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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. 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.
As one Court has stated : Obviously, when the issuer of a letter of Credit knows that a document, although correct in form, is, in point of fact, false or illegal, he cannot be called upon to recognise such a document as complying with the terms of a letter of credit.
No hardship will be caused by permitting the bank to refuse payment where frauds is claimed, where the merchandise is not merely inferior in quality but consists of worthless rubbish, where the draft and the accompany document are in the hands of one who stands in the same position as the fraudulent seller, where the bank has been given notice of fraud before being presented with the drafts and documents for payment, and where the bank itself does not wish to pay pending an adjudication of the rights and obligations of the other parties.

Legal relation of a Negotiating Bank vis-a-vis the Issuing Bank:

61. The contract between the issuing banker and the paying or negotiating (intermediary) banker may partake of a dual nature. The relationship is mainly that of principal and agent, mandator and mandatory. In order that he may claim reimbursement for any payment he makes under the credit or the indemnity of an agent, the intermediary banker must obey strictly, the instructions he receives, for by acting on them, he accepts then and thus enters into contractual relations with the issuing Bank. The instructions may take the form of an authority either to pay against documents or drafts accompanied by document, or to negotiate drafts drawn either on the issuing banker or on the buyer. The authority may be accompanied by instructions to the intermediary banker to confirm the credit, that is, to place himself in binding contractual relationship with the beneficiary. There is ordinarily no privity between the intermediary banker and the buyer. But the intermediary banker, though initially the agent of the issuing Bank, may also act as principal in relation to him. (Pagets' Law of Banking, 9th Ed., 1982 pp. 543, 544).

