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Court of AppealPartially AllowedCivil Appeal No. 111 of 2010

Zenith Steel Fabricators Limited v Continental Builders Limited & Eltex (EPZ) Limited (Civil Appeal 111 of 2010) (Civ) [2018] KECA 215 (KLR)

Court of Appeal of Kenya
26 October 2018
4,848 words in judgment
View original judgmentRead on Kenya Law Watch case
AI-assisted case brief
·~19 min to read original · ~4 min brief

The bottom line

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Kenya's Court of Appeal confirmed that a main contractor—not the employer—must pay nominated subcontractors unless the contract says otherwise.

What this practically means

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Executive summary

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The Court of Appeal at Nairobi (Waki, Nambuye and Makhandia, JJ.A) allowed the subcontractor's appeal against the High Court's dismissal of its claim for unpaid construction works. The employer commenced a garment factory project at Athi River in 1994 with Continental Builders as main contractor; Zenith Steel was appointed as subcontractor for steel and roofing works for Sh.20,500,000, with no formal contracts signed at any level. The High Court (Kasango, J) found the subcontractor was nominated by the employer, that payment was the employer's responsibility, and that the contractor was a mere conduit, dismissing the suit. The Court of Appeal reversed. It held that the trial court misapplied the Building Contract Dictionary's general definition of a nominated subcontractor, preferring the FIDIC conditions and the Joint Building Council (Kenya) Clause 31, under which a nominated subcontractor is deemed a subcontractor employed by the contractor, with payment rights exercisable only against the main contractor. In the absence of an express 'pay when paid' clause, that absence was construed against the contractor who drafted the founding letter of 12th July 1994, by which the contractor itself nominated the subcontractor and agreed the sum payable. The court also found no privity between the employer and subcontractor, so no direct claim lay against the employer. The judgment and decree of the High Court were set aside and substituted with judgment against Continental Builders for Sh.4,283,320 with interest at court rates from filing suit, and costs of the suit and appeal awarded to the subcontractor against the 1st respondent.

Questions the Court framed

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The issues the Court set itself to decide, in its own words.

  1. 1.The true meaning of a 'nominated subcontractor' in the building construction industry
  2. 2.Who between the employer and the main contractor is bound to pay the sub-contractor
  3. 3.Whether there was privity of contract between the parties
  4. 4.Whether the contractor breached the terms of the contract by failing to pay the subcontractor

Key legal issues

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01

Meaning of a nominated subcontractor

Holding

A nominated subcontractor, though named or approved by the employer, is a subcontractor employed by the contractor; nomination does not shift liability for payment to the employer.

Reasoning

The court preferred the FIDIC definition and the Joint Building Council (Kenya) Clause 31 definitions over the general Building Contract Dictionary definition relied on by the trial court. Those standard forms declare nominated specialists to be subcontractors employed by the contractor, and the employer is not liable to the subcontractor even where the employer made the nomination. The trial court's extrapolation that nomination placed payment liability on the employer was therefore wrong in principle.

p. 4
02

Who bears the obligation to pay the subcontractor

Holding

In the absence of express provisions to the contrary, the main contractor is liable for the subcontractor's payments; only an express 'pay when paid' clause or an express employer assumption of responsibility shifts that burden.

Reasoning

Relying on the Murdoch & Hughes treatise, the court held that the lack of a direct contractual link between employer and subcontractor means the employer is not liable to pay directly; payment rights are exercisable only against the main contractor. Here, the contractor's letters of 12th July 1994 and 1st December 1994 showed it nominated the subcontractor and agreed the amount payable. Since no 'pay when paid' clause was included, its absence was construed against the contractor who drafted the founding letter.

p. 6
03

Privity of contract between employer and subcontractor

Holding

There was no privity of contract between the employer and the subcontractor, so the subcontractor could not claim directly from the employer.

Reasoning

Applying the privity principle from Agricultural Finance Corporation v Lengetia, the court found the employer expressly disclaimed direct responsibility in its fax of 8th December 1994 directing the subcontractor to liaise with the main contractor on all payments. No collateral agreement existed and the employer tendered no evidence of any direct undertaking. The employer therefore could not be called upon to indemnify or pay the subcontractor.

p. 6

Legal principles established

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  • Ordinarily, and absent express provisions, a subcontractor, whether or not nominated by the employer, is responsible to the contractor, and the contractor is responsible for the subcontractor's payments.
  • A nominated subcontractor, though nominated or approved by the employer, is deemed a subcontractor to the main contractor, whose payment rights lie against the main contractor.
  • In the absence of an express 'pay when paid' clause, the contractor who drew up the contract letter cannot rely on a conduit-payment arrangement.
  • An appellate court may interfere with trial court factual findings based on no evidence or where the judge acted on wrong principles.

Court orders

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  1. 1.The judgment of the lower court is set aside
  2. 2.Judgment entered against Continental Builders Limited for the principal sum of Sh.4,283,320/=
  3. 3.The said sum to bear interest at court rates from the date of filing suit until payment in full
  4. 4.The costs of the suit and of the appeal to be borne by the 1st respondent

The bench

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One judgment of the whole court — no separate or dissenting opinions.

majority
majority
majority
On appeal from
High Court of Kenya at Nairobi
H.C.C.C. No. 641 of 1998
Jurisdiction invoked
First appellate jurisdiction under the Court of Appeal Rules (Rule 29), reviewing the High Court judgment and decree

Relief refused

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Direct payment claim against the employer (Eltex (EPZ) Limited)

No privity of contract between employer and subcontractor; subcontractor cannot claim directly from the employer

p. 6

Costs

The costs of the suit and of this appeal shall be borne by the 1st respondent.

Quotable passages

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Verbatim from the judgment, each located to the page it appears on in the official PDF — so these can be cited and checked directly.

ordinarily, and in the absence of express provisions, a subcontractor, whether or not nominated by the employer, is responsible to the contractor and the contractor is responsible for the subcontractor's payments.
p. 6Liability of main contractor for nominated subcontractor payments
the fact of nomination makes no difference to the basic principle that a subcontractor's payment rights are contained in the subcontract and are therefore exercisable only against the main contractor.
p. 3Effect of nomination on payment rights
We must construe the absence of such provision against the contractor who drew up the letter founding the contract and who seeks protection under it.
p. 6Construction contra proferentem - absence of pay-when-paid clause
The judgment of the lower court is hereby set aside and substituted with an order for judgment against M/s Continental Builders Limited for the principal sum of Sh.4,283,320/=.
p. 6Final orders - disposition
The costs of the suit and of this appeal shall be borne by the 1st respondent.
p. 6Costs order

Key timeline

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Practical implications

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Frequently asked questions

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Cite this brief

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Cite this brief

Caselaw, "Zenith Steel Fabricators Limited v Continental Builders Limited & Eltex (EPZ) Limited (Civil Appeal 111 of 2010)  (Civ) [2018] KECA 215 (KLR)", Case Analysis (2018). Civil Appeal No. 111 of 2010. Source: https://new.kenyalaw.org/akn/ke/judgment/keca/2018/215/eng@2018-10-26

Suggested citation format for research notes or client memos. Always verify the original judgment before relying on any point.