Article

Prior History: Cruise Connections Charter Mgmt. 1, LP v. Attorney Gen. of Can., 634 F. Supp. 2d 86 (D.D.C. 2009) [USA], noted in 2010 ANNUAL REVIEW OF INTERNATIONAL BANKING LAW & PRACTICE at 476.

Note: The Royal Canadian Mounted Police (Beneficiary/Canadian Government Entities) decided to use cruise ships as floating hotels to house security forces before, during, and after the 2010 Vancouver Winter Olympics. Bids to implement the plan were solicited and accepted two years before the games commenced. Cruise Connections Charter Management 1, LP (Applicant/Broker) was formed as a ship charter brokerage company to bid on a contract.

A bid bond standby LC for 10% of the bid total - amounting to USD 5,057,000 in this case - was required from Applicant/Broker as part of bid submission. In a last minute rush to obtain the needed LC, Applicant/Broker approached businessman and private investor, John Sessions (Issuer), in North Carolina for help with funding. Issuer agreed to provide the LC, extracting a promise for a dollar for dollar payment.

As set forth in the Opinion, the undertaking stated

Dated May 22, 2008, the Sessions Letter of Credit was titled "Irrevocable Standby Letter of Credit" It listed the Southern Community Bank and Trust "We" Credit Administration Department, Winston Salem, NC as the "advising" bank; Canada as the Beneficiary; [Broker] as the "Applicant;" and Carolina Shores Leasing, LLC, as the "co-applicant." The face amount of the Sessions Letter of Credit was $5,057,500.00 and its "Expiry date" was July 1, 2008. It further stated:

We hereby issue our Standby Letter of Credit in favor of the Crown in the amount of Five million fifty-seven thousand five hundred dollars and zero center ($5,057,500.00), subject to the following terms: This Letter of Credit may not be drawn upon under any circumstances, and is provided only to show that applicant has the ability to provide a Letter of Credit. Notwithstanding the foregoing, for greater clarity, this Letter of Credit shall not be drawn upon even if the applicant is the successful bidder ... .

Despite the bizarre language used to limit the function of the LC, Beneficiary/Canadian Government Entities accepted it as part of the bid and awarded the contract to Applicant/Broker. After the award, negotiations ensued for two months prior to subsequent signing of Articles of Agreement. Insurmountable problems in the finalization process were the method by which Applicant/Broker would secure the cruise ships for the games through advance payment, what Beneficiary/Canadian Government Entities would require as proof of committed funds guaranteeing that the ships would be available, which taxes the Canadian Government would assess, and which entities would be responsible for paying them.

Well before the Vancouver Games, the relationship broke down and Beneficiary/Canadian Government Entities canceled the agreement. Each party blamed the other for the collapse, and Applicant/Broker sued Beneficiary/Canadian Government Entities for breach of contract alleging that they made performance impossible by refusing to honor their contractual commitments.

Beneficiary/Canadian Government Entities argued that they did not breach because at the time of termination, it was impossible for Applicant/Broker to finance the agreements and fulfill its obligations. They contended that if Applicant/Broker had paid Issuer USD 5,075,000 pursuant to the terms of the Sessions Letter of Intent, or if Applicant/Broker had been forthcoming about their obligation to the Royal Bank of Canada - from whom Applicant/Broker attempted to obtain funding later in the negotiation process - their funding scheme would have collapsed. In response, Applicant/Broker contended that:

[Issuer's] Letter of Intent is of no significance for four reasons: (1) it was not enforceable; (2) if enforceable, it did not violate [Applicant/ Broker's] covenants to the Bank; (3) [Applicant/ Broker] could have paid [Issuer] if not for [Canadian Government Entities'] delay; and, as an investor, (4) [Issuer's] fiduciary duties would have prevented him from causing a breach of the financing agreement between [Applicant/Broker] and the Royal Bank of Canada.

Applying British Columbia law, which both parties agreed was controlling, the United States District Court for the District of Columbia, Collyer, J., granted Summary Judgment to Applicant/ Broker. The Judge determined that Beneficiary/ Canadian Government Entities' actions constituted a fundamental breach by materially altering the original agreement and frustrating the commercial purpose of the contract.

As to the "Letter of Credit", the opinion stated that a witness, Mr. Siemens of the Royal Bank of Canada "testified at deposition that he had not seen it before and did not believe [Applicant/Broker] had provided it to the Bank when applying for financing ... . He testified that he did not know that the Sessions Letter of Credit had expired in July, that it could not be drawn upon, or that [Applicant/Broker] was '$5 million in debt as a result of obtaining th[e] letter of credit.' ... Had the Bank known about the Sessions Letter of Credit, it would have affected the 'risk analysis ... unfavorably.' ... Mr. Siemens also testified that the clause in the Sessions Letter of Credit to the effect that it could not be drawn upon meant that it was 'not a definitive debt obligation and could never be.'"

[MSD]

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