Topics: Attorneys' Fees

Note: Midcontinent Express Pipeline, LLC (Applicant) was formed to construct a natural gas pipeline and contracted with Man Industries (India), Ltd. (Beneficiary) to supply pipe for the construction. The contract was arranged by Prime Pipe International, Inc. (Broker), which acted as Beneficiary's agent in the U.S. Pursuant to the contract, Beneficiary was required to supply pipe at certain installments, "time being of the essence." Beneficiary, however, fell behind the contracted schedule almost immediately. Furthermore, Beneficiary informed Applicant that it would run out of steel prior to completion of the contracted amount of pipe, thus having to order more steel at a higher rate. The order of steel caused the contract amount to be increased by $16 million.

Subsequently, Beneficiary informed Applicant that it would not be able to supply all the pipe contracted for. The order was reduced by ten percent, and Applicant obtained the deficit in the pipe market. Ultimately, Beneficiary delivered less pipe than required under the contract.

In connection with the contract, the Bank of Tokyo-Mitsubishi UFJ, Ltd. (Issuer) issued a standby letter of credit in the amount of $33,298,751.48, which Beneficiary could draw upon in the event that Applicant failed to pay an invoice within the timeframe provided in the contract. The letter of credit was subject to New York law and required that presentation be made at the Issuer's New York office. The expiry date of the LC was September 30, 2008.

On September 23, 2008, when Applicant's total outstanding obligations to Beneficiary were approximately US$19 million, Beneficiary attempted to draw the entire amount of the letter of credit, but because the presentation was not made at the Issuer's New York office, the Issuer dishonored. A few days later, the Beneficiary at Issuer's New York office, but because it failed to include a signed beneficiary statement, the presentation was again dishonored.

Applicant sued Beneficiary in the state court of Texas for breach of contract and fraud, and obtained a temporary restraining order (TRO) enjoining Beneficiary from presenting the LC to Issuer. The order further stated that Issuer was permitted to rely on the TRO in refusing to pay Seller/Beneficiary. The next day, Seller/Beneficiary and representatives of the nominated bank delivered the documents by hand to Bank and its original documents to Issuer. Issuer refused Seller/Beneficiary's LC, claiming that the signature was defective. Bank presented its copy of the TRO to Seller/Beneficiary. Subsequently, the standby expired without being honored.

The issue of this appeal was whether the trial court properly awarded attorneys' fees to the Applicant. Under Texas law, the trial court is permitted to award reasonable and necessary attorneys' fees. Beneficiary argued, however, that (i) attorneys' fees is a substantive issue subject to the choice of law provision of the LC; (ii) New York law was applicable in this case; and (iii) New York law did not permit an award of attorneys' fees in the dispute at question. Beneficiary concluded that Texas law was improperly applied and that attorneys' fees should not have been awarded under applicable New York law.

The Court, however, rejected Beneficiary's argument and noted that the application of the Texas Uniform Declaratory Judgment Act is procedural in nature and that its application is appropriate even when the substantive law of another jurisdiction is being applied for substantive issues. The Court concluded that because Texas law permitted the trial court to award reasonable and necessary attorneys' fees, the trial court in this instance did not ere in so doing.



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.