The Court of Appeal has delivered a significant ruling, ordering Stanbic Bank Kenya to compensate logistics firm Kenya Haulage Agency Ltd (KHA) Sh25 million for negligence arising from a critical error in a tender security bond that cost the firm a lucrative Kenya Ports Authority (KPA) contract.
The dispute originated from a 2018 tender where KHA sought to supply KPA with ribbed-type pneumatic rubber fenders, a crucial port equipment. To secure its bid, KHA required a bank guarantee (performance bond) from Stanbic Bank, valid for the mandatory 120 days stipulated by KPA.
Stanbic Bank issued a bond for USD 1,250,000 (approximately Sh160 million at the time). However, crucially, this bond was only valid for 119 days, falling just one day short of the mandatory requirement.
This one-day deficiency led KPA to automatically disqualify KHA’s tender bid. Kenya Haulage Agency Ltd subsequently sued Stanbic Bank, arguing that the bank’s failure to provide a bond meeting the exact 120-day validity period constituted negligence and directly caused the loss of the tender opportunity and potential profits.
Stanbic Bank appealed an earlier High Court decision that found in favour of KHA. The bank contested the Sh25 million award, arguing primarily that there was no guarantee KHA would have won the tender even with a valid bond. However, a three-judge bench of the Court of Appeal, comprising Justices Agnes Murgor, Pauline Nyamweya, and George Odinga, unanimously dismissed the bank’s appeal and upheld the compensation.
Justice Murgor, delivering the lead judgment, firmly established the bank’s duty of care in such transactions. “It is our finding that there was a breach of the duty of care which was owed by Stanbic (appellant) in the circumstances, arising from the relationship it had with Kenya Haulage Agency Ltd (respondent) both as its banker and guarantor, and arising from its duty to exercise reasonable care and skill in this regard,” Justice Murgor stated.
The judges emphasized that Stanbic Bank, in honoring its customer’s instructions for the tender bond, had an obligation to exercise “due diligence and reasonable care and skill.” This duty specifically included ensuring the guarantee was issued strictly according to the agreed terms, verifying the amount was correct and within scope, and being prepared to honor it upon valid demand. The failure to provide a bond valid for the full 120 days constituted a breach of this duty.
The court specifically addressed Stanbic Bank’s argument regarding the uncertainty of KHA winning the tender. While acknowledging the inherent uncertainty in tender outcomes, the judges found that the bank’s negligence directly prevented KHA from even being considered.
The Sh25 million award compensates KHA for the loss of the opportunity to compete for and potentially secure the tender, valued at the time at approximately Sh1.25 billion, due solely to the bank’s error.
This ruling reinforces the high standard of care expected of financial institutions when issuing critical instruments like tender bonds and guarantees for their corporate clients. Banks must meticulously adhere to the specific requirements outlined in tender documents, as even minor administrative oversights can lead to substantial financial losses for their customers and resultant legal liability. The Sh25 million penalty serves as a stark reminder of the potential cost of such negligence in Kenya’s competitive business environment.
– By Nusurah Nuhu
