On 11th March 2020, the World Health Organisation (WHO) declared COVID-19 a pandemic, which is defined as “an epidemic occurring worldwide, or over a very wide area, crossing international boundaries and usually affecting a large number of people”.
Since then, the economic threat posed by the novel coronavirus has rapidly turned from a looming threat to a reality. Governments, Central Banks and the private sector are putting in place plans to respond to effects of the virus. However uncertain the times ahead may be, companies nonetheless need to consider how the spread of the virus may affect the conduct of their underlying business and their contractual obligations.
Some of the effects of the COVID-19 outbreak are obvious, such as travel restrictions, quarantines and shortages of medical equipment. However, their immediate impact on contractual obligations, such as the ability to pay, deploy resources on time and meet service levels as agreed, may be less obvious. Most contracts that require ongoing performance are, in principle, absolute: that is, a party affected by the COVID-19 outbreak will be required to perform its obligations and will be potentially liable to its counterparty for a failure to do so. There are, however, two key exceptions to the rule: force majeure; and the common law doctrine of frustration.
A force majeure event refers to the occurrence of an event which is outside the reasonable control of a party and which prevents that party from performing its obligations under a contract. If successfully invoked, the clause would excuse a party’s performance of its obligation under the contract, thereby avoiding a breach. It could also lead to termination if the event survives for a long period of time. However, this is a factual question and is largely dependent on the wording of the clause in the contract.
The first thing to check in a contract is whether or not it contains a force majeure clause, as the same will not be implied. Moreover, the applicability of a force majeure clause is largely dependent on the specific drafting. For instance, where the term “pandemic” does not form an express part of the clause, there may be a blanket-clause which covers all events “beyond the reasonable control of the parties”, which may be applicable to consequence emanating from COVID-19.
It appears probable that WHO’s classification of COVID-19 as a “pandemic” means it will be within the scope of clauses that include the words “pandemic” or even “epidemic”. However, certain other aspects of this crisis, such as the increase in government-decreed lock downs aimed at slowing the pandemic’s spread may also fall within the scope of the clause.
If a force majeure clause provides that the relevant triggering event must ‘prevent’ performance, the relevant party must demonstrate that performance is legally or physically impossible, but not just difficult or unprofitable – See Tennants (Lancashire) Ltd v G.S. Wilson & Co Ltd  AC 495. A change in economic or market circumstances, affecting the profitability of a contract or the ease with which the parties’ obligations can be performed is not regarded as a force majeure event – See Thames Valley Power Limited v Total Gas & Power Limited  EWHC 2208.
In addition, the force majeure event must be the only effective cause of default by a party under a contract relying on a force majeure provision as was held in Seadrill Ghana v Tullow Ghana  EWHC 1640 (Comm). Moreover, the ‘supervening event’ will excuse performance of only those obligations which are affected by the outbreak of COVID-19. Therefore, in contracts with divisible performance obligations, a supervening event like COVID-19 could cause only partial impossibility or impracticability and the party’s unaffected performance obligations will not be excused.
The party claiming relief is usually under a duty to show that it has taken reasonable steps to avoid the effects of the force majeure event, and that there are no alternate means for performing under the contract.
The Court of Appeal in Channel Island Ferries Limited v Sealink UK Limited  1 Lloyd’s Report 323 held that any clause referring to events “beyond the control of the relevant party” could only provide relief if the affected party had taken all reasonable steps to avoid its operation or mitigate its results.
It is, therefore, important for companies to document the impacts of COVID-19 on their businesses, as well as steps taken to mitigate those impacts, as these could form a viable record for a potential force majeure claim.
In addition, if a contract has a force majeure clause, it is likely that it will contain notice provisions, which notice provisions should be carefully followed so as to mitigate the losses that may be occasioned upon the other party. Some contracts, especially construction contracts, include a “time bar” clause that requires notice to be provided within a specific period from when the affected party first became aware of the force majeure event, failure of which will result in a loss of entitlement to claim.
