Month: November 2023

Arbitration as a preferred method of dispute resolution has gained popularity in the recent past because it is considered to be flexible, allows for party autonomy and confidentiality, and more importantly, saves time and money in comparison to litigation. There is, however, increased concern and discussion around the costs of international commercial arbitrations and the length of time within which disputes are resolved.

It has been particularly noted that arbitral proceedings are increasingly exhibiting the negative aspects associated with litigation such as high costs, delay and inefficiency. The question of cost-effectiveness and efficiency in international commercial arbitration is one that cannot be over emphasised.

Parkinson’s law states that work expands to fill the time available for its completion. This adage is especially true where the person executing the task is remunerated on an hourly basis as is customary in most if not all international arbitrations. In the context of an international arbitration, this means that the lengthier the proceedings, the higher the costs.

Fortunately, arbitration as a dispute resolution mechanism is designed to allow parties to control the costs and the procedure or process within which this can be done. Party autonomy in arbitration means that parties are the masters of the arbitration process, and they can determine and agree on virtually all the steps taken from the commencement to the conclusion of the arbitral proceedings. If utilised effectively, party autonomy can be a powerful tool for controlling the costs and avoiding delays in arbitral proceedings.

In this article, we discuss various factors that parties to arbitral proceedings must consider if they wish to have the dispute resolved in a cost effective, expeditious and efficient way.

The general costs associated with international arbitration mainly include the arbitrators’ fees and expenses, legal or other costs of the parties such as witness expenses, investigation fees, expert witnesses and the fees and expenses of the arbitral institution concerned. Interestingly an analysis of the breakdown of general arbitration costs done by Louis Flannery of Stephenson Harwood reveals that administrative costs (fees of the administering institution) amount to two percent (2%) of the total cost, the arbitrator’s fees and expenses amount to sixteen percent (16%) of the total cost, while legal counsels’ costs for legal representation amount to eighty-two percent (82%) of the total cost.

What this data shows is that greater focus should be on bringing down the costs for legal representation. In this article, we identify various stages of an arbitration at which costs may be controlled.

a) Administering Bodies and Institutional Rules

From the outset, the parties should decide between an institutional (or administered) arbitration versus an ad hoc (non-administered) arbitration. There are numerous institutions that provide assistance in running the arbitration in exchange for a fee. These institutions assist in the administrative aspects of the arbitration such as organising hearings, handling communication between the parties and the arbitrators, and handling payments. However, they do not decide on the merits of the dispute – this is left entirely to the arbitral tribunal. An ad hoc arbitration on the other hand, places the burden of running the proceedings on the parties and the arbitrators. However, parties may choose a set of arbitration rules designed to aid in ad hoc arbitrations such as those developed by the United Nations Commission on International Trade Law (UNCITRAL).

An institutional arbitration may particularly be beneficial to parties without arbitration experience as it will provide guidance and avoid time consuming discussions between the parties on preliminary issues that are incidental to the main dispute.

Examples of leading international arbitration institutions include; the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), the American Arbitration Association (AAA), the International Centre for Settlement of Investment Disputes (ICSID), China International Economic and Trade Arbitration Commission (CIETAC), and the World Intellectual Property Organisation (WIPO). However, some of these institutions are specific to certain types of disputes, for example, ICSID only caters to legal disputes arising out of an investment between a state party to the ICSID convention and a national of another state party to the ICSID convention.

It should be noted however, that fee structures differ depending on the institution, with some institutions charging on the basis of the amount in dispute and others charging on a flat hourly rate basis. The decision to use or not to use an administering body and institutional rules or institutional rules will have an impact on the costs of the arbitrations and parties are encouraged to compare costs of the various institutions beforehand.

b) Drafting the Arbitration Agreement

A well drafted arbitration agreement or clause will avoid preliminary arguments such as whether the dispute is subject to arbitration. Disputes as to the meaning or scope of the arbitration agreement clause are ordinarily determined first and tend to substantially add to the length and cost of the arbitration. Parties should as far as possible, avoid attempting to limit the scope of disputes that are subject to the arbitration unless special circumstances require it. This is because, even when drafted carefully, exclusions may provide an opportunity for preliminary arguments to be raised regarding the jurisdiction of the arbitral tribunal to hear and determine the dispute.

