[2023] KEHC 19380 (KLR)

Azicon Kenya Limited v Sinohydro Corporation Limited; Receiver, Chase Bank Limited (In Receivership) (Interested Party) (Commercial Case E284 of 2019) [2023] KEHC 19380 (KLR) (Commercial and Tax) (30 June 2023) (Ruling)

Neutral citation: [2023] KEHC 19380 (KLR)

Republic of Kenya

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

Commercial and Tax

Commercial Case E284 of 2019

FG Mugambi, J

June 30, 2023

Between

Azicon Kenya Limited

Plaintiff

and

Sinohydro Corporation Limited

Defendant

and

Receiver, Chase Bank Limited (In Receivership

Interested Party

Ruling

1. The plaintiff entered into a subcontract with the defendant for the Execution of AGL System and Scada Remote Control System for Runway Capacity and ILS Upgrade And Rehabilitation of Aircraft Pavements At Jomo Kenya International Airport (no. KAA/ESL/JKIA/593/C/2) (“the Subcontract”). Under the Subcontract, the plaintiff provided two Advance Payment Guarantees issued by theinterested party (“the Bank”); No. 008APGR1xxxxxxxxx1 for USD 583,264. 55 and No. 008AAPGR1xxxxxxxxx2 for Kshs. 12,257,129. 50 (“the Guarantees”)

2. Pursuant to the Guarantees, the defendant paid the plaintiff USD 583,264. 55 and Kshs. 12,257,129. 50 for mobilization of the works under the Subcontract. According to the Plaint dated 1August 4, 2019, theplaintiff states that it utilized all the advance payments for mobilization as agreed and even ended up executing additional work for which it claimed from the defendant payment under Interim Payment Certificate No. 1. Theplaintiff therefore accuses the defendant of fraudulently calling up the Guarantees and alleging that it did not perform any services under the Subcontract, yet it had used the advance payments for mobilization and raised a claim for the work done. It therefore seeks a permanent injunction restraining the defendant from recovering or otherwise making any claim arising from the Guarantees and a permanent injunction restraining Chase Bank from honouring thedefendant’s demand for payment of the Guarantees.

3. Together with the Plaint, the plaintiff also filed the Notice of Motion dated August 14, 2019made, inter alia, under section 7 of the Arbitration Act, 1995 (“the Act”) and Order 40 of the Civil Procedure Rules seeking an injunction restraining the defendant from calling up or otherwise making any claim under the Guarantees and an injunction restraining Chase Bank from honouring the defendant’s demand for payment under the Guarantees. The application is supported by the affidavit of the plaintiff’s Managing Director, David Kibet Tonui, sworn on August 14, 2019. The defendant opposes the application through the replying affidavit of its officer, Mo Xiu, sworn on September 13, 2019. The parties have filed written submissions in support of their respective submissions.

4. The plaintiff’s application is made under section 7 of the Act which gives the court wide powers to preserve the subject matter of the arbitration as follows:7(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.

5. The Act does not define what an interim measure of protection is, but I think the following observations of Nyamu JA., inSafaricom Limited v Ocean View Beach Hotel Limited & 2others [2010] eKLR are instructive on the meaning of interim measures and the applicable principles:By determining the matters on the basis of the [Giella] principles the superior court failed to appreciate what interim measures of protection entail in terms of arbitration law, during or before the commencement of an arbitration. It may be necessary for an arbitral tribunal or a national court to issue orders intended to preserve evidence, to protect assets, or in some other way to maintain the status quo pending the outcome of the arbitration proceedings themselves. Such orders take different forms and go under different names. In the case of Kenya, the Arbitration Act is modeled on the Model Law and the UNCITRAL Rules and this is the reason they are known as “interim measures of protection” under section 7 of the Arbitration Act. On the other hand, in the English version of the ICC Rules for example, they are known as “interim conservatory measures”. Whatever their description however, they are intended in principle to operate as “holding” orders, pending the outcome of the arbitral proceedings. The making of interim measures was never intended to anticipate litigation.------------------------Interim measures of protection in arbitration take different forms and it would be unwise to regard the categories of interim measures as being in any sense closed (say restricted to injunctions for example) and what is suitable must turn or depend on the facts of each case before the court or the tribunal – such interim measures include, measures relating to preservation of evidence, measures aimed at preserving the status quo measures intended to provide security for costs and injunctions. 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. [Emphasis mine]

6. As I understand, the purpose of the interim measure of protection is to protect the substance of the arbitration pending the outcome of the proceedings hence the court ought to direct its mind to the purpose of the order vis-à-vis the arbitration proceedings.

7. Turning to the substance of the application, the plaintiff seeks to restrain the defendant from calling up the Guarantees and Chase Bank from honouring the demand pending arbitration. Both parties agree on the nature of the Guarantees as contracts distinct from the Subcontract. The Guarantees are contracts between the defendant and the Bank.

