Note: To assure payment of taxes in connection with developing a 199-unit residential area with Taylor, Michigan (City), WHRJ L.L.C. and REI Island Lakes Owner, L.L.C. (Developers) agreed to post a US$1,500,000 standby letter of credit. The agreement also contained an arbitration clause and a provision requiring Developers to renew the standby whenever City drew on it to cure a default by Developers. The agreement also provided that if Developers failed to renew the standby, City had the right to draw the balance of the standby and use the funds "for any purposes".

When the housing market collapsed, Developers halted work on the development and stopped making tax payments. The matter was submitted to arbitration as provided in the agreement, and the arbitrator found that Developers were liable for tax payments, but could not determine the exact amount. The arbitrator ruled that until another hearing was held or the parties came to an agreement, City could draw on the standby for no more than $944,076.66.

After City drew on the standby Developers failed to renew it. City then sued Developers in Wayne County Michigan Circuit Court, seeking a court order vacating the arbitration proceedings and permitting City to draw on the entire standby. The trial court found that the issue of the Developers' failure to renew the standby had not been before the arbitrator and that the arbitration proceedings were therefore moot. The trial court vacated the arbitration award and ruled that because Developers failed to renew the standby as required by Agreement, City had the right to draw down the entire standby balance.

On appeal, the Court of Appeals of Michigan, Wilder, P.J., and Saad and Donofrio, JJ., in a per curiam opinion, reversed the trial court's ruling. The appellate court concluded that the trial court erred in concluding that the nonrenewal of the standby had not been considered by the arbitrator, stating that "the arbitrator was aware that the letter of credit would not be renewed" and "it is clear that the arbitrator considered the issue of nonrenewal of the letter of credit and it did not affect his award. Further, he viewed the possibly constituting a penalty". The case was remanded for further proceedings in accordance with the appellate court's ruling.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.