Eldo City Limited v Corn Products Kenya Ltd & another [2013] KEHC 5916 (KLR)

REPUBLIC OF KENYA

IN THE HIGH COURT OF KENYA AT NAIROBI

CIVIL CASE NO. 37 OF 2013

COMMERCIAL & ADMIRALTY DIVISION

ELDO CITY LIMITED............................................………………......PLAINTIFF

VERSUS

CORN PRODUCTS KENYA LIMITED...................................................DEFENDANT

EQUIP AGENCIES LIMITED.................................................INTERESTED PARTY

RULING

1. Before me is the Plaintiff’s Notice of Motion dated 1^st February, 2013 brought under Order 40 Rules 1, 2 and 3(3) of the Civil Procedure Rules and Section 3A of the Civil Procedure Act. The Plaintiff has sought orders to restrain the Defendant from advertising, selling, alienating, transferring, or disposing the equipment and related assets listed under the Second Schedule of the Draft Agreement for Sale exchanged between the parties to this suit, including the property known as Title Number Eldoret Municipality/Block 8/47 (hereinafter collectively referred as the “Suit Assets”). The Plaintiff relied on the grounds on the body of the motion and the supporting affidavit and further affidavit of David Bett Lang’at sworn on 1^st February, 2013 and 26^th February, 2013, respectively.
2.  The Plaintiff’s contention is that it entered into a valid and legally enforceable collateral contract in the nature of a Memorandum of Understanding (“the MOU”) with the Defendant to which it was entitled to purchase the suit assets. It contended that through a letter dated 4^th September, 2012, a formal expression of interest to purchase the suit assets was placed through an entity called DL Group of Companies Limited to the Defendant but later the transaction was to be undertaken by the Plaintiff. It was further contended that as a sign of seriousness and commitment to buy the suit assets, the Defendant required an irrevocable bank guarantee in the sum of USD$2,000,000 from the Plaintiff, which the Plaintiff procured from I&M Bank Limited.  The guarantee was approved by the Defendant and the Defendant’s Bank, Citibank (Kenya) Limited. The Approval by Citibank was at a commission which was a cost borne by the Plaintiff.  Thereafter the Plaintiff executed a Confidential Agreement dated 3^rd October, 2012 and an MOU on 28^th November, 2012, although not without having raised concerns with regard to certain clauses therein.  Since the guarantee was lapsing as at the time the MOU was executed, the Plaintiff renewed the same for a further three months and the same was set to lapse on 13^th March, 2013. This was at an extra cost to the Plaintiff.
3.  After carrying out an inspection of the suit assets and the Plaintiff placed a formal bid for the purchase of the suit assets at USD$3,500,000. A draft sale agreement was thereupon forwarded to the Plaintiff by the Defendant’s Advocates.  Subsequently, the Plaintiff notified the Defendant that it was ready to proceed with the transaction notwithstanding the misgivings it had regarding the terms thereof and the inadequate due diligence that had been carried out.  However, the Defendant declined to proceed with the proposed sale without giving any reasons. In the premises, the Plaintiff contended that it had established a prima facie case to warrant a grant of injunction given that it had fulfilled all the underlying conditions set out in the MOU which included the execution of a Bank Guarantee in favour of the Defendant. The Plaintiff further urged the Court to evaluate the conduct of the Defendant throughout the entire transaction as it would be inequitable for the Defendant to simply walk away from a binding collateral contract in the form of the MOU.
