Article

Factual Summary: In 1995, the applicant entered into a construction contract which required the applicant to obtain a bank guarantee from a European bank to secure its performance of the contract. In order to secure the bank guarantee, a letter of credit was issued that provided that the guarantor of the separate guarantee could draw upon notification of a drawing under the separate performance guaranty.

The following year, after being notified that applicant would be unable to perform due to changes made to the contract specifications, the beneficiary of the separate performance guaranty awarded the contract to another builder and, subsequently, requested and received a refund of the advanced installment money on the contract from the applicant.

In 1997, after failed discussions between the applicant and the beneficiary of the separate performance guaranty over whether there was a breach of the contract and, if so, whether there were any damages, the beneficiary of the separate performance guaranty asserted its entitlement under the performance guaranty to damages without "prior prosecution." The next day, the beneficiary presented a draft for payment on the letter of credit.

After being informed by the issuer of the letter of credit that it would honor the draft but before payment had been made, the applicant requested the court to issue a Temporary Resisting Order (TRO) against the issuer, the beneficiary, and the beneficiary of the separate performance guaranty. The trial court initially granted a TRO enjoining the issuer from honoring any draws on the letter of credit and, subsequently, modified the TRO to further enjoin the beneficiary and the beneficiary of the separate performance guaranty from attempting to draw on the credit. At a subsequent hearing, the trial court dissolved the TRO and denied the applicant's motion for a preliminary injunction. On appeal, affirmed.


Legal Analysis:

1. Preliminary Injunction: A preliminary injunction can be issued only if the plaintiff shows that injury is both imminent and irreparable and there is no adequate remedy at law. After noting that under the terms of the letter of credit the applicant could sue in Germany if the beneficiary of the separate performance guaranty had no legitimate basis to draw, the court stated, "[w]here an adequate legal remedy otherwise exists, [the applicant] will not suffer imminent or irreparable."

2. Preliminary Injunction: Fraud in the Transaction. The court emphasized that for a preliminary injunction the scope of the inquiry is whether the party moving for the injunction will suffer irreparable and imminent harm. If irreparable and imminent harm are not present, allegations of fraud are extraneous. In refusing to "delve into the underlying contract," the court noted that maintaining the independence of the letter of credit from the underlying transaction is essential to preserving the commercial utility of letter of credit transactions.

3. Availability of Injunctive Relief: Because the court found that the applicant did not satisfy the elements necessary for the issuance of injunctive relief, the court did not specifically address the issue of whether the fraud exception extends to the UCP. However, the court reiterated that under Alabama Code Section 7-5-102(4), Article 5 is inapplicable when letters of credit are issued subject to the UCP.

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