[2022] KEHC 15303 (KLR)

Taib A Taib Advocates v Hirji & another; Housing Finance Company of Kenya (Third party) (Civil Suit E401 of 2020) [2022] KEHC 15303 (KLR) (Commercial and Tax) (11 November 2022) (Ruling)

Neutral citation: [2022] KEHC 15303 (KLR)

Republic of Kenya

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

Commercial and Tax

Civil Suit E401 of 2020

A Mshila, J

November 11, 2022

Between

Taib A Taib Advocates

Plaintiff

and

Firoz Nurali Hirji

1st Defendant

Sharok Kher Ali Hirji

2nd Defendant

and

Housing Finance Company of Kenya

Third party

Ruling

1. The Notice of Motion dated 10th December 2021 by the Third Party was brought under Section 6 of the Arbitration Act No. 4 of 1995 for the following orders;a.The dispute between the Defendants and the Third Party be referred to arbitration.b.The costs of this application be awarded to the Third Party/ Applicant.

2. The Application was supported by the sworn Affidavit of Regina Anyika who stated that by a Deed of Settlement dated 11th December, 2019 between the 2nd Defendant (Attorney for 1st Defendant) and the Third Party, the parties negotiated a mutual compromise to settle the dispute which was subject in H.C.C.C No. 226 of 2003 and Civil Appeal No. 31 of 2016 and Civil Appeal No. 32 of 2016 and Supreme Court Petition No. 46 of 2019, conclusively.

3. In the said Deed of Settlement, the parties mutually agreed that the Third Party would pay the Defendants compensatory damages in the amount of Kshs.239, 200, 000 to conclusively resolve the entire dispute between the parties.

4. By virtue of a consent order adopted and recorded in Supreme Court Petition 46 of 2019 on 25th September, 2020, the Third Party was to pay the 2nd Defendant's costs of the suit and all previous litigation agreed at the sum of Kshs.25, 100, 000 in full and final settlement of all costs whatsoever, and however arising against the Third Party in connection with the suit.

5. The Third Party also undertook to pay the 2nd Defendant's advocate's fees as agreed between the parties or as taxed by a competent authority.

6. The Defendants' claim against the Third Party arises from the said Deed of Settlement and consent order. The Defendants’ claim against the Third Party indemnity and contribution or an order that the Third Party is liable to pay all the legal fees due to the Plaintiff in respect of the cases subject matter of the suit herein whether as taxed by a court or as agreed or as decreed in this suit or any judgment passed against the Defendants.

7. It is therefore clear that the Defendants' claim is pegged on the Third Party's alleged indemnity and/or contribution arising from the Deed of Settlement. In view of the arbitration agreement it is the arbitral tribunal to decide whether the Third Party is liable to indemnify and/or obligated to settle any sums and or judgment sum or decree issued against the Defendants.

8. It is therefore in the interests of justice that this court enforces what the parties agreed and stay the third party proceedings pending arbitration.

9. The Plaintiff/Respondent opposed the 3rd Party’s Application by way ofGrounds of Opposition dated 15th May 2022 on the following, amongst other grounds: -a.The Application is misconceived and is bad in law;b.The Application is grounded on reasons that have no basis either in fact or any foundation in law but is premised purely on the basis that itsuits the purposes and intents of and is therefore the desirable outcome sought by the Third Party/Applicant;c.Ordering a stay of proceedings in this matter would infringe the Plaintiff/Respondent’s right to be heard as against all the parties to this suit and which is not only a principle of natural justice, but forms an integral part of what constitutes the right to a fair trial which is one of the rights under the Constitution which cannot be limited as provided under Article 25(c) of The Constitution also under Article 50(1) of the Constitution, which provides inter alia, that: - “Every person has the right to have any dispute that can be resolved by the application of law decided in a fair and public hearing before a court or, if appropriate another independent and impartial tribunal or body.”d.Granting the Application would be highly prejudicial to the Plaintiff/Respondent who filed this suit in order that he may be heard, and the suit determined conclusively and expeditiously;e.The provisions of the law relied on by the Applicant in prosecuting the Application are erroneous and do not apply; andf.The Defendant’s Application has no merit and should be dismissed with costs.

Applicant’s Case 10. It was the Applicant’s submission that the Third Party has not taken any steps in the proceedings other than the steps allowed by Section 6of the Act requires that the application for stay of proceedings be filed not later than the time when that party enters appearance or otherwise acknowledges the claim against which the stay of proceedings is sought.

11. In Adrec Limited vs Nation Media Group Limited [2017] eKLR, the court held that;“Any party who wishes to take advantage of the arbitration clause in a contract should either at the time of entering appearance or before the entry of appearance make the application for reference to arbitration.”

