Ital Imports Limited v Mohamed Salim Karanja T/A Mosal Cleaning Enterprises & Commercial Bank Limited [2014] KECA 368 (KLR)

REPUBLIC OF KENYA

IN THE COURT OF APPEAL

AT NAIROBI

(CORAM: GATEMBU, M’INOTI & MURGOR, JJ.A)

CIVIL APPEAL NO. 99 0F 2005

BETWEEN

ITAL IMPORTS LIMITED………………………………......APPELLANT

AND

MOHAMED SALIMKARANJA T/A

MOSAL CLEANING ENTERPRISES….....…….....1STRESPONDENT

KENYA  COMMERCIAL BANK  LIMITED…..…….2NDRESPONDENT

(Appeal  from  the  Judgment  of  the  High  Court  at Nairobi  Hon. Mr. Justice J. W. Mwera) dated 24th November 2003

in

HCCC No. 1832 of 1999)

************

JUDGMENT OF THE COURT

The appellant’s claim is for a sum  of US Dollars 16,100 (equivalent to  Kshs.  1,207,500 at the rate  of Kshs. 75  to  the US Dollar), arising  from  a  Contract  of  sale   of  laundry  equipment made between the  appellant and  the 1st respondent, where it was agreed that  payment  to  the appellant  would be  through  an irrevocable letter of credit following the shipment and  supply of the  laundry equipment.

By way  of proforma invoices dated 3rd   December 1998, and an agreement dated 26th  February 1999, (thesale  contract) the 1st respondent  agreed  to  purchase  a Realstar dry cleaning machine and  a pressing machine Ghidini GB-Matic with  Air compressor, boiler, iron  assembly and  air spotting pistol (theequipment) from the  appellant. Payment for the  equipment was to be effected through a confirmed irrevocable, negotiable and divisible letter of credit to be opened in favour of the appellant by the  2nd respondent’s Issuing  bank  on the  instructions of the 1st respondent.

A letter of credit was opened by the  2nd respondent’s Issuing bank  on 22nd February 1999  the terms of which specified that  the equipment would be delivered to the  Inland Container Depot, Embakasi, Nairobi,and payment would  be binding  on the confirming bank  once it had  been confirmed to the appellant that it was opened, and  that, the letter of credit would be  payable after 90 days  on sight against the  presentation by the appellant of a full set of clean  “On  Board  “ bills  of lading, signed invoices, a certificate of origin, a certificate of conformity, a certificate of insurance and  a packing list.The payment currency was to be in US Dollars. Following  the signing of the sale  contract and  the opening of the  confirmed letter of credit, the appellant ordered the equipment from the  suppliers, which it says was subsequently delivered to the port of Genoa, awaiting shipment  instructions from the appellant.

On  8th April 1999, the 1st respondent terminated  the sale contract claiming that the  purchase price for the  equipment was too  high, and  instructed the  2nd respondent to cancel the letter of credit. On the  same  date, the  2nd respondent’s Kenyatta Avenue branch, requested the appellant to hold  the matter in  abeyance pending the  resolution of three outstanding issues  namely, the date and place  of expiry of the letter of credit, the  discrepancies between the  amount on  the   letter  of credit and  the proforma invoices, and  the  currency quoted on  the  letter of credit. In  the meantime, the appellant was requested to open  a back  to  back foreign letter of credit for the  benefit of the overseas suppliers,and to  deposit with it, an amount equivalent to  the  import value of the equipment. The appellant was  also  advised not to  proceed to import  the equipment  until   the import  letter of credit applications were  approved by the  2nd respondent.

