[2014] KEHC 6618 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

COMERCIAL & ADMIRALTY DIVISION

MILIMANI LAW COURTS

HCCC CASE NO 445 OF 2013

THE BOARD OF GOVERNORS NG’IYA GIRLS HIGH SCHOOL...... APPLICANT

VERSUS

MESHACK OCHIENG’ T/A

MECKO ENTERPRISES........................................................ RESPONDENT

RULING

INTRODUCTION

The Notice of Motion application dated 10th December 2013 and filed on 11th December 2013 has been filed on behalf of The Board of Governor’s Ngiya Girls High School, shown as the 2nd Respondent herein, by the Honourable Attorney General. The same was brought under the provisions of Sections 35(2) (a) (iv) and 35 (2) (vi) of the Arbitration Act, Order 51 Rule 1 of the Civil Procedure Rules and all other enabling provisions of the law. It sought the following orders:-

An order setting aside the arbitration award on materials amounting to Kshs 18,942,992. 66.

An order setting aside the arbitration award on compound interest amounting to Kshs 6,523,069. 10.

An order setting aside the arbitration award on compound interest which was awarded at the rate of 17. 5% per annum.

An order setting aside the arbitration award on labour amounting to Kshs 5,105,188. 44.

An order setting aside the award on costs of the Arbitration.

Costs of this application.

The grounds under which the said application was premised were as follows:-

That the dispute on materials did not fall within the terms of reference of the arbitration according to the arbitration clause;

That the Arbitrator was not empowered to award compound interest;

That the Arbitrator was fraudulently misled into believing that the supervising ministry acknowledged Kshs 24,048,181/= was payable to the Respondent in a letter dated 24th November 2011;

That the Arbitration Award was not issued based as per issues raised in the pleadings, proceedings and subsequent submissions;

That the Award stands to occasion gross injustice to the Applicant resulting to loss of public funds.

The said application was supported by the affidavit of David Oketch. It that was sworn on 11th December 2013. He contended that the Applicant and the Respondent herein entered into a labour contract only in the sum of Kshs 6,368,892. 25 from a grant to the school from the Ministry of Finance’s Economic Stimulus Programme. It was its contention that the condition of contract constituted part of the labour- only contract and that the conditions were not applicable to subsequent agreements/contracts inter-parties.

It was also its averment that it verbally requested the Respondent to supply materials worth Kshs 8,000,000/= which the Respondent supplied and it paid it the said sum. It was its contention that there was no agreement to refer disputes touching on materials to the arbitral process.

The deponent deposed that counsel who was handling the matter on its behalf objected to the arbitral tribunal’s jurisdiction to hear and determine the dispute on materials since Clause 37 of the Arbitration clause was in respect of labour – only contract but the arbitrator nonetheless heard and determined the same.

Further contended out that the arbitrator did not have power to award compound interest unless the same had been claimed as part of special damages as had been stipulated in Rule 16 (C) of the Chartered Institute of Arbitrators Rules of Procedure.

Another objection regarding of the award arose out of the debt of Kshs 24,048,181/=. The deponent stated that the letter of 24th November 2011 did not specifically acknowledge the debt and that in any event the said letter was not signed. He further said that this was pointed out to the arbitrator by the Applicant’s counsel but nonetheless, the arbitrator considered the same and found that the Applicant herein owed the Respondent the said amount.

The Applicant also averred that the arbitrator was not impartial as the arbitral award was wholly based on a single document which was the Statement of Account. It said that the statement was ambiguous as it did not provide for prior payments made out to the Respondent amounting to Kshs 13,703,761/=. It averred that the said statement of Account created the impression that the Respondent was the sole supplier of materials whereas there were twelve (12) other suppliers and that it did not have the chance to interrogate the Project Architect who authored the statement for payment.

The deponent deponed that QS Newton Dishon Maungu published his arbitration award on 30th September 2013 and that on 24th October 2013, the Applicant sought clarification of the award pursuant to Section 34 of the Arbitration Act. He stated that the said arbitrator clarified certain issues in his letter of 13th November 2013.

