## Facts

- A Slovenian manufacturer (SAVA) and a U.S. polymer company (APS) planned a joint venture to produce and distribute composite-fiber coating products in Eastern Europe.
- The parties executed a company formation agreement under which APS would contribute technology and patent rights, and SAVA would purchase specialized manufacturing equipment from APS and lease it to the new venture.
- A separate equipment agreement required SAVA to pay APS a $550,000 deposit for filament-winding and curing equipment, secured by a standby letter of credit issued by a bank in favor of SAVA.
- The letter of credit stated that all equipment was to be delivered by September 9, 1999, but the equipment agreement required that date only for the curing equipment; the filament-winding equipment was not due until 2001.
- By 2000 the relationship deteriorated; SAVA notified APS it was canceling the arrangement and attempted to draw $550,000 on the letter of credit.
- SAVA’s draw presentation asserted, in substance, that the delivery date had passed and relied on the September 9, 1999 “all equipment” deadline, even though the contractual deadline for the filament-winding equipment had not passed.
- APS obtained a restraining order preventing the bank from honoring the draw; after a bench trial the court declared the letter of credit void for “material fraud,” found SAVA breached the equipment agreement, awarded APS damages and attorneys’ fees, and denied SAVA’s counterclaims.

## Issues

1. Whether SAVA’s draw presentation and nondisclosure of the letter of credit’s erroneous delivery term constituted “material fraud” justifying cancellation/avoidance of the standby letter of credit.
2. Whether the evidence supported the finding that SAVA breached the equipment agreement.
3. Whether the damages award improperly included certain items and failed to credit amounts previously paid.
4. Whether attorneys’ fees required reconsideration after changes to liability and damages.
5. Whether exclusion of deposition testimony warranted reversal.

## Decision

- Reversed the trial court’s finding of material fraud and its resulting cancellation/voiding of the letter of credit, holding the evidence legally insufficient.
- Affirmed the finding that SAVA breached the equipment agreement.
- Reversed the damages award in part and rendered corrections, including removal of improperly awarded banking-related costs and a $200,000 credit associated with the engineering fee.
- Reversed and remanded attorneys’ fees for reconsideration in light of the modified judgment and the “equitable and just” standard.
- Left the evidentiary ruling undisturbed as non-dispositive (any error not shown to warrant further reversal).

## Legal Principles

- A letter of credit is independent of the underlying contract; disputes or breach in the underlying transaction do not, by themselves, permit avoidance of the issuer’s obligation or judicial cancellation of the credit.
- Injunctive or cancellation relief against a letter of credit requires “material fraud,” a demanding standard requiring egregious misconduct tied to the credit presentation, not merely contract-related disputes.
- Contract-breach liability and letter-of-credit fraud are analytically separate; conduct may support breach of the underlying agreement without meeting the “material fraud” threshold for letter-of-credit remedies.
- Damages for breach must exclude items not recoverable under the governing measure and must account for appropriate credits to prevent overcompensation.
- Attorneys’ fees in Texas contract actions may depend on whether a fee award remains “equitable and just” after appellate modification of merits and damages.

## Conclusion

The court held that SAVA’s draw documents did not meet the high “material fraud” standard required to void a standby letter of credit, but it still affirmed that SAVA breached the underlying equipment agreement; it corrected the damages by removing improper components and crediting prior payments, and it remanded attorneys’ fees for reevaluation under the revised outcome.


SAVA Gumarska In Kemijska Industria d.d. v. Advanced Polymer Scis., Inc., 128 S.W.3d 304 (Tex. App.—Dallas 2004, no pet.)