Njuca Consolidated Company v Athi Water Works Development Agency; Equity Bank Limited (Interested Party) [2022] KEHC 15994 (KLR) | Performance Guarantees | Esheria

Njuca Consolidated Company v Athi Water Works Development Agency; Equity Bank Limited (Interested Party) [2022] KEHC 15994 (KLR)

Full Case Text

Njuca Consolidated Company v Athi Water Works Development Agency; Equity Bank Limited (Interested Party) (Commercial Suit E859 of 2021) [2022] KEHC 15994 (KLR) (Commercial and Tax) (2 December 2022) (Ruling)

Neutral citation: [2022] KEHC 15994 (KLR)

Republic of Kenya

In the High Court at Nairobi (Milimani Commercial Courts Commercial and Tax Division)

Commercial and Tax

Commercial Suit E859 of 2021

A Mabeya, J

December 2, 2022

Between

Njuca Consolidated Company

Plaintiff

and

Athi Water Works Development Agency

Defendant

and

Equity Bank Limited

Interested Party

Ruling

1. Before Court are two applications both filed by the plaintiff. The first one is a Notice of Motion dated 13/10/2021. It was brought under Article 159 (2)(c) of the Constitution of Kenya; section 7 of the Arbitration Act; sections 1A, 1B, 3A of the Civil Procedure Act, Order 40 and 51 of the Civil Procedure Rules.

2. In the Motion, the plaintiff sought to restrain the defendant from ejecting it from possession of the construction site, appointing another contractor to proceed with construction works therein pending the determination of this suit. It also sought that the interested party be restrained from paying the performance guarantee dated October 15, 2020 in respect of the construction of Changamwe Repooling Sewer Network-Contract No AWSB/AFDB/KTSWSSP/W/09/2019, pending the determination of the suit.

3. There was also a prayer for the Chairman of the Architectural Association of Kenya to be the sole authority of appointing an arbitrator in the dispute between the parties herein.

4. The grounds for the application were that; the plaintiff entered into a contract with the defendant dated October 30, 2018 for the construction of Changamwe Repooling Sewer Network. Pursuant thereto, the interested party issued a performance guarantee dated October 15, 2020 for Ksh 20,448,329. 50 to the defendant on behalf of the plaintiff. That by a letter dated October 12, 2021, the defendant purported to call in the performance guarantee despite being in breach of the contract.

5. The plaintiff averred that the defendant breached the contract in various ways and therefore had no legal or contractual right to call or demand for the sums in the performance guarantee. As consequence of the breach, the plaintiff issued a notice of declaration of dispute to the defendant but the latter failed and/or refused to participate in an amicable resolution of the dispute as stipulated under the contract. This forced the plaintiff to commence the process of seeking compensation from the defendant.

6. That faced with the threat of adjudication, the defendant purported to retaliate by recalling the performance security in bad faith all in an effort to cripple the plaintiff financially and to leverage on the resulting desperation to terminate the plaintiff’s employment without paying the sums due under the contract.

7. The plaintiff asserted that a dispute had arisen and it invoked the dispute settlement clause in the contract. In the premises, it had approached the Court for interim measures of protection to secure the subject matter of the potential arbitration under section 7 of the Arbitration Act 1995 (“the Act”). That if the orders sought are not granted in the interim, substantial sums of money and the underlying securities may be lost beyond recovery.

8. The second application was brought inter-alia under Article 159 (2)(c) of the Constitution of Kenya and section 7 of the Arbitration Act.

9. In this application, the plaintiff sought to restrain the interested party from paying any amount undertaken as Advance Payment Guarantee dated 6/11/2019 and renewed on October 15, 2020 for the construction of Changamwe Repooling Sewer Network-Contract No. AWSB/AFDB/KTSWSSP/W/ 09/ 2019, pending the determination of the suit.