In a letter dated 19th  April  1999, the 2nd   respondent advised the   appellant that it  was   informed that  the   2nd respondent’s Issuing  bank  had  received instructions from the  1st  respondent to cancel the  letter of credit, but requested the  appellant to contact the  1st respondent. Upon receiving the letter dated 19th April  1999 purporting to cancel the  letter of credit, the  appellant’s Managing Director Dr.  Uno Bono,  advised the  2nd   respondent that the  letter of credit was  not capable of cancellation without its consent. The appellant  claimed that  subsequent   to  the   cancellation it  had written  severally to  the 2nd respondent  demanding  the reinstatement of the letter of credit to enable the performance of contractual terms and  conditions. As it received no response from the  respondents’ on the  status of the  letter of credit, the shipment was stopped and the equipment returned to Genoa. The appellant states that  it  suffered loss  of  its   deposit  and   transport  costs following cancellation of the contract and the  letter of credit.

According to the appellant the 2nd   respondent’s Issuing  bank was under a duty to pay  the  amount of the  letter of credit on presentation of the requisite documentation irrespective of the status of the  sale contract between the  appellant and the 1st respondent.

The 1st respondent  confirmed  that  a sale   contract  was entered into  with the appellant and  the 2nd respondent’s Issuing bank was instructed to  open a  letter of credit in  favour of the appellant. It was when  the  appellant failed to open a back  to back foreign letter of credit, and  the  2nd  respondent’s Kenyatta Avenue branch queried the  discrepancies in  the  pricing on  the proforma invoices and  the declaration forms, that he  sought to  cancel the letter of credit through the  2nd respondent’s  Issuing bank.  In  his view, the letter of credit was not cancelled, but was insufficient to import the equipment without a foreign letter of credit in favour of the  suppliers.

The 2nd   respondent’s also admitted opening a letter of credit in favour of the  appellant, but considered this  to be inadequate as a back  to back  foreign letter of credit required to  be  opened to secure payment to the suppliers against the delivery of the equipment  shipped  from  overseas. According to the  2nd respondent’s  branch manager, Mr.  Samuel Mburu, the  appellant had  refused to open  a foreign  back  to back  letter of credit, and also failed to deposit an amount equivalent to the  import value  of the  equipment, or meet the  account opening conditions specified by  the   2nd respondent’s Kenyatta avenue branch (the Advising bank). On 19th April  1999  they wrote to the appellant advising that they had  received communication from their Issuing  bank  under instructions from the  1st respondent to cancel the  letter of credit. It was  the 2nd    respondent’s contention that, the letter was in  all respects, a  notification to  the   appellant informing it  of the 1 st respondent’s instructions to cancel the  letter of credit, but was at all times aware of its own inability to cancel the  irrevocable letter of credit, without the  appellant’s consent.

In his  judgment, the  learned judge, dismissed the suit with the costs having found that, despite the existence of the  expiry period of 90 days, that the period did  not commence, and consequently, there was  no  expiry of the letter of credit. On the issue of whether the  appellant fulfilled the  obligations under the

letter of credit, the learned judge found that the  appellant did  not perform its  obligations to  deliver the equipment. As to  whether the   appellant suffered  any loss, the  learned judge found  that there was no evidence that the appellant had  suffered any  loss, contrary to  its  contention that it had  lost  the deposit paid  to the suppliers for the manufacture of the  equipment.

The  appellant was  aggrieved by  the   decision of the  High Court and filed this  appeal, wherein it specified several grounds of appeal which in the main, centered on the  letter of credit. In summary, the  contention  was  that the   learned  judge  erred  in finding that the  2nd   respondent’s letter dated 19th April  1999  did not amount to  a  cancellation of the  letter  of credit dated 22 nd February 1999, and which letter of credit could  not be cancelled, that  the finding that  the   letter  of credit was  not  utilised and remained valid was  erroneous; that   the learned judge erred in finding that the  appellant did  not fulfil its obligations under the letter   of  credit  failed  to appreciate  that  the  contract  was frustrated when  the  2nd   respondent cancelled the  letter of credit, and   could    not  proceed  to import  the  equipment  when the respondents had  clearly repudiated the  contract; that the  learned judge did  not appreciate the nature of a letter of credit, and  the finding that the  letter of credit dated 22nd  February 1999  was  a local    letter  of  credit,  that  was   incapable  of  importing the equipment was erroneous; that the learned judge erred in finding that the appellant had  not suffered any loss;  and finally that the learned judge erred in  finding that the appellant having failed to file a reply to defence was  deemed to have  admitted the  entire defence and evidence of the respondents.