Generally, the effect of a force majeure clause includes some or all of the following:
Before suspending performance in reliance upon a force majeure clause, parties should review their contractual agreements and consider:
In the absence of an express force majeure clause, the common law doctrine of frustration may apply. The doctrine of frustration, as established in Taylor v Caldwell (1863) 3 B&S 826, allows a contract to be automatically discharged when a frustrating event occurs so that parties are no longer bound to perform their obligations.
It was perfectly illustrated in the Kenyan case of Five Forty Aviation Limited v Erwan Lowe  eKLR where the Court stated:
“the doctrine of frustration operates to excuse further performance where it appears from the nature of the contract and the surrounding circumstances that the parties have contracted on the basis that some fundamental thing or state of things will continue to exist, or that some particular person will continue to be available, or that some future event which forms the foundation of the contract will take place, and before breach performance becomes impossible or only possible in a very different way to that contemplated without default of either party and owing to a fundamental change of circumstances beyond the control and original contemplation of the parties.”
The doctrine of frustration (or discharge, as it is sometimes referred to) is generally thought to provide a solution to the problems of loss allocation which arise when performance is prevented by supervening events. Therefore, in the event of a contract being frustrated (and therefore terminated) by the onset of COVID-19 and the resultant inability to perform contractual obligations, the operation of the doctrine automatically allocates risk and loss following from the said termination.
Over time, the courts have adapted the test in Taylor v Caldwell and developed a broader test for frustration. Generally speaking, a frustrating event is an event which:
The doctrine of frustration automatically terminates the contract in question and the parties will no longer be bound by their obligations thereunder. Moreover, the drastic consequences of contractual frustration mean that the threshold for proving frustration is much higher than that for most force majeure provisions since it must be shown that the obligations impacted by the event or circumstance are fundamental to the contract.
Where there is an express provision in the contract addressing a particular act or supervening event, such an act or event cannot be relied upon when invoking the doctrine of frustration. A clause in the contract which is intended to deal with the event which has occurred will normally preclude the application of the doctrine of frustration as frustration is concerned with unforeseen, supervening events, and not events which have been anticipated and are provided for within the contract itself.
It is likely that the doctrine of frustration will not be available if the contract contains an express force majeure provision, since the said provision will be deemed to be the agreed allocation of risk between the parties.
This alert is for informational purposes only and should not be taken to be or construed as a legal opinion.
If you have any queries or need clarifications, please do not hesitate to contact Jacob Ochieng, Partner (email@example.com), Milly Mbedi, Senior Associate (firstname.lastname@example.org) or your usual contact at our firm, for legal advice on how COVID-19 might affect your business.
8th January, 2020
Oraro & Company Advocates is pleased to announce the appointment of Naeem Hirani as a Partner in the firm effective from 7th January 2020. Naeem’s appointment further strengthens the firm’s Corporate & Commercial practice as he brings extensive experience in Mergers & Acquisitions, Private Equity, Venture Capital and Corporate Law. Naeem has advised international and domestic clients in complex cross-border transactions across sub-Saharan Africa. His commitment to excellence furthers the firm’s tradition of providing exemplary service to its clients whilst upholding the highest levels of integrity and professionalism.
Naeem joins us after founding a boutique law practice called “Hirani Law” and prior to that he served as a Senior Associate at Anjarwalla & Khanna where he worked for eight years. In 2017, Naeem spent nine months working with Cleary Gottlieb Steen & Hamilton in New York under the Africa Legal Fellowship, an initiative by the Cyrus R. Vance Centre for International Justice which aims to promote diversity and strengthen the legal profession in Africa.
Welcoming Naeem to the firm, Chacha Odera, Managing Partner, stated “the partnership is delighted to have Naeem whose breadth of knowledge and impressive track record are a great addition to our Corporate & Commercial team and an asset to our clientele.”
Naeem obtained his Bachelor of Laws (LLB) from the University of Leeds, a Post Graduate Diploma in Tax from the East Africa School of Taxation and is currently pursuing a Master of Business Administration from Queen Mary, University of London.
Naeem is also a Board member of the Fleischer Foundation, a non-profit organisation whose mission is to promote the personal development and empowerment of underprivileged children in developing countries through mentorship and education.
