Man-Shield (NWO) Construction Inc. v. Tarion Warranty Corporation et al.

[Indexed as: Man-Shield (NWO) Construction Inc. v. Tarion Warranty Corp.]

Ontario Reports

Ontario Superior Court of Justice

Fitzpatrick J.

January 6, 2021

154 O.R. (3d) 210 | 2021 ONSC 144

Case Summary

Construction law — Performance bond — Interpretation — Plaintiff contractor attempting to remediate leaks in parking garage of condominium project — Tarion retaining another contractor after becoming dissatisfied with plaintiff's attempts — Tarion calling on performance bonds [page211] posted by vendors — Plaintiff alleging failure by Tarion to act in good faith and moving to enjoin Tarion from drawing on bonds — Motion dismissed — Based on plain reading, bond was autonomous payment obligation rather than conditional payment obligation — Plaintiff not a party to the bonds — Bonds were demand bonds such that injunctive relief required strong prima facie case of fraud — Plaintiff did not allege fraud — No serious issue to be tried, no irreparable harm and balance of convenience favoured Tarion.

Injunctions — Availability — Plaintiff contractor attempting to remediate leaks in parking garage of condominium project — Tarion retaining another contractor after becoming dissatisfied with plaintiff's attempts — Tarion calling on performance bonds posted by vendors — Plaintiff alleging failure by Tarion to act in good faith and moving to enjoin Tarion from drawing on bonds — Motion dismissed — Plaintiff not a party to the bonds — Bonds were demand bonds such that injunctive relief required strong prima facie case of fraud — Plaintiff did not allege fraud — No serious issue to be tried, no irreparable harm and balance of convenience favoured Tarion.

Sale of land — New Home Warranty Program — Plaintiff contractor attempting to remediate leaks in parking garage of condominium project — Tarion retaining another contractor after becoming dissatisfied with plaintiff's attempts — Tarion calling on performance bonds posted by vendors — Plaintiff alleging failure by Tarion to act in good faith and moving to enjoin Tarion from drawing on bonds — Motion dismissed — Plaintiff not a party to the bonds — Bonds were demand bonds such that injunctive relief required strong prima facie case of fraud — Plaintiff did not allege fraud — No serious issue to be tried, no irreparable harm and balance of convenience favoured Tarion.

The plaintiff was a general contractor who built two condominium towers sharing a common underground parking garage. When the roof of the parking garage developed serious leaks, a dispute arose between the plaintiff and the condominium corporations as to who would fix the leaks. Tarion Warranty Corporation became involved as a result of its obligations under the Ontario New Home Warranty Program. Tarion had required that the vendors of the project to the condominium corporations post performance bonds. The parties to the bonds were in each case the vendor, Tarion, and an insurer. Although the plaintiff was ultimately terminated from its ongoing work on the project, it subsequently returned to the site to attempt to fix the garage roof leaks pursuant to a "repair agreement" between the plaintiff and Tarion. Tarion was not satisfied with the plaintiff's attempt to repair the leaks and retained another contractor. Tarion sought to call on the performance bonds to recover moneys it had paid to fix the leaks. The plaintiff alleged that Tarion failed to act in good faith in allowing it to conduct the roof repairs. The plaintiff brought a motion for an injunction to prevent Tarion from drawing on the bonds.

Held, the motion should be dismissed.

The nature of the bond at issue was a demand bond. Based on a plain reading of its terms, the bond was an autonomous payment obligation and not a conditional payment obligation. The fact that the plaintiff was not a party to the instrument was strong evidence that it was not intended to be a beneficiary of the bond. The bond referred to a "Builder" which was not the plaintiff, but the condominium corporation who sold the condominium units to members of the public. The [page212] performance bond was designed to assist Tarion in carrying out its statutory function of protecting those end consumers. The fact that the plaintiff had made no complaints on 13 prior calls by Tarion on the bond was strong evidence that the plaintiff was very well aware of Tarion's rights, and the limits of its own ability to do anything about Tarion's ability to call upon the bond. Tarion had no contract with the plaintiff not to call on the bonds or forego its right to security.

Because the bond was an autonomous payment obligation, the test for injunctive relief required the demonstration of a strong prima facie case of fraud. The plaintiff did not allege fraud. The plaintiff had no basis in fact or in law to obtain an order enjoining Tarion from calling upon the bonds.

