Commercial Transactions – Invoking Force Majeure and Frustration in Contracts

Posted on April 14th, 2020

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.

Effect On Contracts

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

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.

Acts Within the Scope

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.

Impossible to Perfom

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 [1917] 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 [2005] 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 [2018] 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.

Mitigation

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 [1988] 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.

Notice Provisions

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.

Effect of a Force Majeure Clause

Generally, the effect of a force majeure clause includes some or all of the following:

    1. Suspension – for the most part, affected obligations do not go away and are simply suspended for the duration of time that the force majeure event continues, unless parties agree otherwise.
    2. Non – liability – once the force majeure clause is triggered, the non-performing party’s liability for non-performance or delay is removed (usually for the duration of time that the force majeure event continues).
    3. Right to terminate – in some cases, suspension of obligations may be unsatisfactory if it becomes commercially unfeasible for the parties to resume performance of the contract once the force majeure event ceases.
Practical Considerations

Before suspending performance in reliance upon a force majeure clause, parties should review their contractual agreements and consider:

    1. The scope of the applicable force majeure clause and whether a pandemic falls within the scope.
    2. The notice requirements and whether they have been triggered.
    3. Whether mitigation steps should be taken, and if so, the reasonable time for the same.
    4. The potential consequences of a breach under the contract.
    5. How the force majeure clause reads with any indemnity clauses under the contract.
B. FRUSTRATION

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 [2019] 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.

Test For Frustration

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:

    1. Occurs after the contract has been formed.
    2. Is so fundamental as to be regarded by the law both as striking at the root of the contract and entirely beyond what was contemplated by the parties when they entered the contract.
    3. Is not due to the fault of either party.
    4. Renders further performance impossible, illegal or makes it radically different from that contemplated by the parties at the time of the contract.
Effect of Frustration

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.

Limitations

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 (jacob@oraro.co.ke), Milly Mbedi, Senior Associate (milly@oraro.co.ke) or your usual contact at our firm, for legal advice on how COVID-19 might affect your business.

Salient Changes Under the Business Laws (Amendment) Act, 2020

Posted on March 30th, 2020

On 18th March, 2020 the President assented to the Business Laws (Amendment) Act, 2020 (the Act). The Act, which came into force on its date of assent, seeks to facilitate the ease of doing business in Kenya by amending various statutes. Below is a summary of the salient changes brought about by the Act, that affect specific sectors:

CONVEYANCING AND REAL ESTATE
Electronic Execution of Documents
The Act recognises the use of advanced electronic signatures and electronic signatures as a valid mode of execution of documents in Kenya. The recognition of electronic signatures is poised to improve the ease at which land transactions are carried out, especially in transactions where the parties are not in Kenya at the time of execution.

The Stamp Duty Act has equally been amended to provide that documents can be electronically stamped, extending the scope of the initial provision which only recognized stamping by a franking machine or an adhesive stamp.

Electronic Registries
The Registration of Documents Act (the RDA) has been amended to recognise electronic filing of documents. The Registrar of Documents is empowered to establish both the Principal Registry in Nairobi and the Coast Registry in electronic form. This is intended to ease the process of applying for registration of documents under the RDA, as one may not require to physically present a document for registration at either of the two Registries.

Abolishment of Land Rate and Land Rent Clearance Certificates
Previously, a person seeking to register an interest in land was required to provide proof of payment of land rates and land rent before registration is effected. An application for registration therefore had to be accompanied with Rates and Rent Clearance Certificates where rent and rates were payable.

The Act has deleted these provisions in entirety implying that it shall no longer be mandatory to produce Land Rent and Rates Clearance Certificates when applying for registration of an interest in land. Transferees therefore have to individually carry out their own due diligence and satisfy themselves that rent and rates have been paid in order to avoid assuming these liabilities.

It is however important to note that although Section 38 and 39 have been deleted from the Land Registration Act, Sections 55 (b) and 56 (4) which require production of a Rent Clearance Certificate and Consent to Lease or Charge prior to registration remain in force. It will, therefore, be necessary to address this disparity going forward, in order to clarify the applicable completion documents in property dealings.

