Eurobank Ergasias S.A. v Bombardier Inc is an important decision of the Supreme Court of Canada addressing letters of credit. In this decision, the Court has provided guidance on the relationship between the autonomy principle and the fraud exception as these principles apply to letters of credit in circumstances where an issuing bank is asked to honour a demand for payment in the face of fraudulent conduct by a third party.


The underlying dispute involved two contracts between the Hellenic Ministry of Defense, or “HMOD” (as purchaser), and Bombardier Inc. (as seller). The first contract was a procurement agreement for the purchase of aircrafts; the second agreement was an offsets contract, which stipulated that Bombardier would subcontract some of its work to Greek companies, failing which it would be liable to pay liquidated damages to HMOD.[1] Disputes arising from the offsets contract were to be settled pursuant to the rules of the International Chamber of Commerce (the “ICC”).[2]

Payment of the liquidated damages was guaranteed by a letter of credit issued by a predecessor company of Eurobank Ergasias S.A., a Greek bank (“Eurobank”), in favour of HMOD (the “Greek Letter of Guarantee”), which letter was governed by Greek law.[3] Subsequently, the National Bank of Canada issued a second letter of credit in favour of Eurobank, ensuring reimbursement for any amounts Eurobank might need to pay HMOD under the Greek Letter of Guarantee (the “Canadian Letter of Counter-Guarantee”).[4] This letter of guarantee was governed by Quebec law.

Ultimately, Bombardier determined that it could not satisfy its subcontracting obligations because of an insufficient number of available and qualified Greek companies. As a result, Bombardier claimed that it should not be liable for liquidated damages; HMOD disagreed. The parties therefore initiated ICC-administered arbitration proceedings. After the arbitration had begun, HMOD formally undertook to Bombardier and the arbitral tribunal not to demand payment under the Greek Letter of Guarantee for as long as the arbitration remained ongoing.

Despite its undertaking, HMOD delivered multiple demands to Eurobank under the Greek Letter of Guarantee prior to the tribunal’s final award.[5] In response, Bombardier obtained a procedural order from the tribunal ordering HMOD to abstain from demanding payment under the Greek Letter of Guarantee. Bombardier then obtained an injunction from the Superior Court of Quebec to prevent payment under the Greek Letter of Guarantee and the Canadian Letter of Counter-Guarantee until the final award was issued, because it was not sure whether HMOD would comply with the procedural order.

Nevertheless, HMOD continued to demand payment. In the days prior to the issuance of the tribunal’s final award, HMOD delivered a further demand to Eurobank in which it advised that if Eurobank failed to pay HMOD within one day, then the Greek state would pursue civil and criminal measures against the responsible officers and employees of Eurobank. One day later, Eurobank paid HMOD under the Greek Letter of Guarantee, and then sought reimbursement from the National Bank of Canada under the Canadian Letter of Counter-Guarantee.[6]

The tribunal’s final award nullified the offsets contract on the basis that it violated European Union law, as a result of which the liquidated damages provisions were void.[7] Subsequently, Eurobank initiated proceedings in Greek courts to recover the funds paid to HMOD, but was unsuccessful.[8] In brief, the Greek courts ruled that HMOD’s actions did not constitute fraud under Greek law.

Meanwhile, in the Quebec courts, Bombardier sought to prevent the National Bank of Canada from paying Eurobank under the Canadian Letter of Counter-Guarantee, citing the fraud exception.[9] The trial judge determined that HMOD’s conduct in obtaining payment under the Greek Letter of Guarantee was fraudulent, and Eurobank’s awareness of this fraud (which the trial judge found as a fact) rendered its demand for payment under the Canadian Letter of Counter-Guarantee fraudulent as well.[10] Consequently, the trial judge enjoined the National Bank of Canada from making any payments to HMOD under the Canadian Letter of Counter-Guarantee.[11]

On appeal, the Quebec Court of Appeal upheld the trial decision, reasoning that the Canadian bank was not obligated to pay the Greek bank under the Canadian Letter of Counter-Guarantee because the Greek bank had prior knowledge of HMOD’s fraudulent conduct associated with the payment under the Greek Letter of Guarantee.[12] The lone dissenting judge concluded that Eurobank should not be held responsible for HMOD’s fraud, given that it had no way of knowing that HMOD expected to lose at arbitration or that HMOD intended to keep the funds even if it lost; while Eurobank may have had “suspicions” of fraud, this was not sufficient to rise to the level of knowledge necessary to hold Eurobank responsible. Eurobank then sought and was granted leave to appeal to the Supreme Court.

The Majority Decision

The Nature of Letters of Credit

Justice Kasirer, for the majority, observed that the legal distinction between demand guarantees and standby letters of credit is largely semantic. Legally, demand guarantees and standby letters of credit are indistinguishable, with the latter falling within the definition of demand guarantees.[13] (The dissent, from Justice Côté, disagreed, observing that while letters of credit protect against non-payment, demand guarantees protect against non-performance or part-performance.)

