National Bank of Kenya Ltd v Devji Bhmji Sanghani & another [1996] KECA 86 (KLR)
The bottom line
#Kenya's Court of Appeal ruled that a bank's 'comfort letter' promising payment became a binding guarantee, costing the bank over Shs 6 million.
What this practically means
#Executive summary
#Key legal issues
#Whether the bank's letters of 5th and 20th July 1978 constituted a guarantee rather than mere letters of comfort
The letters constituted a binding guarantee/assurance by the bank to see that Sanghanis were paid the contract sum on architects' certificates; the presumption of intention to create legal relations was not rebutted by evidence or construction
The letters confirmed suitable banking facilities, stated Pentax were good for the contract, and directed payment 'direct' to the contractors out of the bank's facilities. Uncontroverted evidence showed the letters were the reason Sanghanis signed the contract and commenced work. The bank called no evidence to rebut the presumption of contractual intent, and the letter contents were categorical that payment would be made by the bank.
Whether the respondents were strangers to the letters because these were addressed to their bankers
The respondents could enforce the letters; they were meant for the respondents' consumption and assurance, not merely for the bankers
The letters expressly referred to 'your M/s Sanghani Builders' and were written to induce Sanghanis to sign the contract and commence work. In modern business, such letters cannot be written in a vacuum; the recipients' identity as intended beneficiaries defeats the privity objection.
Whether interest could be awarded from the dates the architects' certificates fell due
Yes; section 26 of the Civil Procedure Act empowers the court to award interest from such date as it thinks proper, whether before or after filing of suit
Although the building contract made no provision for interest on unpaid certificates, the superior court's statutory power under section 26 of the Civil Procedure Act independently justified the award of interest from the due dates, and the learned judge could not be criticised for exercising it.
Legal principles established
#- Courts will treat bank letters of comfort as capable of constituting binding contractual obligations unless the contrary intention is clearly expressed; where uncontroverted evidence shows the letters were issued to induce the contractor to sign and commence work, a presumption of intention to create legal relations arises which the bank must rebut
- Letters addressed to a contractor's bankers may still be enforced by the contractor where they were meant for the contractor's consumption and assurance
- Under section 26 of the Civil Procedure Act the superior court has power to award interest from such date as it thinks proper, whether before or after the date of filing of suit
Court orders
#- 1.Appeal dismissed with costs
- 2.The sum of Shs. 6,014,777/= received by Sanghanis at the end of May 1992 to be taken as payment in reduction of the appellant bank's liability
- 3.Sanghanis to pay the appellant bank Shs. 6,014,777/= with interest at 12% per annum from 1st June 1992 until payment, as they had been paid the decretal sum in full by the bank
- On appeal from
- High Court of Kenya at Nairobi
- H.C.C.C. No. 2004 of 1984
- Jurisdiction invoked
- First appeal to the Court of Appeal from the High Court (statutory appellate jurisdiction; no specific provision quoted in the judgment)
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "National Bank of Kenya Ltd v Devji Bhmji Sanghani & another [1996] KECA 86 (KLR)", Case Analysis (1996). Civil Appeal No. 13 of 1994. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1996/86/eng@1996-11-15
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.