A good arbitration agreement or clause should be clear and should specify the number of arbitrators, the arbitration institution and rules if any, the seat of the arbitration, having regard to practical considerations such as neutrality, availability of hearing facilities, proximity to witnesses and evidence. While the seat of the arbitration does not determine the governing law of the contract and the merits, it determines the law that governs certain procedural aspects of the arbitration. Where parties choose institutional arbitration, ideally, the rules adopted should coincide with the institutional rules. It is also advisable that the parties use the model clause recommended by the institution as a starting point for drafting the arbitration agreement as this would have been tried and tested.

c) Choice of Counsel

Given the significant costs and expenses of international arbitrations, it would be foolhardy for a party to declare a dispute and initiate arbitration proceedings without first carrying out a cost benefit analysis. A lawyer with experience in international arbitration and is familiar with the fee structure and workings of the various administering bodies would be in a position to provide a legal opinion on the merits of the dispute which can then assist a party to take a commercial view on the matter.

Ultimately, the parties should set a realistic budget for the arbitration at the initiation of the arbitration and cross-check with their legal counsel on whether the funds set aside will suffice. Parties may also require that their counsel seek their approval before exceeding a set limit.

The choice of legal counsel is therefore vital if a party is to keep the costs and length of the arbitration down. Parties are encouraged to select lawyers with a reputation for efficiency and availability. Selected lawyers should also have specific arbitration expertise as opposed to litigation. In fact, there is nothing to prevent a party from interviewing or pre-screening potential legal counsels and requiring that they confirm their “availability for an efficient and reasonably expeditious schedule.”

d) Terms of Reference and Case Conferences

The terms of reference and case management conferences have been hailed as the kernel of cost-effectiveness in international arbitration. Both are very useful tools for managing arbitrations in order to ensure the fast and efficient progress of arbitral proceedings as they set out framework of the arbitration from the beginning to the end.

The terms of reference are drawn and signed by mutual consent of the parties and include information relating to the parties and arbitrators, a summary of the pleas and defences of the parties, the claims, the dispute in question, and the procedural provisions which shall be applied. More importantly it may be used to compel the parties to provide case summaries in order to narrow down the issues and empowers the arbitral tribunal to decide procedural issues while dispensing with physical meetings as much as possible and using conference calls.

At this stage, parties may also consider whether it is necessary to join other parties or consolidate disputes with a view to avoiding a multiplicity of suits thereby cutting down costs and enhancing efficiency.

e) Evidence Production, the Hearing and the Award

The production of numerous unnecessary documents that are not material to the matters in dispute can spike the costs of arbitration and cause significant delays in the expeditious resolution of the dispute. It is therefore imperative that parties produce only those documents that are material to the dispute rather than all documents that are relevant to the dispute. For example, there is no need to produce documents in respect of non-controversial facts. Parties should also agree on an organised system of producing and identifying the documents and as far as possible avoid duplication and adopt a coherent system of numbering. As a general ruleall documents should be submitted in electronic form and should be considered authentic unless their authenticity is challenged. As a preliminary matter, parties should consider whether it is entirely necessary to have an oral hearing, and whether the dispute can be determined on the basis of the documents produced by the parties. This can significantly cut down the on the costs of witnesses, accommodation, travel expenses, hiring a venue among others. It also greatly reduces the length of the arbitration.

The existence of a hearing agenda, a fixed timetable and time keeper as well as regular “housekeeping” sessions throughout the hearing aid in saving time. Other considerations include, whether the location of the hearing is convenient for all parties, whether the number of witnesses may be limited, whether consecutive hearing dates can be scheduled to avoid back and forth travel and minimise travel costs and conducting a pre-hearing conference in order to discuss logistics of the hearing; At the end of the hearing, parties should seriously consider whether closing submissions are necessary, and if they are, they should elect to have either oral or written submissions but not both. It will also save time and costs for the arbitral tribunal to specify the questions that they wish to be addressed in the closing submissions.

The arbitral tribunal must use its best efforts to submit the draft award to the administering institution as quickly as possible and within the timeline set by the administering institution if any and must ensure that time has been reserved in their diaries after the hearing for deliberation on the dispute. It may be prudent to select an administering institution that scrutinizes and reviews the award before it is issued as it avoids further litigation that may be initiated in local courts as grounds for setting aside the award.

Conclusion

Whereas there is a wide range of tools and devices that are available in arbitrations to ensure that the arbitration is conducted cost-effectively and efficiently, the ultimate decision depends on the various stakeholders involved in international arbitration that are key in monitoring and determining the ultimate cost and length of the arbitration. These are, the parties to the arbitration (or in-house counsel), external counsel, and the administering institution the arbitral tribunal, all of whom have a role to play in assessing the objectives and merits of the arbitration, drafting the arbitration agreement, engaging in pre-arbitration negotiations, setting a budget for the arbitration, selecting the arbitral tribunal, determining the procedure and procedural rules applicable to the arbitration among other matters. Arbitration may indeed be cheaper than litigation. However, in the realm of international institutional arbitration, the cost-effectiveness of the arbitral process requires conscious effort from the various stakeholders.

