Facts:
Para 3: The appellant was the 5th defendant in the suit filed by the 3rd respondent, namely, the Corporation Bank which has its zonal office at Bangalore. The suit was filed in the year 1985 by the said Bank against Defendants 1 to 4 belonging to Tadikonda family residing at Guntur in Andhra Pradesh and against the appellant ITC Limited. The relief claimed in the suit was for a sum of Rs. 52,59,639.66.
Para 6: …….The first defendant belonging to Tadikonda family (hereinafter called the buyers) approached the plaintiff Bank in December 1979 for the issue of a Letter of Credit in favour of the appellant-Company for an amount of Rs. 32 lakhs for the purpose of securing the payment towards supply of cigarettes manufactured by the appellant and for certain other facilities……….
Para 7: ….the appellant availed the benefits of drawing various sums on several dates purporting to be for despatch of goods (cigarettes) by the appellant to the buyers (Defendants 1 to 4) and that was how the appellant appropriated the amounts drawn as against goods purportedly despatched by the appellant to the buyers. It stated in para 6 of the plaint, that "the 5th defendant misrepresented to the plaintiff that the goods were despatched while presenting the relevant demand bills for negotiation under LC and fraudulently obtained payments". After referring to the refusal of the buyers to make good the payment made by the Bank to the appellant to the extent of the money already paid by the Bank to the appellant under the LCs, the plaint proceeded to state that the plaintiff demanded reimbursement of the said amounts by the buyers and that the buyers informed the plaintiff that in fact, there was no movement of the goods by the appellant and that unless there was such a movement, the appellant was not entitled to draw any amount under the LC facility from the plaintiff-Bank. It was stated in para 8 of the plaint that the buyers by letter dated 23-1-1984 stated that the appellant had drawn the bills for an amount of Rs. 18 lakhs without support of actual movement of stock of cigarettes on 1-9-1983. It was stated in para 8 that the Bank has now realised that the appellant had drawn monies from the Bank without movement of goods to the buyer and had therefore acted fraudulently. The plaint then proceeds to a state in para 9, that the appellant had committed breach of faith and acted contrary to the terms of the Letters of Credit and that the plaintiff issued registered notices to all the parties.

Presentation of false & fraudulent documents:
Para 20(e,f,g): We may, illustrate this aspect - relating to "fraudulent documents" by referring to the well-known case of United City Merchants (Investments) Ltd. v. Royal Bank of Canada ((1982) 2 All ER 720 : (1983) 1 AC 168 : (1982) 2 WLR 1039, HL) decided by the House of Lords which has been referred to by this Court in the U.P Coop. Federation case ((1988) 1 SCC 174). In that case the date 15-12-1976 was falsely and fraudulently entered on the Bill of Lading as the date on which the goods were shipped even though the goods were actually shipped on 16-12-1976 and the Bank which came to know about this fact refused to pay. The House of Lords held that the Bank could have justifiably refused to pay because the Bill of Lading, which was one of the documents to be presented before the Bank, was a fraudulent document. Having laid down the principle as stated above, the House of Lords however held on facts that the said false statement on the Bill of Lading was not made by the seller but was made by the shipping agent and inasmuch as the sellers were not responsible, the Bank could not refuse payment. We are referring to this case only to illustrate what could be a "fraudulent document" presented before the Bank by the sellers.
Para 21(a): Likewise in the "Cement scandal case" in Establishment Esefka International Anstalt v. Central Bank of Nigeria ((1979) 1 Lloyd's Rep 445, CA), Lord Denning pointed out that the shipping documents, the bills of lading, certificates etc. were forged and were all "moonshine" and there were no such shipping vessels at all. That case is an example of forged documents.
Para 26(Last sub-para “a” at page 81): It Will be noticed that Sztejn ((1941) 31 NYS (2d) 231) was a case where "fraudulent documents" were presented which simulated shipping of goods which were not only not shipped but on the other hand the seller shipped some rubbish deliberately. Therefore the allegations in the complaint filed by the buyers in that case were based upon the above facts - which as per the legal position in this branch of law - i.e. presentation of "fraudulent documents" where goods were deliberately not shipped and an attempt was made to pass off "rubbish" as the goods ordered for - amounted to "fraud".

Fraud:
Para 22(d, c): What is necessary for the Bank to refuse payment is a case of clear "fraud" and the Bank's knowledge as to such fraud (Bolivinter Oil S.A. v. Chase Manhattan Bank N.A.) ((1984) 1 LLR 392). As pointed by Lord Denning and Lord Lane in Edward Owen ((1978) 1 All ER 976 : 1978 QB 159 : (1977) 3 WLR 764, CA), the Bank cannot refuse payment merely because according to it the claim was "dishonest" or "suspicious" or it appeared to be a sharp practice but it must be established as "fraud". Lord Ackner in United Trading Corpn. S.A. & Murray Clayton Ltd. v. Allied Arab Bank Ltd. ((1985) 2 LLR 554, CA) held that the Bank could object to pay not because the demand was not "honestly" made but was made fraudulently. Waller, J. in Turkiye v. Bank of China ((1996) 2 LLR 611) [LLR pp. (617-618)] said that the question was whether the demand for payment was "fraudulent". Mere allegations and counter-allegations between the parties as to breach of contract, non-payment of advances or non-supply of machinery did not amount to fraud.
Para 23(d): In the result we hold that an allegation of non-supply of goods by the sellers to the buyers did not by itself amount, in law, to a plea of "fraud" as understood in this branch of the law and hence by merely characterising alleged non-movement of goods as "fraud", the Bank cannot claim that there was a cause of action based on fraud or misrepresentation.

Clever drafting - does not make out a case of fraud:
Para 16: The question is whether a real cause of action has been set out in the plaint or something purely illusory has been stated with a view to get out of Order 7 Rule 11 CPC. Clever drafting creating illusions of cause of action are not permitted in law and a clear right to sue should be shown in the plaint. (See T. Arivandandam v. T. V. Satyapal ((1977) 4 SCC 467)).
Para 17(g): …. The Bank, in the present case before us, could not, by merely stating that there was non-supply of goods by the appellant, use the words "fraud or misrepresentation" for purposes of coming under the exception.
Para 23(d): In the result we hold that an allegation of non-supply of goods by the sellers to the buyers did not by itself amount, in law, to a plea of "fraud" as understood in this branch of the law and hence by merely characterising alleged non-movement of goods as "fraud", the Bank cannot claim that there was a cause of action based on fraud or misrepresentation.
Para 27: the ritual of repeating a word or creation of an illusion in the plaint can certainly be unravelled and exposed by the Court while dealing with an application under Order 7 Rule 11(a). Inasmuch as the mere allegation of drawal of monies without movement of goods does not amount to a cause of action based on "fraud", the Bank cannot take shelter under the words "fraud" or "misrepresentation" used in the plaint.

No cause of Action – Suit Not maintainable: Non-supply of goods or Non-confirmation of goods as per contract:
Para 17(g): ….there will be no cause of action in favour of the bank in cases where the seller has not shipped the goods or where the goods have not conformed to the requirements of the contract. The Bank, in the present case before us, could not, by merely stating that there was non-supply of goods by the appellant, use the words "fraud or misrepresentation" for purposes of coming under the exception. The dispute as to non-supply of goods was a matter between the seller and buyer and did not, as stated in the above decision, provide any cause of action for the Bank against the seller.

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

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