By: Julius Melnitzer - National Post, Nov. 25 2009

Parties have an implied contractual duty of good faith not to act in a way that defeats the purpose and objective of a letter of credit, says the Ontario Court of Appeal. The ruling in Nareerux Import Co. Ltd. v. Canadian Imperial Bank of Commerce rejected the bank's defence that it had complied strictly with the terms of the LC it issued. But the court disagreed, noting the bank's contribution to frustrating compliance with the LC and then using that non-compliance to justify its refusal of payment.

"Although [Nareerux] does not import a broad duty of good faith into the law of letters of credit, it should nonetheless be considered when issuing letters of credit," write Martin Sclisizzi and Daniel Zacks in their case review on Borden Ladner Gervais' website. "Where the terms of a letter of credit provide a party with discretionary control over some aspect of compliance, that control must be exercised in good faith."

Jack Berkow and Alexandra Lev-Farrell of Berkow, Cohen represented Nareerux. Joel Richler, J.A. Prestage and Marcy McKee of Blake, Cassels & Graydon represented the CIBC.

Click here to read the original FP Legal Post article 

Click here to download a .pdf copy of the court's decision