News & Analysis

The Applicability of ADR Mechanisms in Managing Governance Conflicts

Published

1 year ago

May 18, 2022

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By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), Winner of Kenya’s ADR Practitioner of the Year 2021, ADR Publisher of the Year 2021 and CIArb (Kenya) Lifetime Achievement Award 2021.*

Well governed corporations are less likely to have conflicts. However, where conflicts arise, there is need to have in place a suitable process and venue to manage the conflict in a timely and cost-effective manner. A good corporate governance framework ensures availability of a reliable mechanism for managing emerging and existing disputes. In managing governance disputes, there are several underlying issues that need to be addressed. It has been rightly pointed out that corporations hate to go public with their governance disputes. Such disputes if brought to limelight could affect public perception of an organization and ultimately its overall performance. Further, if governance disputes are not managed expeditiously, much of the Board’s resources and time will be diverted at the expense of the success of the organization.

Litigation therefore cannot effectively deal with the underlying issues in governance conflicts. It has been pointed out that the court’s role is dependent on the limitations of civil procedure, and on the litigious courses taken by the parties themselves. Conflict management through litigation can take years before the parties can get justice in their matters due to the formality and resource limitations. Litigation is often slow and expensive and it may at times lose the commercial and practical credibility necessary in the corporate world.

The shortcomings of litigation make it a less viable mechanism of managing governance conflicts due to the need for expeditious results and continued working relations. These challenges can be effectively addresses through the suitable use of ADR solutions which can be tailored by the parties to deal with ongoing situations in a manner that allows the parties to continue working together. Indeed, most global and national corporate governance statutes, principles and codes advocate the use of ADR in managing governance conflicts.

The OECD Principles of Corporate Governance encourage equitable treatment of shareholders and the need to provide a framework through which shareholders can enforce their rights and initiate legal and administrative proceedings against management and board members. Towards this end, OECD notes that: “a balance must be struck between allowing investors to seek remedies for infringement of ownership rights and avoiding excessive litigation. Many countries have found that alternative adjudication procedures, such as administrative hearings or arbitration procedures organised by the securities regulators or other regulatory bodies, are an efficient method for dispute settlement, at least at the first instance level.”

The King III Report on Corporate Governance for South Africa advocates the use of ADR as a tool of good corporate governance. It encourages directors to preserve business relationships. Consequently, when a dispute arises, in exercising their duty of care, directors should endeavour to resolve it expeditiously, efficiently and effectively. Further, in advocating the use of mediation, the Report notes that it enables novel solutions which may not be attained in litigation which is constrained to enforce legal rights and obligations. The Report correctly states that in mediation, the parties’ needs are considered, rather than their rights and obligations.

In Kenya, The Code of Corporate Governance Practices for Issuers of Securities to the Public while providing the guidelines for managing internal and external disputes involving companies states that “Disputes involving companies are an inevitable part of doing business. Companies shall establish mechanisms for resolving the disputes in a cost effective and timely manner. Mechanisms to avoid their recurrence shall also be established and implemented. It is incumbent upon directors and executives, in carrying out their duty of care to a company to ensure that disputes are resolved effectively, expeditiously and efficiently. Further, dispute resolution shall be cost effective and not a drain on the finances and resources of the company.”

The Code of Governance for State Corporations in Kenya advises the Board to ensure that disputes with and among stakeholders are resolved effectively, efficiently and expeditiously. Under the Code, the Board is encouraged to take reasonable steps towards managing disputes involving stakeholders through the use of Alternative Dispute Resolution Mechanisms. Board members are expected to resolve issues in a fair and respectful manner which considers informal processes such as dialogue or mediation. ADR mechanisms especially mediation are viable in managing governance disputes. The King Report in while advocating the use of mediation in managing governance conflicts notes that “mediation is often more appropriate where interests of the disputing parties need to be addressed and where commercial relationships need to be preserved and even enhanced.”

It has been noted that governance conflicts have at least three dimensions; emotional, legal and commercial. Mediation is able to effectively manage such disputes since it considers all the three dimensions unlike litigation which only considers the legal dimension of a case. In K.M. Patel and another v. United Assurance Company Ltd, mediation was successfully used in managing a governance conflict. In the case, two shareholders filed a petition against the Respondent company on allegations that their 40-percent shares in the company had been wrongfully and illegally diluted during the company’s restructuring and sale without prior notice.

With the consent of both parties, the Commercial Court offered to mediate the case. In encouraging the parties to engage in the mediation process, the mediator stated that “Both parties should sit down as business partners and come to an amicable understanding because at the end of the day, you may find that no one has benefited if the company has wound up.” Consequently, the mediation was successful and led to a consent judgement in which the company bought out the two shareholders and amicably resolved the dispute. Arbitration is also a preferable mechanism of conflict management especially in conflicts between an organization and third parties.