EMPLOYMENT AND LABOUR
Waiver of Registration of Workplaces for new businesses
New businesses with less than one hundred (100) employees can now operate without registration of a workplace for a period of one year from the date of registration of the business. This provision is set to provide small and medium sized enterprises with more time to register their workplaces.

CORPORATE AND COMMERCIAL
Increased threshold for enforcing Squeeze-Out rights in mergers and takeovers
The stake that an acquiring party should purchase before enforcing a squeeze-out has been restored to ninety per cent (90%) from the current stake of fifty per cent (50%). The increase in the squeeze-out threshold seeks to restore the protection of the rights of minority shareholders, especially in listed companies.

Abolishment of the use of common seals in execution
The use of common seals in executing contracts by companies has been abolished. The adoption of this amendment broadens the scope for holding a company accountable for contracts as such contracts may be executed by any person acting under its authority, express or implied authority.

Treatment of bearer shares
Bearers of share warrants can now convert their warrants into registered shares. This provision is poised to recognize and protect the rights of bearers acquired before the coming into force of the Companies Act, 2015.

RESTRUCTURING AND INSOLVENCY
Additional factors to consider when lifting a moratorium in insolvency matters
The Act has included additional factors to consider when the courts seek to lift a moratorium in insolvency. These include, whether the value of the secured creditor’s claim exceeds the value of the encumbered asset, whether the secured creditor is not receiving protection for the diminution in the value of the encumbered asset, whether the encumbered asset is not needed for the reorganisation or sale of the company as a going concern and whether relief is required to protect or preserve the value of the assets such as perishable goods.. The inclusion of these factors is to take into account the different business exigencies of companies under administration.

Information requests by creditors
The Act gives creditors the right to request for information from the insolvency practitioner in respect of the insolvency process. The information rights will provide more transparency in relation to the insolvency process in Kenya.

CONSTRUCTION
Enforcement of the Building Code
The National Construction Authority (NCA) has been authorised to promulgate and enforce the Building Code in the construction industry. Consequently, any matters concerning compliance with the Building Code shall be under the purview of the NCA. The NCA will also have power to promulgate regulations relating to and to conduct mandatory inspections of the construction sites with a view to verify and confirm whether contractors are complying with the construction regulations.

TAX
Investment deductions, exemption of supplies for bulk storage of Standard Gauge Railway raw materials and market protectionism
Companies that incur a capital expenditure of at least Kenya Shillings Five Billion (KES 5,000,000,000) on construction of bulk storage and handling facilities with a minimum capacity of one hundred thousand metric tonnes in relation to the Standard Gauge Railway (SGR), will be entitled to investment deductions equal to one hundred and fifty per cent (150%) of the capital expenditure incurred from the year of first use of the facility.
Additionally, taxable supplies procured locally or imported for the construction of bulk storage in support of the SGR operations are exempted from paying import declaration fees.

Further, a twenty five per cent (25%) tax has been imposed on imported glass bottles under the Excise Duty Act.

The adoption of these amendments is intended to boost businesses for local manufacturers and ultimately grow Kenyan brands.


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 Pamella Ager (pamella@oraro.co.ke), Nelly GitauJacob Ochieng (jacob@oraro.co.ke), Lena OnchwariNaeem Hirani or your usual contact at our firm, for legal advice relating to the Business Laws (Amendment) Act, 2020 and how the same might affect your business.

George Oraro SC Ranked ‘Star Individual’ Top Dispute Resolution Lawyer in Kenya

Posted on February 17th, 2020

17th February, 2020

Chambers Global Guide which ranks the most outstanding law firms and top lawyers across the world has released its 2020 rankings.

We are delighted to announce that our Senior Partner, George Oraro SC has surpassed the Band 1 ranking receiving the prestigious ‘Star Individual’ accolade in Dispute Resolution. The accolade is awarded to lawyers with exceptional recommendations in their field and George is the only lawyer ranked in this category in Kenya. Acclaimed by sources as "a man of integrity and humility", and regarded as being "wise, patient, extremely brilliant in all respects and very client-focused”, Chambers Global noted that multiple interviewees affirm his stature as a "litigation powerhouse" and "one of the best lawyers Kenya has ever produced."  George whose practice cuts across the full spectrum of contentious mandates and arbitration has also been ranked Band 1 among leading Arbitrators in Kenya. George has decades of experience which have seen him feature in some of Kenya's most eminent cases.

