Rising Star Commodities Limited v Mumias Sugar Company Limited & Diamond Trust Bank Kenya Limited [2015] KEHC 2904 (KLR) | Bank Guarantees | Esheria

Rising Star Commodities Limited v Mumias Sugar Company Limited & Diamond Trust Bank Kenya Limited [2015] KEHC 2904 (KLR)

Full Case Text

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT MOMBASA

CIVIL SUIT NO. 15 OF 2015

RISING STAR COMMODITIES LIMITED…............……….……….PLAINTIFF

VERSUS

MUMIAS SUGAR COMPANY LIMITED………………….…1ST DEFENDANT

DIAMOND TRUST BANK KENYA LIMITED……………….2ND DEFENDANT

R U L I N G

1.       RISING STAR COMMODITIES LIMUTED, the plaintiff has been the distributor of the products of MUMIA SUGAR COMPANY LIMITED, the 1st defendant, since 1st March 2009. To that end the plaintiff and the first defendant entered into a distribution agreement dated 1st march 2009. That agreement was extended in October 2011 for three years and expired on 1st October 2014. The agreement provided that the plaintiff would obtain a Bank guarantee for its business cheques issued to the 1st defendant

2.      The plaintiff banker DIAMOND TRUST BANK KENYA LIMITED, the 2nd defendant issued the Bank guarantee dated 2nd March 2009 to the 1st defendant. The 2nd defendant guaranteed the plaintiff for Ksh 50 million. That guarantee was extended from time to time with its terms remaining the same. It expired on 24th February 2015.

3.      The plaintiff filed this case against both defendants.

4.      In summary the plaintiff’s claim is that the 1st defendant has called on the 2nd defendant to make payment under the guarantee of Ksh 17,480,486. 03 which the 1st defendant alleges is owned to it by the plaintiff. Plaintiff also pleads that the Distribution Agreement is integral part of the guarantee. That since the Distribution Agreement expired the guarantee was therefore, as at October 2014, rendered null and void. That  the plaintiff is  entitled to credit notes for goods never sold and or delivered; discount and price differences, which had not been factored in the 1st defendant’s account; the transport account payable to the plaintiff by the 1st defendant. That the  1st defendant had failed to reconcile the plaintiff’s account which reconciliation would have revealed that the 1st defendant owed the plaintiff Ksh 21,101,700. 95, which amount ought to be offset from the amount claimed by the 1st defendant, that is Ksh 17,480,486. 03.

5.       The plaintiff further pleaded that the letter of demand of payment under the guarantee issued by the 1st defendant to the 2nd defendant had failed to disclose the nature of the default and the period of that default incompliance with the guarantee.

6.      The plaintiff in its final prayers in the plaint sought:

* That the guarantee and its renewal issued by 2nd defendant to the 1st defendant, in disregard of the distribution agreement was invalid, null and void;

* declaration that the 1st defendant’s claim to 2nd defendant on the strength of the guarantee is invalid;

* a permanent injunction be issued restraining the 2nd defendant from paying the 1st defendant  on the strength of the guarantee; and

* a  permanent injunction be issued restraining the 1st defendant from making any demand.

7.       The plaintiff in filing its plaint simultaneously filed an inter locutory application by way of Notice of Motion dated 5th February 2015. The plaintiff seeks by that application interlocutory injunction to restrain the 2nd defendant from honouring the guarantee issued to the 1st defendant.

8.      The plaintiff affidavit in support of that application, which for unexplained reason begins at paragraph 26, follows the line of the pleadings in the plaint. I will not therefore once again reproduce the same in this Ruling but only wish to state that the plaintiff in that affidavit, at paragraph 47 (i) alleged that the 1st defendant had perpetrated fraud against it. That allegation of fraud is not pleaded in the plaint at all. It therefore remains an unsupported allegation.

9.      The plaintiff’s application was opposed by the 1st defendant. In opposing it the 1st defendant relied on the replying affidavit sworn by Jonathan Koome on 10th June 2015.

