Vulcan Co. Limited v Attorney General on behalf of the Ministry of Health [2015] eKLR

Key Facts

Transaction Type

Issues

• Whether the Ministry of Health was justified in cancelling the tender for supply of blood taking sets on the ground of the manufacturer's name change from Peninsula Polymers Limited to Terumo Penpol Limited.
• Whether the Plaintiff had procured the balance of the sodium hypochlorite solution consignment by 31st July 1997 when the order was terminated and if the decision was justified.
• Whether the Ministry of Health awarded the Plaintiff tenders for supply of disposable dental needles and Hartmann's solution and if the Plaintiff supplied the same to the Ministry.
• Whether the Ministry of Health awarded the Plaintiff tender for supply of blood taking sets, cotton stockinette, and trifluoperazine tablets as alleged, and if the Defendant's denial in the statement of defence is valid.
• Whether the second consignment of 2396 packs of sodium hypochlorite solution met the specifications set out in the letter of offer and if the Ministry was entitled to reject it.
• What order should be made with respect to the costs of the suit, including the allocation of costs and interest thereon.
• Whether the sum of Kshs. 4,817,442/- paid by the Ministry of Health to the Plaintiff settled the full value of the consignment of 13,800 packs of sodium hypochlorite solution or constituted partial payment.
• Whether the Defendant breached any of the contracts for the supply of various medical items, including sodium hypochlorite solution, disposable dental needles, Hartmann's solution, blood taking sets, cotton stockinette, and trifluoperazine hydrochloride tablets, as pleaded in the plaint.
• Whether the Plaintiff is entitled to the reliefs or any of the reliefs set out in the plaint, including monetary claims for sodium hypochlorite solution, dental needles, Hartmann's solution, and other damages.

Holdings

• The court allowed monthly-compounded interest at 2% per month on the first limb of the claim (pending accounts) from 31st May 2005 until payment in full, including for Sodium Hypochlorite Solution, Disposable Dental Needles, and Hartmann's Solution.
• The court awarded lost profits for cancelled contracts (Sodium Hypochlorite Solution, Blood Taking Sets, Trifluoperazine Tablets, and Cotton Stockinette) with interest at court rates from the date of filing the suit until payment in full.
• The court upheld contractual interest rates of 2% per month as non-punitive, emphasizing that parties freely entered into agreements and the court cannot rewrite contracts. This applied to claims for Sodium Hypochlorite Solution and related products.
• The court found the Ministry of Health's termination of contracts for Sodium Hypochlorite Solution, Blood Taking Sets, Trifluoperazine Tablets, and Cotton Stockinette to be unjustified breaches of contract, citing failure to comply with termination clauses and bad faith actions.
• The court dismissed the Defendant's time-bar defense, citing the Ministry of Health's 2007 admission of debt and payment obligations, which reset the limitation period for claims.

Remedies

• The Plaintiffs shall have the costs of this suit.
• Judgment for pending accounts: a. Sodium Hypochlorite Solution - US$ 740,094.44; b. Disposable Dental Needles - US$ 50,343.26; c. Hartmann's Solution - US$ 195,362.96. All attract interest at 2% per month compounded monthly from 31st May 2005 until payment in full.
• Judgment for lost profits: d. Sodium Hypochlorite Solution - US$ 183,348.00; e. Blood Taking Sets - US$ 56,870.00; f. Trifluoperazine Tablets - US$ 33,490.00; g. Cotton Stockinette - GBP 77,100.00. Interest at court rates from the date of filing of the suit until payment in full.

Legal Principles

• The court held that the Ministry acted in bad faith by terminating contracts without justification, violating the principle of good faith in contractual dealings. This was evident in the Ministry's failure to adhere to its own procurement procedures and its unreasonable treatment of the Plaintiff's claims.
• The court conducted a judicial review of the Ministry's procurement actions, finding them ultra vires as they violated their own tender regulations. The termination of contracts was deemed unreasonable and disproportionate, failing Wednesbury scrutiny for administrative decision-making.
• The court found that the Plaintiff met the burden of proof by demonstrating that the Ministry breached the contracts, supported by the Ministry's own admissions in letters to the Truth, Justice and Reconciliation Commission. The Defendant failed to provide credible evidence to challenge the Plaintiff's claims.
• The court determined that the Ministry breached multiple supply contracts by unilaterally terminating them without adhering to the termination clauses. This included failing to purchase completed goods and not compensating the Plaintiff for procured materials as required by the tender documents.
• The court found the Ministry's actions against natural justice, as the termination of contracts was arbitrary and lacked procedural fairness. This was highlighted in the Ministry's failure to follow its own procurement guidelines and provide proper notice or justification for cancellations.
• The court applied the literal interpretation of the contract terms, including the 2% monthly interest rate, without altering them despite their high amount. It rejected the Ministry's attempts to argue for a lower rate by interpreting the contract in a way that would effectively rewrite the agreed terms.
• The court emphasized that parties must honor their contractual obligations as agreed, particularly in enforcing the interest rates specified in the procurement contracts. It held that the Ministry of Health could not rewrite or ignore the agreed terms, including 2% monthly compounded interest, and was bound by the contracts it freely entered into.