4. The Defendant opposed the application through Grounds of Opposition dated 13^th February, 2013 and a Replying Affidavit of Martin Ndung’u of the same date. The Defendant contented that at all material time it had made it clear to the Plaintiff that the purchase of the suit assets was a bid process and that negotiations were not done on an exclusive basis. That the Defendant had disclosed to the Plaintiff that there were other interested parties with whom the Defendant was dealing with. The Defendant admitted having been furnished with the Bank Guarantee of USD 2,000,000 by the Plaintiff. That by bringing this suit,  the Plaintiff had breached the confidential agreement executed on 3^rd October, 2012.  It was the Defendant’s case that it had made it clear to the Plaintiff that a definitive contract would be entered into by the Defendant and the successful bidder after negotiations and a mutual agreement on the key terms and conditions of the Draft Sale Agreement.
5. With regard to the MOU, the Defendant contended that although the Plaintiff claimed that the same was unfair, onerous and oppressive, it nevertheless had  executed the same on its own will. That under the MOU, each party had the option of withdrawing from the bidding process at any time. That if the parties elected to proceed with the proposed transaction, then  mutually definitive documentation would be executed within 30 days of executing the MOU; that no exclusivity was created between the parties and that the MOU did not create or impose any binding obligation to continue discussions between parties or to engage in the proposed transaction.  That  accordingly, each party was to bear its own expenses and that either party had the option to terminate discussions with the other .
6.  It was the Defendant’s case that under the MOU, neither party was entitled to the remedy of specific performance of any of the terms of the draft documents or to damages or other compensation of any sort from the other. That the Plaintiff had delayed  in executing the MOU which the Defendant construed as lack of interest on the Plaintiff’s part.
7. The Defendant however admitted that its Advocates forwarded a Draft Agreement of Sale for the Plaintiff’s Advocates review via email dated 7^th January, 2013 wherein it specifically informed the Plaintiff that subject to the comments the Defendant’s Advocates received, the Defendant would consider the Plaintiff’s offer in light of other offers .The Defendant was of the opinion that the submission of the Draft Agreement did not constitute acceptance of the Plaintiff’s offer of US$3,500,000. The Defendant  asserted that by the time the Defendant’s Advocates reverted on 28^th January, 2013 indicating that the Plaintiff was  ready to sign the Agreement for Sale, the Defendant had already accepted another bidder’s offer. That an Agreement for Sale was executed on 24^th January, 2013 which however could not be produced in these proceedings on the allegation that it was confidential. The Defendant therefore contended that in light of the foregoing, the Plaintiff was undeserving of the Orders sought as it had not established a prima facie case with any probability of success. That further,  there was no cause of action by the Plaintiff against it and that the present proceedings are only aimed at scaring off the successful bidder.
8. I have considered the Affidavits on record and the rival submissions by Counsel. I have also carefully considered the various authorities relied on by counsel. I take the following view of the matter. The principles governing the grant of injunctions are well known. An applicant must rise to the threshold set in the case of Giella Vs Cassman Brown [1973] E.A 358. That he must establish a prima facie case with a probability of success,  that he stands to suffer harm not compensable in damages and if in doubt, the court will decide the matter on a balance of convenience.
9. Prima facie case has been defined in Black’s Law Dictionary 2^nd  Edition  as:-

