Article

Note: Charlton Corporation (Buyer) entered into a contract with Dadourian Group Inc. (Seller) by which it had an option to purchase hospital bed manufacturing equipment. The contract provided that Buyer was to open an LC in favor of Seller should it exercise the option. Buyer exercised the option but failed to open an LC, claiming it was not required to open the LC until Seller had acquired all of the equipment that it was to sell.

Both Buyer and Seller claimed repudiatory breach, and Buyer sued. Arbitration was initiated pursuant to the contract. The arbitral tribunal found for Seller on its claims of fraudulent misrepresentation and breach of contract and awarded substantial damages.

Because Buyer as a business entity possessed no actual assets, Seller sued the owners and directors of Buyer, alleging fraudulent misrepresentation, conspiracy, and breach of contract. The allegation was that that the owners of Buyer represented themselves as independent intermediaries for the purpose of inducing Seller into entering into the contract. Seller further alleged that this was done with the full knowledge of the officers of Buyer. Seller sought for the arbitral finding to be given a res judicata effect against the owners and directors of Buyer.

The High Court of Chancery, Warren, J., found for Seller on the claim of fraudulent misrepresentation but ruled that Seller, rather than Buyer, had breached its warranty under the contract by not possessing all of the equipment that it had warranted to possess.

In the arbitration, Seller had successfully counterclaimed that Buyer failed to open an LC within a reasonable period of time, thereby breaching the contract. In the lawsuit, however, the court noted that the option contract controlled the terms of the LC.
"[T]here was nothing express in the Option Agreement which stated when the letter of credit had to be opened . . . . [T]here was, in my judgment, no obligation, at this time [when option was exercised], on [Buyer] to have opened it." The appellate court noted that "it was quite wrong of [Seller] to insist that the exercise of the option resulted in [Buyer] immediately becoming obliged to open the letter of credit." However, the appellate court also noted that once the equipment was clearly identified "[i]t was, nonetheless, necessary to have the letter of credit opened a reasonable time before shipment."

[JEB/bca]

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