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Kenya’s President disagrees with contents of the proposed change to surety law

Kenya’s President disagrees with contents of the proposed change to surety law

By way of a Memorandum dated 3 January 2020 (the Memorandum), the Kenyan President has communicated to the National Assembly the reasons why he has not assented to the proposed Law of Contract (Amendment) Bill 2019 (the Bill) seeking to amend surety law in Kenya. In exercise of his constitutional powers, the President has returned the Bill to the National Assembly and it now remains to be seen which route the National Assembly will take in the exercise of its legislative powers.

What did the Bill seek to amend?

The Bill sought to amend surety law in Kenya by requiring a creditor to first exhaust all avenues available to it and to enforce its rights against the principal debtor before seeking to enforce its rights against a surety. For a more detailed commentary and impact analysis of the Bill, refer to our 25 September 2019 article available here and the 20 May 2019 article appearing here.

The President’s Reservations

The President was apprehensive that the Bill could potentially adversely affect Kenya’s economy and the ease of doing business in Kenya.

In the Memorandum, the President has listed the following grounds for his refusal to assent to the Bill:

  • the proposed amendments in the Bill have been re-introduced prematurely as the National Assembly has not considered the ongoing stakeholder consultations regarding similar changes proposed in a different bill (the Statute Law (Miscellaneous Amendments) Bill, 2019);
  • the proposals will negate a long-standing principle of contract law relied on by participants in the Kenyan economy that the enforcement of a beneficiary’s rights in a guarantee will not be frustrated through abuse of the litigation process;
  • the proposals will prejudice the financial sector as they would give guarantors ammunition to engage a beneficiary of a guarantee in protracted debt recovery process;
  • the proposals will adversely affect credit to the micro, small and medium enterprises as lenders will be reluctant to rely on third party collateral; and
  • the proposals will prejudice capital raising in the capital markets.

The above reasons given by the President mirror to a large extent the concerns we raised in our two previous commentaries on the Bill.

What Follows?

Once the President refers a bill brought to him for assent back to the National Assembly, the National Assembly may either:

  • consider the President’s reservations and amend the bill accordingly; or
  • disregard the President’s reservations and pass the bill by way of a vote supported by two-thirds of members of the National Assembly either (i) without amendments or (ii) with amendments that do not necessarily accommodate all reservations by the President.

We shall wait to see which way the National Assembly will go following the referral of the Bill back to the National Assembly.

If you have any queries regarding the financial services practice area generally, please do not hesitate to contact Peter Mwaura at pmwaura@mwc.legal. Please note that this e-alert is meant for general information only and should not be relied upon without seeking specific subject matter legal advice.

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