When the parties appeared before us,  Mr. Mwangilearned counsel for the  appellant submitted that upon  the presentation of the  letters of credit, the  2nd respondent was  obliged to comply with the terms and  conditions. It was on the assurance under the letter of credit that the appellant procured the equipment for delivery. Counsel questioned whether, a  letter of credit having been  issued, it could  be cancelled by the  2nd   respondent. Counsel submitted that a letter of credit could not be cancelled without the  consent of the  seller  and  the  paying bank. In counsel’s view the  cancellation of the letter of credit was  unlawful, and  the  only instances where a letter of credit was  dishonoured  was either where documentation was  not presented or  where there was  an element of fraud. Counsel complained that the  learned judge took into  account extraneous matters including whether the appellant was capable of importing the goods  without a foreign banks  letter of credit. The  learned judge also considered that  despite being aware that  the letter  of credit was incapable of revocation  or cancellation,  the   appellant  did   not  proceed  to   complete  the contract terms, but did  not question the  reasons behind the appellant’s failure to  perform. On the  issue  of the failure to file a reply to  the defence, counsel submitted that Order  6 rule  10  of the  Civil  Procedure Rules  only  applies to  cases where no defence is filed, there is a joinder of issue,  which operates as a denial of the  facts, and that the  learned judge failed to take  this  into consideration. On the question of the  quantum, the  appellant had made  advance payments for 7 million Liras,  4. 5  million Liras  and US Dollars 2,400, and  the total amount requested is for Kshs. 1. 3 million.

Mr. Moibi, learned counsel for the  respondents opposed that appeal and  submitted that the respondents  did  not cancel the letter of credit. According to  counsel, the  letter of 19th  April  1999 merely  sought  information  from  the   appellant,  to   which  the appellant failed to respond. Counsel contended that the  appellant had  failed to open  a foreign letter of credit yet the  suppliers were foreign, and  that a local  letter of credit would only  suffice where the  contract sums  were  to be paid  locally. Counsel  continued that the  advance payment allegedly paid  by the appellant was not acknowledged by the suppliers, and  questioned whether the payments were  in  respect of the  machines or  for other supplies. There   was   also   no   evidence  to   show   that  the   goods   were transported to the  port of shipment. These  amounts were  special damages which had  not been  proved.  No documentary evidence was  produced to  support the  claims for profits. On the  failure to reply  to  the   defence, counsel  submitted  that  there  was   an obligation on the  part of the  appellant to reply to the  defence, and the  failure to do so was to the  appellant’s detriment.

This  being a  first appeal, it is  our  duty to  re-evaluate the evidence,  assess  it and  reach   our  own  conclusions bearing  in mind that  we  have   neither seen  nor  heard the  witnesses and hence   due allowance must be  made   for this – See   SELLE V. ASSOCIATED MOTOR BOAT COMPANY LTD. [1968]  E.A.123 and WILLIAMSON DIAMONDS LTD.VS.   BROWN[1970] E.A. 1.

Having  considered  the   pleadings,  the  evidence,  the judgment and  the  respective parties’ submissions, we  take   the view  that the  issues  for determination are as follows:

i)  Was there  a valid letter of credit in existence?

ii) Was the letter of credit cancelled?

iii) Were  the  terms  and  conditions specified under  the letter of credit complied with, and was the appellant entitled to payment?

iv) Was the appellant entitled to reimbursement?

v)  By  failing to file  a  reply   to defence,   did  the  appellant admit the respondents’ entire defence  and evidence?

From  the evidence it is clear  that the  suit evolved around an irrevocable  letter  of  credit,  and   its  subsequent  alleged cancellation, and  whether following the  cancellation of the sale contract and  the letter of credit, the appellant was  entitled to damages for loss.