Even if the less stringent test for injunctive relief applied, the plaintiff would not have met it. There was no serious issue to be tried because the plaintiff's arguments about the nature of the bond were unpersuasive and lacking in any evidentiary basis that the bond could be anything other than a demand bond. Once it was determined that the bond was a demand bond, any allegations of conduct of either party leading to the call on the bond was irrelevant. Further, the plaintiff's evidence regarding irreparable harm was speculative and any such harm could have been answered in damages. The balance of convenience favoured Tarion, who was charged with enforcing a statutory regime. As the plaintiff was not even a party to the bonds, its economic self-interest should not be permitted to prevail over a potential harm to the public good.

Bank of Nova Scotia v. Angelica-Whitewear Ltd., 1987 CanLII 78 (SCC), [1987] 1 S.C.R. 59, [1987] S.C.J. No. 5, 36 D.L.R. (4th) 161, 73 N.R. 158, 6 Q.A.C. 1, 36 B.L.R. 140, 3 A.C.W.S. (3d) 372, apld

RJR-MacDonald Inc. v. Canada (Attorney General), 1995 CanLII 64 (SCC), [1995] 3 S.C.R. 199, [1995] S.C.J. No. 68, 127 D.L.R. (4th) 1, 187 N.R. 1, J.E. 95-1766, 100 C.C.C. (3d) 449, 62 C.P.R. (3d) 417, 31 C.R.R. (2d) 189, 57 A.C.W.S. (3d) 578, 28 W.C.B. (2d) 216, 1995 CCAN para. 10,042; Veolia Water Technologies, Inc. v. K+S Potash Canada General Partnership, [2019] S.J. No. 98, 2019 SKCA 25, [2019] 7 W.W.R. 375, 93 B.L.R. (5th) 220, 440 D.L.R. (4th) 129, 98 C.L.R. (4th) 351, consd

Other cases referred to

Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 CanLII 654 (SCC), [1999] 3 S.C.R. 108, [1999] S.C.J. No. 48, 176 D.L.R. (4th) 257, 245 N.R. 88, [1999] 9 W.W.R. 380, 127 B.C.A.C. 287, 67 B.C.L.R. (3d) 213, 50 B.L.R. (2d) 169, 11 C.C.L.I. (3d) 1, 47 C.C.L.T. (2d) 1, [1999] I.L.R. I-3717, 90 A.C.W.S. (3d) 786

Statutes referred to

Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31 [as am.]

MOTION by plaintiff for an injunction to prevent defendant from drawing on performance bonds.

R. Johansen, for plaintiff.

D. Outerbridge, N. Wall and Z. Ali, for Tarion Warranty Corporation.

N. Wainwright, for Condominium Corporations (taking no position on this motion). [page213]

[1] FITZPATRICK J.: — Man-Shield (NWO) Construction Inc. ("MS") moves to enjoin Tarion Warranty Corporation ("Tarion") from drawing on two performance bonds.

Background

[2] This litigation involves a construction dispute. MS is a general contractor that built two large high-rise condominium towers on the waterfront in Thunder Bay, Ontario. I have been case managing other significant litigation involving that construction and I am therefore familiar with the background of this matter. The buildings were designed in a manner that called for an underground parking area to be built under a space between the buildings. The underground garage was to be accessible to condominium owners in both buildings. Following construction of the parking garage, the roof of the parking area developed serious leaks. A dispute arose as to who would fix the leaks and how that work would be accomplished. Tarion became involved as the result of its obligations under the Ontario New Home Warranty program.

[3] MS was the builder of the condominium project and two other corporate entities were the vendors of the project to the named condominium corporation defendants. The project had two towers known as Aurora and Allure. The vendors of the towers were referred to in the injunction motion materials as Aurora and Allure. The Aurora and Allure entities entered into contracts entitled "Vendor Agreements" with Tarion in 2014. The Builders Agreement and the Vendor Agreements contain contractual terms relating to the duty to satisfy warranty obligations, the duty to provide security and the duty to indemnify Tarion.

[4] Aurora and Allure posted the bonds at issue on this injunction motion. These bonds were required by Tarion as the condominiums were residential accommodations. The value of the bonds are approximately $1.02 million and $960,000, respectively. The parties to the bonds are Aurora, Tarion and the Intact Insurance Company ("Intact") on the one hand, and Allure, Tarion and Intact on the other. MS entered into an indemnity agreement with Intact in respect of the bonds. Tarion has called on the bonds on 13 previous occasions, which were not met with requests for injunctive relief by MS.

