Background and Context

In 2019, the Tanzania National Roads Agency (TANROADS) awarded an international road construction contract to Kundan Singh Construction Ltd, a Kenyan-based construction company, to upgrade a portion of the Mbeya–Chunya–Makongolosi Road in southwestern Tanzania.

As part of the contract requirements, Kundan Singh Construction Ltd submitted performance guarantees (valued at USD 1.5 million) through Kenya Commercial Bank (KCB), headquartered in Nairobi. These guarantees were irrevocable, unconditional, and payable on first demand in the event the contractor failed to perform as agreed.

The dispute arose when TANROADS terminated the contract in late 2023 due to alleged non-performance and delays. Subsequently, TANROADS demanded enforcement of the performance guarantees from KCB. KCB, however, declined to honor the demand, citing procedural issues and possible contract dispute matters still under arbitration.

Key Legal Issues

1. Whether the Kenyan courts had jurisdiction to enforce guarantees related to a Tanzanian infrastructure project.
2. Whether KCB was obligated to honor the demand under the performance guarantee unconditionally.
3. The independence of bank guarantees from the main contract.
4. Impact of arbitration clauses in the underlying contract on enforcement of the guarantee.

Court’s Analysis and Ruling

1. Jurisdiction

The court held that since the performance guarantee was issued by a Kenyan bank, the Kenyan courts had jurisdiction to hear the dispute, even though the underlying contract was executed in Tanzania.

“The locus of the bank and its obligations lie within the Republic of Kenya, and therefore this court is seized with jurisdiction.”

2. Nature of Performance Guarantees

Justice Ohungo reaffirmed the independence principle in bank guarantees: that such instruments are separate from the underlying contract and must be honored on first demand, provided the terms of the guarantee itself are satisfied.

“It is not the role of a bank to interrogate contractual disputes in the underlying project. Their role is to pay upon demand if conditions under the guarantee are met.”

3. Effect of Arbitration Clause

While the main contract was under arbitration in Tanzania, the court clarified that arbitration does not affect the enforceability of the guarantee. The performance bond was a stand-alone commitment.

“Existence of arbitration proceedings does not bar the beneficiary of a performance bond from enforcing payment, unless the bond itself provides otherwise.”

4. Order

The court ordered Kenya Commercial Bank to honor the performance guarantee within 21 days or face contempt proceedings.

Lessons and Implications

1. Legal Independence of Bank Guarantees

Performance guarantees are enforceable independently of the underlying contract. Contractors and banks must understand that performance issues, even if disputed, do not negate the obligation to pay once a compliant demand is made.

2. Importance of Carefully Drafted Guarantee Language

The wording in the guarantee instrument determines enforceability. Any deviation from unconditional payment language could introduce ambiguity or delay.

3. Jurisdictional Clarity in Cross-Border Contracts

Even for projects outside a country’s borders, if a financial instrument is issued domestically, courts in that jurisdiction retain authority to adjudicate disputes.

4. Arbitration Does Not Preclude Guarantee Enforcement

Disputes under arbitration do not prevent beneficiaries from calling on bank guarantees unless the guarantee itself is contractually linked to the dispute resolution mechanism.

5. Strategic Risk for Banks

Banks involved in cross-border guarantees face risks if they fail to promptly honor obligations. Courts may enforce against them even when underlying disputes exist.

Conclusion

This case is a precedent-setting ruling in East African commercial and construction law. It highlights how financial institutions, contractors, and public agencies must operate with legal precision and risk awareness when executing infrastructure projects that cross national boundaries. The case also strengthens the enforceability of financial instruments vital to regional trade and development.