Article

Factual Summary:Applicant contracted to purchase 2,000,000 long distance "minutes" per cycle from Beneficiary, a licensed long distance carrier, that would terminate on either land lines or cellular lines. As a carrier itself, Applicant claimed that it informed Agent of its intention to sell the minutes to third party consumers. Applicant contended that it was contacted by a person representing himself as an agent of an intermediary company that itself was an agent of Beneficiary who was selling the "minutes".

Beneficiary, on the other hand, contended that it had been contacted by the same Agent, that it had been offered a contract with Applicant, that the Agent was sent to the intermediary company, and that it was unaware that Applicant was a licensed carrier or that minutes would be sold to consumers or terminate on cellular lines.

To assure payment, applicant posted a standby for US$ 180,000 covering 2 million minutes. The Agent had indicated that payment could be weekly and the applicant assumed that the cycles were weekly although the contract provided that the cycles were monthly. The contract form, part of which was allegedly filled out by the Agent, misstated the circumstances of Applicant and indicated use of 2 million minutes per month whereas intended usage was 2 million minutes per week. Other documents that incorporated in the contract include warranties that Applicant was not a licensed carrier. The rate form purportedly received by Applicant omitted Beneficiary's terms regarding its limitation only to calls ending on landlines.

Within forty-eight hours of commencing long distance service, Beneficiary realized that Applicant's actual usage far exceeded its estimated usage, and that most of the minutes were used for international calls terminating on cellular phones which would result in significantly higher costs. As a result, Beneficiary terminated service and presented Applicant with an invoice for $513,795.44. Applicant refused to pay that amount, and, based on its own calculations, tendered Beneficiary $22,449, which was refused.

Contending that if the LC were drawn, its investors would desert, Applicant then filed suit for breach of contract, and sought to enjoin Beneficiary from drawing on the LC. Held: Preliminary Injunction denied.

Legal Analysis:

1. Preliminary Injunction: In considering the facts, the court observed that "this case presents one of the most baffling - and admittedly, intriguing - fact scenarios this Court has encountered in quite some time. The parties dispute nearly every fact underlying the lawsuit, and the record makes it clear that someone, either one of the parties or some third party, has perpetrated fraud." The court noted that a preliminary injunction requires a showing of (a) likelihood of success on the merits; (b) irreparable harm; (c) that the balance of harm favors the Applicant; and (d) that the public interest favors the Applicant. 81 2002 LC CASE SUMMARIES

2. Likelihood of Success: Noting that "courts have defined very limited circumstances under which they will enjoin the honoring of a [LC]," the court stated that there must be "fraud in the transaction" to sustain an injunction. It indicated that such fraud takes place when a beneficiary "has no plausible or colorable basis under the contract to call for payment of the LC, its effort to obtain the money is fraudulent." Applicant did assert that Beneficiary had "'no plausible or colorable basis under the contract' to call for payment of over half a million dollars and to draw on the $180,000 LC, because the real amount owed pursuant to the contract terms is under $25,000." The court, however, did not find adequate evidence of fraud in the transaction to justify enjoining the LC. It noted that "[t]here is no question that [Beneficiary] did, in fact, provide long distance services to [Applicant], and the only question is what the contract price for those services should be. Moreover, [Beneficiary] has made a colorable claim that it has demanded the appropriate sum under the contract." The court concluded that Beneficiary's "claim is not so groundless as to constitute fraud in the transaction."

3. Irreparable Harm: The court stated Applicant's claim that it would be forced out of business since Applicant's investors would terminate their investment were the LC drawn was "purely speculative." Additionally, the court found Applicant's claims that it would be forced out of business because of called loans to be unsupported and unsubstantiated.

4. Balance of Harms: Applicant claimed that Beneficiary would suffer no harm if an injunction were granted. The court, however, disagreed, stating that "[j]ust as [Applicant] asserts that it will be harmed if it is forced to relinquish $180,000 that it does now owe, so [Beneficiary] will be harmed if deprived of $180,000 that it is owed." Noting that "the very purpose of an [LC] is, in part, to shift the risk of harm in the event of a dispute to the applicant rather than the beneficiary," the court stated that the balance of harms to each company "would be a 'wash,' but for the parties' agreement to utilize a [LC] which purposefully places the risk of harm on [Applicant] rather than [Beneficiary]."

5. Public Policy: Beneficiary argued that public policy generally favors honoring LCs. The court agreed, claiming public policy "should weigh strongly in favor of honoring [LCs] so that they continue to sere as solid collateral for small or new businesses. . . . Enjoining payment on any one LC lessens the value of them all, making them less attractive, reliable collateral."

Comment:

1. This decision properly denies injunctive relief. While there may have been fraud, it was not LC fraud justifying interruption of the obligation to honor. Curiously, however, the court makes no reference to UCC Article 5, although its analysis tracks the statute.

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