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In a 1986 treaty, the United States and Iceland sought to ensure that military shipping between the two countries would be represented by shipping companies from both countries. In order to ensure competition, the countries concluded that the lowest bidder from each country would be awarded the contract with the U.S. military and that at least 35% of the shipment would go to the lowest U.S. bidder.

In one such shipment contract, the U.S. Army awarded 65% of the contract to TLI, an Icelandic company and 35% of the contract to TLL, an American company. Both companies were owned by the same people, and used the same credit line of US$ 1,000,000. Prior to awarding TLI's portion of the contract, the U.S. Army relied on a "tentative" letter of credit to TLL in determining both TLL and TLI's financial responsibility.

Iceland Steamship Co. brought this action against the U.S. Army claiming that the companies were under common direction, which prevented them from bidding on the entirety of the contract and thwarted the desired competition. Iceland Steamship Co. noted that the U.S. Army had improperly relied on the "tentative" letter of credit as evidence of the Army's failure to comply with the terms of the treaty.

The district court granted summary judgment in favor of Iceland Steamship Co. stating that the U.S. Army's officer's determination of TLI's financial responsibility, which was based on TLL's letter of credit, was "arbitrary and capricious." Subsequently, TLI and TLL, who had intervened on behalf of the U.S. Army, appealed. The appellate court reversed, stating that TLI and TLL had not prevented competition for the contracts, and that it was the Army officer's discretion to determine TLI's financial responsibility by means of a "tentative" letter of credit.

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