“At first sight; on the first appearance; on the face of it………….A prima facie case is one which is established by sufficient evidence and can be overthrown only by rebutting evidence adduced on the other side”

In Mrao –vs- First American Bank Ltd & 2 others (2003) KLR 125, the Court of Appeal defined prima face case as a case where on the material presented to the court, a tribunal properly directing itself will conclude that there was a right that had been breached by the other party as to call for a rebuttal.  So has the Plaintiff demonstrated that it has a right that has been breached by the Defendant?

10. It is common ground that the parties entered into an MOU which was by all means a preliminary agreement. The terms of the said MOU indicated that the same was non-binding on the parties and that it was non-exclusive in that, the Defendant was in negotiation with other potential purchasers of the suit assets. It is also common ground that the Plaintiff did take out an irrevocable Bank Guarantee of USD$2,000,000 in favour of the Defendant in terms of the MOU, that on the Plaintiff giving a bid for US$3,500,000 the Defendant forwarded to it a draft  Sale Agreement.  It is when the Plaintiff sought the engrossment of the Sale Agreement and for its execution on 28^th January, 2013 that the Defendant did not wish to continue with negotiations.  It is on this basis that the Plaintiff contends that having carried out all its obligations under the said MOU, it is entitled to enter into a contract with the Defendant.
11. As stated earlier, the MOU between the Defendant and the Plaintiff was a preliminary agreement. Preliminary agreements are referred to by a number of descriptions including letters of intent, heads of agreement, memorandum of understanding or commitment letters. A preliminary agreement is utilized where for one reason or another it is desirable to enter into an interim or initial agreement or understanding pending the parties’ mutual rights and obligations being set out in a formal contract. It is thus a useful tool in commercial transactions. As to the question as to whether MOU’s are legally binding, I would state that the same is partly a matter of construction of the particular document and partly a question of legal analysis. It is therefore a question of fact whereby the Plaintiff has the burden of persuading the Court that such an agreement exists and was in the circumstances binding.
12. It is trite law that in deciding disputes, it is the court’s duty to give effect to the intention of the parties.  The parties’ intention is discernible from the documents and conduct of the parties.  However, onerous a document or contract may be, the court’s duty is to give effect to it.  In the case of Smith –vs- Cook (1891) AC 297 at 303 the court held:-

“The duty of the court is to give the natural meaning to the language of the deed unless it involves some manifest absurdity or would  be inconsistent with some other provision of the deed and would therefore be contrary to the intention of the parties as appearing upon the face of the deed.”

In the case of Rose and Frank Co. –vs- J.R Crompton and Brothers Ltd (1923) 2 KB 261, the court held that there was nothing wrong in having clauses in an agreement  where parties agree not to be bound in law but subject to a contract being drawn up.

13. In the case of RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14,  the Supreme Court of the United Kingdom considered whether using the phrase “subject to contract” during contract negotiations prevented an enforceable contract from being formed. The Court held that whether or not there was a binding contract in place could be established by considering the communication, by words and by conduct, between the parties and assessing whether it led to the objective conclusion that the parties intended to create legal relations and whether the parties had agreed on all terms essential to form a contract. In Investec Bank (UK) Ltd v Zulman and another [2010] EWCA Civ 536 the Court cautioned against putting too much weight behind the phrase ‘subject to contract’ and held that it is the parties’ intention that matters. The presence or absence of the phrase will not of itself determine whether or not a contract exists.  It is the intention of the parties that matters.
14. How does the Court then determine the intention of the parties? The Case of Storer v Manchester City Council [1974] 1 W.L.R. 1403 is instructive.  In that case LORD DENNING M.R. stated that:-

“In contracts you do not look into the actual intent in a man's mind. You look at what he said and did. A contract is formed when there is, to all outward appearances, a contract. A man cannot get out of a contract by saying: “I did not intend to contract” if by his words he has done so. His intention is to be found only in the outward expression which his letters convey. If they show a concluded contract that is enough.”

15. So what does the conduct of the parties in this matter indicate? That the Plaintiff and the Defendant entered into negotiations for the purchase of the suit assets is not in question.  That the suit assets belonged to the Defendant who put them up for sale is also not in question.  There is an MOU executed by the parties.  An  irrevocable Bank Guarantee of USD$2,000,000 by the Plaintiff in favour of the Defendant which was subjected to the approval of the Defendant’s Bank, Citi Bank- Kenya at a cost to the Plaintiff.  Further negotiations led to the Plaintiff placing its bid of USD$3,500,000 whereby the Defendant’s Advocates forwarded a draft sale agreement for the review and consideration of the Plaintiff. I have seen the correspondence that followed the draft sale agreement.  The Plaintiff’s  attempt to renegotiate certain terms in the draft agreement was rejected, whereupon the Plaintiff agreed to execute the draft agreement as drawn by the Defendant.  I  have seen both the MOU and the draft agreement. Some of the clauses in the MOU were replicated in the draft agreement.  Both the MOU and Sale Agreement were accepted by the Plaintiff as drawn by the Defendant.  Any suggestion to change the terms were met with a firm No.  It is when the Plaintiff had accepted to execute the draft agreement that the Plaintiff sought to pull out of the transaction.  The question that arises is in the circumstances of this case, what is the position of the MOU in the face of the draft agreement?  
16. In the Case of Masters v Cameron (1954) 91 CLR 353; (1954) 28 ALJR 438, the High Court of Australia had an occasion to deal with the issue enforceability of preliminary agreements in Australia.  It identified three categories of preliminary agreements. The Court delivered itself thus:-

“Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three cases. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

In each of the first two cases there is a binding contract: in the first case a contract binding the parties at once to perform the agreed terms whether the contemplated formal document comes into existence or not, and to join (if they have so agreed) in settling and executing the formal document; and in the second case a contract binding the parties to join in bringing the formal contract into existence and then to carry it into execution. Of these two cases the first is the more common...

Cases of the third class are fundamentally different. They are cases in which the terms of agreement are not intended to have, and therefore do not have, any binding effect of their own ... The parties may have so provided either because they have dealt only with major matters and contemplate that others will or may be regulated by provisions to be introduced into the formal document ... or simply because they wish to reserve to themselves a right to withdraw at any time until the formal document is signed. (Underlining mine)

17. I have seen both the MOU and the Draft Agreement for sale.  In my view save for the clause about the purchase price, the latter document restated the terms contained in the MOU.  Indeed it sought to make the terms of the MOU more precise. As I have already stated, both documents were accepted by the Plaintiff as drawn by the Defendant.  The Defendant could not allow any alteration whatsoever. On the non-binding nature of the MOU, the same stated:-

“No binding contractual commitment as to the proposed transaction shall be created or inferred absent execution by both parties of final transaction Documents, except for the obligations of the parties set forth above under “confidentiality” and “Non-Exclusive,” which obligations shall be binding and enforceable on the parties ..... Either party may decide at any time, in its sole discretion and for any reason, to terminate discussions with the other and such party shall not be liable for any expenses,  costs or losses incurred by the other party arising from such termination.” (Underlining mine)

18. Further to the foregoing, I have seen the email and letter dated 27^th and 28^th January, 2013, respectively by the Plaintiff’s Advocates to the Defendant’s Advocates.  They confirm that the Plaintiff was now ready to execute the agreement as had been drawn by the Defendant’s Advocates. It is then the Defendant’s Advocate informed the Plaintiff’s Advocates that the Defendant did not wish to “proceed with negotiations with  the Plaintiff” in relation to the proposed sale. The question that arises is, as at the date of the letter by the Defendant’s Advocates dated 28^th January, 2013 were the parties still under negotiations or they had agreed on all the terms and what was remaining was engrossing of the Agreement and subsequent  execution?  I think the parties had crossed the line of negotiations. They had agreed on everything as had been reduced into writing by the Defendant by way of the Draft Agreement for sale including the price and mode of payment and what was left was engrossment and execution thereof.  In my view, the transaction perfectly fell on the second category of Masters –vs- Cameron (Supra) case.  This, in my view, was beyond negotiation stage  and different from the cases relied on by the Defendant.  The parties had reached the arena of execution of the formal contract.   The parties had sealed their bargain.  In the circumstances, can the Defendant at that stage argue that it was still negotiating and was entitled to pull out under the terms of the MOU?  I entertain doubts.
19.   It is not lost to this court that, throughout the entire transaction the Defendant seemed to have been preoccupied with enticing the Plaintiff to the transaction, while at the same time preserving for itself the freedom to opt out at any stage.  That, the Defendant was perfectly entitled to but not after all its conditions had been accepted, the Plaintiff having acted on the representations of the Defendant and the parties having reached a consensus on the transaction. To my mind, such conduct on the part of the Defendant can be construed to be not only oppressive but unacceptable in the world of commerce. Though the Defendant submitted that it owned the suit assets and therefore at liberty to dispose them as it deems fit, I find the case of Kenya Institute Of Management –v- Kenya Reinsurance Corporation (2008) eKLR instructive.  In that case Nambuye J (as she then was) held:- 