It was the Applicant’s contention that the arbitration award would occasion it gross injustice resulting to a great loss of money from public funds.

The Respondent filed a Supporting Affidavit. It was sworn by Meshack Ochieng on 16th December 2013. As counsel for the Applicant rightly pointed out, this ought to have been Replying Affidavit. As this court is mandated to determine matters before it without due regard to procedural technicalities, the said Supporting Affidavit will be deemed to be a Replying Affidavit, for all purposes and intent, particularly in view of the fact that the Respondent was not represented by counsel.

In the said Affidavit, the Respondent explained that the sum of Kshs 24,048,181/= was final account upon labour only contract of Kshs 30,000,000/= and that the sum of Kshs 8,500,000/= was an advance and payment.

He deposed that a Mr David Oketch did not technically understand the drawing of a class that exceeded 792 m² for Kshs 30,000,000/= and he was therefore seeking a sum of Kshs 38,366,305/=. It was the Respondent’s contention that the said Mr David Oketch flouted Section 2 of Public Procurement and Disposal Act, 2005 and Regulations 2006 and that the authorised accounting officer of Ministry of Education ordered that the Respondent be paid a sum of Kshs 38,366,305/=.

The Respondent was seeking an order of this court for the immediate payment of the sum of Kshs 38,366,305/= on the following grounds:-

That under Section 4 (Act was not specified), the arbitration agreement was binding.

That the available fund was Kshs 30,000,000/= that was equivalent to constructing an area of 792m² to a drawing of 2970 m².

That non-payment of his monies was a violation of Section 2 of the Public Procurement and Disposal Act 2005 and Regulations 2006 (Building and Civil Engineering).

That the Applicant continued to enjoy the classrooms since the commissioning of the same by the Permanent Secretary Ministry of Education on 21st July 2011.

LEGAL SUBMISSIONS BY THE APPLICANT

In its written submissions dated and filed on 11th December 2013, the Applicant reiterated that on 9th March 2010, it entered into a labour - contract only with the Respondent for the sum of Kshs 6,368,892. 25 wherein Clause 37 of the Conditions of Contract had an arbitration clause. It stated that the subsequent contract for the Respondent to supply materials in the sum of Kshs 8,500,000/= had no arbitration clause.

The first issue that the Applicant raised was that of jurisdiction. It was the Applicant’s submission that by issuing an award on materials, the arbitrator dealt with a dispute which did not fall within the terms of reference. It relied on the case of Owners of Motor Vessel “Lillian S’ vs Caltex Oil (Kenya) Ltd [1989] KLR 1,14 where Nyarangi J (as he then was) held as follows:-

“Jurisdiction is everything. Without it, a court has no power to make one more step”

The second issue that the Applicant raised was that of the award of compound interest. It pointed out that the arbitrator awarded compound interest as follows:-

Compound interest of Kshs 6,523,069. 10 on the principle amount since 2012;

Compound interest at the rate of 17. 5% per annum on Kshs 30,571,250. 10 until payment in full.

It therefore submitted that the arbitrator exceeded his mandate by awarding compound interest and sought for the setting aside of the award. It said that Rule 16 C (11) of the Chartered Institute of Arbitrators Rules which the parties adopted stipulated compound interest was a special damage claim.

The third ground relied upon by the Applicant for setting aside the award was that the same was induced by fraud. It argued that the Respondent fraudulently misled the arbitrator to believing that the Ministry of Public Works acknowledged the sum of Kshs 24,048,181/= as per the contents of the letter of 24th November 2011. It invited the court to look at the said letter and note that the same was unsigned and that there was no acknowledgement of it owing the Respondent owing the sum of Kshs 24,048,181/=.

It further submitted that it objected to production of the unsigned letter which the arbitrator upheld and it was shocked to see that the arbitrator relied on the same and the statement of payment on account to issue an award of the said sum of Kshs 24,048,181/= in favour of the Respondent.