Historically, the basis of judicial review in Kenya was derived from the Law Reform Act (Cap. 26) Laws of Kenya and Order 53 of the Civil Procedure Rules, 2010 as better developed by case law on the area. On this basis, judicial review was limited to ensuring compliance by administrative bodies with the principles of proportionality, legitimate expectation and reasonableness in the carrying out of their functions.

However, the promulgation of the Constitution of Kenya, 2010 (the Constitution) brought with it Article 47 which expressly provides for the right to fair administrative action that is expeditious, efficient, lawful, reasonable and procedurally fair. In operationalising Article 47, Parliament subsequently enacted the Fair Administrative Action Act, 2015 (the FAAA). The FAAA has transformed judicial review in Kenya by expanding its scope from a review of the decisions of only public entities or administrative bodies, to include any person, body or authority which exercises a judicial or quasi-judicial function.

In this article we shall look at section 9 of the FAAA, which provides for the procedural aspect of judicial review applications by delineating the circumstances under which one may institute such proceedings. We will then examine the exceptional circumstances that might allow a party to bypass a prescribed statutory remedy and pursue a judicial review remedy through Court instead.

Statutory Remedies

Section 9 (1) of the FAAA provides that a person aggrieved by an administrative action may apply for judicial review of such a decision in the High Court or a subordinate court upon which original jurisdiction is conferred pursuant to Article 22 (3) of the Constitution. However, section 9 (2) of the FAAA limits this avenue of redress by providing a specific threshold to be satisfied whereby administrative action is only subject to judicial review if alternative mechanisms (including internal mechanisms for appeal or review), as well all remedies available under any other written law, are first exhausted.

Section 9 (2) of the FAAA may be viewed as a codification of the doctrine of exhaustion of administrative remedies. In applying the said doctrine, the Court of Appeal in the case of Geoffrey Muthinja & another v Samuel Muguna Henry & 1756 others (2015) eKLR, stated that the requirement is in conformity with Article 159 of the Constitution as it encourages the use of alternative dispute resolution. Of note was the Court’s holding that:

“It is imperative that where a dispute resolution mechanism exists outside Courts, the same be exhausted before the jurisdiction of the Courts is invoked. Courts ought to be the fora of last resort and not the first port of call the moment a storm brews… as is bound to happen. The exhaustion doctrine is a sound one and serves the purpose of ensuring that there is a postponement of judicial consideration of matters to ensure that a party is first of all diligent in the protection of his own interest within the mechanisms in place for resolution outside of Courts.”

For the above reason, a Court before which an application for judicial review is placed often satisfies itself, before seizing jurisdiction, that the parties seeking its intervention have first exhausted the prescribed statutory mechanisms for redress. In the case of Aly Khan Satchu v Capital Markets Authority (2019) eKLR, the High Court (Mativo, J) quashed the decision of the Capital Markets Tribunal on the basis inter alia, that the Tribunal that rendered the impugned decision was not properly constituted and that the applicant had not satisfied the ecxceptional circumstances requirement under section 9 (4) of the FAAA. Further, in recognizing that the Capital Markets Act (Cap. 485A) Laws of Kenya, provides for an express dispute resolution mechanism, the Court remitted the dispute back to a properly constituted Capital Markets Tribunal.

It is noteworthy that a person aggrieved by the decision of an administrative body prescribed by statute to hear a dispute has recourse to pursue redress in the High Court, either as a consequence of a provision of the statute providing for an appellate procedure to the

High Court, or in exercise of the Constitutional right of access to justice. An appeal procedure under statute ordinarily clothes the High Court with appellate jurisdiction which is often confined to determining the propriety of both the decision-making process as well as a limited review of the merits of the decision itself.

It is also important to note that administrative bodies created under statute are intended to be constituted by persons who are specially trained or have knowledge in the field in question. This ensures that any grievance arising under the statute is heard by persons who are uniquely qualified to handle the issues at hand and who have the ability to foresee the implications of any decision made.

