Proposed re-introduction of The Law of Contract (Amendment) Bill, 2019
The Law of Contract (Amendment) Bill, 2019 (“the Bill”) which was sponsored by the Late Honourable Francis Munyua Waititu seeks to amend section 3 of the Law of Contract Act (CAP 23) by providing that a lender must first realize the assets of the principal debtor before instituting a suit against the guarantor/surety for recovery of the debt advanced to the principal borrower. The Bill was passed by Parliament on 18th September 2018 but the President declined to assent to it citing reasons that the Bill, if assented to as drafted, would prejudice the country’s financial sector by making the debt recovery process longer and cumbersome ultimately affecting the ease of doing business in the country.
However, following the death of Honourable Francis Munyua Waititu, some Members of Parliament led by the former Leader of Majority, Aden Duale, have indicated that they shall reintroduce the Bill to the National Assembly “in honor” (emphasis ours) of the late legislator. In light of this, and if the Bill is reintroduced, members of Parliament will have two (2) options as stipulated under article 115 of the Constitution:
- Amend the Bill in light of the President’s reservations and pass the Bill by a simple majority, or
- Pass the Bill a second time by a two thirds (2/3) majority without incorporating the President’s reservations.
Parliament ultimately is the organ that passes the law and not the President. If indeed Parliament overrides the President’s reservations and passes the Bill into law, then the new law will significantly affect lending and the use of guarantees and third party security. Upon default, secured lenders will no longer have the option to either sue the third party security provider or first realise the security but will now be constrained to realise the security of the principal borrower before they can sue. The lender will not even be able to collect rental income from a third party security before realizing the security of the principal borrower. The amendment will also impact the secured lender’s recourse under the Land Act No. 6 of 2012, which allows the secured lender various options to enforce its rights including the right to sell the land or sue the borrower for failure to pay the loan.
Moreover, where a lender accepts a guarantee or other third party security, it shall bear the risk of being unable to recover the monies advanced to the principal borrower since guarantors and third party security providers will now be accorded a lengthy period of time to dispose off or conceal their assets while the lender pursues the principal debtor. Finally, the Bill as drafted is silent on its retrospective application and may affect existing arrangements between secured lenders and third party security providers. Ultimately, borrowers who fail to provide alternative security for their borrowing will now therefore be less likely to access financing.
We shall follow the progression of the Bill post its reintroduction by Parliament and update you accordingly. It would be prudent for stakeholders to deliberate on the effects of the proposed amendment on the financial sector which will evidently significantly affect their business should the same be passed by Parliament.
This alert is for information purposes only. Should you have any questions or need legal advice, please contact Mwangi Kibicho (mwangi@jkkibicho.co.ke) or Leah Muchiri (wmuchiri@jkkibicho.co.ke)