It was its further submission that the Statement of Account gave the impression that the Respondent was the sole supplier of materials whereas there were twelve (12) other suppliers and to that extent, the Arbitrator was misled into awarding the said sum on costs of labour and materials.

Finally, the Applicant stated that by the closing of the hearing, the Respondent had not served the Applicant with any supporting document apart from the Statement of Claim. The Applicant questioned how the Arbitrator got hold of the documents that were never filed nor served upon the Applicant to form the basis of his Award. It also argued that the arbitration process was marred with irregularities and fraud much to its detriment as it was not accorded a chance to inspect and cross-examine the Respondent on the documents.

The Applicant therefore submitted that the Arbitration Award of the items was set out in paragraph 1 herein be set aside.

The Respondent attached its written submissions dated 16th December 2013 to its Supporting Affidavit and Bundle of Documents. Since then, the Respondent has continuously filed documents ranging from one (1) page to several pages. Whilst the Respondent is not represented by counsel, this court cannot consider all those documents that were filed without leave of the court as doing so would cause prejudice to the Applicant which would not have been given an opportunity to respond to the same.

The court suggested to the Respondent to instruct counsel to represent it in these proceedings but its director indicated to the court that he would present the Respondent’s case without assistance from counsel. In this regard, the court will only consider the written submissions dated 16th December 2013 and expunge all the documents filed on 9th January 2014, 15th January 2014, 4th February 2014, 7th February 2014, 10th February 2014 and 13th February 2014 from the court record as the same were filed without leave of the court.

This court observes that in paragraph 35 of the Arbitral Award dated 30th September 2013, the Arbitrator stated that the Respondent continued submitting additional documents prompting him to caution it both in writing and verbally. He indicated that he ignored those documents and only considered those that had been properly filed and served.

The said written submissions are difficult to comprehend but the court will do the best that it can to decipher the same.

The Respondent that the Applicant waived his right to object under Section 5 of the Arbitration Act, 1995 (as amended in 2009) when it proceeded with the arbitral proceedings. The Respondent also contended that the Applicant did not seek a measure of protection as provided for in Section 7 of the Arbitration Act, 1995.

It argued that granting the order sought by the Applicant would be a disproportionate remedy and that the order would amount to contempt of the arbitral proceedings. The court does not agree with this submission as intervention by the court would not amount to contempt within the provisions of the Arbitration Act Cap 49 (laws of Kenya) (hereinafter after referred to as “the Act”).

It also averred that the Applicant continued to enjoy the classrooms and would never understand the pain that the director was going through.

The Respondent further contended that an application for setting aside could only be made after a request had been made under Section 34 from the date on which that request had been disposed of the arbitral award (sic). It argued that the Arbitral Award was final and binding on the parties as was stipulated in Section 32A of the Arbitration Act.

It was a further submission by the Respondent that Section 32 C of the Arbitration Act permitted an Arbitral Award to include provision of simple or compound interest calculated from such date as such rates and such rests as may be specified in the award.

The Respondent therefore urged this court to :-

Uphold the award of Kshs 28,048,181/= plus simple interest of prevailing bank rates plus 3% as per the contract of 9th March 2010.

Order the Applicant to pay the award costs of the arbitration in the sum of Kshs 1,301,833/=

Order the Applicant to pay Security of Kshs 50,000/= under Section 37 (2) of the Arbitration Act, 1995.

Consider Section 2 of the Public Procurement and Disposal Act, 2005.

In his oral submissions to the court, the Respondent added that the contract did not have a specific amount of payment and that the arbitration clause was general and not specific to labour. He contended that the letter of 24th November 2011 was a copy and that the original had been signed by the concerned officer.

Further, the Respondent averred that the Arbitrator clarified the issue of interest in his letter of 13th November 2013 where he omitted the compound interest and left the principal sum of Kshs 24,000,000/=. He therefore persuaded this court to uphold the final account of Kshs 24,000,000/= with interest rate in accordance with the Public Procurement and Disposal Act.