[5] In September 2015, Aurora and Allure had terminated MS from its ongoing work on the project. However, MS and Tarion entered into a contract entitled "Repair Agreement" dated February 26, 2019, which placed MS back on the site to attempt to fix the parking garage roof leaks. Ultimately, Tarion was not satisfied with MS's performance in completing repairs to the garage roof. MS was terminated from the repair project in April 2019. Another contractor was [page214] retained to fix the leaks. Tarion seeks to call on the performance bonds to recover moneys it has paid to fix the parking garage roof leaks. MS seeks an order enjoining Tarion from calling on the bonds.

The Issues

[6] There are three issues to be decided on this motion. First, what is the nature of the bonds? Second, what is the test to be applied on this motion? Third, has MS successfully satisfied the applicable test such that an injunction should issue?

Issue No. 1: The nature of the bonds

[7] The language used in the two bonds at issue on this motion is identical. The principals are different. The principals are the two condominium corporations who sold the units of the respective towers to members of the public. The surety for both bonds is Intact. The obligee for both bonds is Tarion.

[8] The condominium corporation principals are referred to as the "Vendor" in the language of the bond. The bonds set out in the recitals section that each Vendor has requested that Intact enter into the bond "in favour of Tarion as additional security to Tarion for the due performance by the principal of its obligations under the Act". The "Act" is the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31 ("ONHWA").

[9] As the language used in the bonds is identical, the parties referred to only one specific bond and the various documents related to it. They chose the bond relating to the Allure condominium project when making their arguments. For consistency, I will do the same.

[10] Tarion takes the position the bond at issue is a demand bond. It is a commercial security instrument that has been described in well settled jurisprudence as creating an autonomous payment obligation. This is significant because Tarion argues the test to be applied on an injunction motion involving an autonomous payment obligation is different than the usual three-branch test for injunctive relief set out by the Supreme Court in RJR-MacDonald Inc. v. Canada (Attorney General), 1995 CanLII 64 (SCC), [1995] 3 S.C.R. 199, [1995] S.C.J. No. 68. I will deal with that argument under Issue No. 2.

[11] MS argues that the bond is not in the nature of an autonomous payment obligation. Counsel for MS describes the bond as a conditional payment obligation. It argues that the bonds are integrally connected to a contractual obligation between itself and Tarion. Despite the fact that MS is not a party to the bond on its face, it submits MS is a beneficiary of the bond. MS argues the obligations under the bond, and Tarion's ability to call upon the bond, are limited by the Repair Agreement contract that MS and Tarion entered into in February 2019. [page215]

[12] Counsel for MS relies on three specific paragraphs in the Repair Agreement to argue the bond at issue is a conditional payment obligation. Counsel argues these terms create express conditions which govern when Tarion can make a demand upon the bond at issue. These paragraphs read as follows:

6. Tarion is to engage a third-party Engineering firm to review the FORM Architecture Engineering's scope of work, review historical information pertaining to the garage leaks, meet with all parties, visit the site and provide an assessment as to whether the scope of work proposed by FORM Architecture Engineering is an appropriate and reasonable scope of work to remedy the garage roof leaks. Should the third-party Engineering firm determine the scope of work is not appropriate Tarion will reassess the situation. Repair work will not move forward until Tarion is satisfied with the scope of work . . .

7. Following notice by Manshield Construction of completion of the garage roof repairs it is understood that if the garage roof leaks (in Tarion's opinion) within a period of a year following the notice of completion, Tarion will consider Manshield Construction repairs to have failed and will revert to settling the garage repair leak directly with the Corporation.

8. Tarion reserves the right to check in with the parties from time to time during the repair period, and to hold meetings as it deems necessary to ensure the repairs are proceeding at a reasonable pace and to assist with any issues that arise between the parties. If at any time, Tarion, at its sole discretion, determines that the repairs are not being executed in good faith by the Builder, then Tarion can abridge the repair timelines in this agreement, on reasonable notice to the parties, and conduct a Claim Inspection before the Repair Deadline. Tarion will then resolve the garage ceiling leaks directly with the Condominium Corporation.

[13] MS submits that the language of this agreement creates a contractual series of obligations, which MS argues Tarion must exercise in good faith, and which must be satisfied before Tarion can call upon the bond. The ability to "reassess the situation", as set out in para. 6, is argued to be a contractual limit on Tarion's ability to call upon the bond. The agreement to settle directly with the condominium corporations as set out in paras. 12 and 13 in the event MS's repairs fail is argued to be a limit on Tarion's ability to call upon the bond.

