Month: July 2024

In ClientEarth v Shell Plc & Others (2023) EWHC 1137, which is a recent decision by the English High Court, the Court declined an application by ClientEarth- a non-profit environmental law organization and minority shareholder of Shell Plc (Shell), to bring a derivative action on behalf of Shell against its directors, arising out of alleged acts and omissions of the said directors relating to the company’s climate change risk strategy.

A derivative action is a means through which a shareholder can litigate on behalf of a company against a third party – usually a director or other shareholder – whose action has injured or threatens to injure the company. It is therefore a tool of accountability to obtain redress against wrongdoers, in the form of a representative suit filed by a shareholder on behalf of the company. However, it should be noted that a shareholder must first obtain permission from the Court to commence a derivative action (the Permission Stage).

The Permission Stage is necessary since claims of this nature are an exception to the rule that it is a company acting through its proper constitutional organs, and not one of its shareholders, which should determine whether to pursue a cause of action that may be available to the company. The Permission Stage further provides a filter for what may be termed as “unmeritorious” or “clearly undeserving” cases.

Claims made in ClientEarth v Shell Plc

As stated above, ClientEarth sought permission to continue a derivative action against Shell on the basis that Shell’s directors had refused to act on ClientEarth’s climate change risk strategy, as well as failed to comply with an order made by the Hague District Court on 26th May 2023 in Milieudefensie v Royal Dutch Shell Plc, which imposed a forty-five percent (45%) emissions reduction order on Shell to be achieved by 2030 (the Dutch Order).

At the Permission Stage, ClientEarth sought to establish that Shell’s directors were in breach of their statutory duties to promote the success of the company, as well as their statutory duty to exercise reasonable care, skill, and diligence in adopting and pursuing an appropriate energy transition strategy so as to manage the numerous risks that climate change presents for Shell. The specific breaches alleged by ClientEarth against Shell’s directors fell into three (3) categories, namely – (i) failure to set an appropriate emissions target (ClientEarth claimed that Shell’s existing Carbon Intensity Target was inadequate); (ii) failure to have a climate risk strategy which establishes a reasonable basis for reaching the net zero target and which is aligned with the Paris Agreement; and (iii) failure to comply with the Dutch Order.

ClientEarth’s central allegation was that by adopting and pursuing an inadequate energy transition strategy, Shell’s directors were mismanaging the material and foreseeable financial risk that climate change presents for Shell, which primarily operates in the fossil fuel sector. ClientEarth also alleged that Shell’s directors were not adequately preparing Shell to overcome commercial and regulatory risks, such as lower demand and lower margins for oil and gas products, as well as the ever-increasing threat that governments worldwide would in the near-future set regulatory frameworks to restrict further exploration, production and use of hydrocarbons and their products.

Within the underlying derivative claim, the reliefs sought by ClientEarth were a mandatory injunction requiring Shell’s directors to – (i) adopt and implement a strategy to manage climate risk in compliance with their statutory duties; and (ii) immediately comply with the Dutch Order.

Shell, on the other hand, argued that the duties which ClientEarth was trying to impose on its directors were misconceived for reasons that – (i) they were inherently vague and incapable of constituting enforceable personal legal duties; (ii) it was for Shell’s directors themselves to determine the weight to be attached to the various factors which they considered to promote the success of the company; and (iii) the duties created by ClientEarth amounted to an unnecessary and inappropriate elaboration of the statutory duty of care.

Indeed, while Shell agreed with ClientEarth that the company faces material and foreseeable risks as a result of the impact of climate change, which could or would have a material effect on its operations in the future, this point did not in and of itself demonstrate a prima facie case, warranting permission to continue with the derivative claim. The more important question, according to Shell’s directors, was the nature of Shell’s response to those risks and the extent to which ClientEarth had demonstrated a case of actionable breach of duty by the directors in their management of those risks.

Shell also contended that there was good reason to conclude that the application for permission to continue the derivative action was an attempt by ClientEarth to publicise and advance its own policy agenda, which was a misuse of the derivative claim procedure, and supported the proposition that the application had not been brought in good faith.

