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.

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

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

Posted on December 12th, 2018

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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.

Competition Authority Ready to Snap the Whip on Abuse of Buyer Power

Posted on December 11th, 2018

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:

  1. Delayed payment by a buyer of goods or services without justifiable reasons in breach of contractual terms;
  2. unilateral termination (or threat of termination) of a commercial agreement without notice;
  3. a buyers refusal to receive or return goods without justifiable reasons and in breach of contractual terms; and
  4. a buyer demanding preferential terms that are unfavorable to suppliers or demanding suppliers limit products sold to competitors.

In determining buyer power, the BPD will look at:

  1. The nature and determination of contract terms;
  2. the payment requested for access infrastructure; and
  3. the price paid to suppliers.

Industry-specific investigations

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.

Penalties

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.


Should you require further information on the BPD, 2017 please contact: Chacha Odera or Milly Mbedi

Related Insights

Milly Mbedi

Posted on October 24th, 2018

Milly Mbedi

Senior Associate

 

T: +254 709 250 000/709 250 714

E: milly@oraro.co.ke

 

Milly is a Senior Associate in the Corporate and Commercial practice group and specialises in corporate & commercial law, competition law, employment & labour law and intellectual property law. Milly has advised local and international clients on corporate restructurings, mergers & acquisitions, commercial contracts, drafting employment contracts, reviewing of employment policies & procedures, trademarks and copyrights.

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.

“Milly has experience advising local and international clients on a wide array of Corporate & Commercial aspects.”

Experience
  • Part of a team that advised Essar Overseas Energy Limited in connection with their sale of 50% stake in Kenya Petroleum Refineries Limited to the Government of Kenya, including assisting in drafting the agreements and the completion process.
  • Part of a team that advised Equity Group Holdings Limited (EGHL) (formerly Equity Bank Limited) on its acquisition of 79% of the share capital of ProCredit Bank, a financial institution in the Democratic Republic of Congo, from Belgische Investeringsmaatschappij voor Ontwikkelingslanden, Stichting DOEN and ProCredit Holding AG, including structuring the all stock consideration for the sale through issue and allotment of EGHL’s shares to each of the three sellers, undertaking due diligence on ProCredit Bank and addressing the multiple financial and competition regulatory challenges to the transaction.
  • Part of a team that assisted in undertaking due diligence and thus advising Godrej Consumer Products Limited on its proposed acquisition of a major stake in Canon Chemicals Limited.
  • Part of a team that assisted in advising Atlas Development and Support Services Limited (formally Africa Oilfield Logistics Limited), a company incorporated in the Island of Guernsey, Channel Islands and listed on the London Stock Exchange, on its cross-listing onto the Growth Enterprise Market Segment (GEMS) of the Nairobi Securities Exchange – the first ever successful cross-listing onto GEMS.
  • Assisted in advising clients in a variety of sectors on employment and labour related issues. The scope of work included drafting and developing a standard template for expatriates, senior local employees and junior local employees, drafting separation/settlement agreements and advising on dismissals and redundancies.

About Us

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