[14] MS also submits it is a beneficiary of the bond by virtue of the Builder Agreement contract between itself and Tarion, dated August 12, 2010. The Builder Agreement at para. 1.4 requires MS at the request of Tarion to:

. . . furnish Tarion with such guarantees, indemnities, surety bonds, letter of credit, . . . or other security instruments as Tarion may reasonably require in accordance with the Act and the Regulations . . . securing the obligations imposed upon the Registrant by the Act, the Regulations, this Agreement and/or the Bulletins. [page216]

[15] Further, the Builder Agreement at para. 2.1 requires MS to indemnify Tarion from all claims arising from non-performance or inadequate performance of any work by MS. MS argues this agreement evidences an intent to confer a benefit on MS from the bonds. MS also argues that it is the "Builder" actually referenced in the language of the bond and its construction activities are the very activities contemplated to be covered by the bonds.

[16] MS relies on a recent decision of the Saskatchewan Court of Appeal in Veolia Water Technologies, Inc. v. K+S Potash Canada General Partnership, [2019] S.J. No. 98, 2019 SKCA 25, 440 D.L.R. (4th) 129. MS cites paras. 41 to 43 of Veolia which state:

[Simon Carves Limited v. Ensus UK Limited] is perhaps worthy of more detailed consideration. There, a contractor provided an on demand performance bond, an instrument conceptually very similar to a letter of credit, pursuant to a construction contract that contained express conditions as to when a call on the bond could be made. In continuing an injunction to prevent such a call, Akenhead J. summarized the governing legal principles as follows at paragraph 33:

(a) Unless material fraud is established at a final trial or there is clear evidence of fraud at the without notice or interim injunction stage, the Court will not act to prevent a bank from paying out on an on demand bond provided that the conditions of the bond itself have been complied with (such as formal notice in writing). However, fraud is not the only ground upon which a call on the bond can be restrained by injunction.

(b) The same applies in relation to a beneficiary seeking payment under the bond.

(c) There is no legal authority which permits the beneficiary to make a call on the bond when it is expressly disentitled from doing so.

(d) In principle, if the underlying contract, in relation to which the bond has been provided by way of security, clearly and expressly prevents the beneficiary party to the contract from making a demand under the bond, it can be restrained by the Court from making a demand under the bond.

(e) The Court when considering the case at a final trial will be able to determine finally what the underlying contract provides by way of restriction on the beneficiary party in calling on the bond. The position is necessarily different at the without notice or interim injunction stage because the Court can only very rarely form a final view as to what the contract means. However, given the importance of bonds and letters of credit in the commercial world, it would be necessary at this early stage for the Court to be satisfied on the arguments and evidence put before it that the party seeking an injunction against the beneficiary had a strong case. It cannot be expected that the court at that stage will make in effect what is a final ruling.

The situation in Australia also deserves at least brief mention. The decision in Wood Hall Ltd. v Pipeline Authority has been interpreted in a number of [page217] decisions to suggest a beneficiary may be restrained from calling upon a bank to pay on a letter of credit, based on the terms of the underlying agreement. Recently, Chief Justice French of the High Court, writing for himself only but not in dissent, confirmed this approach in Simic v New South Wales Land and Housing Corporation, a case dealing with a performance bond. The Chief Justice noted that the legal principles governing the effect and operation of performance bonds are similar to those applicable to letters of credit and then observed that the autonomy principle "does not prevent a party to a contract who procures the issue of a performance bond claiming as against the beneficiary that the beneficiary's action in calling upon the bond is fraudulent or unconscionable or in breach of a contractual promise not to do so unless certain conditions are satisfied".

There appears to be merit, as per Chief Justice French in Simic and the more recent English cases, in allowing an applicant to enjoin a beneficiary from drawing on a letter of credit in circumstances where the draw would be a violation of an express agreement between the beneficiary and the applicant, at least when the conditions limiting the beneficiary's right to draw on the letter of credit are distinct from its obligations with respect to the performance of the substance of the underlying contract. Simply put, I do not see the legal or commercial logic in allowing a beneficiary to clearly agree to the conditions on which it can have resort to a letter of credit and to then permit the beneficiary to immediately avoid those very same conditions by invoking the autonomy principle. However, given the importance of letters of credit in the commercial world, and the weight of the English authorities, it would seem an applicant should be obliged to establish a strong prima facie case that the beneficiary is expressly disentitled from making a draw before an injunction will issue. The rationale for this approach, expressed in the context of performance bonds, was explained by Popplewell J. in Ouais Group:

