Note: Dimare Fresh, Inc. (Buyer) contracted with Sun Pacific Marketing Cooperative, Inc. (Supplier) to supply tomatoes for three months at a set price subject to a force majeure clause excusing performance in the event of an Act of God. A heat wave impacted the crops and Supplier invoked the force majeure clause of the contract to excuse its performance, forcing Buyer to cover by purchasing tomatoes from other companies on the open market.

Buyer filed a formal reparation complaint with the United States Department of Agriculture and was awarded USD 1,136,599 plus interest, fees, and costs by an Administrative Law Judge. Supplier appealed the decision to the federal district court which reviewed the matter de novo, taking the prior findings of fact as prima facie evidence that reparation was warranted. Supplier posted an appeal bond in the form of a surety agreement, backed by an irrevocable standby LC issued by Wells Fargo. The U.S. District Court for the Eastern District of California, Ishii, J., awarded Buyer USD 1,132,562 plus interest, fees, and costs. Supplier appealed to the U.S. Court of Appeals for the Ninth Circuit, and petitioned the District Court seeking to change the form of the appeal bond to a standby LC in favor of Buyer for the full amount, in order to save USD 17,750 a year in fees to surety. The District Court Judge granted Supplier's motion to modify appeal bond.

The Judge found that the appeal bond requirement of the Perishable Agricultural Commodities Act state that one acceptable form of the bond is a negotiable security. The Judge ruled that "courts seem to consider letters of credit and negotiable securities to constitute separate categories of assets" and that the LC did not fit the definition of "negotiable" because Supplier had not demonstrated that the LC may be transferred. Despite his finding, the Judge stated "the court will exercise the discretion to allow a letter of credit to be substituted for the existing surety bond."



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.