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In Cases/ Suits/ Writs involving Letters of Credit/ Bank Guarantee, the Court is often confronted with the question of granting or not granting of any injunction/ stay against the payment being made by the bank of the amount involved in the Letters of Credit/ Bank Guarantee to the supplier.
In relation to the scope of an irrevocable letter of credit the Hon’ble Supreme Court of India, in the case of M/s Tarapore and Co., Madras …V/s… M/s V/O Tractoroexport Moscow and another, A.I.R. 1970 SC 891, quoted with approvable the following paragraph at Para 6:
“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 matters involving Letters of Credit/ Bank Guarantee, the Hon’ble Supreme Court of India & Hon’ble High Courts of Different States of India in catena of Decisions and particularly in the case of United Commercial Bank …V/s… Bank of India and others A.I.R. 1981 SC 1426 at Para 49, and Svenska Handelsbanken, Appellant v. M/s. Indian Charge Chrome and others, Respondents AIR 1994 SUPREME COURT 626 at Para 93-98, has held that:
“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