Month: June 2024

Francois-Marie d’Arouet, better known by his pen name Voltaire, consistently repulsed efforts by his father nudging him towards the pursuit of law as a profession. As if Voltaire’s rebuffs of his father’s

(himself a lawyer) career advice was not enough, Voltaire went on to famously criticise the very notion of a lawsuit when he lamented thus: “I was never ruined but twice: once when I lost a lawsuit, and once when I won one.”

In his brooding, perhaps Voltaire was merely speaking to the ugly side of litigation, where both the winner and loser of a lawsuit are prone to incur significant costs. Perhaps, looking through the lens of Voltaire’s eyes, lawsuits were too time-consuming and acrimonious for him. Or perhaps he was just disillusioned with the process of trying a lawsuit, which sometimes bears no resemblance to the notion of justice as sought by the aggrieved party. Whatever informed Voltaire’s view, it is generally accepted that a litigant would be ‘less ruined’ if the legal costs payable are contingent on the outcome of the dispute, or are borne by a third-party. Such considerations have enkindled and spurred the concept of third-party funding in dispute resolution.

Definition of Third-Party Funding

Despite the existence of various definitions, third-party funding may be aptly described as “an arrangement between a litigant and a third-party with no prior interest to the legal dispute in which the third-party agrees to fund the litigant’s costs in consideration of a percentage of the damages awarded to the litigant”.

In some jurisdictions, such arrangements may be likened to contingency fee agreements known as champerty, where lawyers charge fees based on the outcome of the case and agree to split or share

the award recovered by their clients in a certain ratio or percentage. Ardent proponents of these arrangements insist that they enhance access to justice, reduce the risk of loss by the litigant, and rule out  frivolous suits given that the third-party is likely to fund only claims with a reasonable chance of success. On the flip side, the third-party funder would be the party to bear the financial brunt of the lawsuit, as the litigant does not have to repay the funding, should the suit be unsuccessful.

Historical Perception and Global Trends

Historically, litigation financing arrangements i.e., champerty and maintenance, were unenforceable under common law, as they were considered to be against public policy. For instance, in British Cash

& Parcel Conveyors Ltd v Lamson Store Service Co Ltd [1908] 1 K.B. 1006, it was held that “maintenance and champerty are founded on the principle that no encouragement should be given to litigation by the introduction of parties to enforce those rights which others are not disposed to enforce…the law of maintenance as I understand it is confined to cases where a man improperly, and for the purposes of stirring up litigation and strife, encourages others either to bring actions or make defences which

they have no right to make.”

In view of the global economic uncertainty and the upsurge of international commercial litigation, common law jurisdictions have over the years grown receptive to the notion of litigation financing, and a number of countries have legislated on the legality and enforceability of such arrangements. Equally, some arbitral institutions have recognised third-party financing as an essential feature of moder dispute resolution process in the international arbitration landscape. For instance, the International Chamber of Commerce Arbitration Rules 2021, under Article 11(7), encourage non-party or third-party financing, subject to certain requirements on disclosure and transparency.

These notable gains notwithstanding, it may be argued that the recent majority decision of the Supreme Court of the United Kingdom has eroded the bright outlook of litigation financing in R (on

the application of PACCAR Inc and others) v Competition Appeal Tribunal and others [2023] EWCA Civ 299 by holding that arrangements which entitle a third-party funder to recover a percentage of

the damages awarded constitute “damage-based agreements” and are thus unenforceable if they fail to meet the statutory requirements for such agreements. The import of this decision is that most funders in the United Kingdom will have to review and interrogate the extent to which their current litigation financing arrangements are statutorily compliant and enforceable.

Moreover, going forward, litigants seeking litigation financing should undertake a rigorous due diligence exercise on the third-party funder just as the funder would, to ensure the arrangements comply with relevant statutory schemes of regulation as far as damages-based agreements are concerned.

The Position in Kenya

Despite the progress made in various jurisdictions, such as the United Kingdom, Australia, Nigeria, and Singapore, in recognising third-party financing both as an investment opportunity and a catalyst for access to justice, Kenya, just like many common law jurisdictions, prohibits these arrangements, including contingent fee agreements.

