Month: March 2025

Liquidated Damages (LDs), also known as Liquidated and Ascertained Damages (LADs), are clauses that establish a predetermined amount that the breaching party must pay to the other party for a specified breach and operate as an exclusive remedy in respect of that breach. The primary purpose of these clauses is to pre-define the damages payable in the event of a breach, ensuring that the damages are compensatory rather than punitive.

Historical Origins and Development

Penal bonds were commonly used before the introduction of LDs. These bonds involved a promise to pay a specified sum if another obligation was not fulfilled. Initially, common law Courts upheld and enforced these penal bonds – however, Courts of equity intervened, offering relief by restraining actions based solely on penalties.

After the penal bond, the agreed sum for breach of contract emerged, reversing the previous approach where penalties were the primary obligation in agreements. In the 18th Century, a party could choose to sue either for the penalty or for damages.

It was not until 1801 when the doctrine of LDs was first established, pursuant to which a plaintiff could only recover the actual damage proven, even under common law. This implied that if the sum was a pre-estimate of the loss, it would not be regarded as a penalty and could be recovered as LDs.

Difference between LDs and Penalties

The distinction between an LDs clause and a penalty clause in a contract is critical as it affects the enforceability of the stipulated sum in case of breach. First, a stipulated sum will be classed as a penalty where it is in the nature of a threat fixed in terrorem of (i.e., to scare) the other party, coercing them to act in a particular way with the intention of preventing a breach of the contract. Generally speaking, when a stipulated sum is described as being in terrorem it implies that the amount is not a genuine pre-estimate of loss, but rather a punitive measure which is designed to coerce the other party into fulfilling their obligations under the contract out of fear of the severe penalty.

Secondly, a stipulated sum is considered to be a penalty if it is extravagant and unconscionable in comparison with the loss that could be proven to have followed from the breach. In addition, when a single stipulated sum is applied to various types of breaches— some of which may carry substantial financial consequences, while others are relatively minor— it raises a presumption that the sum is intended as a penalty. This presumption, though not definitive, suggests that the sum is not a genuine pre-estimate of damages but rather a punitive measure designed to discourage breaches of any kind.

Pros and Cons

In construction contracts, LDs clauses are a critical tool used to manage and allocate risks associated with potential breaches, particularly delays in project completion. While LDs clauses offer significant advantages in terms of certainty and risk management, they also come with potential drawbacks that must be carefully considered during contract negotiation.

Pros

One of the primary benefits of LDs clauses is that they define the contractor’s liability for a specified breach, leaving both parties with certainty on the potential consequences of a breach. It is difficult to predict additional costs within contractual relationships, particularly those related to delays, with the result that establishing fixed monetary liability on the outset offers valuable clarity to both parties. For the contractor, agreeing to LDs provisions reduces uncertainty surrounding potential penalties for missing the completion deadline, allowing for more accurate risk assessment.

In the case of Ravina Agencies Limited v. Coast Water Works Development Agency (2024) KEHC 3264 (KLR) the Court examined a contractual provision stating that the payment of LDs would not affect the contractor’s liabilities. The Court observed that: – “There is no dispute that the Defendant deducted Kshs 4,415,299.88 from the sums due to the Plaintiff for completed works. The deduction is reflected in the Certificate for Interim Payment dated 14th October 2015, at page 88 of the Plaintiff’s Bundle of Documents. The explanation given by DW1 was that the aforesaid sum was deducted as liquidated damages on account of the delay the Plaintiff in completing the works and as pointed out herein above, notice to this effect was given by the Defendant vide its letter date 28th July 2015…

From the uncontroverted evidence presented herein, it took the Plaintiff 1½ years to complete the project. In the premises, the Defendant was within its rights to charge liquidated damages as provided for in Clause 52.1 of the General Conditions of Contract…”

In addition, LDs negate the need for the innocent party to prove the actual loss suffered, as LDs are recoverable as a debt, thereby bypassing the need for costly proof of damages. The clause enables a contractor to conduct a cost-benefit analysis to assess whether it is more commercially advantageous to pay the stipulated damages or pursue other options. Furthermore, the specified level of LDs serves as a ceiling for damages payable, thereby preventing a party from altering the amount even if the actual loss surpasses the stipulated LDs.