The High Court’s Decision

The Court agreed with Shell’s arguments to the effect that the duties which ClientEarth sought to impose on the directors were an indirect attempt to impose specific obligations on the company’s directors as to how to manage and conduct Shell’s business and affairs, and that such a directive would go against the well-established principle that it is for directors themselves to determine (acting in good faith) how best to promote the success of a company for the benefit of its members as a whole.

The Court further held that through the derivative action, ClientEarth was seeking to impose absolute duties on Shell’s directors, which cut across their general duty to have regard to the many competing considerations as to how best to promote the success of Shell.

In particular, the Court found that a business of the size and complexity as that of Shell required its directors to take into account a large range of competing considerations, the proper balancing of which is a classic management decision that the court was ill-equipped to interfere with. As such, the directors were in the best position to weigh the impact of Shell’s operations on the community and the environment against the business risks for Shell which are associated with climate change.

In this respect, the Court reiterated the principle in Howard Smith Limited v Ampol Limited (1974) AC 821, where it was held that Courts of law will not sit on appeal on a company’s management decisions as Courts should not act as a supervisory board over decisions within the powers of the management of a company, which decisions were arrived at honestly.

Notably, the Court held that the need to establish a prima facie case at the Permission Stage involves a rigorous test and entails establishing that there is no basis upon which the directors could reasonably have come to the conclusion that the actions that they had taken were in the best interests of Shell. In this respect, the Court found that there were a number of fundamental reasons why ClientEarth’s allegations did not establish a prima facie case for permission to continue, namely:–

• ClientEarth had failed to establish that the directors were managing Shell’s business risks in a manner incompatible with a board of directors acting reasonably.
• ClientEarth had failed to establish that there is a universally accepted methodology as to the means by which Shell might be able to achieve the targeted reductions in emissions.
• In principle, the law respects the directors’ autonomy in decision-making on commercial issues, and their judgement as to how best to achieve results which are in the best interests of themembers.
• ClientEarth had failed to establish how the directors had gone wrong in balancing the factors for their consideration on how to deal with climate risk, and that no reasonable director could have properly adopted the approach that they did.
• The Court applied the principle of de minimis shareholding to hold that the fact that ClientEarth, together with the parties supporting it, whilst holding only a small fraction of Shell’s shares, was proposing that it should be entitled to seek relief on behalf of Shell in a claim of a considerable size, complexity and importance, which gave rise to an inference that ClientEarth’s real interest was not in how best to promote the success of Shell, but an attempt to impose upon Shell its views and those of its supporters as to the right strategy for dealing with climate change risk.

Importance of the Decision

The Court’s decision appears to have taken a “reasonableness” approach to hold that directors who are applying their best efforts to balance all considerations impacting a company cannot be deemed to have breached their statutory duties to the company for failing to elevate climate-change-related risks above other considerations, be they commercial, societal, or physical. Indeed, the Court found that attempting to bring a derivative action with the sole objective of pushing a climate-change agenda was an abuse of this very special and limited procedure provided for under the Companies Act.

This decision brings to the spotlight the inherent difficulties of enforcing environmental, social, and governance (ESG) compliance guidelines in circumstances where a company has other competing interests. Whereas there may be in place ESG guidelines in an organization or legislation geared towards ESG compliance, ensuring compliance and enforcement of the same might not be as straightforward.

In a world where ESG compliance is headlining the news every day and resulting in corporations implementing vast policy changes, this decision may, at first glance, seem like a step in the wrong direction. However, it is a perfect example of the delicate balance that most corporations will struggle to attain when trying to push the ESG agenda while ensuring that their strategies and actions are in the best interest of their shareholders.

It will also be interesting to watch the Kenyan jurisprudential space to see how our Courts will handle ESG compliance-related claims, especially in light of the various policy changes being effected in our markets, including the introduction of the Nairobi Securities Exchange ESG Disclosures Guidance Manual and the Central Bank of Kenya’s Guidance on Climate-Related Risk Management.

