Nakuru Oil Mills Ltd v DK Lakhani [1976] KECA 5 (KLR)
The bottom line
#When a Kenyan seller lawfully resells goods after a buyer's default, the original contract—including its arbitration clause—dies, so the dispute goes to court, not arbitration.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether the defendant was entitled under section 6 of the Arbitration Act to have the plaintiff's suit for damages for loss on resale stayed and the matter referred to arbitration
- 2.Whether the defendant satisfied the court that there was no sufficient reason why the matter should not be referred to arbitration and that he was, at the commencement of proceedings and still remained, ready and willing to do all things necessary to the proper conduct of the arbitration
- 3.Whether, by operation of section 48(4) of the Sale of Goods Act upon the seller's exercise of a reserved right of resale, the original contracts were rescinded and the arbitration clause annulled, so that the agreement for arbitration had become inoperative within section 6(2)(b) of the Arbitration Act and the jurisdiction to stay the proceedings had ceased to exist
Key legal issues
#Effect of rescission under section 48(4) of the Sale of Goods Act on the arbitration clause
Rescission under section 48(4) annuls the whole contract including the arbitration clause; only the seller's claim for damages is preserved, and that right is statutory and enforceable in the ordinary courts.
The court distinguished frustration, where an arbitration clause may survive to regulate disputes arising before destruction, from statutory rescission by operation of law on the buyer's default. Section 48(4) expressly saves only the seller's claim for damages; nothing else survives. Reading an arbitration clause back into the rescinded contract would, following Beckett J in Chandu Lal Parma Nand, read into the subsection something it does not contain.
Consequence for the jurisdiction to stay proceedings under section 6 of the Arbitration Act
With the arbitration clause annulled, the agreement for arbitration has become inoperative within section 6(2)(b), and the court's jurisdiction to stay the suit ceases to exist.
The stay jurisdiction under section 6 depends on the existence of a live arbitration agreement. Since the rescission under section 48(4) extinguished the clause, there was no longer an arbitration agreement to justify a stay, and the judge below, had section 48(4) been brought to his notice, must have refused the stay.
Readiness and willingness to arbitrate under section 6(1) of the Arbitration Act
The defendant failed to demonstrate readiness and willingness to arbitrate; his dishonoured cheques, refusal to accept notice of resale and silence showed unwillingness to have the matter adjudicated.
The judge's reasoning that an applicant for a stay is deemed ready and willing to arbitrate was found difficult to follow. Wambuzi P added that a party cannot sit back until suit is filed and then, at the last moment, assert a dispute; identification of the areas of dispute is one of the things necessary to the proper conduct of an arbitration.
Whether a wide arbitration clause survives rescission by reason of the breadth of its scope
The breadth of the clause is irrelevant; the question is not its scope but its life, and on rescission it ceases to apply or becomes inoperative.
Mr Khanna's argument, drawing on Henck v Andre Cie SA, that a clause of very considerable width covers disputes arising after the contract is destroyed was rejected: that line concerns frustration. Rescission under section 48(4) is different; the clause was an agreement on the method of ascertaining loss, not part of the saved right to damages, and ceases to operate on rescission, leaving damages to the ordinary courts.
Legal principles established
#- Where a seller expressly reserves a right of resale and, on the buyer's default, resells the goods, section 48(4) of the Sale of Goods Act rescinds the original contract of sale and, with it, the arbitration clause; only the statutory right to claim damages survives, enforceable in the ordinary courts.
- Once the arbitration agreement has become inoperative by reason of such rescission, the High Court has no jurisdiction under section 6 of the Arbitration Act to stay proceedings on the damages claim.
- A party applying for a stay under section 6 of the Arbitration Act must show that it was, when the proceedings were commenced and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration; silence after notice of a claim does not establish such readiness.
Court orders
#- 1.Appeal allowed
- 2.The order staying the proceedings set aside
- 3.The order that the plaintiff pay the defendant half the costs of the suit set aside
- 4.The proceedings reinstated and the suit to proceed to hearing
- 5.Costs of the application in the High Court left to the discretion of the court below in light of the eventual determination of the suit
- 6.Each party to bear their own costs of the appeal (no order as to costs)
The bench
#One judgment of the whole court — no separate or dissenting opinions.