About Oraro & Company Advocates
Established 43 years ago by George Oraro SC (one of Kenya’s top litigators), Oraro & Company Advocates is a top-tier, full-service Kenyan law firm providing specialist legal services both locally and regionally in Arbitration, Banking & Finance, Conveyancing & Real Estate, Corporate & Commercial, Dispute Resolution, Employment & Labour, Infrastructure, Projects & PPP, Restructuring & Insolvency and Tax.
The firm’s corporate & commercial practice area continues to shine and prides itself in creative solutions to the most complex transactions entrusted to them. The team has been extensively involved in the recent consolidations and acquisitions within the banking sector in Kenya, including acting for the National Bank of Kenya Limited in relation to the take-over of 100% of the company’s shares by KCB Group PLC, advising Transnational Bank and its shareholders in the sale and purchase of 93% shares to a Nigerian multinational commercial bank, and also assisting Prime Bank Limited in obtaining regulatory approvals in connection to the acquisition of a significant minority stake in the Bank by AfricInvest and Catalyst Principal Partners.
The practice area and its lawyers are recognised by leading international legal directories such as Chambers Global and IFLR1000.
Oraro & Company Advocates has, once again, been recognised among the regional leading law firms in the Financial and Corporate Transactional Practice in the 2020 IFLR 1000 rankings. The firm was praised for having, “…...a knowledgeable and diverse team of lawyers who are experienced and competent in diverse fields. The firm is able to call upon this expertise at any one time….”
The research was conducted by IFLR 1000, a leading legal directory that is fully dedicated to ranking law firms and lawyers based on Financial & Corporate transactional work.
IFLR 1000 ranked the firm Tier 2 in Project Development: Infrastructure and Project Development: Mining practice area. Oraro & Company Advocates further received a Tier 3 rating in Project Development: Power and a Tier 4 ranking in Financial and Corporate. The firm was commended for its good research skills, sound legal advice and professionalism. Clients commended the firm's practice noting that “The firm provides quality work and sound legal advice. They are professional and provide commendable services.”
Three of our Partners solidified their positions from the previous rankings by being recognised as Leaders in their respective fields. George Oraro SC, Senior Partner, was ranked a ‘Highly Regarded’ lawyer in Project Development, M&A whereas Pamella Ager, Partner, was ranked ‘Highly Regarded’ in Banking, M&A. Moreover, Nelly Gitau, Partner, was also ranked ‘Highly Regarded’ in Banking (Real Estate). IFLR1000 also noted Noella Lubano’s expertise with clients speaking highly of her saying that “Noella is a very competent and knowledgeable lawyer, who is very deep at research and analysis. Her client handling skills are very good, and she is very skilled at arbitration and insolvency matters in the region.” Another client also lauded Noella saying that she is "very knowledgeable and provides good and sound legal advice. She is also very responsive, accessible and reliable. Her work is commendable." Noella is a Partner in the firm’s Dispute Resolution team advising clients in a wide range of areas such as energy, financial services, manufacturing & industries, public sector and private clients.
Chacha Odera, Managing Partner was pleased to receive the good news and said “This is a good indicator of the continuous growth in our Corporate and Commercial practice and also solidifies our stand and belief as a firm which is to offer exceptional service to our clients while upholding the highest level of professionalism and ethical standards. We are grateful and have taken note of the feedback provided by our clients who have continously believed and supported our firm. We take the feedback seriously and find it usefull as a tool to serve our clients better”
Established 42 years ago by George Oraro SC (one of Kenya’s top litigators), Oraro & Company Advocates is a top-tier, full-service Kenyan law firm providing specialist legal services both locally and regionally in Arbitration, Banking & Finance, Conveyancing & Real Estate, Corporate & Commercial, Dispute Resolution, Employment & Labour, Infrastructure, Projects & PPP, Restructuring & Insolvency and Tax. The firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 and its partnership includes well-recognised advocates who are regarded for their expertise in their respective areas as well as their significant contribution to Kenyan jurisprudence.
Jacob Ochieng and Cindy Oraro participated in the 16th Annual African Private Equity and Venture Capital Association (AVCA) 2019 Conference. The AVCA conference provides the private equity and venture capital industry globally with a platform to discuss the most pertinent opportunities and issues.
