Article

Note: Great Lakes Gas Transmission Limited Partnership (Beneficiary), a natural gas provider, contracted with Minnesota Steel Industries (Applicant), a steel manufacturer, which was later acquired by Essar Steel Minnesota, LLC, to provide natural gas for the production of steel in its yet to be completed Nashwauk facility.

To secure payment, Applicant obtained a standby LC from American Bank of the North (Issuer) for USD 580,000 in favor of Beneficiary. The contract provided that any disputes arising under the agreement would be resolved by Michigan law.

Applicant alleged that the economic downturn of 2008 caused steel prices to plummet, making it impossible for it to acquire financing for the construction of the Nashwauk facility. Without the facility, Applicant had no need for the natural gas delivery and did not pay for the services. When Beneficiary failed to receive payment, it drew upon the LC. Applicant claimed the "credit freeze, the world-wide economic problems, and the depression of steel prices" that prevented its ability to secure financing was out of its control and invoked the force majeure clause of the contract, which would nullify the contract due to the impossibility and impracticability of performance.

Beneficiary sued Applicant for breach of contract. Applicant filed a counterclaim against Beneficiary seeking declaratory judgment that its performance was excused due to inability to secure financing and impossibility/impracticability under the force majeure clause. Additionally, Applicant asserted a claim for conversion, alleging that Beneficiary "had no basis for drawing upon the Letter of Credit, as [Applicant]'s non-performance under the Contract was excused by the force majeure clause." Applicant's conversion claim was alternatively based on the ground that Beneficiary had no authority to draw on the standby until the resolution of a Federal Energy Regulatory Commission (FERC) investigation of Beneficiary. Beneficiary filed a motion to dismiss based on failure to state a claim, which was granted by the United States District Court for the District of Minnesota, Nelson, J. Applicant's counterclaims were likewise dismissed.

The Judge ruled that Applicant failed to make a claim under the force majeure clause as the events of 2008 made it difficult, but not impossible to obtain credit. The court added, "[A] force majeure clause may not be invoked to excuse performance where the delaying condition was caused by the party invoking it or could have been prevented by the exercise of prudence, diligence, and care." It was completely foreseeable that the Applicant might not be able to secure the necessary financing for the Nashwauk facility.

The Judge ruled that the terms of the LC and contract clearly allowed Beneficiary to draw upon the standby for Applicant's payment failure and that the "parties' obligations [were] not conditioned on [Applicant]'s ability to obtain financing, the status of the Nashwauk facility, or the status of the construction of any lateral pipelines necessary to transport natural gas to that facility." Additionally, the court ruled that Beneficiary's right to draw on the LC was independent of the FERC investigation, which would neither invalidate the contract nor sustain a claim for conversion.

[JEB/cmh]

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