Introduction and Background
1. By a plaint dated 5th December 2024, the plaintiffs have brought this suit against the 1st defendant in her personal capacity and as the personal representative of the late Ronald King’eru Kaburia (RKK). In summary, the plaintiffs invested funds and securities at RKK’s request, following which Aiveo Limited, a company owned by RKK, was granted distributorship contracts with EABL and UDV.
2. As a condition for the distributorship, Aiveo Limited was required to issue a guarantee in favor of KBL and UDV. This guarantee was issued but only after the plaintiffs had invested their financial resources, provided security, and executed guarantees. It was then agreed that a special purpose vehicle, which is the 2nd defendant, would be established to manage the distributorship business. The plaintiffs were to hold a 49% shareholding in the 2nd defendant and share in the revenue as a return on their investment.
3. Aiveo Limited was subsequently taken over by the 2nd defendant, but before the transfer of shares could be completed, RKK passed away. The plaintiffs allege that the 1st defendant engaged in fraud, misrepresentation, and breach of fiduciary duty, as detailed in paragraph 20 of the plaint.
4. Specifically, they accuse her of fraudulently registering 500 shares in the 2nd defendant under her name, amending the shareholding structure of the 2nd defendant, changing the account mandate of a bank account held jointly by the plaintiffs and the deceased, fraudulently withdrawing and making payments from the account, misrepresenting herself as the sole director of the 2nd defendant and sidelining the plaintiffs from the management of the company.
5. In response, the defendants filed a Preliminary Objection (PO) dated 18th December 2024, arguing that the suit violates the provisions of Section 3(1) of the Law of Contract Act and should therefore be struck out.
Analysis and Determination
6. I have carefully considered the PO together with the pleadings filed and the oral submissions made by respective parties.
7. Section 3(1) of the Law of Contract Act states as follows;
“No suit shall be brought whereby to charge the defendant upon any special promise to answer for the debt, default or miscarriages of another person unless the agreement upon which such suit is brought, or some memorandum or note thereof, is in writing and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized”.
8. This provision establishes a fundamental requirement that any agreement imposing liability on a party for the debt or default of another must be in writing and signed by the party to be held liable. The section serves a crucial role in contract law by ensuring that agreements made to assume the debts, defaults, or obligations of another person are legally binding only if they are in writing and signed, so as to prevent fraudulent or fabricated claims. The provision is in alignment with the Statute of Frauds.
9. The courts have consistently maintained that section 3(1) relates to a situation where a defendant promises to answer for the debt, default of miscarriage of another person. The Court of Appeal in the case Jagjivan Singh Trading T/A Spancrete Vs. Menengai Investment Ltd (1995) eKLR held as follows: -
“It has been established from a very early date that the words “debt, default or miscarriage of another person” mean that the section only applies where there is some person other than the surety who is primarily liable. The section therefore applies when the surety assumes a secondary liability and agrees to be answerable if the principal debtor fails to meet debtor fails to meet his liability but it does not apply where the surety assumes a primary liability. This is the origin of the distinction between contracts of guarantee and contracts of indemnity, the former falling within the Section and the latter outside it…”
10. Upon considering the plaint, which establishes the claim by the plaintiffs, it is evident that their claims do not rely on a special promise by the 1st defendant to answer for RKK’s debts. The claim is premised on allegations of fraud, misrepresentation, and breach of fiduciary duty, which fall outside the scope of Section 3(1). These are wrongs that the plaintiffs allege have been committed by the 1st defendant without any involvement of RKK. I have reviewed the documents filed by the plaintiffs in the case and I do not see any way that they impute any actions or undertakings by RKK on the 1st defendant.
11. The actions of the 1st defendant, such as altering shareholding and withdrawing funds, constitute independent wrongdoing. The actions, if proved, would make her personally liable irrespective of the deceased’s obligations. I do not see any inference in the plaint that the 1st defendant is sued because she assumed a secondary liability or agreed to be answerable to the plaintiffs for failures of RKK to meet his obligations. There is equally no reference to a contract of guarantee between RKK and the 1st defendant by the plaintiffs. The claim as I see it, is purely based on breaches and irregularities committed by the 1st defendant in her own right.
12. For these reasons the preliminary objection is dismissed with costs to the plaintiffs.
DATED, SIGNED AND DELIVERED IN NAIROBI
THIS 27th DAY OF FEBRUARY 2025.
F. MUGAMBI
JUDGE