In African Cotton Industries Limited v ABN AMRO Bank V (Civil Case 1185 of 2000) the High Court considered whether an injunction application made by the plaintiff buyer of goods should be granted to restrain the defendant bank from honouring, paying, transmitting the proceeds or in any manner whatsoever dealing with an irrevocable letter of credit which the defendant bank was contractually bound to pay.

The plaintiff buyer entered into a contract with an Egyptian supplier for the supply of assorted paper tissue products. It was a term of the contract that the paper products comply with the Kenya Bureau of Standards' specifications. Payment for the goods was to be by way of an irrevocable letter of credit issued by the defendant bank.

Upon importation, the paper tissues were rejected by the Kenya Bureau of Standards on the ground that they did not comply with the bureau's specifications. The plaintiff therefore rejected the goods and the supplier accepted the plaintiff's rejection. The plaintiff instructed the supplier not to collect the proceeds of the letter of credit and informed the defendant bank not to make payment under the letter of credit. The defendant bank was of the view that it was contractually bound to pay once proper documents were tendered. Although one of the conditions in the letter of credit required compliance with the Kenya Bureau of Standards' requirements, the letter of credit did not identify the documents required to be presented in respect of this condition. The plaintiff later forwarded to the defendant the Kenya Bureau of Standards' letter of rejection of the goods stating that that condition in the letter of credit had not been complied with.

In the proceedings, the defendant bank relied on the legal principle that under the letter of credit, the defendant bank was contractually bound to pay, as is laid out in Hamzeh Malas & Sons v British Imex Industries Limited (1958) 2 QB 127, where it was held that:

"a confirmed letter of credit constituted a bargain between the banker and the vendor of the goods, which imposed upon the banker an absolute obligation to pay, irrespective of any dispute there might be between the parties whether or not the goods were up to contracts."
The defendant bank also relied on RD Harbottle (Mercantile) Limited v National Westminster Bank Limited (1977) 2 All ER 862 and Edward Owen Engineering Limited v Barclays Bank International Limited, and it was pointed out that the bank's duty to the seller was only vitiated if there was fraud on the part of the seller.

In the African Cotton Case, the court stated that there was no dispute that the goods to be supplied by the seller were to meet the specifications required by the Kenya Bureau of Standards. This condition, which was included in the letter of credit and of which both the defendant bank and the supplier were aware, was not met.

The court was of the opinion that refusing the application for an injunction would amount to encouragement of fraudulent transactions and unjust enrichment.

Further, as the defendant bank could be left open to a suit by the supplier, the court granted the injunction on condition that the plaintiff provided an undertaking to indemnify the defendant bank in respect of any damages it may be required to pay as a result of the injunction order granted against it.

Although the court acknowledged that courts should not stop banks from honouring letters of credit, as that would "create confusion" and undermine confidence in the banks, it went on to say that in this case it had no real alternative but to grant the injunction. The fact that the supplier had accepted the goods back itself was a material factor.

For further information on this topic please contact Atiq Anjarwalla or Sonal Sejpal at Kapila Anjarwalla & Khanna Advocates by telephone (+254 2 337625) or by fax (+254 2 337620) or by email ([email protected] or [email protected]).