LDs also save time and expenses. By agreeing on a rate for LDs, the need for costly and lengthy legal proceedings to determine the employer’s losses from a breach is eliminated. Instead, the employer can simply deduct the damage from an interim or final payment to the contractor, following the issuance of a “pay less” notice. Although the contractor must pay the LDs, they avoid the legal costs that would otherwise be incurred in proceedings to determine the general damages owed to the employer for the breach.

Further, from a commercial perspective, the employer’s reasons for imposing LDs are likely to include the desire to deter breach of contract or, at least, to encourage compliance by the contractor in the contract.

Cons

Typically, LDs clauses are designed to apply only to specific breaches. However, there are instances where an employer may attempt to impose LDs for a different type of breach. Conversely, though less common, an employer might argue that a particular breach falls outside the scope of the LDs clause, while the contractor contends that it does. For example, if the employer suffers a substantial and unforeseen loss, they might seek to bypass the exclusive remedy provided by the LDs clause in favor of pursuing general damages.

Issues related to LDs in a subcontract arise from the terms agreed upon during contract negotiations. One challenge is passing down LDs from the main contract to the subcontract.  If the subcontract stipulates a lower LDs amount than the main contract, the main contractor’s ability to pass on LDs deductions to the responsible subcontractor is limited to the lesser amount. This exposes the main contractor, as it will be forced to cover the shortfall in the LDs deducted by the employer.

Consequently, if a subcontractor’s delay causes a corresponding delay for the main contractor under the main contract, the amount recovered from the subcontractor would be borne by the employer. In cases where LDs are the exclusive remedy for delay, the main contractor would receive no additional compensation for direct losses caused by the subcontractor’s delay beyond the LDs paid to the employer under the main contract.

LDs clauses generally do not allow a party to recover a higher sum than the stipulated amount, even if the actual damages are significantly greater. This situation often arises when the stipulated sum is intended to cover a range of varying and potentially unprecedented breaches. In the case of Diestal v Stephenson (1906) 2 KB 345, a contract for the sale of coal stipulated that the defaulting party would pay one (1) shilling for every tonne not delivered. Despite the seller’s greater loss due to non-delivery, the Court held that the seller was limited to recovering only the stipulated amount.

In an ideal contractual setting, LDs would be negotiated between parties of equal bargaining power, ensuring both parties agree on terms that are balanced. This may, however, not be the case in public contracts awarded through tendering processes whereby contracts may be presented on a “take it or leave it” basis with the contracting authority having pre-determined LDs.

Alternative Remedy

An alternative remedy or option to LDs is the extension of time, where the employer (normally acting through its designated architect) permits the contractor’s request for an extension of time with respect to the completion deadline as a result of a relevant delay event specified in the contract. These events include, but are not limited to force majeure, variations to design, industrial action, abnormal weather conditions, or delays caused by the employer’s failure to hand over the site on time.

Conclusion

LDs clauses serve as a powerful tool in contract management, offering clear benefits in risk allocation, cost certainty, and streamlined dispute resolution. However, they also come with limitations, such as the risk of unenforceability if deemed punitive and the challenge of applying them to unforeseen breaches. Parties must carefully draft LDs clauses to balance fairness with commercial needs, ensuring they are neither excessive nor too restrictive. Ultimately, the decision to include LDs should align with the parties’ overall risk management strategy and project objectives.

The Governments of Zambia and Tanzania, jointly manage a 1,710km long TAZAMA Pipeline. TAZAMA (acronym of Tanzania and Zambian Mafuta (oil in Swahili) Authority) pipeline was built to overcome the Zambian oil crisis that emerged after the white settler community in Rhodesia (now Zimbabwe) issued a unilateral declaration of independence in 1964 and frustrated Zambia’s petroleum imports through their country. The pipeline runs from the Tanzanian capital of Dar-es-Salaam to Ndola, a hub of the Copperbelt Province of Zambia. The pipeline was built between 1967 and 1968 by the Italian national oil company, Ente Nazionale Idrocarburi (ENI).