Chambers Global has also highly ranked other lawyers from the firm. Chacha Odera, Managing Partner, was ranked Band 1 in both Dispute Resolution and Employment practice areas. Chacha was commended for his expertise in land, employment and constitutional disputes with market commentators highlighting that he has a "very sharp mind," and other sources saying he is “a man full of wisdom; courteous, respectful, hard-working and a team player.”

Our Employment & Labour law Partner, Georgina Ogalo-Omondi, continues to excel in the Employment practice area. Georgina received praise from the interviewees for being “ambitious, very hard-working and a team player," also adding that “she is fearless.

Moving up the ranking, our Partners Noella Lubano and Jacob Ochieng were also ranked in Dispute Resolution and Corporate/M&A respectively. Chambers Global commended Noella for her in-depth understanding of financial and commercial disputes, covering banking, insolvency and asset tracing mandates. Noella was lauded for having a “very determined” approach and “outstanding client handling skills.” Jacob Ochieng is well regarded in the Corporate & Commercial space and his peers noted that he “is commercially astute and always looks out for his clients in any transaction.

In general, the firm continues to maintain its position as a market leader. Ranked Band 1, our Dispute Resolution team was lauded for routinely appearing in high quantum and sensitive matters and its representation of regional and international clients in complex cases. The firm was also well ranked in Employment and Banking & Finance categories.

Chacha Odera, Managing Partner, commented on the awards saying “It is such a great honour for me and the firm to receive such commendable rankings. I congratulate everyone in the firm for their unrelenting efforts. Our clients, thank you for your valuable feedback, unwavering support and trust over the years.” These accolades reinforce the firm’s leading position in the region and its standing globally.

Chambers Global rankings are based on extensive research and one-on-one client interviews. The Guide assesses the quality and magnitude of cases or transactions handled by each firm, technical ability, professional conduct, client service, commercial awareness/astuteness and commitment to providing solutions to clients, among other qualities.

###

Profile

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 with a focus on Arbitration, Banking & Finance, Conveyancing & Real Estate, Corporate & Commercial, Dispute Resolution, Employment & Labour, Infrastructure, Projects & PPP, Restructuring & Insolvency and Tax.

Oraro & Company Advocates prides itself in its deeply rooted client relationships by steadily providing quality legal services through its partner-led approach and continues to distinguish itself as an African law firm offering legal services drawing from local knowledge and global perspectives.

Kipkirui Kosgei

Head of Business Development

T: +254 709 250 000/709 250 735

E: gkosgei@oraro.co.ke

A ‘Dicey’ Matter: The Fate of Employees in Mergers and Acquisitions

Posted on February 3rd, 2020

Share this article

There has been a rise in mergers and acquisitions transactions (M&A Transactions) in Kenya even as business entities grapple with tough economic times and the ability to stay afl oat in the evolving business market. Th e recent acquisition of National Bank of Kenya Limited by KCB Bank PLC, the merger of NIC Group PLC and Commercial Bank of Africa Limited, the acquisition of Quick Mart and Tumaini Self Service Supermarkets by Sokoni Retail Kenya to form a single retail operation and the proposed acquisition of one hundred percent (100%) of the issued share capital of De La Rue Kenya Limited (a subsidiary of De La Rue PLC) by American firm HID Corporation Limited are some of the notable M&A Transactions that have taken place in Kenya in 2019. All these recent M&A Transactions have brought to the fore, among other issues, the fate of employees in the merging entities. In most instances, a high number of employees are declared redundant and thereaft er, have to wait for fresh advertisements of positions by the merged or acquiring entity and apply to be recruited.

Employment and labour law considerations feature highly during M&A Transactions. More often than not, such transactions lead to loss of employment due to the restructuring of the target company, or the change in character and identity of the transferring entity. Unlike other contracts involving assets and liabilities of the transferor, contracts of employment are currently not assignable to the acquiring entity under Kenyan law.

Other than setting out the basic conditions of employment and addressing the legal requirements for engagement and termination of employees, both the Employment Act, 2007 and the Labor Relations Act, 2007 are silent on the effect of M&A Transactions on employees. In practice, the contracts of employment are terminated on account of redundancy subject to compliance with the conditions as set out under section 40 of the Employment Act.

