CORPORATE INSURANCE CO. LTD v NYALI BEACH HOTEL LTD [1998] KECA 30 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that a performance bond guarantor must prove the contract was fully performed, and vague defences will not stop summary judgment.
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 Hotel was required to prove non-performance of the construction contract before obtaining summary judgment on the bond
- 2.Whether the Hotel owed the appellant surety a duty to disclose the contractor's failure to perform
- 3.Whether the extension of time for completion discharged the appellant's liability under the bond
- 4.Whether non-compliance with the retention clause discharged the surety
- 5.Whether alleged collusion between the liquidator and the Hotel in the arbitration raised a triable issue
- 6.Whether the trial judge erred in entering summary judgment under Order 35
Key legal issues
#Burden of proof on non-performance of the bonded contract
The onus lay on the appellant surety to prove full performance; the Hotel's claim was supported by the architect's certificate which the appellant did not impugn.
The bond was conditioned to be void only if the contractor fully conformed to the contract; in any other event it remained in force. The Hotel's director deponed to non-performance and annexed a detailed 22-page architect's certificate. The appellant made no attempt to show the certificate was faulty, so no triable issue on quantum or liability arose.
Duty of disclosure by creditor to surety
No duty lay on the Hotel to notify the surety of the contractor's failures; the duty of disclosure arises at formation of the guarantee, and the alleged non-disclosure here related to later events.
The very object of the bond was to assure the Hotel of performance. The appellant was not misled at formation. Authorities (Seaton v Heath; Kiby v Duke of Marlborough; O'Hara v Allied Irish Banks; Trade Indemnity) show the surety must inquire rather than presume, and a creditor with whom the surety has no direct bargaining owes no duty of care.
Effect of extension of time on the surety's liability
The extension was granted by the architects under the contract which was the basis of the bond, and the bond expressly preserved liability notwithstanding breaches; the defence failed.
Hudson's authority that an extension releases the surety is subject to extensions made under the provisions of the principal contract, which applied here. The bond's proviso discharged liability for no breach 'with or without the knowledge or consent' of the contractor. Further, an extension could only benefit the surety by enabling completion.
Alleged collusion between liquidator and Hotel in the arbitration
The allegation was bland and unsupported by any prima facie evidence; the liquidator was the contractor's agent and there was no evidence of bad faith.
While an award against the principal debtor does not bind the surety, whose liability must be proved independently, on summary judgment the defendant must show a bona fide defence. The appellant could not use leave to defend as a fishing expedition to gather evidence of collusion at trial.
Test for leave to defend on summary judgment
The defendant must condescend upon particulars and show a reasonable or fairly arguable defence; allegations are investigated and leave refused where the point is unarguable.
Order 35 enables a plaintiff to obtain judgment without trial where the claim is clearly proved and no bona fide defence is raised. The court investigates the allegations and may reject prima facie issues as unfit for trial without shutting out genuine defences. The trial judge's discretion was not exercised wrongly in principle or perversely.
Legal principles established
#- On a performance bond conditioned to be void only upon full performance, the surety bears the onus of proving full performance; the creditor need not prove non-performance.
- Ordinary contracts of guarantee do not require utmost good faith by the creditor towards the surety; mere non-communication of facts affecting the risk does not vitiate the guarantee.
- An extension of time granted under the provisions of the principal contract does not release the surety, particularly where the bond expressly preserves liability notwithstanding breaches.
- On summary judgment under Order 35, the defendant must show a bona fide and reasonably arguable defence with sufficient particulars; mere allegations or an intention to call expert evidence at trial are insufficient.
- An appellate court will not interfere with a judge's discretion on summary judgment unless it was exercised wrongly in principle or perversely.
Court orders
#- 1.Appeal dismissed with costs
The bench
#One judgment of the whole court — no separate or dissenting opinions.
Wrote the judgment
- On appeal from
- High Court of Kenya
- H.C.C.C. No. 5123 of 1990
- Jurisdiction invoked
- First appeal to the Court of Appeal under the Civil Procedure Rules/statute (not expressly stated in the judgment)
Relief refused
#Leave to defend the suit / setting aside of summary judgment
The appellant failed to show a bona fide or genuinely arguable defence; the alleged non-disclosure, extension of time, retention and collusion defences were negatived by the bond's terms or unsupported by evidence
Costs
Appeal dismissed with costs to the respondent (the Hotel).
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.
Thus unless there is evidence that the contract had been fully performed by the contractor, the appellant continues to be bound by the bond.
Ordinary contracts of guarantee are not amongst those requiring uberima fides on the part of the creditor towards the surety and mere non communication to the surety by the creditor of the facts known to him affecting the risk undertaken by the surety will not vitiate the contract.
The defendant is bound to show that he has some reasonable or fairly arguable ground of defence to the action.
I would dismiss the appeal with costs.
Issues in the judgment
#The judgment text contains typographical errors in quoted authority names and citations (e.g. 'Kiby vs. Duke of Marlborough', 'uberima fides', '0.353 r2'), reproduced here verbatim as printed.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "CORPORATE INSURANCE CO. LTD v NYALI BEACH HOTEL LTD [1998] KECA 30 (KLR)", Case Analysis (1998). Civil Appeal 270 of 1996. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1998/30/eng@1998-01-09
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.