Crude stock was transported through the pipeline for the exclusive purchase, refinery and wholesaling under the Government of the Republic of Zambia (GRZ) owned Indeni Petroleum Refinery (which was a 50-50 joint venture with Total of France). No Oil Marketing Company (OMC) was permitted to import the crude stock to feed into the pipeline.

Following years of Indeni Refinery plant decline as well as crude oil financing hurdles, a policy decision was made to transform the pipeline and enable it to transport “low sulphur gas oil” (LSGO). The conversion was successful and to facilitate OMCs to import LSGO. To facilitate this, GRZ through the Ministry of Energy and after consultation with stakeholders, approved “TAZAMA Pipeline Open Access Guidelines” (the Guidelines). From an efficiency view point, the previous monopoly of importation, refinery and wholesale under State control, while servicing some strategic public interest, was not sustainable and prone to mismanagement, corruption and created a barrier to development of a robust oil supply chain in Zambia. It is hoped that the implementation of these well-intentioned Guidelines shall not be marred by, among others:

• unfair, rigid or unpragmatic contract terms that may be included under paragraph 3.1 of the Guidelines;
• selection and registration process for OMCs to access the Pipeline under paragraph 4 of the Guidelines shall not be onerous in documentation, high in “registration fees”; prone to political patronage and undue time-wasting paper work;
• a “high powered” 9-member Evaluation Committee at paragraph 4.1.2, of which 3 must be employees of the Ministry of Energy. It is not clear from the Guidelines how the other 6 members shall be appointed, notwithstanding that 3 members from the same Ministry is a recipe for interference in the professional evaluation process in an “open access” regime;
• a bi-annual review of the Guidelines “and as and when required”, with the Ministry’s finger on the trigger as the key determinant of the review process under paragraph 7 of the Guidelines.

Otherwise, kudos to Zambia’s Energy Regulation Board (ERB), the OMCs and the Ministry of Energy for the Guidelines that are expected to foster competition, provide for effective and efficient use of the pipeline, and hopefully, facilitate sustainable availability of the LSGO.

So far, Zambia’s fragile roads to and from Tanzania in the north and to and from the ports of Beira and Durban in Mozambique and South Africa respectively, are lined with oil tankers hauling fuel into Zambia (including those proceeding to the Democratic Republic of Congo –  DRC). It is not yet clear the extent to which Indeni is able to satisfy the local market, as well as take advantage of exports, if any, to the DRC, through the utilization of the pipeline.

While the open access Guidelines are in place, the test of the efficacy of the Guidelines will be seen in terns of the extent of application of the principle of “competitive neutrality” i.e., the fair, transparent, and non-discriminatory application of the Guidelines and notably, procurement process for both State-owned/managed actors and the private sector players. The competition law of Zambia binds the State to the same competition rules, insofar as the State or an enterprise owned, wholly or in part, by the State engages in trade or business for the production, supply, or distribution of goods or the provision of any service within a market that is open to participation by other enterprises.

It is therefore not surprising that the International Monetary Fund (IMF), reportedly in November 2024 included the implementation of the Guidelines as a key performance indicator with the Zambian Government. According to news reports, this primarily is aimed as ensuring that Indeni shall be subjected to competitive bidding process together with the private sector bidders.

With a nine-member evaluation committee having 3 members who are employees of the Ministry of Energy, with the tender drafting itself being undertaken by the Ministry of Energy itself, the actualization of competitive neutrality will be under the hawkish eyes of the IMF and the powerful OMCs.