17. Normally in most of the cases based on personal contract, MOU or tenders, the Courts have to go very slow while issuing writ under Article 226 of the Constitution of India. In most of such decided cases, the facts are found to be of such a nature, where there is a personal agreement or MOU of issuance of bank guarantee or Letter of Credit. The litigant- petitioner has attempted with a prayer that a particular condition of contract either may not be implemented or it may be interpreted in a particular manner and the bank guarantee may not be encashed or payment may not be made against the Letter of Credit. In such type of litigations main adversary party is the party responsible for issuance of either Letter of Credit or bank guarantee and the Banks have been found joined as party so that the writ issued by the Court can be executed effectively. The facts of the present case appears to be a bit different. On reading of the papers and mainly the pleadings, it is not possible for this Court to agree with the proposition made by the learned Counsel appearing for the respondent No. 1 that M/s.A.K. Enterprise or M/s.Ved Cellulose are either necessary or proper parties to be joined. The document at page No. 30 is one of the master documents. Both the parties have placed reliance on the contents of the said document i.e. Letter of Credit dated 01st May 2005. The said Letter of Credit has been issued by the respondent No. 1. The date of expiry is mentioned as 30th September 2007, however, the place of expiry is not mentioned. Certain disputed facts shall have to be considered in view of the rival contentions referred to hereinabove, more particularly, the point of jurisdiction, that the respondent No. 1 issued the Letter of Credit dated 01st June 2005 and one irrevocable revolving Letter of Credit bearing No. NP/Revolving LC/35/51 has been given to the petitioner being the beneficiary and the status of the respondent No. 1-Bank having its branch at Ilorapark, Vadodara is shown to be the advising bank/ available with Bank of India and that branch has been asked to advice on confirmation. So it is clear that some role has been assigned to Bank of India, Vadodara Branch. The respondent No. 1-Bank's branch at Ilorapark, Vadadara was under obligation to advise adding. Indisputably, certain payments have been received by the petitioner through the respondent No. 2 and that too, through the respondent No. 1. Against the request made by M/s. A.K. Enterprise, the Letter of Credit has been issued and the same is for an amount of Rs. 10 lakhs. The obligation of the petitioner was to see that the documents are presented within 30 days after the date of invoices and in any case not later than the date of expiry of credit, and the respondent No. 1 has undertaken to see that 100% payment of the invoice value on the applicant-M/s.A.K. Enterprise is made available, that too, at sight. The petitioner has received this through respondent No. 2. In the case of negotiation exceeds US$ 50,000 or equivalent, a particular mode is found to have been suggested to the negotiating bank. As mentioned hereinabove, there is an admission of the respondent No. 1 that the documents i.e. bills/invoices referred to by the petitioner with respective invoices were received by the respondent No. 1 and these documents were found in order. So there was no technical defect which by itself could have been a cause for rejection of the request made for payment on sight, and more than one document is available clarifying this fact situation. The petitioner had tendered documents initially with respondent No. 2. So the draft at sight along with invoices can be presented within the validity of the credit. It is not the say of the respondent No. 1 that the draft at sight along with invoices has not been received. It is settled legal position that a part of cause of action would be sufficient to invoke jurisdiction of this Court. It may be a Civil Court or the High Court. Merely because the unit established is outside the State of Gujarat and the applicant-lessee i.e. M/s.A.K. Enterprise has got issued Letter of Credit of the respondent No. 1, would go to the root of the issue of jurisdiction raised by the respondent No. 1 because a number of things have taken place at Vadodara and one of the branches of respondent No. 1 was assigned some role to play and the Letter of Credit states that the same is available with the Bank of India, Ilora Park Branch, Vadodara, as an advising bank. When it has not been denied that in past the petitioner had received payment through its bank at Vadodara and the respondent No. 1 has made payment because of the obligation under the Letter of Credit issued, it will not be possible for this Court to agree with the submissions advanced by Shri J.T. Trivedi, learned Counsel appearing for the respondent No. 1, that this Court has no territorial jurisdiction to issue any writ against the respondent No. 1. The Court is aware that each branch is separate business premises of the bank having wide network. The bank may have its branches in a State or States or in the entire country, but ultimately the respondent No. 1 is a nationalized bank and thus, it is a State within the meaning of Article 12 of the Constitution of India, and has opted to select its one of the branches i.e. Ilorapark Branch, Vadodara, in reference to the Letter of Credit issued at the instance of M/s.A.K. Enterprise to the petitioner at Vadodara through the respondent No. 2. This Court can very well consider the grievance on its merits and it would not be either legal, proper or justified to throw away the petition saying that this Court has no territorial jurisdiction to deal with the present petition. The correspondences produced by the respondent No. 1 as well as the petitioner show that proper documents were sent so that the payment can be received at sight by the petitioner from the respondent No. 1. All invoices/ bills were tendered with sight drafts. The sight drafts which were sent are absolutely found in order and as such there is no infirmity or defect in such sight drafts or the invoices tendered. The documents show that on all occasions within the prescribed period, the invoices were sent to the respondent No. 2 by the petitioner and in turn, they were forwarded and received by the respondent No. 1. There is no justification found in saying that the payment could be made only if the amount is received from M/s.A.K. Enterprise. The letters dated 03rd August 2006 and 24th August 2006 addressed to the respondent No. 2 by the respondent No. 1 indicate that the documents are being returned on the ground that the payment is not forthcoming i.e. to say from M/s.A.K. Enterprise, on whose behalf the Letter of Credit has been given. There is one letter dated 27th June 2006 (page No. 366 of the petition), which says, "Please be advised that we have on receipt of the document on each occasion advised the discrepancies to your Bankers i.e. State Bank of Saurashtra well within the stipulated period of 7 banking days. We as L/C opening Bank are committed to reimburse the negotiating Bank provided (a) the documents are received meticulously in compliance with the terms of L/C and/or (b) documents received with discrepancies are duly accepted and discrepancies are waived by the applicants. In this case we are receiving documents with discrepancies as advised to your Bankers from time to time and documents on the basis of these discrepancies are rejected by the applicants (M/s.A.K. Enterprise)". Thus, the respondent No. 1 has expressed its regret and some negotiations have taken place between the higher officers of the respondent No. 1 i.e. General Manager and Assistant General Manager of the respondent No. 1.