Kakamega Paper Converters Limited v Mohanlal Arora & 2 others [2020] KECA 617 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that rescinding a sale without proof of breach backfires, non-parties to a contract aren't liable, and banks can stop payment once a sale falls apart.
What this practically means
#Executive summary
#Key legal issues
#Whether EAPC was entitled to rescind the second agreement for sale
The rescission was wrongful. The appellant had substantially performed, EAPC had taken possession, and no evidence supported the belated allegations of fraudulent misrepresentation, which were in any event excluded by the entire-agreement clause.
The court reviewed the correspondence and found no stated reason for the rescission letter of 17 January 2011. The alleged misrepresentations about profitability were unsupported by evidence and negated by clause 15.1, the entire-agreement clause, which excluded reliance on representations not in writing. Having accepted possession after due diligence, EAPC could not unilaterally unmake the contract.
Whether the Arora's and Raj were liable to the appellant on alleged assurances to procure EAPC's performance
They were not liable. They were not privy to the second agreement, and the entire-agreement clause negated the alleged assurances; novation was not established.
The first agreement was discharged by the deed of substitution and discharge executed between the appellant and EAPC. The Arora's and Raj were not party to the second agreement or the deed. Under privity of contract, a contract binds only its parties, and the entire-agreement clause excluded the claimed collateral assurances. No evidence supported the alleged novation.
Whether the Bank was liable to the appellant under its undertaking of 25th October 2010
The Bank was not liable. The undertaking was given to KCB, was not enforceable by the appellant, its conditions precedent were unfulfilled, and rescission of the sale extinguished the Bank's obligations to register securities and disburse.
The court identified three reasons: the undertaking was addressed to KCB, not the appellant, raising privity difficulties; once the Bank learned of the rescission, whether rightful or not, it was relieved of further obligations to register its securities and disburse; and the conditions precedent - transfer of the land and registration of the Bank's charge - had not been fulfilled when the dispute arose.
Legal principles established
#- A contract binds only the parties to it; under the doctrine of privity, a party who is not privy to a subsequent substituted agreement cannot be held liable on it, and an entire-agreement clause excludes liability based on alleged collateral assurances
- A purchaser who has taken possession and whose vendor has substantially performed cannot rescind where no breach by the vendor is established, and alleged misrepresentations are excluded by an entire-agreement clause
- A bank's payment undertaking conditioned on registration of transfers and charges matures only upon fulfilment of those conditions precedent, and once the underlying sale is rescinded the bank is under no further obligation to register securities or disburse loan proceeds
- A first appellate court is entitled to review the evidence and draw its own conclusions, parting company with the trial court where its analysis so leads
Court orders
#- 1.The appeal and the cross appeal are dismissed
- 2.The appellant shall pay costs of the appeal to the 1st, 2nd and 3rd respondents
- 3.No orders as to costs of the cross appeal
- On appeal from
- High Court of Kenya at Nairobi, Milimani Commercial Courts, Commercial and Admiralty Division
- Commercial Case No. 91 of 2011
- Jurisdiction invoked
- First appellate jurisdiction over an appeal from the High Court (the judgment does not cite a specific constitutional or statutory provision)
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Kakamega Paper Converters Limited v Mohanlal Arora & 2 others [2020] KECA 617 (KLR)", Case Analysis (2020). Civil Appeal No. 98 of 2018. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2020/617/eng@2020-06-05
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.