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Home » Insights » Enforcement of Bank Performance Bonds; Key Takeaways From High Court Case No. E059/2022 Magnate Ventures Limited -Vs- Credit Bank Plc.

Enforcement of Bank Performance Bonds; Key Takeaways From High Court Case No. E059/2022 Magnate Ventures Limited -Vs- Credit Bank Plc.

Magnate Ventures, a local economic giant, has successfully converted Credit Bank’s liability towards a Chinese firm, into an asset as Credit Bank was ordered by Court to honour their performance bond and settle a debt owed by Hebei Tuofa Telecommunication & Electric Manufacturing Ltd. Efforts towards unraveling themselves from the conflict between Magnate and the Chinese firm proved unpliable as the High Court ruled that the Financier was bound by its guarantee which obligation becomes due upon demand. “…a bank which issues a performance bond has to honour that guarantee in accordance to its terms. The obligation arises immediately upon demand,” the judge said.

The dispute arose when the Chinese firm contracted Magnate Ventures to supply and install lines and transformers. The parties agreed that Hebei would take out “on demand performance bonds” from a recognized Bank in Kenya, being Credit Bank in this case. The Chinese firm failed to pay the amount on demand which necessitated an application by Magnate Ventures in the High court seeking redress and further enjoining the Financier claiming that they be compelled to pay off Magnate Ventures by dint of their guarantee. Read the full ruling here.

The main issue

Whether the performance bond rightfully bound the Bank to the contract between Magnate Venture and the Chinese Firm.

Analysis, Implications in Law and our Take.

It is important to understand what a performance security bond is. The same was defined in Sinohydro Corporation Limited v GC Retail Limited & another [2016] eKLR as “…a three-party agreement between the principal, the obligee, and the surety in which the surety agrees to uphold, for the benefit of the obligee, the contractual obligations of the principal if the principal fails to do so.”

If the principal fulfills its contractual obligations, the guarantor’s obligation becomes void. However, if the principal defaults on the underlying contract, the obligee can make a claim against the surety under the surety bond. In the case of Kenindia Assurance Company Limited vs. First National Finance Bank Limited Civil Appeal No. 328 of 2002 the Court of Appeal also held as follows;

“A bank, which gives a performance guarantee, must honour that guarantee according to its terms. It is not concerned in the least with the relations between the supplier and the customer, nor with the question whether the supplier has performed his contractual obligation or not; nor with the question whether the supplier is in default or not. The bank must pay according to its guarantee, on demand if so stipulated, without proof or conditions.

An exception to making such payment as has been mentioned above is where the obligations by the contracting parties one of who is being guaranteed by the financier have been fulfilled and consideration fully settled. In such a scenario compelling the Bank to pay would be considered criminal. Another instance is where the claim being made has no nexus to the performance bond, for which the Guarantee was issued. In such instances, where the Financier is able to determine clear and concise fraud or its likelihood then the Bank is would be allowed to rid itself from its contractual obligation. Keep in mind that the mere assertion or allegation of fraud would not be adequate. The fraud must be shown to exist by irrefutable evidence as was stated by Ackner, L.J.  in the case of United Trading Corporation S.A. v. Allied Arab Bank Ltd (C.A. July 17, 1984) where it was held that;

“The evidence of fraud must be clear, both as to the fact of fraud and as to the bank’s knowledge. The mere assertion or allegation of fraud would not be sufficient ………..We would expect the court to require strong corroborative evidence of the allegation, usually in the form of contemporary documents, particularly those emanating from the buyer. In general, for the evidence of fraud to be clear, we would also expect the buyer to have been given an opportunity to answer the allegation and to have failed to provide any, or any adequate answer in circumstances where one could properly be expected. If the court considers that on the material before it the only realistic inference to draw is that of fraud, then the seller would have made out a sufficient case of fraud.”

In conclusion, a performance bond gives rise to an autonomous contract and the bank’s refusal to make payment on demand amounts, save for the elaborated exceptions simply amounts to a conspiracy. Despite Credit Bank’s exertions in separating themselves from their obligation the court ruled that the performance bond in place had to be honored. This obligation arises immediately upon demand with the only exception being instances of clear fraud which the bank has notice.  In the present case, Credit Bank failed to show that there was any fraud.  Despite making the claim, the allegation of fraud alleged was neither particularized nor any evidence produced to establish the semblance of the same. Unless a bank is able to prove a concise instance of fraud necessitating the court to invalidate an applicant’s claim to specific performance by the Financier, then they remain bound under our Law.

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