China Gezhouba Group v JTG Enterprises Limited & another (Civil Appeal E793 of 2023) [2024] KECA 1940 (KLR) (20 December 2024) (Judgment)
Neutral citation:
[2024] KECA 1940 (KLR)
Republic of Kenya
Civil Appeal E793 of 2023
DK Musinga, J Mohammed & GV Odunga, JJA
December 20, 2024
Between
China Gezhouba Group
Appellant
and
JTG Enterprises Limited
1st Respondent
The Hon. Attorney General
2nd Respondent
(An Appeal from the Judgment of the High Court of Kenya at Nairobi (A. Mabeya, J) delivered on the 9th day of August 2023 in High Court Commercial Case No. E649 of 2021)
Judgment
1.This appeal arises from the judgment of the High Court at Nairobi in High Court Commercial Case No. E649 of 2021 delivered by Mabeya, J. on 9th August 2023.
2.The suit was commenced by way of a plaint filed by the 1st respondent against the appellant dated 18th June 2021 which was amended on 23rd September 2022. In those proceedings, The Attorney General, the 2nd respondent herein, was joined as third party.
3.The 1st respondent’s case was: that the appellant was appointed as the main civil works contractor by the Government of Kenya to construct Thwake Multipurpose Dam (the Main Contract); that sometimes in May 2009, the 1st respondent was awarded a subcontract for excavation, protection and support of the main spillway at Thwake Multipurpose Dam by the appellant, which was formalised in July 2019 by the signing of a Subcontract Agreement Contract No. CTH-ENG-2019-014 (the Subcontract); that prior to the appointment of the 1st respondent as the subcontractor, the main consultants for the entire project, M/s SMEC International Pty Ltd (SMEC) and the main client, the Ministry of Water and Sanitation and Irrigation (the Employer), approved the appointment of the 1st respondent as a subcontractor; that in the Subcontract, the parties outlined, inter alia, the applicable terms, including establishment of topographical levels, Bill of Quantities (BOQ) and mode of payments; that the agreement provided that it was a Fixed Unit Contract where payments were dependent on the nature of the materials being excavated, the complexity and dexterity of the tasks, as well as the volumes excavated; that the method of measurement and payment was to be based on the relevant national and industry standards; that the tentative determination of the quantities of excavation materials as well as the expected topographic soil layers of the main spillway specified by the appellant in the provided Bill of Quantities in the Subcontract were excavation of soft materials (128,000M3 units at the unit price of Kshs.118.496), common excavation for foundation of concrete structures including transport and disposal (2,637,000M3 units at the unit price of Kshs.118.496) and excavation for foundation of concrete structures of rocks, including its transport and stockpile (1,710,000M3 units at the unit price of Kshs.497.42).
4.According to the 1st respondent, it commenced the works from May 2019, albeit before the formal signing of the Subcontract, and continued till October 2020 when the excavation was completed; that in July 2019, shortly after commencing the excavation works, it established that the quantities of topographic soil layers as tentatively determined by the appellant did not match the actual and practical conditions on the ground; that whereas the tentative topographical soil layers were to be in the sequence of soft soil materials, followed by common materials and then concrete structures, immediately after finishing the excavation soft materials, the 1st respondent encountered concrete structures of rock rather than common materials; that due to the unexpected turn of events on the geological formation, the 1st respondent called for a meeting with the appellant at the construction site at which both parties confirmed that there were no common materials immediately after soft materials as initially described; and that as a result, the parties entered into a Supplementary Subcontract agreement in July 2019 (Supplementary Agreement No. CTH-ENG-2019-014-(SI)) and two other supplementary agreements in April 2020 (S2) and August 2020 (S3) (the Supplementary Subcontract Agreements) which modified the Subcontract to reflect the practical conditions on the site.
5.It was the 1st respondent’s case: that according to the Supplementary Subcontract Agreement signed in July 2019, the payment rates to be applied would be based on the practical conditions and requirements of the site being excavated; that as regards existing items identical to those in the Subcontract, the rates in the Subcontract would apply, while as regards items not identical to those in the Subcontract, the unit price would be determined on the basis of similar items; that any other conditions that are neither identical nor similar to the original contract, were to be defined by the two parties, depending upon the prevailing market prices; and that the parties agreed on a rock level in line with the terms of the Subcontract, the July Supplementary Subcontract Agreement, as well as the Main Contract and forthwith, the excavation changed from soft soil excavation to rock excavation.
6.It was the 1st respondent’s understanding of the foregoing provisions: that the fixed payment rates in the BOQs in the Subcontract would apply, while the quantities excavated on the various materials would be determined based on the practical conditions at the site and not the ones initially determined before the commencement of the excavation; that based on the new established rock level, the 1st respondent legitimately expected that the appellant would make payments using the provided rates for rock excavation being Kshs.497.42 per unit; that contrary to the express terms of the contracts and mutual agreements, the appellant continued to pay the 1st respondent using the rates for common excavation instead of the rock excavation; that since the Interim Payment Certificates (IPC) were provisional in nature and were made based on the initial tentative rock ratio classification, the 1st respondent continued with the excavation works to completion, hoping that the appellant would pay the balance upon completion of the excavation; that in a letter dated 28th February 2022 addressed to the Employer, the appellant stated that the IPCs were approved based on the contractor’s figures pending final confirmation once all spillway excavation was concluded.
7.The respondent added: that by October 2020, the excavation works had been substantially completed and the 1st respondent was ready to commence the protection and support works of the main spillway upon receiving payments of the works done and went ahead to raise a final fee note for the excavation; that in a shocking turn of events, the appellant raised an objection, claiming that part of the excavation happened on common rock, despite being aware that there were Supplementary Subcontract Agreements which established a topographical level for rock excavation, and there had never been any agreement establishing a topographical level for common materials in the section of the main spillway excavated by the 1st respondent; and that upon the appellant’s requisition for evidence, the 1st respondent provided a Rock Classification Report on the Thwake Dam Spillway, prepared by a Senior Principal Superintending Geologist, John M. Waita, according to whom, the rocks in the spillway where excavation occurred were only hard rocks (the migmatites).
8.It was disclosed that via a letter dated 31st March 2021 addressed to SMEC, the appellant agreed with the geologist’s report which explained: that the rock classification as determined by SMEC on 4th May 2019 was only tentative/provisional in nature since excavation was yet to start at the time the rock ratio was confirmed; that neither the appellant nor SMEC was able to establish the exact rock ratio before the excavation was done; that during the excavation, it could easily be found that soft materials only exists on the surface or top layer and its quantities were very limited; that the remaining excavations were all executed through blasting; that the tentative rock classification ratio used by SMEC did not match the actual situation on site; that the previous Interim Payment Certificates, the measurements and payment for excavation were all in accordance with the tentative ratio; that the amount of rock measured on the surface excavation was far less than the actual amount of rock excavations; and that the complete excavation quantities of the main spillway had reached 99% of the total excavation.
9.The 1st respondent stated: that according to the appellant’s Survey Data on the excavation works completed by various subcontractors, the quantities of materials excavated by the 1st respondent was 102,353.71M3 on soft materials and 3,031,568.95M3 for foundation of concrete structures of rocks; that based on the above volumes, the 1st respondent was entitled to be paid Kshs.12,128,914.64 for the work done on soft materials and Kshs.1,507,963,027.11 for the work done on hard rocks, totalling to Kshs.1,520,091,941.75; that the appellant, however, insisted that the quantities of topographic soil layers as tentatively determined at the start of the excavation still applied and only approved payment for Kshs.1,042,618,307.51, leaving an outstanding balance of Kshs.477,473,634.24; that the appellant further failed and/or refused to settle the 1st respondent’s 26th Interim Payment Certificate (IPC 26) for Kshs.10,623,086.15 and refused to refund retention money of Kshs.73,431,524.53 several months after the expiry of the defect liability period contrary to the express terms of the Subcontract; and that the appellant also failed to pay Kshs.89,844,519.19 being the 16% VAT on the outstanding contractual amount of Kshs.561,528,244.92.
10.It was the 1st respondent’s claim that the appellant’s conduct amounted to a material breach of the Subcontract and the Supplementary Subcontract Agreements, and urged that the appellant should be compelled to pay liquidated damages for breach of contract as provided for in the Subcontract at 25% of the contract sum, being Kshs.31,390,300.81. The 1st respondent therefore claimed a total sum of Kshs.682,763,064.92 as well as general damages. The 1st respondent further claimed that the Subcontract provided for applicable currency and the proportion in which the settlement was to be made being 90% in USD and 10% in Kenya Shillings at the exchange rate of Kshs.101.86 to the Dollar and urged that the same terms apply to all outstanding settlement to be made by the appellant.