In some instances, the Competition Authority of Kenya (the Authority) established under the Competition Act, 2010 undertakes a public interest assessment to ascertain the extent to which the M&A Transaction will cause a substantial loss of employment and impose conditions to mitigate such as has been in case of the acquisition of National Bank of Kenya Limited by KCB Bank PLC where the Authority approved the merger on condition that KCB Bank PLC retains ninety percent (90%) of the employees from National Bank of Kenya Limited for a period of at least eighteen (18) months. This was also seen in the merger between NIC Group PLC and Commercial Bank of Africa Limited where the Authority approved the merger on condition that both entities retain all the employees for a period of at least one (1) year.

Proposed Law

The Kenya Law Reform Commission, a statutory body established under the Kenya Law Reform Commission Act, 2013 with the mandate to review all the laws of Kenya to ensure that they are modernised, relevant and harmonised with the Constitution of Kenya, 2010, recently prepared a draft Employment (Amendment) Bill, 2019 (the Bill) which amongst other provisions, proposes to amend the principal Act (being the Employment Act, 2007) by introducing a new section 15A which provides for the transfer of employees during M&A Transactions.

The proposed section 15A provides that such transfer of employees shall not operate to terminate or alter the terms and conditions of service as stipulated in the original contracts of the employees. It also creates an obligation on the transferor to notify and consult with the affected employees or their representatives regarding the anticipated transfer, the implications of such transfer and the measures that the transferor envisages will be taken to mitigate such implications. Further, the Bill provides that any dismissal taking place prior or subsequent to the transfer shall amount to summary dismissal if such dismissal is premised on the transfer.

Essentially, the Bill seeks to eliminate the difficulties occasioned during M&A Transactions by ensuring that the employees are not left out in the cold when their employer is bought out. It also creates an obligation for the transferor to inform and consult with the employees who shall be affected in an M&A Transaction. This has been the practice in other jurisdictions such as the United Kingdom and even closer home, in neighbouring Uganda.

The Bill borrows heavily from the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE Regulations) as amended by the Collective Redundancies and Transfer of Undertakings (Protection of Employment) (Amendment) Regulations 2014 applicable in England and Wales. TUPE Regulations are aimed at protecting the rights of employees in M&A Transactions in England and Wales by imposing obligations on employers to inform and, in other cases, consult with representatives of affected employees. Failure to comply with these obligations attracts penalties and sanctions to the employer.

Critique

While the proposed law could be seen as a relief for employees who are mostly losers in M&A Transactions, it brings with it several challenges and may potentially make M&A Transactions even more complex and strenuous, particularly on the part of the transferee.

Firstly, all the transferor’s rights, powers, duties and liabilities in connection with any employment contract shall be transferred to the transferee. Further, the transferee shall be liable for all the employees’ dues dating back to the commencement of the employment contract. This also means that the transferee shall shoulder all the liabilities that arose from the transferor’s engagements with its employees, including but not limited to cases initiated by and against the transferor.

Secondly, the proposed amendment as currently drafted may subject the parties in M&A Transactions to unnecessary costs and restrictions. It may not be practical to place the transferee under an obligation to automatically retain all the employees of the transferor without any loss of benefits or contractual dues. Such a provision shall defeat the purpose of M&A Transactions, as most of them are geared towards restructuring the business for purposes of reducing operational costs.

With respect to the dismissal of employees immediately prior or subsequent to an M&A Transaction, the proposed amendment as currently framed might open a pandora’s box as it may operate as a blanket protection to all employees including those whose contracts may be terminated for valid reasons during the transition period. The proposed amendment as drafted protects employees against redundancy processes while creating a higher standard of proof against the transacting parties with regards to any termination disputes arising in the course of an M&A Transaction.

Further, the proposed amendment fails to appreciate the contractual rights and obligations of parties with respect to employment and M&A Transactions. There should be provision to allow the transferee to freely negotiate alternative arrangements and contractual obligations with the transferor’s employees and maybe set the standards that should guide this process. By doing so, the parties would have a better chance to make agreements that are favourable to all.

