Facts:
Para 19: The plaintiff's claim against defendants 1 to 12 was that defendants 1 to 3 had promised to supply the captive power plant of the capacity of 108 MW worked with the charcoal whereas on working, the plant was found to be of the capacity of 60 MW. The case of the plaintiff further was that all the agreements between the borrower and the suppliers and borrower and lenders are interconnected and constituted one transaction and are vitiated by fraud committed by defendants 1 to 4. It was pleaded that the plaintiff was fraudulently led into entering of contracts with the suppliers by fraud of the suppliers and defendant 4, the lender. The suppliers were not competent enough to manufacture 108 MW plant. They fraudulently persuaded the plaintiff to go in for a 'stoker fired' boiler instead of a 'pulverised fuel' boiler in spite of the recommendations of the Central Electricity Authority to the contrary…..

Prima Facie Case:
Para 64: Equally, it would be futile to contend that the court was justified in granting the injunction since it has found a prima facie case in favour of the respondent. The question of examining the prima facie case or balance of convenience does not arise if the court cannot interfere with the unconditional commitment made by the bank in the guarantees in question.

Fraud:
Para 65: The Courts have generally permitted dishonour only on the fraud of the beneficiary, not the fraud of somebody else.
Para 66, 79: The nature of the fraud that the courts talk about is the fraud of an 'egregious nature as to vitiate the entire underlying transaction'.
Para 68, 98: fraud has to be an established fraud.
Para 86: Case of: Handerson v. Canadian Imperial Bank of Commerce and Peat Marwick Ltd. The plaintiff arranged an irrevocable letter of credit to fulfil his obligation to purchase 20 episodes of two television shows from a production company. Although the shows were never produced and the production company went into bankruptcy, the receiver of the seller made demand upon the bank for payment under the letter of credit and the plaintiff brought an application for an interlocutory injunction to stop the bank from making payment. The court granted the interim injunction ………………. It will be noticed that this decision is based on obvious fraud.
Para 97: The High Court was not right in working on mere suspicion of fraud or merely going by the allegations in the plaint without prima facie case of fraud being spelt out from the material on record.

Irretrievable Injury:
Para 61: The respondent was not to suffer any injustice which was irretrievable. The respondent can sue the appellant for damages.
Para 83: Case of Itek Corpn. v. The First National Bank of Boston etc. The court was of the view that even if claim for damages is decreed by the American courts situation in Iran was such that the decree will not be executable in Iran. It was on these facts that the court felt that it was a case where the plaintiff had demonstrated that it has no adequate remedy at law and the allegations of irreparable harm are not speculative but genuine and immediate and the plaintiff would suffer irreparable harm if the requested relief is not granted.
Para 98: Irretrievable injury is of the nature as noticed in the case of Itek Corpn. (566 Fed Supp 1210, 1217). Here there is no such problem. Once the plaintiff is able to establish fraud against the suppliers or suppliers-cum-lenders and obtains any decree for damages or diminution in price, there is no problem for effecting recoveries in a friendly country where the bankers and the suppliers are located. Nothing has been pointed out to show that the decree passed by the Indian Courts could not be executable in Sweden.
Para 99: The High Court totally ignored the irretrievable injury which will be caused to defendant 12 (Bank – Emphasis Supplied) in not honouring the bank guarantee in international market which may cause grievous and irretrievable damages to the interest of the country as opposed to the loss of money to the borrower/plaintiff.

Conditions & Warranties:
Para 90: The predominant modern approach is to consider the nature of the terms of the contract in order to decide whether those terms are conditions or warranties. Prima facie a breach of condition entitles the innocent party to rescind the contract and claim damages for any loss he may have suffered, whereas a breach of warranty only entitles him to damages."
Para No. 94: In the present case the plaintiff has not repudiated the contract. In fact it is working with the power plant and, therefore, the breach of condition has been treated by the plaintiff as a breach of warranty and in view of Section 12(3) of the Sale of Goods Act, the breach of warranty gives a right to claim for damages but not to a right to reject the goods and treat the contract as repudiated.

Conduct of Buyer – Rule of Estoppel:
Para No. 94: In the present case the plaintiff has not repudiated the contract. In fact it is working with the power plant and, therefore, the breach of condition has been treated by the plaintiff as a breach of warranty and in view of Section 12(3) of the Sale of Goods Act, the breach of warranty gives a right to claim for damages but not to a right to reject the goods and treat the contract as repudiated.

Law relating to Bank:
Para 39: It has to maintain its credibility and not merely be guided by the loss to our citizens. It has also to maintain its international credibility. Credibility is the most important thing for any banking institution. If the credibility goes the bank cannot survive. The bank in its working has to be most upright and honest in dealing with its customers.
Para 62: The commitments of the banks must be honoured free from interference by the courts; otherwise, trust in commerce internal and international would be irreparably damaged.
Para 65: The bank must pay if the documents are in order and the terms of credit are satisfied. The bank, however, was not allowed to determine whether the seller had actually shipped the goods or whether the goods conformed to the requirements of the contract. Any dispute between the seller and the buyer must be settled between themselves.

Whether case is filed by Bank or Buyer:
Para 64: Whether case is filed by Bank or Buyer: The basic nature of the case relates to the obligations assumed by the bank under the guarantees given to the appellant. If under the law, the bank cannot be prevented by the respondent from honouring the credit guarantees, the appellant also cannot be restrained from invoking the guarantees. What applies to the bank must equally apply to the appellant.
Para 61: The High Court proceeded on the basis that this was not an injunction sought against the bank but against the appellant. But the net effect of the injunction is to restrain the bank from performing the bank guarantee. That cannot be done. One cannot do indirectly what one is one free to do directly.

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

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