A climate cataclysm looms over most living things on Earth. If left unchecked, climate change would be completely and utterly devastating to life on the planet as we know it. To forestall this, we must limit global warming to one point five degrees Celsius (1.5°C) above pre-industrial levels. To achieve this, human beings, who are the chief causative agents of climate change, need to learn, unlearn, and relearn the various ways through which they can reduce their carbon emissions and adopt other practices that may slow down or hopefully avert climate change.

Climate mainstreaming has been touted as one of the most effective ways of combating climate change. It requires the systematic integration of climate considerations of individuals’, organisations’, and governments’ strategies and operations.

In today’s world, embracing sustainability is no longer a matter of preference, it is a legal imperative. A striking example lies within the Climate Change Act, 2016 (the Act), which assigns critical climate change duties to private entities. What is even more eye-opening is that the Act arguably breaks through the corporate veil, leaving no room for individuals like directors, partners, or officers to escape accountability. They now shoulder direct accountability for any failure in fulfilling the climate change duties of the entities they oversee.  The era of sustainability in governance is here, and it is not just a choice – it is the law.

Further, research has demonstrated the existence of a fundamental scalar quantity that fully defines the concept of “natural capital stock” in principle. This principle presupposes that at this point, the

equilibrium point, both human and non-human life will thrive. In recognition of this equilibrium point, together with other principles of sustainability, governments around the globe have started introducing a carbon tax, and professional accounting bodies have started developing standards for making disclosures relevant to sustainability and climate change.

The Standards

At the twenty-sixth Conference of the Parties (COP 26), held in Glasgow, Scotland in 2021, the Trustees of the International Financial Reporting Standards (IFRS) announced the formation of the International Sustainability Standards Board (ISSB). The ISSB was mandated with developing global sustainability disclosure standards. On 26th June, 2023 the ISSB issued its first two (2) sustainability disclosure standards, namely the General Requirements for Disclosure of Sustainability-related Financial Information (IFRS S1) and Climate-related Disclosures (IFRS S2) (together, the Standards). On 4th September, 2023 the Institute of Chartered Public Accountants of Kenya, in conjunction with the Pan African Federation of Accountants, unveiled and adopted these Standards.

Under these Standards (which Standards may override the disparate standards issued by other entities such as the Task Force on Climate- related Financial Disclosures (TCFD), the Global Reporting Initiative and the Sustainability Accounting Standards Board), an entity is required to report its sustainability–related disclosures, as part of its general purpose financial reports.

IFRS S1

IFRS S1 unveils a pivotal shift in financial reporting, beckoning entities to disclose information about their sustainability-related risks and opportunities, that are useful to the primary users of their financial reports. Financial reporting is no longer just about the numbers; it is about transparency, responsibility and foresight. This standard mandates organisations to open their books, not just on profits and losses, but on sustainability-related risks and opportunities. It is a call to arms for businesses to reveal how sustainability-related riskscapital costs over the short, medium or long term. IFRS S1 demands that disclosures stay true to the core principles of fairness and materiality.

No critical nugget of information should be left unshared, if it could influence stakeholders’ decisions. Additionally, from reports and statements that adhere to this standard, one should clearly identify the financial statements to which the sustainability-related financial disclosures relate; and the entity’s performance in relation to its sustainability-related risks and opportunities, including progress towards any targets the entity has set, and any targets it is required to meet by law or regulation.

This standard is structured on the TCFD four-pillar approach, which is founded on governance, strategy, risk management, and metrics and targets. From the disclosures under this standard, one should understand; (i) the governance processes, controls and procedures an entity uses to monitor, manage and oversee sustainability-related risks and opportunities; (ii) the entity’s strategy for managing sustainability- related risks and opportunities; and (iii) the entity’s processes to identify, assess, prioritise and monitor sustainability-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process and its overall risk profile.

