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.

In 2022, Inyatsi Construction Ltd, an Eswatini-based company, was awarded a contract by Uganda’s Ministry of Water and Environment to construct the Kabuyanda Earth Dam in Isingiro District, funded by the World Bank. Inyatsi’s Ugandan subsidiary subcontracted Plinth Consultancy Services Ltd for part of the work.

Dispute:

By October 2023, Inyatsi Uganda Limited terminated Plinth’s subcontract, citing disagreements over project execution. Plinth, alleging wrongful termination, initiated arbitration proceedings under the International Chamber of Commerce (ICC) rules and sought interim protective measures from the Ugandan High Court.

Court Ruling:

On August 30, 2024, Justice Harriet Grace Magala of the Commercial Division of the High Court granted Plinth’s application for interim measures. The court:

• Restrained Inyatsi from accessing a UGX 21.2 billion bank guarantee related to the project.
• Ordered Inyatsi to provide UGX 5 billion as security for costs within 30 days.
• Froze Inyatsi’s accounts held in Absa Bank to secure potential arbitration outcomes.

The court recognized that Inyatsi Construction Ltd, though not a signatory to the subcontract, was deeply involved in the project and could be held liable. This ruling emphasized that non-signatory parties could be subject to arbitration if they are closely connected to the contractual relationship.

Arbitration Against Non-Signatories Permitted

Significance:

In the same case, the High Court addressed the issue of whether non-signatory parties could be compelled to arbitrate.

Court’s Analysis: Justice Magala held that:

• An arbitration agreement can bind non-signatory parties if there is evidence of their involvement or control over the contractual relationship.
• Inyatsi Construction Ltd and its parent company, Inyatsi Group Holdings (Pty) Ltd, were found to be beneficial owners and closely connected to the Ugandan subsidiary, thereby making them subject to the arbitration agreement.

This decision expands the scope of arbitration in Uganda, allowing for more inclusive dispute resolution mechanisms.

A Contractor can still have an entitlement without a Certified Payment Certificate under an Admesurement Contract

Facts of the Case:

1. Parties: The Attorney General (Appellant) and Alpha Gama Engineering Enterprises Ltd (Respondent).
2. Nature of Dispute: The case arose from a contractual dispute concerning the execution of a government construction project. Alpha Gama Engineering claimed that the government failed to meet its financial obligations, while the government contested the claims, alleging breaches of performance standards.
3. Lower Court Decision: The High Court ruled in favor of Alpha Gama Engineering Enterprises Ltd, awarding damages for breach of contract. The Attorney General appealed to the Supreme Court.

Issues for Determination:

1. Whether the Government breached its payment obligations under the contract.
2. Whether Alpha Gama Engineering fulfilled its contractual obligations, including adherence to project timelines and quality standards.
3. What remedies, if any, are available to the Respondent for the alleged breach?
4. Whether the dispute resolution mechanisms outlined in the contract were adequately utilized before litigation.

Legal Principles Applied:

1. Privity of Contract: Only parties to the contract are bound by its terms and can claim relief in case of a breach.
2. Performance and Breach: A breach occurs when a party fails to perform their obligations as stipulated in the contract (e.g., failure to pay or deliver services as agreed).
3. Remedies for Breach: Under Ugandan law, remedies may include damages, specific performance, or restitution.
4. Interest on Delayed Payments: The court may award interest for delayed payments, compensating for the loss incurred due to non-payment.

Court’s Analysis and Ruling:

1. Government’s Breach:
2. Contractor’s Compliance:
3. Remedies:

Conclusion:

The Supreme Court dismissed the appeal and upheld the High Court’s decision. It reaffirmed the principle that the government, like any contracting party, is bound to honor its contractual obligations. Failure to do so attracts liability for breach, with remedies awarded to the aggrieved party.

Implications:

• Strengthens accountability in government contracts.
• Provides precedent for handling disputes in public procurement and construction projects.

For detailed rulings, refer to Uganda Legal Information Institute (ULII) or other official legal documentation platforms.

This project, set to be one of the most significant developments in the region, marks a major milestone for EPE as we continue to expand our footprint in the region.

The project will involve the design and construction of a world-class sports complex that will host various facilities, including football pitches, basketball courts, swimming pools, and training areas. It will also host other recreation facilities like gyms and restaurants.

We are honored to contribute to a project of this magnitude. Our team is fully committed to delivering exceptional planning that will ensure the success of this sports complex. This contract is a testament to our growing reputation in the industry and our unwavering commitment to delivering excellence.

With this project, EPE continues its mission to support large-scale developments across Uganda.