Maina v Francis & 10 others [2022] KEHC 11697 (KLR)

Maina v Francis & 10 others (Civil Suit E112 of 2021) [2022] KEHC 11697 (KLR) (Commercial and Tax) (19 May 2022) (Ruling)

Neutral citation: [2022] KEHC 11697 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Law Courts)

Commercial and Tax

Civil Suit E112 of 2021

A Mabeya, J

May 19, 2022

IN THE MATTER OF THE ARBITRATON ACT. CAP 49 LAAWS OF KENYA AND IN THE MATTER OF THE DISPUTE BETWEEN

Between

Samuel Thenya Maina

Applicant

and

Brian Martin Francis

1st Respondent

Estate of Hiram Ngaruiya

2nd Respondent

Isaac Njoroge Gitoho

3rd Respondent

James Njuguna Gitoho

4th Respondent

Krisco Holdings Limited

5th Respondent

Muiboro Enterprises Limited

6th Respondent

KCB Bank Kenya Limited

7th Respondent

Bilha W. Mwangi & Kemboy Julius Kipkosgey t/a Kemboy Law Advocates Llp

8th Respondent

Njeri Benson Ngugi

9th Respondent

Igeria Arthur Konye

10th Respondent

Njoroge David Ngumbu T/A Igeria & Ngugi Advocates

11th Respondent

Ruling

1. This is a ruling on the Summons in Chambers dated 26/02/2021. The summons was brought under section 7 of the Arbitration Act, 1995 Rule 2 of the Arbitration Act, sections 1A & 3A of the Civil Procedure Act and Article 159(2) (c) of the Constitution.

2. It was supported by the affidavit of Dr. Samuel Thenya Maina sworn on 26/02/2021. The summons sought for an injunction to restrain the 7th, 9th, 10th and 11th respondent from releasing the payment of Kshs. 102,378,022. 98 to the 8th respondent pending the determination of the suit.

3. It also sought orders that the sum of Kshs. 102,378,022. 98 be deposited in a joint interest earning account in the names of the advocates for the applicant and advocates for the 1st to 6th respondent pending the hearing and determination of the suit.

4. The background is that the applicant and the 1st to 6th respondent had entered into a Share Purchase Agreement (SPA) by which the 1st to 6th respondent sold to the applicant 77% of the building owned by Adlife Plaza Limited (“APL”) and part purchase price was paid. The balance of the purchase price was to be financed by the 7th respondent.

5. In order to facilitate the release of the completion documents, the 9th to 11th respondent, acting for the 7th respondent, gave to the 8th respondent a professional undertaking dated 7/5/2018 to pay the balance of the purchase price on the completion date.

6. Subsequently, the applicant discovered that as at the completion date, the 1st to 6th respondent were in breach of certain obligations in the SPA. A dispute arose which led to commencement of arbitral proceedings before Hon. Martin Munyu, Arbitrator wherein the applicant claimed as damages a sum of Kshs. 259,378,022. 93. The parties then entered into what was referred to as a ring-fencing agreement of Kshs. 102,378,022. 93 pending reconciliation of some amounts allegedly misappropriated by the 1st to 6th respondents from APL.

7. However, shortly thereafter, the 8th respondent filed Civil Suit No. 21 of 2020 (formerly HCCC No. 233 of 2018) Bilha W. Mwangi & Another v Njeri Benson Ngugi & 2 others (“the said suit”) against the 9th to 11th respondent on their professional undertaking claiming the said amount of Kshs. 102,378,022. 93. Judgment was entered against the 9th to 11th respondent on 5/02/2021 which directed them to pay the 8th respondent the said sum of Kshs. 102,378,022. 93 plus interest. The 8th respondent begun to execute for the same.

8. The applicant contended that he was not a party in that said suit and only became aware of the matter when prompted by the 7th respondent vide a letter dated 11/2/2021 that it would immediately proceed to make payment to the 8th respondent. Vide a letter dated 10/2/2021, the 9th to 11th respondent advised the 7th respondent to proceed with the payment.

9. The applicant contended that such payment would occasion him irrevocable harm as the substratum of the dispute between him and the 1st to 6th respondent was inextricably linked to the settling of the final accounts and was an issue before the arbitral tribunal.

10. That the arbitral award would be nugatory if the injunction is not granted as the funds would be out of his reach and may be dissipated. That since the 1st to 6th respondent were unincorporated individuals whose assets and whereabouts were unknown, recovery of the said sum would be difficult in the event the applicant succeeded in the arbitration.

