Taxpayers have been spared a Sh120 billion payout after the Court of Appeal slashed a decades-old claim by a Moi-era supplier of insecticides and malaria control products.
In a judgment delivered on Friday, the appellate court reduced the amount payable to Equip Agencies Limited from the Sh127 billion that had been captured in the government's pending bills to Sh5.505 billion.
The dispute dates back to the mid-1990s when Equip Agencies supplied insecticides, agricultural chemicals and malaria control oil to the government.
Following the supplies, the High Court in December 2011 awarded the company Sh1.862 billion, comprising the principal amount, special damages and interest. The court further directed that interest be calculated at 18 percent per annum from March 1, 1999, until payment in full.
However, the Court of Appeal held that compound interest cannot be awarded automatically and must be specifically pleaded and proved.
Justices John Mativo, Paul Lilan and Dr Johnson Okoth Okello said a claimant seeking compound interest must set out the claim as special damages and provide details of how the interest accrued, including the applicable borrowing rates and the intervals at which it accumulated.
The claimant must also show that it borrowed funds at commercially reasonable rates and that the loss was linked to the breach complained of.
“In the instant case, compound interest was never pleaded. The respondent (Equip Agencies Ltd) has not proved any link or causation between the delayed payment and the breach, neither is there anything to show that the appellant was aware that the respondent was relying on third-party financing to perform its obligation. Lastly, the respondent did not prove any loss that was within the contemplation of the appellant,” the judges said.
Court records show that in June 1995, the Ministry of Health requisitioned goods worth Sh156.8 million from the company under an existing supply contract.
Cancelled local purchase orders
A year later, the company was contracted to supply insecticides, agricultural chemicals and related equipment to government ministries and institutions for the period ending June 30, 1997.
On April 11, 1996, the Ministry of Health placed another order for anti-mosquito chemicals and equipment. The ministry subsequently instructed the company on April 29, 1996, to deliver malaria control oil to regional depots in Mombasa, Nairobi, Nakuru, Kisumu, Eldoret and Nyeri.
The company supplied the goods, which were received by the Medical Supplies Coordinating Unit of the Ministry of Health. It later raised invoices totalling Sh1.001 billion.
According to the company, the government later cancelled several local purchase orders through a letter dated July 19, 1996. It maintained that by the time of the cancellation, the goods had already been supplied, accepted and distributed.
The dispute eventually landed in court, where Equip Agencies secured the Sh1.862 billion award together with interest at 18 percent per annum until payment in full.
The Attorney-General challenged the decision, arguing that the trial court erred in awarding both interest and compound interest because the contracts did not provide for payment of interest.
The State further argued that government procurement rules required supplies to be made through official local purchase orders and that no evidence had been presented to show the company financed the supplies through commercial bank loans.
The High Court had accepted the company's argument that it borrowed heavily from commercial banks to fulfil the contracts and was therefore entitled to interest at 18 percent.
Equip Agencies defended the award, arguing that the absence of an interest clause in the contracts did not prevent it from seeking interest through the courts. It also maintained that it had presented sufficient evidence to justify compound interest.
But the appellate court disagreed, reiterating that compound interest is not an automatic entitlement.
“The general rule is that interest is not automatic unless it is a contractual term, in which case it is claimed as a contractual right. However, courts have discretion to award interest in a money judgment to compensate a judgment creditor where payment has been delayed,” the judges said.
