KENYA: An Introduction to Dispute Resolution
CHAMBERS 2022
OVERVIEW OF DISPUTE RESOLUTION IN KENYA
Kenyan court structure
The system consists of subordinate courts and superior courts. The subordinate courts are supervised by the High Court. The Environment and Land Court and the Employment and Labour Relations Court are specialized courts with the status of the High Court. Appeals from the subordinate courts are made to the High Court or the specialized courts with the status of the High Court, depending on the nature of the matter. Appeals from the High Court and the specialized courts lie with the Court of Appeal and further appeals (on certain prescribed matters) lie with the Supreme Court.
Disputes relating to some areas of law are handled by specialized tribunals before appeals can be made to courts. These include tax disputes (Tax Appeals Tribunal); public procurement and asset disposal matters (Public Procurement Administrative Review Board); sports disputes (Sports Disputes Tribunal); competition disputes (Competition Tribunal); industrial property matters, such as patents, utility models and industrial designs (Industrial Property Tribunal); standards disputes (Standards Tribunal); and some environmental disputes (National Environment Tribunal). Save for exceptional circumstances, the available remedies before the tribunals must be fully exhausted before instituting an action in court.
Current trends and changes in practice
In the midst of the COVID-19 pandemic, the judiciary rolled out the electronic filing system in July 2020, which is currently used in many courts.
Court proceedings are predominantly held on virtual platforms, especially in urban areas, with physical court attendance only in exceptional circumstances. With the lifting of COVID-19 containment measures and restrictions in the recent past, physical court attendances have been on the rise, especially for trials. Upcountry court stations mostly conduct their proceedings physically due to internet connectivity issues. Virtual court sessions have improved access to courts, reduced cost for advocates and litigants, and enhanced the recording of court proceedings. There are, however, real risks associated with the virtual sessions such as challenges in maintaining courtroom control, accessibility by unrepresented litigants, challenges associated with the courts’ ability to assess witness credibility and privacy risks, but these are being addressed progressively.
Alternative Dispute Resolution (ADR)
The Constitution promotes alternative dispute resolution (ADR) mechanisms. In promoting the ADR processes, the courts and tribunals adopt four principal approaches of:
a) Upholding contractual agreements for ADR processes.
b) Taking judicial initiatives, on their motion or upon application, to promote out-of-court settlements.
c) Through the Court-Annexed Mediation Programme, where the judiciary determines matters that are referred to mediation upon cases being filed.
d) Referring matters to the alternative fora and channels mandated under various statutes to hear complaints in the first instance.
The most popular forms of ADR in Kenya are arbitration and mediation. The Arbitration Act 1995 governs domestic and international arbitration and one key provision is section 10 which restricts courts’ intervention in arbitral proceedings. Notably, in the case of Nyutu Agrovet Limited v Airtel Networks Kenya Limited [2019] eKLR, the Supreme Court held that the decisions of the High Court in regard to enforcement or setting aside of an arbitral award are appealable to the Court of Appeal. This decision is perceived to upset the previously long-held judicial precedent that the decisions of the High Court on these matters are final unless the parties to the arbitration agreement had specifically provided for further appeals. The decision continues to attract attention and debate on what it portends for intervention of courts in arbitration and the principle of party autonomy.
Current economic conditions affecting clients or the legal profession
The emergence of the COVID-19 pandemic in 2020 and its variants in subsequent waves throughout the year 2021 continued to have huge economic effects in Kenya and globally. Businesses and litigants are trying to recover from the economic crunch experienced due to this outbreak.
General elections are scheduled to be held on 9th August 2022 and the political trends suggest that they will be hotly contested. The risk of instability that comes with elections is always a threat to the economy.
