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"In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller"

Megarry,J. then distinguished the American Case on the ground that "It was important to notice that in the Sztejn case, the proceedings consisted of a motion to dismiss the formal complaint on the ground that it disclosed no cause of action. That being so, the Court had to assume that the facts stated in the complaint were true".

"In such a situation, where the seller's fraud has been called to the bank's attention before the drafts and documents have been presented for payment the principle of the independence of the banks' obligation under the letter of credit should not be extended to protect the unscrupulous seller"

Megarry,j. then distinguished the American Case on the ground that "It was important to notice that in the Sztejn case, the proceedings consisted of a motion to dismiss the formal complaint on the ground that it disclosed no cause of action. That being so, the Court had to assume that the facts stated in the complaint were true".

Learned counsel for the respondent Bank contended that the case before us which is concerned with an application under Order 7 Rule 11(a) CPC for rejecting a plaint on the basis of "absence of cause of action from a reading of the plaint" was identical with the Sztejn case and hence what Megarry, J. stated Discount Records Ltd. directly applies.

It is true, we are also dealing with a question whether the plaint disclosed a cause of action. But here the allegation in the plaint is only one relating to absence of movement of goods by the seller. As pointed in the decided cases and in particular in the U.P. Cooperative Federation Case and other cases decided by this Court and also Courts elsewhere, mere absence of movement has never been, in this branch of law, treated as amounting to fraud, Such non- movement, event if the allegation is to be treated as true, could be for goods reasons or for reasons which were not good. But that is not 'fraud'. In Sztejn (See law relating to commercial credit by A.G. Davis (2nd Ed, 1954) (p160-61 for facts of this case) the position was different. There the complaint was that the sellers who were to ship complaint was that the sellers who were to ship 'bristles' deliberately placed 50 cases of material on board a steamship, procured a bill of loading from a steamship company and obtained customary invoices. The documents described the goods as bristles as per the letter of credit. In fact, the Indian sellers had filled the 50 crates with 'Cowhair' and other worthless material and rubbish with intent to simulate genuine merchandise and so 'defraud' the plaintiff, the buyers - who has instructed the defendants to issue the letter of credit. The sellers then drew a draft under the letter of credit to the order of the Chartered bank of India, Australia and China and delivered the draft and the 'fraudulent documents' to the chartered Bank at Cawnpore for collection on account of the sellers. The buyer brought the action which succeeded, to restrain the defendants from paying the draft. The Learned Judge said (p.634):

"It must be assumed that the seller has intentionally failed to ship any gods ordered by the buyer. In such a situation, where the seller's fraud has been called to the bank's attention before the draft and documents have been presented for payment, the principle of the independence of the bank's obligation under the letter of credit should not be extended to protect the unscrupulous seller. It is true that even though the documents are forged or fraudulent, if the issuing bank has already paid the draft before receiving notice of the seller's fraud, it will be protected if it exercised reasonable diligence before making such payment. However, in the instant action Schroder had received notice of Transea's active fraud before it accepted or paid the draft. The Chartered Bank, which stands in no better position than Transea, should not be heard to complain because Schroder is not forced to pay the draft accompanied by documents covering a transaction which it has reasons to believe is fraudulent"