The IFRS S1 (which is the general standard that governs a range of sustainability topics, including those which pertain to the environment, society and governance) is more than just another accounting rule; it is a compass which guides financial reporting into the realm of sustainability. The standard illuminates the path to a more responsible and informed financial world.

IFRS S2

The IFRS S2 is a topic-specific standard that focuses on climate change. This standard requires an entity to disclose information about its physical or transitional climate-related risks and opportunities that is useful to the users of their financial reports. Like the IFRS S1, this standard is founded on the pillars of governance, strategy, risk management, metrics and targets. The users of reports and statements that adhere to this report should understand; (i) the governance processes, controls and procedures an entity uses to monitor, manage and oversee climate-related risks and opportunities; (ii) the entity’s strategy for managing climate-related risks and opportunities; (iii) the entity’s processes to identify, assess, prioritise and monitor climate-related risks and opportunities, including whether and how those processes are integrated into and inform the entity’s overall risk management process; and (iv) the entity’s performance in relation to its climate-related risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by law or regulation.

More specifically, on governance, the standard requires the disclosure of information relating to the governance body responsible for climate-related risks and opportunities within the entity. This information may encompass the body’s mandate, how it oversees strategies designed to respond to climate-related risks and opportunities, its decisions on major transactions, its setting and monitoring of targets related to climate-related risks and opportunities, together with the entity’s climate-related risk management processes and related policies. Information relating to the entity’s management’s role in the governance processes, and the controls and procedures used to monitor, manage and oversee climate-related risks and opportunities, should also be disclosed.

On strategy, an entity discloses the current and anticipated effects of those climate-related risks and opportunities on the entity’s financial performance and cash flows, business model, value chain, overall strategy and decision-making. The climate resilience of the entity’s business model should also be disclosed. The disclosures on climate-related risks may be categorised into climate-related physical risks and climate-related transition risks. They may also be categorized in accordance with their expected occurrence horizons, whether the risk is expected to occur in the short, medium or long term. While disclosing under this pillar, an entity should disclose anticipated changes to its business model, and direct and indirect mitigation and adaptation efforts made in response to climate-related risks and opportunities. The entity’s detailed assessment of its climate resilience should also be provided.

With regard to risk management, an entity should disclose information about how it uses climate-related scenario analysis to inform its identification of climate-related risks; the nature, likelihood and magnitude of the effects of those risks; and how the risks are prioritized and monitored. An entity should also disclose the processes it uses to identify, assess, prioritise and monitor climate-related opportunities, including information about whether and how the entity uses climate-related scenario analysis to inform its identification of climate-related opportunities; and the extent to which and how the processes for identifying, assessing, prioritising and monitoring climate- related risks and opportunities are integrated into and inform the entity’s overall risk management process.

 

On metrics and targets, an entity is required to disclose the cross-industry and intra-industry metric categories, and the targets set by the entity. Specific to metrics, an entity should disclose; (i) their greenhouse gas emissions and the approach used to measure them; (ii) the amount and percentage of assets or business activities vulnerable to climate-related transition risks and climate-related physical risks, aligned with climate-related opportunities and deployed towards climate-related risks and opportunities; and (iii) internal carbon prices; and remuneration. Specific to targets, an entity is required to disclose; (i) the metric used to set the target; (ii) the objective of the target (for example, mitigation, adaptation or conformity with science-based initiatives); (iii) the part of the entity to which the target applies (for example, whether the target applies to the entity in its entirety or only a part of the entity, such as a specific business unit or specific geographical region); (iv) the period over which the target applies; (v) the base period from which progress is measured; (vi) any milestones and interim targets; (vii)if the target is quantitative, whether it is an absolute target or an intensity target; and (viii) how the latest international agreements on climate change including jurisdictional commitments that arise from those agreements, have informed the target. An entity whose sustainability and climate-related disclosures comply with the Standards is required to make an explicit and unreserved statement of compliance with the Standards.

