When a New Board Regrets an Old Board’s Decisions
On 31st July 2026, the Court of Appeal at Nairobi (Musinga, Lilan & Okello, JJA) delivered its judgment in National Environmental Trust Fund (NETFUND) v Ndegwa, upholding the NETFUND separation agreement with its former Chief Executive Officer and dismissing the state corporation’s attempt to avoid the KSh 5.5 million payment obligation. The case is a masterclass in how not to plead or prove an allegation of illegality against your own signature.
The Set-Up: Twelve Years, One Exit Deal, and a New Board With Regrets
Catherine Gaki Ndegwa served as NETFUND’s Chief Executive Officer from November 2006, her contract renewed periodically, and the last renewal running from 1st November 2016 to 31st October 2019. In 2018, the Board decided it wanted someone with stronger financial qualifications at the helm. Following consultations, the parties executed a Deed of Mutual Separation and Settlement on 28th February 2018 prepared by NETFUND’s own advocates and signed by four trustees, including the chairperson. In exchange for leaving office early, NETFUND agreed to pay her twelve months’ gross salary, contractual gratuity, and a three-month ex-gratia payment, all within fourteen days.
NETFUND paid the gratuity, covering two years of service. It never paid the rest. Ndegwa sued for the balance roughly Kshs 5.56 million and won at the Employment and Labour Relations Court. NETFUND appealed, arguing the whole arrangement was a “bad bargain” built on an illegal contract. It lost again.
You Cannot Argue on Appeal What You Never Pleaded at Trial
NETFUND’s central argument was that the entire arrangement was rotten at the root: Ndegwa’s own third-term contract was unlawful, it said, because she had already served two five-year terms and the Mwongozo Code of Governance for State Corporations barred a further term. If the underlying employment contract was illegal, so the argument went, no valid separation deed could be built on top of it.
The Court of Appeal never reached the merits of that argument, because NETFUND had never actually pleaded it. Throughout the trial, NETFUND’s defence attacked only the Deed, not the employment contract; it had even admitted the paragraphs of Ndegwa’s claim pleading her 2016 contract. A party is bound by its pleadings, and a court cannot pronounce on a claim or defence that was never raised. The illegality-of-the-underlying-contract argument surfaced only in NETFUND’s written submissions being six years after the deed was signed which was far too late; submissions crystallise a party’s existing case, they do not introduce a new one.
Alleging Illegality Is Cheap; Proving It Is Not
Rebuffed on the employment contract, NETFUND fell back on attacking the Deed itself, pleading that it was illegal, fraudulent and void for want of approvals from the Parent Ministry, the National Treasury, the State Corporations Advisory Committee and the Salaries and Remuneration Commission. Allegations of fraud and illegality carry a heightened evidential burden, and NETFUND simply did not meet it.
Its sole witness, the Head of Finance, had not attended the negotiations, admitted he had no evidence of fraud, and conceded the Deed had been duly executed by four trustees. More fatally, NETFUND never called a single member of its Board of Trustees, past or present, to testify that no proper meeting took place, that there was no quorum, or that the signatures were unauthorised. The people who actually knew what happened in the boardroom simply never took the stand. Nor did NETFUND produce a single circular, statute or policy document establishing that ministerial or SRC approval was actually mandatory for this particular transaction. Once Ndegwa produced the executed Deed, the evidential burden shifted to NETFUND to show why it was unlawful, a burden it never discharged with anything beyond assertion.
“What Is Created by Agreement May Be Discharged by Agreement”
NETFUND also argued the Deed conferred benefits beyond what her employment contract allowed. The Court invoked the maxim eodem modo quo oritur, eodem modo dissolvitur – what is created by agreement may be discharged by agreement. Her contract’s termination clause dealt only with unilateral termination; it said nothing preventing the parties from later agreeing to a different, mutual exit on different terms. And the clause stating the employment contract superseded previous agreements was backward-looking, it could not reach forward to invalidate a later, freely negotiated deed. NETFUND’s own conduct reinforced the point: it part-performed the Deed by paying two years’ gratuity, only balking once a new Board took a different view, evidence that the parties themselves treated the Deed as binding at the time.
Cherry-Picking the Deed? Not Quite
One wrinkle remained. Ndegwa herself conceded that the Deed’s arbitration clause was inconsistent with section 12 of the Employment and Labour Relations Court Act, which does not permit parties to oust the Court’s jurisdiction. NETFUND pounced, arguing she could not approbate and reprobate, that is, enforce the money clauses while disowning the arbitration clause.
The Court disagreed. The doctrine of election applies where a party affirms and disaffirms the same obligation; here, Ndegwa never disputed her substantive obligations, she simply challenged one defective procedural mechanism. Applying a severability test, that is, does the illegality go to the root of the bargain, or is it confined to a clause that can be cut away without disturbing the rest, the Court found the arbitration clause merely set the forum for disputes and did not touch the payment terms. It could be severed, leaving the rest of the Deed standing. It also did not escape notice that NETFUND itself had fully litigated the case on the merits without ever invoking the arbitration clause to seek a stay of proceedings.
Practical Takeaways
- For State Corporations and Boards: If you intend to challenge the legality of an underlying employment contract, plead it clearly and from the outset. You cannot raise it for the first time in submissions, years into the litigation.
- For Anyone Alleging Fraud or Illegality: Bare assertions in pleadings are not evidence. Where the facts establishing illegality or fraud lie within your own institutional knowledge, calling no witness who was actually present is close to fatal to your case.
- For Drafters of Separation and Settlement Agreements: Keep dispute-resolution clauses distinct from substantive payment obligations. A defective forum clause need not doom an entire settlement if the payment terms can stand on their own.
- For Incoming Boards and Management: A change of leadership, or a change of heart, is not a legal ground to unwind a validly executed agreement. Absent proof of fraud, coercion or illegality, a “bad bargain” struck by a predecessor still binds the institution.
This article is provided free of charge for information purposes only; it does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary as set out in the article should be held without seeking specific legal advice on the subject matter. If you have any query regarding the same, please do not hesitate to contact the Employment & Labour Law Department at Wamae & Allen:
About the author
Caxstone specializes in civil, employment and labour disputes, constitutional law, family law and succession, and environment and land matters. He has amassed a wealth of knowledge and experience in litigation which is evident in the successes obtained for clients. He is an active member of the Employment and Labour Relations Court Bar-Bench committee.
