Article

Note: To pay Ejong Construction Co. ("Beneficiary") for steel and other materials supplied for the construction of a hotel, owners, Tanota Partners and Hafa Adai ("Applicants"), provided multiple LCs totaling US$8,875,468.40 on which Beneficiary drew and was paid. However, Applicants and Beneficiary never signed a written contract and a dispute subsequently arose between them regarding whether a contract existed and, if it did, how much money Beneficiary was owed for its services.

Beneficiary sued Applicants in the Superior Court of the United States Territory of Guam for breach of contract for the balance it alleged was due. Applicants moved for summary judgment on the ground that the amount claimed was in excess of that which was due, and the court granted the motion, thus dismissing a part of Beneficiary's case.

On appeal by Beneficiary, the Supreme Court of Guam, Torres, J., reversed and remanded.

Since there existed other genuine issues of material fact, the appellate court concluded that summary judgment was improper and reversed the trial court's decision to grant the motion for summary judgment. Noting that the trial court had relied on the invoices and other documents presented under the LCs in determining the amounts owed and paid, the appellate court concluded that summary judgment was improper on such a basis. "According to the independence principle, the fact that [Beneficiary] negotiated and received proceeds from the letters of credit, while relevant, is not itself determinative of the existence of an agreement to supply materials or the terms of any such agreement." The appellate court also stated that "the fact that [Beneficiary] negotiated and received the proceeds of the letters of credit did not create an irrebuttable legal presumption of payment. The trial court erred in finding that the letters of credit constituted payment as a matter of law."

Comment: While the court is undoubtedly correct in its conclusion that the LCs and documents presented under them are not necessarily determinative of the existence of a contract or its terms, its reliance on the independence principle for authority is incorrect. The independence principle isolates the issuer's LC obligation from the underlying transactions that give rise to it so that they do no excuse performance. It is not, however, a two way street. Whether the terms of the LC shed light on the underlying contracts is a factual issue but one as to which LC independence is irrelevant. The LC, so to speak, is independent from the underlying transaction, but the underlying transaction is not independent from the LC. Uncritical application of the independence principle to situations in which it is not applicable does not enhance the principle. Rather it invites its eventual diminution because over-extension will trigger common sense reactions.

[JEB/as]

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