Precedent Name

• BIO - MEDICAL LABORATORIES LIMITED-VS-THE ATTORNEY GENERAL
• Equip Agencies Limited & Others -Vs- Attorney General HCCC No. 1672 of 2000
• TIMOTHY U.K. M'MELLA -VS- SAVINGS & LOAN (K) LTD
• STEWAN HOLDINGS LIMITED & ANOTHER -Vs- DUNCAN KINGORI MUKIRA
• SIMPSON SENDA WA KWAYERA -VS- THE ATTORNEY GENERAL & ANOTHER
• Sigma Engineering Company Ltd vs the Attorney General
• KIAMBU SERVICE STORE LIMITED -Versus- WILLIAM KIGALO AGINGA
• PREMIER BAG & CORDAGE LIMITED - VS - NATIONAL IRRIGATION BOARD

Key Disputed Contract Clauses

• The payment terms in the contracts, including the 2% monthly compounded interest on overdue amounts, were disputed. The Plaintiff claimed this rate was contractual and valid under Section 48(a) of the Public Procurement Act, 2005, while the Defendant argued it was punitive. The court upheld the contractual rate, emphasizing that parties freely entered into the agreement and the court cannot rewrite contracts.
• The Ministry's circular document (20th March 1981) outlined procedures for tender validation, particularly when price increases occur. The Plaintiff argued the Ministry violated these rules by awarding the Cotton Stockinette tender to a higher bidder despite its validated lower bid. The court found this action breached the tender contract and the Ministry's own procurement regulations.
• The Defendant claimed termination under Clause 22 (termination for supplier default) but the court rejected this. The Plaintiff demonstrated no default on its part, and the termination was instead deemed an abuse of Clause 25 (termination for convenience). The court emphasized the Ministry's failure to comply with Clause 22's requirements for default termination.
• Clause 25 of the tender document, which permits the Buyer to terminate the contract for its convenience with written notice, was a key disputed clause. The court determined that the Ministry terminated contracts under this clause without adhering to its procedural requirements (e.g., specifying the extent of termination and effective date). The Plaintiff argued the Ministry failed to purchase ready-for-shipment goods or compensate for procured materials, as mandated under Clause 25.2, rendering the termination unlawful.

Cited Statute

• Civil Procedure Act
• Public Procurement Act, 2005
• Sale of Goods Act
• Evidence Act
• Public Authorities Limitation Act

Judge Name

Passage Text

• 85. I have considered the Plaintiff's submissions, which is the correct position. However, in light of the fact that this court has already allowed monthly-compounded interest on the first limb of the claim, I, in the exercise of my discretion, allow the claim for lost profits as stated above with interest thereon at court rates from the date of filing of this suit until payment in full.
• 52. Further, this court has found that the Defendant, in purporting to terminate the contract or tenders, failed to comply with the provisions for termination of the contract or tender... It is also this court's finding that the prayer for the amount of US$ 230,270.98... are therefore well founded and are herewith allowed by this court.
• 78. It is common ground that the plaintiff transacted with the defendant on payment terms of either 'cash against documents or payment within 30 days from date of bills of landing' and further that interest was to be charged at the rate of 2% per month, compounded monthly on any overdue account until payment in full.

Damages / Relief Type

• Costs of the suit awarded to the Plaintiff.
• Account of Profits for lost profits: US$183,348.00 (Sodium Hypochlorite Solution), US$56,870.00 (Blood Taking Sets), US$33,490.00 (Trifluoperazine Tablets), and GBP 77,100.00 (Cotton Stockinette) with court rates interest from suit filing date.
• Compensatory Damages for pending accounts: US$740,094.44 (Sodium Hypochlorite Solution), US$50,343.26 (Disposable Dental Needles), and US$195,362.96 (Hartmann's Solution) with 2% monthly interest from May 31, 2005.