Court of Appeal Holds That KCB’s Email Assurances on Letters of Credit to a Supplier Created Enforceable Obligations Under the Doctrine of Estoppel, Rendering the Bank Liable for Resulting Losses

Introduction

In international trade, trust is everything. Because buyers and sellers are often thousands of miles apart, they rely on Letters of Credit (LCs). Typically, a Letter of Credit is a bank’s promise to pay the seller on behalf of the buyer. It ensures the seller receives their payment as long as they ship the correct goods and provide the necessary paperwork.

While LCs are usually formal, technical documents, the business world moves fast. Before the final paperwork is signed, bank managers and business owners often exchange emails, hold meetings, and make verbal promises.

For a long time, many banks believed these informal communications weren't legally binding until the "official" LC was issued. However, a recent decision by the Court of Appeal in KCB Bank vs. Kaaya L. Enterprises Ltd has changed the game in Uganda.

The court had to decide a simple but critical question: Is a bank liable if it promises to issue an LC in an email, but then fails to do so?

The Court of Appeal’s answer was a firm yes. The ruling established several key points for businesses and banks in Uganda.

1. Emails are Binding:

   If a bank official sends an email promising to issue credit, that promise can be legally enforced.

2. No "Internal Policy" Escapes:

   A bank cannot back out of a promise by claiming it didn't receive "head office approval" if it never informed the client that approval was still pending.

3. Reliance has a Price: 

   If a business stops looking for other funding because they trust the bank’s word, and then they lose money (like port storage fees or lost goods), the bank must pay for those losses.

This case marks a shift toward substance over form. The courts are no longer just looking at the final signed contract; they are looking at how banks behave and what they say to their clients.

For banks, this is a warning to be extremely careful with "informal" promises. For businesses, it provides a much-needed safety net, ensuring that when a bank gives its word, it is held to it.

Facts

The Respondent, Kaaya L. Enterprises Ltd, a Ugandan company, was awarded a contract by the Uganda National Roads Authority (UNRA) on 18 May 2011 to supply construction machinery spare parts (Caterpillar motor grader cutting edges, moldboard, Komatsu motor grader moldboard, and scarifier). The respondent sourced these goods from USG Products (F.E) Pte Ltd, a China-based supplier, under a contract requiring an initial 30% payment (commitment fee) before production and the remaining 70% upon delivery to Mombasa Port, which would trigger release of the bill of lading and shipping documents.

The respondent approached the appellant, KCB Bank, for financing. On 12 July 2011, the bank advanced a loan of UGX 150,000,000 (equivalent to USD 40,000) to cover the 30% down payment, paid directly to the supplier. The loan was secured by Letters of Credit (LCs) from Stanbic Bank (UNRA's bankers), a mortgage on the respondent's land, and an undertaking from UNRA to pay contract proceeds through the respondent's KCB account.

The goods arrived at Mombasa Port in late November 2011, but the respondent lacked funds for the 70% balance. KCB declined a cash loan request but engaged in discussions to issue LCs to the supplier. In an email dated 2 December 2011, KCB promised to issue irrevocable sight LCs within one week, after convincing the supplier to accept LCs instead of cash. However, KCB never issued the LCs, citing unfulfilled conditions (e.g., extension of UNRA's LCs and a formal loan application).

Demurrage accrued on the goods at Mombasa, leading to partial sale by the Kenya Ports Authority to cover costs. The respondent convinced UNRA to have Stanbic Bank issue LCs to the supplier, securing the bill of lading in March 2012. UNRA then paid 70% of its contract price (USD 80,938) to the respondent's KCB account, which KCB applied entirely to the first loan, leaving no funds for clearance.

The respondent obtained a second loan from KCB for UGX 110,000,000 on 7 August 2012 to clear the goods, but claimed overcharges and incomplete reconciliations. Some goods were auctioned due to delays, leading UNRA to withhold the remaining 30% (USD 53,313.90) of its contract price.

The respondent sued KCB for breach, seeking damages for demurrage, other costs, and an injunction against land sale. KCB counterclaimed for the outstanding second loan (UGX 127,306,931).

The High Court (Kainamura J) ruled in favor of the respondent on the main suit, awarding special damages (KShs 1,481,126 and USD 8,387.13), general damages (UGX 100,000,000), and costs. On the counterclaim, it awarded UGX 80,000,000 plus interest and costs.