Before  we   proceed  to   consider  the    issues,    we   find  a definition of a letter of credit necessary. Black  Law  DictionaryNinth edition defines a “letter of credit”as,

An instrument under which the issuer (usually a bank) at a customer’s request, agrees to  honour a  draft or  other demand for payment made by a third party (the beneficiary) as long  as the draft or payment complies with specified condition, and regardless of whether any  underlying agreement  between  the  customer and  the beneficiary is satisfied.

With  this in mind, we turn to the  first issue,  on the  validity of the  letter of credit in the instant case. It is apparent that, in order for the  letter of credit to  be  valid, it required to  be  issued  by  a bank  upon the request of the  customer, in favour of a beneficiary.

From  the evidence the 1st  respondent requested for a letter of credit which the  2nd respondent’s Issuing  bank  issued on 22nd February 1999  in favour of the  appellant.

It was the 2nd respondent’s argument, that the  letter of credit that was opened by  its Issuing bank was a local  letter of credit payable locally to the  appellant. In their view, the shipments involved payments overseas, and required a foreign letter of credit to be opened to facilitate  payment  to the overseas suppliers.This was not done, as the appellant  found this requirement to be irrelevant, and consequently, the local  letter of credit was inoperable.

Clearly, in order for a valid letter of credit to  be opened, all that was  required was  for an  issuing bank to  issue  the letter of credit on the  instructions of its customer, in favour of the  seller, or beneficiary, upon   terms  already  agreed  between  the parties. There  is no doubt that the  2nd  respondent’s Issuing  bank  opened a confirmed and  irrevocable documentary credit no  88/99/001 on 22nd  February 1999  in favour of the appellant. Accordingly, we find that a valid letter of credit properly existed between the  parties.

As  a  consequence,  the  failure by  the  appellant to  open  a back  -to -back  letter of credit or a foreign letter of credit did not in any  way  affect the validity of the  letter of credit for reasons that the transaction was inoperable. Provided that it was opened by an Issuing  bank, and specified the  terms and  conditions of shipment, and the particulars  of payment  to the beneficiary, it  was considered to be a valid and binding document.

The next issue  is whether the letter of credit was  cancelled by the  2nd   respondent’s letter of 19th April  2014.

The appellant contended that the  letter dated 19th April  1999 cancelled the  letter of credit, and  as  a result, it was  unable to proceed  with   the   importation   of   the    equipment. The 2nd respondent maintained that the impugned letter did  not amount to  a  cancellation, but was  a  proposal from  its Issuing   bank   to cancel the  letter of credit.

As  to  whether a  letter  of credit can  be  cancelled  by  the issuing bank  is provided for under Article9  (d) (i)of the  ICC Uniform  Customs and   Practice for   Documentary  Credits, which provides,

“an   irrevocable credit  can neither be amended nor cancelled  without  the agreement  of  the issuing  bank,  the confirming bank if any and,  the beneficiary.”

To  determine whether the  1st  respondent’s letter was tantamount to a  cancellation of the letter  of credit, we  find it necessary to reproduce verbatim the  2nd   respondent’s letter.

“The Manager                                                                       19. 4.99

Ital Imports Ltd

P.O. Box 66538

Nairobi

Dear Sir

RE:   LOCAL   LETTER  OF   CREDIT  NO   88/99/001     USD 39,457  B/O MR MOHAMED SALIM KARANJA  T/A MOSAL CLEANING ENTERPRISE

Further  to  our  letter dated  14. 4.99  we advise  that we have received instructions from  the  opening  bank-  Meru  Branch under  instruction form  their  client T/A Mosal Cleaning Enterprise to cancel the above letter of credit.

Please contact the openers  if you  have  not done  so and  let us have your confirmation to this effect.

