Bayport Polymers LLC D/B/A Baystar v. CB&I LLC ( 2024 )

Reversed and Remanded and Opinion filed July 23, 2024
In The
Fourteenth Court of Appeals
NO. 14-23-00643-CV
BAYPORT POLYMERS LLC D/B/A BAYSTAR, Appellant
V.
CB&I LLC, Appellee
On Appeal from the 55th District Court
Harris County, Texas
Trial Court Cause No. 2023-35378
OPINION
This is an accelerated appeal from the trial court’s grant of an application for
a temporary injunction to enjoin the payment and presentment of a standby letter of
credit. Appellant, Bayport Polymers LLC d/b/a Baystar (“Baystar”), alleged that
appellee, CB&I, LLC (“CB&I”), owed approximately $75 million in liquidated
damages for failing to meet performance requirements or minimum acceptance
criteria. After Baystar unsuccessfully attempted to draw on the letter of credit, CB&I
sought a temporary injunction to prevent Baystar from making an allegedly
fraudulent draw on the letter of credit that would, among other things, violate the
contractually bargained-for dispute resolution procedure. After a two-day hearing,
the trial court granted the temporary injunction. In three issues, Baystar contends
that the trial court erred in granting the temporary injunction, arguing (1) the trial
court did not make the requisite findings under section 5.109 of the Texas Business
and Commerce Code, (2) Baystar had a colorable right to draw on the letter of credit,
and (3) Baystar did not commit material fraud that vitiated the transaction. Because
CB&I failed to establish that the alleged fraud committed by Baystar was so
egregious that it vitiated the entire transaction, we reverse the trial court’s order
temporarily enjoining Baystar from drawing on the letter of credit. See Philipp Bros.,
Inc. v. Oil Country Specialists, Ltd., 787 S.W.2d 38, 40–41 (Tex. 1990).
Background
CB&I is a subsidiary of McDermott International, Ltd. and specializes in
engineering and building complex projects. In 2017, CB&I entered into two large
Engineering, Procurement, and Construction contracts with Baystar worth a
combined $2.5 billion. The first project was to engineer and construct Baystar’s
ethane cracker facility in Port Arthur, Texas. The second project—the project in
dispute—was to engineer and construct Baystar’s high-density polyethylene plant in
Bayport, Texas, referred to as the Borstar Bay3 Project (“BB3 Project”).
One key metric in delivering the BB3 Project to Baystar was reaching Ready
For Hydrocarbon In Completion (“RFHI Completion”). This is the point at which
Baystar could use and introduce hydrocarbons into the facility. According to the
contract, CB&I committed to achieving RFHI Completion on or before the Ready
For Hydrocarbon In Completion Milestone (“Milestone”) 1,110 days after the
effective date of the contract, or October 8, 2021. The contract required CB&I to
post a standby letter of credit to guarantee performance of certain obligations. The
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contract provided that CB&I was to pay liquidated damages for each calendar week
it failed to achieve RFHI Completion by the Milestone. The maximum total liability
for liquidated damages for delay was limited to 6% of the contract price. In the event
CB&I was liable for liquidated damages, Baystar, at its sole discretion, could either
(1) invoice CB&I for liquidated damages, which CB&I would be required to pay
within 30 days; (2) withhold from CB&I amounts that were otherwise due and
payable in the amount of the liquidated damages; or (3) collect on either letter of
credit issued in the amount of the liquidated damages. The contract permitted the
parties to make changes but prohibited amendments, supplements, or modifications
that were not in writing and signed by authorized representatives of both parties.
CB&I worked on both projects but ran into significant delays due to the
COVID-19 pandemic. Despite the delays, CB&I eventually delivered the ethane
cracker project on April 26, 2021. During the course of the projects, Baystar and
CB&I executed more than 70 change orders. On May 2, 2022, the parties executed
Change Order 68. In its relevant parts, Change Order 68 provided that (1) the parties
agreed to an extension of the Milestone date whereby the new date would be July
31, 2022; (2) the contract price would be increased by $26 million; (3) CB&I could
receive three incentive payments worth $9 million for meeting certain milestones;
and (4) the liquidated damages for failure to achieve RFHI Completion would be
accelerated.1 CB&I did not achieve RFHI Completion by July 31, 2022 as required
1
The original liquidated damages provision provided that:
[CB&I] shall pay to [Baystar] liquidated damages . . . for each calendar week (or
prorated portion thereof) of delay in which [CB&I] has failed to achieve READY
FOR HYDROCARBON IN COMPLETION by the READY FOR
HYDROCARBON IN COMPLETION MILESTONE, at the following
percentages . . . until READY FOR HYDROCARBON IN COMPLETION has
been achieved:
• zero percent (0%) of the CONTRACT PRICE per week for week one (1)
through week eight (8)
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by Change Order 68.