11.At the hearing of the suit, the 1st respondent called 3 witnesses, while the appellant called 1 witness. PW1, Joseph Thuo, the 1st respondent’s director, adopted his witness statement dated 23rd September 2022 and produced the bundle of documents which were marked as exhibits. The statement substantially mirrored issues pleaded in the amended plaint. He explained that the subcontract works were fully completed by the 1st respondent in March 2021 and a handover of the project given to the appellant; that at the time of the contract the 1st respondent did not have adequate drawings or supporting documents when they were needed but were supplied later; that it later transpired that the appellant and the consultants had not done a thorough geological survey on the spillway to be excavated, hence the figures provided in the BOQs had given the wrong rock classification to the major part of the spillway cliff and walls; that although the 1st respondent sought for Geological Survey Report, the same was not forthcoming, and in order not to delay the project the 1st respondent proceeded with the work; that in any case, it was not possible to carry out an actual and factual geological survey without examining and physically inspecting and analysing the rock formation of the spillway cliff and walls; that it was not until the full excavation that the 1st respondent commissioned, at its own costs, a geological survey by qualified geologists and experts from the Ministry of Mining, whose report confirmed that the rock formation was different from what was described by the engineers from SMEC; that on submitting its claim in February 2021, the appellant wrote to the project consultants and actually agreed with the nature of the 1st respondent’s claim and admitted that the figures on the BOQ were erroneous; that at every stage of the work, the appellant verified the performance of the work and issued various Interim Payment Certificates in support of the fact that the 1st respondent fully carried out the work in accordance with the Subcontract; that in accordance with the certified work done, the 1st respondent ought to have been paid a total of Kshs.1,702,758,866.24 but was only paid Kshs.1,016,213,691.93, leaving a balance of Kshs.686,545,174.30 which, with 16% VAT adds up to Kshs.796,392,402.26; and that since the subcontract was signed in Nairobi, the court had jurisdiction to determine the claim.
12.In cross-examination, PW1 admitted: that the Employer was not a party to the deliberations that took place during the site meeting in July 2019 that demarcated the scope of works; that the Subcontract was clear on variation and provided that the changes in the contract must be approved by the Employer; that the meeting gave rise to the Supplementary Subcontract Agreements which, according to him, only described the scope of the work but did not change of standards or vary the character of the work; that having confirmed in the July Supplementary Subcontract Agreement that it was rock excavation, they continued on that basis without any issue being raised and conducted joint measurements, completed the works including the disposal of the materials and were paid part of the IPCs raised; that the 1st respondent did not complete the work as per the contract but did the excavations to completion; and that the 1st respondent did not proceed with the rest of the work because of non-payment by the appellant.
13.In his view, the 1st respondent was not a party to the contract between the appellant and the Employer, and although he admitted that in the event that there were unfavourable external conditions, the two parties were to inform the employer, there were no such conditions, hence there were no variations approved by the Employer.
14.In re-examination, PW1 stated that the letter requiring the approval by the Employer was brought to his attention by SMEC. He insisted that the drainage and protection of supporting works were separate and were to be done after finishing the works contained in the Supplementary Subcontract Agreements but there was no agreement with regard to them. In his evidence, the term external conditions referred to conditions in the contract between the appellant and the 1st respondent and not between the 1st respondent and third parties.
15.PW2, Luke Ouma, a registered Civil and Structural Engineer, produced a prepared a report prepared by one John Waita, a geologist, which, in his evidence, was prepared under his supervision. According to him, the report was as a result of a letter dated 24th February 2021 from the appellant to the 1st respondent requesting for a comprehensive detailed and assertive supporting materials to prove the authenticity of the requirement to modify the percentage of hard rock based on the actual situation at the site. While admitting that the tests are done under the Ministry of Roads and Public Works, he stated that he had no evidence from the said Ministry regarding the said tests.
16.Fredrick Gituma John (PW3), an Engineering Surveyor, instructed by the 1st respondent, testified that he carried out joint survey of the site and in his report, there were two layers, soft and rock.
17.In its written statement of defence and counterclaim, the appellant admitted that it signed the Subcontract with the 1st respondent for Excavation, Protection and Support for the Main Spillway Project as well as the Subcontract Supplementary Agreements that varied some parts of the Main Contract. It was, however, its position that the variation did not by any means give the 1st respondent a right and/or form the basis of the 1st respondent’s claim in the matter. The appellant denied that the pricing mechanism was a unit price which was dependent on the complexity and dexterity of the tasks to be done, and averred that the 1st respondent was bound by the pricing mechanisms stipulated in the Subcontract. According to him, the 1st respondent was to execute the contract according to the drawings and priced Bill of Quantities contained therein unless the 1st respondent received an Order of Variation from the Employer, in the absence of which the claim for Kshs.686,545,174.30 is grossly misconceived and premised on a misapprehension of the Subcontract. While admitting that the subcontracted works commenced, the appellant denied that the 1st respondent substantially completed the said works by February 2021, and stated that most of the subcontracted works were yet to be done as agreed under the Subcontract. It was averred that when the 1st respondent purported to hand over the excavation works through their letter dated 2nd June 2021, the appellant responded vide a letter dated 22nd June 2021 elucidating that the 1st respondent had not completed the subcontracted works, and asserted that they had not conformed with the completion acceptance procedure.
18.The appellant denied that a large portion of the spillway being excavated comprised of hard rocks and maintained that the spillway comprised soft rocks as revealed in the initial geological report. Instead of procedurally initiating a process for variation under the Subcontract as specified therein, a procedure well known to the 1st respondent, the appellant accused the 1st respondent of opting to frustrate the appellant by delaying to complete and hand over the subcontracted works within the stipulated timelines, contrary to the express terms of the contract. It was pleaded that the 1st respondent failed to raise the issues of rock classification since July 2019 when it claimed to have commenced excavation until February 2021 when the excavation works were almost completed, but continued to accept numerous interim payments based on the initial rock classification, hence the 1st respondent’s claim was an afterthought. It was pleaded in the alternative that the 1st respondent waived its right to any variation when it failed to act promptly and/or within reasonable time after it allegedly found out that the rock being excavated was hard rock and not soft rock as initially classified, and that even if the classification of the rocks changed, the same constituted a commercial risk which the 1st respondent assumed when signing the Subcontract.
19.The 1st respondent’s claim, according to the appellant, amounted to an attempt at unilateral alteration and/or modification of the terms of the Subcontract. It was the appellant’s position that the 1st respondent’s claim that the entire spillway was not made of soft rocks, had no veracity or validity in light of the absence of measurement as to the quantity of the works. Instead, the 1st respondent purportedly relied on the measurements allegedly done on hard rocks several years after the work commenced and the assessment allegedly done two years after the excavation works commenced, hence it was not possible to ascertain the claim. According to the appellant, the 1st respondent failed to consider the fact that retention money was held by the Employer as security until the expiry of the defect liability period.
20.To the appellant, the 1st respondent misconstrued the appellant’s letter dated 31st March 2021 which was a mere forwarding letter with brief highlights of the contents of the report being forwarded. However, it was pleaded, the report was not prepared by an expert with the requisite qualifications but by a Mine Geologist, who does not possess the requisite expertise to conduct an assessment on the nature and classification of rocks in a dam construction site. The appellant took issue with the trial court’s jurisdiction to hear the matter and contended that as stipulated in the Subcontract, any suit premised on the subcontract could only be settled in the People’s Courts of China. Further, the Subcontract provided that any dispute occurring under the Subcontract should be referred and settled in Wu Han Hu Bei province of China.
21.In its counterclaim the appellant contended: that the 1st respondent committed gross breaches of the Subcontract which subjected the 1st respondent to fall behind the schedule set for completing the construction of Thwake Dam Project; that although the Subcontract was signed in July 2019, the subcontract period was 520 days, hence the works ought to have been completed and handed over by the 12th December 2020; that according to the Subcontract, the excavation, protection and support of the main spillway ought to have been completed by latest 12th December 2020 but 823 days later, the 1st respondent was yet to complete and hand over the subcontracted works to the appellant; that the Subcontract cannot be severed as the 1st respondent has done by purporting to hand over excavation works, which are yet to be completed, before finishing the protection and support of main spillway; that the delay in completing the subcontracted works is wholly and entirely attributed to the 1st respondent; that according to the terms of the Subcontract, the 1st respondent is liable to pay the to the appellant for the delay, liquidated damage of 0.1% of the subcontract price on a daily basis from the scheduled completion date (12th December 2020) to the actual completion date; that the 1st respondent’s breach is a continuing breach which will only end at such time when the 1st respondent completes the subcontracted works or when the subcontract is effectively terminated; that the contract sum as provided in the contract is Kshs.1,578,966 on the basis of which the appellant’s claim against the 1st respondent as at 1st September 2021 was Kshs.478,426,993.73; that the appellant is still entitled to the liquidated damages accruing after the 1st September 2021; and that the 1st respondent is bound by the terms of the Main Contract and was duty bound to read and understand the Main Contract which expressly prohibited any form of delaying the contract whilst awaiting a response in the case there is need for a variation.
