Note: Caroline Apartments Joint Venture (Applicant) financed the development of apartment buildings through municipal bonds. Interest and redemption payments were assured by a standby letter of credit issued by Bank (Issuer). The standby contained a merger clause, which read, "This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein (including, without limitation, the Bonds), except only certificates required herein and the Uniform Customs referred to herein; and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except such certificates."

Because the interest rate on the bonds was tied to the strength of the Issuer, its downgrading by both Moody's and Standard & Poor's caused a rise in the interest rate. Subsequently, the full amount of bond redemption was drawn under the LC, Issuer paid, and Applicant defaulted on its reimbursement agreement with Issuer.

Claiming that Issuer "had a contractual duty and duty of good faith to maintain the creditworthiness of the LC so that the bonds could trade at the lowest possible interest rate", Applicant sued Issuer. Applicant alleged that Issuer breached this duty through risky lending activity. The Circuit Court for Waukesha County, Wisconsin, Hassin, J., granted summary judgment for Issuer. Applicant appealed and Issuer moved for attorney's fees. The Court of Appeals of Wisconsin, District Two affirmed in a per curiam opinion on de novo review.

The trial judge had found that parol evidence of an oral agreement to maintain Issuer's creditworthiness could not be admitted, since the LC contained a merger clause. The trial judge further concluded that there was no oral agreement, and, accordingly, no duty of good faith beyond the written terms. Applicant argued that the standby was not a contract between itself and Issuer, but only an agreement between Issuer and beneficiaries.

Finding that the merger clause rendered the LC and reimbursement agreement to be fully integrated contracts, the appellate court barred any resort to parol evidence because the LC was "a part of the bundle of contracts defining [Issuer's] undertaking with respect to the bonds and its obligations to [Applicant] and cannot...simply be ignored."

Since Issuer's risky behavior was not "intentionally directed at [Applicant] or intended to prevent [Applicant's] performance", the appellate court upheld the summary judgment dismissing the claim for breach of implied duty of good faith.

Issuer sought attorney fees incurred in litigation in the amount of US$134,035.65, based on terms in the reimbursement agreement, and produced affidavits showing that the rate was within the local competitive market rate. The trial and appellate courts dismissed Applicant's contention that Issuer was not entitled to attorneys fees because Applicant's claims were not based on written provisions in the reimbursement agreement. The trial court found the rate reasonable, which was within its discretion. The court of appeals rejected Applicant's contention that the trial court had shifted the burden of proof to Applicant, affirmed the trial court's award of $99,759.62, and remanded the case on the matter of subsequent attorney fees sought by Issuer.


Merger clauses (that is, clauses that provide that prior or contemporaneous oral statements or writing) have no place in the interpretation of independent undertakings. They would, however, have a role in reimbursement agreements and would be expected to appear in a well drafted reimbursement agreement. This case is about the duty of an issuer to its customer to maintain its credit standing, rendering any such clause in the standby that was issued irrelevant.

What is puzzling is why such a clause ever appeared in a standby. As indicated in the analysis of Rainy Sky S.A. v. Kookmin Bank (abstracted in the 2012 Annual Review at page 485), however, such clauses sadly may make sense in countries where courts do not begin their analysis of such undertakings by asking whether or not they are independent.



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.