Note: Travelers Casualty & Surety Company of America (Surety) and Winmark Homes, Inc. (Developer) executed an indemnity agreement under which Surety was to issue surety bonds on behalf of Developer and Developer was to indemnify Surety for any loss incurred as a result of issuing the bonds.

The indemnity agreement stated:

"(a) Indemnitors shall, within thirty (30) days of receipt of Company's [Surety] written demand ("Discharge Demand"), procure the full and complete discharge of the Company from any and all Bond(s) . . . If Indemnitors fail to provide the aforementioned discharge Indemnitors shall, within an additional seven (7) days, provide Company with an irrevocable letter of credit in form, content and by a bank acceptable to Company. The letter of credit shall be in an amount equal to the total of all undischarged liability under said Bond(s), which liability shall be determined at the time of the Company's Discharge Demand." (emphasis added)

The indemnity agreement also contained a waiver provision which stated:

"(b) Indemnitors waive, to the fullest extent permitted by law, each and every right that they may have to contest this requirement. Indemnitors stipulate and agree that Company will not have an adequate remedy at law should Indemnitors fail to post said letter of credit and further agree as a result that Company is entitled to specific performance of this provision." (emphasis added)

Subsequently, the residential subdivisions were abandoned, and Developer failed to complete its obligations under the bonds. Surety demanded that Developer provide either a full discharge of Surety from all outstanding bonds or obtain a standby letter of credit for the undischarged liability under the outstanding bonds.

When Developer failed to accede to Surety's demands, Surety sued Developer to recover under the indemnity agreement. Developer counterclaimed, alleging breach of contract, breach of the covenant of good faith and fair dealing, and breach of fiduciary duty. The United States District Court for the Northern District of Georgia granted Surety's motion for summary judgment for specific performance and indemnification, requiring Developer to provide an irrevocable letter of credit. On appeal, the U.S. Court of Appeals for the 11th Circuit affirmed. The appellate opinion reasoned that the waiver provision in light of the plain language of the indemnity agreement was not unconscionable.



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.