Article

Factual Summary: Indian Buyer (Buyer/Applicant) obtained commercial letter of credit in favor of Saudi Arabian Seller (Seller/Beneficiary) to pay for 148,500 metric tons of plastic packing material. When the goods were delivered, Buyer/Applicant found that some of the packaging incorrectly described the goods. Buyer/Applicant alleged that its claim was supported by an independent inspection agency which had examined the packaging but not the contents. Contending that it would not be able to recover from Seller/Beneficiary in Saudi Arabia, Buyer/Applicant sued Issuer and Seller/Beneficiary in India seeking to restrain payment on the LC. The trial court dismissed the suit.

Legal Analysis:

1. Fraud; Injunction; Independence. Buyer/Applicant argued that Seller/Beneficiary “deliberately and mischievously supplied inferior grade material” to Buyer/Applicant, which amounts to egregious fraud. The Judge dismissed this claim, stating that no document on record exists revealing that the plastic granules were of an inferior quality except the description of the packaging. The Judge explained that Buyer/Applicant had to prove either fraud or irretrievable injustice to warrant an injunction. Because Buyer/Applicant failed to demonstrate either fraud or irretrievable injustice, the Judge denied the request. He cited Section 17 of the Indian Contract Act, 1872 which defines “fraud” as:

“mean[ing] and include[ing] any of the following acts[:]

(1) the suggestion, as a fact, of that which is not true, by one who does not believe it to be true;

(2) the active concealment of a fact by one having knowledge or belief of the fact;

(3) a promise made without any intention of performing it;

(4) any other act fitted to deceive;

(5) any such act or omission as the law specially declares to be fraudulent.”

The Judge noted that Buyer/Applicant did not allege that Seller/Beneficiary conducted any of these fraudulent acts in supplying the plastic granules and failed to prove that the materials were not of the quality requested. He stated that Buyer/Applicant’s mere inspection of the packaging label did not constitute a proper showing of fraud without a chemical examination of the plastic granules. The Judge also stated that, “the only ground on which injunction can be granted in favour of the plaintiff is if fraud of an egregious nature which will vitiate the very foundation of the Bank Guarantee or letter of credit or irretrievable harm or injustice.”

The Judge further noted that Seller/Beneficiary properly presented to Issuer the documents required by the LC, placing Seller/Beneficiary in compliance with the terms of the LC, explaining that LCs are a separate contract, and a bank issuing the LC cannot be deterred from releasing payment regardless of whether a dispute exists between the parties.

2. Injustice; Injunction; Irreparable Harm. Buyer/Applicant also argued that since Seller/Beneficiary is a Saudi Arabian company, it would be unable to collect amounts owed, thus rendering moot any remedies awarded by the court. The Judge rejected this argument, stating that difficulties in collecting dues do not amount to irretrievable injustice. The Judge stated, “This kind of difficulty is a necessary fallout of international transactions where one party is overseas.”

[SRJ/ZTS]

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The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of the ICC or Coastline Solutions.