LEGAL ANALYSIS

Parties may opt to have their disputes determined either by the court or other alternative dispute mechanisms, one of which is arbitration. When parties opt for arbitration, the parties are essentially telling the court that they want the process of resolving their disputes to be final and binding. In this way, they chose not to be engaged in the rigmaroles of litigation.

It is for that reason that as was rightly pointed out by the Respondent that the Arbitral Award is final and binding upon the parties as envisaged in Section 32 A of the Act.

However, even with the finality of the Arbitral Award the ouster of the court’s jurisdiction is not without limitations. This is captured in Section 10 of the Act which provides as follows:-

“Except as provided in this Act, no court shall intervene in matters governed by this Act.”

It is for that reason that the Applicant was correct in bringing to this court, an application for setting aside the Arbitral Award under Section 35 (2) (a) (iv) and 35 (2) (a) (vi) of the Act. The said provisions provide that the Arbitral Award can be set aside where:-

“2(a) (iv) The arbitral award deals with a dispute not contemplated by or not falling within the terms of the reference to arbitration or contains decisions on matters beyond the scope of the reference to arbitration, provided that if the decisions on matters referred to arbitration can be separated from those not so referred, only that party of the arbitral award which contains decisions on matters not referred to arbitration may be set aside; or

2(b) (vi) the making of the award was induced or affected by fraud, bribery, undue influence or corruption”.

As was seen in the Applicant’s application, oral and written submissions set out hereinabove, its case was that the Arbitrator:-

Entertained a dispute relating to materials whereas the contract it had entered into with the Respondent was a Labour – only contract.

Awarded compound interest on the sums he found due whereas the Chartered Institute of Arbitration Rules that the parties adopted provided that compound interest was to be claimed as a special interest.

The court will therefore consider the two (2) issues which it identified for determination under separate heads.

(a) Materials Contract

The court has considered the Applicant’s argument that there was no arbitration agreement to refer disputes touching on materials to the arbitral process and that the arbitration agreement related to the labour – contract only.

The court has found it necessary to reproduce the arbitration clause which states as follows:-

“Settlement of disputes

In case any dispute or difference shall arise between the Employer or the Project Manager on his behalf and the Contractor, either during the progress or after the completion or termination of the Works, such dispute shall be notified in writing by either party to the other with a request to submit it to arbitration and to concur in the appointment of an Arbitrator within thirty days of the notice. The dispute shall be referred to the arbitration and final decision of a person to be agreed between the parties. Failing agreement to concur in the appointment of an Arbitrator, the Arbitrator shall be appointed by the Chairman or Vice Chairman of any of the following professional institutions;

Architectural Association of Kenya

Institute of Quantity Surveyors of Kenya

Association of Consulting Engineers of Kenya

Chartered Institute of Arbitrators (Kenya Branch)

Institution of Engineers of Kenya

On the request of the applying party. The institution written to first by the aggrieved party shall take precedence over all other institutions.

The arbitration may be on the construction of the Contract or on any matter or thing of whatsoever nature arising thereunder or in connection therewith, including any matter or thing left by this Contract to the discretion of the Project Manager, or the withholding by the Project Manager of any certificate to which the Contractor may claim to be entitled to or the measurement and valuation referred to in clause 23. 0 of these conditions, or the rights and liabilities of the parties subsequent to the termination of Contract”.

Clause 23 of the Conditions of Contract referred hereinabove stipulated as shown:-

23. 1

The Contractor shall submit to the Project Manager monthly applications for payment giving sufficient details of the Work done and materials on Site and the amounts which the Contractor considers himself to be entitled to. The Project Manager shall check the monthly application and certify the amount to be paid to the Contractor within 14 days. The value of Work executed and payable shall be determined by the Project Manager.

23. 2

The value of Work executed shall comprise the value of the quantities of the items in the Bills of Quantities completed; materials delivered on Site(emphasise mine), variations and compensation events. Such materials shall became the property of the Employer once the Employer has paid the Contractor for their value.(Emphasise mine)Thereafter, they shall not be removed from Site without the Project Manager’s instructions except for use upon the Works.