Conclusion

While the issue of how to deal with employees and employment contracts remains a challenge in M&A Transactions in Kenya, the proposed amendments to the Employment Act will no doubt come as a sigh of relief for many employees who have long viewed themselves as collateral damage in M&A Transactions. However, the proposed amendment is likely to increase the cost of undertaking M&A Transactions in Kenya which may well end up being counterproductive as regards the rationale for which the M&A Transaction was carried out in the first place.

What the Data Protection Act, 2019 Means for You

Posted on November 13th, 2019

8th November, 2019 marked a great milestone in the history of Kenyan legislation with the enactment of the long-awaited Data Protection Act, 2019 (the Act). The purpose of the Act is to inter alia regulate the collection and processing of data in Kenya. The Act has introduced elaborate obligations to persons who collect and process data whose infringement would lead to stiff penalties of an administrative fine of up to KES 5 million or in case of an undertaking, up to 1% of its annual turnover of the preceding year, whichever is lower.

The Act establishes the office of the Data Protection Commissioner which is to be headed by a Data Commissioner. The role of the office of the Data Protection Commissioner includes overseeing the implementation of the Act, establishing and maintaining a register of data controllers and data processors, exercising oversight on data processing operations, receiving and investigating any complaint by any person on infringement of the rights under the Act.

The Act has extraterritorial application as it applies to data controllers and processors established or resident in or outside Kenya in so far as they process personal data while in Kenya or of data subjects located in Kenya.

All data controllers and data processors who meet the thresholds to be prescribed will now be required to be registered with the Data Commissioner. Failure to register is an offence, whose fine on conviction is KES 3 million or an imprisonment term not exceeding ten (10) years or both.

The Data Commissioner may carry out periodical audits of the processes and systems of the data controllers or data processors to ensure compliance with the Act.

Section 24 of the Act allows data controllers and data processors to appoint a data protection officer who may be a staff member whose role includes advising on compliance with the Act. A group of entities is allowed to appoint a single data protection officer provided that the officer is accessible by each entity.

The Act outlines the principles of data protection which are modelled on the principles set out in the EU General Data Protection Regulation. It further stipulates the rights of persons whose data is collected, including the right to: be informed of the use to which their personal data is to be put; access their personal data in custody of a data controller or data processor; to correction of false or misleading data; and to deletion of false or misleading data about them.

Processing of data is prohibited unless certain conditions set out under the Act, including the obtainment of the consent of the person whose data is processed are fulfilled. In addition, the processing of sensitive personal data is prohibited except for the stipulated permitted grounds. Further, personal data relating to the health of a person may only be processed by or under the responsibility of a health care provider; or by a person subject to the obligation of professional secrecy under any law.

The Act also stipulates that a person shall not use, for commercial purposes, personal data unless inter-alia the person obtains consent from the person whose data is to be used.

The Act outlines the conditions for the transfer of personal data outside of Kenya and the safeguards that must be considered. For instance, where the transfer is necessary for the performance of a contract between a person whose data is collected and the data controller or data processor or implementation of pre-contractual measures taken at the person’s request.

The impact of this Act is that persons who collect, control, manage and store data will need to review their terms and conditions and operations to avoid the risks of non-compliance.


This alert is for informational purposes only. If you have any queries or need clarifications, please do not hesitate to contact Jacob Ochieng, Partner, Milly Mbedi, Senior Associate or your usual contact at our firm, for advice relating to the Data Protection Act, 2019 and how the same will affect you

AVCA Conference 2019

Posted on July 16th, 2019

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

Kosgei Kipkirui

Head of Business Development

T: +254 709 250 000/735

E: gkosgei@oraro.co.ke

Within Limits: Understanding Restrictive Trade Practices Under the Competition Act, 2010

Posted on December 12th, 2018

Share this article

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.

What are Restrictive Trade Practices?

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

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.

Penalties

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.

Immunity

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.

New Directives Affecting Work Permits in Kenya

Posted on July 29th, 2018

Share this article

On the 20th of April, 2018, the Cabinet Secretary for Interior and Coordination of National Government, Dr. Fred Matiangi, issued directives requiring all foreigners to regularise their work permits within sixty (60) days. The directives were issued during a Parliamentary Security Committee meeting in Mombasa.