22.The appellant therefore prayed that the 1st respondent’s suit be dismissed and that judgment be entered against the 1st respondent for: a declaration that the contract between the 1st respondent and the appellant was for excavation, protection and support for the main spillway and that the same could not be severed and completed in parts; a declaration that the 1st respondent could not stop and/or delay the subcontracted works whilst awaiting a response on the request for variation; an order for payment of special damages of Kshs.478,426,993.73 being the accrued liquidated damages for delay as at 1st September 2021; an order for payment of liquidated damages that accrues after 1st September 2021; general damages for breach of contract; costs of the suit; interests on the special, liquidated and general damages; and any other order as the court may deem fit and just.
23.In support of its case, the appellant called, as its witness, Tang Yazhou, its Project Manager, who relied on his statement dated 30th September 2022. Apart from reiterating what is contained in the statement of defence and counterclaim, he stated: that the relationship between the appellant and the 1st respondent was based solely on the Subcontract and the Main Contract, which two documents constituted the whole agreement between the parties; that a party could not unilaterally alter the terms of the said contracts without the consent of the other; that any alteration of the Subcontract between the appellant and the 1st respondent had to be in writing and signed by both parties; that the parties signed Subcontract Supplementary Agreements every time there was need to amend the subcontract such as in April 2020 and August 2020; that the 1st respondent’s claim could only be sustained if supported by a written agreement in the form of a Subcontract Supplementary Agreement, and in its absence the 1st respondent’s claim of Kshs.796,545,174.30 was not sustainable as it fell out of the express terms of the Subcontract; that pursuant to the General Conditions of the Subcontract (Standards and Specifications) and the Subcontract, the 1st respondent was obliged to fulfil all obligations of the appellant in accordance with the Main Contract; that by signing of the Subcontract, the 1st respondent must be deemed to have read and fully understood all the obligations in the Main Contract and was to perform the subcontracted works in accordance with the Main Contract; that the Main Contract prohibited the appellant from making any form of alteration and/or modification of the permanent works unless and until the Engineer instructed or approved the variation; that the Subcontract required that the quality of the works done by the 1st respondent be measured according to the quantity approved by the Employer; and that the 1st respondent was bound to complete the subcontracted works according to the drawings and measurements provided by the Employer.
24.According to the witness, although the Subcontract provided for modification and variations, the claim of change of rock classification as claimed by the 1st respondent amounted to variation, which could be implemented only after the 1st respondent received an order of variation from the Employer, since the 1st respondent was prohibited from changing any part of the works without permission; and that the 1st respondent was required to claim additional payment from the Employer before claiming the same from the appellant, indicating that it was only the Employer which could authorise and effect the additional payment of Kshs.796,392,402.26 claimed by the 1st respondent.
25.In cross-examination, the witness stated that Subcontract Supplementary Agreement of July 2019 was signed on the basis of mutual discussion on the quantities of works; that the alterations were on the scope of work since the work scope expanded by 75m; that there were three layers to be excavated, soft material, common material and rocks which the 1st respondent excavated; that of the excavated materials the Bill of Quantities provided for 10% soft materials, 45% common materials, and 45% rock materials; that although the letter dated 31st March 2021 stated that 50% of common material had been excavated, it was not stated that the highest material excavated was rock; that the Main Contract provided for modification of the subcontract and required cancellation of work in the Subcontract but that was not what was done with the Subcontract Supplementary Agreement of July 2019 which changed the scope of the details of the works done by the 1st respondent; that the Employer paid the appellant according to the earth rock ratio that was confirmed by SMEC and, similarly, the 1st respondent was paid according to the same ratio; that the letter dated 31st March 2021 was forwarded to SMEC because the 1st respondent was asking for more money; that SMEC was of the view that the ratio proposed by the 1st respondent was wrong; that the Employer conducted many meetings between the appellant and the 1st respondent to resolve the matter; that the retention monies was not payable by the Employer until the defects notification period comes to an end; that the survey report noted that there were three types of material, soft, common and rock; that they had not paid part of the final retention money amounting to about Kshs.10,000,000; and that should the Court find that there was a variation, the same ought to be paid by the Employer.
26.The witness further confirmed: that as per the Main Contract, they were supposed to inform the Ministry of the progress, but he had no evidence that they updated the Ministry; that the letter given by them to SMEC to hand over to the Ministry was rejected; that the letter did not request for a variation but represented reclassification report; and that whereas it was upon SMEC and the Ministry to decide what constituted a variation, there was no letter to the Ministry for variation.
27.After considering the evidence adduced and the submissions made by the parties, the learned Judge (Mabeya, J.) in his judgment was of the view that the issues that fell for consideration by the court were:
28.In his judgment, the learned Judge found: that based on the letter dated 31st March 2021 by the appellant to SMEC International Pty Ltd, the Employer’s Project Manager, there was an admission by the appellant that the rock classification as contained in the original BOQs, on which the subcontract was based did not match the actual site position; that the soft material was scarce while common material was absent and that the majority of the excavation consisted of rock material; that the 1st respondent’s contention had a basis; that the documents were conclusive evidence that the 1st respondent’s assessment on the rock formation was true; that clause 10 of the subcontract did not prohibit the 1st respondent from changing any part of the works without permission for the Employer; that the effect of the Supplementary Subcontract Agreements signed in July 2019, April 2020 and August 2020 was to accommodate the change in status of rock formation but the Bill of Quantities did not change; that the modification of the Subcontract under paragraph 10.1 did not require approval by the Employer; that the 1st respondent proceeded with the work on the basis that the parties had agreed to be bound by the Subcontract as well as the Subcontract Supplementary Agreements; that since the contracts were entered into voluntarily, the parties were bound by them and the court could only interpret and enforce the agreed terms; that the appellant was supposed to pay the 1st respondent on the basis of the exact excavations as done on the site which was that the ratio for common material was replaced with that of rock material excavation; that the appellant having failed to make payments for works as were on site and as agreed in the Subcontract Supplementary Agreements, the appellant had breached the contract between itself and the 1st respondent; and that the 1st respondent had established its claim to the required standards.
29.On the basis of the said findings, the learned Judge concluded: that the general principle is that there can be no award of general damages for breach of contract; that both the retention money and the balance from Interim Payment Certificate No. 26 were admitted by the appellant; that the appellant did not pay the actual excavated works as were on site but only paid as per the BOQ, yet the Subcontract Supplementary Agreements executed by the parties took care of the unforeseen works on site; that the evidence offered was that the sum of Kshs.477,473,634.24 was in respect of rock excavations; and that the reports on the record clearly showed that the rock formation on the site and as excavated was bigger than what was anticipated in the Subcontract, and that was what led to the execution of the Subcontract Supplementary Agreements as admitted in the letter dated 31st March 2021.
30.On the reliefs, the learned Judge held: that the 1st respondent was entitled Kshs.10,623,086.15 in respect of special damages for IPC No. 26, Kshs.73,431,524.53 being retention money, and Kshs.477,473,634.24 for unpaid excavation works; that the VAT sum of Kshs.89,844,519.19 being 16% of the total sum 561,528,245.95 claimed by the 1st respondent was both contractual and statutory and was hence due; that since the appellant was in breach of contract, the Subcontract provided that the liability for breach of contract was 2% of the contract sum of Kshs.1,520,091,941.75 which amounted to Kshs.31,390,300.80; and that since the breach was occasioned by the appellant, the counterclaim failed. The Court also awarded interest on the total sum being Kshs.682,763,067 at court rates from the date of filing suit till payment in full, and the costs of the suit and counterclaim with interest thereon.
31.Dissatisfied with the said decision, the appellant filed this appeal, challenging the judgment on the grounds that the learned Judge erred in law and in fact: by misquoting the provisions of Clause 10.1.6 of the Particulars of Subcontract as though they were the provisions of Clause 10.1 of the Subcontract; that as a result, the learned Judge made an implied finding that although the 1st respondent’s claim amounted to a variation of the Subcontract, the misquoted provision did not require the 1st respondent to seek approval or permission of the Employer before undertaking changes or variations in any part of the works; that this finding was contrary to the actual provisions of Clause 10.1(2) and Clause 10.1(5) of the Subcontract which required the Employer to grant approval for any variations or modifications to the subcontract; that the 1st respondent could only have been paid pursuant to the subcontract variation after the Main Contractor had been paid by the Employer.
