Article

Factual Summary: On the award of a bid for software development and installation, the awardwinning Service Provider was required to post a performance bond. Purchaser agreed instead to accept a standby LC for US$1,616,000. Unable to obtain a standby, Service Provider arranged for a minority shareholder (Applicant) to apply for the standby. The opinion explained the agreement in the following manner:

Section 5.4 of the agreement stated that [Beneficiary/Purchaser] agreed to accept a letter of credit in lieu of a performance bond; explained that the purpose of the letter of credit was to "mitigat[e] [Beneficiary/Purchaser]'s actual losses"; stated that [Beneficiary/Purchaser] would remit to [Service Provider] the difference between the amount of the letter of credit and the actual loss; and outlined the terms of the letter of credit. The section stated that the letter of credit would "be attached hereto as schedule D." Schedule D stated that "The Letter of Credit applied for by [Applicant], executed in favour of [Beneficiary/Purchaser] on [date omitted from the schedule], 2002 is incorporated herein by reference without attaching a copy of the LOC herein, and each party acknowledges having received a copy of the Letter of Credit." The contract also included a nontransferability clause and prohibited assignment of the contract "without the prior written consent of the other party." The agreement also denied both parties the "authority or power to bind or contract in the name of or to create any liability against the other party in any way for any purpose.

When Service Provider failed to complete the project, Beneficiary/Purchaser drew on the LC for the full amount and was paid.

Applicant then requested an accounting from Beneficiary and requested a refund of proceeds from the LC in excess of Beneficiary's actual loss. When Beneficiary refused to provide the accounting, Applicant sued Beneficiary for breach of its statutory LC warranty under US Revised UCC Section 5- 111(a) and for breach of contract. The trial court entered summary judgment in favor of Beneficiary. On appeal, affirmed.

Legal Analysis:

1. US Revised UCC Section 5-111(a); Warranty. Applicant claimed that Beneficiary breached its Rev. UCC Section 5-111 warranty by failing to remit the difference between the amount of the LC drawn and the actual loss that Beneficiary suffered. The appellate court rejected this contention. It found that under Alabama law an applicant may sue a beneficiary for breach of warranty if the beneficiary has drawn on the LC in violation of its right to do so under the agreement. By drawing on the LC, Beneficiary warranted that it satisfied all the conditions necessary for it to do so. Here the requirement that Beneficiary remit to Applicant the difference between the LC and the actual loss suffered was not a condition that Beneficiary had to satisfy to draw on the LC. "[Applicant] focuses incorrectly on conduct expected of [Beneficiary/ Purchaser] after it drew on the letter of credit. The requirement that [Beneficiary/Purchaser] remit payment to [Service Provider] did not 'create[...] a condition for honoring a draft'." Therefore, Beneficiary did not draw on the LC in violation of its agreement with Applicant, and Applicant could not maintain a cause of action for breach of warranty.

The appellate court also rejected Applicant's claim that it was a third party beneficiary of the contract between Beneficiary/Purchaser and Service Provider. The appellate court interpreted Section 5 of the contract as not conferring any direct right: "Section 5.4 provided for the letter of credit to 'be attached hereto as schedule D[,]' but did not state that [Applicant] had any rights as applicant for the letter of credit".

[JEB/jdc]

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