Exceptional Circumstances

In order to address unique and peculiar circumstances, the Courts have recognised exceptions to the doctrine of exhaustion of remedies, which exceptions are also provided for under the FAAA. Section 9 (4) of the FAAA provides that in exceptional circumstances, and on application by a party, the Court may exempt such party from the obligation of exhausting alternative remedies if the Court considers such exemption to be in the interest of justice. The exceptional circumstances are not outlined in the Act, thus leaving the Courts to exercise their discretion when faced with an application for exemption.

The High Court in the case of Krystalline Salt Limited v Kenya Revenue Authority (2019) eKLR expressed its view on the definition of “exceptional circumstances” as follows:

“What constitutes exceptional circumstances depends on the facts and circumstances of the case and the nature of the administrative action at issue. Thus, where an internal remedy would not be effective and/ or where its pursuit would be futile, a court may permit a litigant to approach the court directly. So too where an internal appellate tribunal has developed a rigid policy which renders exhaustion futile.

The Fair Administrative Action Act does not define ‘exceptional circumstances’. However, this court interprets exceptional circumstances to mean circumstances that are out of the ordinary and that render it inappropriate for the court to require an applicant first to pursue the available internal remedies. The circumstances must in other words be such as to require the immediate intervention of the court rather than to resort to the applicable internal remedy.”

In Republic v Council for Legal Education ex parte Desmond Tutu Owuoth (2019) eKLR, the High Court went further to state that in determining whether an exception to internal remedies should be granted in allowing parties to institute judicial review proceedings, the Court must look at whether the internal appeal mechanism available to a party under statute would serve the ends of justice. The Court had previously stated that the doctrine of exhaustion of remedies would not be applied where a party may not have an audience before the forum created, or the party may not have the quality of audience before the forum created which would be proportionate to the interests the party wishes to advance within the suit.

Therefore, a Court is obliged to look at whether the dispute resolution mechanism established under the statute in question is competent in the circumstances of the case to serve the interests of justice, or whether it warrants a party applying for an exemption from the doctrine of exhaustion of remedies.

Of interest, when faced with an application under section 9 (4) of the FAAA, the Courts have looked at the practicality and efficacy of the statutory remedies as well as the nature of the issue at hand when making their decision. For instance, in the case of Republic v Kenya Revenue Authority ex parte Style Industries Limited (2019) eKLR, the Court held that it would grant exemption where it would be impractical to make an application to the administrative body.

For example, where the issue at hand is legal in nature and thus ought to be decided by the Courts rather than an administrative body, the Court would grant the exemption.

Upshot

Our review of case law reveals that parties tend to institute judicial review proceedings in Court for a variety of reasons. It may be that the statutory body that ought to hear the dispute at hand has not been constituted, and yet the dispute is time sensitive in nature, or the nature of the complaint is such that the statutory body cannot render an effective, impartial or dispassionate decision.

However, the downside of pursuing judicial review remedies through Court action is the comparatively longer time that Courts take to hear and determine matters. Another downturn is the fact that judicial review proceedings are restrictive, and save for exceptions, the Courts have been reluctant to delve into a review of the merits of the decision, placing the focus more on the propriety of the decision-making process itself.

Empanelment of a bench of judges refers to the administrative action of appointing several judges, to preside over a case or to hear an appeal. In the Court of Appeal empanelment of a bench would entail appointing an uneven number of judges being not less than three (3) in number, to hear and determine the matter either through a unanimous decision or by way a majority decision.

Section 13 (1) (b) of the Court of Appeal (Organization and Administration) Act, 2015 provides the President of the Court of Appeal is “…responsible for the allocation of cases and the constitution of benches, including ordinary and extraordinary benches, of the Court” amongst other functions. The Act does not define what an extraordinary bench is but from the meaning of the word extraordinary, it is taken to mean that the Court would be constituted in a unique, unusual or exceptional manner i.e. in a numerically greater coram than usual. This was remarked upon by the President of the Court of Appeal, Justice Ouko (P), in the case of Multichoice (Kenya) Ltd v Wananchi Group (Kenya) Limited & 2 Others (2020) eKLR:

“The Act does not define what extraordinary benches are but, in my assessment, these would not be the usual benches of one judge (in chambers) or three in open Court, but of a number greater than these provided that the number is odd.”