On August 1, 2022, the president of Baystar wrote a letter to CB&I reminding
CB&I of the “current contract terms.” The letter stated:
We note that the READY FOR HYDROCARBON IN COMPLETION
MILESTONE was July 31, 2022 upon which delay liquidated damages
began to accrue pursuant to the CONTRACT.
[BAYSTAR] hereby reserves all rights and remedies under and with
respect to the CONTRACT, including with respect to any delay
liquidated damages owed by [CB&I].
CB&I did not file a change order request, and no other adjustment was ever
made to the Milestone date. According to CB&I, it did not seek to formally extend
• zero point one percent (0.1%) of the CONTRACT PRICE per week for
week nine (9) through week twelve (12)
• zero point two percent (0.2%) of the CONTRACT PRICE per week for
week thirteen (13) through week sixteen (16)
• zero point three percent (0.3%) of the CONTRACT PRICE per week for
week seventeen (17) through week twenty (20)
• zero point four percent (0.4%) of the CONTRACT PRICE per week for
week twenty-one (21) through week twenty-four (24)
• zero point five percent (0.5%) of the CONTRACT PRICE per week for
week twenty-five (25) and each week thereafter.
In Change Order 68, the accrual rate of liquidated damages was replaced as follows:
• zero percent (0%) of the CONTRACT PRICE per week for week one (1)
through week two (2);
• zero point zero eight one percent (0.081%) of the CONTRACT PRICE for
week three (3);
• zero point one six three percent (0.163%) of the CONTRACT PRICE for
week four (4);
• zero point five six nine percent (0.569%) of the CONTRACT PRICE for
week five (5);
• zero point seven three two percent (0.732%) of the CONTRACT PRICE
per week for week six (6) and each week thereafter.
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RFHI Completion or enforce other contractual rights because it relied upon oral
representations made by Baystar’s president. CB&I maintained that Baystar’s
president assured CB&I on multiple occasions that Baystar would not assess
liquidated damages provided that CB&I completed the BB3 Project “quickly and
safely.” Baystar’s president, however, denied making these affirmative
representations.
By the end of October 2022, CB&I surpassed the liquidated damages cap and
still had not achieved RFHI Completion. The parties discussed the anticipated RFHI
Completion for several months. Ultimately, in June 2023, Baystar exercised its right
to obtain liquidated damages by drawing on the letter of credit. Baystar sent a letter
to the issuer stating that (1) CB&I was in default; (2) CB&I owed Baystar liquidated
damages; (3) the liquidated damages owed arose out of or related to a breach of
contract; and (4) Baystar was entitled to payment of $75,386,233.32 as liquidated
damages. Baystar also initiated arbitration proceedings for both projects.
On June 8, 2023, CB&I filed suit against Baystar seeking a temporary
restraining order and preliminary injunction to prevent Baystar from drawing on the
letter of credit. The trial court entered a temporary restraining order the same day.
Subsequently, the trial court held a two-day temporary injunction hearing. At the
conclusion of the hearing, the trial court entered a temporary injunction. In the
relevant parts of the order, the trial court found that “CB&I has shown a probable
right to relief against Baystar in that it has adduced evidence to support claim of
material fraud under section 5.109 of the Texas Business and Commerce Code.” The
trial court relied on the following facts: (1) Baystar fraudulently induced CB&I to
relinquish its rights to submit change orders to formally extend RFHI Completion;
(2) Baystar induced CB&I into spending more funds on the BB3 Project; (3) Baystar
certified materially fraudulent representations in its written application to draw on
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the letter of credit for liquidated damages; and (4) Baystar’s claim for liquidated
damages is subject to a binding arbitration agreement.
Issues Presented
On appeal, Baystar presents three issues for review:
1. Did the trial court err by temporarily enjoining Baystar from drawing
on a letter of credit without finding that CB&I was more likely than not
to succeed on its claim of material fraud?
2. Did Baystar have a colorable right to draw on a letter of credit when the
plain text of the contract between Baystar and CB&I provides such a
right?
3. Did Baystar commit material fraud that vitiated an entire $1.2 billion
transaction by exercising a contractual right to draw on a letter of credit
to obtain $75 million in liquidated damages owed under the contract?
Governing Law & Standard of Review
A letter of credit is a definite undertaking by an issuer (usually a bank) to a
beneficiary at the request of an applicant to honor a documentary presentation by
payment or delivery of an item of value. Tex. Bus. & Com. Code § 5.102(10). Rights
and obligations under a letter of credit are independent of any underlying contract
dispute between the beneficiary and the applicant. Id. § 5.103(d). This principle of
independence is the central feature of a letter of credit and is essential to its
commercial viability. SRS Prods. Co. v. LG Eng’g Co., 994 S.W.2d 380, 384 (Tex.
