Case Facts
Two contracts were made on 12 and 13 July 1967 between the sellers, a Kenyan coffee-producing company, and the buyers, an Egyptian import company, for the sale of 250 tons of Kenyan coffee each. The price was expressed as "Shs. 262/- per cwt of 112 lbs nett F.O.B. Mombasa", with payment to be made by confirmed irrevocable letter of credit. The contracts were governed by the terms and conditions of the London Coffee Trade Association, which required that letters of credit be opened in strict conformity with the contract.
Under the Central Bank of Kenya Act 1966, the unit of currency of Kenya was the Kenya shilling, and all monetary obligations or transactions in Kenya were deemed to be expressed and settled in Kenyan currency unless otherwise provided. The abbreviated form "Sh" in the schedule to that Act meant the Kenya shilling. At the time the contracts were made, there was parity between sterling and Kenyan currency.
The buyers re-sold the coffee to sub-buyers in Spain, who established an irrevocable transferable letter of credit in a Spanish bank. Part of this credit was transferred to a confirming bank — the buyers' bank in Tanzania. However, the letter of credit notified to the sellers did not conform with the contracts: it was expressed in sterling rather than Kenya shillings, and it was valid only until 5 October 1967, not covering the full shipment period. The sellers raised no complaint and did not ask for the currency to be altered.
The sellers drew on the credit for shipments made in September 1967, comprising 250 tons under the first contract and 29 tons under the second. The invoice for the first shipment expressed the price in Kenya shillings converted to sterling; the invoice for the second shipment was expressed in sterling only. The remaining 221 tons under the second contract were shipped on 16 November 1967. An invoice dated 18 November was made out in sterling for £57,877 15s 9d and headed "Drawn under... Irrevocable Letter of Credit." Sterling was devalued on 18 November 1967. On the same day, the sellers sent the documents to the confirming bank and were paid £57,877 15s 9d in sterling.
Following devaluation, the sterling amount received was worth only 987,734.4350 Kenya shillings. The sellers claimed an additional 165,530.4345 Kenya shillings, representing the difference between the contract price in Kenya shillings for the 221 tons and the Kenya shillings realisable in exchange for £57,877 15s 9d after devaluation. The central question before the Court of Appeal was whether the sellers had waived their contractual right to payment in Kenyan currency, or whether the contract had been varied, such that they could not recover the additional sum.
Held
The Court of Appeal dismissed the sellers' claim and held in favour of the buyers on several grounds.
First, on the proper construction of the original contracts, the money of account was Kenyan currency. The price was expressed using "Shs.", the appropriate abbreviation for Kenya shillings but not for sterling; the contracts were made in Kenya; delivery and shipment were in Kenya; and Kenyan law deemed all monetary transactions there to be in Kenyan currency. This finding was a necessary preliminary to the questions of waiver and variation.
Second, the sellers had, by their conduct, waived their contractual right to payment by letter of credit expressed in Kenyan currency. The sellers accepted and drew upon a non-conforming letter of credit expressed in sterling without objection across multiple shipments. A letter of credit ordinarily operates as conditional payment; once duly honoured by the confirming bank, payment becomes absolute and is treated as having discharged the buyer's liability from the time the letter of credit was given and acted upon. Having accepted payment under the sterling letter of credit and received the funds, the sellers could not subsequently seek to recover more.
Third, in the alternative, Megaw LJ and Stephenson LJ held that the terms of the original contracts had been varied by agreement, substituting sterling for Kenya shillings as the currency of account. By notifying the sellers of the non-conforming sterling letter of credit, the confirming bank — with the knowledge and on the instructions of the buyers — made an offer involving sterling as the currency of account. The sellers accepted that offer by drawing on the credit to receive payment for part of the contractual goods. Both the confirming bank and the buyers thereby became bound, with the buyers incurring legal obligations including the obligation to indemnify the bank. The sellers' acceptance was not a merely temporary or provisional acquiescence but related to the totality of the letter of credit transaction.
Fourth, per Megaw LJ, on the true construction of the contractual payment provision, the sellers had no right to require payment otherwise than in accordance with a duly established confirmed irrevocable letter of credit. Having accepted the benefits of such a credit in sterling, they could not now insist on a different currency.
Ratio Decidendi
The ratio of this case is best understood as comprising two concurrent lines of reasoning, differing as between the members of the court.
Per Lord Denning MR — waiver and promissory estoppel: Where one party to a contract represents to the other, by words or conduct, that he will not insist upon his strict contractual rights, and the other party acts in reliance on that representation, the first party may be precluded from resiling from it. The sellers, by accepting the non-conforming sterling letter of credit without objection and by drawing upon it for successive shipments, clearly represented to the buyers that they would not insist on payment in Kenyan currency. They were therefore estopped from reverting to the strict terms of the contract and claiming the additional sum arising from devaluation. This analysis drew upon Hughes v Metropolitan Railway [1877] and was consistent with the approach in Tool Metal Manufacturing v Tungsten Electric [1955].
A particularly significant doctrinal point arising from Lord Denning MR's judgment is his statement that it is not necessary for a party relying on waiver or promissory estoppel to demonstrate that the other party acted on the representation to their detriment. This is a departure from the stricter view that detriment is a requirement of promissory estoppel, and the point remains of academic and practical importance.
Per Megaw LJ and Stephenson LJ — contractual variation: The alternative and concurrent ratio is that a binding variation of the contract was agreed between the parties. The buyers' bank, acting with the buyers' knowledge and authority, communicated the sterling letter of credit to the sellers. This constituted an offer to vary the currency of account. The sellers' conduct in making use of the credit — drawing on it and accepting payment under it for successive shipments — amounted to acceptance of that offer. The variation was supported by consideration: both parties undertook new obligations as a result, including the buyers' obligation to indemnify the confirming bank. The variation was not a temporary concession but a permanent substitution of sterling for Kenya shillings as the currency applicable to the letter of credit transaction.
The decision therefore confirms that in a commercial context involving letters of credit, a seller who accepts a non-conforming credit without objection and draws upon it will ordinarily be taken either to have waived the right to insist on conformity, or to have agreed a binding variation of the relevant contractual term.
Obiter Dicta
Lord Denning MR's statement that detriment is not required for promissory estoppel to operate is, relative to the variation ratio adopted by the other members of the court, properly characterised as obiter. It was not necessary to resolve the detriment question in order to decide the appeal, and Stephenson LJ expressly noted that, on the facts, the buyers had in any event acted to their detriment in reliance on the sellers' waiver. The significance of Lord Denning MR's observation lies in its potential to broaden the doctrine of promissory estoppel beyond the formulation requiring detriment as a precondition, a position which has continued to generate debate in subsequent cases and academic commentary.
There are also notable judicial observations regarding the nature of letters of credit as instruments of payment. The court's remarks that a letter of credit constitutes conditional payment, becoming absolute and dating back to the time it was given and acted upon once honoured, while directly relevant to the outcome, contain wider implications for the law governing documentary credits and their interaction with underlying sale contracts.