Section 46 of the Advocates Act (Cap. 16) Laws of Kenya and the Law Society of Kenya Code of Standard of Professional Practice and Ethical Conduct 2016 regard such agreements as invalid and unenforceable. Kenyan litigants must therefore fund their legal costs or seek legal aid from non-profit organisations who not only offer legal services but also procure Advocates to render services for litigants ordinarily on a pro bono basis.

Given the current trends where costs for commencing and sustaining international commercial arbitration or litigation are on the rise, it is arguable that Kenya is ready for the recognition of third-party financing. It is probable that to catch up with comparative jurisdictions such as the United Kingdom, Australia, and Nigeria, Kenya may soon loosen the grip on the unenforceability of litigation financing, marking a new dawn in the country’s litigation history, particularly in

the arbitration space. Such a bold step would certainly spearhead the realisation of Article 48 of the Constitution of Kenya, 2010 which mandates the state to ensure access to justice to all persons despite the constraints of legal fees and associated costs.

Kenya cannot, however, clamour for the recognition of litigation financing without critically looking into its overstated fears. Critics believe that litigation financing would erode the very foundation of

the practice of law, which maintains that legal practice is a profession and not a business.

Some maintain that dampening the grip on the invalidity of litigation financing would prioritise the monetization of legal claims at the expense of justice. It is also believed that litigation financing might lead to an increase in unmeritorious or frivolous claims as well as an undisclosed conflict of interest between the parties involved. Party autonomy over the course of the litigation would also be ceded to the third-party funder, who would naturally want to have a say on the course that litigation would follow, the strategy deployed and even the choice of Advocate to be engaged.

Whatever the concerns, it is possible to allay or mitigate against the risks or downsides through regulation. For instance, in the aforementioned decision by the United Kingdom Supreme Court in R (on the application of PACCAR Inc and others) v Competition Appeal Tribunal,

it was held that for litigation funding arrangements to be enforceable, they must meet the mandatory requirements prescribed in law, being inter alia:

• The agreement must be in writing.
• The funder must be a person of a description prescribed by the Secretary of State.
• The sum to be paid by the litigant must consist of any costs payable to him in respect of the proceedings which the agreement relates together with an amount calculated by reference to the

funder’s anticipated expenditure in funding the provision of the services.

• The amount must not exceed such percentage of that anticipated expenditure as may be prescribed by the Secretary of State in relation to proceedings of the description to which the agreement related.

It would also be prudent to encourage self-regulation by the third-party funder through developing a code of conduct to be observed by them, and by the same token, establishing an association for the said funders to regulate and ensure compliance with the code of conduct.

Conclusion

Third-party funding in both arbitration and litigation is poised to inhere itself within the international commercial disputes landscape. Kenya should thus take cognizance of the changing tides and perhaps borrow a leaf from other common law jurisdictions, such as Nigeria, which have adapted to the times and now allow for third-party funding.

The Supreme Court on 8^th November, 2023 delivered a judgment in the case of Derick Adu-Gyamfi v. the Attorney General in which parts of some provisions in the Companies Act, 2019 (Act 992) on disqualification of persons who can be appointed directors have been declared as unconstitutional. It is important for lawyers, in particular, and businesses, in general, to understand the full import of the judgment.

The Claim: The plaintiff in the case claimed that specific provisions in the Companies Act that disqualify a person from being a director are unconstitutional. The disqualification criteria challenged are:

• Parts of section 13(2)(h)(i) and section 172(2)(a)(i), which disqualify a person charged with a criminal offence involving fraud or dishonesty;
• Parts of section 13(2)(h)(ii) and section 172(2)(a)(i), which disqualify a person charged with a criminal offence relating to the promotion, incorporation or management of a company
• Part of section 177(1)(c), which gives the High Court the power to restraint a person from being a director if that person has been found culpable of a criminal offence relating to a corporate entity, even where the person is not convicted; and
• Section 177(1)(e) which gives the High Court the power to restrain a person from being a director if that person is under ongoing investigation by a criminal investigation body or the Registrar of Companies or an equivalent foreign institution for offences stated in the subsection.

It was argued that since a person is presumed innocent until proven guilty and entitled to a fair trial, seeking to disqualify the person from being a director before actual conviction is unconstitutional.

