Article

Factual Summary: Supplier entered into a $250 million Generator Contract with Power Plant to supply the turbines and generators for the plant. Power Plant then entered into a separate "turnkey" contract by which General Contractor agreed to build the plant, and Power Plant assigned the Generator Contract to General Contractor.

To secure Supplier's performance under the Generator Contract, Supplier provided General Contractor with a standby LC for US$25,644,666.

When the plant was substantially completed, General Contractor claimed that Supplier had defaulted under the Generator Contract and had caused overrun costs of $20 million. Because Supplier had been paid in full without retention of any portion of the payments, General Contractor notified Supplier of the alleged default as required by the LC and of its intention to draw on the letter of credit. Under the terms of the Generator Contract, General Contractor could draw on the LC within thirty days after giving notice.

Claiming that it had not defaulted under the Generator Contract and that General Contractor was trying to ease its financial burdens, Supplier filed an action for a declaratory judgment that Applicant is not in default under the contract, to compel arbitration, and to enjoin General Contractor from drawing on the LC. At the hearing, General Contractor sought a preliminary injunction. The court denied the motion.

Legal Analysis:

1. Irreparable Harm; Preliminary Injunction; TRO: Supplier asserted that it would suffer irreparable harm, since it would only have an unsecured claim if General Contractor was allowed to draw upon the LC and then went bankrupt because of its deteriorating financial condition. Supplier presented the Court with several claims regarding the deteriorating financial condition of General Contractor, including: (1) the downgrading of General Contractor's credit rating; (2) General Contractor's default to several creditors; (3) losses of $50 million in the last quarter; (4) a significant decrease in General Contractor's operating cash; (5) a 50% decrease in the value of General Contractor's stock. Expert testimony for Supplier presented a likelihood of bankruptcy test and estimated that the likelihood of General Contractor going bankrupt was 82-94%.

General Contractor countered the evidence presented by Supplier, including explanations for each of the conditions alleged by Supplier as well as additional evidence that the company was in a stable financial condition. General Contractor offered counter expert testimony that the likelihood of bankruptcy was only 3.66%. General Contractor further argued that even applying the test used by Supplier, General Contractor was no more likely to go bankrupt at the present time than it was when Supplier first applied for the letter of credit.

The Court determined that the financial status of General Contractor was stable and that the company was not likely to go bankrupt in the near future. Relying on the established rules that preliminary injunctions should only be granted in cases where the plaintiff will suffer irreparable harm unless the injunction is granted, and that monetary damages are not usually considered irreparable harm because they can be estimated and compensated, the Court held that Supplier was not likely to suffer irreparable damages by allowing General Contractor to draw upon the letter of credit.

Comment: One wonders why there was no reference to LC fraud, without which an injunction should not issue. The court's analysis proceeds as if there were no LC statute that addresses this question.

[JEB/hth]

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