Conclusion

The Standards present a notable advancement in the global establishment of harmonious environmental, social and governance standards. Reports and statements that adhere to the Standards are comparable, verifiable, timely and understandable. While the Standards may pose a formidable challenge for some, prudent entities are advised to embrace innovation and adopt new systems and processes to gather and disclose the required information. Should they do so, they may reap the benefits of improved access to capital, enhanced reputation and reduced exposure to sustainability and climate-related risks. Further, they will not only boost their profile as responsible global citizens, but perhaps our planet might also just be spared!

Have you ever been roped into an emergency technology or digital-enabled online fundraiser? The fundraiser could be aimed at raising funds to meet the medical bills of a sick person, or to contribute towards funeral arrangements. It could also be aimed at raising funds to assist a student in paying for their school fees or funding a worthwhile charitable community project. Even if you may have not participated in such fundraisers, you may have come across calls for contributions online. This method of raising funds from a large group of people using an online platform is called “crowdfunding”. As the term suggests, crowdfunding connotes raising money from a crowd or many individuals or entities to finance a project or business through a website, an internet-based portal, or such other technological application.

Crowdfunding varies depending on the objectives of the project being funded. For instance, investment-based crowdfunding, unlike donation crowdfunding exemplified above, is meant to fund a business idea or a profit-making project. Innovative start-ups have been major beneficiaries of crowdfunding, and as is the case for business associations, the law comes in to address the interests of investors, issuers and project owners; issues of liability; consumer protection; procedural compliance; money-laundering; and data protection measures among others.

Considering the rise of crowdfunding markets in Kenya and the need to promote investor confidence in the crowdfunding sector, the Capital Markets Authority (the Authority) together with the Cabinet Secretary for National Treasury and Planning, promulgated the Capital Markets (Investment-Based Crowdfunding) Regulations, 2022 (the Regulations). The Regulations clearly set out the definitions, responsibilities and liabilities of various actors or participants in crowdfunding transactions such as crowdfunding platform operators, investors, issuers, and other pertinent issues, for instance, fundraising limits and persons legally prohibited from crowdfunding. In this article, we highlight some of the salient issues outlined in the Regulations.

Important Definitions

The Regulations provide for a “cooling off period” within which an investor can withdraw from a crowdfunding transaction without any restrictions. This means that a project owner or issuer cannot provide conditional penalties in its offer documents for cancellation or withdrawal from the transaction within a certain period. However, the cooling off period has been left at the discretion of the project owner or issuer to determine. As a balance of power, the investor may negotiate for a longer cooling off period.

Another key term in the Regulations is “crowdfunding platform” which is defined to mean a website, internet-based portal or such other technological application, which facilitates interactions between investors and issuers and other related interactions.

A “crowdfunding platform operator” is an entity licensed by the Authority to facilitate a crowdfunding transaction or a transaction involving the offer or sale of investment instruments through a crowdfunding platform. An “issuer” on the other hand, is a company which issues the security or investment instrument, which is hosted on the crowdfunding platform for purposes of crowdfunding. Whereas an issuer is, in common parlance, the project owner, most of the responsibilities in a crowdfunding transaction will lie with the platform operator.

The Regulations also define a “start-up” as a company incorporated in Kenya that is newly established or has not been in existence for more than ten (10) years and is established for the purpose of developing an innovative and scalable product or service. This definition is important because the Regulations restrict raising funds via crowdfunding platforms to only micro, small, and medium enterprises (MSMEs) and start-ups. As such, not all companies are eligible to use crowdfunding as a means of raising funds under the Regulations.

Crowdfunding Platforms and their Operators

The platform operators, for purposes of investment-based crowdfunding, must be licensed by the Authority, and a person who establishes, maintains or operates an investment-based crowdfunding platform without a licence commits an offence and is liable to the penalties outlined in section 34A of the Capital Markets Act (Cap 485A) Laws of Kenya (the Act).