On 21st April 2023, the Supreme Court delivered its Judgment in Dina Management Limited v County Government of Mombasa & 5

Others (2022) KESC 24 (KLR) wherein it dismissed the Appellant’s Petition of Appeal. The decision sent seismic shock waves across the Kenyan legal terrain the reverberations of which arguably upended an entire system of land law. The history of the case dates back to September 2017, when it is claimed by the Appellant (Dina Management Limited) that the 1st Respondent (the County Government of Mombasa), without prior notice, forcefully entered the property known as MN/1/6053 situated in Nyali Beach, Mombasa County (the Suit Property), which was registered to the Appellant, and demolished the entire perimeter wall facing the beachfront and also proceeded to flatten the developments on the suit property.

Prior to filing of the Petition of Appeal, the Appellant and the 1^st Respondent had filed Petitions before the Environment and Land Court (the ELC), which were consolidated to be heard as one (1) case. Among the issues for determination before the ELC was whether the Appellant should suffer the faults (if any) of the third parties in the matter. On this issue, the ELC found that the Appellant could not be protected as a bonafide purchaser without notice as it failed to demonstrate that it had conducted due diligence before purchasing the Suit Property.

Aggrieved by the decision of the ELC, the Appellant moved the Court of Appeal, which, in delivering its Judgment on the issue, agreed with the ELC that the Appellant cannot enjoy protection under the doctrine of the bonafide purchaser. The Court of Appeal’s rationale was that because the Suit Property was originally acquired unlawfully, the title in the property could not qualify for indefeasibility. It is against this background that the Appellant filed the present Petition of Appeal in the Supreme Court.

The Supreme Court’s determination

In its Judgment, the Supreme Court indicated that to establish whether the Appellant is a bonafide purchaser, there was need to go to the root of the title, right from the first allotment.

It was not in contention that the Suit Property was first allocated to the former President, H. E. Daniel arap Moi, in 1989, and that the applicable law at the time relating to physical planning was the Land Planning Act (Cap. 303) Laws of Kenya, which was later repealed by Physical Planning Act (Cap. 286) Laws of Kenya, which has since been repealed by the Physical and Land Use Planning Act, No. 13 of 2019.

Under the Development and Use of Land (Planning) Regulations, 1961 made under the Land Planning Act, public open spaces were classified as land designated for public purposes. At the time, the Suit Property was designated as an open space. It is on this premise that the Supreme Court held that the Suit Property was a public utility and could not be described as unalienated land that was available for allotment as urged by the Appellant.

Nonetheless, the Supreme Court, in giving the Appellant the benefit of the doubt, discussed the procedure for allocating unalienated land. In its analysis, the Supreme Court pointed out that a Letter of Allotment, being one of the primary documents used in the allocation of land, should be accompanied by a Part Development Plan, which document was not produced in Court as evidence of the allocation of the Suit Property to the seller. As such, the Supreme Court found that the said allocation would have been irregular in any event.

Consequently, it was held that because the first allocation of the Suit Property had been irregularly obtained, there was no valid legal interest which could pass to the seller, who in turn could pass to the Appellant. The Supreme Court’s rationale was that the Appellant ought to have been more cautious in undertaking its due diligence, when purchasing the Suit Property.

While the Petition of Appeal raised various issues for determination, the crux of this article is the Supreme Court’s interpretation of the doctrine of the bonafide purchaser in light of the Curtain Principle.

The Curtain Principle

The Curtain Principle is one of the foundational principles of the Torrens system of registration of land. The Torrens system, which finds its roots in Australia, is a system of land registration under which the Certificate of Title is sufficient evidence of good title. There are three (3) principles underpinning this system, that is: the Mirror Principle, the Curtain Principle, and the Insurance Principle. More specifically, the Curtain Principle stipulates that there is no need to look beyond the register, as the Certificate of Title contains all information about the title. In essence, a purchaser need not make inquiries or search previous titles as the current Certificate of Title serves as proof of ownership.

