[2022] KEHC 10606 (KLR)

Roko (Kenya) Construction Limited v Rosslyn Suites Ltd & another (Miscellaneous Application E538 of 2021) [2022] KEHC 10606 (KLR) (Commercial and Tax) (13 May 2022) (Ruling)

Neutral citation: [2022] KEHC 10606 (KLR)

Republic of Kenya

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

Commercial and Tax

Miscellaneous Application E538 of 2021

A Mshila, J

May 13, 2022

Between

Roko (Kenya) Construction Limited

Plaintiff

and

Rosslyn Suites Ltd

1st Respondent

Guaranty Trust Bank (Kenya) Ltd

2nd Respondent

Ruling

Background 1. The Applicant filed a Notice of Motion dated 21st July 2021 pursuant to Order 40 Rule land Order 51 of the Civil Procedure Rules; Sections IA, 1B, 3A and 3B of the Civil Procedure Act; Section 7 (l) Arbitration Act 1995 Laws of Kenya; and Arbitration Rules 1997; The Application was supported by the grounds on the face of it and by the sworn Affidavit of Derek Claassen who sought the following orders;a.An order be issued restraining the 2nd Respondent herein whether by itself, employees, servants and agents, assigns and/ or any other person whatsoever acting on its behalf and/ or under its mandate or instructions from making any payments arising from the performance bond from Guaranty Trust Bank (Kenya) Ltd in the sum of Kenya Shillings One Hundred and Twenty Eight Million Three Hundred and Forty Three Thousand Nine Hundred and Thirty Two and Sixty Cents (128,343,932. 60/=) to the 1st Respondent in relation to ongoing residential apartments construction on L.R NO. 10688/219 and L.R NO. 10688/220 Redhill Road Nairobi pending the hearing and determination of this Application.b.An order be issued restraining the 2nd Respondent herein whether by itself, employees, servants and agents, assigns and/ or any other person whatsoever acting on its behalf and/ or under its mandate or instructions from making any payments arising from the performance bond from Guaranty Trust Bank (Kenya) Ltd in the sum of Kenya Shillings One Hundred and Twenty Eight Million Three Hundred and Forty Three Thousand Nine Hundred and Thirty Two and Sixty Cents (128,343,932. 60/=) to the 1st Respondent in relation to ongoing residential apartments construction on L.R NO. 10688/219 and L.R NO. 10688/220 Redhill road Nairobi pending the hearing determination of the intended arbitration.c.Any other or further orders and/ or directions as the Court may deem just, fit and expedient to issue.

2. The Applicant and the 1st Respondent entered into a construction contract whereby the 1st Respondent contracted the Applicant in two contracts to undertake construction of residential apartments known as Enaki Residential Apartments situate on L.R NO. 10688/219 and L.R NO. 10688/220 Redhill Road, Nairobi.

3. It was a requirement of the contract that the Applicant avails to the 1st Respondent a performance security and the Applicant did avail the same in the form of a performance security bond for a sum of Kenya Shillings One Hundred and Twenty-Eight Million Three Hundred and Forty-Three Thousand Nine Hundred and Thirty-Two and Sixty Cents (128,343,932,60/=) from the 2nd Applicant Guaranty Trust Bank (Kenya) Ltd.

4. As it stands right now, the Applicant is at the tail end of the project, substantial works have been done on site and the Applicants have barely two (2) months left to the contract completion.

5. As hereinabove stated, the project is very close to its conclusion and the 1st Respondent has not officially terminated the contract as per Clause 15. 2.2 of the contract, the calling for the payment of the performance is therefore premature.

6. The Applicant is in the process of commencing arbitration proceedings in accordance with the contract so as to get redress for the illegal, unlawful and fraudulent actions of the 1st Respondent.

7. Further, the Applicant is reasonably apprehensive that unless the Court urgently intervenes, the 2nd Respondent through its agents/ employees will pay the performance bond amounts notwithstanding the progress made by the Applicant in the project as a result occasioning the Applicant immense prejudice and irreparable harm and loss.

Applicant’s Case 8. It was the Applicant’s case that the performance bond in this case was issued for the benefit of the Applicant as per the main contract. A performance guarantee/ bond is therefore a three- party agreement between the principal, the obligee and the surety in which the surety agrees to uphold, for the benefit of the obligee, the contractual obligations of the principal if the principal fails to do so.