The directives require foreigners to obtain electronic work permits and the Government to set up a digital register where one can search to confirm whether a foreigner is legally in Kenya. Regularisation of the permits will involve surrender of the present permits in exchange for electronic permits and updating of information on the systems at the immigration offices. Currently, there are no e-permits. By this process, the Government will confirm who is in Kenya legally or illegally.

Immigration officials will also be required to vet foreigners in strict accordance to the Kenyan laws and there will be more rigorous processes for approval of permit applications.  This means that, in adherence to the laws, no permits will be issued for skills that are readily available within the country.

The effect of these directives is that upon the lapse of the sixty (60) days, the police will be mandated to arrest and deport anyone who has not regularised their permits and is in Kenya illegally. The directives will also tighten the already stringent measures the Government has imposed relating to issuance of work permits and special passes.

Employers of foreign nationals also need to familiarise themselves with the directives since upon implementation; their foreign employees may be affected forcing employers to employ skills that are locally available. Employers should therefore ensure that all foreign employees comply with the directives once implemented.

Although we understand that the immigration officials have begun implementing the directives, the directives have not (as at the date of this alert) been published as required by law and may be subject to a legal challenge.


This alert is for informational purposes only. If you have any queries or need clarifications, please do not hesitate to contact Jacob Ochieng or your usual contacts at our firm, for advice relating to the directives and how the same will affect you.

Related Practice areas

Two Cents: The Sale & Leaseback Model Alternative

Posted on June 27th, 2018

Share this article

Conventional debt and equity financing models have become largely inaccessible amidst the economic slump that has been occasioned by the global financial crisis. The ramifications of this have been felt in Kenya where there has been a slow-down on lending to the private sector. This has inadvertently resulted in a deceleration of economic growth as traditional lenders have scaled back on loan disbursements. This has also been exacerbated by the capping of interest rates chargeable by banks and financial institutions which was introduced in 2016.

The decline in credit issuance and uptake has had an effect on the recent slowdown of Kenya’s economic performance due to the general election in 2017 which greatly affected the country’s economic outlook. These are clear manifestations of a paradigm shift needed in Kenya in the manner in which capital is raised by various entities. But there is hope, with the world economy bouncing back from the global recession in 2010, reforms have been made in the traditional financing models in Kenya. Against this backdrop, companies now have the recourse to explore alternative financing models to remain competitive and profitable.

Sale and Leaseback Transactions

Sale and leaseback financing has proved to be an attractive option for some companies that seek to keep up with their growth strategies. Essentially a sale and leaseback transaction involves a sale of an interest in property with a reservation on the possessory terms. The underlying characteristic of these kind of transactions is that, the seller acts as a lessee and they raise the capital through property that they hold by transferring the property to a buyer through sale. This transaction enables the seller to dispose of the property and obtain capital injection for the business, while maintaining the use of the same property at an agreed lease premium for a specified term. This is especially beneficial to a buyer who seeks to incur the least possible maintenance costs of the property.

Characteristics

A sale and leaseback financing model varies from traditional financing models because it typically entails:

  • A sale of assets by an entity that desires to raise capital from the property to an investor who seeks to achieve a low-risk, high yield investment
  • Simultaneous obtaining of a long-term lease of the property by the seller-lessee from the buyer-lessor which enables the continuing possession and use of the property by the seller-lessee in exchange for payment of rentals at an agreed premium
  • The retention by the seller-lessee of most of the risk and rewards incident to ownership save for the right to mortgage where the lease is an operating lease
  • Transfer of substantially all the risks and rewards incident to ownership where the lease is a capital lease.

Classification of Leases

Whether a lease shall be classified as an operating lease or a capital lease is usually agreed upon at the inception of the transaction. It is important to classify the lease the parties intend to enter into as both have different effects on the parties.

A lease will be classified as an operating lease where the rental premiums are considered as operating expenses in the seller-lessee’s book of accounts, and the property leased does not form part of the seller-lessee’s balance sheet. On the other hand, a capital lease is considered as a loan to the seller-lessee and stated as such in the seller-lessee’s books of account. Most leases in a typical sale and leaseback transaction will be operating leases. However, a capital lease would arise where there is a buyback agreement contained in the lease; there is a buyback option with a defined price in the lease; or the lease value is greater than ninety per cent (90%) of the value of the property.

