Topics: Injunction; Comity; UCC § 5-109; LC Fraud; Comity Arbitration

Note: The United States Agency for International Development (USAID) awarded the Louis Berger Group, Inc. (Contractor/Beneficiary) a US$ 700,000,000 contract to undertake aspects of an infrastructure program in Southern Sudan. Contractor agreed with Progressive Constructions, Ltd. (Subcontractor/Applicant) to complete elements of the road construction for $ 69,650,453.

Under the contract, performance was to be secured by a standby. Contractor initially notified Subcontractor that it was too slow in its work rate and subsequently that it was in violation for not providing security. Two months later, when a surety was not forthcoming, Contractor/Beneficiary sent Subcontractor/Applicant a Notice to Cure indicating that it would deem Subcontractor/Applicant in default if the required surety was not obtained by 18 September 2009. On 29 September 2009, Applicant obtained a standby from the Bank of India (Issuer 1) in the amount of $ 3,401,071 and a standby from JPMorgan Chase (Issuer 2) in the amount of $ 3,573,975. The Louis Berger Groups, Inc. v. JPMorgan Chase Bank, 2011 WL 2837462 (N.D. Ill.) [U.S.A.] noted in 2012 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW AND PRACTICE, at [_].

Two days later, Contractor/Beneficiary sent a Notice of Default to Subcontractor/Applicant and "forcibly expelled" Subcontractor/Applicant from worksite. Subcontractor/Applicant then sought an interim injunction restraining payment on both standbys in the City Civil Court of Hyderabad, India which granted preliminary inunctions. Subcontractor also commenced arbitration in New Jersey, and requested that the arbitrators enjoin Contractor/ Beneficiary from drawing on the LC pending its request for permanent injunctive relief.

Contractor/Beneficiary then demanded payment on the LC from Issuer 1, which refused to honor because of the injunction by the Indian Civil court. At the time of the decision in this case, the Indian case was currently under appeal and the injunction had been extended until a final judgment could be reached. Beneficiary then brought this action against Issuer 1 in the United States District Court for the Southern District of New York for wrongful dishonor. Applicant then applied for an order seeking (1) permission to intervene; (2) a preliminary order enjoining Beneficiary from making any demand on the first LC pending arbitration; and (3) a stay of the matter pending arbitration. In an earlier hearing, the court had denied Subcontractor's request for injunctive relief, reserving ruling on the remaining issues. The United States District Court, Marrero, J., granted Applicant's motion to intervene, and ordered the action stayed.

The Judge noted that Applicant had shown that the dispute between Beneficiary and Issuer 1 and Applicant's putative claim share the common question as to whether the first LC may be drawn upon. The Judge noted that the facts differ from those in the case on the second LC in Louis Berger Group, Inc. v. JPMorgan Chase, N.A., 2011 WL 2837462 (N.D. Ill. July 18, 2011). In the latter case, Applicant was not permitted to intervene, because it was found that Issuer 2 would adequately represent Applicant's interest by arguing against honoring the LC. By contrast, in this case, Issuer 1 had not taken a position on whether the LC should be honored.

In response to the motion for a stay of the Illinois proceedings pending resolution of the arbitration proceedings, Contractor/Beneficiary argued that the LC was not arbitrable because of its independent charter. While recognizing this principle, the Judge noted that Contractor/Beneficiary and Subcontractor/ Applicant had agreed to arbitrate contract disputes and "a stay is favored where "at least one of the issues in the suit is within the scope of the arbitration agreement."" quoting from Kolacek v. Gemexco Trading, Inc., No. 90 Civ. 5760, 1991 WL 2857, at *2 (S.D.N.Y. Jan. 10, 1991)" Noting that Subcontractor/ Applicant had asserted that Contractor/Beneficiary "wrongfully induced it to deliver the [LCs] by making materially false promises concerning its ongoing review of [Subcontractor/Applicant's] performance under the construction contract." ... [Subcontractor/Applicant] argues that this constitutes fraud and invalidates the LCs under § 5-109." Because honor could be enjoined in such a circumstance, the Judge ordered a stay.

The Judge also noted that this action and the arbitration:

concern the events leading to an immediately following Progressive's procurement of the [LCs]. The Arbitration will determine, in relevant part, whether (1) Progressive was obligated to provide [Contractor/Beneficiary] with [LCs] prior to [Contractor/Beneficiary's] submission of a progress payment and (2) [Contractor/Beneficiary] was required to review the project's progress under a revised work plan after [Subcontractor/Applicant] obtained the [LCs]. These same factual issues will, in turn, determine whether the First [LC] is valid and must be honored by the Bank of India. See § 5-109. As such, the facts giving rise to the Arbitration are necessarily related to [Contractor/Beneficiary's] instant claim and "will likely provide significant insight into, if not actually resolve, the claims asserted in this action."

The Judge also noted:

Staying this case in favor or arbitration will not only promote judicial economy by eliminating any duplicative effort by the Court to resolve the issue of the First [LC's] validity, it will also avoid any inconsistency that would arise if the Arbitration and Court were to reach different conclusions on the matter.


Where a letter of credit does not provide for arbitration, a court should be loathe to enjoin honor pending arbitration of the underlying transaction. Where a stay has the same effect, it should not be entered absent LC fraud or abuse.



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.