Nakuru Oil Mills Ltd v DK Lakhani [1976] KECA 5 (KLR)
The bottom line
#When a Kenyan seller lawfully resells goods after a buyer's default, the original contract—including its arbitration clause—dies, so the dispute goes to court, not arbitration.
What this practically means
#Executive summary
#Key legal issues
#Effect of rescission under section 48(4) of the Sale of Goods Act on the arbitration clause
Rescission under section 48(4) annuls the whole contract including the arbitration clause; only the seller's claim for damages is preserved, and that right is statutory and enforceable in the ordinary courts.
The court distinguished frustration, where an arbitration clause may survive to regulate disputes arising before destruction, from statutory rescission by operation of law on the buyer's default. Section 48(4) expressly saves only the seller's claim for damages; nothing else survives. Reading an arbitration clause back into the rescinded contract would, following Beckett J in Chandu Lal Parma Nand, read into the subsection something it does not contain.
Consequence for the jurisdiction to stay proceedings under section 6 of the Arbitration Act
With the arbitration clause annulled, the agreement for arbitration has become inoperative within section 6(2)(b), and the court's jurisdiction to stay the suit ceases to exist.
The stay jurisdiction under section 6 depends on the existence of a live arbitration agreement. Since the rescission under section 48(4) extinguished the clause, there was no longer an arbitration agreement to justify a stay, and the judge below, had section 48(4) been brought to his notice, must have refused the stay.
Readiness and willingness to arbitrate under section 6(1) of the Arbitration Act
The defendant failed to demonstrate readiness and willingness to arbitrate; his dishonoured cheques, refusal to accept notice of resale and silence showed unwillingness to have the matter adjudicated.
The judge's reasoning that an applicant for a stay is deemed ready and willing to arbitrate was found difficult to follow. Wambuzi P added that a party cannot sit back until suit is filed and then, at the last moment, assert a dispute; identification of the areas of dispute is one of the things necessary to the proper conduct of an arbitration.
Whether a wide arbitration clause survives rescission by reason of the breadth of its scope
The breadth of the clause is irrelevant; the question is not its scope but its life, and on rescission it ceases to apply or becomes inoperative.
Mr Khanna's argument, drawing on Henck v Andre Cie SA, that a clause of very considerable width covers disputes arising after the contract is destroyed was rejected: that line concerns frustration. Rescission under section 48(4) is different; the clause was an agreement on the method of ascertaining loss, not part of the saved right to damages, and ceases to operate on rescission, leaving damages to the ordinary courts.
Legal principles established
#- Where a seller expressly reserves a right of resale and, on the buyer's default, resells the goods, section 48(4) of the Sale of Goods Act rescinds the original contract of sale and, with it, the arbitration clause; only the statutory right to claim damages survives, enforceable in the ordinary courts.
- Once the arbitration agreement has become inoperative by reason of such rescission, the High Court has no jurisdiction under section 6 of the Arbitration Act to stay proceedings on the damages claim.
- A party applying for a stay under section 6 of the Arbitration Act must show that it was, when the proceedings were commenced and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration; silence after notice of a claim does not establish such readiness.
Court orders
#- 1.Appeal allowed
- 2.The order staying the proceedings set aside
- 3.The order that the plaintiff pay the defendant half the costs of the suit set aside
- 4.The proceedings reinstated and the suit to proceed to hearing
- 5.Costs of the application in the High Court left to the discretion of the court below in light of the eventual determination of the suit
- 6.Each party to bear their own costs of the appeal (no order as to costs)
- On appeal from
- High Court
- Not stated in the judgment
- Jurisdiction invoked
- First appeal to the Court of Appeal with leave, from the High Court's decision under section 6 of the Arbitration Act (specific appellate provision not stated in the judgment)
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#Cite this brief
Caselaw, "Nakuru Oil Mills Ltd v DK Lakhani [1976] KECA 5 (KLR)", Case Analysis (1976). Not stated in the judgment. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/1976/5/eng@1976-01-14
Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.