Yours faithfully

S.N. MBURU

BRANCH MANAGER”

When  we  consider the  contents of the impugned letter  as framed, it is clear  to  us that the  letter was  an  advisory from the 2nd   respondent to the  appellant informing it that its  Issuing  bank had been  instructed by  the  1st  respondent to  cancel the letter of credit, but requested the  appellant to contact the  1st  respondent regarding the proposed cancellation. In response, the appellant advised the 2nd respondent that  the  letter  of  credit  was   not capable of  being  cancelled by  the   issuing  bank  or  by  the 1st respondent, without its consent.

It is our  view, that the communication in and  of itself did  not amount to a  cancellation, as  the  2nd   respondent’s  issuing bank was  incapable of cancelling the letter of credit, without the appellant’s consent. Instead,  the  appellant  was   requested  to contact the1st   respondent regarding the proposed cancellation, and  to advise the 2nd   respondent whether or not the parties were agreeable to a cancellation of the letter of credit. There  is correspondence to  show   that  at  all times  the  appellant  was opposed to  a cancellation, and  consistently maintained that the letter of credit  was   not capable of  cancellation by the respondents. In the  circumstances, we find that the  letter of credit was not cancelled by  the  2nd   respondent, but rather, it remained open  until the  terms and conditions were  duly  complied with.

This  leads  us into  the  next issue  on  whether the  terms and conditions of the letter of credit were complied with.

In the  case of  Har Bottle (Merchantile) Ltd & Another vsNational Westminister Bank & Others 1977  2 All ER 720

The whole commercial purpose for which the system of confirmed irrevocable documentary credits has  been developed in international trade was  to  give the seller of goods  an assured right to be paid  before he parted with control of  the goods without risk  of the  payment being refused, reduced or deferred because of a  dispute with the buyer. It followed the contractual dutyowed by an issuing or confirming bank to the buyer to honour the credit notified by him on presentation of apparentlyconfirming documents by  the  seller was matched by  a corresponding contractual liability on the part of the bank to the sellerto pay him the  amount of credit onpresentation of the document”. (emphasis ours)

From  the sale  contract and  the  letter of credit, the appellant agreed to  supply the 1st respondent with the equipment. The letter  of credit specified that  the equipment would be  shipped from Genoa, Italy  to IUD Embakasi, Kenya  accompanied by,

“ a)the signed invoices in triplicate;

b)full  set  of clean “on board” Ocean bills of lading made out to order and endorsed in blanked marked “freight” copy of  bill of  lading  not  negotiable and notify”;

c) certificate of origin- ITALY;

d) certificateto  the  effect that the  goods  conform to proforma invoices dated 3rdDecember1998;

e)  certificate of issuance ofclean  report of findings byBureau Veritas;

f) packing list original coveringfor Realstar Dry Cleaning Machine RS  237-US$ 28215 and Pressing Machine Ghidini GB- Matic 87 U3AP-US$  11260. ”

The letter of credit also  provided that reimbursement would be paid,

“….at   sightclaim reimbursement from K.C.B Meru for value of documents that conform to L/C terms.”

At the  last  paragraph it is stated that the  letter of credit was subject to the terms  and   conditions of  theICCUniform Customs and  Practice for Documentary Credits. Article9states.

“An irrevocable letter of credit constitutes adefinite undertaking ofthe  issuing bank, provided that the stipulated documents are presented to the  nominated bank of the issuing bank and that the terms and conditions are  complied with;

i)           Ifthe  credit provides for  sight payments- to pay  at sight.

ii)          …”

Under  the  Special  Conditions of the  letter of credit, it was clearly provided that,

“1. Only  95%  of the  payment amounting to US Dollars (37,501. 25)  will  be  affected (sic) on  production of documents a-b-c-d-e-f  as on page one of the L/C”.

It is evident that these  were  obligations that required to  be performed by the  appellant prior to receipt of payment.

Following  receipt of the impugned letter, the appellant, despite refuting the purported cancellation of the letter of credit, sought to obtain assurance from the 1st respondent, that the letter of credit had not been cancelled. As this  was not forthcoming the shipment was stopped, and the  equipment returned to Genoa.