Advantages and Disadvantages Certain advantages have been identified to inure with sale and leaseback financing model. One key motivation for adopting this financing model is the tax advantages that flow from these transactions. It has been noted that in majority of these transactions, the seller is usually motivated by the need to realise immediate loss which is used to offset the seller’s operating income. The seller in essence receives proceeds from the sale of a non-liquid asset, yet retains for a term the use and possession of the asset.

The seller in a sale and leaseback transaction obtains a greater amount of capital through a leaseback than when they opt for conventional types of borrowing. Needless to say, this financing model is essential in providing working capital to the seller-lessee who will realise approximately one hundred per cent (100%) of the market value of the property unlike debt and equity forms of financing which may not result in the same returns. This is especially important in markets experiencing fluctuations in conventional lending sources.

For the buyer-lessor, this financing model allows it to have a hands-off approach to the management of the property as it incurs no responsibility for the operational or managerial aspects of the property which is left to the seller-lessee.

A sale and leaseback transaction also comes with its fair share of challenges, a notable one being a high interest rate on the lease that the rental property may attract. Tax implications may also be evident with recent changes in the International Financial Reporting Standards.

The fact that the property is no longer under the ownership of the sellerlessee also means that the seller-lessee may have no say with regards to the interest that the buyer-lessor will charge on the leased property. This may in the long run mean that the seller-lessee has to incur higher costs in using and managing the property as this responsibility does not rest with the buyer-lessor. This denotes an inherent risk that is evident in many lease arrangements.

It is clear that the sale and leaseback financing model is an option Kenyan companies could consider in their quest to raise capital to finance their growth strategies in the market. Numerous advantages can be drawn from the adoption of this model, especially in light of the drawbacks of conventional financing models.

Moreover, this model is attractive to entities that are unable to attract a wide variety of financing. This financing model may be useful for companies that may want to accrue some capital to use for their expansion initiatives. Ultimately, these entities could benefit from unlocked real estate value, reduction in a company’s investment in non-core business assets, such as buildings and land and freeing-up of the entity’s cash in exchange for executing a long-term lease.

 

Of Purchases & Protection: Spotlight on M&A Transactions

Posted on June 27th, 2018

Share this article

Co-authored by Radhika Arora.

With the Kenyan banking sector being brought into the spotlight for a projected increase in Mergers and Acquisitions (M&A), it is important for businesspersons to have a basic understanding of this type of transaction. Buyer protection in any M&A is at the forefront and is also the reason that any Share Purchase Agreement (SPA) in a majority of cross-border transactions is composed primarily of the seller’s representations and warranties. The need for this protection is particularly enhanced when there is more than one potential buyer involved in the transaction from the outset, as multiple potential buyers give the seller a chance to sway the representations and warranties in the SPA to its favour, leaving the buyers vulnerable in the event that the target company does not perform as projected.

The scope and detail of these representations and warranties are often heavily negotiated and tailored to reflect not only the essence of the target company and its business, financial status and operations, but also the relative negotiating strength of the buyer and the seller. Representations and warranties also help in providing information to the buyer, thereby allowing for a fair allocation of risk between the contracting parties with respect to the matters covered by the representations and warranties.

Representations and warranties, for purposes of simplicity, may be defined as “promises” - they are the contractual tool that buyers and sellers use in an M&A transaction to allocate the risk of any imperfections in the deal. On the other hand, indemnities serve as “protection” to the buyer for issues related to the target company that are discovered during the due diligence. What are some of the important representations, warranties and indemnities that a buyer should look out for within an SPA?

Balance Sheet Warranties

The balance sheet warranty in an SPA is arguably the most important warranty for a buyer, as it paints a complete picture (to the extent possible) of the financial standing of the target company. It normally entails a warranty over all, or at least the important, balance sheet data. However, it is common practice to extend the warranty to the income and loss statements of the target company, as well as to the notes in the financial statements.

