Article

Factual Summary: To assure its performance in a joint venture to construct a highway in the Republic of Haiti, Applicant caused insurance company to issue guarantees payable to Beneficiary. Applicant caused two independent guarantees to be issued for the benefit of Beneficiary, one of which was at issue in this case. The instruments were entitled "Garantia de Ejecucion-Performance Bond."

When Applicant failed to perform its obligations under the joint venture, Beneficiary presented the demand and notification to Guarantor required to collect under the guarantee. Guarantor refused to pay the amount demanded and Beneficiary sued for wrongful dishonor. On motion by Beneficiary, summary judgement was awarded.

Legal Analysis:

1. Parol Evidence: Guarantor urged the court to admit extrinsic evidence that indicated that the instrument did not create an independent obligation. The court, however, noted that in order to consider extrinsic evidence, the court "must first find the relevant terms of the agreement unclear." It concluded that the guarantee contained no ambiguities.

2. Independent Guarantee; Independence; Title of Undertaking; Rev § 5-103: The Guarantor argued that the instrument was not an independent guarantee but was conditioned on the principal's failure to comply with the joint venture agreement, urging that its Title, "performance bond" exemplified its effect. The court noted that the terms "guaranty", "surety", and "performance bond" tend to be used interchangeably in case law. The court, however, concluded that the title, while persuasive, was not determinative as to the legal obligations undertaken by the parties. Instead, the court looked to the terms of the agreement, which stated in its first paragraph that the instrument was "an irrevocable and unconditional guarantee." The court noted that this language was typical of an LC "designed to operate completely independent of any other contractual obligation." In particular, it noted that the only conditions for payment were linked to a written notification of default. The court concluded that the plain language indicated that the undertaking was of the sort to be regarded as independent under the statute applicable to letters of credit and similar to revised UCC Article 5. Accordingly, it concluded that it would have been improper to refuse payment based on provisions in the underlying joint venture agreement.

Comments:

1. This decision is important in that it demonstrates that the principles of letter of credit law apply to any undertaking which by its terms is independent and documentary, regardless of what it is named. It is also important because it demonstrates at this level of legal abstraction that letters of credit and independent guarantees are functionally equivalent and both fall within the scope of revised US UCC Article 5. Since decisions under this statute involving independent guarantees are rare, it is useful to have one that properly applies the statutory rule. While this point is made in Official Comment 1 to Section 5-103, it might have been made from a less parochial perspective, and it is no surprise that the court does not refer to it. This decision clarifies its applicability to independent guarantees.

2. The decisive provision in the guarantee that made it independent is its linkage of the obligation to pay against presentation of a document. The court is correct in stating that the title is not determinative. The recital that it is "unconditional and irrevocable", however, is not determinative either. While some LCs do contain this phrase, it is not typical of a letter of credit. It is unnecessary to recite that they are irrevocable under either the UCC or the UCP, since both so provide unless the undertaking provides that they are revocable. It is incorrect to state that they are unconditional since they are conditioned on the presentation of a document and are not, like commercial paper, simply due on demand or on the passage of time. ISP98 stipulates a standby should not or need not state that it is unconditional. If it does, ISP98 Rule 1.10(a)(i) provides "unconditional ... signifies merely that payment under it is conditioned solely on presentation of specified documents". Here, the court understandably, if somewhat incorrectly, takes the phrase "unconditional" to mean that the undertaking is not subject to any event related to the underlying contract. In reality, the recitation is irrelevant to understanding the character of the undertaking which should be determined by whether it is structured like a letter of credit and, most importantly, the nature of the conditions on which it turns. Where, as here, they are solely documentary, the undertaking should be treated as independent and a member of the letter of credit family of undertakings, including not only independent guarantees but also standby and commercial letters of credit.

[JEB/jam]

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