From   this  evidence, it  is clear   that  no   equipment was shipped to ICD,  Embakasi, Nairobi, as required by  the letter of credit. There is also no  evidence to  show that  the appellant presented a full set to shipping documents to the 2nd respondent’s Issuing  bank  as specified in  the  letter of credit, in exchange for the reimbursement  of  the  amounts being  the value of  the equipment.

We  would  agree   with  the   learned  judge, that,  since   the appellant did  not fulfil the  terms and conditions set out in  the letter of credit, it was not entitled to  payment from the  2nd respondent’s Issuing  bank.We find it curious that, despite being fully cognizant of the infallibility of the irrevocable letter of credit, the appellant  did   not  deem it necessary to comply with  the stipulated terms and conditions, and seek  to present a complete set of shipping documentation to the 2nd respondent in return for the payment under the  letter of credit.

The principle governing letters of credit is that, payment by the  issuing bank  is made  on the  basis  of presentation of documentation that conform to  the terms and  conditions of the letter  of  credit. Without presentation of  the requisite documentation, an issuing or paying bank  has  no authority upon which to make  payment to a third party.

In the  circumstances, we find that notwithstanding the letter of credit remained open, since  the appellant did  not present any documentation to the  2nd    respondent’s  Issuing   bank, it was  not entitled to payment in respect of the  letter of credit.

The next issue  is the  appellant’s claim for compensation on account  of the  part performance of the sale  contract, that being the payment of the deposit of US$4,300 and  US$  2,400 to the suppliers, transport costs  and profit.The appellant’s complaint is that the  contract was frustrated by the cancellation of the sale contract and the letter of credit by the  respondents, and therefore it was  entitled to a reimbursement for  the amounts paid as deposit.

The terms of the sale contract and the  proforma invoices provided that the  payment would be through a letter of credit to be opened by the 2nd  respondent’s Issuing  bank,  and that “reimbursement” would be on the  basis of,

“…presentationto the issuing  bank   of aFull set of “Clean on Board  Bills of Lading.”

As to  whether the  appellant was  entitled to a refund of the amounts paid is entirely dependent on the terms  of  the agreement. The sale contract required the appellant to import the equipment, whereupon, it would be paid  through a letter of credit, upon presentation  of  the  shipping documentation  to  the   2nd

respondent’s Issuing bank. Consequently, though the 1st respondent  cancelled the sale contract, the letter of credit remained  open,and was a guarantee  and an assurance  of payment under the letter of  credit, upon presentation of  the shipping documents. Again,  as the appellant did not import the equipment,  and deliver  the shipping documents  to the 2nd appellant, it followed that, the  appellant was  not entitled to reimbursement of the deposit alleged to have  been  paid  to the suppliers  or  the   ancillary costs. Accordingly,  we  find that the appellant was  not entitled to  compensation for part performance of the contract.

Regarding the final issue  where the learned judge found that by failing to file a response to defence the appellant admitted the respondents’  pleadings and  evidence, we  consider that the  facts pleaded  by  the  Plaintiff are already  particularized,  and are deemed to be a denial as  there is a joinder of those issues by virtue of rule  10  (1)  of the  Civil  Procedure  Rules, which joinder operates as a denial of the material allegations of fact alleged in the   pleadings. The  High Court  therefore erred in deeming  theappellant as having admitted the allegations of negligence in the defence against  him.   See Denmus Oigoro Oonge vs NjucaConsolidated Limited [2012] eKLR.

For the  above stated reasons, we find no reason to interfere with the  decision of the  court below, and  dismiss the  appeal with costs  to the  respondent herein.

Dated and Delivered at Nairobithis 3rdday ofOCTOBER, 2014.

S.GATEMBU KAIRU

………………………

JUDGE OF APPEAL

K. M’INOTI

…...........................

JUDGE OF APPEAL

A.K. MURGOR

…..........................

JUDGE OF APPEAL

I certify that this is a true copy of the original.

DEPUTY REGISTRAR