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BANK GUARANTEE & LETTER OF CREDIT

 

“It is often made a condition of a mercantile contract that the buyer shall pay for the goods by means of a confirmed credit, and it is then the duty of the buyer to procure his bank, known as the issuing or originating bank, to issue an irrevocable credit in favour of the seller by which the bank undertakes to the seller, either directly or through another bank in the seller’s country known as the correspondent or negotiating bank, to accept drafts drawn upon it for the price of the goods, against tender by the seller of the shipping documents. The contractual relationship between the issuing bank and the buyer is defined by the terms of the agreement between them under which the letter opening the credit is issued; and as between the seller and the bank, the issue of the credit duly notified to the seller creates a new contractual nexus and renders the bank directly liable to the seller to pay the purchase price or to accept the bill of exchange upon tender of the documents. The contract created between the seller and the bank is separate from, although ancillary to, the original contact between the buyer and the seller, by reason of the bank’s undertaking to the seller, which is absolute. Thus the bank is not entitled to rely upon terms of the contract between the buyer and the seller which might permit the buyer to reject the goods and to refuse payment therefore; and, conversely, the buyer is not entitled to an injunction restraining the seller from dealing with the letter of credit if the goods are defective.”

“In law relating to bank guarantees, a party seeking injunction against the encashing of bank guarantee by the suppliers has to show:

Prima facie case of established fraud and

An irretrievable injury i.e. where the plaintiff has no adequate remedy at law, and

Balance of convenience in his favour.

Other Important Case Laws relating to Letter of Credit/ Bank Guarantee

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Last Updated: 15 July 2010