The Kenyan Parliament passed Law of Contract (Amendment) Act, 2019 September 18th, 2019 and awaiting Presidential assent. The Amendment provides that the creditors need to realize the principal debtor’s assets before filing a suit against a surety including that of guarantor. Further, the amendment shall not be applicable retrospectively.
The amendment passed by the Parliament of Kenya may affect the enforceability of:
- security agreements of third parties;
- financial instruments and guarantees issued by banks eg. letters of credit; and
- legal instruments that are packaged eg. put options.
As per the practice of English Courts, the Courts of Kenya shall interpret transactions on basis of substance rather than their form.
This amendment however presents problem in its structure and enforcement:
- It limits freedom of contract of parties to agree on the proposition that a surety performs the obligation of principal debtor.
- It is a major departure from the international conventional norms and may have repurcussions on the Kenyan financial market.
- Creditors usually rely on guarantors before lending to the debtors who otherwise are credit risks for the company.
- The guarantees which are governed by the foreign law would also be affected.
Therefore, it is a wait and watch observation that needs to be adopted once the amendment comes into force.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.