App.—Houston [14th Dist.] 1999, no pet.). The bank must honor a presentment that
“appears on its face strictly to comply with the terms and conditions of the letter of
credit.” Tex. Bus. & Com. Code § 5.108(a). However, payment of a letter of credit
does not determine the ultimate right to retain the funds as between the beneficiary
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and the applicant. See CKB & Assocs., Inc. v. Moore McCormack Petroleum, Inc.,
734 S.W.2d 653, 655 (Tex. 1987). The general rule is that an injunction will not
issue to block payment of a letter of credit where the beneficiary has presented
conforming documents. SRS Prods., 994 S.W.2d at 384. The standard for injunctive
relief is high, and the burden remains on the applicant to show, by evidence and not
by mere allegation, that such relief is warranted. Tex. Bus. & Com. Code § 5.109
cmt. 4.
The Uniform Commercial Code recognizes only three instances in which a
court may enjoin the honoring of an otherwise conforming letter of credit: (1) a
required document is forged, (2) a required document is materially fraudulent, or (3)
honor of the presentation would facilitate a material fraud by the beneficiary on the
issuer or applicant. Tex. Bus. & Com. Code § 5.109(b). Only the second and third
instances are relevant to this appeal. If an applicant claims that a required document
is forged or materially fraudulent or that honor of the presentation would facilitate a
material fraud, a court may temporarily enjoin payment of a letter of credit if the
court finds that:
(1) the relief is not prohibited under the law applicable to an accepted
draft or deferred obligation incurred by the issuer;
(2) a beneficiary, issuer, or nominated person who may be adversely
affected is adequately protected against loss that it may suffer
because the relief is granted;
(3) all of the conditions to entitle a person to the relief under the law of
this state have been met; and
(4) on the basis of the information submitted to the court, the applicant
is more likely than not to succeed under its claim of forgery or
material fraud and the person demanding honor does not qualify for
protection under Subsection (a)(1).
Id.; Philipp Bros., 787 S.W.2d at 40–41 (providing that payment of a letter of credit
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may not be enjoined unless there is evidence of a material fraud by the beneficiary
on the applicant or the bank).
If a statute’s meaning is unambiguous, we generally interpret the statute
according to its plain meaning. City of San Antonio v. City of Boerne, 111 S.W.3d
22, 25 (Tex. 2003). A review of section 5.109 indicates that the UCC necessarily
incorporates general principles to obtain a temporary injunction. See Tex. Bus. &
Com. Code § 5.109(b)(3) (providing that the court must find that “all of the
conditions to entitle a person to the relief under the law of this state have been met”);
see also SRS Prods., 994 S.W.2d 380 at 386. Thus, to obtain a temporary injunction,
an applicant must also demonstrate that it (1) has a cause of action against the
opposing party; (2) has a probable right on final trial to the relief sought; and (3)
faces probable, imminent, and irreparable injury in the interim. See Butnaru, 84
S.W.3d at 204 (enumerating the requirements to obtain a temporary injunction); see
also Hoist Liftruck Mfg. v. Carruth–Doggett, Inc., 485 S.W.3d 120, 122 (Tex.
App.—Houston [14th Dist.] 2016, no pet.) (same).
The purpose of a temporary injunction is to preserve the status quo of the
litigation’s subject matter pending trial on the merits. Butnaru v. Ford Motor Co.,
84 S.W.3d 198, 204 (Tex. 2002). Temporary injunctions are an extraordinary
remedy and do not issue as a matter of right. Id. (citing Walling v. Metcalfe, 863
S.W.2d 56, 57 (Tex. 1993) (per curiam)). When reviewing the particulars of a
temporary injunction, we are not limited to the reasons stated by the trial court. Hsin-
Chi-Su v. Vantage Drilling Co., 474 S.W.3d 284, 298 (Tex. App.—Houston [14th
Dist.] 2015, pet. denied). We review all of the evidence presented and indulge all
legitimate inferences from the evidence in the light most favorable to the temporary
injunction. Id.We review a trial court’s decision to grant or deny a temporary injunction for
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an abuse of discretion. Butnaru, 84 S.W.3d at 204. A trial court abuses its discretion
when it rules without reference to guiding rules and principles or when its decision
is unreasonable or arbitrary. Transcor Astra Grp. S.A. v. Petrobras Am., Inc., 650
S.W.3d 462, 482 (Tex. 2022).
