Article

Factual Summary:

In order to provide a bid guaranty on a fiber optics network project, the applicant had a standby letter of credit for $85,000 issued. The standby was payable upon the submission of a statement certifying that "Global Network Technolo-gies, Inc. has failed to comply with the terms and conditions of the Invitation to bid." The Invitation to Bid only referred to one contingency: that the applicant enter into a final contract with the beneficiary no later than 30 days after the award. But the Bid Form required the successful bidder to furnish required performance bonds no later than 10 days after the award and to enter into the contract within 30 days of the award. Failure to meet these conditions, the Bid Form stated, would result in the forfeiture of the letter of credit. On 6 June 1995, the applicant was awarded the contract but failed to obtain the requisite bonding, thus leading the beneficiary to draw on the standby on 29 June (23 days after the award).

After reimbursing the issuer, the applicant brought suit, alleging that the beneficiary had submitted a false signed statement in its presentation under the credit. While the applicant admitted it had failed to comply with the bonding provision, it argued that the statement that it had not complied with the terms of the Invitation to Bid was knowingly false because the Invitation to Bid only called for forfeiture of the letter of credit if the bidder had not executed the contract within 30 days and the beneficiary had drawn after only 26. The trial court determined that the statement was inaccurate, but dismissed the applicant's claims. On appeal, affirmed for other reasons.


Legal Analysis:

1. Beneficiary Warranty: The court called the applicant's interpretation of the letter of credit "far too cramped." While the court recognized that the beneficiary should have been clearer in its drafting of the Invitation to Bid and Bid Form, it stated that at most there was a latent ambiguity which arises, "where a writing appears clear and unambiguous, but some collateral matter makes the meaning uncertain." In the face of this latent ambiguity the court considered parol evidence such as the other agreements, the parties actions, and circumstances surrounding the contract. The applicant argued that the court, in this instance, was bound by the independence principle and could not look to the parol evidence. Because the dispute concerned the underlying contract and not the letter of credit, the court examined all of the parol evidence and determined that the clear intent of the parties was for the letter of credit to cover both contingencies. As such, the beneficiary's statement was not false and the beneficiary was entitled to keep the funds.

Comment:

While not noting the notion of a warranty by the beneficiary, this case falls within that realm. As the court properly concludes, the only issue is whether there is a breach of the underlying contract, not some etherial action predicated on the LC.

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