Issues

The appeal raised six grounds:

1. Failure to properly evaluate evidence, leading to an erroneous conclusion.

2. Erroneous finding of breach of contract by the appellant.

3. Erroneous finding of breach of fiduciary duty.

4. Award of special damages (KShs 1,481,126 and USD 8,387.13) without specific proof.

5. Excessive general damages (UGX 100,000,000).

6. Insufficient award on counterclaim (only UGX 80,000,000 instead of UGX 127,306,931).

The cross-appeal raised two grounds:

1. Failure to award loss of profit despite evidence.

2. Failure to award money recalled by UNRA (USD 53,313.90) due to non-delivery of auctioned goods.

   
   

Submissions

Appellant's Submissions (on Appeal):

On liability (Grounds 1-3)

The Appellant submitted that the High Court erred in finding a breach based on the 2 December 2011 email (DEX10). The promise to issue LCs was conditional (e.g., UNRA LC extension by 31 January 2012, formal loan application), not fulfilled timely manner by the respondent. The representation was to the supplier, not the respondent, and no fiduciary duty existed. Losses stemmed from the respondent's lack of funds, not KCB's actions. Cited Bank of Nova Scotia v. Maclellan (1977) for fiduciary duty principles.

On special damages (Ground 4)

The Appellant submitted that demurrage predated LC negotiations (from 24 November 2011); the respondent failed to prove quantum (e.g., payments to Gulf Badr Group unrelated to demurrage). Award exceeded claimed amount (KShs 948,958.42). LC amendment fees (USD 3,031.13) were legitimate or passed to Stanbic.

On general damages (Ground 5)

The Appellant submitted that the award was excessive; it ignored the respondent's own causation of delays.

On counterclaim (Ground 6)

The outstanding loan was UGX 127,306,931 (per Exhibit P37); the High Court ignored interest and miscalculated after UGX 30,000,000 payment.

Respondent's Submissions (on Appeal and Cross-Appeal):

On liability:

The Respondent submitted that KCB's email created a binding representation under estoppel, relied upon by the Respondent, causing delays and losses. Cited Greenwood v. Martin's Bank Ltd (1932) and Yonasani B. Kanyomozi v. Motor Mart (U) Ltd (1995) for estoppel principles.

On damages

The Respondent submitted that Special damages were proven via Exhibits P50-P52 (demurrage) and P39 (LC fees wrongly charged). General damages justified by KCB's delays. On counterclaim, only UGX 80,000,000 proven; no interest due to KCB's wrongdoing.

On cross-appeal: Loss of profit (USD 87,467) proven via Exhibit P59 and PW1's evidence. UNRA recall (USD 53,313.90) was directly caused by KCB's delays leading to the auction (per PW1 and Exhibit P45).

Legal Representation

At the hearing, Mr. Opio Moses (holding brief for Mr. Ssekabanja Arthur) appeared for the appellant (KCB Bank). Mr. John Mike Musisi and Mr. Shamil Kakooza appeared for the respondent (Kaaya L. Enterprises Ltd).

Coram: Cheborion, Gashirabake, and Asha-Mugenyi, JJA

Court's Findings

1. Actionable Representation and Estoppel

(Grounds 1, 2 and 3 of the Appeal)

The Court of Appeal considered whether KCB’s communications amounted to an actionable representation capable of grounding liability under the doctrine of estoppel. In doing so, the Court applied the classic formulation in Greenwood v Martin’s Bank Ltd [1932] All ER Rep 318, which sets out three essential elements:

1. A representation or conduct amounting to a representation intended to induce a course of conduct;

2. Reliance by the representee through an act or omission;

3. Detriment suffered as a consequence of that reliance.

Applying these principles, the Court found that KCB, through its email of 2 December 2011, made a clear and unqualified representation that it would issue irrevocable sight Letters of Credit within one week. That representation was directed to the foreign supplier but was plainly intended to benefit, and did benefit, the respondent customer.

The Court further held that:

1. The representation induced the respondent to refrain from sourcing alternative financing;

2. The respondent reasonably relied on the bank’s assurance in waiting for issuance of the LCs;

3. The respondent suffered direct and foreseeable loss, including demurrage charges and loss of goods, as a consequence of that reliance.