Discussion
As indicated above, Baystar raises three issues on appeal, asserting (1) the
trial court erred by enjoining Baystar from drawing on the letter of credit without
finding that CB&I was more likely than not to succeed on its claim of material fraud,
(2) Baystar had a colorable right to draw on a letter of credit when the plain text of
the contract permitted such, and (3) Baystar did not commit material fraud. We
address each issue raised by Baystar in turn.
I. There is No Prescribed Format for the Trial Court’s Order Under
Section 5.109
In its first issue, Baystar challenges the form of the trial court’s order. Baystar
claims that the plain text of section 5.109 governs the specific form of the trial
court’s order. Baystar argues that the trial court determined that an injunction was
warranted under section 5.109 but did not make the “more likely than not” finding
required by the statute. Even though the standard for injunctive relief under section
5.109 is high, Baystar suggests that the trial court did nothing more than find that
CB&I satisfied the generic standard for injunctive relief; that is, that CB&I alleged
a cause of action, had a probable right to relief, and faced irreparable injury. See
Butnaru, 84 S.W.3d at 204. CB&I counters that the trial court’s order is consistent
with section 5.109 because “no magic language” is required. CB&I suggests that the
trial court’s order is based on extensive and credible evidence rather than mere
allegations, all necessary findings are implied by the order, and the order details
specific factual findings. We agree with CB&I only to the extent that the statute does
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not set out a prescribed format for the written order.
The requirements for granting a temporary or permanent injunction are set
forth in section 5.109. See Tex. Bus. & Com. Code § 5.109(b). To temporarily or
permanently enjoin the issuer from honoring a presentation, the trial court is required
to find, among other things, that “the applicant is more likely than not to succeed
under its claim of forgery or material fraud.” Id. But, neither the statute nor any other
provision of the UCC sets forth a prescribed format for the written order. When
interpreting court orders, we avoid elevating form over substance. Compare Serafine
v. Crump, 665 S.W.3d 93, 109 (Tex. App.—Austin 2023, pet. pending) (providing
that the procedures governing recusal on a party’s motion and recusal on a judge’s
motion do not “set[] out a prescribed format for the written order, and when
interpreting court orders, we avoid elevating form over substance”); Tex. Dep’t of
Pub. Safety v. J.H.J., 274 S.W.3d 803, 810–11 (Tex. App.—Houston [14th Dist.]
2008, no pet.) (providing that the right to seek expunction of one’s arrest records,
which is governed by strict statutory requirements, should not turn upon whether the
trial court uses magic words in its discharge order from felony community
supervision); and In re Att’y Gen. Of Tex., 162 S.W.3d 739, 742 (Tex. App.—
Houston [14th Dist.] 2005, no pet.) (explaining that the Family Code does not require
the child support master’s proposed order to contain language of recommendation
and holding that invalidating the order because it did not contain the words
“recommended” or “proposed” elevates form over substance); with Tex. R. Civ. P.
683 (stating that “[e]very order granting an injunction . . . shall set forth the reasons
for its issuance; shall be specific in terms; [and] shall describe in reasonable detail
and not by reference to the complaint or other document, the act or acts sought to be
restrained.”).
Here, the trial court granted the temporary injunction sought by CB&I. In its
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relevant parts, the order provides:
The Court therefore FINDS that CB&I has shown a probable right to
relief against Baystar in that it has adduced evidence to support claim
that a material fraud [occurred] under Section 5.109 of the Texas
Business and Commerce Code based on the following facts:
1) The Court finds that Baystar fraudulently induced CB&I to
relinquish its rights to submit change orders to formally
extend the Ready for Hydrocarbon in (“RFHI”) date after July
31, 2022 . . .
3) The Court finds that Baystar induced CB&I into spending
more funds[] on the project including but not limited to
[]approximately $22 million[] on FTE wages
4) The Court finds that Baystar certified materially fraudulent
representations in its written application to draw on the [letter
of credit] that CB&I is liable for liquidated damages
5) The Court finds that (a) Baystar’s claim for liquidated
damages is subject to a binding arbitration agreement under
the parties’ contract; (b) Baystar has instituted arbitration
proceedings regarding the liquidated damages for which it
seeks to draw on CB&I’s letter of credit; and (c) Baystar’s
draw on CB&I’s letter of credit, if permitted, would cause the
destruction of all or an essential part of the subject matter to
be arbitrated.
Invalidating the trial court’s order because it does not contain the words “more
likely than not” elevates form over substance, especially when the trial court
enumerated several factual findings to support its order. See Serafine, 665 S.W.3d at
109; Tex. Dep’t of Pub. Safety, 274 S.W.3d at 810–11; In re Att’y Gen. of Tex., 162
S.W.3d at 742. We believe that a trial court’s decision to temporarily or permanently
enjoin the issuer from honoring a presentation should not turn on whether the trial
court uses “magic words.” We therefore overrule Baystar’s first issue.