Whereas section 5 (3) of the Appellate Jurisdiction Act (Cap. 9) Laws of Kenya provides for making of rules for the purposes of “fixing the numbers of judges who may sit for any purpose”, this provision has not been taken advantage of and no such rules have ever been made. In the circumstances, empanelment of appellate benches (whether ordinary or extraordinary) has come to be matter of practice, rather than procedural rule, and is a function carried out by the President of the Court. This observation is well captured in the aforementioned case of Multichoice (Kenya) Ltd v Wananchi Group (Kenya) Limited:

“Though the Rules Committee is empowered under section 5 (3) (i) of the Appellate Jurisdiction Act to make rules to fix the number of judges of the Court comprising an uneven number not being less than three, no such rules, unfortunately have been made. So that, apart from section 5 (3) (i) and the general provisions in section 13 (1) (b) of the Court of Appeal (Organization and Administration) Act, the empanelling of benches has been a matter of practice and not rules of procedure.”

In the Multichoice (Kenya) Ltd v Wananchi Group (Kenya) Limited case, Justice Ouko took a walk down memory lane and re-traced the practice of empanelment of a five-judge (or extraordinary) bench, pointing out that the power to empanel a five-judge bench rested with the President of the Court, while the process could be initiated either through an oral application made by a party before a three judge bench, or through a formal letter to the President of the Court:

“I take advantage of this appeal to, briefly outline…the correct practice and the proper circumstances for constituting a bench of more than three judges in this Court because the long-held practice appears to have been lost along the way. In the past it was the function of the President of the Court (in the years 1954 to 1977 when the predecessor of the Court had President) or the Presiding Judge in the years immediately preceding the promulgation of the 2010 Constitution, to constitute such benches. Today acting on an oral application, a three-judge bench would direct that the President of the Court constitutes an enlarged bench…Sometimes, in response to mail from advocates, the Presiding Judge or President would empanel the bench. As way back in history as 1954, it was recognized by the predecessor of this Court…that the role of empanelling a five-Judge bench rested with the President of the Court.”

Having touched upon the process and means through which an extraordinary bench might be empanelled, we turn now to consider the grounds or basis upon which such empanelment might be made.

Departure from Previous Decisions

One of the grounds upon which one may request for the empanelment of an extraordinary bench would be where one would be asking the Court to depart from one or more of its previous decisions i.e. potentially upsetting precedent, in recognition of the fact that while the Court should abide by the doctrine of precedent, it is nevertheless free in both civil and criminal cases to depart from previous decisions, when it is right to do so.

In the case of Income Tax v T (1974) EA 549, Justice Spry (Ag. P) explained as follows —being a reiteration of an earlier decision of the Court of Appeal in PHR Poole v R (1960) EA 63:

“A full Court of Appeal has no greater powers than a division of the Court; but if it is to be contended that there are grounds, upon which the Court could act, for departing from a previous decision of the Court, it is obviously desirable that a matter should, if practicable, be considered by a bench of five judges.”

Review of Conflicting Decisions

Closely related to a situation where the Court is directly asked to depart from a previous decision, (not previously thought to be wrong), is where the Court has unwittingly given varying opinions on a matter. Whilst the Court is not bound by its previous decision, the doctrine of stare decisis calls for deference to precedent, while conflicting decisions on the same issue necessarily means that one school of thought is wrong.

Thus, while stating that the “strengthening of the normal bench of three by two more heads” was desirable when the Court was called upon to review inconsistent decisions, the Court of Appeal rendered itself as follows in Eric V. J. Makokha & 4 Others v Lawrence Sagini & 2 Other (1994) eKLR

“Some muted but not impolite observation was made about the numerical composition of the Court by the applicant’s counsel but the breadth and sophistication of the submissions made to us for four whole days, justified the strengthening of the normal bench of three by two more heads. Because of the hierarchical structure of the Court, it is also the practice adopted to review inconsistent decisions of this Court.”

Substantial Question of Law

The Constitution does not define what a substantial question of law is (it may well be argued that any question of law is substantial), but Justice Majanja attempted a definition in the case of Harrison Kinyanjui v Attorney General & Another (2012) eKLR, where he held that:

“…the meaning of ‘substantial question’ must take into account the provisions of the Constitution as a whole and the need to dispense justice without delay particularly given specific fact situation. In other words, each case must be considered on its merits by the judge certifying the matter. It must also be remembered that each High Court judge, has authority under Article 165 of the Constitution, to determine any matter that is within the jurisdiction of the High Court. Further, and notwithstanding the provisions of Article 165(4), the decision of a three Judge bench is of equal force to that of a single judge exercising the same jurisdiction. A single judge deciding a matter is not obliged to follow a decision of the Court delivered by three judges.”