11. The court granted ex-parte conservatory orders on 1/3/2021. On 8/3/2021, the 1st to 6th respondent and the 8th respondent raised a preliminary objection challenging the jurisdiction of this Court to entertain the suit. The objection was dismissed vide a ruling dated 8/4/2021. The respondents were then directed to respond to the application within 14 days.

12. The application was opposed vide the replying of affidavits of Bilha W. Mwangi and Isaac Njoroge Gitoho both sworn on 21/4/2021. It was deponed that the 8th respondent was an applicant in the said suit which related to the enforcement of a professional undertaking given to the 8th respondent by the 9th to 11th respondent. That the 8th respondent had released the completion documents relying on the said professional undertaking. The same were utilized and the shares in the subject property transferred to the applicant and charged to the 7th respondent. The applicant had taken over the assets and management of APL.

13. They contended that the 9th to 11th respondent had applied for a stay of proceedings pending arbitration in the said suit alleging breach of the SPA agreement and breach of the professional undertaking but the same was dismissed. That judgment was delivered on 5/2/2021 and the same had not been appealed against.

14. It was contended that in the said judgment, a finding had been made that the 9th to 11th respondent were liable to pay the judgment amount as they had utilized the completion documents in favor of the applicant and the 7th respondent. That the gist of the application was that the 9th to 11th respondent wished to settle the decretal amount then claim from the applicant. In the premises, there was no connection between the arbitration which seeks damages for purported breach of contract and the decretal amount in the said suit.

15. It was further contended that the issues raised in the application had been raised by the 9th-11th respondent when they applied for stay of proceedings pending arbitration vide an application dated 27/11/2018. However, the court held that the issue of the alleged breach of the SPA was a separate and independent matter from the undertaking.

16. That there was no subject matter capable of preservation under section 7 of the Arbitration Act as the amended claim only sought damages for breach of contract and that the Kshs. 102 million was neither damages nor was it sought in the arbitration. That decretal amount in HCCC No 18 of 2020 and the professional undertaking were not a subject of the arbitral proceedings as there was no dispute about the purchase price.

17. The applicant swore a further affidavit on 4/5/2020. He deposed that the sum of Kshs. 102,378,022. 93 was intertwined with the arbitral proceedings. That the issues raised in Comm 18 of 2021 only related to the removal of Mr. Martin Munyu as the arbitrator, but did not relate to enforcement of the professional undertaking. He prayed that the application be allowed as prayed.

18. I have considered the pleadings, evidence and the submissions on record. The sole issue for determination is whether there is a need of interim relief by way of an injunction pending arbitration.

19. Section 7 of the Arbitration Act provides: -“(1) It is not incompatible with an arbitration agreement for a party to request from the High Court, before or during arbitral proceedings, an interim measure of protection and for the High Court to grant that measure.(2)Where a party applies to the High Court for an injunction or other interim order and the arbitral tribunal has already ruled on any matter relevant to the application, the High Court shall treat the ruling or any finding of fact made in the course of the ruling as conclusive for the purposes of the application.”

20. Counsel for the 1st to 6th and 8th respondent submitted that, under the aforesaid provision, what is sought to be preserved must be the subject matter of the arbitration. There is no dispute that there are two competing interest in this matter. The applicant has an SPA which he alleges was breached by the 1st to 6th respondent. Out of the breach, he has commenced arbitral proceedings against them claiming damages amounting to KShs.259 million.

21. On the other hand, the 8th respondent has a judgment in his favor against the 9th to 11th respondent for a sum of Kshs. 102,378,022. 93. He has sought to execute for the same against the 9th to 11th respondent. The applicant has a right not to have his right to his claim not rendered nugatory while at the same time, the 8th respondent is entitled to the fruits of his judgment.

22. The 6th to 6th respondent and 8th respondent submitted that the sum of Kshs. 102,378,022. 93 was not a subject of the arbitral proceedings. That the same cannot therefore be a subject of preservation as what is before the tribunal is a claim for damages. The applicant submitted otherwise and contended that the said sum and the arbitral proceedings were inextricably intertwined.