Jacob and Cindy are partners in the corporate and commercial practice group and have advised international and local clients in various sectors including Private Equity and Mergers and Acquisitions. For more about the AVCA, click here
Imagine arriving at your work place bright and early one morning, only to find police officers barricading the door to your office and officials from the Competition Authority of Kenya (the Competition Authority) collecting documents, flash disks, computer drives etc. Members of staff are stopped from entering the office and are informed that the company is under investigation for engaging in anti-competitive conduct. The company is later invited for a hearing and is eventually served with a hefty fine amounting to ten percent (10%) of the company’s previous year turnover.
This hypothetical scenario highlighted above indeed recently happened to two Kenyan companies because they knowingly or unknowingly engaged in practices that are prohibited by the Competition Act, 2010 (the Competition Act). It is trite that ignorance of the law is no excuse. It is therefore imperative that all companies are aware of the provisions of the Competition Act and the practices that will expose them to sanctions including fines and jail term. The Competition Authority has in the past few years become very aggressive in using its enforcement powers to rein in companies that are engaging in anticompetitive conduct.
With the turbulent economic climate, companies are increasingly considering mergers, joint ventures, restructuring, vertical and horizontal integration aimed to reduce high operational costs. All these options have some competition element which would in most cases require notification to the Competition Authority. It is therefore vital that businessmen and in-house counsel appreciate what practices are restricted under the Competition Act.
The Competition Act defines restrictive trade practices as agreements between undertakings, decisions by associations of undertakings, decisions by undertakings or concerted practices by undertakings which have as their object or effect the prevention, distortion or lessening of competition in trade in any goods or services in Kenya or a part of Kenya. Restrictive trade practices are generally prohibited, unless they have been expressly exempted pursuant to the provisions of the Competition Act.
The Competition Authority considers that the words “object” or “effect” are used disjunctively and will therefore use an alternative as opposed to a cumulative approach in assessing an infringement. Under the “object” test, the Competition Authority considers whether there is evidence of an agreement or concerted action. If there is evidence of an agreement, the infringement has been proved and no further assessment needs to be conducted. The existence of an agreement that entails a restrictive trade practice establishes prima facie, the prohibited conduct has, in fact and in law, been committed. In effect, the mere existence of an agreement which appears on the face of it to prevent, distort or lessen competition runs afoul of the restrictive trade prohibitions under Competition Act,whether or not the agreement has been performed.
The “effect” test is used to assess certain conduct that could have are deeming competitive value such as information sharing among competitors, unilateral or single-firm anti-competitive conduct like vertical pricing arrangements, collaborations on technical, safety, and educational standards for an industry and also other activities which generally tend to promote or preserve quality preservation in an industry. The Competition Authority considers that collusive horizontal agreements, such as collusive tendering, market division or customer allocation agreements and horizontal price fixing agreements may be subject to strict or object assessment. While most vertical agreements, such as tying and bundling, exclusive dealing and licensing agreements and vertical pricing and distributorship agreements may be subject to an effect assessment or a full rule of reason analysis.
Examples of agreements, decisions or concerted practices contemplated by the Competition Act include:
a) Agreements between parties trading in competition (undertakings in a horizontal relationship).
b) Agreements between an undertaking and its suppliers or customers or both (parties in a vertical relationship).
c) Agreements or practices which:
• directly or indirectly fix purchaser or selling prices, or any other trading condition
• divide markets by allocation of customers, suppliers, areas or specific types of goods or services
• involve collusive tendering
• involve a practice of minimum resale price maintenance
• limit or control production, market outlets or access, technical development or investment
• apply dissimilar conditions to equivalent trans-actions with other trading parties, as a result of which they are placed at a competitive disadvantage
• make the conclusion of contracts subject to acceptance by other parties of supplementary conditions which by their nature or according to commercial usage have no connection with the subject of the contracts
• amount to the use of an intellectual property right in a manner that goes beyond the limits of legal protection
• The list set out above is not exhaustive and any combination of undertakings that engage in any other practice which prevents, distorts or lessens competition in any other way may be deemed to be engaging in a restrictive trade practice that is prohibited under the Competition Act. Oral agreements are also included in the above list.
