In Pacific Atlantic Pipeline Construction Ltd. (“PAPC”) v Coastal Gaslink Pipeline Ltd, 2024 ABCA 74 (“CGL”) the Alberta Court of Appeal affirmed that the higher “strong prima facie case” standard was the correct standard to apply when considering whether an interlocutory injunction should be granted to prevent  a party from drawing on a standby letter of credit (“SLOC”) until arbitration proceedings were completed.[1] The judgment in Coastal Gaslink demonstrates the Court of Appeal’s recognition of the importance of not undermining efficacy and utility SLOCs in commercial transactions.

Background:

CGL entered into a construction contract with PAPC for the construction of parts of its pipeline project in British Columbia. As security for the performance of its obligations, PAPC provided a SLOC. The terms of the SLOC were clear stating that in the event of non-performance by PAPC, CGL could draw on the SLOC.[2]

In 2022, the parties had a dispute regarding the work and CGL terminated the contract. In response, PAPC began arbitration proceedings seeking damages for wrongful termination. In 2023, CGL sought to draw on the SLOC. In response, PAPC sought an interlocutory injunction to prevent CGL from drawing on that SLOC until the arbitration proceedings were complete. The chambers judge denied the injunction and instead issued a short-term injunction to allow for PAPC to appeal that decision.[3]

Arguments

In its appeal, PAPC argued three main points:

1. The chambers judge erred in his application of the “strong prima facie case” standard for granting interlocutory injunctions.

PAPC argued that the correct standard for determining whether an interlocutory injunction should be issued is the lower standard of whether there is a “serious question to be tried.” The Court of Appeal held that while that is the typical standard used for interlocutory measures, a stricter standard is occasionally required when a party is attempting to restrain payment under a letter of credit. The stricter “strong prima facie case” standard was required in this action to ensure the Court did not  too readily interfere with the operation of the SLOC, thus hindering its utility and efficacy in commercial agreements. In its reasons, the Court also stated that the stricter standard is applicable equally to all parties, regardless of whether the injunction is against the issuing bank or the beneficiary.[4]

2. The chambers judge erred in finding CGL had a valid purpose for drawing on the SLOC.

PAPC also argued that the SLOC was in place to secure performance obligations and since the work required was substantially completed by other contractors, CGL had no basis to draw on the SLOC. The Court of Appeal however held that the contract expressly allowed CGL to draw on the SLOC in the event of non-performance by PAPC. In this case, PAPC failed to perform their contractual obligations which authorized CGL to draw on the SLOC. All that was relevant was that CGL’s attempt to draw on the SLOC was connected to the purpose for which that SLOC was put into place.[5] The Court was reluctant to imply any terms beyond those specified in the contract, as that would be an undermining of the security granted and certainty of the SLOC.

3. The chambers judge erred in holding that a breach of the duty of honest performance requires a party to intentionally lie or deceive the other party.

PAPC’s final argument was that the chambers judge erred by stating the test for a breach of the duty of honest performance as intentionally deceiving or lying when it should have been knowingly misleading or lying. PAPC’s claim was that CGL had a duty of honest performance to not draw on the SLOC until after arbitration because of their previous assurances that they did not intend to draw on the SLOC. The Court of Appeal held there was no meaningful legal difference between the two phrasings of the test and that using one over the other would not have changed the outcome.[6]  The Court held that there was no “strong prima facie case” that CGL’s assurance would remain in place until completion of arbitration. The Court maintained it was a misunderstanding born from PAPC’s “wishful thinking.”[7]

The Court of Appeal upheld the chambers judge’s ruling and dismissed the appeal.

Key takeaways

The Court of Appeal’s ruling in Coastal Gaslink affirms that courts recognize the importance of SLOCs in commercial transactions; and will avoid undermining or interfering with the international commercial utility and efficacy of letters of credit.[8]

This case provides some important considerations for parties utilizing SLOCs:

  • In the event that a party seeks an interlocutory injunction to prevent another party from drawing on an SLOC, they will likely be required to meet the stricter “strong prima facie case” standard.
  • Courts will generally follow the written terms for authorizing the drawing on a SLOC and so parties should be clear in their intentions. If there are to be any restrictions in the use of a SLOC, those should be outlined clearly at the time of contracting.

Courts will be reluctant to allow the duty of honest performance to bind a party to past verbal assurances of not drawing on a SLOC.

Should you have any questions, please do not hesitate to reach out to a member of Miller Thomson’s Construction and Infrastructure group.

[1] Pacific Atlantic Pipeline Construction Ltd v Coastal Gaslink Pipeline Ltd, 2024 ABCA 74 [Coastal Gaslink].

[2] Coastal Gaslink at paras 1 – 3.

[3] Coastal Gaslink at paras 2 – 3.

[4] Coastal Gaslink at paras 5 – 10.

[5] Coastal Gaslink, at paras 13 – 16.

[6] Coastal Gaslink, at paras 18 – 19.

[7] Coastal Gaslink, at para 22.

[8] Coastal Gaslink, at para 10.