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Court of AppealPartially AllowedCivil Appeal No. 90 of 2017

Sucham Investments Limited v Kenya Hotel & Allied Workers Union (Khawu) & another [2018] KECA 304 (KLR)

Court of Appeal of Kenya
20 September 2018
3,253 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 hotel reopened under a different company name is not bound by a union recognition agreement signed by the old company.

What this practically means

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Executive summary

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This was an appeal against the judgment of Rika J. of the Employment and Labour Relations Court at Mombasa, which had ordered the appellant to desist from victimising the 1st respondent union's members, deduct union dues per check-off lists, negotiate and register a fresh CBA within 90 days, and grant the union workplace access. The dispute arose from a 2006 recognition agreement between Tiwi Beach Resort (Sucham Investments Ltd) and the 1st respondent union. The hotel burnt down, all employees were declared redundant, and business re-opened in October 2012 under the name Amani Tiwi Beach Resort, which entered into a recognition agreement with the rival 2nd respondent union. The Court of Appeal framed the single substantial question as whether the Judge was right to compel the appellant to negotiate a fresh CBA with the 1st respondent. Holding that the trial Judge overlooked that the re-opened business was a different legal entity from the one that executed the 2006 recognition agreement, the court applied the Salomon principle of separate corporate personality and the doctrine of privity of contract, holding the appellant could not be bound by another entity's agreement and was free to contract with a union of its choice. The court declined to enter the broader union demarcation controversy between the rival unions. The appeal was allowed in its entirety, the award and consequential orders of 30th June 2017 were set aside, and each party was ordered to bear its own costs both in the Court of Appeal and the court below.

Questions the Court framed

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The issues the Court set itself to decide, in its own words.

  1. 1.Whether the learned Judge was right in ordering the appellant to negotiate, conclude and register a fresh CBA with the 1st respondent within 90 days of the judgment
  2. 2.Whether the recognition agreement signed on 17th October 2006 between Tiwi Beach Resort (Sucham Investments Ltd) and the 1st respondent survived the burning down of the business premises and the declaration of redundancy of all employees, and whether it was still binding and enforceable against the appellant
  3. 3.The effect of the judgment in Industrial Court Cause No. 39 of 2007 (Koskei J.) and the three-judge decision in Petition No. 5 of 2013 on union demarcation in the hotel industry

Key legal issues

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01

Whether the 2006 recognition agreement survived the burning down of the hotel and the redundancy of all employees, and was enforceable against the re-opened business

Holding

The agreement was not terminated by the fire, but it did not bind the appellant because the appellant is a different legal entity from the one that signed it, with no privity of contract or assignment

Reasoning

The court accepted the Judge's finding that mere closure of the business did not terminate the recognition agreement, which required termination under section 54(5) of the Labour Relations Act or a court order. However, the Judge overlooked that the entity which re-opened the hotel in October 2012 under the name Amani Tiwi Beach Resort was legally distinct from Tiwi Beach Resort (Sucham Investments Ltd) which had executed the 2006 agreement. Invoking Salomon v Salomon and section 16(2) of the Companies Act, and the doctrine of privity of contract, the court held the appellant could not be held liable for another entity's contractual obligations.

p. 4
02

Whether the appellant, as a different entity, was free to enter into a recognition agreement with a union of its choice

Holding

Yes - the appellant, being a distinct entity, had the liberty to enter into a recognition agreement with any union, subject to the 51% recruitment threshold

Reasoning

The court accepted counsel's submission, anchored on Article 36 of the Constitution on freedom of association, that an employer has the right to choose the union with which to enter a recognition agreement, provided that union has recruited 51% of the employees, the two rights being construed in harmony. Since there was no privity binding the appellant to the 1st respondent, the order compelling it to negotiate a fresh CBA with the 1st respondent could not stand.

p. 4
03

The rival union demarcation controversy in the hotel industry

Holding

The court declined to enter into the demarcation controversy between the rival unions, confining itself to whether the Judge erred in the orders made

Reasoning

The court acknowledged two divergent decisions - Koskei J.'s in Cause No. 39 of 2007 excluding KUDHEIHA from the hotel industry and the three-judge bench decision in Petition No. 5 of 2013 upholding KUDHEIHA's freedom of association. Following Rika J.'s approach, the court declined to be drawn into that controversy, as its role was only to determine whether the Judge erred in the orders against the appellant.

p. 3

Legal principles established

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  • A recognition agreement binds only the parties who executed it; a different legal entity that later operates the business is not bound by it absent a transfer clause or assignment
  • Each company in law is an independent body with its own soul and mind (separate legal personality)
  • A recognition agreement can only be terminated in accordance with section 54(5) of the Labour Relations Act or by an order of the court; mere closure of the business does not terminate it

Court orders

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  1. 1.The appeal is allowed
  2. 2.The award and consequential orders made on 30th June 2017 are set aside
  3. 3.Each party to bear their own costs both in this Court and the one below

The bench

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One judgment of the whole court — no separate or dissenting opinions.

majority

Wrote the judgment

majority

Wrote the judgment

Martha Karambu Koome
M.K. KoomeJA
Currently serving
majority

Wrote the judgment

On appeal from
Employment & Labour Relations Court at Mombasa
E&L.R.C.C. No. 163 of 2014
Jurisdiction invoked
First appeal against the judgment of the Employment & Labour Relations Court under the Court of Appeal Rules

Relief refused

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Enforcement of the 2006 recognition agreement and direction to negotiate a fresh CBA against the appellant

The entity that re-opened the hotel (Amani Tiwi Beach Resort) is a different legal entity from the one that executed the recognition agreement; there is no privity of contract or assignment

p. 4

Costs

No order as to costs; each party to bear their own costs both in this Court and the one below

Quotable passages

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Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.

It is obvious a key factor that there was a change of entity after the hotel re-opened escaped the attention of the Judge and that is where we part company. The recognition agreement that was sought to be enforced was entered into by a different entity from the one that was sued.
p. 4separate legal personality - recognition agreement not enforceable against new entity
Accordingly we think we have said enough to demonstrate that since the entity that re-opened the hotel was different from the one that had executed the recognition agreement, they could not be held liable for actions by another entity.
p. 4privity of contract - appellant not liable for predecessor entity's agreement
In the event we find merit in this appeal which we hereby allow with the result that the award and consequential orders made on 30 th June 2017 are hereby set aside. We make no order as to costs considering the nature of the dispute and order each party to bear their own costs both in this Court and the one below.
p. 4final orders - appeal allowed, award set aside, each party bearing own costs

Issues in the judgment

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minor

The judgment states the recognition agreement was signed on 17th October 2006 in one passage but on '17th October, 2016' in the issue-framing paragraph, an apparent typographical inconsistency

minor

The judgment records the hotel as having burnt down in February 2007 in the opening narrative but in January 2009 later in the judgment

Key timeline

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Practical implications

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Frequently asked questions

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Cite this brief

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Cite this brief

Caselaw, "Sucham Investments Limited v Kenya Hotel & Allied Workers Union (Khawu) & another [2018] KECA 304 (KLR)", Case Analysis (2018). Civil Appeal No. 90 of 2017. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2018/304/eng@2018-09-20

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