## Facts

- Itek Corp. contracted in 1977 to supply optical equipment to Iran’s Ministry of War for $22.5 million, with a $4.5 million down payment and staged payments thereafter.
- The contract required two guarantees in favor of the Ministry: a $4.5 million down-payment guarantee and a $2.25 million performance guarantee.
- Bank Melli Iran issued the guarantees to the Ministry; to secure Melli, Itek arranged for First National Bank of Boston (FNBB) to issue standby letters of credit in Melli’s favor, payable upon Melli’s certification that the Ministry had demanded payment under the guarantees.
- The contract included a force majeure provision requiring release of Itek if the United States canceled Itek’s export license, and a forum/law clause directing disputes to Iranian courts under Iranian law.
- After the 1979 Iranian revolution, the U.S. government suspended and then refused to renew Itek’s export license, making performance impossible; Itek invoked force majeure and canceled the contract in March 1980.
- By early 1979, the Ministry had released most of the down-payment guarantee, indicating Itek had largely earned the down payment.
- Despite Itek’s cancellation and claimed release of the guarantees, Melli demanded payment from FNBB under the standby letters of credit, certifying that the Ministry had called on the guarantees.
- Itek sued and obtained injunctive relief preventing FNBB from honoring Melli’s draws; after regulatory developments and further proceedings, the district court reinstated a preliminary injunction, which Melli appealed.

## Issues

1. Whether Melli’s demand on the standby letters of credit constituted “fraud in the transaction” allowing a court to enjoin payment despite the independence of letters of credit.
2. Whether Itek showed irreparable harm and no adequate remedy at law, given potential recourse in Iranian courts or before the Iran–United States Claims Tribunal.

## Decision

- The First Circuit affirmed the preliminary injunction barring FNBB from paying Melli on the standby letters of credit.
- The court held that the record supported a finding that Melli’s draw was “fraud in the transaction” under Massachusetts law because it had no plausible or colorable contractual basis after force majeure cancellation and contemplated release of the guarantees.
- The court held that Itek demonstrated irreparable harm because post-payment recovery was realistically unavailable: Iranian litigation was uncertain and potentially ineffective, and Tribunal relief was not reasonably knowable as available before the filing deadline.
- The court emphasized that the fraud exception is narrow and does not permit injunctions in ordinary underlying-contract disputes, but applies where the beneficiary knowingly seeks payment without any right to it.

## Legal Principles

- Letters of credit are generally independent of the underlying contract; issuers must honor facially compliant demands.
- A court may enjoin payment under a narrow “fraud in the transaction” exception where the beneficiary’s demand lacks any plausible or colorable basis and functions as an attempt to obtain funds with knowledge of no entitlement.
- Irreparable harm may be shown where honoring the letter of credit would effectively deprive the applicant of meaningful recovery because available legal remedies are speculative, practically unavailable, or not reasonably ascertainable at the time injunctive relief is sought.
- Equitable analysis may turn on what remedies were reasonably apparent when action was required, not on later-developed information.

## Conclusion

The court upheld injunctive relief preventing payment on standby letters of credit where the beneficiary’s demand had no plausible contractual basis after force majeure cancellation and where recovery after payment was practically unavailable, applying a narrow fraud exception consistent with letter-of-credit independence.


Itek Corp. v. First Nat’l Bank of Bos., 730 F.2d 19 (1st Cir. 1984)