In addition, there is a presumption that a prohibited agreement or concerted practice exists between two parties if one of the parties owns a significant interest in the other or has at least one director or one substantial shareholder in common. However, this presumption may be rebutted if a party, director or shareholder concerned establishes that a reasonable basis exists to conclude that any practice in which the parties engaged was a normal commercial response to conditions prevailing in the market.
For the purposes of this presumption, the term director is defined broadly and includes a director of a company as defined under Companies Act, 2015; a trustee of a trust; in relation to an undertaking conducted by an individual or a partnership, the owner of the undertaking or a partner of the partnership; in relation to any other undertaking, a person responsible either individually or jointly with others for its management. However, agreements between or practices engaged in by a company and its wholly owned subsidiary or a wholly owned subsidiary of that subsidiary; or undertakings other than companies, each of which is owned or controlled by the same person(s) are not deemed to be restrictive trade practices within the meaning of the Competition Act.
Exemptions are outlined under the Competition Act for certain agreements that, though restrictive or bear some risk of distortion of competition, have certain compelling qualities such as:
a) maintaining or promoting exports
b) improving, or preventing decline in the production or distribution of goods or the provision of services
c) promoting technical or economic progress or stability in any industry
d) obtaining a benefit for the public which outweighs or would outweigh the lessening in competition that would result, or would be likely to result, from the agreement, decision or concerted practice or the category of agreements, decisions or concerted practices
Any undertaking or association of undertakings may apply to be exempted from the aforesaid provisions of the Competition Act. Such application is to be made in a prescribed form and manner accompanied by any information as required by the Competition Authority.
Upon consideration, the Competition Authority may grant an exemption subject to certain conditions that they deem fit. The exemption may later be revoked or amended.
With regards to intellectual property rights, the Competition Act allows for an exemption to be granted with regards to copyright, patents, industrial designs, trademarks, plant varieties and other intellectual property rights.
A professional association is permitted to apply for the exemption where their rules contain a restriction that has the effect of preventing, distorting or lessening competition in a market. This application is to be made in the prescribed manner.
All other agreements not subject of an exemption and which prevent, distort or lessen competition are subject to enforcement proceedings. Companies entering into distributorship agreements, agency agreements, contracts of sale franchise agreements, licencing agreements should consider engaging legal counsel to review the agreements to ensure that they do not infringe on the provisions of the Competition Act.
The Competition Act sets out severe financial penalties of up to ten percent (10%) of the preceding year’s gross annual turnover in Kenya of the undertaking engaging in restrictive trade practices. In addition, a person who contravenes the provisions of the Competition Act on restrictive trade practices commits an offence and is liable on conviction to imprisonment for a term not exceeding five (5) years or to a fine not exceeding KES 10 million (USD 100,000) or both.
The Competition Authority can offer full or partial immunity to an undertaking in respect of restrictive trade practices committed by it. The Leniency Programme Guidelines which were gazetted on 19th May 2017, allow the Competition Authority to grant immunity in exchange for provision of evidence and full co-operation by the undertaking concerned so as to enhance compliance. There is a prescribed form that the applicant completes for the Competition Authority to consider immunity after which the applicant may be granted conditional leniency pending investigations. The applicant may also seek confidentiality in respect of the information submitted to the Competition Authority. Once the investigations are complete, the applicant may be granted full, partial or no immunity. Where full immunity is not granted, an undertaking may approach the Competition Authority with a view to negotiating a settlement. A leniency agreement covers the applicant’s directors and employees as long as they comply with the obligation to cooperate with the Competition Authority.
The Competition Authority of Kenya (CAK) has in the recent past increased its efforts in ensuring the provisions of the Competition Act are adhered to. This is evidenced by a statement issued by the CAK on 28th November, 2018 informing the public of the establishment of a buyer power department (BPD) within its premises to exclusively handle concerns about businesses abusing their influence over suppliers.