KCB’s attempt to qualify the representation by reference to internal approval requirements and the need for a formal loan application was rejected. The Court emphasized that:

1. None of the alleged conditions were communicated to the respondent or the supplier;

2. The only condition disclosed in the correspondence (DEX10) was acceptance of Letters of Credit by the supplier, which condition was fulfilled.

The Court stated:

“Since the respondent relied on the appellant’s representation by waiting for the issue of LCs and opting against sourcing for alternative financing from other sources, and since the respondent suffered losses as it waited for the issuance of LCs, the appellant was liable for the consequent losses.”

Grounds 1, 2 and 3 of the appeal failed.

2. Special Damages – Demurrage and Related Charges

(Ground 4 of the Appeal)

The Court examined whether the trial court properly awarded special damages arising from demurrage and related costs. It upheld the award for:

1. KShs 1,481,126 and USD 5,356, being demurrage and port-related charges paid to the Kenya Revenue Authority, Kenya Ports Authority, and Gulf Badr Group (supported by Exhibits P50, P51 and P52);

2. USD 3,031.13, being Letter of Credit amendment fees wrongly debited from the respondent’s account.

The Court found that the payment documents constituted credible and strictly proved evidence. With respect to the LC amendment fees, the Court held that KCB could not lawfully charge for services performed by Stanbic Bank, which had carried out the amendments.

Ground 4 of the appeal failed.

3. General Damages

(Ground 5 of the Appeal)

The Court reaffirmed the settled appellate principle governing interference with awards of general damages, citing Crown Beverages Ltd v Sendu Edward, Supreme Court Civil Appeal No. 10 of 2005:

“An appellate court will not interfere with an award of damages unless the trial court acted on a wrong principle of law or the award is so inordinately high or low as to represent an erroneous estimate.”

Applying this standard, the Court held that the award of UGX 100,000,000 in general damages was a reasonable exercise of the trial judge’s discretion, properly compensating the respondent for non-pecuniary loss arising from prolonged delay, inconvenience, and commercial disruption.

No error in principle or manifest excessiveness was established.

Ground 5 of the appeal failed.

4. Counterclaim for Outstanding Loan

(Ground 6 of the Appeal)

The Court addressed KCB’s counterclaim for UGX 127,306,931, alleged to be the outstanding loan balance. It found that KCB failed to properly substantiate this claim.

In particular:

1. Exhibit P37, relied upon by KCB, related to a separate loan facility issued in October 2008, not the August 2012 loan in issue;

2. KCB failed to explain interest accruals or reconcile the figures claimed.

The Court held that only the proven loan amount of UGX 110,000,000, less the UGX 30,000,000 already repaid, could be awarded. The outstanding balance was therefore correctly calculated at UGX 80,000,000.

 Ground 6 of the appeal failed.

5. Cross-Appeal – Loss of Profits

(Ground 1 of the Cross-Appeal)

On the respondent’s claim for loss of profits, the Court applied the test in The Heron II (Koufos v Czarnikow Ltd) [1967] 3 All ER 686, which requires proof that:

1. The loss was directly caused by the breach; and

2. The loss was within the reasonable contemplation of the parties at the time of contracting.

The Court found that Exhibit P59, purporting to quantify profits, was inadequately supported. The nature, basis, and quantum of the alleged profits were unclear, and the trial judge had correctly declined this head of damages.

Ground 1 of the cross-appeal failed.

6. Cross-Appeal – UNRA Recalled Funds

(Ground 2 of the Cross-Appeal)

The Court allowed the respondent’s claim relating to USD 53,313.9, being the 30% balance of the UNRA contract price withheld due to non-delivery of goods.

The Court found that:

1. The goods were auctioned by the Kenya Revenue Authority due to accumulated demurrage;

2. The demurrage and delayed clearance were a direct result of KCB’s failure to issue Letters of Credit as represented;

3. A clear causal link existed between KCB’s breach and the respondent’s loss of the withheld contract sum.

The Court held:

“Since the appellant’s refusal to promptly issue LCs had caused the delayed clearance and accumulated demurrage which had caused the sale of the goods by Kenya Revenue Authority, I would hold the appellant liable for the respondent’s loss of the 30% balance of the contract price.”