23. 3

Payments shall be adjusted for deductions for retention. The Employer shall pay the Contractor the amounts certified by the Project Manager within 30 days of the date of issue of each certificate. If the Employer makes a late payment, the Contractor shall be paid simple interest on the late payment in the next payment. Interest shall be calculated on the basis of number of days delayed at a rate three percentage points above the Central Bank of Kenya’s average rate for the bases lending prevailing as of the first day the payment becomes overdue.”

It is evident that a Contractor could provide materials to the Employer. That is what the Respondent herein did. The correct position is as was pointed out by the Respondent, that is the arbitration clause encompassed all manner of disputes including those of labour and materials that it supplied to the Applicant.

This court therefore finds and holds that Arbitrator did not deal with a dispute that was not contemplated by or not falling within the terms of the reference. Going further, the court finds and holds that in considering the Final Account by the Project Manager, the Arbitrator was well within the terms and conditions of the contract between the Applicant and the Respondent.

The court has arrived at the said conclusion after having due regard to Clause 32. 1 of the condition’s of contract that provides as follows:-

“The Contractor shall issue the Project Manager with a detailed account of the total amount that the Contractor considers payable to him by the Employer under the Contract before the end of the Defects Liability Period. The Project Manager shall issue a Defects Liability Certificate and certify any final payment that is due to the Contractor within 30 days of receiving the Contractor’s account if it is correct and complete(emphasise mine). The Employer shall pay the Contractor the amount due in the Final Certificate within 60 days.”(Emphasise mine)

Whereas the Applicant may have strongly felt that the sum of Kshs 24,048,141/= was not payable to the Respondent, this court cannot hear the correctness or veracity of the same as it was squarely within the jurisdiction of the Arbitrator.

This is because the Arbitrator had without prejudice to the generality of his powers, power under Clause 37. 8 of the Conditions of Contract “to open up, review and revise any certificate, opinion, decision or notice and to determine all matters in dispute which shall be submitted to him in the same manner as if no such certificate, opinion, decision, requirement or notice has been given”.

The issue of quantum was a matter of fact that cannot be challenged under the Act. In any event, the dispute before the Arbitrator was of a technical and not legal nature that this court would even dare to address due to lack of expertise in construction matters. The dispute was referred to an arbitrator who was skilled and knowledgeable in the area of dispute as was envisaged under Section 13 of the Act.

The mandate of this court is only to determine whether the issue of the quantum awarded to the Respondent on the labour and materials contract was outside the terms of the reference or if the Arbitral Award contained decisions which were outside the scope of the reference to arbitration but not to open, revise or review the Certificate of Final Accounts issued by the Project Manager and on which the Arbitrator relied upon to publish his Arbitration Award.

This court is therefore not persuaded by the Applicant’s submissions that the Arbitral Award ought to be set aside on the ground that the Arbitrator did not have jurisdiction to hear the dispute on materials as was presented by the Respondent. This court hereby upholds the Respondent’s argument that that the said sum of Kshs 18,942,992. 66 in respect of the claim for materials was payable.

The court has considered the case of Owners of Motor Vehicles“Lilian “5” vs Caltex Oil (Kenya) Ltd(Supra) and while it agrees that a court or arbitral tribunal cannot make one more step in any proceedings before it if it does not have jurisdiction, the case is distinguishable from the facts of this case as the court has found that the Arbitrator indeed had jurisdiction to determine the labour and materials contract by taking into account the usages of the trade applicable to the contract in accordance with Section 29(5) of the Act.

(b) Compound Interest

The Applicant pointed out that parties adopted the Chartered Institute of Arbitration Rules (hereinafter referred to as “the Rules)” as the procedural rules. This is in line with Section 20(1) of the Act which provides that”-

“Subject to the provisions of this Act, the parties are free to agree on the procedure to be followed by arbitral tribunal in the conduct of the proceedings”.