The Competition Act No 12 of 2010 (the Competition Act) defines “buyer power” as the influence exerted by an undertaking or group of undertakings in the position of a purchaser of a product or service to obtain from a supplier more favourable terms, or to impose a long-term opportunity cost including harm or withheld benefit which, if carried out, would be significantly disproportionate to any resulting long-term cost to the undertaking or group of undertakings. Buyer power is not prohibited. It is the abuse of buyer power in a market in Kenya or a substantial part of Kenya that is specifically prohibited under the Competition Act. This is intended to protect parties with a weaker bargaining power like suppliers to supermarkets.
Examples of conduct that constitutes abuse of Buyer Power includes:
In determining buyer power, the BPD will look at:
The CAK has indicated that the BPD will begin to undertake investigations in the retail sector following complaints of abuse of buyer power within the retail value chain. The implication of this is that some businesses in the retail sector may begin to receive requests for information from the BPD or worse off the BPD may raid the premises in a bid to collect the information and/or documentaion. It is therefore imperative that these businesses handle these requests carefully and seek legal advice at the earliest opportunity.
The penalty for abuse of buyer power is a 5-year prison sentence or a fine of Kenya Shillings ten million (Kshs. 10,000,000), or to both.
The CAK may also impose an administrative penalty of up to ten percent (10%) of the undertaking’s preceding year’s turnover, or issue cease and desist orders to remedy the infringement.
Milly was part of a team that advised Equity Group Holdings Limited (formerly Equity Bank Limited) on a 79% stake of the of ProCredit Bank, a financial institution in the Democratic Republic of Congo, from Belgische Investeringsmaatschappij voor Ontwikkelingslanden, Stichting DOEN and ProCredit Holding AG. The acquisition required undertaking a comprehensive due diligence, drafting and reviewing of the share purchase agreement and undertaking the competition filings at the Competition Authority of Kenya.
Milly has a Bachelor of Laws (LLB) from Moi University and a post-graduate diploma in Law from Kenya School of Law.
The Companies Act 2015 (the Act) is amongst a suite of new laws intended to streamline business in Kenya, by making it easier for entities to establish a presence and operate. Although quite voluminous, the Act takes into consideration, developments in technology and procedure, to boost the ease of doing business. In addition, the Act codifies and gives life to the now generally accepted principles of corporate governance.
Below are some of the more salient features of the Act:-
Undoubtedly, the most significant change in business legislation in the last year has been the new Companies Act, 2015 (the Act). The Act is set to among other things, streamline business practice in Kenya as well as enhance corporate governance. Borrowed heavily from the UK’s Companies Act of 2006, the voluminous act consists of thousands of sections. It is noteworthy that only Section 2 of the Act came into operation on the date of gazettement (15th September, 2015), the remaining sections were to be operationalised in a phased out manner by way of gazzettement.
The first phase of the Act was operationalised with effect from 6th November, 2015 vide Legal Notice No. 233 of 2015 published on the same date. Consequently, the following provisions of the Act came into operation then:
a) Parts 1 to 14, 23, 31, 32, 38, 40, 42
b) The First Schedule
c) The Second Schedule
d) The Sixth Schedule
Published on 18th November 2015, Legal Notice No. 239 of 2015 introduces the Companies (General) Regulations, 2015 (the Regulations) made by the Attorney-General in exercise of the powers conferred by Section 1022 of the Act. These regulations came into operation on 2nd December, 2015 and they provide for additional requirements as required by the Act and the necessary forms and fees for the services offered by the Companies Registry.
Provisions of the Regulations that relate to components of the Act that did not come into operation by 2nd December, 2015 shall come into operation on the day on which the corresponding provisions of the Act come into operation.
For a detailed analysis of the Companies Act, 2015 click here
Oraro & Company Advocates is a full-service market-leading African law firm established in 1977 with a strong focus on dispute resolution and corporate & commercial law. With a dedicated team of 10 partners, 4 senior associates, 10 associates, 1 lawyer and 36 support staff, the Firm has been consistently ranked by leading legal directories such as Chambers Global, IFLR 1000 and Legal 500 as a top-tier firm in Kenya.
Oraro & Company Advocates is an affiliate member of AB & David Africa.
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