32.The learned Judge was also faulted: for finding that the appellant had breached the subcontract between the appellant and the 1st respondent on account of failure to pay the sum of Kshs.477,473,634.24 to the 1st respondent for the alleged actual excavated works on the site, despite having found that the appellant had already made payment for the very said works in accordance with the Subcontract Bill of Quantities; by failing to recognise that the sum of Kshs.477,473,634.24 which he ordered the appellant to pay to the 1st respondent for the excavation works constituted an amount over and above the subcontracted project costs, which amount required to have been approved by the Employer before the 1st respondent could claim it from the appellant in accordance with Clause 17 of the subcontract; by holding that the parties executed the Supplementary Subcontract Agreements to cater for the unforeseen excavation works on site when as a matter of fact, the Subcontract Supplementary Agreements did not in any way adjust the proportion of the three excavation materials namely, the soft material, common material and hard rock; by holding that the appellant’s letter dated 31st March 2021 constituted an admission that the rock classification as contained in the original Bill of Quantities on which the Subcontract was based did not match the actual site position when as a matter of fact the letter did not make any such admission but merely paraphrased the contents of the 1st respondent’s letter which had spelt out the 1st respondent’s position regarding the rock classification; by solely relying on the appellant’s letter dated 31st March 2021 and the report dated 18th December 2020 as conclusive evidence that the respondent’s contention regarding the rock classification was correct, while completely ignoring the report prepared by the Employer dated June 2022 which had been filed by the appellant discrediting the 1st respondent’s report; by holding that the appellant was liable to pay the 1st respondent retention money in the sum of 73,431,524.53 merely on account of an admission by the appellant’s former counsel in their written submissions that the said amount was payable, whilst ignoring the fact that the 1st respondent admitted that it never completed the works on site, which automatically disentitled it to the said sum in line with Clause 11.3 as read with Clause 15 of the subcontract and particulars of subcontract; by holding that the appellant was liable to pay to the 1st respondent IPC No. 26 in the sum of 10,623,086.15 merely on account of an admission by the appellant’s former counsel in their written submissions that the said amount was payable while ignoring the fact that the 1st respondent admitted that it never completed the work on site which entitled the appellant to withhold payment of the said sum to the 1st respondent in line with Clause 16.4.6 of the particulars of the Subcontract; by holding that the appellant was liable to pay to the 1st respondent the sum of Kshs.89,844,519.19 as 16% VAT on the total sum of Kshs.561,528,244.92 awarded to the 1st respondent comprising of Kshs.477,473,634.24 for the excavated works, Kshs.73,431,524.53 for retention and Kshs.10,623,086.15 for IPC No. 26 when all these sums were not contractually or legally payable to the 1st respondent; by awarding to the 1st respondent, pursuant to Clause 16 of the particulars of subcontract, liquidated damages for breach of contract in the sum of Kshs.31,390,300.80 being 2% of the entire contract sum when the said clause provided that if any liquidated damages were payable they could only comprise 2% of the total overdue amount; by failing to find that the 1st respondent was in breach of contract despite the 1st respondent readily admitting that it never completed the subcontracted works, which failure amounted to breach of contract pursuant to Clause 16.3.7 of the subcontract; by failing to appreciate and recognise the key role of Employer who was the party responsible for determining the proportion of earth and stone in the spillway and also who was responsible for making all the payments to the appellant and the 1st respondent, hence arriving at a completely erroneous decision; by dismissing the appellant’s counterclaim despite the 1st respondent admitting to failing to complete the project works, which constituted a breach of contract; by finding that the 1st respondent’s breach of contract was occasioned by the appellant’s actions without any contractual, evidentiary or legal basis to support that finding; and by completely ignoring or selectively applying the applicable provisions and particulars of the Subcontract when determining the dispute between the parties, hence arriving at an erroneous decision.
33.The appellant sought that the decision allowing the 1st respondent’s claim and dismissing the appellant’s counterclaim be set aside and be substituted with one dismissing the 1st respondent’s claim and allowing the appellant’s counterclaim with costs.
34.The 1st respondent also filed a Notice of Cross Appeal dated 10th November 2023 on the ground that the learned Judge erred in law and in fact by declining to order that payment of the decretal sum be made as prayed for by the 1st respondent, admitted to by the appellant and provided for under the Subcontract. The 1st respondent therefore, sought that the sum be computed in the mode of 90% USD and 10% Kenya Shillings based on the exchange rate of 1USD = Kshs.101.86 and that the costs of the cross appeal be awarded to the 1st respondent.
35.At the virtual plenary hearing on 18th November 2024, learned counsel, Mr Wandati appeared for the appellant, learned counsel, Mr Lawrence Atonga, appeared for the 1st respondent, while learned counsel, Ms Bett, appeared for the 2nd respondent. Mr Wandati and Mr Atonga relied on their written submissions which they briefly highlighted, while Ms Bett supported the appeal and made brief oral submissions.
36.As we embark on the consideration of the grounds of appeal and cross-appeal and the responses thereto, we are alive to our mandate in this first appeal that we are enjoined to consider the submissions made before us as well as the record of the proceedings before the trial court. In so doing, we are under a duty to analyse and re-assess the evidence on record and reach our own conclusions on the issues for determination in the appeal. Caution must, however, be exercised that in so doing since, unlike the trial court, we had no benefit of seeing or hearing the witnesses testify and we must give allowance for that handicap. This position was restated in Selle v Associated Motor Boat Co. [1968] EA 123 where this Court held that:
37.In this case, the determination of the dispute revolves around the construction of the Main Contract, the Subcontract and the Supplementary Subcontract Agreements. The law guiding the construction of contracts was restated by the Supreme Court of Uganda (Karokora, JSC) in the case of Magezi and Another v Ruparelia [2005] 2 EA 156 in which the Court cited Chitty on Contracts, 27th Edition, paras 12.039-040 and the cases of Reardon Smith Line Ltd v Hansen Tangen [1976] WLR 995 & 996; Glynn and Others v Margetson & Co and Others [1893] AC 351; Southland Frozen Meat and Produce Export Co. Ltd v Nelsen Brothers Ltd [1898] AC 442 at 444; Miramar Miramar Corporation v Holtorn Oil Ltd [1984] AC 682E and held that:
38.The principles guiding the construction of contracts are now well settled. For the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the conduct of the parties and the circumstances of the case, which is a question of fact in each particular case. See Potgieter v Stumberg & Another (No. 2) [1972] EA 370 [2513]. A necessary term will be implied in the contract to give effect to the agreement in accordance with the clear intention of the parties. See Hassan Mbarak v North Coast Fishermen's Co-Operative Society Ltd, Civil Appeal No. 48 of 1995 (UR). When interpreting a contract, the Court ought to give effect to the intention of the parties as far as possible, and in particular, avoid deviating interpretations however easy or plausible they may appear to be. See Kairu v Shaw and Others [1986-1989] EA 221 (CAK). The Courts of law should maintain the performance of contracts according to the intention of the parties and should not overrule any clearly expressed intention on the basis that the Judges know the business of the parties better than the parties themselves. The document must receive a construction according to the plain meaning of the words and sentences contained therein; for the interpreters of any document have to deal with the written expression of the writer’s intention and the Courts of law have to carry into effect what the writer has written, and not what it may be surmised, on whatever probable grounds, that he intended to have written. What a man has written ought to be acted on unless it is clearly proved that he meant something different from what he said. See John Njoroge Michuki v Kenya Shell Ltd. Civil Appeal No. 227 of 1999(UR).
39.On ground 1 of appeal, the appellant submitted: that the learned Judge erred in his finding that the modification of the Subcontract under paragraph 10.1 did not require approval by the Ministry given that he erroneously misquoted the provisions of Clause 10.1.6 of the Particulars of Subcontract as the provisions of Clause 10.1 of the Subcontract between the parties, hence arrived at an erroneous finding; that from the actual provision of clause 10.1 of the subcontract, any variations to the performance of the subcontract were to be governed in the first instance by the provisions of the Subcontract unless otherwise specified in the Particulars of Subcontract; that the Particulars of Subcontract did not have any provisions which deviated or departed from the express provisions of Clause 10.1 of the Subcontract and consequently, modification of the subcontract to alter the quantities of materials being excavated required approval of the Employer, the Ministry of Water, Sanitation and Irrigation; and that Clause 10.2 of the Subcontract confirms the requirement for approval of any variation therein by the Employer.