II. Section 5.109’s Fraud Exception is Not Limited to Lack of
Colorable Right
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As its second issue, Baystar contends that the trial court erred in granting the
temporary injunction because Baystar had a right to draw on the letter of credit under
the contract. Baystar maintains that the parties’ contract provided a colorable right
to draw on the letter of credit, and Baystar had the option to do so if CB&I failed to
meet the performance requirements or minimum acceptance criteria. CB&I asserts
that section 5.109’s fraud exception is not limited to lack of colorable right and
insists that the trial court correctly reviewed evidence of the underlying
circumstances in determining Baystar’s alleged fraudulent acts. We agree with
CB&I only to the extent that section 5.109’s fraud exception is not limited to lack of
colorable right. See generally Tex. Bus. & Com. Code § 5.109.
The supreme court has interpreted the fraud exception in section 5.114,2
determining that the nature of fraud is correctly described as:
The situation of fraud in which the wrong doing of the beneficiary has
so vitiated the entire transaction that the legitimate purposes of the
independence of the issuer’s obligation would no longer be served.
Philipp Bros., 787 S.W.2d at 40 (quoting GATX Leasing Corp. v. DBM Drilling
Corp., 657 S.W.2d 178, 182 (Tex. App.—San Antonio 1983, no writ)). This court
has upheld that standard and explained that the fraud exception is “applicable only
in limited situations where there has been an intentional perversion of the truth in
order to induce another to part with something of value or surrender a legal right.”
2
Acts 1999, 76th Leg., ch. 4, § 1 amended Chapter 5 effective September 1, 1999. The
former Chapter 5, Letters of Credit, consisting of §§ 5.101–.117, was amended as Chapter 5,
Letters of Credit, consisting of §§ 5.101–.118. The 1999 amendments increased the applicant’s
burden to show entitlement to injunctive relief when asserting fraud against the other party to the
underlying transaction. Compare Act of May 29, 1983, 68th Leg., R.S., ch. 442, § 13, 1983 Tex.
Gen. Laws 2511, 2576, with Tex. Bus. & Com. Code § 5.109. Section 5.109 stems from the pre-
1999 version of section 5.114. See Act of March 23, 1999, 76th Leg., R.S., ch. 4, § 10, 1999 Tex.
Gen. Laws 7, 21 (amendments applicable only to letters of credit issued on or after September 1,
1999); Tex. Bus. & Com. Code § 5.109. Both sections nonetheless concern entitlement to
injunctive relief when asserting fraud.
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SRS Prods., 994 S.W.2d at 384.
On appeal, Baystar relies solely on an official comment to section 5.109 to
support its position. In the third paragraph of comment 1 to section 5.109, it states:
Material fraud by the beneficiary occurs only when the beneficiary has
no colorable right to expect honor and where there is no basis in fact to
support such a right to honor. The section indorses articulations such as
those stated in Intraworld Indus. v. Girard Trust Bank, 336 A.2d 316(Pa. 1975), Roman Ceramics Corp. v. People’s Nat. Bank, 714 F.2d
1207 (3d Cir. 1983), and similar decisions and embraces certain
decisions under Section 5-114 that relied upon the phrase “fraud in the
transaction.”
Tex. Bus. & Com. Code § 5.109 cmt. 1. We note that an official UCC comment like
this one is not legally binding, but it is persuasive authority concerning interpretation
of the statute’s language. See Prosper Fla., Inc. v. Spicy World of USA, Inc., 649
S.W.3d 661, 671 (Tex. App.—Houston [1st Dist.] 2022, no pet.) (citing Fetter v.
Wells Fargo Bank Tex., 110 S.W.3d 683, 687 (Tex. App.—Houston [14th Dist.]
2003, no pet.)). We decline to follow persuasive authority when the supreme court
has specifically interpreted the nature of this type of fraud. See Philipp Bros., 787
S.W.2d at 40; see also SRS Prods., 994 S.W.2d at 384–85 (following the fraud
standard articulated in Philipp Bros.).
While colorable right to draw on a letter of credit is certainly relevant to
establishing material fraud, it is not the standard followed by this court in analyzing
fraud under the terms of section 5.109. See Philipp Bros., 787 S.W.2d at 40; see also
Tex. Bus. Com. Code § 5.109, State Bar Committee cmts (2021) (providing that both
Philipp Brothers and the third paragraph of comment 1 support the nature of fraud
that vitiates the entire transaction as the type of fraud that justifies an injunction
against honor). Baystar’s reliance on an official comment is misplaced, and Baystar
does not otherwise make a cogent legal argument or cite to legal authority suggesting
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that a different standard other than the one articulated in Philipp Brothers applies
when an applicant claims fraud by the beneficiary in the presentation.