10. The grounds were that pursuant to a contract between it and the defendant, the interested party had issued an Advance Payment Guarantee for Ksh 40,896,659/- dated 6/11/2019 which was renewed on October 15, 2020. That the advance payment by the defendant to the plaintiff was to be progressively deducted from interim payment certificates presented to the defendant in the course of the performance of the contract.

11. That by a letter dated October 25, 2021, the defendant purported to call in the entire Advance Payment Guarantee despite being in breach of the contract and therefore without any legal right to demand the sums in the performance guarantee.

12. The plaintiff contended that a dispute had arisen necessitating the initiation of arbitral proceedings. That it is apprehensive that substantial sums of money and the underlying securities may be lost if the orders sought in the application were not granted.

13. The 1st respondent filed a preliminary objection dated 25/1/2022 against the suit and the applications. The grounds were that there is an elaborate dispute resolution mechanism provided for in the contract dated October 30, 2018. That the application and originating summons dated October 13, 2021 are contrary to section 7 of the Act.

14. The interested party opposed the first application through a replying affidavit sworn on 3/12/2021 by its Legal Manager.

15. It was averred that upon the request of the plaintiff, the interested party issued a Performance Guarantee bond dated October 15, 2020 in favour of the defendant for Ksh 20,448,329. 50. That on October 12, 2021, the defendant demanded for the immediate payment of the said sum on account of failure by the plaintiff to perform its obligations.

16. The interested party contended that it cannot be restrained from paying the money under the Performance Guarantee bond pending the determination of the dispute between the plaintiff and defendant as it does not affect the interested party’s obligations under the Guarantee which is an independent contract.

17. The plaintiff filed a further affidavit in response to the defendant’s Preliminary Objection dated 25/1/2022 and the interested party’s replying affidavit dated 3/12/2021.

18. It emphasised that there exists an arbitration agreement in the contract that binds the parties. That the plaintiff had already commenced the process of arbitration by declaring a dispute through a notice dated 6/9/2019.

19. Further that among the issues to be determined during arbitration would be whether the defendant is entitled to recall the Performance security from the interested party.

20. The assistant manager of the interested party swore a replying affidavit on 28/2/22 in response to the 2nd application.

21. He averred that the Advance Payment Guarantee is an independent contract between the interested party and the defendant. That in the premises, the plaintiff is not a party to the same and cannot therefore seek to restrain the interested party from performing its contractual obligation thereunder.

22. Vide a replying affidavit sworn on 22/3/22, the defendant opposed the first and second applications.

23. It was averred that the plaintiff gave the Performance Bond dated 9/10/2018 issued by the interested party for the sum of Kshs 20, 448,329. 50. That vide a letter dated 16/9/2021, the defendant requested the plaintiff to extend the same as it was due to expire on October 14, 2021 but the plaintiff failed to do so.

24. That the plaintiff had also obtained an Advance Payment Guarantee from the interested party for Kshs 40, 896,659/- but failed to renew the same when it fell due. In the premises, the defendant issued a Notice of Claim due to the slow progress of work vide a letter dated 24/8/2020. That there was very slow progress of works. That the plaintiff had abandoned the construction site between January 2021 and June 2021 despite issuance of instructions to resume works.

25. That pursuant to Clause 4. 2.3 of the General Conditions of Contract, the defendant proceeded to recall the performance guarantee on October 12, 2021 for failure by the plaintiff to perform its obligations under the contract which included failure to renew the performance guarantee within 28 days before expiry of the same.

26. That the plaintiff having failed to renew the Performance Bond and Advance Payment Guarantee, the contract between the parties terminated and the defendant was within its rights to demand a recall of the same.

27. The plaintiff lodged two further affidavits sworn on 28/2/22 in response to the interested party’s replying affidavits of 3/12/2021 and of 28/2/2022.

28. It was averred that it the Performance Bond and Advance Payment Guarantee were issued pursuance to the contract between the plaintiff and defendant. That the same were to act as security for compliance with the Contractor Performance Obligations. They were to be recalled by the defendant in the event of breach of the contract. The same were therefore not independent of the contract between the plaintiff and the defendant.

