Documentary Credit World

Following a New York trial decision (summarized at Jul/Aug 2023 DCW 16) which entered a temporary injunction against LC beneficiary Alto Maipo, SpA and standby LC issuer, Credit Agricole, Alto Maipo appealed. LC applicant Strabag, SpA was contractor for substantial works and “Critical Milestones” regarding Alto Maipo’s hydroelectric powerplant located in Chile. These works included water supply tunnels from the Maipo River upper basin to the powerplant. In the event of unmet milestones, Alto Maipo could make demands on the standby LC for “contractually set liquidated damages”. Essentially, the trial court found that Strabag had sufficiently demonstrated a likelihood of success on its claim of material fraud as a contract amendment excused testing delays due to insufficient water levels.

The appellate court, however, unanimously reversed on the law with costs. The court noted that the LC was a “clean, standby letter of credit”, and contractual disputes, in light of LC independence, ordinarily are insufficient to justify temporary injunctions or restraining orders. The exception thereto is material fraud, citing N.Y. Rev. UCC Section 5-109 (i.e. “no colorable basis”; also citing 3M Co. v. HSBC Bank USA, N.A., 2018 WL 1989563 (S.D.N.Y. Apr. 25, 2018). As the appellate court expressed, the contracts gave “rise to a reasonable interpretation that the extension only applies to the extent that the low water levels push the completion of testing past the cut-off date for completion of the Critical Milestones. Moreover, there is no dispute that the tunnel collapse prevented water testing and supports [Alto Maipo] invoking its rights pursuant to the drawdown provision of the parties’ agreement.”

The extension for insufficient water flow did not apply “day for day” to the delays. Thus, the appellate court found that the trial court abused its discretion in ruling in favor of Strabag on its allegation of material fraud. The Appellate Division also granted a motion for Professor Boris Kozolchyk to file an amicus brief supporting defendant-appellant Alto Maipo.

Appellate Citation. Strabag, SpA v. Credit Agricole CIB, No.650865/23,  slip op. (N.Y. App. Div. Nov.
9, 2023) [USA]

Update: Following reversal on appeal, LC beneficiary Alto Maipo demanded payment from Credit Agricole. The bank honored for USD 90 million and Alto Maipo deposited the funds “at Itau’ Corpbanca in the Project’s Disbursement account.” The next day, the Court of Appeals (the N.Y. court of ultimate jurisdiction) issued an interim stay of the appellate court reversal; this effectively reinstituted the trial’s court preliminary injunction. Accordingly, Strabag filed a motion for an attachment of the LC proceeds or, alternatively, an injunction to prevent disbursement of the funds into any accounts except a relevant “Insurance Proceeds and Compensation Account”. Arbitration is
ongoing.

Initially, the trial court rejected Alto Maipo’s argument that the motion was collaterally estopped: “This is a different case, at a different time, with a different procedural posture.” Alto Maipo essentially ignored the effect of the Court of Appeals interim stay.

Turning to the instant motion for attachment, Strabag raised fears that Alto Maipo would disburse the funds rendering a possible arbitration award moot. There was no evidence, however, that Alto Maipo would use the proceeds for anything other than the underlying powerplant project. That was the purpose of the aforementioned Disbursements account: “While threat of rendering an arbitration award ineffectual may give Strabag standing to seek interim relief here, it is not sufficient.” The attachment request was denied.

As for the preliminary injunction motion, the court began and ended with the issue of likelihood of success on the merits. All competing breach of contract arguments were squarely before the ICC arbitrator: “Whether the draw on the Letter of Credit constitutes delay damages, as Alto Maipo asserts, is an issue to be resolved by the arbitrator.” Unlike the original motion which alleged material LC fraud, this was a contract matter. Accordingly, the trial court denied Strabag’s motion.

Citation: Strabag, SpA v. Alto Maipo SpA, No.655653/2023,  slip op. (N.Y. Sup. Ct. Dec. 8, 2023) [USA].

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