Svenska Handelsbanken v Indian Charge Chrome

• Indian Charge Chrome borrowed from a consortium of foreign banks, led by Svenska Handelsbanken, to set up a power plant, and IDBI furnished a guarantee in favour of the lenders. Alleging that the suppliers and lenders had fraudulently induced the contracts, the company sued in Orissa and obtained an injunction from the High Court restraining encashment of the guarantee. The lender appealed.

1. Whether a court may restrain encashment of an irrevocable bank guarantee because of allegations of fraud and disputes under the underlying contracts.

• The guarantee was independent of the contracts between the borrower and the suppliers and could be enforced without reference to claims under them. An irrevocable commitment, whether a confirmed bank guarantee or an irrevocable letter of credit, cannot be interfered with except in a case of fraud or of irretrievable injustice. Neither was made out, and the High Court's injunction was set aside.

Bank guarantees and irrevocable credits are independent of the underlying transaction. To restrain their operation there must be a serious dispute and a good prima facie case of fraud, or special equities showing irretrievable injustice; disputes under the main contract must be settled by litigation or arbitration, not by stopping the bank's payment.