29. I have considered all of the pleadings, affidavits and submissions on record.

30. The first issue for determination is the defendant’s preliminary objection. The same was hinged on the allegation that the contract between the parties had an elaborate dispute resolution mechanism and that the applications were contrary to section 7 of the Act.

31. Clause 20. 6 of the contract between the parties provided:“Any dispute between the parties arising out of or in connection with the contract not settled amicably in accordance with GC Clause 20. 5 (amicable settlement) and in respect of which the DB’s decision has not become final and binding, shall be finally settled by arbitration.”

32. On the other hand, section 7 of the Actprovides: -“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.”

33. From the foregoing, it is clear that the contract between the parties contemplated two levels in dispute resolution; an attempt to amicable settlement and then arbitration. There is no dispute that a dispute had arisen. There is evidence that the plaintiff had attempted an amicable resolution of the dispute but the same was unsuccessful. In this regard, the procedure followed is within the 4 corners of the contract.

34. This Court has the jurisdiction to grant interim orders of protection pending a determination of an arbitration. In granting interim orders, the Court cannot be said to be interfering with the dispute resolution process between the parties. It will be doing so in order to protect the subject matter of the arbitration.

35. Accordingly, the objection has no basis and is dismissed with costs.

36. The second issue for determination is whether the plaintiff has met the threshold for the granting of the interim orders sought. In Safaricom Limited v Ocean View Beach Hotel Limited & 2 others [2010] eKLR, the Court of Appeal held: -“Under our system of the law on arbitration the essentials which the court must take into account before issuing the interim measures of protection are: -1. The existence of an arbitration agreement.2. Whether the subject matter of arbitration is under threat.3. In the special circumstances which is the appropriate measure of protection after an assessment of the merits of the application?4. For what period must the measure be given especially if requested for before the commencement of the arbitration so as to avoid encroaching on the tribunal’s decision making power as intended by the parties?”

37. On the first consideration, it is not in dispute that an arbitral agreement exists by dint of Clause 20. 6 of the contract.

38. On the second consideration, the defendant demanded payment of the Advance Payment Guarantee and Performance Guarantee sums claiming breach of contract on the part of the plaintiff.

39. In this case, both parties accuse each other of being in breach of the contract. The plaintiff intends to submit its claims against the defendant to an arbitral tribunal while the defendant pursued the option to redeem the guaranteed sums from the interested party.

40. The interested party further argued that the Performance Guarantee Agreement and the Advance Payment guarantee were independent contracts between it and the defendant and could therefore be implemented separately.

41. The contract between the plaintiff and the defendant provided that the guarantee sums are payable in the event of breach. It is yet to be determined which party is in breach of the contract.

42. Clause 20. 6.1 of the contract provides that any dispute between the parties arising out of or in connection with the contract shall be finally settled by arbitration.

43. I am of the opinion that, the bond and the guarantee cannot be said to be independent of the contract between the plaintiff and the defendant. The same are but intricately connected to the contract as they find their validity and existence on that contract.

44. In this regard, before the sums guaranteed therein are released by the interested party, the Arbitral Tribunal ought to resolve the dispute between the parties.

45. The subject matter of the arbitration being the construction site and the sums of money held as guarantee, the same would be under threat if an interim injunction is not granted.

46. Finally, the Court has to consider the appropriate measure of protection and what period must the measure be given. In the circumstances of this case and guided by the section 7 of the Act, the measure of protection has to be until the Arbitral Tribunal determines the dispute.

47. Accordingly, I grant prayers (a) and (b) of the application dated October 13, 2021 pending determination of the arbitration.

48. I also order that the Chairman of the Architectural Society of Kenya as the sole appointing authority to appoint an arbitrator within 21 days of the date of this ruling. Costs of both applications to be in the arbitration.

It is so ordered.DATED and DELIVERED at Nairobi this 2nd day of December, 2022. A. MABEYA, FCIArbJUDGE