]: Article 48(i) reads in part, “The First Beneficiary has the right to substitute his own invoice(s) (and Draft(s)) for those of the Second Beneficiary(ies), for amounts not in excess of the original amount stipulated in the Credit and for the original unit prices if stipulated in the Credit, and upon such substitution of invoice(s) (and Draft(s)) the First Beneficiary can draw under the Credit for the difference, if any, between his invoice(s) and the Second Beneficiary’s(ies’) invoice(s).”