The FOB seller (the “Seller”) of a cargo of gasoline and gasoil (the “Cargo”) brought a claim under Section 49 of the Sale of Goods Act 1979 (the “SGA”) for the purchase price of the Cargo against the FOB buyer (the “Buyer”), after the bank which had issued letters of credit (the “L/Cs”) in favour of the Seller (the “Bank”) refused to make payment thereunder.

Section 49 of the SGA allows an unpaid seller of goods to sue a buyer for the purchase price of the goods, where “property in the goods has passed to the buyer and he wrongfully neglects or refuses to pay for the goods according to the terms of the contract” (emphasis added).

Under the Sale Contract terms, and as agreed between the parties, the Cargo was delivered and property in it had passed to the Buyer. The parties also agreed that the Seller had not been paid for the Cargo.  There was no evidence before the Court as to whether the Bank was, or was not, entitled to refuse to pay under the L/Cs.

The Buyer’s key arguments in defence of the claim under Section 49 therefore sought to negate the assertion that the Buyer had wrongfully neglected or refused to pay, including because:

• The exclusive method of payment under the Sale Contract was via the L/Cs, so the Buyer’s only obligation was to arrange the issue of the L/Cs;
• The Buyer had no obligation to pay the purchase price outside of or other than via the L/Cs; and
• The reason the purchase price was not paid out under the L/Cs was that the Seller failed to present valid shipping documents prior to the expiry of L/Cs.

Therefore, one of the central issues in dispute, which related to arguments (a) and (b) above,  was whether the L/Cs operated as conditional or absolute payment for the Cargo under the Sale Contract and whether the Buyer was indeed obliged to pay thereunder if the bank refused or failed to do so under the LCs.

As cited by the Buyer in their submissions, the question of whether the opening of a letter of credit operates as conditional or absolute payment is a matter of construction.[1]

The Court considered the provisions of the Sale Contract and in particular the following:

“The Buyer shall, at its expense, pay the agreed price in U.S. Dollars in immediately available funds in full…”

and

“Unless otherwise agreed to by the Seller and the Buyer in the Sales Contract, payment shall be made by means of an irrevocable Documentary Letter of Credit…” (emphasis added)

Without regard to authority and based primarily on the aforementioned provisions, the Court was of the view that the latter provision did not alter the former primary obligation on the Buyer.  Therefore, the Court considered that the Sale Contract terms placed primarily responsible for the payment of the purchase price on the Buyer, although the Buyer was obliged to arrange for the issue of the L/Cs to “cover” such payment.

The Court also considered numerous authorities on this question of construction, as well as whether there was any applicable general presumption that the opening of a letter of credit operates as conditional payment, and concluded that those authorities established the following principles:

• Letters of credit normally operate as a conditional payment. Only if the contractual terms (express or implied) are clear in requiring a letter of credit to operate as absolute payment, would it do so.   However, there is no presumption in play as to whether a letter of credit is intended as conditional or absolute payment.
• Where the letter of credit operates as absolute payment:
  1. The buyer’s obligation to pay the purchase price is discharged when the letter of credit is issued because it becomes the exclusive source of payment.
  2. The bank may refuse to pay thereunder in three scenarios: (i) the seller does not present documents for payment at all, or (ii) the seller does not present compliant documents for payment, or (iii) the seller does present compliant documents for payment in time.
  3. Where the reason for the bank’s failure or refusal to pay is not related to the seller’s fault or responsibility, then the seller can pursue payment of the price or damages for non-acceptance from the buyer.
  4. Where the seller is responsible for the bank’s failure or refusal to pay, the seller has no recourse against the buyer for the price if title to the goods has passed to the buyer and the buyer is entitled to, and does, reject the documents and goods.
  5. Where the buyer has accepted the goods and title has passed to the buyer, the seller is entitled to be paid the price of the goods by the buyer, whether the seller is responsible or not for the bank’s failure or refusal to pay.

Having regard to the facts that (1) property in the goods had passed to the Buyer, and (2) under the Sale Contract and pursuant to the above principles the Buyer was primarily responsible to pay under the Sale Contract and the LCs functioned only as conditional payment, the Court found that the Buyer’s failure to pay was wrongful and therefore the Seller was entitled to the purchase price under Section 49 of the SGA.

[1] Benjamin’s Sale of Goods (12^th ed., 2023), para 23-310

The clarity offered by the Court on the operation of letters of credit signals a need for careful drafting of payment and credit clauses in sale and purchase contracts.

Buyers may wish to limit their exposure and responsibility for payment, by including express wording that the payment obligation is primarily on the bank under a letter of credit, and rejecting any overarching, primary or standalone obligations on the buyer to pay.

Sellers, on the other hand, may wish to ensure that all primary responsibility for payment is expressly on the buyer, and that the relevant clauses include express wording to the effect that where the bank refuses or fails to pay under a letter of credit, the buyer shall remain responsible in full for payment of the purchase price.

Sellers may also wish to undertake detailed due diligence relating to the buyer’s financial position before contracting, even where the buyer is paying under a letter of credit,  and seek additional security for the buyer’s payment obligations, if necessary.

[1] Benjamin’s Sale of Goods (12^th ed., 2023), para 23-310