In Santosh Hazari v Purushottam Tiwari (2001) 3 SCC 179, the Supreme Court of India summarized the question of whether a matter raises a substantial question of law as follows:

• directly or indirectly, it affects substantial rights of the parties
• the question is of general public importance
• it is an open question, in that the issue has not previously been settled by the Court
• the issue is not free from difficulty
• it calls for a discussion for alternative view

The above considerations shed some light as to what would amount to “a substantial question of law” for the purposes of empanelment of an extraordinary bench. As Justice Odungasuccinctly stated in Wycliffe Ambetsa Oparanya & 2 Others v Director of Public Prosecutions & Another (2016) eKLR:

“…a Court seized with the question as to whether or not an extraordinary bench is required may also consider whether the matter is moot in the sense that the matter raises a novel point; whether the matter is complex; whether the matter by its nature requires a substantial amount of time to be disposed of; the effect of the prayers sought in the petition and the level of public interest generated by the petition.”

Upshot

There is no doubting the juridical benefit derived from drawing upon the collective wisdom, experience and understanding of an increased number of judicial heads put together, where the circumstances call for the same. It is a recourse that perhaps the Rules Committee of the Court of Appeal might make readily available by promulgating the Rules envisaged under section 5 (3) of the Appellate Jurisdiction Act, which would stipulate the procedure and grounds for the empanelment of an extraordinary bench.

The principal remedy under common law for breach of contract is an award of damages, with the purpose of damages being to compensate the injured party for the loss suffered as a result of the breach, rather than (except for very limited circumstances) to punish the breaching party. This general rule, which can be traced back to the decision in the case of Robinson v Harman (1848) 1 Ex 850, is to place the claimant in the same position as if the contract had been performed, with the guiding principle being that of restitution. As was held by the Court in Robinson v Harman:

“The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”

In this article, we explore various types of damages that a Court of law might award depending on the nature of the case. It is important for parties to be aware of the types of damages available in law and the circumstances upon which such damages might be awarded, so as not to pursue that which one is not entitled to, and perhaps more importantly, not to omit that which one is entitled to.

Special Damages

Special damages are awarded to compensate a claimant for actual out-of-pocket expenses and provable losses that have been incurred as a direct result of the defendant’s actions or behaviour. Special damages are amenable to precise monetary quantification and as such the claimant must be able to support their claim with compelling and accurate evidence of the losses sustained.

In Equity Bank Limited v Gerald Wang’ombe Thuni (2015) eKLR, the Court highlighted the importance of special damages being specifically pleaded and thereafter strictly proved before they can be awarded. This position was further buttressed by the Court in OkuluGondi v South Nyanza Sugar Company Limited (2018) eKLR, where it was held that “special damages must indeed be specifically pleaded and proved with a degree of certainty and particularity.”

General Damages

General damages, or non-pecuniary losses, are those damages which cannot be mathematically assessed as at the date of the trial. These damages are not amenable to precise monetary quantification and are assessed by the Court, ordinarily guided by precedents of a similar nature.

It is noteworthy that general damages are ordinarily not recoverable in cases concerning breach of contract as highlighted in the Court of Appeal case of National Industrial Credit Bank Limited v Aquinas Francis Wasike & Another (2015) eKLR.

Further, the Court of Appeal has on numerous occasions held that allowing a claim for general damages in addition to quantified damages under a breach of contract would amount to duplication. In addition, where there has been a breach of contract but the innocent party has not sustained any actual damage therefrom, or fails to prove that he has, only nominal damages would be recoverable by the innocent party.

Expectation Damages

Expectation damages are a form of compensation awarded to the party harmed by a breach of contract for the loss of what was reasonably anticipated from the transaction that was not completed and are aimed at placing the innocent party in the position he would have been, had the breach not occurred.

Expectation damages are recoverable only where they can be calculated to a reasonable certainty, and where this is not possible, the injured party will only be able to recover nominal damages.

Typically, the issue of certainty arises in cases where the damages suffered are in the form of lost profits. The general rule regarding lost profits and certainty in calculating damages is that if the injured party is an established business, lost profits are not treated as speculative because they can be estimated from past profits. Therefore, an established business will generally recover its lost profits, based on reasonable estimates derived from previous records.

Consequential Damages

Consequential damages are intended to reimburse a claimant for indirect losses other than contractual loss. However, this head of damages is not as open ended as it seems; the standard of proof is higher than that of special damages, as the loss needs to have been foreseeable or communicated in advance.