12. In the present case, it is common ground that the Third Party made the Application for stay of proceedings at the time of entering appearance. The Application and the Memorandum of Appearance were filed together on 10th December 2021. Further, the Third Party has not filed any Defence. There is therefore no doubt that the Third Party has not taken any steps in the proceedings other than the steps allowed by the Section.

13. The 2nd Defendant has acknowledged the existence of the Deed of Settlement in the Replying and Supplementary Affidavits and admitted in her submissions that the Deed of Settlement contains an arbitration clause. There is therefore no question as to the validity of the arbitration agreement.

14. It is instructive to note that the issue to be determined by the arbitral tribunal under the Arbitration Clause is whether the Third Party is liable to indemnify and/or obligated to settle any sums and or judgment sum or decree issued against the Defendants. Differently put. the arbitral tribunal is to determine the issue of liability as between the Third Party and the Defendants and not between the Third Party and the Plaintiff.

15. The Third Party is not privy to the alleged retainer agreements between the Plaintiff and any of the Defendants. Further, the issue of the Defendants' liability to settle the Plaintiff's legal fees and the quantum thereof is for determination by the court. The same can be determined in the present suit without the participation of the Third Party. The Third Party is only called upon to indemnify in the event of a finding of liability against the Defendants.

16. As to the issue of liability of the Third Party to indemnify the Defendants, it is an issue arising out of the Deed of Settlement which is for determination by the arbitral tribunal as between the Third Party and the Defendants. It does not require the participation or involvement of the Plaintiff. Therefore, the issue of whether the Plaintiff is bound does not arise.

17. Moreover, the determination by the arbitral tribunal will not in any way prejudice the court's determination on the Plaintiff's costs. If anything, the arbitral tribunal's decision will complement the court's determination such that, in the event the court finds that the Defendants are liable to pay the Plaintiff's fees, the Third party would only be required to indemnify the 2nd Defendant if found liable by the Arbitral tribunal. If the Arbitral Tribunal finds that the Third Party is not liable to indemnify the 2nd Defendant, the Defendants will be obligated to satisfy the decree.

18. The Defendants' claim against the Third Party arises from the Deed of Settlement and consent order. The 2nd Defendant's claim against the Third Party is for indemnity and contribution or an order that the Third Party is liable to pay all the legal fees due to the Plaintiff in respect of the compromised cases whether as taxed by a court or as agreed or as decreed in this suit against the Defendants.

19. It is therefore clear that the Defendants' claim is pegged on the Third Party's alleged indemnity and/or contribution arising from the Deed of Settlement. The issue of liability of the Third Party to indemnify the Defendants is an issue arising out of the Deed of Settlement which is for determination by the arbitral tribunal as between the Third Party and the Defendants.

20. It is the Third Party's submission that by virtue of a consent order adopted and recorded in Supreme Court Petition 46 of 2019 on 25th September, 2020, the Third Party was to pay the 2nd Defendant's costs of the suit and all previous litigation agreed at the sum of Kshs.25, 100,000 in full and final settlement of all costs whatsoever, and however arising against the Third Party in connection with the suit.

21. The dispute is therefore whether the Third Party is liable to indemnify the Defendants more than the sum of Kshs.25, 100,000 already paid in full and final settlement of all costs arising in connection with the compromised suits.

22. In view of the arbitration agreement, it is the arbitral tribunal to decide whether the Third Party is liable to indemnify and/or obligated to settle any sums and or judgment sum or decree issued against the Defendants and to what extent.

23. Parties are bound by the terms of their agreement. The Third Party and the Defendants having voluntarily agreed to subject any dispute arising from the Deed of Settlement to arbitration, should not be excused from the terms of their agreement without a valid reason.

Respondents’ Case 24. The 1st Defendant in response to the Application stated that Third Party proceedings will decide liability not only between the Defendants and the Third Party but also between the Plaintiff and the Third Party. The Plaintiff, who is not party to the Deed of Settlement is not bound by the arbitration clause and hence the dispute cannot be referred to arbitration.

25. The Deed of Settlement is so intrinsically connected to the claim by the Plaintiff that it cannot be severed from the main suit. Justice will be better served if the entire dispute is decided within the main suit.

26. It was the 2nd Defendant’s submission that in the present case, the Deed of Settlement and the Addendum compromised the suit referred to in the Plaint herein. Vide the Addendum it was agreed that the Third Party was to settle all the legal fees payable to the 2nd Defendant's former advocates in the matters. In relation to the Plaintiff’s fees it was envisaged that his fees may exceed the sum of Kshs.17, 400, 000. Accordingly, it was agreed that the Third Party was obligated to settle any other sums over and above the sum of Kshs.17, 400, 000 if agreed between the parties or as it may be determined by a competent authority. In the premises, the Plaintiff becomes central in determination and payment of his fees while on the other side the Third Party has a primary interest in the issue since it committed to pay any such fees. Therefore, the Third Party's proceedings will seek to determine an issue between the Plaintiff and the Third Party, to wit, the quantum of legal fees payable to the Plaintiff.

