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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
2006 LC CASE SUMMARIES 2006 Mich. App. LEXIS 3510 (Mich. Ct. App. 2006). [USA]
Topics: Compliance; Post Honor Recovery by Applicant; Illegality
Type of Lawsuit: Applicant sued Beneficiary for declaratory judgment and damages for improperly drawing on the LC.
Parties: Applicant/Plaintiff - English Gardens Condominium, LLC
Beneficiaries/Defendants - Howell Township, Merry Bering (township zoning administrator), and Lawrence Hammond (township treasurer)
Underlying Transaction: LC as security for the completion of a condominium complex.
LC: Performance standby for US$60,000. Silent as to governing rules.
Decision: The Court of Appeals of Michigan, Whitbeck, C.J., and Sawyer and Jansen, JJ., applying Michigan law, affirmed summary judgment for Beneficiary on the contract claim but reversed summary judgment in favor of Applicant on the declaratory judgment claim awarded by Livingston Circuit Court and remanded for return of the LC proceeds.
Rationale: Where a beneficiary complied with the requirements of the LC and had a good faith reason to draw, it is not liable to the applicant for wrongful drawing.
Where a local ordinance setting forth the rights of the local government to draw on performance standby requires that work be completed by the local government, it is improper for it to draw on the LC without completing the work even if the standby is about to expire.
Article
Factual Summary: As security for completion of a condominium complex, Applicant was required to post a standby LC with the local government as beneficiary. The instrument stated that "each draft ... must be ... accompanied by a signed statement from [Beneficiary] that [Applicant] has failed to honor their contractual agreement, per site plan review, with [Beneficiary]."
Claiming that there was outstanding landscaping work and in view of the pending expiration of the LC, Beneficiary drew the full amount without itself completing the work and drawing on the standby for reimbursement as provided by local ordinance which required the standby. Because the documents complied, Issuer honored.
Claiming that Beneficiary had improperly drawn on the LC and seeking refund of unused proceeds, Applicant sued Beneficiary. The trial court entered summary judgment for Beneficiary. On appeal, reversed and remanded in part and affirmed in part.
Legal Analysis:
1. Compliance: The court concluded that the LC's procedural requirements for drawing were satisfied by Beneficiary. Although there was a dispute between Beneficiary and Applicant regarding compliance with the underlying contractual obligations, the LC did not require resolution of the dispute prior to the drawing. The LC required only that Beneficiary assert that Applicant failed to fulfill its contractual obligations.
The court further noted that "all contracts normally presume good faith and fair dealing." This provision did not restrict the Beneficiary from drawing based on a reasonable belief that Applicant had not fulfilled its contractual obligation.
2. Post Honor Recovery by Applicant: The township ordinance authorized the local government to complete improvements on their own and reimburse themselves through the LC for expenses incurred. In siding with Applicant, the court concluded that the ordinance did not permit the "preemptive seizure of deposited security before work is completed." Beneficiary was only allowed to draw for expenditures related to completed work, not in anticipation of expenditures to complete work even if the funds might soon become unavailable.
Comments: This case affords an interesting instance of recovery by an applicant where the drawing was deemed to be proper but the beneficiary, a governmental unit, was not entitled to have made it. Violation of the applicable ordinance was, obviously, not LC fraud and should not be treated as illegal.
[JEB/tjd]
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