We therefore overrule Baystar’s second issue.
III. Any Alleged False Statements in Making Presentment Did Not
Vitiate the Entire Transaction
In its third issue on appeal, Baystar argues that the trial court erred in granting
the temporary injunction because the trial court’s findings that CB&I “adduced
evidence” of fraudulent acts cannot support a determination of material fraud under
section 5.109. As presented, Baystar’s argument is not a model for clarity, but we
interpret Baystar’s issue as challenging whether CB&I, as the applicant, provided
evidence that Baystar, the beneficiary, committed material fraud as contemplated by
section 5.109(b). CB&I claims that Baystar’s attacks on the trial court’s findings “do
not defeat the propriety of the trial court’s injunction.” We begin by examining the
fraud alleged in this case to determine if it warrants interference with payment of the
letter of credit. SRS Prods., 994 S.W.2d at 384.
The trial court’s order granting the temporary injunction provided that CB&I
adduced evidence to support its claim of material fraud under section 5.109, finding
that (1) “Baystar fraudulently induced CB&I to relinquish its right to submit change
orders”; (2) “Baystar induced CB&I into spending more funds”; (3) “Baystar
certified materially fraudulent representations in its written application to [the
issuer]”; and (4) “Baystar’s claim for liquidated damages is subject to a binding
arbitration . . . and Baystar’s draw on CB&I’s letter of credit, if permitted, would
cause the destruction of all or an essential part of the subject matter to be arbitrated.”
Baystar classifies the trial court’s findings into three categories: (1) “breach of
contract” theory, (2) “fraud in the presentment” theory, and (3) “fraud in the
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transaction” theory. We address each of these findings in turn and examine whether
the trial court abused its discretion in enjoining Baystar from drawing on the letter
of credit.
“Breach of Contract” Theory. In enjoining Baystar from drawing on the
letter of credit, the trial court found that “Baystar’s claim for liquidated damages is
subject to a binding arbitration . . . and Baystar’s draw on CB&I’s letter of credit, if
permitted, would cause the destruction of all or an essential part of the subject matter
to be arbitrated.” Baystar urges that this finding conflicts with established law for
two reasons: (1) payment of a letter of credit does not determine the ultimate right
to retain the funds, and (2) a breach of contract alone cannot justify issuing an
injunction. CB&I reasons that the trial court’s findings are consistent with applicable
law because Baystar’s actions relating to the arbitration create two different grounds
for injunction: (1) Baystar’s actions illustrate material fraud in representing that
CB&I was in default, and (2) Baystar could not invoke a binding arbitration and then
seek to draw on the letter of credit.
As discussed, letters of credit are independent of any underlying contract
dispute between the beneficiary and the applicant. See Tex. Bus. & Com. Code §
5.103(d) (providing that rights and obligations of an issuer to the beneficiary under
a letter of credit are independent of the contract). As between the beneficiary and the
applicant, payment of a letter of credit does not determine the ultimate right to retain
the funds, but causes of action arising out of the wrongful presentation of a letter of
credit are “not inconsistent with a beneficiary’s right of immediate possession of the
disputed funds through the mechanism of a valid letter of credit.” See CKB, 734
S.W.2d at 655. There are only three instances in which a court may enjoin the
honoring of an otherwise conforming letter of credit: (1) a required document is
forged, (2) a required document is materially fraudulent, or (3) honor of the
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presentation would facilitate a material fraud by the beneficiary on the issuer or
applicant. Tex. Bus. & Com. Code § 5.109(b). To allow a party to obtain an
injunction based on a “mere contractual dispute” would “destroy the commercial
viability of letters of credit.” SRS Prods., 994 S.W.2d at 385.
In this case, the contract between the parties specifies the procedure for
resolving any dispute that should arise. CB&I states that Baystar never notified
CB&I of the arbitration and did not inform the issuer of arbitration. CB&I suggests
that these efforts evidence a fraudulent scheme to improperly draw on the letter of
credit. But, the issuer’s obligation to pay Baystar upon presentment is entirely
independent of any obligation of Baystar to CB&I (or vice versa) under the contract.
See id. It would “fly in the face of Article 5” to enjoin payment of the letter of credit
based solely on a dispute between Baystar and CB&I over underlying contractual
obligations. See id. at 385–86; see also Tex. Bus. & Com. Code § 5.108(a) (“[A]n
issuer shall honor a presentation that . . . appears on its face strictly to comply with
the terms and conditions of the letter of credit.”) (emphasis added). While there is a
clear disagreement between the parties regarding entitlement (or lack thereof) to the
liquidated damages, Texas law does not provide injunctive relief to preclude
payment on a letter of credit for contractual disputes.