The conditions for the grant of licence are provided under the Regulations and among them include that the applicant should provide: (i) evidence of its financial soundness and capital adequacy confirming the financial position of the company including audited financial

statements, management accounts and certified bank statements, where applicable; (ii) detailed information of the crowdfunding website or application to be used including system capacity and security measures and evidence of its functionality; (iii) details of platform outsourcing arrangements, if any; (iv) proposed procedures to verify the completeness, correctness and clarity of the information of the issuer and investment hosted on the platform; and (v) adequate risk management framework that includes details of its fraud detection and prevention measures.

Further, only companies limited by shares with a minimum paid up share capital of KES 5 million and a further minimum liquid capital of KES 10 million or eight percent (8%) of its liabilities, whichever is higher, are eligible to be licensed as platform operators for purposes of investment-based crowdfunding. Nevertheless, the Authority may refuse to grant the licence or revoke an already issued licence, where reasons to do so exist.

On the flipside, a platform operator cannot simply opt-out of crowdfunding business without a smooth and orderly transition. The platform operator is required to notify the Authority at least thirty (30) days prior to ceasing its operation, and the Authority must be satisfied that neither investors nor issuers are disadvantaged by its closure. Additionally, the Authority may impose terms and conditions to ensure orderly cessation of business.

It is important to note that a crowdfunding platform operator is prohibited from raising its own funds through its platform; offering investment advice; handling investor funds; promising a guaranteed return to investors; and promising a guaranteed outcome of the offer to the issuer. On their part, issuers are prohibited from hosting the same offer document concurrently on multiple crowdfunding platforms.

Crowdfunding Participants and the Limits of Raisable Funds

Crowdfunding participants are the relevant issuers and investors. An issuer under the Regulations must be an MSME with a minimum of two (2) years excellent operating track record and good corporate governance. A start-up with a good operating track record and good corporate governance can also be considered as an eligible issuer. Issuers may only raise a maximum of KES 100 million within a twelve (12) months’ period. However, an issuer may apply to the Authority requesting to raise more than the capped limit within a specified duration, and the Authority may issue a notice of no-objection to such request if satisfied. Investors eligible to invest in crowdfunding investments are either sophisticated investors or retail investors, subject to investment limits prescribed by the crowdfunding platform operator but up to a maximum of KES 100,000.

The Act defines a sophisticated investor as (i) a person who is licensed under the Act; (ii) an authorised scheme or a collective investment scheme; (iii) a bank, a subsidiary of a bank, insurance company, co-operative society, statutory fund, pension or retirement fund; or (iv) an individual, company, partnership, association or a trustee on behalf of a trust which, either alone or with any associates on a joint account, subscribes for securities with an issue price as the Authority may prescribe from time to time.

The Crowdfunding Transaction

Crowdfunding transactions are required to provide for the permitted investment instruments, offering document, requirements for issuers, use of funds, transaction fees, the responsibilities of platform operators and issuers including any restrictions thereof. The investment instruments are limited to shares, debt securities including bonds or debentures or any other instruments approved by the Authority from time to time.

Platform operators are required to develop a standardised offer document which captures the details of the transaction to be used by the issuers to offer securities to the investors in line with the Regulations. An offering document should be made available for approval to the Authority at least forty-eight (48) hours before its publication on the platform. Once published, the offer period should not commence until at least fourteen (14) days have lapsed. The offer document should also clearly state the period of offer and the threshold amount for the offer. In the event the minimum threshold amount is not reached, the offer is to be withdrawn and the monies raised returned to the investors within forty-eight (48) hours, without any deductions. Any costs of such refunds are to be fully borne by the issuer. Where an offer is withdrawn, the issuer may undertake a fresh crowdfunding transaction not earlier than ninety (90) days after the withdrawal.

It is an offence under the Act for a person to make false statements in any form or context in an offering document knowing the same to be false or misleading. The offence, upon conviction, is punishable by a fine not exceeding KES 10 million or imprisonment for a term not exceeding seven (7) years where the offender is an individual, and a fine not exceeding KES 30 million where the offender is a company.

