In the Spring 2024 issue of this newsletter, we commented on the decision of Associate Justice Robinson in TruGrp Inc. v. Karmina Holdings Inc., 2024 ONSC 2165, which concerned the sufficiency of the letter of credit commonly used for the purpose of vacating liens in Ontario.
Back in April, Associate Justice Robinson heard a motion to set aside an order vacating a lien upon posting of security in the form of a letter of credit. The lien claimant, TruGrp, had argued that there was a potential gap whereby the letter of credit is not renewed by BMO, but the Accountant will not accept the bank draft as contemplated by the letter of credit without a court order, resulting in there being no enforceable security held in court for TruGrp’s lien between that time. Since the owner, Karmina, was allegedly seeking to sell the liened premises, TruGrp was concerned that it could be left without any security for its lien, contrary to the intent of the Construction Act. Further, TruGrp argued that since nothing in the letter of credit requires notice to any party other than the Accountant, a lien claimant could also be entirely unaware of a potential deficiency with the security for its lien.
Associate Justice Robinson considered, but did not finally resolve, the issue of the sufficiency of the letter of credit. Instead, he directed that the motion be served on the Accountant of the Superior Court of Justice and the bank who provided the letter of credit, and that they be given an opportunity to be heard.
As we previously commented, this unresolved challenge left some possible doubt as to the use of letters of credit as security for vacated liens. The form is not statutorily mandated, but appears as an appendix to Conduct of Lien, Trust and Adjudication Proceedings.
Both the Accountant and the Bank of Montreal have now weighed in on the matter. The Accountant submitted its position as follows:
The letter of credit with standard form provisions permitting the issuing bank to decline renewal of the letter upon providing the Accountant with at least thirty days’ notice as well as a bank draft for the amount of letter of credit, less any payments already made under it, is sufficient authority for the Accountant to accept and deposit the bank draft provided that a court Order has permitted the payment into Court of the letter of credit with these provisions.
BMO agreed with that position.
The Accountant clarified that a further court order would only be necessary in circumstances where parties other than the issuing bank seek to substitute the letter of credit with a bank draft, a scenario not contemplated by the approved letter of credit.
In other words, the Accountant confirmed that it will accept and deposit a bank draft submitted by the issuing bank in accordance with the terms of the letter of credit, provided that the letter of credit with such terms has been posted pursuant to a court order approving that form, and BMO agreed.
As we argued in the Spring, this makes sense. The original order inherently permits the substitution of the letter of credit with a bank draft, even if not explicitly stated. The Court Order provides that the letter of credit is only cancelled if the bank actually provides a replacement bank draft for the Accountant to accept. The Court Order, by its terms, at least implicitly requires the Accountant to not only accept the letter of credit but accept it subject to its terms, including tendering of the replacement draft.
Further, a bank draft, a familiar instrument to both banks and accountants, is essentially equivalent to cash. Unlike a normal “cheque” which merely directs one’s banker to remit the face value of the instrument, provided that there is adequate credit held to the customer’s account with the financial institution, a bank draft asserts to the holder that the issuing or certifying institution financially backs the instrument.
Therefore, it was the authors’ view that the Accountant should not require further explicit court authorization to accept the bank draft as replacement security for the court-approved letter of credit.
It is now clear that that view is shared by the Accountant and the bank. Considering this development, TruGrp confirmed that its concerns were satisfied. Subject to costs which are yet to be determined, the motion is resolved. Of general interest, the issue of the sufficiency of the commonly accepted form of letter of credit as security to vacate a lien has been affirmed.