Article

Note: To secure its performance of servicing wastewater treatments facilities in Atlanta, Georgia, Veolia Water North America Operating Services, LLC (Contractor/Applicant) obtained a USD 9,525,304 letter of credit in favor of City of Atlanta (City/Beneficiary). Under the service agreement, City/Beneficiary was permitted to fully drawn on the LC provided it gave Contractor/Applicant notice of termination due to default.

Following the failure of digester tanks due to insufficient maintenance, City/Beneficiary leased substitute processing equipment from a third party to continue water treatment operations. City/Beneficiary also sent Contractor/Applicant a notice of termination and fully drew on the LC, which was honored. Contractor/Applicant sued City/Beneficiary for various unpaid invoices and costs, and City/Beneficiary counterclaimed for breach of contract.

Following a bench trial, the Judge found both parties in breach: City/Beneficiary owed Contractor/Applicant for unpaid work and was required to return the LC proceeds, and Contractor/Applicant was liable for expenses stemming from the failed digester tanks. Upon motion, the Judge applied prejudgment interest to each award; after offsetting each award the Judge granted damages in favor of Contractor/Applicant for USD 10,001,991.58. The Judge concluded that Contractor/Applicant’s “prejudgment interest award included interest on the full amount of the letter of credit.” When both parties appealed the calculation of damages, the appellate court reversed, finding that the trial court “failed to properly consider ‘expenses that were avoided [by City/Beneficiary] but otherwise would have been incurred in the absence of breach.’” The appellate court also reversed the trial court’s award of prejudgment interest on the standby proceeds because “[City/Beneficiary] could not have wrongfully drawn on the entire letter of credit intended to secure [Contractor/Applicant]’s payment for anticipated damages given that [City/Beneficiary] successfully proved breach and damages” exceeding the LC value.

After further discovery, the trial court recalculated damages finding that City/Beneficiary had saved approximately USD 3,344 per month over a twenty-five-month period as a result of Contractor/Applicant’s breach and entered an amended judgment in favor of Contractor/Applicant for USD 5,688,191.10. Contractor/Applicant appealed. The United States Circuit Court for the Eleventh Circuit, Tjofalt, Martin, and Anderson, JJ., affirmed in part and reversed in part.

The appellate court approved of the trial court’s calculation of City/Beneficiary’s avoided costs stating that “the method it actually employed was in keeping with the instructions given for remand”, i.e. to place each party “in the position he would have been in had the contract been performed”. The appellate court rejected Contractor/Applicant’s challenge to the recalculation because the evidence offered reflected the avoided costs to “a reasonable degree of certainty.” The appellate court, however, reversed the trial court’s reassessment of prejudgment interest stating “[Contractor/Applicant] was not awarded any compensation for those additional five years of delay” as a result of the appeals process. The appellate court also concluded that City/Beneficiary “should not be awarded any prejudgment interest on damages that were covered by the letter of credit, but instead should receive prejudgment interest only for the portion of its damages in excess of the letter of credit.”

[WMIV/MJK]

COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE

The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.