“In the circumstances of this case if the Plaintiff’s, argument that, existence of a collateral contract is not defeated by the provisions of Section 3(3) of the Law of Contract Act Cap. 23 Laws of Kenya, in line with the decision in the MUMIAS CASE (SUPRA), and that the facts of the MUMIAS case are not distinguishable as asserted by the defence, are upheld by the trial court the court would have upheld the principle of substantial justice as opposed to adherence to technical justice.  The trial court would have gone a long way to fortify this principle by establishing that although a property owner has a right to sell or not to sell it, he has no right to dangle it with impunity before the eyes of a serious intending buyer and where he does so, he has to be made to meet the consequences for his impunity by either being put on hold in the exercise of his right of sale to a 3^rd  party, pending the trial or to ultimately be told to specifically perform the contract in favour of the serious intending purchaser before whose eyes the sale was dangled with impunity as alleged by the Plaintiff.  “(Emphasis mine)

In my view, to uphold the position where a party can pull out of a transaction when the parties are already at consensus ad idem, will not be prudent in the world of commerce. To my mind, that freedom should be limited up to a point the parties are still negotiating.   Once all terms have been agreed and settled, that freedom should dissipate.  Otherwise, mischievious parties with no intention of selling their merchandise may engage serious purchasers in a wild goose chase knowing very well that they can pull out at any stage.  I think that is not to be encouraged.

20. With regard to the contention by the Defendant that it had already accepted another bidder’s offer, the Defendant indicated that it could not produce the alleged sale agreement as it was a subject of a confidentiality agreement. I am aware that some contracts deal with commercially sensitive information and the parties may want to keep this kind of information confidential. Such information may be of a proprietary nature such as intellectual property or trade secrets. However, I am of the view that such agreements, though demanding confidentiality in terms of disclosure of information to third parties, usually contain exceptions as to when the information can be disclosed. One such exception, in my view is where a Court of Law may require it. Though this Court cannot compel the production of the alleged Sale Agreement between the Defendant and the Interested Party, it is important to note the provisions of the Evidence Act Cap. 80 with regard to proof of facts.  It is a party who alleges the existence of a fact is called upon to prove it.  I do not think Section 139 of the Evidence Act  relied on by the Defendant could properly be relied on as the Defendant sought to. There is evidence on record to show that as early as September, 2012, the Defendant was in the process of removing information relating to intellectual property. It was not contended that the information in the contract was of a confidential nature. The Defendant contended that the suit assets have been disposed off to the Interested Party by the 24^th January, 2013 without producing any evidence. The terms of the said Agreement are unknown at this stage. I do not think that the court should have compelled the Defendant and the Interested Party to produce the said Agreement.   It was them to do so to prove their contention that the suit assets were now unavailable for sale to the Plaintiff.  There is therefore no evidence that the suit assets are  beyond reach of the Defendant. In light of the foregoing, I hold the view that the justice of the case requires that the suit assets be preserved pending the hearing and determination of this Suit.
21. I am satisfied that on the foregoing, the Plaintiff has established a prima facie case.  I need not consider the other two limbs  of the Giella case.  However, my view is that from the nature of the suit assets, if an injunction is not granted damages will not be enough compensation were the Plaintiff to succeed at trial.  As regards the balance of convenience, I consider it tilting in favour of maintaining the status quo
22. For these reasons, the Court is satisfied that the Plaintiff has laid down sufficient ground for the grant of a temporary injunction. However, in the circumstances of this case, I think a conditional injunction will be appropriate. Prayer 3 of the  Notice of Motion dated 1^st February, 2013 is hereby granted on the condition that  the Plaintiff do execute under seal  and file in court within seven (7) days an undertaking as to damages.

DATED and DELIVERED at Nairobi this 21^st day of June, 2013.

...........................................

A. MABEYA

JUDGE