Transaction Banking (TB) can be defined as the set of instruments and services that a bank offers to trading partners to financially support their reciprocal exchanges of goods (e.g.trade), monetary flows (e.g., cash), or commercial papers (e.g., exchanges). TB allows banks to maintain close relationship with their corporate clients so banks don’t want to be dis-intermediated by other payers.
Transaction Banking division of a bank typically provides commercial banking products and services for both corporates and financial institutions, including domestic and cross-border payments, risk mitigation, international trade finance as well as trust, agency, depositary, custody and related services. It comprises the Cash Management, Trade Finance and Trust & Securities Services businesses.
A number of global trends are leading to a renewed focus on the transaction banking sector. These trends include the globalization of trade, the increasing importance of liquidity management and a heightened emphasis on securing relationships in a world where both competition and clients are becoming more global and sophisticated. Transaction banking is also particularly attractive in the current economic context because it often has relatively low regulatory capital requirements.
No prohibitory order can be passed by a court to interfere with normal banking transactions and with the contract obligation of the bank where the only dispute is as to the performance of the contract and the dispute can be resolved by a suit for damages. When money is deposited with a bank, its withdrawal is governed by the terms of the contract and the bank is bound to comply with the conditions of the contract and no injunction can issue preventing operation of the bank account.
It is fairly well settled that the courts are reluctant to interfere with international business transactions which have been entered into by the parties through performance guarantee or letter of guarantee. Bank guarantee or letter of credit is given by a banker at the instance of one of the parties to, and pursuant to the terms of, the main contract. Generally speaking, no injunction can be issued to restrain the bank from making payment under an unconditional bank guarantee or an irrevocable letter of credit. There is a distinction between the terms of the bank guarantee or letter of credit and the terms of the underlying contract between two parties with which the banker is not concerned. Once the conditions of the bank guarantee or the letter of credit are fulfilled, the bank has nothing to do with the performance or non-performance of the underlying contract. A bank issuing a bank guarantee or letter of credit is not concerned with the underlying contract between the buyer and seller or between employer and the contractor; the bank guarantee or letter of credit constitutes an independent contract between the bank and the party in whose favour it is issued. Where the State Trading Corporation entered into agreement with a foreign buyer to sell goods which the Corporation was to obtain from a local supplier for which the local supplier furnished a bank guarantee, but the contract failed because of the default of the local supplier, the enforcement of the bank guarantee cannot be stopped by injunction. The general rule is subject to the exception that such bank guarantee or letter of credit can be stopped by injunction on the bank only in case of fraud of which the bank has clear notice or when there is special equity justifying such injunction. But no injunction can be granted in international business transaction merely on allegation of fraud. Banks cannot be made to act as policeman to police upon any kind of fraud in international transaction; no re-imbursement should be stopped by any court when an authorised or negotiating bank makes any payment to a third party on the basis of papers appearing to be correct. Where the beneficiary of the bank guarantee or letter of credit has perpetrated fraud when the bank guarantee is sought to be invoked despite the contractor withdrew his bid before acceptance, there results no formation of contract and injunction can be issued to restrain the bank from making payment under the bank guarantee. Where the buyer did not take steps to add confirmation to the letter of credit as required by the contract of purchase and the buyer en cashed the bank guarantee furnished as performance bond, mandatory injunction was issued for return of the amount of the guarantee to the bank which issued it. Cases involving allegations of misrepresentation or suppression of material facts or violation of the terms of the guarantee cannot be treated differently and as such where there are allegations of such nature the court would not hesitate to grant injunction. Where the plaintiff received part of contracted goods and the balance was not supplied and the documents were negotiated beyond the stipulated time, the plaintiff is entitled to injunction restraining payment under the letter of credit for the portion not supplied.
The question arises whether the issuing bank is liable to make payment when the issuing bank comes to know about the fraud after it accepted the draft in a case where the letter of credit provided for deferred payment and in the meanwhile the negotiating bank made payment to the beneficiary of the letter of credit on acceptance of the draft by the issuing bank. In Korea Exchange Bank v. Gemini Garments the negotiating bank made payment on discrepant documents and then sent it to the issuing bank which accepted the draft, but the fraud perpetrated by the beneficiary of the letter of credit was found out and the High Court Division after examining a number of cases from local as well as foreign jurisdictions found that the negotiating bank was a collecting bank and it having made payment before the acceptance by the issuing bank could not be treated as holder in due course and the issuing bank could not be compelled to make payment to the negotiating bank. The High Court Division further found that the beneficiary having been found to be a bankrupt, Korea Exchange Bank would have no right to payment since its principal forfeited its right to such payment and such payment would result in irretrievable injustice. Where the bank has no notice of the fraud perpetrated by the drawer of the bill of exchange, payment to the holder in due course of the bill of exchange under a letter of credit cannot be restrained by injunction.
Banker’s letter of indemnity stands in the same position with bank guarantee or letter of credit. The court should not interfere in a transaction between a bank and a beneficiary of a letter of indemnity by grant of injunction at the instance of the other party restraining the beneficiary from enforcing the liability under the letter of indemnity executed by the banker which was absolute and upon a demand being made by the beneficiary, the bank becomes liable to honour the same regardless of any controversy between the parties.