Thursday, January 26, 2006

Sloppy Is As Sloppy Does

The case of Buchbinder v. Natanzon shows that contracts can be sloppily drafted even when substantial amounts of money are involved.

A business dispute arose between Buchbinder and Natanzon. As part of the settlement of that dispute, Natanzon agreed to indemnify Buchbinder with respect to "any draw on" two letters of credit in the total amount of $1,000,000. The letters of credit were issued by Swiss bank UBS AG ("UBS") in favor of anIsraeli bank, Bank Leumi, to secure certain financial obligations of an Israeli corporation.

In late 2001, Buchbinder was asked to agree to an extension of the letters of credit through January of 2003. He agreed to the extension, but the UBS confirmation of the extension to Bank Leumi contained a typographical error stating that the extension was through December of 2003.

Subsequently, on February 5, 2003, Bank Leumi drew on the UBS letters of credit and UBS honored the draws, seizing collateral that Buchbinder had posted. Buchbinder sued UBS alleging that it had seized his collateral even though the letters of credit had expired. In settlement of that claim, UBS returned all of Buchbinder's collateral. The settlement was entered into approximately a year after the seizure of the collateral.

The suit between Buchbinder and Natanzon was initially filed requesting indemnification for the entire amount of Buchbinder's collateral that UBS had seized. However, the Buchbinder/UBS settlement left Buchbinder with an indemnification claim only for the year's worth of foregone interest and the attorneys' fees he incurred in overturning UBS's seizure of the collateral.

Judge Motz granted Natanzon's motion for summary judgment holding that the parties only intended that Natanzon's indemnification obligation only "contemplated [indemnification with respect to] timely and proper draws."
In my view, a reasonable person in the position of the parties would not have understood "any draw on the . . . letters of credit" to include demands on letters that ceased to legally exist. If that had been the meaning of the words, . . . Nantanzon would have been assuming an obligation of infinite duration, unlimited by the express written terms of the letters of credit. Reasonable business people do not assume - or expect others to assume - such obligations.
The problem with the ruling is that it undermines the intent of the indemnification provision. As I understand the facts, Buchbinder agreed to continue placing his credit and collateral at risk in order to effect the settlement with Natanzon. Absent that settlement, he would have removed himself from any risk of loss to UBS. Seen in that light, it seems reasonable to conclude that Natanzon was really agreeing to indemnify Buchbinder from any loss growing out of the relationship with UBS, since Buchbinder had only agreed to continue with that relationship as part of the settlement. Absent his obligations under the settlement agreement, he would never have been exposed to the possibility of the wrongful demand or seizure by UBS that actually occurred.

A better drafted indemnification provision could have changed the outcome of the case (e.g., "any expense, loss, or damage, including attorneys' fees or foregone interest suffered or incurred by Buchbinder with respect to any claims under the letters of credit or any extensions thereof made against him"). However, the indemnification language was hashed out in the course of the settlement of what was apparently a fairly acrimonius business dispute. In such cases, meticulous drafting is the exception rather than the rule. The Court should not have insisted, especially in the context of ruling on a summary judgment motion, on such a precisely drawn contractual provision.

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