Banks shall be held liable where they fail to honour letters of credit under an international contract

BD LAW DIGEST WITH CLRN & ALP NG & Co.

OWIGS AND OBIGS NIG. LTD. v. ZENITH BANK PLC

SUPREME COURT OF NIGERIA

(MOHAMMED; GARBA; OGUNWUMIJU; KEKERE-EKUN; ABUBAKAR, JJ.CA)

FACTS

Owigs and Obigs Nigeria Limited (the Appellant) entered into a banking relationship with Zenith Bank Plc (the Respondent), under which the Respondent agreed to provide Export Finance Facilities contingent upon the Appellant securing an Export Trade contract, supported by confirmed Letters of Credit from a foreign entity. In accordance with this agreement, the Appellant engaged Eglone Group Asia Pte Ltd (Eglone Group) to facilitate contracts for the supply of solid minerals, specifically Tin Ore, Tantalite Ore, and Columbite Ore from Nigeria to China. Under the terms of the arrangement, Eglone Group was entitled to a 4% commission for each secured contract, with a 2% penalty fee imposed in the event of non-performance. Eglone Group successfully secured two contracts with Chinese firms, and as part of the process, the Group was tasked with obtaining Letters of Credit from the Industrial and Commerce Bank of China (ICBC). These Letters of Credit were successfully issued, and the Respondent was designated as the confirming bank.

Despite prior agreements and negotiations between the Respondent and ICBC, the Respondent failed to confirm the Letters of Credit, which led to the cancellation of the contracts between the Appellant and the Chinese firms. As a result, the Appellant became liable for penalty fees to Eglone Group due to the breach of contract. Aggrieved by the act of the Respondent, the Appellant filed an action in the High Court of the Federal Capital Territory, Abuja (trial court), alleging that the Respondent’s failure to confirm the Letters of Credit caused the cancellation of the contracts. The trial court, however, found no negligence on the part of the Respondent and dismissed the Appellant’s suit.

Dissatisfied with the judgment, the Appellant appealed to the Court of Appeal (lower court). The Court of Appeal held that the Respondent had indeed been negligent but only ordered the Respondent to refund the penalty fees, amounting to $4,486.04 (Four Thousand, Four Hundred and Eighty-Six United States Dollars and Four Cents).

Still dissatisfied with the lower court’s decision, particularly with regard to the limited award of monetary damages, the Appellant appealed to the Supreme Court. One of the key issues raised was: Whether, having found the Respondent negligent and acknowledging that such negligence had caused the breach of contract and the consequent losses suffered by the Appellant, the lower court was correct in failing to indemnify the Appellant with damages proportionate to the losses incurred.

ARGUMENTS

Learned Counsel for the Appellant contended that, in international trade transactions governed by the Uniform Customs and Practice for Documentary Credit (UCP), damages arising from a breach of contract are typically addressed through default or penalty fees, which serve as compensation for the losses suffered. Counsel asserted that under the contracts with the Chinese firms, the Respondent was obligated to confirm the Letters of Credit issued on the Appellant’s behalf. Given that these contracts were interdependent, the Respondent’s negligence and failure to fulfil its obligations in a timely manner led to the termination of the contracts, thereby exposing the Appellant to penalty fees. Moreover, the Respondent unilaterally deducted these penalty fees from the Appellant’s funds without proper authorisation. Furthermore, Counsel argued that the Respondent had effectively admitted liability for breach of contract by acknowledging its failure to confirm the Letters of Credit—an omission that constituted a fundamental breach and directly resulted in the termination of the underlying contracts. The only conceivable defence available to the Respondent, Counsel maintained, would have been the invocation of a force majeure event, which was neither pleaded nor proven.

Additionally, Counsel emphasised that having found the Respondent negligent, the lower court ought to have awarded damages commensurate with the losses suffered by the Appellant. The breach in question, Counsel argued, was not merely technical but involved a breach of trust, violations of confidentiality, and a failure to exercise the requisite contractual duty of care. In light of these considerations, the Appellant submitted that it was entitled to a full and appropriate remedy rather than the nominal sum of $4,486.04 awarded in its favour, and that the courts are duty-bound to award the appropriate damages, including general damages, to restore the injured party to the position they would have been in but for the breach.

In response, Learned Counsel for the Respondent maintained that the lower court was correct in limiting the Appellant’s relief to a refund of the penalty fee amounting to $4,486.04 and denying any further damages. Counsel contended that while international trade transactions often involve multiple independent contracts, the specific contract in question was between the Respondent, acting as the confirming bank, and the Appellant, the seller. The Respondent, therefore, was merely a third party concerning the contracts between the Appellant and the buyers and could not be held liable for breaches arising from those agreements.

Furthermore, Counsel argued that the Appellant’s claim was anticipatory in nature and fell under the category of special damages, which are not automatically recoverable. To be entitled to such damages, Counsel asserted, the Appellant would have had to prove the precise loss incurred, as stipulated in the contracts. According to Counsel, the breach of contract did not immediately result in a crystallized financial loss, and the Appellant was not entitled to the full sum claimed without presenting concrete proof of the specific loss suffered. Learned Counsel urged the Court to dismiss the appeal and rule in favour of the Respondent, contending that the decision to limit the Appellant’s recovery to the penalty fee refund was both appropriate and legally sound.

DECISION OF THE COURT

In resolving the issue, the Supreme Court held that:

A bank’s obligation to honour a letter of credit is independent of the existence, non-existence, performance, or non-performance of the contract or arrangement out of which the letter of credit directly or indirectly arises or on which it is based. It therefore follows that even though the contract between the Appellant and Respondent is interconnected with the other contracts between the Appellant and third parties, as well as between the Respondent, as confirming Bank and the Issuing Bank, these contracts are autonomous, giving rise to distinct rights and obligations. Thus, the Respondent, though liable for its negligence to the Appellant in honouring the letters of credit, it cannot be liable for the unilateral termination of the contracts between the Appellants and third party being not a party to the contract. This accords with the elementary principle of law that it is only the parties to a contract that can sue on the contract or be sued. Since the Respondent cannot sue under the contract, and could not terminate the said contract, it follows that it cannot be liable for a breach of the said contract.

Notable Pronouncement

In the dissenting judgment of Ogunwumiju, J.S.C., the Supreme Court further held that:

Where a bank deliberately frustrates the terms of an international contract, it should be held accountable. The Respondent was obligated to provide funds via letters of credit to facilitate the transaction but failed to do so and unlawfully withdrew money belonging to the Appellant. The Appellant cannot be expected to bear sole responsibility when the Respondent was the one who breached the terms of the contract, which in turn negatively impacted the Appellant’s business dealings with its international partners. The Respondent, by its own admission, was in breach of international commercial contracts, and the consequences of that breach cannot be dismissed by merely relying on privity of contract to determine liability. The Respondent’s refusal, without justification, to provide the Appellant with a confirmed letter of credit had a detrimental effect on its business relationships with its international partners. Having found the Respondent negligent, the Appellant is entitled to damages.

Issue partly resolved in favour of the Appellant.

Emmanuel I. Ikpebe, Esq., with Grace E. Elechi, Esq., for the Appellant
Dr. James Agbonhese, Esq., for the Respondent.

This summary is fully reported at (2024) 12 CLRN in association with ALP NG & Co.
See www.clrndirect.com ; www.alp.company