45. In my view the court must have a high degree of assurance that the beneficiary is not entitled to call on an on demand bond before it will, at an interlocutory stage, restrain payment of the bond. That follows from the very nature of an on demand bond, and the importance which such bonds have in international commerce. They are the commercial equivalent of cash security for performance of obligations, payable against bona fide assertion of breach. By agreeing to provide a bond which is payable on demand, a party agrees that the bond may be called pending resolution of any dispute with the counterparty beneficiary. He thereby agrees to assume the risk of payment being made notwithstanding that he can subsequently establish in litigation or arbitration that the dispute is to be resolved in his favour. That is so where the dispute is whether he is in breach of the obligations for which the bond stands as security. It is equally so where the dispute is whether circumstances have arisen which permit the bond to be called or require payment to be made under it. The nature of an on demand bond is that it is payable merely upon an assertion by the beneficiary of his entitlement to payment, without inquiry into the validity of the grounds asserted by the beneficiary as giving rise to that entitlement. The court should be reluctant to interfere unless confident that the grounds asserted do not give rise to the entitlement to payment. For this reason what is usually required at the interlocutory stage is, at the least, a strong case that there is no such entitlement.

(Citations omitted) [page218]

[17] MS also relies on the decision of the Supreme Court of Canada in Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., 1999 CanLII 654 (SCC), [1999] 3 S.C.R. 108, [1999] S.C.J. No. 48, establishing a principled exception to the historic common law doctrine of privity of contract. MS argues it was the intention of Tarion to extend the benefit of the bond to MS and to MS's actions in carrying out the terms of the Repair Agreement.

[18] MS argues that because the instruments are conditional payment obligations, the court is obliged to apply the traditional three-part test for the granting of injunctions set out in RJR-MacDonald. MS filed a great deal of evidence on this motion attempting to show how Tarion allegedly failed to act in good faith in allowing MS to conduct the roof repairs and should therefore now be enjoined from calling on the bond.

Decision on Issue No. 1

[19] I am persuaded that the bonds at issue are demand bonds. They are autonomous payment obligations. They are not conditional payment obligations. I agree with the arguments of counsel for Tarion regarding the nature of the instruments at issue on this motion. I say so for the following reasons.

[20] Counsel for Tarion directed the court to the language of the bond. I agree with Tarion's submission that the nature of the bond can be easily discerned from a plain reading of its terms.

[21] In the recitals section of the bond at Para. E, the condominium corporation principals as Vendor, not MS, note that they have requested Intact to provide the bond in favour of Tarion. This is to secure performance by the principals under the ONHWA. Section 5 of the bonds contain Intact's obligation to pay Tarion on demand. Section 5 authorizes Tarion to "declare this bond or a portion thereof forfeited" when, in Tarion's judgment, a default event occurs. There is no other condition mentioned. There is no reference to any other contract and, in particular, no reference to any contract with MS.

[22] Upon Tarion making a declaration of default, the amount "shall become due and payable by the Surety on demand as a debt to Tarion without further proof or need for inquiry by the Surety". The only requirement for payment is that Tarion must deliver a drawdown certificate confirming that the amount drawn is in relation to the Vendor's obligations to Tarion.

[23] Section 6(c) of the bonds prevent the Principals and non-parties to the bonds from interfering with the "on demand" nature of the bonds through litigation. It clearly states that no right of action shall accrue on the bond to or for the use of any person or corporation other than Intact and Tarion. This is an important commercial [page219] provision designed to ensure performance will not be unnecessarily impeded by litigation. I agree this express section is strong evidence that MS's arguments about the presence of other contracts that limit Tarion's ability to call upon the bond are without merit.

[24] I am persuaded, on a plain reading of the instrument at issue, that this is a demand bond. The fact that MS is not a party to the instrument is strong evidence that it was not intended to be a beneficiary of the bond. I also do not agree that MS is the "Builder" referenced in the bond. The "Builder" referenced in the bond is the condominium corporation who sold the condo units to members of the public. Tarion exists to protect these end consumers. This performance bond is designed to assist Tarion in carrying out its statutory function. It seems to me that it would require very express, clear and obvious language to the contrary in the language of the bond, or in another contract designed to limit Tarion's right to make demand to interfere with this obvious important consumer protection aspect of Tarion obtaining demand bonds to secure performance.

