## Facts

- SRS Products Co., Inc. agreed to design and construct a commercial refrigeration unit for LG Engineering Co., Ltd. for use in Thailand, for a price exceeding $2.4 million.
- The contract required conformance to specifications and included warranties that the unit would be free from defects and that SRS would repair or replace covered failures within the warranty period.
- To secure SRS’s performance and warranty obligations, the parties substituted a standby letter of credit for a performance bond; Heritage Bank issued the credit in LGE’s favor.
- The letter of credit permitted LGE to draw upon presenting specified documents, including a written declaration that SRS failed to perform its obligations under the refrigeration-unit contract.
- After delivery and operation, LGE asserted the unit had performance problems and did not conform; SRS disputed that the complained-of issues were covered by the warranty.
- LGE demanded payment under the letter of credit and presented documentation that facially complied with the credit’s terms.
- SRS sued to prevent payment, alleging LGE’s draw was fraudulent because LGE allegedly knew the claimed defects were not covered and thus lacked a good-faith basis to declare default.
- The trial court issued a temporary restraining order but denied a temporary injunction; SRS pursued an accelerated interlocutory appeal.

## Issues

1. Whether SRS showed a probable right to relief and irreparable injury sufficient to temporarily enjoin payment on a standby letter of credit based on “fraud in the transaction.”
2. Whether the trial court abused its discretion in denying a temporary injunction in light of the independence principle and the limited fraud exception applicable to letters of credit.

## Decision

- The court of appeals affirmed the denial of the temporary injunction.
- The court dissolved the appellate injunction that had maintained the status quo during the appeal.
- SRS failed to show the type of egregious “fraud in the transaction” required to interfere with payment on a facially complying letter-of-credit demand.
- Because SRS did not establish a probable right to recover on its fraud theory, the trial court did not abuse its discretion.

## Legal Principles

- A standby letter of credit is independent of the underlying contract; the issuer’s duty to honor turns on strict facial compliance with the credit’s documentary requirements, not actual contract performance.
- Courts recognize only a narrow “fraud in the transaction” exception allowing injunctive relief against payment; it requires more than a dispute over contract performance or warranty coverage.
- For letter-of-credit fraud, the applicant must show the beneficiary had no colorable right to draw (e.g., a sham demand or a knowingly baseless claim), not merely that the beneficiary may be wrong on the merits.
- Temporary injunction relief requires proof of a probable right of recovery and probable, imminent, irreparable injury without an adequate remedy at law; appellate review is for abuse of discretion.

## Conclusion

The court held that LGE’s conforming draw request could not be enjoined absent clear evidence of egregious fraud depriving LGE of any plausible contractual basis to demand payment, and it therefore affirmed the trial court’s refusal to block payment under the standby letter of credit.


SRS Prods. Co. v. LG Eng’g Co., 994 S.W.2d 380 (Tex. App.—Houston [14th Dist.] 1999)