Article

Factual Summary: Contractor was required to obtain standbys to ensure it would construct roads and drainage systems in a residential development in a timely manner for USD 1,701,428 and USD 514,805 in favor of Local Government. Surety personally guaranteed reimbursement of Contractor/Applicant's obligations to Issuer.

As summarized in the opinion, the applications provided that Applicant would "pay to [Issuer] a sum equal to the amount which has been withdrawn under the Letters of Credit plus any and all charges and expenses which [Issuer] incurred relative to the credit, including reasonable attorneys' fees and court costs. [Contractor/Applicant] also agreed to pay interest on any and all amounts remaining unpaid at [Issuer]'s National Commercial Rate plus one percent (1.0%). [Contractor/Applicant] further agreed that [Issuer] would not have any liability or responsibility other than to pay the sight drafts when presented to [Issuer] by the [Local Government] under the credit, without any duty or right of [Issuer] to inquire as to the right of the [Local Government] to such funds".

The standby provided "[p]erformance must be completed by the [Applicant] by the Expiration Date of this Letter of Credit. If satisfactory performance has not occurred by the Expiration of this Letter of Credit, [Local Government] shall be entitled to draw funds from this Letter of Credit, as reasonable as necessary to complete construction or to procure others to perform the work in accordance with the approved construction plans on file with the [Local Government]".

When Contractor/Applicant did not complete the development project, Local Government drew on the standby, submitting the following statement as required by the standby: "[Contractor/Applicant] has failed to complete the construction of roads and stormwater management at The Reserves Resort Spa & Country Club. Demand is hereby made in the amount of the enclosed draft", and Issuer honored. When Contractor/Applicant and Surety failed to reimburse it, Issuer sued Applicant and Surety and, subsequently, assigned its interests to Assignee.

Successively, Contractor/Applicant and Surety sued Local Government/Beneficiary and, as a result, agreed to a process by which they would "hire contractors to construct the roads and stormwater drainage and the [Local Government] will pay the contractors' bills. Any money left over would be returned to the attorneys for [Contractor/Applicant] and [Surety]". Assignee then moved for Summary Judgment in its action against Applicant and Surety which was granted.


Legal Analysis:

1. Independence, standing: Applicant and Surety argued that Issuer should have only paid Local Government/Beneficiary "the amount of money that was 'as reasonable as necessary' to complete the construction of the roads and stormwater drainage" based on terms taken from the two LCs. The Judge rejected Applicant and Surety's argument.

Noting the independent character of a letter of credit under U.S. Rev. UCC Section 5-108(f) (Issuer's Rights and Obligations) and LC case law, the Judge observed that these arguments were irrelevant. The Judge stated that because Applicant and Surety were not parties to the LCs, they lacked standing to raise defenses regarding Issuer's payments under the terms of the standby. Moreover, the Judge stated that Local Government/Beneficiary was the only party under the LCs charged with determining how much money was reasonably necessary to complete the projects.

2. Reimbursement Agreement: The Judge also noted that Applicant and Surety waived all defenses to Issuer's actions on the standby by virtue of the terms of the reimbursement and suretyship agreements. The suretyship agreement stated "[t]he [Surety] further waives and agrees not to asset or claim at any time any deductions to the amount guaranteed under the Guaranty for any claim of setoff, counterclaim, counter demand, recoupment or similar right, whether such claim, demand or right be asserted by the [Applicant], the [Surety], or both".

[JEB/cmh]

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