23. I note that, in the said suit, the court made the following findings: -“Having said so, there was no provision in the undertaking that in the event a dispute was to arise, the same would be subject to arbitration proceedings.…The Defendants cite on an alleged breach of the SPA pointed out by the Purchasers Advocates. The Purchasers were not parties to the undertaking. Aside from the facts that no breach of the warranties has been proved, even if the same were shown to exist, this would be an entirely separate and independent matter not related to the undertaking at all. The undertaking was clear that the same was to be honoured upon completion of the sale. The sale is now complete. No other conditions were attached for fulfillment of the Professional Undertaking. The Defendants cannot now seek to plead the cause of a third party in an attempt to evade fulfilling their obligation under the Professional Undertaking.”

24. The Court notes that in the said suit, the matter was between the 8th respondent and the 9th to 11th respondent. The applicant and the 1st to 6th respondent were not parties. Further, neither the SPA nor the ring-fencing of the sum of Kshs. 102,378,022. 98 was an issue in that suit.

25. Be that as it may, the Court has to consider the underlying issues between the parties. The professional undertaking was given in respect of the balance of the purchase price against release of the completion documents. It was given on behalf of the 7th respondent for the applicant. Although the beneficiary of the undertaking was the 8th respondent, it was for the benefit of the 1st to 6th respondent who were legally bound to the applicant through the SPA.

26. It has been alleged, and not denied, that because of the alleged breaches to the SPA that had been admitted by the 1st to 6th respondent, they had agreed by a letter dated 19/7/2018 that the said sum of Kshs. 102,378,022. 98 being ring fenced. In effect, that agreement means that they are not entitled to the said sum of Kshs. 102,378,022. 98 which had been ring-fenced until the dispute under the SPA is determined.

27. The foregoing being the case, the said suit properly determined that the 8th respondent was liable to receive the amount under the undertaking given by the 9th to 11th respondent. No doubt he was supposed to receive it and pass it over to the 1st to 6th respondent under the normal course of events, to wit, in the SPA transaction. It was not for his own use but that of the 1st to 6th respondent.

28. In this regard, since the 1st to 6th respondent are bound by their agreement that the said sum be ring-fenced, it would be inequitable to allow the release of the said sum before the conclusion of the arbitral proceedings. It was alleged, and not denied by the 1st to 6th respondent, that their whereabouts and asset base is unknown. That they having embezzled the funds of APL, having admitted to some breaches of SPA and having agreed to the ring-fencing of the said sum of Kshs. 102,378,022. 98, if the same is paid over to them, they may dissipate the same whereby the arbitral proceedings would be rendered nugatory.

29. As of now, the 1st to 6th respondent have performed their part of the SPA, albeit with some breaches and are entitled to the balance of the purchase price. On the other hand, the 8th respondent, having released the completion documents became the beneficiary of the judgment in the said suit and is therefore entitled to receive the judgment sum but for and on behalf of the 1st to 6th respondent for whom he was acting.

30. On the other hand, the 7th respondent is duty bound to pay the said sum having received the completion documents and charged them. The 9th and 11th respondent are duty bound to settle the said sum in terms of the aforesaid judgment which came about as a result of their professional undertaking on behalf of the 7th respondent. On his part, the applicant is entitled to protection to the extent that, if he is successful in the arbitral proceedings, the award thereof is not rendered nugatory.

31. In view of the foregoing, the justice of the case demands that none of the parties should be made to suffer. I will not grant the injunction as sought. The 7th, 8th, 9th, 10th and 11th respondent have nothing to do with the dispute between the 1st to 6th respondent and the applicant, either in the SPA or before the arbitral tribunal. Their roles, in my view, ended with the release of the completion documents and the completion of the SPA.

32. The view the Court takes is that, the 1st to 6th respondent are out to circumvent the agreement for ring-fencing of the sum of Kshs. 102,378,022. 98. Although the said suit was brought by the 8th respondent on the professional undertaking given to him by the 9th to 11th respondent, it is not lost of the Court that the same was for the benefit of the 1st to 6th respondent who were still bound to their ring-fencing agreement. It would be unjust to allow the 1st to 6th respondent to escape their responsibility under that agreement.

33. Accordingly, in order to do justice, the Court will release the 7th, 8th, 9th 10th and 11th respondents from the brawl between the 1st to 6th respondent and the applicant. This will be achieved by having the said sum held by the advocates for the disputants herein and not otherwise.

34. Accordingly, prayer no.3 is hereby dismissed. However, prayer nos. 4 and 5 of the Summons dated 26/2/2021 are granted. The said amount be deposited by the 7th respondent within 7 days of the date of this ruling.It is so ordered.

DATED AND DELIVERED AT NAIROBI THIS 19TH DAY OF MAY, 2022. A. MABEYA, FCIArbJUDGE