Zenith Steel Fabricators Limited v Continental Builders Limited & Eltex (EPZ) Limited (Civil Appeal 111 of 2010) (Civ) [2018] KECA 215 (KLR)
The bottom line
#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
#Executive summary
#Questions the Court framed
#The issues the Court set itself to decide, in its own words.
- 1.The true meaning of a 'nominated subcontractor' in the building construction industry
- 2.Who between the employer and the main contractor is bound to pay the sub-contractor
- 3.Whether there was privity of contract between the parties
- 4.Whether the contractor breached the terms of the contract by failing to pay the subcontractor
Key legal issues
#Meaning of a nominated subcontractor
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.
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.
Who bears the obligation to pay the subcontractor
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.
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.
Privity of contract between employer and subcontractor
There was no privity of contract between the employer and the subcontractor, so the subcontractor could not claim directly from the employer.
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.
Legal principles established
#- 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
#- 1.The judgment of the lower court is set aside
- 2.Judgment entered against Continental Builders Limited for the principal sum of Sh.4,283,320/=
- 3.The said sum to bear interest at court rates from the date of filing suit until payment in full
- 4.The costs of the suit and of the appeal to be borne by the 1st respondent
The bench
#One judgment of the whole court — no separate or dissenting opinions.
- 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
#Direct payment claim against the employer (Eltex (EPZ) Limited)
No privity of contract between employer and subcontractor; subcontractor cannot claim directly from the employer
Costs
The costs of the suit and of this appeal shall be borne by the 1st respondent.
Quotable passages
#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.
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.
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.
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/=.
The costs of the suit and of this appeal shall be borne by the 1st respondent.
Key timeline
#Practical implications
#Frequently asked questions
#Cite this brief
#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.