An Overview Of The Law Of Contract (Amendment) Bill, 2019
2020

An Overview Of The Law Of Contract (Amendment) Bill, 2019

Introduction.

The Law of Contract (Amendment) Bill, 2019 was passed by Parliament on the 18th day of September 2019 and presented to the President for assent on the 23rd day of December 2019. The Bill seeks to amend section 3 of the Law of Contract Act CAP 23 Laws of Kenya to provide that a creditor has to first realize the assets of the principal borrower before proceeding to commence court proceedings against the guarantor for the recovery of the debt.

The current law contains no such express restriction and lenders would like to be empowered with the right to pursue a guarantor for repayment of the loan without having to pursue the principal borrower upon the default of a loan. The Amendment Bill proposes to reverse this position and compel a lender to go after the borrower’s assets prior to invoking a guarantee. The subsection reads as follows:

“(1A) Notwithstanding subsection (1), before a suit is brought against a defendant under subsection (1), the plaintiff shall first realize the security of the principal.

Knock-on effect.

  • The enactment of the Bill into law will serve as a draw-back to financial institutions and the law regarding guarantee in Kenya. 
  • The amendment will affect the Land Act No. 6 of 2012, which sets out various options that a security holder has in enforcing its rights, which include the right to sell the land or sue the borrower for the non-payment of the loan. Therefore, If the proposed amendment is accepted and passed into law, secured creditors will no longer have an option to elect whether to sue or to realize the security first but will instead be bound to realize the security before they can sue.

President Uhuru Kenyatta, through a Memorandum dated the 3rd day of January 2020 addressed to Parliament, declined to assent to the Bill and recommended that Clause 2 of the Bill be deleted giving the following reasons:

  • The proposed section would result in a prolonged process of settling debts in the case of a default.
  • The amendment will adversely affect credit advanced to micro, small and medium enterprises due to lenders’ reluctance to rely on third-party collateral, thereby adversely affecting the gains made in Kenya’s ease of doing business index. 
  • He also pointed out that the Amendment was introduced prematurely before allowing for more comprehensive consultations with all stakeholders.

Following these developments, Parliament is required to consider the President’s recommendations upon receipt of the Memorandum. Where Parliament in exercising its authority under Article 115 (2) of the Constitution may do one of the following:

 

  • Amend the Bill in light of the President’s reservations. Since the Bill primarily consists of section 2, such an action will defeat the reason for Bill’s existence.
  • Pass the Bill a second time, with or without amendments. In this case, a two-thirds vote of members of parliament will be required.

 

Conclusion.

Given the considerable time that enforcement can take through court proceedings in Kenya, a lender’s rights against a guarantor would potentially be postponed for many years negating the value of the obligation. Further, it is our hope that the Bill does not come to fruition since it will be a draw-back on the law regarding the guarantee and its adoption will only serve to render guarantees as inferior security which will have a negative impact on the economy.

We shall stay abreast of the developments regarding the Bill and keep you updated. 

Do not hesitate to contact us for any further assistance and clarification on the matter.

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