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Note: In 1999, Warner Brothers International Television Distribution (Licensor) licensed its program broadcasting rights to Golden Channels & Co. (Licensee), an Israeli television company, for thirty months. The contract required Licensee to obtain "an irrevocable unconditional draw down letter of credit" for a minimum of US$5,000,000 in favor of Licensor. As described in the appellate opinion, the credit that was issued required only presentation of sight draft drawn on the issuer and provided for automatic extension unless terminated by notice at least 60 days before expiry.

Before the contract expired on 31 May 2002, Licensor exercised its contractual option to extend the license. The contract, however, was silent regarding the LC in the event of an extension and stated that the LC issued was "only" to be available to be drawn on for the term of the agreement. It stated "[t]he Letter of Credit...shall be in place from 19 July 1999 to 31 May 2002 only. If Licensor...intends to exercise the Extension Option...Licensee...agrees to discuss with Licensor appropriate security to be given in respect of Licensee Fees due" during this period.

During the negotiations in which both parties disputed the amount in which the LC should be issued, the US$5,000,000 LC was automatically extended for another year, continuing to tie up Licensee's credit for this amount. When negotiations faltered and Licensor issued notices of default for Licensee's unpaid licensing fees, Licensee sought to terminate the contract. Licensee suggested payments through an escrow arrangement into which it would pay outstanding licensing fees in return for surrender of the LC by Licensor, thereby freeing up its credit line with the issuing bank. In response, Licensor notified Licensee that it was terminating the contract, drew the full amount on the LC, was paid, and filed suit for breach of contract, seeking the balance owed.

The U.S. District Court for the Central District of California, Morrow, J., entered judgment in favor of Licensor. On appeal, the U.S. Court of Appeals for the Ninth Circuit, Noonan, Kleinfeld, and Paez, JJ., in an opinion by Kleinfeld, J., reversed and remanded.

The trial court had ruled that Licensee was equitably estopped from conditioning its tender of payment on return of the LC because Licensee's silent allowance that the LC be extended was a "misleading act, causing [Licensor] to believe that [Licensee] had agreed that this should be the amount of security for the second term." The trial court then concluded Licensor was entitled to license fees still due and "future 'benefit of the bargain' damages for future sales to [Licensee]" totaling US$19,315,960.

In reversing, the appellate opinion concluded that the trial judge had erred "because estoppel requires reasonable reliance on a misleading communication upon which the victim was intended to rely" and there was no reason for reliance when the contract explicitly limited the security to the duration of the original agreement. Further, the opinion concluded that "[s]ince the parties had agreed only to 'discuss' security, and did, neither breached its promise to discuss it. Failure to agree was not a breach because an agreement to agree is not a contract."

Comment:

The appellate opinion contained the following observations: "Like a Travelers Check (which is a letter of credit), [an LC] enables international business to be done safely and securely because the vendor need only rely on the financial strength of the issuing bank, and not on the financial strength and willingness to pay of the vendee." (citing First Empire Bank- New York v. FDIC, 572 F.2d 1361 (9th Cir. 1978)). While there are functional resemblances between a traveler's check and an LC, there are legal and practical differences, especially with respect to defenses that can be raised.

[JEB/plc]

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