Compliance with Capital Market Regulations

Most of the obligations in the Regulations rest with the crowdfunding platform operators who are required, in addition to the Regulations, to comply with the Capital Markets (Conduct of Business) (Market Intermediaries) Regulations, 2011, the Capital Markets (Corporate Governance) (Market Intermediaries) Regulations, 2011, the Guidelines on the Prevention of Money Laundering and Terrorism Financing in the Capital Markets, and any other existing capital market laws and regulations to the extent applicable except where expressly exempted by the Authority.

Conclusion

Crowdfunding is a quick way to raise funds from many investors, especially for innovative businesses that lack capital to achieve their investment objectives such as start-ups and MSMEs. However, international investors and other sophisticated investors are usually skeptical of unregulated markets due to lack of clear procedures such as client accounts rules, codes of conduct, and investor protection. It is therefore anticipated that the Regulations will enhance investor confidence in Kenya, whilst providing additional means through which start-ups and MSMEs can raise capital.

Disputes are prone to arise in the course of construction projects. It is in the various parties’ interests (be it the employer, main contractor, sub-contractor, architect, quantity surveyor etc.) that such disputes are speedily resolved so as to ensure that the construction project does not slow down or fall off the track altogether. Adjudication is one of the foremost alternative dispute resolution (ADR) mechanisms used to settle disputes as and when they arise, and whose efficacy is most pronounced in the construction industry.

Article 159 (2) (c) of the Constitution of Kenya, 2010 (the Constitution) provides for the use of ADR mechanisms such as reconciliation, mediation, arbitration, and traditional dispute resolution mechanisms. Though not expressly mentioned, adjudication is one of the modes of ADR contemplated under Article 159 (2) (c) of the Constitution, and which the Courts are called upon to promote.

What is Adjudication?

Adjudication refers to a means of dispute resolution where a neutral person to the dispute, known as the adjudicator, considers the dispute between the parties and makes an interim but speedy determination that enables the contractual relationship (invariably of a construction nature) to continue. The Adjudication Rules of the Chartered Institute of Arbitrators, (Kenya Branch) describe adjudication as “a dispute resolution procedure based on the decision-making power of an impartial, third party neutral natural person known as an adjudicator to reach a fair, rapid and inexpensive decision upon a dispute arising under a construction contract.”

Adjudication can also be termed as a private dispute resolution mechanism whereby two or more parties agree to resolve their current or future disputes through an adjudication process, as an alternative to litigation. Parties by mutual agreement thus forego their lawful right to have their disputes determined by the Courts.

An adjudication clause gives contractual authority to an adjudicator to determine disputes between the parties, which may either be binding or temporary in nature depending on the wording of the adjudication clause. Adjudication is thus viewed as an alternative to the Court process, the latter of which is ordinarily lengthy and costly, and rarely spares the relationship between the parties.

Who are the parties to Adjudication?

The parties to an adjudication process consist of the various professionals in a construction project such as the contractor, sub-contractors, the employer, the architect, the quantity surveyor amongst others. The adjudicator, who is usually an expert in the construction industry, considers and settles the dispute within a short period of time, typically twenty-eight (28) days.

Parties to a contract who wish to refer their dispute to an adjudication process, should include adjudication as the form of dispute resolution in the contract. The most common contracts in the construction industry which adopt adjudication as a form of dispute resolution are the agreements and conditions of contract for building works popularly known as the Joint Building Council (JBC) contracts, New Engineering Contracts (NEC) and the Fédération Internationale Des Ingénieurs-Conseils (FIDIC) contracts. FIDIC is the French language acronym for the International Federation of Consulting Engineers.

When can Adjudication be initiated and by whom?

Adjudication can be initiated by any party to a construction contract which contains an adjudication clause, at any time a dispute arises in the course of the construction contract. The dispute must arise from the construction contract and the contract must contain an adjudication clause.

