Article

Contract to Provide LC; "Reasonably Acceptable" Applicant v. Beneficiary

Note: To finance its acquisition of Birting Fisheries, Inc., Norway Seafoods, a Norwegian corporation, agreed to make installment payments to the former owners. To assure these payments, the company agreed to provide "an irrevocable letter of credit in form and amount reasonably acceptable" to the former shareholders in the event that the financial condition of the company fell below agreed points. Should the company fail to provide such a letter of credit on demand, the entire amount would become due and owing.

When the company fell below the agreed amount, its bank provided a standby subject to a 90- day renewal if the company were not in compliance by the next reporting quarter. The former stockholders rejected these LCs and sued for the entire amount. Denying their motion for summary judgment, the trial court on its own motion granted summary judgment for the corporation.

On appeal, the court of Appeals of the State of Washington, Agid, J., reversed and remanded for entry of summary judgment in favor of the shareholders. The court noted that a "temporary" LC could properly be rejected as unreasonable under the circumstances. "If the parties had intended that the letter could be withdrawn as soon as Norway Seafoods regained compliance with the financial requirements, it is unlikely that they would have agreed on the word 'irrevocable'".

Oddly, the appellate court placed more emphasis on the term "irrevocable" than on the notion that the LC must be "reasonably acceptable" to the buyers. The proffered credit was irrevocable but only lasted for the period of the default. While such a credit may have been reasonable from the perspective of the buyer, it may not have been reasonable from the perspective of the shareholders who could have (and did) reasonably insist on having a standby in place for the duration of the agreement.

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