40.In response to this ground, the 1st respondent submitted: that the trial court did not misquote the provisions of Clause 10.1.6 of the Particulars of the subcontract which the appellant urged the trial court to consider; that paragraph 10 on the General Conditions of the Subcontract and paragraph 10 of the Particular Conditions of the Subcontract bear same title which is “Modification of Subcontract” and speak about variations; that the trial court considered paragraph 10 of the Particular Conditions of the Subcontract, while the appellant submits in this appeal that the trial court should have instead considered paragraph 10 of the General Conditions of the sub Contract; that that was not the appellant’s submissions in the trial court, hence the learned Judge cannot be faulted for considering paragraph 10 of the Particular Conditions of the Subcontract which also talks about modification of the contract; that even if the trial court considered paragraph 10.1 General Conditions of the Sub Contract which stipulates 5 variations, the net outcome would still be the same; that although the absence of common materials in the area of excavation amounted to a variation and fell under the express provisions of paragraph 10.1, the appellant failed to point out which of the 5 conditions of the contract was met to warrant a variation; that during excavation the 1st respondent only encountered soft material and rock and the common materials were absent in the excavated area, which necessitated the parties entering into a Supplementary Subcontract Agreement signed in July 2019 where parties agreed payment would be concluded by Party A in accordance with actual completed quantities of work which have been confirmed by both parties; that this meant that if the material excavated by the 1st respondent was rock instead of common materials as initially expected, the 1st respondent was to be paid for rock excavation and the fact that the common materials were absent did not amount to a variation so as to require the approval of the Employer; that the volume or quantities of materials excavation provided for in the BOQs were only tentative; that any requirement in the original contract that might have possibly required approval by the Employer before payments are made based on the actual work done, are incapable of implementation in light of the overriding provisions of the Supplementary subcontract.
41.In his judgment, the learned Judge, in finding that the 1st respondent was not prohibited from changing any part of the works without permission from the Employer, purportedly relied on paragraph 10 of the Subcontract which he reproduced as providing that:
42.It is clear that what the learned Judge cited were not the provisions of Clause 10.1 of the Subcontract but Clause 10.1.6 of the Particulars of Subcontract. Clause 10.1 of the Subcontract provides that:
43.It is clear from the terms of the Subcontract that the decision as to what constituted a variation under the above clause remained ultimately with the Employer. The 1st respondent’s position is that the Supplementary Subcontracts only described the scope of the work but did not change the standards or vary the character of the work. It is not in doubt that the Bill of Quantities on which the Subcontract was based before the Supplementary Subcontract Agreements were entered into was specified not only on the units of the respective rock/soil formation to be excavated, but also stated their respective unit price. The 1st respondent, in its submission on Clause 10.1 of the Subcontract, seems to have relied on the first part of Clause 10.1(2) without considering the whole clause. The said Clause deals with:
44.In our view, a change whose effect would be the incurring of expenses than the contemplated charges in the Subcontract clearly falls within the rubric of “other character of any work”. Although the 1st respondent is of the view that it is a minor change which does not amount to a variation, we are of the view that the change in the costs of a contract is a substantial change that effectively varies the terms of a contract and in this case required that an Order of Variation be sought and obtained by the 1st respondent from the Employer.
45.In its submissions, the 1st respondent seemed to have taken the view that since it was not a party to the Main Contract, the provisions of that Contract did not bind it. It is however clear that the requirement for an Order of Variation was contained in the Subcontract to which the 1st respondent was a party. Clause 10.2 of the Subcontract states that:
46.For avoidance of doubt, Clause 1.5.1 of the Subcontract provides that Party A shall provide the Main Contract for Party B to consult. In Clause 1.5.2, it is expressed that Party B shall carefully read and fully understand all the provisions of the Main Contract and that the signing of the Subcontract shall be construed that Party B has fully understood the obligations and responsibilities of Party A in relation to the subcontracted works under the Main Contract and accepts to bear the risks associated therewith. Since it was admitted that the 1st respondent was aware of the Main Contract, it ought to have sought, for avoidance of doubt, the Order of Variation from the Employer.
47.It is not in dispute that the 1st respondent did not seek and obtain the Order of Variation from the Employer before proceedings with the work. By not doing so, the 1st respondent chose to bear the risks associated by not seeking the Order. In those circumstances, we find merit in this ground of appeal and hold that the learned Judge erred in his finding that the 1st respondent did not, in the circumstances of the case, require an Order of Variation from the Employer and we set aside that finding.
48.On grounds 2 and 3 of appeal, the appellant submitted: that the basis of the trial court’s finding that that there was unforeseen works undertaken by the 1st respondent which comprised of excavation of increased rock material due to absence of common material where the said common material was expected to be present were the expert reports touching on the question of rock classification and the appellant’s letter dated 31st March 2021; and that at the time when the trial court was writing its judgment, two expert reports addressing the question of rock classification were on record, namely, the Report dated 18th December 2020 prepared by one John M. Mwaita, Senior Principal Superintending Geologist, and the one prepared by the Ministry of Water, Sanitation and Irrigation. According to the appellant, that the High Court’s finding that the evidence on record clearly showed that “the rock formation on the site and as excavated was bigger than in what was anticipated in the sub-contract” was erroneous for the reasons, that, firstly, the expert report dated 18th December 2020 confirms that the report did not address in any way whatsoever, the classification of the quantities of materials which the 1st respondent had excavated and was therefore not helpful at all in confirming what percentage/proportion of the materials excavated by the 1st respondent consisted of soft material, common material or hard rock. Secondly, the report was not based on the technical standards agreed in the Thwake Project Contract (British standards-BS1377), which use the D82 bulldozer pushing method. Further, that the Employer supervisor, the consultant and appellant were not invited to witness the process that culminated in the report.
49.It was further contended: that the trial court ignored without any lawful justification, the Report of June 2022 prepared by the Ministry of Water, Sanitation and Irrigation, yet this particular report was pivotal to the case before the trial court; that it was implausible for the trial court to make a finding that was based on the reports on record, the rock formation on the site and as excavated was bigger than what was anticipated in the sub-contract since nothing in the report of 18th December 2020 or the report of June 2022 supported that finding; that in the absence of any evidence to substantiate the claim that the 1st respondent excavated more rock than was contemplated in the Subcontract quantified in the sum of Kshs.477,473,634.24, this amount cannot have been payable; that even assuming that evidence had been tendered to show that the 1st respondent had actually excavated more hard rock than the quantities contemplated in the Subcontract and that the payment for such hard rock had been computed at Kshs.477,473,634.24, this amount would have constituted an additional claim which was not within the amounts contemplated in the Bill of quantities (BOQ); that such amount could only be paid conditional upon a claim for the additional payment being made by the appellant to the Employer, and such claim being approved by the Employer in line with Clause 17.1 of the parties’ subcontract; that the 1st respondent did not adduce any evidence to show that it requested the appellant to make an additional claim for the sum of Kshs.477,473,634.24 from the Employer, and that such a claim was indeed made and was either accepted or declined; that the claim of Kshs.477,473,634.24 is tied to the additional hard rock allegedly excavated by the 1st respondent but the claim was only brought to the appellant’s attention when the excavation works were 99% complete and not during the course of the excavation process, which was the appropriate time to raise the issue to afford the 1st respondent time to seek approval for variation of the subcontract from the Employer; that the claim was made after the 1st respondent had duly raised interim payment certificates No’s 1 – 5 and these had been duly paid without any issue; that the claim ought to have been brought if at all, immediately the 1st respondent established that the common rock was missing and more hard rock had to be excavated since the impact of such increased quantities of hard rock to be excavated had a significant change in the amounts to be paid under the Subcontract which required the approval of the Employer; and that no claim for approval was made to the Employer, thus the amount of Kshs.477,473,634.24 was not payable.
50.In response to grounds 2 and 3 of appeal, the 1st respondent submitted: that the letter dated 28th February, 2022 by the appellant’s Consultant, SMEC International to the Employer confirms that the 1st respondent was paid based on the tentative figures provided by the appellant in the BOQ instead of the actual work done; that the learned Judge’s decision was not only based on the expert reports touching on the question of rock classification and the appellant’s letter dated 31st March 2021, but also the findings informed by survey reports and data prepared by the appellant; that the appellant had never referred the report dated June 2022 prepared by Ministry of Water, Sanitation, and Irrigation and chose to adopt the 1st respondent’s evidence during the hearing; that the report was actually minutes from a boardroom meeting at the Ministry which focused on discussing and analysing the merits and demerits of the High Court Civil Suit No. E649 of 2021 viz a viz the report prepared by the 1st respondent’s Consulting Geologist, John Waita; that it was an internal appraisal report and not an expert report and the officers who prepared the report were neither called for cross-examination in court on the contents of the report, nor did they conduct the actual tests and analysis of the materials found in the main Spillway; that the report was based on “analysis of data and other reports” and does not offer any perspective of the nature of materials excavated in the Spillway and cannot therefore be relied upon to challenge or oust the report dated 18th December 2020 by John Waita; that the unpaid Kshs.477,473,634.24 is not an additional claim which would require the 1st respondent to make an application for additional payment from the Ministry as submitted by the appellant since the contract does not contemplate a situation where the 1st respondent would make an application for additional payment for the actual work done; that the change in the rock ratio was notified to the appellant in July 2019 at the onset of the excavation and not as alleged by the appellant that it was notified of the same when excavation was 99% complete; that the Supplementary Subcontract signed in July 2019 was as a response to the claims raised by the 1st respondent regarding the absence of common materials and although the parties agreed to have the contract payment made based on the actual work done, the appellant continued to pay based on the tentative quantities as admitted in the letter dated 28th February 2002.