8. The nature of payment guarantees, performance bonds and, like documentary credit documents have been the subject to several decisions some of which the parties have quoted in their submissions. These decisions include Sinohydro Corporation Limited v GC Retail Limited andanother[2016] eKLR, Saj Ceramics v HMS Bergabau AG andanother [2018] eKLR, Transfrica Assurance Co., Ltd v Cimbria (EA) Ltd [2002] 2 EA 627 and Kenindia Assurance Co., Ltd v First National Finance Bank Limited [2008] eKLR. The principle elucidated in these decisions is that documentary credits, like guarantees are contracts independent of the primary contract. Lord Denning MR in Edward Owen Engineering Limited v Barclays Bank International Limited [1978] 1 All ER 976 stated as follows in that regard:A performance bond is a new creature so far as we are concerned. It has many similarities to a letter of credit, with which of course we are very familiar. It has been long established that when a letter of credit is issued and confirmed by a bank, the bank must pay it if the documents are in order and the terms of the credit are satisfied. Any dispute between buyer and seller must be settled between themselves. The bank must honor the credit.It is well established that a letter of credit is independent of the primary contract of sale between the buyer and the seller. The issuing bank agrees to pay upon presentation of documents, not goods. This rule is necessary to preserve the efficiency of the letter of credit as an instrument for the financing of trade. [Emphasis mine]

9. Considering the application against the principles I have cited above; I must warn myself that the dispute between the parties may be settled by an arbitral tribunal hence I must avoid making any definitive findings on disputed issues or otherwise making any comments that would prejudice an arbitrator in the event the parties make reference to arbitration.

10. The first condition the plaintiff must establish as stated in Safaricom Limited v Ocean View Beach Hotel Limited & 2others(supra) is that there must be in existence an arbitration agreement. On this score the plaintiff’s case must fail as there is no arbitration agreement between the plaintiff and the defendant in relation to the Guarantees. The jurisdiction to grant interim orders of protection rests on an arbitration agreement between the parties to the dispute and since the Guarantees are separate agreements between the Bank and the defendant, it follows that the plaintiff’s application lacks any foundation. Moreover, there is no dispute between the plaintiff and the Bank and no relief has been sought against the Bank.

11. Even if I were to accept that the Guarantees are subject to arbitration, the plaintiff must show that the subject matter of arbitration is under threat. The subject matter of arbitration is the dispute between the plaintiff and the defendant is monies advanced to the plaintiff by the defendant as advance payment for mobilization of the Subcontract. While the plaintiff contends that it is entitled to the money which it has spent on mobilization for the Subcontract, the defendant takes the view that money was not used for purposes of the Subcontract but for other works outside the Subcontract hence it is entitled to the refund of the monies. The defendant has to that end filed its Statement of Defence and Counterclaim dated November 11, 2022 seeking the amount secured by the Guarantees. I do not see nor has the plaintiff demonstrated how the subject under arbitration is threatened as there is no suggestion or even evidence that if the money is paid over that it may not be recovered. Ultimately, the dispute is not between the plaintiff and the Bank since the plaintiff is not privy to the Guarantees and the Bank confirmed in its letter dated February 8, 2017 that it would honour the defendant’s demand once the moratorium imposed by the Central Bank was lifted.

12. On the third consideration, whether the court ought to consider the special circumstances of the case are appropriate for a measure of protection, I do not find any special circumstances. The plaintiff urges that the defendant has committed fraud in calling up the Guarantees. In its particulars of the fraud pleaded in the Plaint, the plaintiff alleges that defendant was privy to the fact that the plaintiff had attended several site meetings relating to the Subcontract and that the its was privy to the fact that the plaintiff has used all the advance payment in mobilization in respect of the works under the Subcontract as agreed and that it ended up executing more project works under the Subcontract.

13. The plaintiff argues that this is a case of fraud hence the court should intervene in restraining the Bank’s contractual obligations to the defendant. It relied on the following dicta in Kenindia Assurance Company Limited v First National Finance Bank Limited (supra) as follows: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 has performed his contractual obligation or not; 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 …….. only exception is when there is clear fraud of which the bank has notice....... As to the fulfilment of the conditions incorporated in the guarantee the statement of the beneficiary shall be taken at its face value unless the contractor can establish that the beneficiary’s stand is motivated by fraud, misrepresentation, deliberate suppression of material facts or the like of which would give rise to special equities in favour of the contractor. [Emphasis mine]

14. From the above case, the only reason the Bank may refuse to honour a guarantee is if it has notice of fraud. In this case, the Bank has already indicated that it is ready and willing to honour the Guarantees but for the fact that at the material time it was under a moratorium imposed by the Central Bank. Even if the facts complained of by the plaintiff amount to fraud, there is no indication that the Bank was aware of the dealings between the plaintiff and the defendant until the defendant issued the demand for payment under the Guarantees.

15. The last consideration concerns the period the measure may be given, especially if requested for before the commencement of the arbitration to avoid encroaching on the tribunal’s decision-making power as intended by the parties. On this aspect, I agree with the defendant that since the suit was filed no steps have been taken to commence arbitration proceedings. In any case, the defendant has filed its Defence and Counterclaim and no step has been taken at the earliest opportunity to stay these proceedings or refer the dispute to arbitration.

16. The plaintiff has not made out a case for interim measures of protection under section 7 of the Arbitration Act. It seeks to restrain the performance of Advance Payment Guarantees to which it is not a party. It has not taken any steps to refer this matter to arbitration since the suit was filed. For the reasons I have outlined, I dismiss the Notice of Motion dated August 14, 2019 with costs to the defendant.

SIGNED AT LONDON, ENGLANDD. S. MAJANJAJUDGEDATED AND DELIVERED AT NAIROBI THIS 30TH DAY OF JUNE 2023. F. MUGAMBIJUDGECourt Assistant: Mr Michael OnyangoMs Ngetich instructed by Mitey and Company Advocates for the plaintiffMr Githumbi instructed by Githumbi Gachaga and Achoki Advocates for the defendant.