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Law of Contracts (Amendment) Bill 2019

Updated: Mar 8, 2020

The principal object of this Bill is to amend the Law of Contract Act, Cap. 23. It proposes to amend the law so that in case of a default by the principal borrower, the creditor should first realise the assets of the principal borrower before proceeding to realise the assets of the guarantor.


The Impact


The amendment to the Act will have an impact on credit lending institutions and debt recovery agencies. By introducing a prerequisite condition of pursuing the principal debtor in case of default. The Act limits the recovery options for lenders by slowing down the recovery process if a debtor does not not have enough assets to cover the principal debt, then the creditor will be forced to commence new debt recovery proceedings. Considering litigation typically takes two years, this will prove costly and time consuming.


This will likely impact credit lending and more so on the crucial role played by banks in guaranteeing large projects as is a a prerequisite in most government issued tenders and PPP( Public Private Partnerships), e.g Independent Power Producers in the energy industry.This will likely have an adverse effect on development and foreign direct investment in government projects.


The Act infringes on the parties freedom of contract by limiting the parties' use of third parties to enforce primary obligations. Of course, this applies both way as parties will be limited in their options of use of appropriate consideration. Guarantors play a crucial role in contract negotiations as they give sellers the confidence to enter into contracts through the use of a third party to mitigate their risk.


The Act will likely impact the issue and trading of various securities. e.g guaranteed bonds, options or any securities that are backed by a bank or insurance company. The Act is more likely to have an adverse impact on the capital markets.


Various institutions and sectors may be affected by this change;


  1. Credit lending institutions.

  2. Guarantors for development & infrastructure projects.

  3. Debt recovery.

  4. Capital Markets.


Status


President Uhuru Kenyatta refused to sign the Bill and returned it to parliament with reservations for review. In his justification, the President stats that the bill was introduced prematurely and not enough consultations were made, the President further notes that amending the law in the manner proposed in the Bill will negate a long-standing principle of contract law, prejudice the financial sector, and adversely affect credit advanced to micro, small and medium enterprises.The President also refused to assent the bill on grounds that it will adversely affect the capital markets.


LKK Law LLP has the capacity to advise and represent on financial structuring agreements.





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