[25] I agree with the submission of Tarion that the autonomy principle recognizes that the efficacy of the instrument at issue on this motion rests on a promise of swift and unhindered payment. It is only where a party can show actual fraud that the courts will be prepared to block the payment of demand security. A bond of the type at issue would become effectively useless as a form of security if a non-party to the instrument (like MS) could obstruct payment through an injunction motion.

[26] I also agree that the fact that Tarion has made 13 prior calls on the bond at issue, without complaint by MS, is strong evidence that MS was very well aware of Tarion's rights, and the limits of its own ability to do anything about Tarion's ability to call upon the bond. The evidence put forward by MS to the effect that the previous calls were made when MS was not on project was shown by cross-examination of MS's deponent to be patently false. I agree with the submission of counsel for Tarion that it has demonstrated that the MS deponent was not a reliable or credible witness on this particular point.

[27] MS's arguments that its Repair Agreement or its own Builder Agreement from 2012 impact in any way on Tarion's right under these bonds were unpersuasive. They were unpersuasive because the provisions relied upon by MS on a plain reading have nothing to do with Tarion's ability to call upon the bond. The Repair Agreement does not even contain the word "bond". Given the commercial purpose of a performance bond, it seems to me that very specific and direct language would be required if parties were agreeing to limit the ability of Tarion to call upon the bond. Such language is not [page220] present in either the Repair Agreement or the Builder Agreement. This is because, in my view, MS did not contract with Tarion to limit its ability to call upon the bond in any way.

[28] I also find MS's argument that it was a beneficiary of the bond to be ill founded. The beneficiary of the bond is Tarion. I do not understand how MS could be the beneficiary of the bond at the same time it has made an independent guarantee to Intact to indemnify it for any payments made thereunder.

[29] I agree with Tarion's submission that it has no contract with MS not to call on the bonds or forego its right to security.

Issue No. 2: The applicable test

[30] Tarion argues that as the bond at issue is an autonomous payment obligation, the decision of the Supreme Court of Canada in Bank of Nova Scotia v. Angelica-Whitewear Ltd., 1987 CanLII 78 (SCC), [1987] 1 S.C.R. 59, [1987] S.C.J. No. 5, sets out the test to be applied on this motion. In Angelica-Whitewear, the Supreme Court held that injunctive relief against the exercise of a demand under an autonomous payment obligation will only lie where a strong prima facie case of fraud is made out. In Angelica-Whitewear, the Supreme Court set out the commercial policy principles underlying its decision at paras. 10-11:

The fundamental principle governing documentary letters of credit and the characteristic which gives them their international commercial utility and efficacy is that the obligation of the issuing bank to honour a draft on a credit when it is accompanied by documents which appear on their face to be in accordance with the terms and conditions of the credit is independent of the performance of the underlying contract for which the credit was issued. Disputes between the parties to the underlying contract concerning its performance cannot as a general rule justify a refusal by an issuing bank to honour a draft which is accompanied by apparently conforming documents. This principle is referred to as the autonomy of documentary credits. It is reflected in general provision c. of the Uniform Customs (1962), which states: "Credits, by their nature, are separate transactions from the sales or other contracts on which they may be based and banks are in no way concerned with or bound by such contracts." It is further reflected in Article 8 of the Uniform Customs (1962), which reads: "In documentary credit operations all parties concerned deal in documents and not in goods." Article 3 of the Uniform Customs (1962) defines the obligation of the issuing bank to the beneficiary of the credit as follows: "An irrevocable credit is a definite undertaking on the part of an issuing bank and constitutes the engagement of that bank to the beneficiary or, as the case may be, to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with." A bank's duty of verification with respect to documentary compliance is defined by Article 7 of the Uniform Customs (1962) as follows: "Banks must examine all documents with reasonable care to ascertain that they appear on their face to be in accordance with the terms and conditions of the credit." The [page221] general rule with respect to fraud is that a bank is not responsible for payment against forged or false documents which appear on their face to be regular, as indicated in Article 9 of the Uniform Customs (1962), which provides in part: "Banks assume no liability or responsibility for the form, sufficiency, accuracy, genuineness, falsification or legal effect of any documents, or for the general and/or particular conditions stipulated in the documents . . . ." The same principles are embodied in the 1974 and 1983 revisions of the Uniform Customs and Practice for Documentary Credits.