9. The Applicant went on to state that the Courts have found that despite the lack of privity, the Applicant can approach the Court to issue an injunction against the 2nd Respondent herein. Sinohydro Corporation Limited v GC Retail Limited & AnotherCivil Suit No. 487 of 2015.

10. The 1st Respondent alleged that the Applicant’s senior management had unceremoniously left the country without notifying the 1st Respondent. The Applicant argued that it informed the court that the said manager had abruptly travelled to South Africa for further treatment but had problems travelling back into the country due to a warrant of arrest that had been prematurely issued against him. The said warrant was duly lifted and the manager travelled back into the country only to find that the contract has been terminated.

11. It was therefore the Applicant’s submissions that the contract was illegally terminated and thus the calling of the payment of the performance bond was done illegally and fraudulently. It is in that regards that the Applicant is in the process of referring the matter to arbitration to deal with the issues of the illegal contract termination and the allegations raised by the 1st Respondent in its Replying Affidavit.

12. The Applicant’s main issue for its submissions was that it has fulfilled the requisite requirement needed for the issuance of an injunction as prayed.Injunctions are thus provided for under Order 40 of the Civil Procedure Rules and the principles guiding the granting of a temporary injunction were well enunciated in the much-celebrated case of Giella v Casman Brown (1974) E.A 358.

13. The Applicant argued that it has established a prima facie case with a probability of success. The Applicant in its supporting affidavit as sworn by Mr. Derek Claassen has adduced sufficient evidence and/ or material which on the face of it should be sufficient for the temporary injunction to issue pending the arbitration process.

14. The sums involved in this application, that is, the sum of Kenya Shillings One Hundred and Twenty-Eight Million Three Hundred and Forty-Three Thousand Nine Hundred and Thirty-Two and Sixty Cents (Kshs. 128,343,932. 60/=) is a large sum of money and thus if this application is not allowed and the performance guarantee is paid out by the 2nd Respondent to the 1st Respondent, the Applicant stands to suffer irreparable damages that cannot be salvaged by damages in the event the arbitration proceedings are in favor of the Applicant herein.

Respondents’ Case 15. It was the Respondent’s submission that the 2nd Defendant/Respondent's involvement in the proceedings is premised on the grant of facilities to the Plaintiff which included the grant of a performance bond in favour of the 1st Defendant.

16. The role of banks in commercial disputes giving rise to performance bonds is discussed in the case of State Bank of India and another v Denel Soc Limited [2015] eKLR which stated that: -“A bank issuing an on-demand guarantee is only obliged to pay where a demand meets the terms of the guarantee. Such a demand, which complies with the terms of the guarantee, provides conclusive evidence that payment is due. "

17. The 2nd Defendant was only obligated to determine whether the terms and conditions set out in the guarantee itself have been met, and once that is the case, then it has an obligation to perform in terms of the guarantee. This must be done without consideration whatsoever to the underlying contract or a dispute between the defaulting party and the beneficiary of the guarantee. There is thus no duty on the 2nd Defendant to look into matters between parties at the time of assessing whether it should pay or not.

18. Further, the only exception to the rule on enforcement of guarantees is in the presence of fraud of which the bank has had notice. It is likely that banks may be faced with a situation where a party to the underlying agreement claims that, due to the presence of force majeure causing their inability to perform (and thus triggering the guarantee), a claim for payment by the beneficiary amounts to fraud.

19. The Plaintiff, in its submissions, contended that the contract between itself and the 1st Defendant was illegally terminated. In its defence, the Plaintiff/Applicant averred that the termination was triggered by the fact that its Senior Manager had left the country without notice. A fact they contend, was occasioned by the Senior Manager's underlying medical condition. Therefore, the burden of proving the truth or otherwise of the above claim falls on the 1st Defendant.

20. The Respondent argued that that the bank's role in the current proceedings is limited to enforcement of the performance bond. The 2nd Defendant/Respondent cannot therefore comment on the nature of the relationship between the parties and the liability arising therefrom.

21. It was the Respondent’s opinion that the 2nd Defendant is an unnecessary party to this suit since it is neither a party to the intended arbitration proceedings nor does it have any rights flowing from the subject matter of the dispute herein.

