Article

Breach of Contract; Duty of Good Faith and Fair Dealing; Contract to Provide LCs

Subsequent History: Ssangyong (USA) Inc. v. Innovation Group, Inc., 2000 U.S. Dist. LEXIS16144 (S.D. Iowa) (granting Ssangyong's motions for a stay of execution and an extension of time to file an appeal, and IGL's motion to require Ssangyong to post a supersedeas bond).

Note: Ssangyong and IGL entered into an agreement making IGL the exclusive sales agent for Ssangyong of cookware. As part of this agreement, Ssangyong agreed to authorize its banks to open LCs to facilitate IGL's importation of cookware from Korea for each of IGL's sales contracts. IGL's U.S. customers were directed to send payments for the merchandise directly to Ssangyong. However, most of them sent their payments to IGL, who initially forwarded the checks to Ssangyong. Although Ssangyong retained the right to refuse the issuance of LCs on contracts where the customer was uncreditworthy, it exposed itself to the risks that "(1) IGL did not guarantee customer repayment; (2) there were no credit limits on the amount of Ssangyong's obligation to finance; and (3) Ssangyong didthird of IGL's profits. This agreement was exclusive in that Ssangyong could not enter into the cookware business with any other agent, and IGL could not obtain financing from any other source. not have a security interest in the goods sold to customers." In exchange for that risk, Ssangyong was entitled to one

When a more conservative vice president took charge of Ssangyong's U.S. operations, he attempted to change the terms of the contract to reduce the amount of risk to which his company was exposed. In addition, Ssangyong began to slow down the average processing time of the LC's from about 6 days to about 27 days. Ssangyong knew that IGL would not be able to secure alternative means of financing in time for the holiday season. Ssangyong also knew that IGL's suppliers and customers were equally dependant on the financing. As a result of the delayed financing, IGL was unable to fulfill its sales obligations in a timely manner, and, accordingly, lost profits. Additionally, IGL's customers lost profits and some even went out of business as a direct result of the delays in financing.

To meet its customers' demands, IGL began withholding payments due Ssangyong, and using the funds to finance new orders instead of waiting for the issuance of the LCs. Additionally, IGL transferred some of those funds to its sister companies for similar use. When Ssangyong became aware of this practice, it sued IGL for conversion and fraudulent conveyance. IGL counterclaimed against Ssangyong for breach of contract and of its duty of good faith and fair dealing.

The U.S. District Court for the Southern District of Iowa, Longstaff, J., found that Ssangyong purposefully delayed the issuance of the LCs in an effort to persuade IGL to nullify the current agreement and sign the new agreement proposed by Ssangyong. In so doing, Ssangyong breached its implied covenant of good faith dealing. The court awarded damages to IGL in the amount of US$ 23.2 million based on lost profits, diminution in value and uncollectible receivables. The court also awarded IGL nominal damages of $1000 for its slander per se suit against Ssangyong, which is not discussed in this note.

Although the agreement between Ssangyong and IGL did not specify a particular time period for processing the LCs, the court gave weight to expert testimony that in the commercial world there is a general standard that LCs will be processed within an outside limit of 10 days, and that any delay exceeding 10 days is commercially unreasonable.

IGL's award was partially offset by a judgment for $15,722,758 against IGL in favor of Ssangyong for its claims of conversion and fraudulent conveyance. The court concluded that, despite Ssangyong's wrongful conduct, IGL was not entitled to withhold the receivables that belonged to Ssangyong, and furthermore would not be entitled to retain any of the profits made from the wrongful use of that money, or retain any commission on the transactions made with that money.

A total judgment was entered in favor of IGL in the amount of $7,478,242.00, plus interest.

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