The level of activity, trends and developments in our areas of practice
In addition to the adaptation of courts and court users to deal with the challenges posed by the COVID-19 pandemic as highlighted above, there are some changes and trends that have been witnessed which may or may not be related to the COVID-19 pandemic, including:
a. An increase in small claims. The Chief Justice operationalized the Small Claims Court Act in early 2021. The Small Claims Court has jurisdiction to handle pecuniary claims of less than KShs 1 million.
b. An upsurge of corporate insolvencies. This is noticeable from notifications advertised in the official Kenya Gazette. This is possibly due to the fact that the steps that had been taken to cushion businesses such as debt moratoria directives by the Central Bank of Kenya at the onset of COVID-19 in 2020 were lifted and businesses had to fulfil their obligations.
c. An increase in disputes relating to debt recovery, breach of contract, security realization by banks and other commercial institutions, among others.
d. An increase in tax disputes possibly as a result of the negative economic effects of the pandemic and the resultant difficulty for taxpayers to meet their tax obligations. The Kenya Revenue Authority (KRA) has also taken steps to collect as much revenue as possible. In most instances, KRA would take enforcement action after issuing tax assessments. KRA has, however, in the recent past increasingly taken enforcement measures not commonly used in the past, such as issuance of preservation notices which restrict taxpayers’ access to funds in their bank accounts, pending issuance of formal assessments. The law allows issuance of preservation notices in certain circumstances such as where a taxpayer is likely to frustrate the recovery of tax. There is, however, an increasing trend by KRA of issuance of preservation orders and the court has suspended some of these orders in cases that were deemed unjustified.
With regard to developments in the law, especially with regard to court decisions:
a. In the Finance Act of 2020, there was an amendment of the Income Tax Act by introducing a minimum tax of 1% for businesses at section 12D. This amendment was declared unconstitutional and nullified by the High Court in a judgment delivered on 20th September 2021 in Stanley Waweru & 6 others v National Assembly & 2 others; Institute of Certified Public Accountants of Kenya (ICPAK) & 2 others (Interested Parties) [2021] eKLR.
b. The High Court has delivered inconsistent decisions with regard to whether a holder of a debenture made prior to the Insolvency Act, 2015 can appoint an administrator under the Act without recourse to the court. The inconsistency revolves around the interpretation of section 534 of the Act. Section 534(1) of the Act provides that the holder of a “qualifying floating charge” in respect of a company’s property may appoint an administrator of the company. This appointment does not need the court’s sanction. Section 534(2) then provides that a qualifying floating charge is one that is created by a document that says that section 534 of the Act applies to the charge or empowers the holder to appoint an administrator of the company. In re Arvind Engineering Limited [2019] eKLR, Tuiyott J (as he then was) on 26th April 2019 held that there is a need to give a purposive interpretation of section 534(2)(b) of the Act (to find that they empower the debenture holder to appoint an administrator) so as not to disadvantage debenture holders who hold debentures that predate the Act. This decision had been relied on by lenders who hold debentures made before enactment of the Insolvency Act, 2015 to appoint administrators. In I & M Bank Limited v ABC Bank Limited & another [2021] eKLR, Majanja J on 31st May 2021, held that a secured creditor holding a debenture created before the enactment of the Insolvency Act 2015, does not fall within the meaning of holder of a “qualifying floating charge” under section 534 of the Act so as to entitle such secured creditor to appoint an administrator without the court’s sanction. According to this view, such a lender (secured creditor) would need to apply to the court like any other creditor, for the appointment of an administrator. There is a need to resolve the conflicting precedent by a higher court.
New legislation that will have an effect on clients
The Data Protection Act 2019 is now being operationalized after the appointment of the Data Commissioner in late 2020. Varied subsidiary legislation to further operationalize the Act was also published in January 2022.
An attempt by the Government to roll out the National Integrated Identity Management System (NIIMS) – which is popularly known as “Huduma Namba” was stopped by the High Court on 14th October 2021 delivered in Republic v Joe Mucheru, Cabinet Secretary Ministry of Information Communication and Technology & 2 others Ex Parte Katiba Institute & another; Immaculate Kasait, Data Commissioner (Interested Party) [2021] eKLR for non-compliance with Section 31 of the Act which has requirements on Data Protection Impact Assessments (DPIAs). The court held that the government should have conducted a DPIA before rolling out the Huduma Cards.