The majority observed that letters of credit – particularly standby letters of credit – are commonly used in both domestic and international commercial transactions in order to mitigate risk. In that regard, a letter of credit does not replace the customer’s obligation to pay the beneficiary under the contract; rather, it acts as an additional layer of security. A demand for payment typically arises when there is an alleged failure by the customer to fulfill their contractual duties, with the operative principle being “pay now, argue later”.[14] From a judicial perspective, courts are “slow to interfere” with letters of credit, out of concern that such interference might impair the reliance that international business places upon them.

The majority then reaffirmed that the two key principles governing letters of credit are (1) the autonomy principle and (2) strict compliance.

The autonomy principle refers to the proposition that a letter of credit contains an independent obligation of the issuing bank in favour of the beneficiary, unaffected by the performance or existence of the underlying contract between the beneficiary and the issuing bank’s client. This principle ensures certainty in credit transactions, as the issuing bank’s duty to pay is solely based on the terms outlined in the letter of credit; they need not inquire into the performance of the underlying contract.[15]

The rule of strict compliance dictates that the bank’s duty to make payment is conditional upon the beneficiary submitting documents that precisely conform to the requirements specified in the letter of credit, and which must also be consistent with each other. There is next to no room for error on this point, although courts do have minimal tolerance for immaterial discrepancies in exceptional cases.[16] That being said, if the issuing bank pays the beneficiary without evaluating the documents to ensure that they strictly conform to the requirements set out in the letter of credit, then the bank runs the risk of not being reimbursed by their client.

The Fraud Exception

Importantly, the majority also reaffirmed that fraud remains the only exception to the obligation to honour demands on letters of credit that is recognized in Canada, and “must import some aspect of impropriety, dishonesty or deceit”.[17] In that regard, the majority emphasized that this exception was identical in both common law and civil law systems, which underscores “the desirability of as much uniformity as possible in the law with respect to these vital instruments of international commerce”.[18]

Furthermore, a mere absence of good faith may not be sufficient; there must be some aspect of impropriety, dishonesty, or deceit.[19] The fraud exception permits non-payment if fraud by the beneficiary is sufficiently proven or brought to the attention of the issuing bank before payment. The standard for proving fraud is set high, in order to strike a balance between safeguarding the autonomy of letters of credit and deterring fraud. This exception applies not only to the original letter of credit, but also to counter-guarantees (the latter of which was particularly relevant in this case).[20]

In this case, Eurobank argued that the trial judge and the majority in the Court of Appeal had erred in applying the fraud exception, given that the Greek courts had found no fraud in HMOD’s demand for payment under the Greek Letter of Guarantee, and that even if fraud had occurred, it did not affect Eurobank’s right to demand payment under the Canadian Letter of Counter-Guarantee. Rather, the principle of autonomy suggested that the Canadian Letter of Counter-Guarantee should have been treated distinctly. In addition, Eurobank argued that there was no proof that Eurobank was aware of HMOD’s alleged fraud.[21]

However, the majority disagreed with Eurobank and HMOD, emphasizing that Eurobank had not identified a palpable and overriding error for appellate intervention, and that in this transaction, both letters of credit were intimately linked to one another such that fraudulent conduct in respect of one letter could be relevant to an assessment of the other.[22]

Further, the trial judge was entitled to deference with respect to his conclusions that (1) HMOD demanded payment under the Greek Letter of Guarantee despite having no right to do so, which constituted fraud, and (2) Eurobank knew of and participated in the fraud by making payment.[23] This was notwithstanding that Greek courts had concluded there was no fraud, because the Greek judgments had not been formally recognized by Quebec courts and were thus unenforceable in Quebec (although they were admissible as fact evidence).[24]

Notably the majority observed that while the fraud of a third party typically does not engage the fraud exception, the beneficiary may be deemed complicit if they have clear knowledge of the third party’s fraud and participated in that fraud.[25] Indeed, participation in the fraud is paramount, as knowledge of fraud without participation will not suffice to invoke the exception.[26] Participation may take the form of honouring a demand for payment in improper situations, such as (1) where the beneficiary is aware of the fraud but then nonetheless demands payment under the letter of credit,[27] and (2) by knowingly presenting fraudulent documents to the issuer.[28] In such instances, the fraud becomes the beneficiary’s own, justifying non-payment under the letter of credit.

Ultimately, the majority concluded that the fraud exception applied in this case to enjoin Eurobank from drawing down on the Canadian Letter of Guarantee. HMOD had demanded payment under the letter despite knowing it had no right to do so, contravening orders from the ICC Arbitral Tribunal and the Quebec Superior Court.[29] Eurobank had knowledge of HMOD’s fraudulent activities, but nonetheless made payments under the Greek Letter of Guarantee. The majority therefore concluded that Eurobank’s knowledge of and participation in the fraud thereby attributed HMOD’s fraudulent conduct to Eurobank itself.

Lastly, the majority dismissed Eurobank’s argument that they were acting under duress, finding that it voluntarily chose to participate in the fraudulent activities despite being aware of the circumstances.[30] Consequently, the fraud exception applied to prevent Eurobank from drawing down on the Canadian Letter of Counter-Guarantee.

