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Note: Tiger Security Group, Inc. (Contractor) contracted with the State of New York (State) to provide unarmed security services at the offices of the Department of Motor Vehicles. As a part of Contractor's agreement, Contractor/Applicant was required to provide a letter of credit in the amount of US$300,000 in favor of State/Beneficiary, but Contractor/Applicant provided an LC in the amount of only US$30,000. Cotnractor/Applicant failed to fulfill its contractual obligations to the satisfaction of the State, resulting in a termination of the contract in accordance with the termination clause contained in the hiring contract. After termination, State/ Beneficiary returned the LC.

Contractor/Applicant sued State/Beneficiary for balance due for services rendered; State counterclaimed for the return of payments previously made to Contractor/Applicant for services rendered. The Court of Claims of New York, McCarthy, J., entered judgment for Contractor/Applicant and dismissed the State/Beneficiary's affirmative defense.

One of State/Beneficiary's claims was that the failure to provide the contractually-required LC constituted a material breach of contract and warranted non-performance of the financial obligations to Contractor/Applicant. The court stated that State/Beneficiary had discretion with respect to the LC requirement of the contract, and the LC only served to protect the state against potential financial damages. Since the State/Beneficiary returned the LC after the contract was terminated, reflecting that it was no longer needed, and the record did not show any damages resulting from Contractor/Applicant's failure to comply with the contract, the court found that the failure to provide a contractually required LC did not constitute a material breach when the parties did not consider the failure to be a material breach.

[JEB/gsp]

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