Wrote the judgment
Delivered the leading judgment. Held that under section 48(4) of the Sale of Goods Act the exercise of an expressly reserved right of resale on the buyer's default rescinds the original contracts, and the arbitration clause falls with them, leaving only the statutory right to claim damages enforceable in the ordinary courts. The jurisdiction to stay the suit under section 6 of the Arbitration Act therefore ceased to exist, and the appeal would be allowed.
The subsection preserves in existence the right to claim damages, and nothing else, out of the rescinded contract. The arbitration clause having gone with the contract, the jurisdiction to stay a suit for damages for loss on resale, and to refer the dispute to arbitration, has ceased to exist.p. 4
Agreed with the conclusion of Law V-P. Emphasised that the defendant's silence in response to letters threatening proceedings did not show readiness and willingness to arbitrate, and that 'rescind' in section 48(4) bears its ordinary meaning of abrogate, annul, revoke or cancel, not 'complete destruction', so that a rescinded contract ceases to operate except for determining the seller's damages.
I would prefer, therefore to put it simply that a contract which is rescinded under the section ceases to have effect, it ceases to operate, except for the purpose of determining any damages for the seller.p. 5
Agreed with Law V-P's judgment. Went further and held that 'rescind' in section 48(4) means annul or complete destruction, so the rescinded contract is destroyed and becomes void ab initio; the seller's right to damages is conferred by statute and does not flow from the defunct contract, and can be proved in the ordinary way in court.
I think "rescind" in the context of section 48(4) of the Kenya Act has the meaning given to it by Tek Chand J, and that once rescinded the contract is destroyed and becomes void ab initio.p. 6
- On appeal from
- High Court
- Not stated in the judgment
- Jurisdiction invoked
- First appeal to the Court of Appeal with leave, from the High Court's decision under section 6 of the Arbitration Act (specific appellate provision not stated in the judgment)
Relief refused
#The defendant's claim to have the suit stayed and referred to arbitration
The arbitration agreement had become inoperative because the contracts were rescinded under section 48(4) of the Sale of Goods Act on the exercise of the reserved right of resale, taking the arbitration clause with them; further, the defendant had not shown readiness and willingness to arbitrate
Costs
Each party to bear their own costs of the appeal; the judgment concludes 'Appeal allowed; no order as to costs.' Costs of the stay application left to the discretion of the court below.
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
I would allow this appeal. I would set aside the order staying the proceedings, and the order that the plaintiff do pay the defendant half the costs of the suit. I would order that the proceedings be re-instated and that the suit proceed to hearing.
Appeal allowed; no order as to costs.
All the other terms, including an arbitration clause, are annulled on rescission.
The arbitration clause having gone with the contract, the jurisdiction to stay a suit for damages for loss on resale, and to refer the dispute to arbitration, has ceased to exist.
I would prefer, therefore to put it simply that a contract which is rescinded under the section ceases to have effect, it ceases to operate, except for the purpose of determining any damages for the seller.
I think "rescind" in the context of section 48(4) of the Kenya Act has the meaning given to it by Tek Chand J, and that once rescinded the contract is destroyed and becomes void ab initio.
but rather that party must show that he was at the time of commencement of the proceedings ready and willing, and still is, to go to arbitration.
Issues in the judgment
#The costs of the appeal are stated in two formulations - Law V-P says he would leave the parties to bear their own costs of the appeal, while the operative endorsement reads 'Appeal allowed; no order as to costs.' These are substantively consistent but differ in wording.
The case title, case number and neutral citation are not stated anywhere in the judgment text; the parties are referred to only as 'the plaintiff' and 'the defendant'.
The members of the bench express slightly different views on the meaning of 'rescinded' in section 48(4) - Law V-P adopts annulment/cessation of operation, Wambuzi P expressly declines 'complete destruction', while Mustafa JA endorses 'void ab initio' - though all agree the arbitration clause does not survive.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Nakuru Oil Mills Ltd v DK Lakhani [1976] KECA 5 (KLR)", Case Analysis (1976). Not stated in the judgment. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1976/5/eng@1976-01-14
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.