27. The Defendant argued that if the Application by the Third Party were to be allowed the consequence thereof would be that the Arbitrator will be called upon to determine not only issue of liability by the Third Party to pay the Plaintiffs legal fees, but also the quantum of fees payable. The danger thereof is that the said proceedings would proceed in the absence of the Plaintiff and the possibility of arriving at a decision different from the decision of this court.

28. In addition, the Plaintiff is not a party to the Deed of Settlement and Addendum. Accordingly, he cannot be bound by the terms and conditions therein including the Arbitration clause.

29. The consensual nature of arbitral proceedings cannot be overemphasized. Both the Uncitral Model Law and the Arbitration Act operate under the premises that parties must have agreed to have their disputes resolved by way of arbitration. The foregoing position has been reiterated by our Courts of law. The Defendant relied on the case of Nyutu Agrovet Limited v Airtel Networks Limited [2015] eKLR the Court of Appeal had this to say: -“It is not disputed that the mode to resolve disputes and particularly to commercial ones by way of arbitration, is entirely the disputants' own choice. The state has set up the Court System to resolve disputes but the larger commercial community has decided, for various reasons that it will in a Consensual manner, take the resolution of whatever disputes that may arise in their transactions in their own way. And so by agreements duly executed and therefore binding on them, the business people and merchants place their disputes before a single or whatever number of arbitrators, again selected, appointed in their own way or in the way they agree, to settle their disputes.”

30. An arbitrator acquires jurisdiction to determine a dispute from either an arbitration agreement or by consent of the parties. Where there is no arbitration agreement then an arbitrator cannot be seized of jurisdiction. In this particular case the plaintiff is not party to the Deed of Settlement which provides for arbitration. Accordingly, he cannot be bound by the Arbitration Clause.

31. It is conceded that the Deed of Settlement dated 11th December 2019 contains an Arbitration Clause. However, the issues to be determined by the arbitral tribunal relate to liability of the Third Party to settle the Plaintiff’s legal fees and the quantum thereof. Not being a party to the Deed of Settlement, the Plaintiff is not bound by the Arbitration clause. In the premises, the issues to be determined by the Third Party proceeding out to be determined in this suit as opposed to an arbitral tribunal.

32. The Plaintiff on its part submitted that once an order has been made by a court under order 1 rule 15 (1) of the Civil Procedure Rules, then it follows that automatically kicks in order 1 rule 22 of the Civil Procedure Rules.

33. The aforementioned provision mandates the court to consider the pleadings and to give directions on whether there is a triable issue between the Defendant and Third party as to the liability of the 3rd Party and to establish the manner in which the dispute between the Defendant and the 3rd Party is to be tried. The Applicant 3rd Party HFCK has not done the above. They have not discharged their obligations and have not obtained the directions of this court. Their Application for stay is therefore pre-mature and ought not be considered or granted at all until such a time as directions have been issued by the court in compliance with the law.

34. Where a third party makes an appearance under order 1 rule 22 of the Civil Procedure Rules as was the case of the Third Party, the Defendant was supposed to apply for directions by way of summons. As it is at this point that the directions in the manner the matter may be determined is given. Prior to giving directions the Court must be satisfied that there is a proper question to be tried as to the liability of the Third Party before giving the method to be adopted by the Defendant and the Third Party whether it should be determined in the course of trial of the suit or otherwise.

35. The matter is now no longer confined to a dispute between the Defendant & the 3rd Party; The moment a Third Party Notice was ordered by the court and issued to the 3rd Party, the dispute ceased to be confined only to the narrow interests of the Defendant and the 3rd Party and was broadened by operation of order 1 rule 15 (1) of the Civil Procedure Rules to include all and any question or issue arising between the Plaintiff and the Defendant and should properly be determined not only as between the Plaintiff and the Defendant but as between the Plaintiff and Defendant and the third party or between any or either of them.

36. It is in the Interest of the 3rd Party to participate in the determination of the dispute as between the Plaintiff and the Defendants. This issue is self-evident and needs no further elaboration as the decision of the court and its judgment as between the Plaintiff and Defendants shall be binding upon the 3rd Party. It is therefore critical that the court demands and ensures their participation to avoid Appeals or other complications downstream.

37. Equity demands that the Applicant approaches the court with clean hands. Neither the Applicant nor the Defendants have advised the court nor the Plaintiff as to who holds what funds and in what quantities as directed by the court’ injunction orders and it is critical that they first do that and place it on record so as to ensure that the court’s orders are complied with and that these Applications are not used for ulterior motives intended to ultimately defeat the cause of justice.