51.In our view, the appellant does not seem to have attached much weight to the report dated June 2022. Its author was never called to testify before the trial court and was consequently not subjected to cross-examination. We find no reason to fault the learned Judge in not making any reference to the said report. As regards the report dated 18th December 2020 by John Waita, it is instructive that in his conclusion, he states in part that:
52.The report, while it seems to justify the choice of the site for the purposes of the construction of a dam, does not come out clearly on the lack of common materials at the site. In these circumstances, it would have been prudent to call the author of the report to shed more light on his report and its relevance to the issues in dispute, particularly as regards the rock formation as contemplated in the Subcontract. Without clarity on that issue, we are unable to make definitive finding that there were no common materials at the site of the excavation.
53.Clause 17.1 of the Subcontract provides that:
54.It is not in doubt that the effect of the variation of the Bill of Quantities as initially contemplated by SMEC was that the amount payable to the 1st respondent was increased. Although it is the 1st respondent’s position that the unpaid Kshs.477,473,634.24 is not an additional claim which would require the 1st respondent to make an application for additional payment from the Employer, it is clear that this amount was not contemplated in the Subcontract which not only set out the units but also the amount per unit. In determining this issue and as was held in Magezi and Another v Ruparelia (supra) we appreciate that since no contract is made in vacuum and in construing the contractual document, the court may look at its commercial purpose and the factual background against which it was made, including its commercial purpose which in turn presupposes knowledge of the genesis of the transaction, the background, the content and the market in which the parties are operating.
55.In this case, the parties were aware that at “the back office” was the Government of Kenya which had contracted the appellant and was ultimately responsible for the payment to the appellant, who in turn would pay the 1st respondent. Without payments being made to the appellant by the Government of Kenya, there would be no money to pay the 1st respondent. This must be what informed clause 17.1 of the Subcontract which was an appreciation that any escalation in costs would ultimately have to be incurred by the Government, hence the requirement that such additional claims be made to, and approved by the Employer. This, in our view, is also what informed the need to obtain an Order of Variation from the Employer. We agree that the 1st respondent ought to have claimed the additional charges from the Government consequent upon seeking and obtaining an Order of Variation. As this was not done, we find that the appellant was not liable to pay the additional claim and this ground of appeal succeeds.
56.On ground 4 of appeal, the appellant submitted: that whereas besides the Subcontract, the parties also executed 3 Subcontract Supplementary Agreements, the finding by the learned Judge that “the rock formation on the site and as excavated was bigger than in what was anticipated in the Subcontract” is what led to the execution of the sub-contract supplementary agreements was wrong; that with regard to Supplementary Subcontract Contract of July 2019 (S1), the parties did not enter into this agreement as a result of any increased excavation of rock material beyond the proportions contemplated in the original subcontract; that to the contrary, the parties entered into the Supplementary Subcontract Agreement to adjust the scope of work from CHO+640- CH2+200 to CHO+565-CH2+000, which was part of the construction scope of Sinoma Company, since the 1st respondent had mistakenly worked on part of Sinoma’s construction scope (CHO+565); that this supplementary agreement was not executed to address or modify the soil-rock ratio as the Court erroneously found; that with regard to Supplementary Subcontract Agreement (S2) of April 2020, the parties did not enter into this agreement as a result of any increased excavation of rock material beyond the proportions contemplated in the original subcontract; that this supplementary agreement (S2) was entered into by the parties to cater for the additional excavation and protection works for the intake tower and the approach channel which were not part of the spillway section; that with regard to Supplementary Subcontract Agreement (S3), this contract was not entered into by the parties as a result of any increased excavation of rock material beyond the proportions contemplated in the original subcontract, but was entered into by the parties to cater for the additional protection works for the discharge channel (BOQ item No. 4) which was not part of the spillway section; that the learned Judge therefore erred in finding that the Supplementary Subcontract Agreements were executed to address or cater for the additional hard rock which was allegedly found to have been excavated by the 1st respondent beyond the quantities contemplated in the original subcontract.
57.The 1st respondent, in response to ground 4 submitted: that the trial court was guided by facts and evidence; that in the Supplementary Subcontract Agreement signed in July 2019, parties agreed that payment was to be concluded by Party A in accordance with the actual completed quantities of work which have been confirmed by both parties, which meant that if the material excavated by the 1st respondent was rock instead of common materials as initially expected, the 1st respondent was to be paid for rock excavation.
58.We have perused the three Supplementary Subcontract Agreements. Our own consideration of the July 2019 Supplementary Subcontract Agreement (S1) reveals that it was intended to adjust the scope of work from CHO+640-CH2+200 to CHO+565-CH2+000. Nowhere in the agreement does it specifically state that it was executed to address or modify the soil-rock ratio. To the contrary, it is stated that:
59.Whereas when construing a document, the court may resolve an ambiguity by looking at its commercial purpose and the factual background against which it was made, to construe the phrase “in accordance with the actual completed quantities of work which have been confirmed” to mean the change in the soil-rock ratio, when there is no document confirming the said quantities would, in our view, amount to importing into the document something other than what the document states. Supplementary Subcontract Agreement (S2) of April 2020 similarly does not expressly deal with the increased excavation of rock material beyond the proportions contemplated in the Subcontract. It states that it was entered into to cater for “the associated excavation and protection works for Intake Tower and its Approach Channel required by party A”. The same position applies to Supplementary Subcontract Agreement (S3) of August 2020.
60.We are therefore unable to agree with the learned Judge that the Supplementary Subcontract Agreements were executed to address or cater for the additional hard rock which was allegedly found to have been excavated by the 1st respondent beyond the quantities contemplated in the original subcontract. Similarly, this ground of appeal succeeds.
61.On grounds 5 and 6 of appeal, the appellant submitted: that contrary to the erroneous finding of the trial court, the appellant’s letter dated 31st March 2021 did not amount to an admission of the fact that “the rock classification as contained in the original Bill of Quantities on which the subcontract between the parties did not match the actual site position”;
62.In response to grounds 5 and 6 of appeal, the 1st respondent submitted: that the letter dated 31st March 2021 amounted to an admission by the appellant to the effect that the 1st respondent excavated rocks and limited soft materials which confirmed the 1st respondent’s claim of the absence of common materials in the area excavated; that the words used in the letter clearly expressed the appellant’s observation of the rock excavation and explained the actual situation on the ground as compared to the tentative rock ratio provided by SMEC engineer in the BOQ.
63.The letter dated 31st August 2021 was titled “Forward Rock Classification Report Issued by JTG Enterprises Ltd”. It is clear that it was forwarding to SMEC a report issued by the 1st respondent. Throughout the letter, reference is made to the said report. Whereas a reading of paragraphs 4 and 5 of that letter in isolation may lead one to conclude that the appellant admitted that “the tentative rock classification ratio issued by the above mentioned SMEC Engineer does not match the actual situation on site”, the letter concludes by recommending that:In the attitude of seeking truth from facts and friendly negotiation principles, we formally forward to the Employer and Engineer’s Representative with the geological investigation report that was issued by JTG. And kindly request the Employer and the Engineer’s Representative to organise professional analysis and identification.
64.Considered holistically, we are not persuaded that the letter was an unequivocal admission of liability by the appellant that the site consisted only of soft and hard rocks. The recommendation that a professional analysis be undertaken is an indication that the contents of the report required further investigation. We therefore hold that the learned Judge erred in finding that the letter amounted to an admission that the rock formation at the site only consisted of soft and rock materials and therefore this ground succeeds.
65.On grounds 7 and 8 of appeal, the appellant submitted: that the admission which the learned Judge was referring to was the one made by the appellant’s former advocates in their final written submissions filed after the hearing was concluded; that during the hearing of the appellant’s case, the appellant’s witness, Tang Yazhou, testified that the retention monies was not payable by the Ministry until after defects notification period ends; that the express provisions of Clause 11.3.2 of the Subcontract as read with Clause 15 of the particulars of subcontract between the parties disentitled the 1st respondent to payment of retention money until after expiry of the defects liability period of 1 year after the lapse of the contract; that the appellant’s former advocate’s admission that the retention money was payable because ‘the defects liability period has since lapsed’ was incapable of overriding the express provisions of the Subcontract and Particulars of Subcontract; that the said admission was factually incorrect given that the defects liability period has even not yet commenced since the project is presently over 90% complete; and that by completely disregarding the express provisions of the subcontract between the parties and wholly adopting the appellant’s former advocate’s submissions as the basis for his finding that the retention money was payable, the learned trial judge erred in law since his finding amounted to the court re-writing the subcontract between the parties which, based on the cases of National Bank of Kenya Ltd v Pipe Plastic Samkolit (K) Ltd (2002) 2 E.A. 503, (2011) eKLR and Pius Kimaiyo Langat v Co-operative Bank of Kenya Ltd (2017) eKLR, the court did not have power to do.
