Article

Factual Summary: To finance the purchase of solar power, applicant caused a standby letter of credit to be issued. When the beneficiary drew upon the credit, the issuer dishonored the presentation, claiming the credit had expired and, alternatively, seeking to reduce its liability by the amount of damages actually mitigated by the beneficiary. Beneficiary then brought an action for wrongful dishonor, breach of contract, and breach of implied covenant of good faith and fair dealing. The trial court granted beneficiary's motion for summary judgment. Issuer's appeal was limited to the award of summary judgment regarding mitigation of damages. On appeal, affirmed.

Legal Analysis:

1. Damages, Mitigation, Prior UCC Section 5-115:The appellate court rejected the notion that beneficiary had a duty to mitigate damages, because mitigation is an extraneous defense which may not be raised by the issuer. The duty to mitigate relates to the underlying contract between the applicant and the beneficiary, not the relationship between the issuer and the beneficiary. The court also rejected the issuer's claim that prior UCC Section 5-115 implies a duty to mitigate, but ruled that it provides for reduction of the beneficiary's recovery in some circumstances where there is mitigation. Applying this rule to a standby, in effect, would contradict the independence principle by imposing a duty on the beneficiary to prove damages from the breach of the underlying contract, in order to recover damages under the letter of credit.

2. Damages, Mitigation, Prior UCC Section 5-115:While Prior Section 5-115 does provide for reduction of the beneficiary's recovery where there has been a "resale or other use or disposition of the subject matter of the transaction", the court noted that the section applies to commercial letters of credit where the beneficiary is a seller of goods.

3. Letters of Credit, Not a contract: Rejecting the issuer's contention that the beneficiary had a duty to mitigate damages, the court noted that the L/C was not a contract but an undertaking with a statutory basis under which the issuer is not entitled to assert extraneous defenses such as mitigation.

4. Independence&Extraneous Defenses, UCP 400 Art. 3, 4,&10: The court noted that one characteristic of independence is that "the issuer of a letter of credit is never entitled to defend against payment based on extraneous defenses which might have been available to the primary obligor."

5. L/C practice, UCP &UCC - 1-102(3): Noting that the standby was subject to UCP 400, the court concluded that subjecting a credit to the UCP constitutes variation under UCC Section 1-102(3) and that "the provisions of the UCP have the force of law with respect to a letter of credit which provides that it is subject to the UCP."

6. Damages:The court stated that a beneficiary is entitled to damages in the facial amount of the credit without an obligation to prove actual damages.

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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.