38. Plaintiff is not a Party to the Arbitration Clause and therefore need not be bound to the clauses of the said Arbitration Agreement nor be made to suffer any prejudice by reason thereof.

Issues For Determination 39. Having considered the Application, the Grounds of Opposition and the respective written submissions by the parties herein; the Court frames only one issue for determination:a.Whether the matter herein should be stayed and the matter be referred to arbitration?

Analysis 40. The substantive provision under which Section 6 of the Arbitration Act court’s intervention is sought is which stipulates as follows:6. Stay of legal proceedings

(1)A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than the time when that party enters appearance or otherwise acknowledges the claim against which the stay of proceedings is sought, stay the proceedings and refer the parties to arbitration unless it finds—(a)that the arbitration agreement is null and void, inoperative or incapable of being performed; or(b)that there is not in fact any dispute between the parties with regard to the matters agreed to be referred to arbitration.(2)Proceedings before the court shall not be continued after an application under subsection (1) has been made and the matter remains undetermined.(3)If the court declines to stay legal proceedings, any provision of the arbitration agreement to the effect that an award is a condition precedent to the bringing of legal proceedings in respect of any matter is of no effect in relation to those proceedings.

41. The tenor and import of Article 159(2) (c) of the Constitution as read together with Section 6(1) of the Arbitration Act is that where parties to a contract consensually agree on arbitration as their dispute resolution forum of choice, the courts are obliged to give effect to that agreement. Secondly, where a party elects to come to court and the other party to the arbitration agreement seeks to invoke the arbitration agreement, the party seeking to invoke the agreement is obligated to do so not later than the time of entering appearance.

42. In the instant Application, the Applicant as well as the Defendant acknowledge that there exists a Deed of Settlement dated 11th December 2019 which contains an arbitration Clause 9 (b) provides that; -“Any and all disputes, controversies or differences arising out of or in connection with the Agreement, including the existence, validity, interpretation, performance, breach or termination thereof or any disputes regarding non - contractual obligations arising out of or relating to it which are not amicably settled between the parties within 30 days from the date of a written notice of such disputes, shall be referred to the decision of an arbitrator to be appointed in writing by the parties and if they cannot agree Upon a single arbitrator, to the Chairman of the Chartered Institute of Arbitrators, Kenya Chapter”.

43. The said Deed of Settlement is between the 3rd Party and the Defendants and does not in any way involve the Plaintiff herein. As a general rule a contract affects only the parties to it, it cannot be enforced by or against a person who is not a party, even if the contract purports to confer the right to sue or to be liable upon it.

44. The essence of the Privity rule is that only the parties who are privy to the contract are entitled to enforce its terms. Therefore, a contract cannot confer rights or impose obligations on any person other than the parties to the contract. Accordingly, a contract cannot be enforced either by or against a third party.

45. The issue of the Defendants’ liability to settle the Plaintiff's legal fees and the quantum thereof is yet to be determined by the court. This Court agrees with the 3rd Party that the same can be determined in the present suit without the participation of the Third Party.

46. The issue of liability of the Third Party to indemnify the Defendants is an issue arising out of the Deed of Settlement which is covered by the Arbitral Clause as between the Third Party and the Defendants.

47. This then brings us to the question – Is there a dispute to be referred to Arbitration? As it stands, there is no dispute to be referred to arbitration. The Court is yet to determine whether the suit between the Plaintiff and the Defendants will raise liability of the 3rd Party. It is there upon the determination of this suit that the Defendant and the 3rd Party invoke the Arbitral Clause.

Findings And Determination 48. For the forgoing reasons this court makes the following findings and determinations;i. This court finds the Application for stay of proceedings and referral to arbitration to be premature and the same is hereby disallowed.ii. The parties to await the outcome of the suit which will determine whether the suit between the Plaintiff and the Defendants will raise liability of the 3rd Party.iii. Each party to bear its own costs.

Orders Accordingly

DATED SIGNED AND DELIVERED ELECTRONICALLY AT NANYUKI THIS 11TH DAY OF NOVEMBER, 2022. HON. A. MSHILAJUDGEIn the presence of;Taib for the PlaintiffMutua for DefendantsOpole h/b for Musyoka for 3rd Party ApplicantCourt Assistant: LucyMutua: Seeking directions and pray for a hearing date.Taib: Pray for a hearing date.Opole: Participation by the 3rd Party is it necessary?Court: Hearing on 1st March 2023 virtually.DATED SIGNED AND DELIVERED ELECTRONICALLY AT NANYUKI THIS 11TH DAY OF NOVEMBER, 2022. HON. A. MSHILAJUDGE