The Decision: The Supreme Court agrees with the Plaintiff on the first and second claims that the disqualification under (a) and (b) above on mere charge is unconstitutional. However, the Supreme Court disagreed with the position in the third and fourth claims and held the provisions as constitutional since the determination will be made by the court and the affected is given a hearing. The section further allows the person to apply to the court for leave to be a director despite the restraint.

The Effect of the Decision on the Companies Act

Contrary to reports that subparagraphs (i) and (ii) of Section 13(2)(h) and subparagraphs (i) and (ii) of section 172(2)(a) of the Companies Act have been struck out, the subparagraphs are still in effect subject to deleting the words “charged with or” from sub-paragraphs. The affected subparagraphs will now read:

“13. (2) The application shall include:

(h) a statutory declaration by each proposed director of the proposed company indicating that within the preceding five years, that proposed director has not been

• convicted of a criminal offence involving fraud and dishonesty;
• convicted of a criminal offence relating to the promotion, incorporation or management of a company; or
• declared insolvent or if that proposed director has been insolvent, the date of the insolvency and the particulars of that company;”

“172 (2) A person shall not be appointed as a director of a company unless the person has, before the appointment

• made a statutory declaration submitted to the company and subsequently filed with the Registrar to the effect that, the person has not within the preceding five years of the application for incorporation been
• convicted of a criminal offence involving fraud or dishonesty;
• convicted of a criminal offence relating to the promotion, incorporation or management of a company; or
• a director or senior manager of a company that has become insolvent or if the person has been, the date of the insolvency and the particular company; and”

In sum, a person charged with a criminal offence involving fraud or dishonesty or relating to the promotion, incorporation or management of a company but not convicted is no longer automatically disqualified from being a director of a company. However, the person must still make a statutory declaration on the fact that he has not been convicted of any such offence.

The import of the Supreme Court holding that paragraphs (c) and (e) of section 177(1) are unconstitutional is that a person who has been charged with a criminal offence relating to a corporate entity or a person under ongoing criminal investigation can still be restrained by the High Court from being a director. Such a person need not be convicted. The court on its own can restrain such a person, or an action to restrain such a person can be instituted by the persons listed in section 177(6) of the Companies Act.

The Wider Implication of the Judgement

There are other statutes other than the Companies Act which have similar provisions that disqualify a person from holding a position or being able to act in some capacity on the mere fact of being charged with an offence, even though not convicted, without recourse to the court. For example, section 5(2)(a) of the Incorporated Private Partnership Act, 1962 (Act 152) gives the Registrar of Companies power to refuse to register a firm if a person named as a partner has “within the preceding five years, has been guilty of fraud or dishonesty, whether convicted or not, in connection with any trade or business”. [emphasis mine]. This and other similar provisions in statutes in force will be affected by the decision in the case of Derick Adu-Gyamfi v AG.

The judgement is a call on the Law Reform Commission to take steps to bring such statutes in line with the Constitution.

The Government has proposed to set up Special Economic Zones (SEZs) in key urban areas; this establishment of SEZs is a flagship project under the national development blueprint of Vision 2030., the country’s development program 2008-2030 Launched by former President Mwai Kibaki. SEZs are to contribute towards the transformation of the country’s economic base in order to realize higher sustained growth, employment creation, and poverty reduction.

Background to the legislation

The introduction of the Special Economic Zones Act, 2015 (the Act) is intended to facilitate unlimited access to local and international markets. The SEZs are expected to help investors cut down on key cost drivers such as transport and provide benefits in terms of tax exemptions.

Principal objectives of the legislation

The purpose of the Act is to establish SEZs and to create incentives for economic and business activities in designated areas as well as removing impediments to economic and business activities that generate profit for enterprises in these zones.

To whom does the legislation apply?

The Act applies to any persons seeking to carry on business as a SEZ developer, operator or enterprises. The zones are currently undergoing a pilot programme in Mombasa (the nation’s second-largest city, on the Kenyan Coast), Lamu, and Kisumu.

How does the legislation apply?

A person must apply for a licence permitting them to operate in a SEZ. The licensed SEZ enterprises (SEZEs), developers and operators enjoy numerous exemptions. For example, they are exempt from existing taxes and duties payable under the Customs and Excise Act, Income Tax Act, East African Community Customs Management Act and Value Added Tax Act.