Section 32 (C) of the Act provides that an arbitral tribunal has power to award simple and compound interest. However, Rule 16 (C) (11) of the Rules provides that an arbitrator can only exercise that power if a party specifically seeks compound interest as special damages in its Statement of Claim. This is a fact the Respondent did not rebut and which is indeed the correct position.

This court did not have the benefit of seeing the Respondent’s Statement of Claim and the Applicant’s Statement of Defence. Suffice it to state that the Arbitrator referred to the same in his award but did not mention any thing about the Respondent having claimed compound interest as special damages.

The first place the issue of compound interest arose in the Arbitral Award is under Clause 42. 5 of the Arbitral Award. Parties do not appear to have made any submissions on the same. The logical conclusion that this court makes is that the question of awarding compound interest was not an issue that was contemplated by or falling within the terms of the reference and that consequently, the decision of awarding compound interest to the Respondent who had not sought the same, went beyond the scope of the reference of the arbitration. On this ground, the Arbitral Award can be set aside as Clause 23. 3 PPOA Standard Conditions provided for awarding of simple interest only.

The sum of Kshs 6,523,069. 10 appears to have been simple interest which this court cannot interfere with. However, the award awarding compound interest at 17. 5% can be set aside.

Be that as it may, Section 35(2) (a) (iv) of the Act is clear that if the decision can be separated, only that party that contains matters not referred to arbitration may be set aside. For the foregoing reason, this court hereby set asides the award on compound interest of 17. 5% per annum on the amount of Kshs 30,571,250. 10. The court cannot interfere with the rate of 17. 5% per annum as Section 32 C of the Act gives the arbitral tribunal the discretion to determine the rate to be specified in the Arbitral Award.

There was no request made by any party under Section 35 (4) of the Act to ask this court to suspend the proceedings to set aside the award to give the Arbitrator an opportunity to take such other action as in his opinion would eliminate the ground for setting aside.

The Act does not give this court any other option other than to set aside that part of the Arbitral Award that offends Section 35 of the Act. The situation would have been different under the English Arbitration Act, 1996 or under Section 39 of the Act as the court would have exercised its discretion to confirm, vary, set aside or remit the award to the Arbitral Tribunal for reconsideration.

In the circumstances foregoing, the court hereby upholds the Applicant’s submission that the Arbitrator did not have any jurisdiction to award compound interest as the same had to be claimed in the Respondent’ Statement of Claim presented to the Arbitral Tribunal and specifically proven.

Before concluding this court wishes to observe that under English Arbitration Act, 1996, the Arbitral Award would have been deemed ambiguous and not cogent. Clause 42. 2 and 42. 3 of the Arbitral Award are contradictory and could cause confusion. It would have been sufficient for the Arbitrator to have shown the sum of Kshs 30,571,250. 10 only. The inclusion of Kshs 24,048,181/= in Clause 42. 1 of the Arbitral Award was superfluous. The fact that the Arbitrator had not given a breakdown of how the sum of Kshs 30,571,250. 10 would also have made the award ambiguous. It is noteworthy that the Arbitrator clarified the same after receiving an application from the Applicant under Section 34 (2) of the Act and to that extent the ambiguity was removed.

For the reason that this court cannot create the law as it is the mandate of the Legislature, but can only interpret the law as it is, the Arbitral Award will only be set aside as aforesaid. This court only hopes that the legislature will enact legislation that is more in tune with the practise in other jurisdictions.

DISPOSITION

In the circumstances foregoing, the Applicant’s Notice of Motion application succeeds only in respect of prayer 3 and the same is allowed to that extent. Prayers (1), (2), (4) and (5) are not merited and fail in their entirety. As both the Applicant and the Respondent have succeeded in their own distinct ways, each party will bear its own costs.

Orders accordingly.

DATED and SIGNED at NAIROBI this 27th day of February 2014

J. KAMAU

JUDGE

DATED SIGNEDandDELIVERED at NAIROBI this 27thday of February 2014

F. GIKONYO

JUDGE