A diligent buyer to a transaction should ensure that he is not only receiving a subjective (soft) warranty but also an objective (hard) warranty. The difference is that the seller´s objective warranty confirms that not only has he complied with applicable law, but also that the balance sheet is objectively true, and thus gives a complete and fair view of the assets, financials and earning position of the target company. Furthermore, objective warranties are governed by the law of strict liability, which means that a buyer can bring an action against the seller regardless of whether or not the defect in the target company that accrued and was linked to the balance sheet was the direct fault of the seller. A subjective warranty on the other hand, confirms that the provisions of the balance sheet warranty are in compliance with applicable accounting principles.

It should also always be borne in mind that balance sheet warranties do not extend to the period between signing and closing of the transaction, which means there is often a period (usually a couple of months) where if the situation of the target company changes, the buyer will have little or no protection. In such a situation a diligent buyer should request a “closing balance sheet” which covers this period. Monitoring the performance of the target company during this period, and comparing the returns on the closing balance sheet to the last audited balance sheet, will allow the buyer to ascertain with confidence that the target company is performing as was projected. In the event that the target company does not perform to the standards expected, the closing balance sheet places the buyer in a favourable position to be able to negotiate the purchase price downwards.

Materiality and Knowledge Qualifiers

In negotiating the SPA, the seller and the seller’s lawyers will have an incentive to keep the representations and warranties as narrowly drawn as possible. The buyer, on the other hand, would want full coverage for any possible eventuality and so would ideally want the representations and warranties to be as broad as possible. One way through which a seller tries to limit liability is to qualify the representations and warranties to its “knowledge” or “materiality”.

Materiality qualifiers entail the use of phrases such as, “could reasonably be expected to have a material adverse effect.” Phrases such as these immediately protect the seller for any eventuality that could not reasonably have been foreseen by a third party, or eventualities which to the buyer would be a major development but to the seller are not “material” enough as to warrant a reduction in the purchase price or indemnification from the seller.

Knowledge qualifiers are phrases such as, “to the best of the seller’s knowledge.” Once again, as in the case of materiality qualifiers, these protect the seller from any legal issues that may arise which could not reasonably have been foreseen.

It is therefore important for a buyer to be prudent when reviewing the SPA and to ensure that all connotations of materiality or knowledge are taken out from the seller’s representations and warranties, so as to achieve complete coverage and protection even after the transaction is complete.

Tax Indemnities

Tax is notoriously known to be one of the most contentious areas of any M&A transaction, as tax liabilities are hard to predict with absolute certainty and often entail the buyer taking a substantial risk. The ideal scenario with respect to tax indemnities would be for the buyer to get full protection in the event of any pre-closing tax liability, arising subsequent to completion. In Kenya however, this is still an emerging area of the law that is yet to be formally legislated upon. Buyers and sellers will usually negotiate the period of time to which the liability for tax extends.

Tax indemnities have the reputation of being the part of any SPA where the buyer’s and seller’s lawyers will have to employ their most savvy contracting techniques, especially where it is a cross-border deal. Ordinarily, the process of sending repeated amended drafts of the SPA to and fro will be quite intense as both sets of lawyers attempt to secure the best deal for their respective client. The buyer’s lawyer in this situation will usually have close contact with the target company’s auditors so as to ensure that every problem flagged during the due diligence is covered by a specific indemnity to protect the buyer.

Liability Limitations

These are provisions within the SPA that limit the amount of exposure the target company, or the buyer, might face in the event that a claim is made against the target company.

Firstly, the buyer must look out for the “survival period” clause in the SPA that dictates the length of time within which a claim may be brought against the seller for any eventuality arising out of the status of the target company as at the time of sale. As a buyer, one should always try and maximize the amount of time to bring a claim, bearing in mind that core provisions (such as ownership of shares in the target company) warrant longer survival periods.

Another important liability limitation to look out for as a buyer would be the “caps”, which are the maximum liability clauses. Indeed it is argued that these are often the single most important clauses in the entire SPA. The main aim as a buyer would be to try and secure as high a cap as possible to ensure maximum protection.

About Us

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.

Contact Us

Oraro & Company Advocates
ACK Garden Annex, 6th Floor, 1st Ngong Avenue
P. O. Box 51236 - 00200, Nairobi, Kenya.
T: +254 709 250 000
E: legal@oraro.co.ke | W: www.oraro.co.ke

Oraro & Company Advocates © 2021