Future review/revision and steps required in regard to the legislation

There needs to be clear transition provisions with respect to the fate of Export Processing Zones (EPZs) it has been suggested that the government plans to freeze new investments within its EPZs before the end of 2015 as it takes up the SEZs model.

Competition law and policy have increasingly influenced the structure of the industry with the aim of achieving industry structures that catalyze competitiveness. A monopoly, duopoly or highly concentrated oligopoly are not desirable industry structures. Therefore, through application of competition law, it is expected that this would contribute to the free market economy by ensuring and provoking open and fair markets e.g., by, inter alia, questioning & scrutinizing market agreements, and reviewing commercial & administrative barriers to regional and domestic trade. The underlying theory of harm is that markets are susceptible to be captured by greedy business entrepreneurs to the detriment of other possible beneficiaries hence the need for a system to “monitor” and “control” anti-competitive agreements in the market.

ECOWAS Competition Law

The Economic Community for West African States (ECOWAS) adopted in 2008 the Supplementary Act A/SA.2/06/08 on the Establishment, and Function of the Regional Competition Authority for ECOWAS. Article 3[b] thereof mandates the competition authority to carry out on its own initiative or at the request of private persons or government officials from the Member States or of the Community Court of Justice, such investigations in relation to the conduct of business in the Common Market as will enable it to determine whether any enterprise is engaging in business practices in contravention of the Supplementary Act adopting the Common Competition Rules.

The competition concerns

Article 4 of Supplementary Act A/SA.1/12/08 “Adopting Community Competition Rules and the Modalities of their Application within ECOWAS [“Competition Rules”], sums up the competition concerns. It provides that the Supplementary Act (SA) applies to agreements, practices, mergers, and distortions caused by Member States which are likely to have an effect on trade within ECOWAS. The Competition Rules under the SA concern notable acts, which directly affect regional trade and investment flows and/or conduct that may not be eliminated other than within the framework of regional cooperation.

Mergers and Acquisitions

Inevitably, one of the key roles for competition law and policy is the regulation of mergers and acquisitions that are implemented in commerce and industry.  The word “merger” is ordinarily generically used in many jurisdictions to refer to all forms of amalgamations which include takeovers, acquisitions, joint ventures or other forms of control.

Article 1[a] of the said SA’s Competition Rules, define ‘acquire’ as: in relation to:

• goods: means to obtain by way of gift, purchase or exchange, lease, hire or hire purchase;
• services: means to accept benefit from or to perform the service;
• intellectual property rights: means to obtain by license, assignment or government grant;

Interestingly, Article 3 of the Supplementary Act A/SA.2/06/08 on the Establishment, Function of the Regional Competition Authority for ECOWAS does not have a provision on the functions of the ERCA to include review of mergers but this may be captured under “agreements”.

Mergers in a Single Economic Unit

From best practice, a merger occurs between independent enterprises and not those that fall within the same shareholding structures [e.g, a holding company and its subsidiaries or between “interconnected” enterprises – these are a Single Economic Unit [or single economic enterprise]

Article 1[2] and [3] of the Competition Rules provide some insight that any two companies are to be treated as interconnected companies if one of them is an affiliate of the other or both are subsidiaries of the same company; and a group of interconnected companies shall be treated as a single economic unit. It goes further to state that for purposes of the SA, a company is a subsidiary of another company if it is controlled by that other company. Mergers occurring within a single economic unit are not a competition concern.

Consideration of Control of another Enterprise

Mergers leading to control of another enterprise, a product or market are often a concern for competition authorities.  Article 1[1][i] of the Competition Rules, provide that “control” in relation to a company means the power of a physical or moral person to secure by means of

• The holding of shares or the possession of voting power in relation to that company; or
• Any other power conferred by the company’s constituent documents or other documents regulating the company;
• The effective exercise of power of decision within the company; so that the company’s business is conducted in accordance with that individual’s wishes.

Merger Assessment Guidelines

Merger guidelines are under preparation by the ECOWAS Competition Authority [ERCA]. These will expand on the merger assessment criteria as well as the mod