66.According to the appellant, this Court should to find that the trial court erred in making a finding that the amount of Kshs.73,431,524.53 was payable because it had been admitted by the appellant; that even assuming that the said sum of Kshs.10,623,086.15 was indeed payable to the 1st respondent by the appellant, the appellant was nevertheless contractually and legally justified to withhold the payment on account of the 1st respondent’s breach of contract by failing to complete the project works it had been subcontracted to undertake, resulting in the overall delay of the project; that with regard to the amount of Kshs.10,623,086.15 being the unpaid balance for interim payment certificate No. 26, the trial court’s finding that this amount was payable to the 1st respondent because it had been admitted to be payable was erroneous since, in his witness statement, Tang did not admit that the sum of Kshs.10,623,086.15 was payable; that what was stated was that about Kshs.10 Million had not been paid to JTG as part of the final settlement; and that on the basis of Clause 16.4.6 of the particulars of subcontract, there was no admission made by the appellant that the sum of Kshs.10,623,086.15 was owing to the 1st respondent, hence the learned Judge erred in law and in fact by awarding the sum of Kshs.10,623,086.15 to the 1st respondent merely on the basis that it had been supposedly admitted.
67.In response to ground 7 of appeal regarding the award of retention money of Kshs.73,431,524.53 to the 1st respondent, the 1st respondent submitted: that it is entitled to the un- refunded amount on the basis of admissions by the appellant and by dint of paragraphs 11.3 and 15 of the Subcontract the specific deadline for the defects liability period which was 365 days; that it is not in contention that the appellant was holding a total retention amount of Kshs.73,431, 524.53 as of October 2020 when the 1st respondent completed excavation works; that based on the provisions of the Subcontract, the 365 days defect liability period lapsed in October 2021 and that during trial, both parties agreed that the retention money was payable; that there were no defects reported by the appellant before the lapse of time or at all, meaning that the appellant considered the 1st respondent’s work faultless and/or perfect; that the appellant has not challenged the fact that the 1st respondent completed excavation works in October 2020 and the 365 days from October 2020 lapsed in October 2021; that the project referred to under paragraph 15 of the subcontract “Excavation, Protection, Supporting and Drainage for Main Spillway Project Sub contract Agreement” clearly establish that the defect liability period is meant to start running upon completion of the subcontracted project which is the excavation, protection, support, and drainage of the main spillway; that to interpret it to mean the entire Thwake Dam Project would defeat logic since the entire project consisted many facet and subcontracts by other contractors which and who are not part of the matter presently before court; that the 1st respondent was the only contractor whose specific task was to do excavation, protection, supporting and drainage for main spillway of the dam and nothing else; that the issues raised by the appellant such as the issue of retention money, Kshs.73,431,524.53 and the unpaid Kshs.10,623,086.15 for IPC No. 26 were not raised in the trial court but openly admitted; that there was therefore no controversy whatsoever at the trial court surrounding the issues of retention money and the balance for IPC 26; that, based on the decisions in Mohamed Mahamud Ali v Independent Electoral and Boundaries Commission & 2 Others [2018] eKLR and in Fidelis Kitili Kivaya, Returning Officer Njoro Constituency & Another v Karanja Kabage & Another [2014] eKLR, the issues cannot form a ground of appeal since the trial court did not render itself on the said questions; that this Court should disallow grounds 7 and 8 of the appeal because the issues raised therein were admitted and therefore not canvassed at the trial Court.
68.In response to ground 8 of appeal, the 1st respondent submitted: that the award of special damages of Kshs.10,623,086.15 for IPC No. 26 was justified for it was based on evidence on record and admission by the appellant; that the appellant’s witness, Tang Yazhou, admitted the claim unequivocally during the hearing and in their submissions; that the said witness stated that they had not paid so far to JTG part of the final settlement about Kshs.10 million and the retention monies; that it was submitted in the appellant’s written submissions that the only money owing to the respondent was the balance for IPC No. 26 and the retention monies; that the argument by the appellant that as per Clause 16. 4.6 of the particulars of the sub-contract, it had a right to retain the Kshs.10,623,086.15 for IPC No. 26 from the 1st respondent on account of its failure to complete the project work, is a misinterpretation and misunderstanding since a plain reading of the Clause refers to instances of delay and of instances of incompletion, and even makes specific reference to delay damages applicable to the 1st respondent’s delay in execution of its duties; that although the 1st respondent, through Mr. Thuo, admitted it did not complete the project, it did not directly or otherwise admit or even infer any delays from executing its mandate, thus Clause 16.4.6 was and remains unavailable for the appellant to seek refuge in the circumstances; that the 1st respondent completed excavation works and left the construction site before completing drainage, support and protection of the main spillway because of non-payment which does not amount to a delay under Clause 16.4.6 of the particulars of the subcontract; that even if this Court would find the Clause is applicable in the circumstances of this case, the 1st respondent would still not be liable for breach of the subcontract, in particular Clause 2.1 of the sub-contract, the contract between the appellant and 1st respondent being a Fixed Unit Price Contract, meaning that payment was to be based on the actual work done and/or units excavated; that the first Supplementary Subcontract Agreement signed in July 2019 provided that settlement shall be concluded in accordance with the actual completed quantities of work which have been confirmed by both parties; that the appellant failed to effect payment based on the actual work done and as agreed in the Supplementary subcontracts; that it was the appellant’s negating conduct and breaches that caused the 1st respondent to stop any further construction and vacate the construction site; that based on the case of Nabro Properties Ltd v Sky Structures Ltd & 2 Others [2002] eKLR, it is a well-established rule and principle that a contracting party cannot rely upon an event brought by his own breach of contract to defeat an otherwise valid claim; that the 1st respondent completed all the excavation works for the main spillway as required under the subcontract, but the failure to complete the remaining (minor) parts of the project (drainage, support and protection works) was directly as a result of non-payment by the appellant and therefore the appellant cannot take advantage of its wrong to disadvantage the 1st respondent by denying the 1st respondent Kshs.10,623,086.15 being the payment of IPC No. 26.
69.In his judgment, the learned Judge found that both the retention money and the balance for Interim Payment Certificate No. 26 were admitted by the appellant. It was on that basis that the two claims were allowed. However, in his statement which he adopted as his evidence, DW1 did not expressly admit these claims. The admission of these claims appeared in the final submissions made by counsel for the appellant. However, as regards the claim in respect of the retention, it was submitted that:
70.The above statement, even if taken as a true statement of fact, in our view does not amount to an admission of liability by the appellant. It is clear that what the appellant was admitting was that the retention money, although due, was payable by a third party. It was incumbent upon the learned Judge to not only make a finding that the retention money was due but also that it was due from the appellant.
71.Apart from that, Clause 11.3 of the Subcontract provided that:
72.It is clear that retention money was only due to the 1st respondent at the expiry of the defect liability and upon fulfilment of the defects repair responsibility and only upon the receipt of the payment from the Employer by the appellant. Clause 15 of the Subcontract provides that defects liability period starts from the date of successful acceptance of the whole project upon completion. In his evidence, PW1 in cross- examination stated that:
73.This was an admission that the 1st respondent had not completed the subcontracted works. There was no evidence that it took any step to terminate the contract as a result of non-payment. Therefore, the appellant’s liability to pay the retention money had not accrued, firstly because the defects liability period was yet to start running, and secondly, because there was no evidence that the appellant had received payment from the employer. In the premises, the award in respect of retention must be set aside.
74.As regards, the award for IPC No. 26, whereas the appellant’s counsel submitted that the amount in respect thereof was due, what DW1 stated was that:
75.That statement only admits that the appellant had not paid the final settlement of Kshs.10 million. It is however not the same thing as saying that the said sum was due. However, in light of the admission in the submissions by the appellant’s counsel that the said sum was due, the appellant was bound to pay the same. This Court in Diamond Trust Bank of Kenya Ltd v Ply & Panels Limited & Others Civil Appeal No. 243 of 2002 [2004] 1 EA 31, Githinji, JA. held that:
76.Omolo, JA on his part held that:
77.We have no reason to fault the learned Judge in finding that the appellant admitted that the final settlement of Kshs.10,623,086.15 was due but had not been paid. The ground of appeal challenging this finding fails.