The Dissent

In dissent, Justices Côté and Karakatsanis would have allowed the appeal.[31] The dissent differed from the majority primarily on two points: first, the factual finding that Eurobank knew of and participated in the fraud; and second, the extent to which the Greek judgments should be given weight. In particular, the dissent concluded that the decisions of the Greek courts, which found no fraud in the demand for payment under the Greek Letter of Guarantee, should be given weight and not disregarded due to the principle of international comity, and particularly given that foreign judgments are prima facie proof of the reported facts contained in those judgments, such that Eurobank ought not to be found to have known of or engaged in fraud itself.[32]

Moreover, the dissent highlighted the nature of demand guarantees as contracts established at the request of a principal where the guarantor (usually a bank) irrevocably promises to pay the beneficiary on demand, regardless of any disputes between the principal and the beneficiary.[33] The guarantor’s obligation to pay was triggered solely by the terms and conditions specified by the principal, and the guarantor’s role was to ensure compliance with those terms, without delving into the underlying contract’s disputes.[34]

Further, the dissenting justices emphasized the high bar for proving fraud in order to prevent payment under a demand guarantee, stating that fraud must be blatantly apparent and, under Quebec law, must involve an aspect of public order. The dissent found that fraudulent conduct by a third party should not necessarily prevent an innocent beneficiary from demanding payment under the guarantee.[35]

Finally, the dissent concluded that the judgments of the Greek courts should have been considered as factual constraints by the Quebec courts, even if those judgements were not formally recognized, and therefore should not have been ignored by Canadian courts.[36] Eurobank’s payment under the Greek Letter of Guarantee, based on the Greek court’s decision, therefore should not have been deemed fraudulent. Based on the principle of comity, Eurobank should have been considered an innocent beneficiary under the Canadian Letter of Counter-Guarantee, as it had no clear or obvious knowledge of any alleged fraud at the time of payment.[37] Thus, the dissent concluded that the fraud exception did not apply in this case, and that the appeal should have been allowed.[38]


As the foregoing suggests, Eurobank provides a thorough articulation of the Canadian law on letters of credit. Furthermore, the case clearly articulates the threshold for applying the fraud exception to letters of credit. Mere allegations or suspicions of fraudulent conduct are insufficient; compelling evidence demonstrating fraud, and the beneficiary’s knowing participation, is required. This stringent standard safeguards the autonomy principle, while addressing instances of clear misconduct that undermine the letter of credit’s purpose.

The majority decision also offers a helpful clarification as to the requisite nature of the fraud itself. While fraud in the context of letters of credit might arguably be more common with respect to the documents tendered by the beneficiary to the issuing bank, the fraud exception can also be engaged by fraud in the underlying transaction between the beneficiary and the issuing bank’s client (as was the case in Eurobank).

In addition, the majority’s confirmation that breach of a procedural order from an arbitral tribunal can constitute grounds for fraud (although there must be an element of dishonesty or impropriety) reaffirms judicial support for the legal force of such procedural orders.

Finally, with respect to international comity, Eurobank highlights the limitations of extra-jurisdictional judgments within Canada, given their status as issues of fact rather than law (and the trial judge’s ability to assign weight to such judgments accordingly).

[1] Ibid at para 21.

[2] Ibid at para 24.

[3] Ibid.

[4] Ibid at para 22.

[5] Ibid at para 25.

[6] Ibid at para 34.

[7] Ibid at para 36.

[8] Ibid at para 42.

[9] Ibid at paras 44-45.

[10] Ibid at para 46.

[11] Ibid at para 48.

[12] Ibid at para 54.

[13] Ibid at para 69.

[14] Ibid at para 70.

[15] Ibid para 74-76.

[16] Ibid at paras 77-79.

[17] Ibid at para 115.

[18] Ibid at para 84.

[19] Ibid at para 115.

[20] Ibid at paras 80-87.

[21] Ibid at paras 89-90.

[22] Ibid at para 138

[23] Ibid at paras 92, 108-111.

[24] On this point, the majority engaged in a detailed analysis under Quebec law as to why the trial judge was entitled to give the Greek judgments little evidentiary weight, particularly in circumstances where the Greek appellate courts gave no weight to the decisions of the Superior Court of Quebec and the Court of Appeal of Quebec: para 109.

[25] Ibid at para 129

[26] Ibid at para 131.

[27] Ibid at para 130.

[28] Ibid at para 131.

[29] Ibid at para 134.

[30] Ibid at para 142.

[31] Ibid at para 157

[32] Ibid at para 235. The dissent also provided a detailed analysis under Quebec law of how foreign judgments are to be treated as findings of fact and which factors are appropriately considered in assigning weight to those findings of act. However, given that this case comment is intended for a common law audience, we do not discuss the dissent’s analysis on this point in detail.

[33] Ibid at para 240.

[34] Ibid.

[35] Ibid at para 259.

[36] Ibid at para 248.

[37] Ibid.

[38] Ibid at para 299.

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