Counter-Indemnity Agreement (Kenya)

A Counter-Indemnity Agreement in Kenya sets out the rights, duties and consideration binding the parties to it.

The Law of Contract Act Cap. 23, particularly sections 120 to 147 dealing with contracts of indemnity and guarantee, distinguishes between a contract of guarantee — where the surety is secondarily liable — and a contract of indemnity — where the indemnifier assumes primary liability. A Counter-Indemnity Agreement sits at the intersection of these two categories: it is a separate, independent undertaking by the principal debtor that runs parallel to the underlying guarantee. Courts in Kenya, including the Court of Appeal in Consolidated Bank of Kenya Ltd v. Mwangi [2004] eKLR, have consistently enforced counter-indemnities as standalone contractual obligations that survive the expiry or discharge of the primary guarantee.

The Contracts Act Cap. 23 requires that contracts of indemnity satisfy the general requirements of offer, acceptance, consideration, and intention to create legal relations. The counter-indemnity consideration is typically the bank's willingness to issue the guarantee, which constitutes sufficient valuable consideration under Kenyan law. The Banking Act (Cap. 488) further requires that banking institutions obtain adequate security before issuing contingent liabilities; a duly executed counter-indemnity, often supported by a fixed or floating charge over assets registered under the Companies Act No. 17 of 2015 with the Business Registration Service, fulfils this regulatory requirement.

In public procurement contexts governed by the Public Procurement and Asset Disposal Act No. 33 of 2015, performance bonds and advance payment guarantees are mandatory for contracts exceeding thresholds set by the Public Procurement Regulatory Authority. The Counter-Indemnity Agreement is the back-to-back instrument that protects the issuing institution when the procuring entity makes a call on the bond. Similarly, under the National Construction Authority Act No. 41 of 2011, contractors must furnish bonds, making counter-indemnities a routine feature of the construction industry.

A well-drafted Counter-Indemnity Agreement under Kenyan law will specify: the exact amount of the primary guarantee or bond; the circumstances triggering the guarantor's liability; the principal's obligation to provide cash cover or additional collateral upon demand; the right of the guarantor to debit any account held by the principal; accrual of default interest at a rate referenced to the Central Bank Rate published by the Central Bank of Kenya; and the right of the guarantor to commence recovery proceedings in the High Court of Kenya — Commercial Division — without first exhausting any other remedy. The agreement will also incorporate a waiver of the principal's right to require the guarantor to exhaust remedies against other parties before enforcing the counter-indemnity, consistent with section 135 of Cap. 23 which allows such waivers to be expressly agreed.

A Counter-Indemnity Agreement in Kenya is required whenever a bank, insurance company, or other financial institution issues a guarantee, bond, or letter of credit on behalf of a principal debtor. The most common situations include: bid bonds and performance bonds in public procurement contracts under the Public Procurement and Asset Disposal Act No. 33 of 2015; advance payment guarantees in construction projects regulated by the National Construction Authority; shipping guarantees issued in lieu of original bills of lading under the Merchant Shipping Act No. 12 of 2009; customs bonds issued under the East African Community Customs Management Act 2004 where the bank acts as surety; and standby letters of credit supporting trade finance facilities regulated by the Banking Act (Cap. 488).

In corporate finance transactions, a Counter-Indemnity Agreement is needed whenever a parent company or major shareholder provides a guarantee to secure the obligations of a subsidiary, and the subsidiary — as principal debtor — must in turn indemnify the parent. This structure is common in project finance arranged through the Infrastructure Finance and Public Private Partnerships Act No. 15 of 2021 and in energy sector projects licensed by the Energy and Petroleum Regulatory Authority under the Energy Act No. 1 of 2019.

Small and medium enterprises accessing credit guarantee schemes operated by the Kenya Credit Guarantee Scheme — a government-backed programme — are also required to execute counter-indemnities in favour of participating financial institutions. The Kenya Mortgage Refinance Company, established under the Central Bank of Kenya Act (Cap. 491), similarly requires counter-indemnities from primary mortgage lenders participating in its refinancing programmes.

A Counter-Indemnity Agreement is also needed in international trade transactions where a Kenyan exporter or importer requires a bank to issue documentary credits or guarantee payment to foreign counterparties, particularly in transactions subject to the ICC Uniform Rules for Demand Guarantees (URDG 758) or the UCP 600 rules incorporated by reference in the banking agreement. Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 2 of the Law of Contract Act (Cap 23) govern the core requirements for this type of document.

A legally effective Counter-Indemnity Agreement for Kenya must include the following key elements to withstand scrutiny by the High Court of Kenya — Commercial Division and to satisfy the due diligence requirements of lending institutions regulated by the Central Bank of Kenya.

**Parties and Recitals:** Full legal names, registration numbers (for companies registered under the Companies Act No. 17 of 2015 with the Business Registration Service), and registered addresses of the principal debtor and the guarantor. The recitals must identify the underlying transaction, the instrument of guarantee or bond, its reference number, amount, and beneficiary.

**Primary Obligation:** A clear statement that in consideration of the guarantor issuing or agreeing to issue the guarantee or bond, the principal debtor irrevocably and unconditionally undertakes to pay on first written demand all sums paid or payable by the guarantor under or in connection with the guarantee, together with all costs, charges, and expenses (including legal fees on a full indemnity basis) incurred by the guarantor.

**Demand Mechanism:** The procedure for making a demand under the counter-indemnity, including the form of demand notice, the address for service, and the payment period — typically two to five business days after demand — consistent with section 56 of the Law of Contract Act Cap. 23 on notice requirements.

**Cash Cover and Collateral:** The principal debtor's obligation to deposit cash cover or provide additional security acceptable to the guarantor upon the occurrence of a demand event, including the right of the guarantor to set off any credit balance in the principal's accounts in exercise of the banker's right of set-off recognised in Kenyan banking law.

**Interest and Charges:** Default interest at a specified rate (often tied to the Central Bank Rate plus a margin) accruing from the date of demand until full repayment, and the obligation to pay all stamp duty under the Stamp Duty Act (Cap. 480) and all registration costs.

**Governing Law and Dispute Resolution:** Express submission to Kenyan law and to the exclusive jurisdiction of the High Court of Kenya or, alternatively, arbitration under the Nairobi Centre for International Arbitration Rules administered under the Arbitration Act No. 4 of 1995 (revised 2009).

**Duration and Continuation:** The counter-indemnity remains in force until all obligations under the primary guarantee have been discharged and any limitation period under the Limitation of Actions Act (Cap. 22) — six years for simple contracts — has expired.

Forms Legal provides this template to assist Kenyan businesses and financial institutions in structuring compliant counter-indemnity arrangements. Always have the agreement reviewed by an advocate enrolled with the Law Society of Kenya before execution.

**FAQs are answered below. Signatories should include the authorised signatories of both the principal debtor and the guarantor institution, with company seals where applicable under the Companies Act No. 17 of 2015.** The forms-legal.com Counter-Indemnity Agreement (Kenya) template covers the mandatory elements under Law of Contract Act (Cap. 23). Under Kenya law, Section 3 of the Companies Act 2015 (No. 17 of 2015) and Section 15 of the Employment Act 2007 (No. 11 of 2007) govern the core requirements for this type of document. Under Kenya law, Section 24 of the Land Registration Act 2012 (No. 3 of 2012) and Section 25 of the Data Protection Act 2019 (No. 24 of 2019) govern the core requirements for this type of document.