78.On ground 9 of appeal, the appellant submitted: that the learned Judge erred in law and in fact by awarding to the 1st respondent the sum of Kshs.89,844,519.19 as 16% VAT on the total sum of Kshs.561,528,244.92 awarded to the 1st respondent comprising of Kshs.477,473,634.24 for the excavated works, Kshs.73,431,52.53 for Retention and Kshs.10,623,086.15 for IPC No. 26; that it has demonstrated that the said amounts of Kshs.477,473,634.24 for the excavated works and Kshs.10,623,086.15 being payment for IPC No. 26 are not lawfully due to the 1st respondent; that the sum of Kshs.477,473,634.24 is not lawfully due, given that the 1st respondent failed to adduce credible evidence to justify its entitlement to the said payment; that the evidence on record (report of June 2022) actually reaffirmed that the 1st respondent was not entitled to the said sum; that the sum of Kshs.10,623,086.15 is equally not lawfully due to the 1st respondent since it admitted to breaching the subcontract by leaving the site without undertaking the drainage, protection and support works under the subcontract, resulting in delay in completion of the project, hence the said breach entitled the appellant to withhold any due payment to the 1st respondent by deducting the amount due from the liquidated damages which the 1st respondent was to pay to the appellant for the breach; that as for the sum of Kshs.73,43,52.53 being the retention money, this amount was not lawfully due to the 1st respondent at the time when the trial court rendered its judgment; that whereas the amount is contractually payable to the 1st respondent, the amount would only become payable to the 1st respondent after expiry of the 1-year defects liability period after completion of the project pursuant to Clause 11. 3.2 of the subcontract as read with Clause 15 of the particulars of subcontract between the parties; that the project which is yet to be completed is over 90 % complete and is set to be completed in December 2024 all factors remaining constant; that it is only after the successful completion of the project that the 1-year defects liability period will commence and at its expiry, the retention money will become payable to the 1st respondent upon the appellant receiving the same from the Employer; that Clause 6 of the parties’ Subcontract provided that the subcontract amounts payable to the 1st respondent would be inclusive of VAT, hence no additional VAT was contractually or legally payable to the 1st respondent for any payments being made within or pursuant to the subcontract; and that the trial court erred in law and in fact by awarding to the 1st respondent the sum of Kshs.89,844,519.19 as 16% VAT.
79.In response to ground 9 of appeal, the 1st respondent submitted that the award of Kshs.89,844,519.19 being the 16% VAT was justified; that having found that the unpaid Kshs.477,473,634.24 was rightfully awarded for excavation work done, it followed that the amount would automatically attract VAT obligations at the awarded rate; that the 1st respondent’s tax obligations flowing from Clause 6 of the Subcontract and the Tax law applicable in Kenya dictate that 16% of the outstanding Kshs.561,528,244.92 be paid to the 1st respondent to enable them discharge their tax obligations, thus 16% of the outstanding amount is Kshs.89,844,519.19; that the learned Judge rightfully held that the 16% VAT was lawfully due and payable.
80.In light of our findings above, we find it unnecessary to address this ground of appeal.
81.On ground 10 of appeal, the appellant submitted: that the learned Judge’s reading of Clause 16 of the Subcontract was completely erroneous; that Clause 16.2.1 provides that in the event of a breach of contract, the liquidated damages would not exceed 2% of the total amount of overdue payment, and not 2% of the contract sum as erroneously held by the trial court; that this award should be completely set aside on the grounds that, firstly, the 1st respondent did not prove on a balance of probability, that the appellant had breached the contract and that there was any overdue payment payable to it, secondly, even assuming that the appellant had been in breach of contract, the award was wrongly computed by basing the 2% on the contract sum rather than on the total amount of overdue payment, and thirdly, the 1st respondent did not lead any evidence regarding the amount of overdue payment (if any), and the length of time which it was allegedly overdue in line with the standards stipulated in the Main contract as required under Clause 16.2.1 of the subcontract before it could be held to be entitled to any liquidated damages; and that the award of Kshs.31,390,300.80 being liquidated damages calculated at 2% of the contract sum was erroneous.
82.In response to ground 10 of appeal, the 1st respondent submitted: that Clause 16 of the subcontract provided that liability for breach of contract as 2% of the contract sum of Kshs.1,520,091,941.75, thus 2% of the contract sum is Kshs.31,390, 300.81 which is what was awarded; that the 1st respondent was entitled to an award of the liquidated damages which was expressly rooted in the contract between the parties.
83.Similarly, in light of our findings above, we find it unnecessary to address this ground, save to note that Clause 16.2.1 of the Subcontract provided that:
84.We agree with the appellant that the liquidated damages, had they been payable, would have been based on 2% of the overdue payment and not 2% of the contractual sum.
85.On grounds 11 to 15 of appeal, the appellant submitted: that the fact that the 1st respondent’s action of leaving the project site before completing the subcontracted works amounted to a breach of the subcontract is not in dispute and it amounted to breaches of the subcontract under Clause 16.3.7 of the subcontract; that the appellant has already paid hundreds of millions of shillings to the 1st respondent pursuant to the interim payment certificates raised by the 1st respondent in line with the subcontract, and, if there was any amount owing to the 1st respondent from the appellant (which is disputed), then the same can only be with regard to the sum of Kshs.10,623,086.15, a relatively small amount compared to the value of the subcontract; that it would be unconscionable to interfere with the project construction on account of a dispute over Kshs.10,623,086.15 when the 1st respondent has been shown to have been in breach of contract by deliberately failing to complete the slope protection and drainage work of the spillway, which had nothing to do with the soil-rock ratio; that it is evident that the trial court erred in dismissing the appellant’s counterclaim when the Court had already found that by its own admission, the 1st respondent did not complete the subcontracted works and also, in the absence of any substantive evidence that the 1st respondent’s failure to complete the works, was attributable to the actions of the appellant as alleged.
86.In response to grounds 11,13, 14 and 15 of appeal, the 1st respondent submitted: that the failure by it to complete the subcontract was occasioned by the appellant’s failure to effect payments as required in the subcontract as well as the Supplementary Subcontract Agreements; that the appellant on several occasions admitted that it was not making payments based on the actual work done as stipulated in the contract but on tentative rock classification which a material breach of the contract; that the 1st respondent had the right to mitigate losses by stopping any further construction of the contracted project and reliance was placed on the case of African Highlands Produce Limited v John Kisorio [2001] eKLR which set out the guiding principles of law of mitigation of losses; that it was entitled to mitigate its losses once it finalized the excavation and was not paid for the actual work it had done; that the support, protection and drainage works were to follow in the sequence of the project and there was no way the 1st respondent was going to even afford to engage in the labour and capital intensive civil works of concreting the support and drainage works for the entire Spillway of the dam when the appellant was not honouring the subcontract.
87.In our view, the appellant’s claim was premature. The appellant had not taken any step to terminate the Subcontract, notwithstanding the 1st respondent’s admission of the delay in not completing the contract. It is also clear that the appellant’s claim is for continuing breach. Therefore, the sum, if any due, to the appellant from the 1st respondent is not capable of being calculated at this stage. We find no reason to upset the holding by the learned Judge, albeit for different reasons.
88.In support its Cross appeal, the 1st respondent submitted: that the learned Judge declined to grant the prayer out rightly without giving any cogent reasons at all as to why it so declined; that the learned Judge did not consider at all the issues of the proposed mode of settlement when the same is clearly anchored in both the Price Schedule of the Main Contract and subcontract in paragraph 11.2.5; that since the appellant raised no objection to settling the 1st respondent’s dues as contractually agreed, the trial court cannot rewrite or simply ignore the provisions of the contract between the parties; that the learned Judge’s failure to apply the settlement formula was erroneous and not based on facts, evidence and the law and therefore the order should be set aside; that this Court should set aside the order and proceed to direct that the settlement be 90% USD and 10% Kenya Shillings based on the exchange rate of 1USD=Kshs.101.86 as provided in the contract between the parties herein.
89.In light of our findings above regarding the claim by the 1st respondent against the appellant, the counterclaim, which was based on the success of the 1st respondent’s claim, fails.
90.In the premises, we partly find merit in this appeal, which we allow in part. We set aside the judgment of the learned trial Judge allowing, the 1st respondent’s suit against the appellant. We substitute therefor a judgment for the 1st respondent against the appellant in the sum of Kshs.10,623,086.15 for IPC No. 26. The same shall be paid with interest at court rates from the date of filling suit until payment in full. We however affirm the learned Judge’s decision dismissing the appellant’s counterclaim. We find no merit in the 1st respondent’s cross- appeal, which we hereby dismiss.
91.Since both the appellant and the 1st respondent are partly successful, we direct each party to bear its own costs of the appeal.
92.Those shall be our orders.
DATED AND DELIVERED AT NAIROBI THIS 20TH DAY OF DECEMBER, 2024.D. K. MUSINGA, (P.)………………………… JUDGE OF APPEALJ. MOHAMMED………………………… JUDGE OF APPEALG. V. ODUNGA………………………… JUDGE OF APPEALI certify that this is a true copy of the originalSigned DEPUTY REGISTRAR