Appollo Insurance Company Limited v East African Development Bank & another [2016] KECA 634 (KLR)
The bottom line
#Kenya's Court of Appeal enforced a Ksh. 35.49 million performance bond against an insurer, confirming performance bonds stand independent of the underlying supply contract.
What this practically means
#Executive summary
#Key legal issues
#Reliance on a statement of issues not agreed by all parties
The trial court erred in relying on the statement of issues dated 10th August 2007 as agreed issues since it was not approved by all parties, but no party was prejudiced and the issues discernible from the pleadings were properly determined; a judgment need not bear a heading 'Issues for Determination'.
The Court accepted that issues flow from the pleadings and that the statement cited by the trial judge was neither signed nor agreed by all parties. However, the parties' pleadings disclosed the real issues - validity and enforceability of the bond, the nature of the deliverable, and non-delivery of 7 buses - and the trial court determined them. The error caused no prejudice save for the undetermined Third Party claim.
Failure to determine the Third Party Notice and indemnity claim
The trial judge erred in law in not making a determination on the Third Party Notice and the indemnity/counter-indemnity between the appellant and the 2nd respondent; that claim was remitted for retrial.
As between the appellant and the 2nd respondent as Third Party, the issue for determination was indemnity and counter-indemnity. Analysis of the trial judgment revealed that the Third Party Notice was not determined. The Court upheld that ground of appeal and remitted the Third Party Notice for retrial rather than determining it itself.
Whether the performance bond was a misnomer and unenforceable
The nomenclature of the instrument is immaterial; the executed instrument was a contract of surety enforceable according to its terms, and a performance bond stands independent of the primary contract.
The appellant admitted executing the performance bond and standing as surety. Drawing on Edward Owen Engineering and Sztejn, the Court held that a performance bond or guarantee is enforceable on its terms and is independent of the primary contract of sale. The trial court enforced the contract between the appellant and the 1st respondent in accordance with its tenor and committed no error.
Burden of proving discharge of the bond and the nature of the deliverable
The onus lay on the appellant to prove that the bond was discharged by delivery of 24 completely built buses; absent delivery notes for the 7 buses, the trial court's finding that only 17 complete buses were delivered stood.
Re-evaluating the correspondence, sales invoice and price breakdown, the Court found the deliverable was a complete 55-seater bus with body and seats: the unit price of Ksh. 5,070,000 comprised Ksh. 2.5 million for the chassis and the balance for fabrication. The appellant failed to tender delivery notes for the seven buses and did not discharge its burden of proof.
Interest at 18% per annum
The trial court erred in awarding 18% per annum without reasons for departing from court rates or justifying the additional 6% default interest; the rate was set aside and substituted with court rates.
Award of interest and its rate is discretionary, but the discretionary rate must be justified. The 18% comprised 12% loan interest plus 6% liquidated damages which the Court viewed as penalty or default interest. In the absence of reasons for departure from the Practice Note directing court rates, the Court allowed this ground and substituted court rates.
Variation of the primary contract and delay
Variation of the primary contract by non-parties to the bond did not alter the appellant's surety obligations; delay in claiming non-delivery was not pleaded and does not discharge the bond.
The performance bond is subject to privity of contract between the appellant and the 1st respondent, so variations by KBS and CMC could not discharge the surety. On delay, the issue was not pleaded in the defence, limitation was neither pleaded nor urged, and delay subject to the limitation period does not discharge obligations under the performance bond.
Legal principles established
#- A trial court may not use a statement of issues filed by one party and constitute it as agreed issues for determination; a judgment must be based on issues arising from the pleadings, and failure to determine a Third Party Notice is an error of law.
- The nature and nomenclature of the instrument is immaterial; what matters is the contract as executed, and a performance bond is independent of the primary contract of sale between buyer and seller.
- The person asserting discharge of a performance bond bears the onus of proving it; a judgment need not contain a heading 'Issues for Determination' provided the issues considered and determined are discernible in the text.
Court orders
#- 1.The ground of appeal on the rate of interest allowed; the rate of 18% per annum set aside and substituted with interest at court rates on the judgment sum of Ksh. 35,490,000/=
- 2.The Third Party Notice and the claim for indemnity and counter-indemnity between the appellant and the 2nd respondent remitted for re-trial
- 3.The judgment entered in favour of the 1st respondent against the appellant affirmed and upheld
- 4.Interest on the judgment sum to be at court rates with effect from 24th March 2003 till payment in full
- 5.Each party to bear its own costs
- On appeal from
- High Court of Kenya at Nairobi
- HCCC No. 160 of 2003
- Jurisdiction invoked
- First appeal to the Court of Appeal under the Court of Appeal's appellate jurisdiction (Civil Appeal No. 149 of 2014 from the High Court)
Key timeline
#Practical implications
#Frequently asked questions
#Later judgments citing this (1)
#Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.
- Mathu & 22 others v Inkom Investment Limited & 2 others[2023] KEELC 19275 (KLR)25 Jul 2023
Cite this brief
#Cite this brief
Caselaw, "Appollo Insurance Company Limited v East African Development Bank & another [2016] KECA 634 (KLR)", Case Analysis (2016). Civil Appeal No. 149 of 2014. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2016/634/eng@2016-04-22
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.