10.     In that affidavit the 1st defendant alluded to the guarantee issued in its favour by the 2nd defendant guaranteeing the plaintiffs payment for up to Ksh 50 million. 1st defendant through its replying affidavit stated that the guarantee was independent of the distribution agreement. That accordingly the plaintiff was wrong to try to import into the guarantee terms and interpretation not found in the guarantee. That under the guarantee the 2nd defendant only required 1st defendant’s invoice and the plaintiff’s signed delivery note as conclusive evidence of the plaintiff’s indebtedness to the 1st defendant. That in accordance with that requirement the 1st defendant by its letter dated 20th January 2015 forwarded to the 2nd defendant copies of invoices and delivery notes of sugar sold by the 1st defendant to the plaintiff for the months of September and October 2014.

11.     I have looked at that letter of 20th January 2015 sent to 2nd defendant by the 1st defendant. It is clear that the invoices dates range from 17th September to 18th October 2014. It follows that by the time the 1st defendant demanded payment from the 1st defendant under the guarantee the 30 days period of non-payment required under the guarantee had lapsed.

ANALYSIS

12.     What is before me is an interlocutory injunction application. That being so it is essential to caution myself of what is expected of me.

13.     A good place to begin is to refer to the case MBUTHIA –V- JIMBA CREDIT FINANCE CORPORATION & ANOTHER (1988) KLR where it was held:

The correct approach in dealing with an application for an interlocutory injunction is not to decide the issues of fact, but rather to weigh up the relevant strength of each side’s propositions. The lower court judge in this case had gone far beyond his proper duties and made final findings of fact on disputed affidavits.

14.     The other case that is useful to consider is NGURUMAN LIMITED -V- JAN BONDE NIELSEN & 2 OTHERS C.A NO. 77 of 2012, Viz:

“ We reiterate that in considering whether or not a prima facie case has been established, the court does not hold a mini trial and must not examine the merits of the case closely. All that the court is to see is that on the face of it the person applying for an injunction has a right, which has been or is threatened with violation. Positions of the parties are not to be proved in such a manner as to give a final decision in discharging a prima facie case. The applicant need not establish title it is enough if he can show that he has a fair and bona fide question to raise as to the existence of the right, which he alleges. The standard of proof of that prima facie case is on a balance or, as otherwise put, on a preponderance of probabilities. This means no more than that the court takes the view that on the face of it the applicant’s case is more likely than not to ultimately succeed.”

15.     In my consideration of the  plaintiff’s application  I will be guided by the case GIELLA –V- CASSMAN BROWN & CO.LTD (1973) E.A which has been tried  and tested severally by our courts and which sets out the principle of granting and interlocutory injunction. For an applicant to succeed in such an application he must successfully meet the following principles:

* an applicant must show a prima facie case with probability of success;

* an injunction will not normally be granted unless the applicant might suffer irreparable injury; and

* when the court is in doubt it will decide the application on the balance of convenience

The Plaintiff’s has pleaded that the guarantee issued by the 2nd defendant in favour of the 1st defendant whereby 2nd defendant guaranteed to pay Plaintiff’s debt to the 1st defendant was not valid by the time the 1st defendant sought payment under that guarantee.  Plaintiff’s contention is that the guarantee was underpinned by the distribution agreement and because that distribution agreement expired in October 2014, the guarantee could not thereafter be called upon for purpose of effecting payment

. Further the Plaintiff contended that it was owed money by the 1stdefendant far much more than it owed 1st defendant.  It would seem that the plaintiff is seeking to set off the amount it alleged it was owed from the amount claimed by the 1st defendant.  Those contentions by the Plaintiff alongside the others such as the Plaintiffs allegation that there were price variations and discounts which the Plaintiff was entitled to, can all be responded to by consideration of the relationship between the distribution agreement ad guarantee.

. I shall begin by considering the definition of guarantee as seen in Halburys Laws of England, 4th edition as follows.

A guarantee is an accessory contract by which the promise must exist or be contemplated.  As in the case of any other contract its validity depends upon the mutual assent of the parties to it, their capacity to contract and consideration, actual or implied.  An additional statutory requirement is that the contract must either be in writing or be evidenced by a written note or memorandum signed by or on behalf of the party to be charged.

