W J Alan & Co Ltd v El Nasr Export and Import Co

A seller who accepts and uses a non-conforming letter of credit may thereby vary the underlying sale contract or waive the right to insist on its original terms. Where a sterling credit was accepted without reservation and operated as the contract’s sole means of payment, the seller could not revert to the original Kenyan currency of account after sterling was devalued.

In the ordinary case, an accepted confirmed irrevocable letter of credit operates as conditional payment. If the bank honours it, the buyer’s debt is discharged; if the bank defaults, the seller may retain recourse against the buyer. Whether a credit has this effect ultimately depends on the construction of the sale contract and the parties’ conduct.

The sellers agreed to sell coffee to the buyers under two contracts governed by English law. The price was stated in shillings, and payment was to be made by confirmed irrevocable letter of credit. Although Kenyan and sterling shillings were then at parity, the contracts used Kenyan currency as the money of account.

The buyers procured a non-conforming credit expressed in sterling. The sellers raised no objection, used the credit for the first shipment, obtained amendments and extensions, and prepared sterling documents for the remaining shipment. Sterling was devalued before that shipment was paid, while Kenyan currency retained its value. The sellers accepted the sterling payment but claimed the exchange-value shortfall from the buyers.

Orr J upheld that claim. The buyers appealed. The central issues were whether acceptance of the sterling credit varied or waived the contractual currency term and whether payment under the honoured credit discharged the buyers’ liability.

1. Appeal allowed unanimously. The original money of account was Kenyan currency. Per Lord Denning MR, Megaw and Stephenson LJJ, the form “Shs. 262/-”, the Kenyan connections of the transaction and the relevant Kenyan legislation established that conclusion. Subsequent conduct could not alter the construction of the original, unambiguous agreement.

2. The sellers nevertheless accepted a credit expressed in sterling. They used it for the first shipment, sought and obtained extensions, prepared sterling invoices and drafts, and made no reservation concerning currency. Per Megaw LJ, this acceptance varied the currency of account from Kenyan shillings to sterling. The credit was a single transaction covering the contractual method of payment, rather than a temporary indulgence which either party could revoke unilaterally.

3. Alternatively, all three members of the court regarded the sellers as having waived the right to insist upon a credit in Kenyan currency. The buyers, banks and sub-buyers had acted upon the accepted credit, and the sellers could not reassert the original currency term after devaluation. Lord Denning MR stated more generally that contractual waiver does not require consideration or detrimental reliance. It is enough that the other party acts differently on the induced belief. Stephenson LJ expressly left that wider question open because the buyers had altered their position to their detriment and the variation was supported by consideration.

4. Lord Denning MR, with Stephenson LJ agreeing, considered that an accepted confirmed irrevocable letter of credit ordinarily constitutes conditional rather than absolute payment. If the bank honours the credit, the underlying debt is discharged. If it defaults, the seller may retain recourse against both bank and buyer, subject to avoiding double recovery. The sale contract may expressly or impliedly provide a different result. Megaw LJ declined to formulate a general rule but held that, under this contract, actual payment under the accepted credit left no residual liability.

5. The honoured sterling credit therefore discharged the price in full. Judgment was entered for the buyers. The appeal in the action was allowed with costs; the appeal on the motion was dismissed with costs; and leave to appeal to the House of Lords was granted.

• Court of Appeal: The buyers’ appeal was allowed unanimously. Judgment was entered for the buyers, with costs. The appeal on the motion was dismissed with costs, and leave to appeal to the House of Lords was granted.
• High Court: Orr J had held that the original money of account was Kenyan currency and had rejected the buyers’ variation or waiver case. The citation of that judgment is not stated.