The general rule with regard to consequential damages is that the breaching party either knew, or ought to have known, that the damages claimed would probably result from his or her breach of the contract. In the absence of such damages being foreseeable, they are only recoverable where the innocent party mentioned their special circumstances in advance of the breach as was held in Hadley v Baxendale (1854) ER 145.

Punitive Damages

As mentioned earlier, the general aim of awarding damages is compensation, and not punishment. However, there are certain instances where a Court might order the breaching party to pay punitive (also known as ‘exemplary’ or ‘aggravated’) damages to deter him or her from committing future breaches of the same kind. Such instances include where:

Duty to Mitigate

Even after having suffered breach of contract and loss arising from such breach, a plaintiff has a legal duty to mitigate the damages suffered, and not to the allow the damages, as it were, to “snowball into an avalanche.” If the plaintiff unreasonably fails to act so as tomitigate its loss, or acts unreasonably so as to increase its loss, the law treats those actions as having broken the chain of causation and measures damages as if the plaintiff had instead acted reasonably.

The law further recognizes that a failure to mitigate damages means that the level of damages recoverable by the plaintiff would be commensurately affected by the extent of that failure.

The burden of proving that the plaintiff failed to take all reasonable steps to minimise or avert loss falls on the defendant. As was held in the case of Lombard North Central PLC v Automobile World (UK) Limited (2010) EWCA Civ 20:

“…it is well recognised that the duty to mitigate is not a demanding one. Ex hypothesi, it is the party in breach which has placed the other party in a difficult situation. The burden of proof is therefore on the party in breach to demonstrate a failure to mitigate. The other party only has to do what is reasonable in the circumstances.”

Interest

In addition to a determination on the quantum of damages, the Court will often award interest on the damages awarded. Such interest may be pre-Judgment or post-Judgment, where the former entails interest accruing on the award from the date of injury or the time of filing the claim to the time of the award, while the latter is interest accruing on the award from the time of entering the award to the time of payment.

An award of interest is not always discretionary. The general rule is that the applicable rate should be sourced from the contract, and where the contract is silent on the applicable interest rate, the rate may be implied from trade usage. In some cases, the contract may be so extensive as to stipulate for default interest. Similarly, an award of compound and simple interest should derive from the contract. In other words, the rate on interest will only be discretionary if it is not provided for in the agreement, implied from trade usage, or prescribed by statute.

Simply put, e-commerce refers to the sale or purchase of goods and services conducted over computer networks by methods specifically designed for the purposes of receiving and placing orders. The spectrum of goods and services sold online is wide, encompassing goods and services delivered physically, as well as intangible digital goods such as music, films, books, software and services such as online banking.

The United Nations Conference in Trade and Development (UNCTAD) reported that as of 2017, e-commerce accounted for six percent (6%) of all purchases made in Kenya. A natural consequence of electronic trading is implications under intellectual property laws or tort such as negligence and defamation. Electronic trading may also raise issues on privacy and data protection. Majority of online transactions were in the form of business-to-consumer or consumer-to-consumer transactions as opposed to business-to-business transactions, raising the question on the need for an effective dispute resolution mechanism. Albeit a relatively emerging area, online dispute resolution (ODR) may be one of the suitable dispute resolution mechanisms for online transactions.

Several definitions have been formulated to describe ODR, for example, the American Bar Association defines ODR as follows:

“ODR uses alternative dispute resolution process to resolve a claim or dispute. ODR can be used for disputes arising from online, e-commerce transactions, or disputes arsing from an issue not involving the internet called an “offline” dispute. It is an alternative to the traditional legal process which usually involves a court judge and possibly a jury.”

Authors Kah-Wei Chong and Len Kardon in the publication E-Commerce: An Introduction describe ODR in the following manner:- “ODR uses the internet as a more efficient medium for parties to resolve their disputes through a variety of methods similar to traditional ADR. It brings parties online to participate in a dialogue about resolving their disputes.”

It is clear that the term ODR is used to describe the process by which a dispute is resolved on an online platform such as the internet by means of arbitration, mediation or negotiation, all of which are alternatives to litigation or court processes.

Some of the means employed in ODR include, video conferencing, emailing, fax, virtual meetings in chat rooms, teleconferences etc. Parties may upload their written claim, evidential documents and written submissions, respond to questions from the arbitrator on email and receive the arbitrator’s decision on email.

With traditional arbitration increasingly incorporating modern technology into its proceedings, the distinction between online arbitration and traditional arbitration is becoming less clear. It is therefore imperative that legal practitioners and jurists continuously keep themselves abreast and familiarise themselves with technological developments to avoid falling on the wayside.