The Curtain Principle is enshrined under section 26 of the Land Registration Act, No. 3 of 2012 (the LRA) under which a Certificate of Title issued by the Registrar is deemed to be conclusive evidence of ownership of land. However, the Supreme Court, in its Judgment, departed from the Curtain Principle on the basis that for a purchaser to seek refuge behind it, he must demonstrate that he is a bonafide purchaser, and should be able to go to the root of the title which he holds.

The Doctrine of the Bonafide Purchaser

The Curtain Principle may be interpreted alongside the doctrine of the bonafide purchaser as the two are both founded on the same rationale. Black’s Law Dictionary (8th Edition) at page 1271 defines a bonafide purchaser as follows:

“One who buys something for value without notice of another’s claim to the property and without actual or constructive notice of any defects in or infirmities, claims, or equities against the seller’s title; one who has in good faith paid valuable consideration for property without notice of prior adverse claims. Generally, a bonafide purchaser for value is not affected by the transferor’s fraud against a third party and has a superior right to the transferred property…”

Until recently, the Courts took the position that purchasers could seek refuge under section 26 of the LRA. The rationale behind this is that the responsibility to ensure the accuracy of the register and the authenticity of titles lies with the Government, and not individuals, which is by law required to pay compensation for any fraud or other errors committed during registration.

The Court of Appeal in Tarabana Company Limited v Sehmi & 7 Others (2021) KECA 76 (KLR) aligned itself with this position in stating that:

“With due respect to the learned trial Judge, the means of determining whether the Appellant’s title was indefeasible and not subject to challenge is spelt out under section 26 of the LRA. What was required was to determine whether the Appellant was in any way involved in the process through which the 4th Respondent obtained title, which the learned Judge found was irregular and with which we agree. There was no evidence adduced before the trial court to show that the Appellant played any role, or was involved in any way in the said process. If title was acquired by fraud, or misrepresentation, illegal, unprocedural or corrupt scheme, the same was before the Appellant came into the picture. We therefore find that the appellant was a bonafide innocent purchaser for value for these reasons, and its title could not and cannot be challenged.”

However, the foregoing is tempered by an alternative school of thought, which is what was followed by the Supreme Court. Under this school of thought, it is posited that the doctrine of the bonafide purchaser should not allow a purchaser free rein to throw caution to the wind, and a purchaser is required to undertake sufficient due diligence at all stages, including satisfying himself on the propriety of the origin and history of the title. In this regard, the Court of Appeal

in the case of Arthi Highway Developers Limited v West End Butchery Limited & 6 Others (2015) eKLR was succinct in stating that:

“For a purchaser who claims that due diligence was carried out at all stages, we find it difficult to believe that there was no explanation sought from the Registrar of Titles about the mysterious disappearance of the original Deed file from the strong room of the land registry. It was common knowledge, and well documented at the time, that the land market in Kenya was a minefield and only a foolhardy investor would purchase land with the alacrity of a potato dealer in Wakulima market.”

In reiterating this position, the Supreme Court in its Judgment pronounced itself as follows:

“…where the registered proprietor’s root title is under challenge, it is not enough to dangle the instrument of title as proof of ownership. It is the instrument that is in challenge and therefore the registered proprietor must go beyond the instrument and prove the legality of the title and show that the acquisition was legal, formal and free from any encumbrance including interests which would not be noted in the register.”

Conclusion

The Judgment of the Supreme Court in Dina Management Limited v County Government of Mombasa & 5 Others is a clear departure from the Curtain Principle that underpins the Torrens system. In essence, it is the Supreme Court’s position that a purchaser cannot claim to be a bonafide purchaser if he cannot go to the root of the title and, in effect, cannot seek refuge under the Curtain Principle. It is therefore advisable for a purchaser to investigate all titles preceding the current one, and it is no longer enough to rely on a Certificate of Title as conclusive proof of ownership.

The Supreme Court’s Judgment, in our view, is a double-edged sword. While it may discourage fraud in land transactions, which is a growing menace, departing from the Curtain Principle may prove to be problematic in the sense that it defeats the purpose of section 26 of the LRA, and altogether discourage the buying and selling of land in this country.