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Court of AppealAllowedCivil Appeal 61 of 2013· [2017] KECA 800 (KLR)

Fidelity Commercial Bank Ltd v Kenya Grange Vehicle Industries Ltd

Court of Appeal
6 October 2017
William OukoW. OukoPKP.O. KiageAMA.K. Murgor
5,421 words in judgment
View original judgmentRead on Kenya Law Watch case
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The bottom line

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Kenya's Court of Appeal ruled that a written guarantee's own terms control its duration, and pre-contract negotiations cannot limit a guarantor's liability.

What this practically means

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Executive summary

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The appellant bank financed Takrim Bus Services' purchase of two buses from the respondent, who by a letter of undertaking dated 29th April 1999 guaranteed to purchase the buses upon Takrim's default once the bank repossessed them. Takrim defaulted; the buses were repossessed, released under a rescheduling agreement, repossessed again, and one was later destroyed by fire. The bank sued the respondent for Kshs. 4,059,304, the outstanding balance. Mutava J. dismissed the suit, holding that the guarantee's tenure had to be gleaned from the earlier letter of 22nd March 1999, which contemplated a 24-month facility, and that the guarantee had expired before demand. The Court of Appeal (Ouko, Kiage and Murgor, JJA) allowed the appeal. It held that the guarantee document itself created the guarantor's duty; that the guarantee was open-ended, continuing and actionable upon default and demand, with no 24-month cap; that the trial Judge erred in importing terms from the pre-contract letter without establishing their incorporation; that the respondent was aware of and participated in the rescheduling, which did not discharge it; and that enforcement of other securities was not a condition precedent. The Court set aside the dismissal, allowed the claim as laid, and awarded costs to the appellant in both courts. The judgment binds lower courts on the parol evidence rule and the construction of guarantees.

Key legal issues

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01

Whether the letter of undertaking of 29th April 1999 was limited to the 24-month repayment period

Holding

The guarantee was open-ended and continuing, actionable upon default and demand; no time limit was imposed on the respondent's liability.

Reasoning

The letter of undertaking made no mention of a 24-month limit; that period appeared only in the earlier letter of 22nd March 1999, which was a pre-contractual application for the facility. The guarantee bound the respondent as soon as Takrim defaulted on its monthly installments, and the respondent could not be absolved merely because the facility period had expired.

p. 9
02

Whether the trial Judge erred in using the pre-contract letter of 22nd March 1999 to construe the guarantee

Holding

Yes. The Judge erred in holding that the terms of the first letter were accepted in the hire purchase agreements without specifying how they were incorporated; the guarantee document itself created the guarantor's duty.

Reasoning

Under the parol evidence rule and the four-corners principle, where parties have reduced their agreement to a final writing, prior negotiations cannot be used to contradict or add to it. Extrinsic evidence is admissible only where the language is ambiguous or the document was not intended as the entire agreement. The guarantee here was not ambiguous as to the trigger of liability.

p. 8
03

Whether the rescheduling of the facility and release of the buses discharged the respondent

Holding

No. The respondent was aware of and participated in the rescheduling through its representatives, and the hire purchase agreement permitted the appellant to grant indulgence without discharging the guarantee.

Reasoning

All letters on the status of the facility were copied to the respondent; a representative attended the rescheduling meeting; and the letter conveying the rescheduling terms referenced confirmation by Kenya Grange. Further, the hire purchase agreement stipulated that the appellant could extend indulgence without notice and without affecting liability.

p. 9
04

Whether the appellant was required to enforce other securities before calling on the guarantee

Holding

No. It was not a requirement of the guarantee that other securities be enforced first.

Reasoning

The guarantee did not make enforcement of other securities a condition precedent to the respondent's liability. The creditor does not have to exhaust all remedies against the principal debtor before proceeding against the guarantor.

p. 9

Legal principles established

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  • The duty of the guarantor is created by the guarantee document itself, not the underlying contract; a guarantee is actionable upon default and demand.
  • Once default is established and formal demand made, secondary conditions may not be used to defeat the security.
  • Pre-contractual negotiations may not be used to contradict, vary or add to a written contract that embodies the final agreement; extrinsic evidence is admissible only where the document was not intended to be the entire agreement or where language is ambiguous.
  • A first appellate court must re-evaluate the evidence and reach its own conclusions while according respect to trial court factual findings.

Court orders

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  1. 1.Appeal allowed with costs
  2. 2.Orders of the High Court dismissing the appellant's suit set aside
  3. 3.Dismissal substituted with an order allowing the appellant's claim as laid before the High Court
  4. 4.Costs in the High Court granted to the appellant

Authorities

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Cases cited (7)

  • Susan Munyi V Keshar Shiani
    Civil Appeal No. 38 of 2002

    Duty of a first appellate court to re-evaluate evidence afresh while respecting trial court factual findings.

  • Kenindia Assurance Company Ltd V. First National Finance Bank Ltd
    Civil Appeal No. 328 of 2002

    Guarantees are special contracts; liability attaches upon default and formal demand.

  • Prudential Assurance Company of Kenya Limited V. Sukhwender Singh Jutney and Another
    Civil Appeal No. 23 of 2005

    No parol or extrinsic evidence is admissible to contradict, vary or alter a written instrument.

  • Chartbrook Limited v Persimmon Homes Limited
    (2009) UKHL 38

    The formal contract records the bargain and puts an end to disputes arising from negotiations.

  • Gillepsie Bros. & Co. v Cheney, Eggar & Co.
    (1896) 2QB 59

    The presumption that a written contract contains all terms is rebuttable by proof of an antecedent stipulation intended to continue.

  • Savings and Loan Kenya Limited V. Mayfair Holdings Limited
    Civil Appeal 152 of 2006

    Whether the writing contains the whole agreement is decided by the court on all relevant evidence.

  • Twiga Chemicals Industries Limited V. Allan Stephen Reynolds
    Civil Appeal No. 300 of 2006

    Whether the writing contains the whole agreement is decided by the court on all relevant evidence.

On appeal from
High Court of Kenya at Nairobi
H.C.C.C. No. 27 of 2005
Jurisdiction invoked
First appellate jurisdiction over the High Court (duty of a first appellate court to re-evaluate evidence)

Key timeline

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Practical implications

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Frequently asked questions

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Later judgments citing this (25)

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Judgments in the corpus that rely on this one. Where the Court said how it treated the authority, that is shown.

Cite this brief

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Cite this brief

Caselaw, "Fidelity Commercial Bank Ltd v Kenya Grange Vehicle Industries Ltd", Case Analysis (2017). Civil Appeal 61 of 2013. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2017/800/eng@2017-10-06

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.