An exception to the general rule that an issuing bank is obliged to honour a draft under a documentary credit when the tendered documents appear on their face to be regular and in conformity with the terms and conditions of the credit has been recognized for the case of fraud by the beneficiary of the credit which has been sufficiently brought to the knowledge of the bank before payment of the draft or demonstrated to a court called on by the customer of the bank to issue an interlocutory injunction to restrain the bank from honouring the draft. The scope and availability in practice of the fraud exception to the autonomy of documentary credits have turned on several questions, of which the most important would appear to be the following: (a) the kinds of fraud that should be recognized as falling within the fraud exception, or more specifically, whether the exception should be confined to cases of forged or false documents or whether it should extend to fraud in the underlying transaction; (b) the related question of the proof or demonstration of fraud that should be required to relieve an issuing bank of its obligation to honour a draft or to warrant the issue of an interlocutory injunction to enjoin it from doing so; (c) whether the fraud exception should be opposable to a holder in due course of a draft, that is, one who took the draft for value and without notice of the fraud; and (d) whether the fraud exception should be confined to fraud by the beneficiary of a credit, or whether it should include fraud by a third party which affects the letter of credit transaction but of which the beneficiary of the credit is innocent. Differences of view or emphasis with respect to these issues, particularly the kind of fraud and proof required, reflect reflect the tension between the two principal policy considerations: the importance to international commerce of maintaining the principle of the autonomy of documentary credits and the limited role of an issuing bank in the application of that principle; and the importance of discouraging or suppressing fraud in letter of credit transactions. The potential scope of the fraud exception must not be a means of creating serious uncertainty and lack of confidence in the operation of letter of credit transactions; at the same time the application of the principle of autonomy must not serve to encourage or facilitate fraud in such transactions. The relative emphasis on the one or other of these two considerations tends to explain what have been characterized as the strict and more liberal approaches to the availability of the fraud exception, each of which has had its judicial and academic adherents. For an interesting analysis of the issues, reflecting an apparent change of view over a period of some fifteen years, see E. P. Ellinger, "The Tender of Fraudulent Documents Under Documentary Letters of Credit" (1965), 7 Malaya L. Rev. 24, and "Fraud in Documentary Credit Transactions," [1981] J.B.L. 258. I propose to make brief reference to American, English and Canadian cases which have considered these issues. Most of the cases have involved an application for a preliminary or interlocutory injunction to restrain an issuing bank from paying under a letter of credit or guarantee. Few, if any, have had to address the precise issue raised by this appeal: what the customer or applicant for the credit must show, where there has not been an application for injunction, to justify a conclusion that an issuing bank was not obliged to pay a draft under a letter of credit because of its prior knowledge of fraud by the beneficiary, and that its payment of the draft was therefore an improper or unauthorized one for which the customer was not obliged to reimburse the bank.

[31] Tarion submits as the bond is a demand security instrument featuring an independent payment obligation, Intact's obligation to pay Tarion is independent of the underlying relationship between Tarion and the Vendors. The bonds dictate that, once Tarion certifies a default has occurred, Intact must pay "on demand . . . without further proof or need for inquiry". Tarion's written certification that the requirements for making its demand (in this case, the Vendors' default) have been met is the only condition of payment. Neither the Vendors nor any non-party to the bonds have the right to sue if Tarion calls on the bonds.

[32] Tarion argues that there is no evidence of fraud alleged in this matter and, as such, the motion for an interim injunction must fail.

[33] MS argues Angelica-Whitewear does not apply as the case only related to documentary letters of credit and not demand bonds. I disagree. In the case relied upon by MS, Veolia, at para. 14, the Saskatchewan Court of Appeal noted (relying on English authority) the conceptual similarity between demand bonds and documentary letters of credit. I agree that a demand bond and a documentary letter of credit is the same type of commercial instrument when it comes to a decision as to whether or not a third party can enjoin the beneficiary of such an instrument from demanding payment thereunder. Further, Veolia, at para. 29, expressly affirms Angelica-Whitewear as the governing law with respect to the test for injunctive relief for a matter involving an autonomous payment obligation.