In that same book the Learned authors proceeded to state:

The principal debtor, or principal, is the person primarily liable to the creditor for the debt, default or miscarriage answered for by the surety.  Although sometimes bound by the same instrument as his surety, the principal debtor is not a party to the surety’s contract to be answerable to the creditor: there is not necessarily any privity between the surety and the principal debtor; they do not constitute one person in law, and are not as such jointly liable to the creditor, with whom alone the surety contracts.

.The principal debtor, in this case, is the plaintiff.  The above quote would seem to show that the plaintiff has no privity of contract, the contract being the guarantee.

.Justice F. Gikonyo in his Ruling of KOLABA ENTERPRISES LTD  -V- SHAMSHUDIN HUSSEIN VARVANI & ANOTHER (2015) eKLR had occasion to consider Liability under a guarantee.  In so doing he had this to says:

In my earlier ruling, I re-stated the law on this legal issue and I will state it again.  Guarantee is a separate contract from and distinct from that of the borrower.  Liability of guarantor is therefore based on the guarantee to pay the debts of the principal debtor should he not pay or be unable to pay.  However liability of gurantor is limited to the liability set out in the guarantee.  See Halsbury’s Laws of England 4th Ed that:

Para 101

“ A guarantee, being merely an accessory contract, does not, even when under seal, cause a merger with that of the principal debtor’s simple contract debt to which it relates…..

Para 103

“….although sometimes bound by the same instrument as his surety, the principal debtor is not a party to the surety’s contract to be answerable to the contract; there is not necessarily any privity between the surety and the principal debtor; they do not constitute one person in law, and are not as such jointly liable to the creditor, with whom alone the surety contracts.”

. Bearing in mind the above authorities, I have cited above I do find that the plaintiff has failed to prove a prima facie case with probability of success.  The court indeed takes the view that on the face of the facts presented by the parties and with the application of the Law relating to gurantees that the plaintiffs case more likely than not to succeed.

. To butteress that finding I will refer to the case EDWARD OWENENGINEERING LTD –V- BARCLAYS BANK INTERNATIONAL LTD (1978) IALLER 976 viz:

“All this leads to the conclusion that the performance guarantee stands on a similar footing to a letter of credit.  A bank which gives a performance guarantee must honour that guarantee according to its terms.  It is not concerned in the least with the relations between the supplier and the customer, nor with the question whether the supplier  is in default or not.  The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions.  The only exception is when there is clear fraud of which the bank has notice.”

.That case in my view responds to the issues raised by the plaintiff on invoices, credit notes, discounts and alleged debt of the 1st defendant to the plaintiff.  The 2nd defendant’s legal obligations under the guarantee are clear as seen above.

. I have looked at the 1st defendant’s letter of demand for payment addressed to 2nd defendant.  On prima facie basis that letter cannot be faulted.  As stated before it demanded payment of invoiced that were due more than 30days from the date of demand, and it referred to specific invoices.  All that is in compliance with the guarantee.

. The plaintiff therefore fails on the first principle of granting an interlocutory injunction.

. In considering the second principle of granting an interlocutory injunction, other than the plaintiff stating that the 1st defendant is facing financial hardship, the plaintiff did not show that it would suffer irreparable injury which it would not adequately be compensated in damages.  In my view since the plaintiff has not yet proved its claim for the amount it contends the 1st defendants owes it, it fails to prove the 1st defendant would not be able to compensate it of any loss it will suffer.

.There being no doubt in my mind in regard to the first two principles of granting an injunction, I shall not proceed to consider the third principle, that is where the balance of convenience lies.

CONCLUSION

.  In view of the above finding the plaintiff’s application dated 5th February 2015 is hereby dismissed with costs to the 1st defendant. Any injunction orders previously issued in this mater they are hereby vacated.

DATED and DELIVERED at MOMBASA this 24th day of September, 2015.

MARY KASANGO

JUDGE

24. 9.2015

Coram

Before Justice Mary Kasango

C/Assistant -

For the Plaintiffs:

For the 1st defendants:

Court

Ruling delivered in their presence/absence in open court.

MARY KASANGO

JUDGE