22. It was the 1st Respondent’s submission that the existence of an arbitration agreement as between it and the Applicant has not been disputed. However, the Applicant had not in any manner demonstrated that it sought to invoke the provisions of the said arbitration agreement.

23. There is no dispute that is capable of being submitted to arbitration by the Applicant as against the 1st Respondent and there is therefore no subject matter of any arbitration that requires preservation by issuance of interim relief.

24. The 1st Respondent submitted that there are no circumstances that call for the Court’s intervention by way of issuance of an injunction or other interim relief and the Applicant has fallen short of the required standard for the grant of injunction as set out in Giella v Cassman Brown & Co. Ltd [1973] EA 358.

Issues For Determination 25. After considering the Application, Response and the respective written submissions, the Court has the following issue for determination;a.Whether an injunctive order should issue pending intended arbitration proceedings.

Analysis 26. The granting of temporary injunction originates from Order 40 Rule 1 of the Civil Procedure Rules which provides;Where in any suit it is proved by affidavit or otherwise—(a)that any property in dispute in a suit is in danger of being wasted, damaged, or alienated by any party to the suit, or wrongfully sold in execution of a decree; or(b)that the defendant threatens or intends to remove or dispose of his property in circumstances affording reasonable probability that the plaintiff will or may be obstructed or delayed in the execution of any decree that may be passed against the defendant in the suit,the court may by order grant a temporary injunction to restrain such act, or make such other order for the purpose of staying and preventing the wasting, damaging, alienation, sale, removal, or disposition of the property as the court thinks fit until the disposal of the suit or until further orders.

27. This Court has noted with concern that the Applicant herein filed the present Application without filing a substantive suit. Section 2 of the Civil Procedure Act defines a suit as “suit” means all civil proceedings commenced in any manner prescribed.

28. Further, Order 3 Rule (i) (ii) of the Civil Procedure Rules provides that every suit shall be instituted by way of a Plaint. As a general rule a suit can only be instituted by way of a Plaint, Petition or an Originating summons. A Notice of Motion is not legally recognized as an originating process. A Notice of Motion can only be filed within a properly instituted suit.

29. This Court aligns itself with the sentiments of the Court of Appeal in the case of Geoffrey Ndungu Theuri v Law Society of Kenya [1988] eKLR where it held;“The appellant did not file a plaint and when his application came before Porter J on November 22, 1983, the learned judge dismissed the application on the ground that the court had no jurisdiction as no suit had been filed and he made an order for costs against the appellant. A little later the appellant tried to get the learned judge to review this order but the learned judge stuck to his guns. The appellant did eventually file a plaint and got his injunction but he was determined to fight the earlier orders. Hence this appeal.I have no doubt in my own mind that the learned judge was quite right in striking out the application and in refusing to review it. The mode of bringing civil suits is set out under order 4 rule 1 and order 36 in the case of originating summons. Order 39 rule 1 states:“1. Where in any suit it is proved by affidavit or otherwise-(a)…………..(b)……………….the court may by order grant a temporary injunction to restrain such act … as the court thinks fit until the disposal of the suit or until further orders.”The order specifically refers to a suit which is defined under section 2 of the Civil Procedure Act in these terms: “suit” means all civil proceeding commenced in any manner prescribed under the Civil Procedure Rules and an applicant is not entitled under order 39 of the Civil Procedure Rules to seek or obtain an order for injunctive relief against another party without filing a suit. The grossly abused section 3A of the Civil Procedure Act does not give the court the power to act without jurisdiction.”

30. In light of the above, the Court finds that the Application is premature as the Arbitration proceedings have not been commenced and there is no suit in before this Court. In addition, the Applicant having failed to file any originating process in this matter the attempt to institute this suit by way of a Notice of Motion renders the entire application as defective and incompetent.

Findings And Determination 31. For the foregoing reasons this court makes the following findings and determination;i.The application is found to be incompetent and it is hereby struck out;ii.The applicant shall bear the costs of the application.

Orders Accordingly.

DATED, SIGNED AND DELIVERED ELECTRONICALLY AT NAIROBI THIS 13THDAY OF MAY, 2022. HON. A. MSHILAJUDGEIn the presence of;Mr. Muhonja for the ApplicantMr. Muhindi for the 1st RespondentMwangi for the 2nd RespondentLucy----------------------Court Assistant