Estate of Terence Peter O’donovan & 3 others v National Bank of Kenya Limited [2020] KECA 329 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that banks must pay demand guarantees on first written demand, and minor format errors don't invalidate the call-up.
What this practically means
#Executive summary
#Key legal issues
#Effectiveness of the call up of the materials guarantee bond
The letters of 23rd December 1998 and 27th January 1999, read together as part of one transaction, effectively called up the materials bond notwithstanding deviations from the prescribed format and single-attorney signature on the clarification letter.
Section 72 of the Interpretation and General Provisions Act provides that a deviation from a prescribed form does not void an instrument unless it affects substance or is calculated to mislead. Applying Marks v Whiteley, the three guarantees formed one transaction and were construed together. Barclays Bank's intention to call up the materials bond was clarified before payment, and no evidence proved the signatories were unauthorized attorneys.
Whether payment under the guarantee should have awaited determination of the subcontract dispute or arbitration
No. The guarantee was a strict liability instrument payable on first written demand without contestation; the bank was a stranger to the subcontract and the arbitration agreement, and no fraud was alleged.
The irrevocable letters of guarantee bound the bank to pay on first written demand without needing to prove grounds. Following Transafrica Assurance v Cimbria and Kenindia Assurance v First National Finance Bank, disputes between buyer and seller under the underlying contract are settled between themselves and do not excuse the bank, save where fraud of which it has notice is established. The respondent was therefore not at fault in honouring the demand.
Validity of the debit of Kshs. 9,684,274.80 from EM's account
The debit was lawful as reimbursement of sums paid under the materials guarantee and fell well within the total facility ceiling of Kshs. 52,355,160.
Clause 1 of the charge and further charge expressly obliged the borrower to repay moneys paid by the bank under guarantees issued on its behalf, with interest. The appellants' argument that the debit exceeded a Kshs. 6 million ceiling failed because the letter of offer showed the aggregate facility and guarantee ceilings far exceeded the amount debited.
Indebtedness of Kshs. 17,109,253.35 and interest charges
The sum was proved by bank statements and demand letters admitted by consent, which the appellants never controverted; the claim of mismanagement and unauthorized interest failed for want of evidence.
The charge expressly authorized compound interest at a rate decided by the bank. No evidence showed the interest charged was exorbitant or unlawful, and the mismanagement allegation was unsupported. Having consented to admission of the documents and cross-examined on them, the appellants were estopped from challenging their introduction at the appellate stage.
Validity of statutory notices and sale of charged properties
The Court declined to determine this issue, being outside its remit since the parties agreed the statutory notices did not form part of the appeal.
Apart from a mention that the Industrial Area notices were defective, insufficient evidence was led to enable a considered finding. Both parties submitted the notices were not part of the appeal, and the Interested Party's contestations on the validity of the sale equally fell outside the Court's remit.
Legal principles established
#- On a first appeal, the Court of Appeal reconsiders and re-evaluates the evidence and draws its own conclusions, while making due allowance for not having seen or heard the witnesses.
- A bank issuing an irrevocable demand guarantee is bound to pay on first written demand without contestation, regardless of disputes between the beneficiary's customer and third parties, and is only excused by fraud of which it has notice.
- Under section 72 of the Interpretation and General Provisions Act, a deviation from a prescribed form does not render an instrument void where it does not affect the substance or is not calculated to mislead.
- Where several deeds form one contemporaneous transaction they are construed as one.
Court orders
#- 1.The appeal is dismissed
- 2.Costs of the appeal awarded to the respondent
- On appeal from
- High Court of Kenya at Nairobi
- HCCC No. 333 of 2008
- Jurisdiction invoked
- First appeal to the Court of Appeal under the Court of Appeal's appellate jurisdiction (Constitution and Appellate Jurisdiction Act); judgment styled 'JUDGMENT OF THE COURT'
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Estate of Terence Peter O’donovan & 3 others v National Bank of Kenya Limited [2020] KECA 329 (KLR)", Case Analysis (2020). Civil Appeal No. 168 of 2014. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2020/329/eng@2020-10-02
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.