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President refuses to assent to the Law of Contract (Amendment) Bill, 201
The Law of Contract (Amendment) Bill 2019 was passed by Parliament on 18th September, 2019 and forwarded to the President for assent. The Bill vide Clause 2, seeks to amend section 3 of the Law of Contract Act to provide, inter alia, that a creditor has to first realize the assets of a principal debtor before pursuing a guarantor.
Currently, lenders are empowered, upon the default of a principal borrower, to pursue guarantors for repayment of the loan without first exhausting all avenues of recovery against the assets of the borrower. The Amendment Bill proposes to reverse this position and compel a lender to go after the borrower’s assets prior to invoking a guarantee.
President Uhuru Kenyatta, through a Memorandum dated 3rd January, 2020 addressed to Parliament, declined to assent to the Bill and recommended that Clause 2 of the Bill be deleted. Among the various reasons given for the President’s refusal is that the proposed section would result in prolonged process of settling debts in the case of a default in addition to adversely affecting credit advanced to micro, small and medium enterprises due to lenders’ reluctance to rely on third party collateral, thereby adversely affecting the gains made in Kenya’s ease of doing business index. He also pointed out that the Amendment was introduced prematurely before allowing for more comprehensive consultations with all stakeholders.
Following this, Parliament is required to consider the President’s reservations for a period of 21 days upon receipt of the Memorandum. Parliament may do one of the following:
- Amend the Bill in light of the President’s reservations. Since the Bill primarily consists of this section 2, such an action will defeat the reason for the Bill’s existence.
- Pass the Bill a second time, with or without amendments. In this case a two-third vote of members of parliament will be required.
We shall follow up on the developments regarding the Bill and shall keep you up-to date of the progress.
Do not hesitate to contact us for any further assistance and clarification on the matter.