## Facts

- An English machinery manufacturer agreed to supply machinery to Indian buyers in instalments over several months, with a contract clause allowing price increases if labor costs rose.
- The buyers arranged a confirmed irrevocable letter of credit in London under which the bank undertook (up to a stated sum and within a stated time) to pay the seller against bills drawn on the buyers accompanied by invoices and shipping documents.
- The seller made shipments and presented documents; the bank paid on earlier shipments.
- The seller’s invoices included increased prices reflecting higher labor costs under the sale contract’s escalation clause.
- Before a later shipment, the buyers instructed the bank to pay only the original contract price and not the increased labor component.
- The bank refused to pay against an invoice including the increased amount unless the buyers consented.
- The seller treated the refusal as repudiation, cancelled the sale contract, and sued the bank for breach of the letter-of-credit undertaking.

## Issues

1. Whether a confirming bank under a confirmed irrevocable letter of credit may refuse payment against conforming documents based on the applicant-buyer’s instructions or disputes under the underlying sale contract.
2. If the bank’s refusal is a repudiation, what damages are recoverable, including how the credit’s amount and expiry limit recovery.

## Decision

- The court held the bank breached (repudiated) its letter-of-credit contract by refusing to pay upon presentation of conforming documents within the credit’s terms.
- The bank’s obligation under a confirmed irrevocable credit was treated as absolute once the documentary conditions were met.
- The bank could not justify nonpayment by relying on the buyers’ instructions or the parties’ dispute over whether the increased prices were owed under the sale contract.
- Damages were awarded to the seller, measured by the loss from the bank’s nonpayment, analogous to damages for non-acceptance, but limited to what could have been drawn under the credit within its stated amount and time limits.

## Legal Principles

- A confirmed irrevocable letter of credit creates an independent contract between the issuing/confirming bank and the beneficiary, separate from the underlying sale contract.
- When stipulated documents conform and are presented within the credit’s temporal and monetary limits, the bank must honor regardless of disputes between buyer and seller.
- The applicant cannot unilaterally vary the bank’s undertaking by later instructions that conflict with the credit’s terms.
- A bank’s stated refusal to honor conforming presentations constitutes repudiation/anticipatory breach of the letter-of-credit contract.
- Damages for wrongful dishonor are assessed by reference to the beneficiary’s loss from nonpayment, comparable to non-acceptance principles, but capped by the credit’s amount and constrained by its expiry.

## Conclusion

The court enforced the autonomy of a confirmed irrevocable letter of credit by holding the bank liable for refusing to honor conforming documents based on buyer instructions and underlying price disputes, and it limited damages to the sums the seller could have drawn within the credit’s stated limits and time.


Urquhart Lindsay & Co. v. Eastern Bank, [1922] 1 K.B. 318 (K.B. 1921)