Note: The U.S. Court of Appeals for the Second Circuit, Jacobs, J., vacated a mandatory preliminary injunction that compelled a surety to fund the reinstatement of a LC and ordered the parties to arbitrate the dispute. Bechtel Power Co. agreed to construct a power-generating facility for Choctaw Generation Limited Partnership, the owner. The construction contract contained a clause providing that controversies unable to be resolved pursuant to it "shall be settled by arbitration." The contract required the contractor to obtain a standby LC for US$ 33 million in favor of the owner, which was to be reinstated within 30 days of any drawing. In part to provide for reinstatement of the LC, the contractor obtained a US$81 million bond issued by American Home Assurance Co. as surety. The bond did not contain an arbitration clause. When there was a project delay, a bona fide dispute arose between the applicant and beneficiary as to whether the delay was caused by a force majeure event. The dispute was submitted to arbitration as per the terms of the construction contract. The beneficiary drew the full amount of the LC and demanded that the surety provide funds to have the LC reinstated. The surety argued that the beneficiary's "drawing down of the letter of credit was an act in breach of the Construction Contract, that the draw down therefore can trigger no enforceable contract right to replenishment that would merely facilitate beneficiary's further breaches; and that the approximately $80 million already drawn down should be promptly refunded with interest".

When its demand was rejected, the beneficiary sued the surety to compel it to fund the LC reinstatement in accordance with the bond. The surety sought to have the dispute arbitrated by the terms of the construction contract. The U.S. District Court for the Southern District of New York, Cote, J., granted a mandatory injunction ordering the surety to reinstate the LC. The contractor, however, funded the reinstatement itself during the pendency of the appeal. On appeal, the U.S. Court of Appeals for the Second Circuit, Jacobs, J., vacated and remanded for arbitration. The appeals court noted that it has been "willing to estop a signatory from avoiding arbitration with a nonsignatory when the issues the nonsignatory is seeking to resolve in arbitration are intertwined with the agreement that the estopped party has signed.".


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.