Some other new legislation or amendments that clients should be aware of include:
a. Central Bank of Kenya (Amendment) Act, 2021, passed in December 2021 which gives the Central Bank of Kenya powers to license digital lenders in the country as well as ensure the existence of fair and non-discriminatory practices in the credit market.
b. Public Private Partnership Act, 2021, passed in December 2021, which repeals the 2013 legislation and provides an elaborate legal framework to cover both national and county-level public private partnership (PPP) projects. The new law expands the role of the private sector in PPP initiatives beyond financing to include construction, operation and maintenance of the projects. It reduces the direct role of the Government in PPPs by removing the Cabinet's approval function.
c. The Business Laws (Amendment) (No. 2) Act, 2021, passed in March 2021. The main reason for the amendments is to facilitate the ease of doing business in Kenya by reducing the costs and time spent on various transactions. Some of the amendments to various pieces of legislation are:
i. Law of Contract Act, Cap 23 which has provisions on mode of execution of documents by companies.
ii. Companies Act No. 17 of 2015 There was litigation during the COVID-19 period as a result of which the definition of a general meeting has been expanded and the same can now be physical, virtual or hybrid.
iii. Insolvency Act No. 18 of 2015 which introduced provisions on moratoria (section 643) and company voluntary arrangements.
d. Finance Act, 2021
The Finance Act, No. 8 of 2021 (FA 2021), which received presidential assent on 29th June 2021 amended various tax laws. Whereas most of the amendments became effective on 1st July 2021, some took effect on 1st January 2022. Some of the changes included those to thin capitalization requirements for related entities, country-by-country reports for ultimate parent entities of multinational enterprises resident in Kenya, amendment to the capital expenditure deductions, introduction and definition of the principles that will govern the application of the Common Reporting Standards (CRS) regime in Kenya, provisions on refunds of fees and levies paid in error, provisions on tax refunds among others.
Potential hurdles or difficulties faced by clients and how these can be overcome
Politically, the push for constitutional amendment in 2021 under the Building Bridges Initiative (BBI) failed after the Constitution of Kenya (Amendment) Bill (“the Bill") was successfully challenged in the High Court in litigation that attracted a lot of attention locally and internationally.
Various appeals to the Court of Appeal were also unsuccessful on the general issue as to whether the Bill could proceed to a referendum. The proposed amendments under the Bill include changing the executive structure by introducing, among others, the office of Prime Minister and two Deputy Prime Ministers, and changing the position of Cabinet Secretaries to Cabinet Ministers and allowing their appointment from members of the National Assembly; introducing the position of the Leader of the Official Opposition; changing the composition of the National Assembly by increasing the number of constituencies; establishing the Office of the Judiciary Ombudsman; and increasing the minimum share of the national revenue allocated to county governments from 15% to 35%. Various appeals to the Supreme Court on the BBI and the Bill were consolidated and were heard between 18th and 20th January 2022. The court will deliver judgment on notice, and either pave the way for a referendum on the Bill or entirely rule out a referendum. It is unlikely that such a referendum would be held before the General Elections on 9th August 2022, even if the Supreme Court allows the exercise to proceed.
As this is an election year, clients need to brace themselves for an intense political campaign period and the likely effects on the business climate. Due to past experiences, including post-election instability and possible violence in some parts of the country, there is often a decline in investments in election years. There is a need for political goodwill and peaceful campaigns to avoid political instability and the effects thereof including the withdrawal of foreign investments from Kenya as previously experienced just before and after general elections.
There is still a significant backlog of cases in our courts. The use of technology in the COVID-19 era has helped to reduce the backlog which would have been much bigger if courts had altogether closed down.
Following the general elections later in the year, a number of judges will be deployed to hear election petitions which have to be determined within set timelines. This will reduce the number of judges dealing with other matters and may increase the backlog of cases.
Authors
George Kashindi - Partner
Irene Kashindi - Partner
James Tugee - Partner
Margaret Miringu- Partner
Munyao Muthama and Kashindi, Advocates