Accordingly, the evidence presented demonstrates that the trial court’s finding
was based on a contractual dispute between the parties, which is insufficient to
support the fraud necessary to interfere with the independence of the letter of credit.
SRS Prods., 994 S.W.2d at 385
“Fraud in the Presentment” Theory. One of the trial court’s findings
supporting the injunction relates to false statements in the presentment documents.
Specifically, the trial court determined that Baystar “certified materially fraudulent
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representations in its written application to draw on the [letter of credit].” Baystar’s
presentment to the bank provided that (1) CB&I is in default, (2) CB&I owes Baystar
liquidated damages, (3) CB&I owes Baystar amounts arising out of or relating to a
breach of obligation under the contract, and (4) Baystar is entitled to payment of
$75,386,122.32.
In this case, the trial court’s findings that the statements in the presentment
documents were false do not support its conclusion that Baystar committed material
fraud such that the letter of credit should be declared void. See Philipp Bros., 787
S.W.2d 40. Even assuming that the statements in Baystar’s presentment documents
were false, false statements in the presentment documents are insufficient to warrant
enjoining payment of a letter of credit. Id. at 40–41 (“To maintain the strong
commercial viability of letters of credit, presentment should not be enjoined because
the beneficiary’s compliance with the terms of payment under the letter of credit
contains untrue statements unless those statements also constitute fraud under
section 5.114(b)(2).”); see also Tex. Bus. & Com. Code § 5.108(a) (providing that
an issuer must honor a presentation that appears on its fact strictly to comply with
the terms and conditions of the letter of credit.). Establishing material fraud requires
more than a showing of untruthful statements in the presentment documents. See
SRS Prods., 994 S.W.2d at 384.
Accordingly, we conclude that any untruthful statements in the presentment
documents were insufficient to warrant enjoining payment of the letter of credit. See
Philipp Bros., 787 S.W.2d at 40–41.
“Fraud in the Transaction” Theory. The remaining two of the trial court’s
findings determined that Baystar fraudulently induced CB&I into relinquishing
rights to submit change orders and spending more funds. Baystar contends that the
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trial court’s injunction was improper for three reasons: (1) the alleged
representations conflict with the plain language of the contract, (2) the alleged
representations are too vague and indefinite, and (3) the alleged representations do
not vitiate the entire transaction. CB&I urges that it provided sufficient evidence of
the requisite fraud to support an injunction under section 5.109.
“Fraud in the transaction” requires a showing that the wrongdoing is so
“egregious, intentional, and unscrupulous” that it vitiates the entire transaction. SRS
Prods., 994 S.W.2d at 384–85. Generally, the wrongdoing sufficient to qualify as
“fraud in the transaction” requires a showing that “the beneficiary of the letter of
credit has utterly failed to perform its obligations or has engaged in a deceptive or
dishonest scheme.” See generally Philipp Bros., 787 S.W.2d at 40 (upholding an
injunction where substandard condition of goods for which letter of credit had been
issued rendered entire inventory virtually worthless, destroying the legitimate
purpose of the letter of credit).
To establish fraud, a plaintiff must show that
(1) the defendant made a false, material representation; (2) the
defendant “knew the representation was false or made it recklessly as a
positive assertion without any knowledge of its truth”; (3) “the
defendant intended to induce the plaintiff to act upon the
representation”; and (4) the plaintiff justifiably relied on the
representation, which caused the plaintiff injury.
Barrow-Shaver Res. Co. v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471, 496 (Tex.
2019) (quoting JPMorgan Chase Bank, N.A. v. Orca Assets G.P., L.L.C., 546
S.W.3d 648, 653 (Tex. 2018)). Only the fourth element is at issue in this appeal. To
establish the fourth element, “the plaintiff must show that it actually relied on the
defendant’s representation and, also, that such reliance was justifiable.” Orca Assets,
546 S.W.3d at 653 (citing Grant Thornton LLP v. Prospect High Income Fund, 314
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S.W.3d 913, 923 (Tex. 2010)).
In this case, Baystar alleges that it had a right to draw on the letter of credit
under the plain language of the parties’ contract, and even if Baystar or its president
did make affirmative representations concerning the assessment of liquidated
damages (or lack thereof), CB&I was not justified in relying on any alleged
representations when the plain language of the contract prohibited oral
modifications. CB&I argues that we should disregard the plain language of the
contract because it provided evidence of the requisite fraud and Baystar’s fraudulent
scheme.
