In June 1995, Southern Energy and Gesellschaft Fur Bauen und Wohnen Hannover (GBH) entered into a construction contract for the second of two housing projects known as “socialized housing” to be built in Hannover, Germany. The socialized housing contract called for a bank guaranty issued by a European bank as security for Southern Energy’s performance of the contract.

GBH wired to Southern Energy 555,117 Deutsche marks, representing the first 30 percent due on the contract, less the 15 percent value-added tax. Deutsche Bank issued the performance guaranty to GBH on the condition that the guaranty would be secured by a standby letter of credit. To facilitate the performance guaranty in favor of GBH, AmSouth issued a letter of credit to Deutsche Bank for an amount not to exceed 1,276,770 Deutsche marks relating to Southern Energy’s performance under the socialized housing contract. The letter of credit served as Deutsche Bank’s security for issuing the performance guaranty.

In January 1996, Southern Energy informed GBH that it would be unable to perform the contract at the agreed price without suffering a substantial financial loss. In February 1996, GBH responded by letter, stating that it would hold Southern Energy in default if Southern Energy failed to complete the project at the agreed time. GBH extended the deadline for performance from March 1, 1996, to March 15, 1996. GBH began rebidding the socialized housing project to other contractors. Southern Energy submitted another quote on the project, but GBH rejected its offer and awarded the contract to another builder. Meanwhile, the date of performance had passed on the initial contract. In June 1996, GBH requested that the advanced installment money on the contract, DM 555,117.39, be refunded. Southern Energy complied and transferred the money to GBH’s account. Southern Energy asserted that because all of GBH’s advanced monies had been returned, GBH no longer had any basis in fact to demand payment on the bank guaranty, and that Deutsche Bank had no legitimate basis to demand payment on the letter of credit. GBH, quoting the terms of the letter of credit itself, decided to “exercise its rights under the performance guaranty” by asserting its right to damages. The next day, Deutsche Bank presented a draft for payment.

After AmSouth informed Southern Energy that it would honor the draft but before payment had been made, the Jefferson County Circuit Court granted 732 Part 5 Debtor-Creditor Relationships Southern Energy’s request for a temporary restraining order but later reversed itself. Southern Energy appealed. Should the temporary restraining order be reversed? Can a court halt the payment on a letter of credit? [Southern Energy Homes, Inc. v AmSouth Bank of Alabama, 709 So2d 1180 (Ala)]

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