AECOM Technical Services, Inc. v. Credit Agricole CIB [2023]

No. 653558, slip op. (N.Y. Sup. Ct. Sept. 18, 2023) [USA]

Analysis:

To support its design work for construction of a light rail project in Bogota, Colombia, AECOM Technical Services, Inc. (Subcontractor/Applicant) applied for and caused Credit Agricole CIB (Issuer)^[1] to issue standby letters of credit in favor of Itaú Corpbanca Colombia S.A. (Local Guarantor). In turn, Issuer requested Local Guarantor to issue “guarantees for the same values to the benefit of” Concesionaria Ferrea De Occidente S.A.S (Contractor/Beneficiary).^[2] As the filing papers noted, in the event of a demand by Contractor/Beneficiary, “[Local Guarantor] could make a draw on the letters of credit issued in its favor by [Issuer].” “Under the Guarantees, [Local Guarantor] had seven business days to issue payment to [Contractor/Beneficiary].” Issuer had three business days to release payment against demands by Local Guarantor. Notably, Subcontractor/Applicant was engaged by separate entity CCECC Fuzhou Survey & Design Institute Co. (Second Contractor).^[3]

The expansive USD 900 million, multi-decade project consisted of four main phases. The Consulting Agreement stipulated terms relevant to Subcontractor/Applicant such as advanced payment, liquidated damages and arbitration under ICC rules in Toronto, Canada. Notably, the Agreement provided that Subcontractor/Applicant was to obtain three guarantees: (1) Advance Payment Guarantee; (2) Performance Guarantee; and (3) Service Quality Guarantee. These instruments supported full repayment of an advance by Second Contractor to Subcontractor/Applicant, 20% of the contract amount supporting all of Subcontractor/Applicant’s obligations, and up to 5% of the contract amount for sums arising from damages or non-compliant works by Subcontractor/Applicant, respectively.

Although Second Contractor and Subcontractor/Applicant executed “several change orders” as the project progressed, Second Contractor eventually notified Subcontractor/Applicant that it would not extend the duration of the Consulting Agreement beyond its February 25, 2023 expiration. Subcontractor/Applicant later initiated settlement proceedings. Second Contractor, however, made a USD 3.6 million payment demand to Subcontractor/Applicant. A few weeks later, Subcontractor/Applicant received notice that Second Contractor “triggered a demand on a series of guarantees related to the repayment of an advance … and a claim for liquidated damages.”^[4]

Local Guarantor in turn made demands on the standbys to Issuer. A few days later, Subcontractor/Applicant sought temporary restraining orders (TRO) against Local Guarantor and Issuer. A TRO was issued with an order to show cause for a preliminary injunction returnable August 2023.^[5] With no objection, the trial court ordered Contractor/Beneficiary be served with notice, then a nonparty to the action (Second Contractor did not participate). The hearing was delayed to allow for Subcontractor/Applicant to respond to Contractor/Beneficiary’s motion in opposition. Oral arguments were heard in early September 2023. The New York Supreme Court, Masley, J., denied Subcontractor/Applicant’s motion for an injunction.

While Subcontractor/Applicant moved for an injunction under N.Y. civil procedure (i.e. showing of irreparable harm, likelihood of success on the merits and a balance of equities favoring the moving party), Issuer took no position against the claim and Local Guarantor merely argued that N.Y. courts “routinely refuse to enjoin payments” under LCs and guarantees because such undertakings are “absolute”.^[6] In rejecting this notion of an absolute obligation to pay, the Judge noted N.Y.’s observance of the LC independence principle and the requirement of strict documentary compliance (citing case law). The narrow exception to LC independence, material fraud, is found in N.Y UCC Rev. Section 5-109(a). The Judge noted the statute is so written to ensure “the smooth operation of international commerce” and to dissuade pre-honor litigation (also citing Section 5-109 Official Comments 1& 3).

As for the issue of likelihood of success on the merits, the Judge expressed that the complaint merely alleged “multiple contract disputes”; Subcontractor/Applicant’s counterparties “have a colorable basis to draw on the letters of credit.” Subcontractor/Applicant further argued that the demands should be enjoined because they were made by Contractor/Beneficiary, not its contractual counterparty, Second Contractor. The Judge disagreed; the Consulting Agreement governed the financial arrangement and was executed with Second Contractor, a Chinese company, but Contractor/Beneficiary, a Colombian company, was the named beneficiary under the guarantees.

Arguing in the alternative, Subcontractor/Applicant claimed Second Contractor prevented its performance under the Consulting Agreement. Allegedly, Second Contractor caused the contractual breach (and thus improperly claimed liquidated damages) which led to the demands for payment.^[7] Again, the Judge expressed this was entirely a contractual argument properly suited for arbitration, not a material fraud issue.

The remainder of Subcontractor/Applicant’s arguments were “genuine contract disputes”, whether regarding the amount of liquidated damages sought, timing of demands for the same, propriety of returning the advanced payment, and allegations concerning non-compliance with the Consulting Agreement (i.e. whether there was in fact a breach). While Subcontractor/Applicant plausibly established “a contract dispute with many differences”, this was insufficient to show likelihood of success regarding material fraud so as to support an injunction. Nor could Subcontractor/Applicant demonstrate irreparable harm; damages would be an adequate remedy and claims that its counterparties would transfer LC proceeds out of the U.S. were “conclusory and rejected.”

Finally, the balance of equities favored Contractor/Beneficiary and Second Contractor. Until conclusion of arbitration, they would receive their benefit of the bargain, i.e. to hold LC/guarantee proceeds until all matters were resolved. In denying the motion for a preliminary injunction, the Judge noted that Subcontractor/Applicant assumed the risk of engaging in this international business arrangement.