The inclusion of an adjudication clause in construction contracts, including JBC, NEC and FIDIC contracts, has become commonplace due to the desire by the parties to steer clear of Court process and resolve their disputes expeditiously. The adjudication clauses may differ in content in various contracts, however, despite certain differences, these clauses retain the general form which provide for:

• Possible disputes that may arise between the parties during the construction
• Timeframe for the resolution of the dispute
• Appointment of the adjudicator
• Place of adjudication

What is the process of Adjudication?

When a dispute arises in a construction contract containing an adjudication clause, the aggrieved party commences the adjudication process by notifying the other party in writing of its intention to refer the dispute to adjudication. This notice should typically include details such as:

• The date and details of the contract between the parties
• The issues which the adjudicator is expected to determine
• The nature and extent of the redress sought
• A statement confirming that the dispute referral procedures in the construction contract have been complied with within the period of the notice

Thereafter, the responding party, upon receipt of the notice, may participate in the appointment of the adjudicator within the notice period. Sometimes, parties to a construction contract may include the name of the adjudicator in the construction contract. If an adjudicator’s name is provided for under the adjudication clause, the parties may request the adjudicator to initiate the adjudication process. If an adjudicator is not named under the construction contract, the referring party should request the appointing authority or body stated in the contract to appoint an adjudicator within seven (7) days of receipt of the request and proof of payment of the appointment fee.

The appointment of the adjudicator is formalised on the signing of an adjudicator’s agreement with the parties. Once the adjudicator is appointed, the party that initiated the adjudication process sends him and the responding party a full statement of the case including a copy of the notice of adjudication, a copy of the contract and copies of the documents in support of the statement of case. Once the responding party receives the statement of the case, the said party is required to submit a response.

Adjudication follows a very strict timetable and therefore parties are subjected to fairly short timelines since the adjudication process is ordinarily meant to be concluded within twenty-eight (28) days or within such other period as might be agreed to by the parties. It is the speedy and cost-effective nature of adjudication that makes it ideal for construction projects, which are themselves time sensitive.

The adjudicator is required to act fairly and within the rules of natural justice, to follow the rules of procedure outlined in the contract, be impartial and give a written decision within twenty-eight (28) days or such other period as might be agreed by the parties. The strict rules of evidence ordinarily do not apply. Where the parties are dissatisfied with the adjudication and depending on the adjudication clause, the matter might be referred to arbitration or Court. It is for this reason that adjudication is sometimes viewed as interim or ephemeral.

The decision made by the adjudicator is legally binding upon the parties, albeit with room to challenge it as indicated above. The adjudication decision can only be challenged or set aside in Court or through arbitration. This will however depend on whether the parties have incorporated an appeal process or a clause to set aside the adjudicator’s award. The parties will normally meet the costs of the adjudicator upon conclusion of the adjudication process.

Conclusion

Adjudication is the preferred method of resolving disputes in the construction industry as it is speedy, cost-effective and allows the construction project to proceed even as the adjudication goes on. Adjudication is a markedly expeditious dispute resolution process since disputes are resolved in approximately a month’s time, thus translating into reduced costs, as compared to litigation or arbitration, which typically take longer to conclude. Like arbitration, adjudication is a private and confidential process hence the adjudicator’s decision will be confidential to the parties. During the adjudication process, the parties enjoy a form of control over the resolution of the dispute since adjudication can be instituted at any time during the construction project. It is an added advantage that an adjudicator is typically selected from a pool of experts, who ordinarily have vast expertise in the subject matter of the dispute.

It is noteworthy that the use of adjudication as a form of ADR has been growing rapidly particularly in the construction industry, where it has increasingly been adopted as the preferred form of resolving disputes. There is thus a need to create greater awareness of adjudication as a method of dispute resolution in other fields beyond the construction industry, for the advantages which it carries. Perhaps it is high time that adjudication was incorporated as a compulsory method of dispute resolution in Kenya, to emulate countries such as the United Kingdom, Australia, New Zealand, Singapore and Hong Kong which have made adjudication a mandatory method for resolving disputes in the construction industry.