[34] I was also not persuaded by the arguments of counsel for MS that the decision of the Saskatchewan Court of Appeal in Veolia is either supportive of MS's position, or is indicative in a change in the common law regarding the test for injunctive relief such that I am not governed by the decision of the Supreme Court of Canada in Angelica-Whitewear. I agree with the submissions of Tarion that Veolia expressly confirms that Angelica-Whitewear sets out the governing test for injunctive relief in connection with a demand security instrument. The Saskatchewan Court of Appeal discusses in obiter (but does not decide) whether a strong prima facie case of fraud is required in a narrow subset of cases where the beneficiary of the bond, in a separate contract, "clearly agrees to the conditions on which it can have resort to a letter of credit. While counsel for MS asserted that there are separate contracts limiting Tarion's rights under the bond, I do not agree that the evidence on this motion can be taken as even remotely supporting that proposition. [page222]

Decision on Issue No. 2

[35] MS does not allege fraud on this motion. The decision of the Supreme Court in Angelica-Whitewear binds me as to the test on this motion. MS has no basis in fact or in law to obtain an order enjoining Tarion from calling upon the bonds at issue. This motion has no merit and must fail.

Issue No. 3: Has MS satisfied the necessary test for injunctive relief in this matter?

[36] As noted above, the short answer is no. However, MS argued as to why the traditional three-part RJR-MacDonald test applies. For the following reasons, I also do not agree that, even on the RJR-MacDonald test, MS would be entitled to injunctive relief on this motion.

[37] On this motion, the "serious question to be tried" is whether or not the bonds at issue are demand bonds. I find that MS's arguments about the nature of the bond are unpersuasive and lacking in any evidentiary basis that the bonds could be anything other than a demand bond. There is no serious issue to be tried.

[38] I agree with the submission of counsel for Tarion that once I have determined that the bonds at issue are demand bonds, all the other allegations concerning conduct of either party throughout the entire piece leading to the call on the bonds are irrelevant.

[39] I do not agree that any alleged breach of any duty of good faith Tarion had under the Repair Agreement would entitle MS to injunctive relief now. As I have found, the Repair Agreement has nothing to do with the bond. In fact, I agree with Tarion's argument that from the perspective of acting in good faith, the evidence points in the direction that Tarion did everything it could to allow MS to complete the garage repairs. It was MS's refusal to comply with Tarion's express directions that ultimately led MS to be removed, again, from the project. However, all of this is irrelevant and would not, in my view, be a basis for a finding of a "serious question to be tried".

[40] I was also not persuaded by MS's arguments concerning the second branch of the test, that of establishing irreparable harm. The evidence put forward by MS on this issue was speculative. I agree with the submission of Tarion that any harm as alleged by the evidence of MS could be answered in damages and therefore does not qualify as being "irreparable". Further, I was not persuaded by the hearsay evidence of the MS deponents that whatever may happen to MS in the event of a bond call is anything other than the result of legitimate commercial decisions that MS made in the past. The fact that MS is now not happy with the particular consequences of [page223] events is not sufficient to satisfy the irreparable harm test. MS is a sophisticated construction company. It has not raised any arguments about inequity in bargaining power. Tarion makes the point that business is business. In this matter, I agree. There is no irreparable harm arising from Tarion calling upon the bonds.

[41] I also agree that, with respect to the third branch of the test, the balance of convenience favours Tarion in this matter. Tarion rightly invokes a public interest as a consideration of this court in declining to grant injunctive relief. Performance demand bonds are there to encourage just such actions on the part of Ontario builders and vendors of new residential properties in Ontario. Tarion is charged with enforcing a statutory regime. I agree with Tarion's submission that granting injunctive relief on these facts would serve to obviate a key incentive for vendors and builders to meet their warranty obligations to homeowners. On a larger view, such a decision would encourage vendors to avoid the consequences of non-compliance for years simply by copying MS's strategy of bringing what I find on the law and the facts of this case to be a meritless motion.

[42] I agree with Tarion's argument that, as MS is not even a party to the bonds, its economic self-interest should not be permitted to prevail over a potential harm to the public good.

[43] I find MS did not demonstrate a serious issue to be tried. It did not demonstrate it would suffer irreparable harm from Tarion calling upon the bonds. The balance of convenience favours Tarion.

[44] For all of the above reasons, the motion is dismissed with costs on a partial indemnity basis.

[45] At the commencement of the motion, I asked counsel for a reasonable assessment of what they would be asking for in the event they were successful on the motion. I am persuaded that counsel for MS's estimate was most reasonable in the circumstances.

[46] Counsel for the condominium corporations attended these motions on a watching brief basis. I am not persuaded that MS should be required to pay any costs to the condominium corporations despite the fact that the motion was dismissed.

[47] Motion for injunction is hereby dismissed. MS shall pay forthwith Tarion partial indemnity costs in the amount of $25,000 inclusive of disbursements plus HST.

Motion dismissed.

End of Document