Ground 2 of the cross-appeal succeeded.

HOLDING

The Court of Appeal ordered as follows:

1. The appeal was dismissed in its entirety;

2. The cross-appeal was partially allowed;

3. The High Court judgment was upheld with modifications;

4. KCB was ordered to pay USD 53,313.9 as additional damages for loss of the withheld UNRA contract sum;

5. Costs of the appeal were awarded to Kaaya Enterprises, together with two-thirds of the costs of the cross-appeal.

SUMMARY OF AWARDS

Damages Awarded to Kaaya Enterprises

• Special damages:

  1. KShs 1,481,126

  2. USD 8,387.13

  3. USD 53,313.9

• General damages: UGX 100,000,000

• Interest:

  1. 20% p.a. on general damages (from judgment until payment);

  2. 13% p.a. on KShs special damages;

  3. 2% p.a. on USD special damages.

Counterclaim Awarded to KCB Bank

1. UGX 80,000,000, being the outstanding loan balance;

2. Interest: 20% p.a. from judgment until payment.

KEY TAKEAWAYS

For Financial Institutions:

1. Representations Create Binding Obligations:

   Banks cannot make representations about issuing financial instruments (like LCs) and then renege without liability, even if internal approval processes are pending.

2. Communication is Critical:

   Conditions precedent to undertakings must be clearly communicated to all parties. Unstated internal requirements will not excuse non-performance.

3. Emails Create Legal Obligations: 

   Written communications from bank officers to third parties can create actionable representations binding on the institution.

4. Estoppel Liability: 

   Where a bank's representation induces reliance and the customer suffers detriment, the bank faces liability under estoppel principles even absent a formal contract.

5. Proper Documentation Required: 

   When claiming outstanding loans, banks must provide accurate, relevant loan statements. Generic or incorrect documentation will undermine recovery efforts.

For Commercial Parties:

6. Document Everything: 

   Written correspondence (especially emails) establishing commitments are powerful evidence of actionable representations.

7. Act Promptly on Breaches: 

   Kaaya's prompt pursuit of alternative financing limited further losses and strengthened its damages claim.

8. Special Damages Must Be Proved: 

   Maintain detailed records and receipts for all costs incurred (demurrage, clearance fees, etc.).

9. Loss of Profits Difficult to Prove: 

   Claims for consequential damages like lost profits require rigorous substantiation and clear causal connection.

10. Multiple Remedies Available:

    Breach of contract, fiduciary duty, and estoppel can provide overlapping grounds for recovery.

General Commercial Law:

11. Duty of Good Faith in Banking: 

    Banks have heightened obligations when dealing with customers' commercial transactions, especially where trust and reliance are established.

12. Demurrage Liability: 

    Party whose breach causes goods to remain at port can be liable for all accumulated demurrage and related losses, including auction of goods.

13. Mitigation Matters: 

    Courts will assess whether the injured party took reasonable steps to mitigate losses.

14. Appellate Standard: 

    Courts will not disturb damages awards absent wrong principles of law or amounts so high/low as to be erroneous estimates.

PRACTICAL IMPLICATIONS

For Banks:

1. Implement clear protocols for when officers can make commitments regarding financial products

2. Ensure all conditional undertakings explicitly state conditions to all parties

3. Maintain accurate, transaction-specific documentation for loan recovery

4. Train staff on legal implications of representations made to third parties

For Commercial Traders:

1. Secure written confirmation of financing arrangements before committing to suppliers

2. Build contingency financing into international trade transactions

3. Monitor port storage times closely and act quickly when financing delays occur

4. Preserve all correspondence and payment records for potential litigation

For Legal Practitioners:

1. Estoppel remains a powerful remedy where formal contracts are incomplete

2. Multi-ground pleading (breach of contract, fiduciary duty, estoppel) provides strategic advantage

3. Special damages require meticulous proof; general damages offer more flexibility

4. Cross-appeals can salvage additional remedies even where main claim succeeds

CONCLUSION

This judgment reinforces that financial institutions cannot make representations inducing reliance without accepting liability for consequent losses. The doctrine of estoppel operates to protect commercial parties who reasonably rely on bank undertakings, even where formal loan agreements are not concluded. The case serves as a reminder of the binding nature of informal commitments in commercial transactions and the substantial damages that can flow from breach.