Article

Factual Summary: The bank issued two standby letters of credit as security for any claims paid by the beneficiary under surety bonds that it issued for the applicant in regard to two projects, one in the state of Washington and the other in Oregon. After the beneficiary was required to pay on the performance bonds posted for the applicant's work in Washington, it drew drafts under each letter of credit. The issuer failed to honor the drafts because it believed one of the letters of credit was issued for the Oregon project.

The beneficiary sued and moved for summary judgment on the ground that it properly presented both drafts and the issuer "failed to comply with the UCP by refusing to honor valid drafts and by not notifying [the beneficiary] of any deficiencies." The trial court granted the motion.


Legal Analysis:

1. Fraud; Dishonor by Issuer: The parties agreed that the UCP does not contain a fraud provision. The court, therefore, turned to Oregon law, stating, "the relevant Oregon statute provides that an issuing bank, acting in good faith, may dishonor a draft on a letter of credit, if the presentation of the draft would facilitate a material fraud by the beneficiary." (O.R.S. 75.1090).

2. Fraud; Proof: The opinion stated that "[the issuer's] only argument in opposition is that one of the letters of credit - was issued for a Bend, Oregon project and has nothing to do with the project in Washington on which [the applicant] defaulted, causing [the beneficiary] to assume responsibility under its bonds."

An affidavit of the loan officer who approved both letters of credit stated "[i]t was my understanding with Black Oak Construction and Mission Insurance Agency, Inc., - that each letter of credit was for a specific job." The loan officer's affidavit, however, contradicted a letter sent to the issuing bank's president from Mission Insurance which stated:

There was no discussion on whether the letter of credit was for a specific job or for any jobs the bonding company bonded. The letter of credit did not specify that the letter of credit was limited to a specific job.

3. Independence Principle; Fraud Exception:Citing case law, the court noted that where there is a claim of fraud, "it is proper for the court to go beyond the documentation required by the letter of credit." While the court ruled it would examine a fraud defense, the issue failed to produce sufficient evidence to raise a material question of fact to support its fraud claim.

Comment:

The court correctly ruled that the issuer failed to raise a material question of fact regarding whether the standbys were linked to a specific project. Even if the issuer had done so, however, the beneficiary would be entitled to summary judgment so long as there was a colorable basis for its drawing.

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.