Reviewing the record, even if we assume for sake of argument that Baystar
made material representations that Baystar knew to be false and intended to induce
CB&I to act upon the representations, the evidence does not support that CB&I’s
reliance on such representations was justifiable. See Barrow-Shaver, 590 S.W.3d at
496. We recognize a long-standing principle that a “party claiming fraud has a duty
to use reasonable diligence in protecting its own affairs.” Thigpen v. Locke, 363
S.W.2d 247, 251 (Tex. 1962); see also Orca Assets, 546 S.W.3d at 654. A “failure
to exercise reasonable diligence is not excused by mere confidence in the honesty
and integrity of the other party.” Thigpen, 363 S.W.2d at 251. A plaintiff therefore
may not “blindly rely on a representation by a defendant” when the plaintiff’s
knowledge, experience, and background alert it to investigate the defendant’s
representations before acting in reliance on those representations. Orca Assets, 546
S.W.3d at 654.
In this case, CB&I is a highly sophisticated corporation with global
operations. CB&I is a self-proclaimed “world leader in engineering and building
complex projects in energy, petrochemicals, and energy transition” for over 100
years. Considering CB&I’s knowledge, experience, and background, it was not
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reasonable for CB&I to rely on Baystar or its president’s representations concerning
the assessment of liquidated damages (or lack thereof) when the contract between
the parties specifically prohibited amendments, supplements, or modifications that
were not in writing and signed by authorized representatives of both parties.3
Thigpen, 363 S.W.2d at 251. The evidence indicates that CB&I was aware that
adjustments to the contract had to be in writing because the parties executed at least
70 change orders throughout the course of both projects. While it is unclear why
CB&I failed to submit a change order when it knew it was not going to achieve RFHI
Completion by the Milestone date, a “failure to exercise reasonable diligence is not
excused by mere confidence in the honesty and integrity of the other party.” Id.
Accordingly, we conclude that the any alleged fraud in the transaction did not
amount to egregious fraud vitiating the entire $1.2 billion transaction. Philipp Bros.,
787 S.W.2d at 40. CB&I’s reliance on the alleged affirmative representations were
3
In its appellate brief, CB&I attempts to distinguish pre-contracting representations and
post-contracting waivers and modifications. CB&I alleges that parties may modify a contract by a
subsequent oral agreement, even though the agreement provides that it can modified only by a
written agreement. CB&I first relies on Shields Limited Partnership v. Bradberry, which provides
that a party’s right under a nonwaiver provision may be waived expressly or impliedly. See 526
S.W.3d 471, 482–83 (Tex. 2017). CB&I also cites Pointe West Center, LLC v. It’s Alive, Inc.,
which explains that “[a] written contract not required by law to be in writing, may be modified by
a subsequent oral agreement even though it provides it can be modified only by a written
agreement.” See 476 S.W.3d 141, 151 (Tex. App.—Houston [1st Dist.] 2015, pet denied). But,
when a contract is required by law to be in writing, the rules are different. A contract that is required
to be in writing may not be rescinded by oral agreement. Givens v. Dougherty, 671 S.W.2d 877,
878 (Tex. 1984); Tex. Bus. & Com. Code § 26.01(b)(6) (providing that an agreement which is not
to be performed within one year from the date of making the agreement must be in writing).
Though CB&I states that the BB3 Project contemplated a multi-year construction, it nonetheless
proposes that the project “could conceivably be performed within a single year.” When parties
enter into a contract without explicitly mentioning a time for performance, the relevant inquiry is
whether the parties intended to complete the contract within a year. Metromarketing Servs., Inc. v.
HTT Headwear, Ltd., 15 S.W.3d 190, 195–96 (Tex. App.—Houston [14th Dist.] 2000, no pet.)
(citing Hall v. Hall, 308 S.W.2d 12, 16 (Tex. 1957)). Reviewing the contract, the parties did not
contemplate the BB3 Project being completed in less than a year. As discussed, CB&I initially
committed to achieving RFHI Completion within 1,110 days after October 8, 2021. See Givens,
671 S.W.2d at 878.
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not reasonable or justified.
We note that we are not limited to the reasons stated by the trial court. Hsin-
Chi-Su, 474 S.W.3d at 298. But, reviewing all of the evidence presented and
indulging legitimate inferences in favor of the temporary injunction, CB&I failed to
establish the requisite fraud necessary under section 5.109. See id.; see also Philipp,
787 S.W.2d at 40. We therefore sustain Baystar’s third issue.
Conclusion
We conclude that the trial court abused its discretion in enjoining payment of
the letter of credit because it misapplied the law to the established facts of the case.
See Downer v. Aquamarine Operators, Inc.,701 S.W.2d 238, 241–42 (Tex. 1985).
We therefore reverse the trial court’s grant of the application for a temporary
injunction and remand this cause for trial on the merits.
/s/ Frances Bourliot
Justice
Panel consists of Justices Jewell, Bourliot, and Poissant.
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