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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1997 LC CASE SUMMARIES No. 96-6804, 1997 U.S. Dist. LEXIS 8217 (E.D. Pa. 5 June 1997)
Topics:
Cancellation: Agreement to Cancel Prior to Issuance of LC.
Type of Lawsuit:
Issuer sued beneficiary for a declaration that letters of credit were cancelled.
Parties:
Plaintiff/Issuer- The Chase Manhattan Bank (as successor in interest to Chemical Bank)
Defendant/Beneficiary- Township of Bensalem
Counsel:
For Plaintiff: Louis R. Moffa, Jr. and Richard A. Barkasy, Schnader, Harrison, Segal & Lewis, Cherry Hill, NJ.
For Defendant: Mark S. Kancher, Bensalem, PA.
Underlying Transaction:
Maintenance of public improvements and construction escrow.
LC:
Standby for US$ 100,000 and five performance LCs totaling US$ 1,690,480.39. Silent as to the UCP.
Decision:
The U.S. District Court for the Eastern District of Pennsylvania, VanArtsdalen, S.J., issued a declaratory judgment to the effect that the five performance LCs had been canceled and were null and void.
Rationale:
Based on a letter which contained the terms of the agreement between the parties, the court determined that their clear intent was to cancel the five performance letters of credit upon the issuance of the new credit.
Article
Factual Summary:
In December 1993, the issuer agreed with the beneficiary township to issue a $100,000 letter of credit to cover maintenance costs of public improvements in a private subdivision being built in the beneficiary township. As part of the agreement, the beneficiary agreed to the cancellation of five performance letters of credit in its favor that totalled $1,690,480.39 and served as an escrow construction fund for the same subdivision.
The parties memorialized the agreement in a letter to the private developer. The relevant portions of the letter stated:
The Township has agreed to accept financial security in the nature of a letter of credit . . . to be effective for a period of 18 months from the date of execution of the Resolution formalizing acceptance of the dedication. We have agreed that this $ 100,000.00 security maintenance may occur by cancellation of all outstanding letters of credit relative to the construction escrow. . .
The letter of credit for maintenance shall be separate and in addition to the letter of credit in the amount of $10,000.00 which shall be supplied by your client as security for completion of certain remaining public improvements. . .
Ten months later, on 21 October 1994, the issuer issued the maintenance letter of credit. In December 1994, the beneficiary township accepted the dedication of the public improvements. The private developer, however, never issued its separate letter of credit as called for in the letter.
Subsequently, the issuer asked the beneficiary to return the five performance letters of credit for cancellation and informed the beneficiary that those credits would be "frozen." Later that year, the beneficiary presented documents on the maintenance letter of credit. Subsequently, the beneficiary made a presentation for $50,000 under one of the performance credits. The issuer dishonored the presentation and filed this suit for a declaration that the five performance credits were cancelled.
Legal Analysis:
1. Cancellation Consistent with Prior Agreement: The beneficiary township first argued that the agreement between it and the issuer was null and void because the issuer had waited an unreasonable time (ten months) to issue the letter of credit. The court rejected this argument by looking at the terms of the letter. The credit, according to those terms, was to cover the 18 month period following the dedication of the improvements. Because the credit was issued prior to the dedication, its timing was not unreasonable and, in fact, was perfectly consistent with the nature of the business being conducted. Moreover, the court noted that the beneficiary had never complained about the timeliness issue until the suit was filed and had, indeed, drawn on the maintenance letter of credit for its full amount, accepting the benefit of its bargain with the issuer.
2. Cancellation Agreement: Condition Precedent: The beneficiary next argued that the private developer's issuance of its separate letter of credit was a condition precedent to the cancellation of the five performance credits. Turning to the language of the letter, the court noted that the paragraph describing the issuance and cancellation of the letters of credit never indicated that the developer's issuance of its letter of credit was a condition precedent. Moreover, the paragraph which discussed the developer's obligations referred to this letter of credit as "separate" from the other obligations. Because the agreement of the parties had been reduced to writing, the court, relying on Pennsylvania law, declined to consider any testimony from the beneficiary concerning the intent of the parties. Accordingly the court ruled that the five performance letters of credit were cancelled and null and void and the issuer had no obligation to honor the $50,000 drawing. Because the contract terms did not call for the return of those credits to the issuer however, the court declined to order that they be returned.
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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.