Why does ODR Matter?

In The World is Flat by Thomas L Friedman, the author argues that the advancement of the internet and computers has equalised the playing field in commerce. This is because a vendor located in different part of the world can sell his products to a consumer located in another part of the world without the two (2) ever physically meeting.

Indeed, it is impossible to deny the rapid rise in the number of commercial transactions that happen on an online platform. This has been further enhanced by the rise in use of the mobile phones that have internet connectivity capabilities. It is now no longer necessary to physically walk into a shop or meet a vendor before one can purchase an item. Many of the day-to-day commercial functions that we undertake are now a “click” or a “swipe” away. Only recently, it was announced that Tesla, the largest electric car dealer in the world had taken the decision to close most of its stores and shift to online–only sales.

It is inevitable that the increase in online commercial transactions would result in an increase in disputes on the same, thereby informing the need for a quick, efficient and cost effectivedispute resolution mechanism that is suited for online transactions.

Most online purchases involve parties located in different parts of the world and are unlikely to involve large or significant sums of money. As a result, the traditional means of dispute resolution which primarily involve courtroom litigation may in the case of an online purchase dispute be inconvenient, impractical, time consuming and prohibitive.

Of concern therefore, is whether consumers of online purchases are sufficiently protected from injury and have an efficient, effective and cost efficient means of seeking redress for such injury.

Related to this issue is whether there is a need for the formulation of a legal framework for ODR. As things stand, there is no law in Kenya that governs or addresses ODR nor is there any indication of an intention by Parliament to pass laws to regulate ODR.

This second question must be considered against the divergent regulatory approaches of the United Kingdom and the United States with the former preferring to pro-actively regulate ODRs while the latter prefers a self regulatory approach which leaves the task of regulation to private actors involved or participating in ODR.

These issues are all part of and should be looked at as part of a broader discussion on the Constitutional right to access to justice and consumer protection guaranteed under Articles 48 and 46 respectively of the Constitution of Kenya.

How Does ODR Work in Practice?

The Virtual Magistrate Project (the VMAG) launched in the US in 1996 was one of the first ODR initiatives. The VMAG served as an arbitrator for online disputes submitted to it and all proceedings would be done by email and decisions transmitted within days.

However, this initiative collapsed because several complaints were not within its jurisdiction, a lack of awareness of the service, failure by parties to participate and the inability of the VMAG to enforce its decisions.

Another significant ODR initiative is the Internet Corporation for Assigned Names and Numbers (ICANN) which resolves disputes regarding domain names. As commercialisation of the internet grew, domain name registry services identified potential issues surrounding the jurisdictional nature of trademarks and their involvement in potential litigation.

At the time of registering a domain name, parties agree to be bound by the ICANN dispute resolution mechanism. What makes ICANN effective is once an arbitrator decides that a domain name should be transferred or cancelled, the decision is binding on the domain name provider who will effect the change as determined by the arbitrator. The decision is however not binding on the parties and may be referred to court. Also, the domain name is instantly suspended on the submission of a complaint. The entire process is concluded using online procedures within about two (2) months. So far ICANN has resolved over five thousand (5,000) domain name disputes.

Other ODRs are Square Trade which has partnered with among the largest online businesses such as eBay, and PayPal among others and has resolved over two hundred thousand (200,000) disputes to date. Also worth mentioning is CyberSettle which was established in 1998 uses a three-round blind bidding system to settle monetary disputes particularly insurance related and workers compensation disputes. CyberSettle is a software technology that automatically compares the ranked bids to determine if the parties have arrived at a settlement. So far it has assisted in settling claims worth approximately USD 500,000 (KES 50 Million).

Advantages of ODR

Disadvantages of ODR

ODR is only suited for a very limited class of disputes such as e-commerce disputes and domain disputes, in most cases, the size of a claim arising from an online transaction will not correspond with the cost of possible litigation proceedings

Way Forward for ODR in Kenya

It has been said that when law and technology converge, change is inevitable. It is therefore doubtful that Kenya will have a choice in the matter other than to adapt to the changing faces of dispute resolution. Rather than wait for private actors to shape and develop ODR, there may be merit in a pro-active approach that is continuously and actively working to formulate regulatory legislation which has the objective of protecting online consumers and promoting their right to access to justice which are both Constitutional guarantees.

Kenya will need to develop a regulatory framework for ODR before this initiative is overtaken by more complex online dispute resolution initiatives such as smart contracts and block chain arbitrations among others.