Article

Note: In connection with the sale of real estate on which a funeral home was located in Chicago, JDL Development Interest, LLC (Buyer/Applicant) provided a standby LC in the amount of USD 3,500,000 in favor of SCI Illinois Services, Inc. (Seller/Beneficiary). The agreements into which the parties entered provided for the construction of a residential high rise, the construction of a new funeral home, and an assignment of Buyer's rights to Dearborn Maple Venture, LLC (Buyer's Assignee) which was controlled by the owner of Buyer. The development agreement provided that the standby was to

"ensure [Buyer's] '[full performance of] its agreements set out herein and in the other agreements between the parties referred to herein.' Paragraph 5 provided that in the event of a breach of or default on any terms of 'this [a]greement,' the face amount of the letter of credit shall become immediately due and payable to [Seller], and that [Buyer] 'shall be released from all obligations hereunder to convey [the new funeral home] to [Seller] and [Seller] shall have no other or further claim or cause of action against [Buyer] under this [a]greement.'"

When Assignee and Buyer failed to complete the project by the agreed deadline, Seller drew on the standby and was paid. It subsequently demanded additional amounts which triggered an arbitration under the terms of the contract. The arbitrator ruled that Seller had materially breached the contract by failing to cooperate, that the Seller was not entitled to retain USD 1,950,932 (USD 1,381,191, plus 9% interest in the amount of USD 569,741) in excess of actual damages incurred, that the standby could not operate as a liquidated damages provision, and that the excess proceeds must be returned. The Illinois state courts confirmed the award, and Seller refunded the excess proceeds.

Subsequently, Buyer's Assignee sued Seller for declaratory judgment in the Illinois state courts to determine the parties' relative rights and obligations. Seller counterclaimed, seeking damages under a separate earnest money contract in the amount of USD 1,761,921.20 and added Buyer as a party. The Circuit Court of Cook County, Arnold, J., entered judgment in favor of Seller. On appeal, Appellate Court of Illinois, First District, Second Division, Cunningham J., affirmed in part but vacated the damages award and remanded for recalculation.

Buyer and Assignee argued that since the arbitrator had determined that Seller had been made whole, Seller was no longer entitled to the "additional sales price" under the earnest money contract. Furthermore, Buyer and Assignee asserted that, despite Paragraph 5 of the development agreement, Seller "was estopped from seeking an 'additional sales price' because, in drawing upon the letter of credit, [Seller] effectively 'released' any further claims or causes of action against them."

The appellate court ruled that the doctrine of collateral estoppel did not apply because the arbitrator had only resolved issues pertaining to the development agreement and not the earnest money contract under which Seller claimed the additional sales price. Furthermore, the appellate court determined that the language of the agreements showed that the parties intended the various agreements to be independent of one another, with each constructed for its own purpose. As such, the appellate court ruled that Seller was not prevented from making an additional claim for the additional sales price based on the terms of the earnest money contract.

[JEB/agj/jdc]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

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.