Letter of credit

In Tarapore & Co. Madras v. V/o Tractors Export, Moscow and Anr., (1969) 2 SCR 920 supreme Court observed that irrevocable letter of credit had a definite implication. It was independent of and unqualified by the contract of sale or other underlying transactions. It was a mechanism of great importance in international trade and any interference with that mechanism was bound to have serious repercussions on the international trade of this country. The Court reiterated that the autonomy of an irrevocable letter of credit was entitled to protection and except in very exceptional circumstances courts should not interfere with that autonomy.

These observations a fortiori apply to a bank guarantee because upon bank guarantee revolves many of the internal trade and transactions in a country. In United Commercial Bank v. Bank of India and Ors., (1981) 3 SCR 300 , Supreme Court was dealing with injunction restraining the bank in respect of letter of credit. This Court observed that the High Court was wrong in granting the temporary injunction restraining the appellant bank from recalling the amount paid to the respondent bank. This Court reiterated that Courts usually refrain from granting injunction to restrain the performance of the contractual obligations arising out of a letter of credit, or a bank guarantee between one bank and another. If such temporary injunction were to be granted in a transaction between a banker and a banker, restraining a bank from recalling the amount due when payment was made under reserve to another bank or in terms of the letter of guarantee or credit executed by it, the whole banking system in the country would fail.