Rao & another v Chheda & 2 others (Civil Appeal 540 of 2019) [2026] KECA 827 (KLR)
The bottom line
#Kenya's Court of Appeal confirmed that 'subject to contract' negotiations are not binding, so a Kshs. 2,000,000 deposit could not be forfeited without a signed agreement.
What this practically means
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.Whether there was a valid and binding contract between the parties notwithstanding the use of the phrase 'subject to contract'
- 2.Whether the High Court correctly interpreted the phrase 'subject to contract' in the circumstances of the dispute
- 3.Whether the deposit of Kshs. 2,000,000 was liable to forfeiture by the appellants
Key legal issues
#Interpretation of the phrase 'subject to contract'
The phrase implies the parties have not yet reached a meeting of minds and intend to be bound only by terms crystallised in a signed formal contract; absent express or conduct-based waiver, negotiations do not create binding obligations.
The Court reaffirmed its prior decisions in Guardian Bank and East African Fine Spinners. It held that the phrase preserves negotiations as a facilitator of contract-making, and only an express waiver or conduct that unerringly points to an intention to be bound displaces it. The appellants failed to demonstrate such waiver; the draft agreements were never executed, so no concluded contract supported forfeiture.
Second appeal scope
The appeal turned on a question of law only: whether the Judge correctly interpreted 'subject to contract'.
Citing Kenya Breweries and Pithon Waweru Maina, the Court reiterated that its mandate on a second appeal is confined to matters of law unless the lower courts considered matters they should not have, failed to consider matters they should have, or the decision is perverse. The Court addressed only the interpretation point and the finding of no meeting of minds.
Whether the respondents' conduct amounted to waiver of the 'subject to contract' term
Forwarding draft agreements for discussion and execution did not unerringly point to an intention to be bound; the respondents did not accede to the proposed forfeiture clause.
The Court held the Judge was right to find that the respondents had not acceded to the appellants' proposal to have the deposit forfeited. The parties exchanged draft versions and no contract was executed; under the endorsed Guardian Bank standard, conduct must unerringly point to an intention to be bound, which was absent here.
Legal principles established
#- On a second appeal, the Court of Appeal is confined to matters of law only, unless it is shown the lower courts considered matters they should not have, failed to consider matters they should have, or that the decision is perverse.
- An arrangement stated to be 'subject to contract' is ordinarily not legally binding until a formal contract is entered into, and parties cannot be bound by the terms of their negotiations absent an express waiver of the 'subject to contract' requirement.
Court orders
#- 1.The appeal is dismissed with costs to the respondents
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- On appeal from
- High Court
- Jurisdiction invoked
- Second appeal to the Court of Appeal under its appellate jurisdiction, confined to matters of law only
Relief refused
#Setting aside of the High Court judgment and restoration of the Chief Magistrate's Court judgment upholding forfeiture of the deposit
The correspondence was subject to contract; no valid contract was concluded to support forfeiture of the deposit
Costs
The appeal is dismissed with costs to the respondents
Quotable passages
#Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.
an arrangement that is “subject to contract” should ordinarily be accepted to be just that. It is not intended to be legally binding until a formal contract is entered into.
Where it is the latter, then the conduct of the parties must unerringly point to an intention to be bound by the “subject to contract” understanding.
where a person accepts an ofier subject to contract, it means that the matter remains in negotiation until a formal contract is settled and the formal contracts are exchanged.
There was no valid contract to support the appellants’ forfeiture of the respondents' deposit. We therefore do not find error in the learned Judge’s findings, and the judgment is hereby upheld.
Consequently, the appeal is dismissed with costs to the respondents.
Issues in the judgment
#Internal inconsistency in describing the trial court's decision: the trial magistrate is said to have found the deposit forfeited and dismissed the case, while earlier the same outcome is described as judgment entered in favour of the appellants.
Parties are referred to generically as 'the appellants' and 'the respondents' without their full names being stated in the judgment text, although the machinery belonged to Kwality Candies & Sweets Ltd.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Rao & another v Chheda & 2 others (Civil Appeal 540 of 2019) [2026] KECA 827 (KLR)", Case Analysis (2026). Not stated in the judgment as provided. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2026/827/eng@2026-04-30
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.