That in relation to “Prima facie case of established fraud”, the Hon’ble Supreme Court of India & Hon’ble High Courts of Different States of India in catena of Decisions has held & Observed as follows:

• In the case of Centax (India) Ltd., Appellant v. Vinmar Impex Inc. and others, Respondents AIR 1986 SUPREME COURT 1924, at Para 5, the Hon’ble Supreme Court of India observed:

  "The opening of a confirmed letter of credit constitutes a bargain between the banker and the vendor of the goods which imposes on the banker an absolute obligation to pay ... and that 'this was not a case in which the Court ought to exercise its discretion and grant the injunction ….. Except possibly in clear cases of fraud of which the banks have notice, the Court will leave the merchants to settle their disputes under the contracts by litigation or arbitration as available to them or stipulated in the contracts."

• In the case of Svenska Handelsbanken, Appellant v. M/s. Indian Charge Chrome and others, Respondents AIR 1994 SUPREME COURT 626, the Hon’ble Supreme Court of India observed:

  At Para 64, “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. Therefore, the frame of the suit by not impleading the bank cannot make any difference in the position of law. 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”.
  
  At Para 65, “In such transactions, the seller (beneficiary) receives payment from the issuing bank when he the presents a demand as per the terms of the documents. 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”.
  
  At Para 66, “The nature of the fraud that the courts talk about is the fraud of an ‘egregious nature as to vitiate the entire underlying transaction’ ".
  
  At Para 91-95, the Hon’ble Supreme Court observed:
  Section 12 of the Sale of Goods Act, 1930 provides the difference between 'condition' and 'warranty' and reads as follows: -
  "12. Condition and warranty.- (i) A stipulation in a contract of sale with reference to goods which are the subject thereof may be a condition or a warranty.
  (2) A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right to treat the contract as repudiated.
  (3) A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated.
  (4) Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction of the contract. A stipulation may be a condition, though called a warranty in the contract".
  Again Section 13 of the Sale of Goods Act provides when 'condition' to be treated as 'warranty', relevant part of sub-sections (1) & (2) thereof reads as under:
  "13. When condition to be treated as warranty.- (1) Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may waive the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.
  (2) Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect."
  It will be noticed that in the present case prima facie the provision for capacity of the power plant being of 108 M. W. was a condition. Therefore, the plaintiff could have repudiated the contract as provided in S. 12(2) of the Sale of Goods Act or treated as a warranty by waiving the condition or elect to treat the breach of the condition as a breach of warranty and not as a ground for treating the contract as repudiated.
  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 S. 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. Even the prayer in the plaint is for diminution of the price of the power plant and the relief is based on S. 59 of the Sale of Goods Act.
  We have already held that the contracts between the lenders and the borrower are not vitiated by any fraud much less established fraud.

• In the case of Unique Alliance Industries, Appellant …V/s… Anupama Agencies, Respondent, I (1995) BC 127 (DB), the Hon’ble Kerala High Court Observed:

  At Para 5, “The Supreme Court in, Syndicate Bank …V/s… Vijayakumar and Others (A.I.R. 1992 SC 1066) observed ………As far as its enforceability, the Supreme Court further said that it depends upon the terms under which the guarantor has bound himself. It is also said that the obligations arising under the Bank Guarantee are independent of the obligations arising out of a specific contract between the parties. Therefore the terms contained in the Bank Guarantee alone need to be considered for its enforceability.
  
  At Para 8, “The allegations of fraud pointed out in the impugned order are concerned with the contract between the appellant and the first respondent at whose instance the Bank Guarantee has been given. It is to be remembered here that there is no case of fraud in the execution of Ext. A.2 guarantee by the Bank in favour of the appellant. The rule is well established that a Bank issuing a letter of Credit is not concerned with the underlying contract between the buyer and seller. (See United Commercial Bank …V/s… Bank of India (A.I.R. 1981 SC 1428)”.

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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