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Note: Metropolitan Transportation Commission (Beneficiary) entered into a contract with Motorola, Inc. (Contractor/Applicant) to "design, build, operate and maintain the 'Translink Project', a unified collection and transfer system for transit operators in the San Francisco Bay Area." Per the terms of the contract, Contractor was required to provide Beneficiary with a letter of credit in the amount of US$3,000,000 that was to remain in effect until Contractor/Applicant "'achieve[d] Final Acceptance of Phase II', whereupon the letter of credit 'may be reduced' to [US]$ 1,500,000."

Shortly after entering into the contract with Beneficiary, Contractor/Applicant provided a US$3,000,000 LC. Two years later, Contractor/ Applicant attempted to assign the contract to ERG Transit Systems, Inc. ("Assignee"). Beneficiary neither approved nor disapproved of the assignment. After the LC was subsequently reduced by the issuer to US$1,500,000, Beneficiary did not object to the decrease until more than a year later when it demanded that Contractor/Applicant post an additional LC in the amount of US$1,500,000. Assignee offered to provide the new LC, but Beneficiary refused this offer.

Beneficiary filed this action seeking "a declaration that [Contractor] remains obligated to perform its obligations under the Contract, including its obligation to provide a [US]$3,000,000 letter of credit." Contractor/Applicant counterclaimed for a declaration that it is not obligated on the contract. Beneficiary moved for judgment in its favor on the pleadings and to dismiss the counterclaim. The U.S. District Court for the Northern District of California, Chesney, J., granted /Beneficiary's motions.

The court noted that because Contractor/ Applicant had conceded that Beneficiary had not agreed in writing to relieve it from responsibility under the contract, Contractor/Applicant remained obligated on the contract unless it was able to allege sufficient facts to prove that it was no longer liable. Contractor/ Applicant argued that Beneficiary had ratified its actions. The court, however, noted that Contractor/ Applicant not only failed to allege that Beneficiary had ratified the reduction of the amount of the LC, it alleged that Beneficiary had expressly objected to the reduction. The court therefore concluded that the crossclaim was insufficient as a matter of law to support a claim based on release, waiver, acceptance or novation.

[JEB/aee]

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