In Kenya, most organizations are using arbitration to manage conflicts with suppliers, dealers and other third parties. Most contracts governing business engagements usually contain arbitration clauses which provide for referral of any dispute arising under the contract to arbitration. Further, employment agreements between some corporations and senior executives call for the use of arbitration in case of any employment related dispute. Even though closely related to litigation, there are certain salient features of arbitration which make it an important and attractive alternative to litigation in managing governance disputes. In arbitration the parties have autonomy over the choice of the arbitrator, place and time of hearing, and as far as they can agree, autonomy over the arbitration process which may be varied to suit the nature and complexity of the conflict.

Negotiation is also one of the most fundamental ADR mechanisms that can be effectively utilised in managing governance conflicts. It refers to the process where parties attempt to find mutually acceptable solutions to the issues at hand without the assistance of a third party. Negotiation focuses on the common interests of parties over their relative power and positions. This mechanism can be effectively applied in governance conflicts such as conflicts between board members or board members and shareholders. This is due to the underlying common interest at hand which is to promote success of the organization. Parties will be more than willing to give up their individual positions and adopt a common position that is mutually acceptable and in the interest of the organization. Negotiation leads to mediation where parties have reached a deadlock. An organization should thus endeavour to use negotiation in managing governance conflicts before resorting to mediation or other ADR mechanisms such as arbitration where the negotiation fails.

*This article is an extract from the Article “Managing Governance Conflicts Through Alternative Dispute Resolution in Kenya,” by Dr. Kariuki Muigua, PhD, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Publisher of the Year 2021 and ADR Lifetime Achievement Award 2021 (CIArb Kenya). Dr. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized among the top 5 leading lawyers and dispute resolution experts in Kenya by the Chambers Global Guide 2022.

References

Muigua, K., “Managing Governance Conflicts Through Alternative Dispute Resolution in Kenya,” Available at: http://kmco.co.ke/wp-content/uploads/2020/08/Managing-Governance-Conflicts-Through-Alternative-Dispute-Resolution-in-Kenya-3.pdf (accessed 17 May 2022).

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News & Analysis

The Roles of the Three Parts of the Permanent Court of Arbitration

Published

1 day ago

May 30, 2023

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H.E. Amb. Marcin Czepelak, the Fourteenth Secretary-General of the Permanent Court of Arbitration (PCA)

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News & Analysis

Brief History of the Permanent Court of Arbitration (PCA)

Published

6 days ago

May 26, 2023

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By Dr. Kariuki Muigua, PhD, C.Arb, Current Member of Permanent Court of Arbitration (PCA) Representing the Republic of Kenya.

The Permanent Court of Arbitration (PCA) is a 124 Years Old Intergovernmental Organization currently with 122 contracting states. It was established at the turn of 20^th Century during the first Hague Peace Conference held between 18^th May and 29^th July 1899. The conference was an initiative of then Russian Czar Nicholas II to discuss peace and disarmament and specifically with the object of “seeking the most effective means of ensuring to all peoples the benefits of a real and lasting peace, and, above all, of limiting the progressive development of existing armaments.” The culmination of the conference was the adoption of a Convention on the Pacific Settlement of International Disputes, which dealt not only with arbitration but also with other methods of pacific settlement, such as good offices and mediation.

The aim of the conference was to “strengthen systems of international dispute resolution” especially international arbitration which in the last century had proven effective for the purpose with number of successful international arbitrations being concluded among Nations. The Alabama arbitration of 1871-1872 between the United Kingdom (UK) and the United States (US) under the Treaty of Washington of 1871 culminating in the arbitral tribunal’s award that the UK pay the US compensation for breach of neutrality during American Civil War which it did had demonstrated the effectiveness of arbitration in settling of international disputes and piqued interest of many practitioners in it as a mode of dispute resolution during the latter years of the nineteenth century.

The Institut de Droit International adopted a code of procedure for arbitration in 1875 to answer the need for a general law of arbitration governing for countries and parties wishing to have recourse to international arbitration. The growth of arbitration as a mode of international dispute resolution formed the background of the 1899 conference and informed its most enduring achievement, namely, the establishment of the PCA as the first global mechanism for the settlement of disputes between states. Article 16 of the 1899 Convention recognized that “in questions of a legal nature, and especially in the interpretation or application of International Conventions” arbitration is the “most effective, and at the same time the most equitable, means of settling disputes which diplomacy has failed to settle.”

In turn, the 1899 Convention provided for the creation of permanent machinery to enable the setting up of arbitral tribunals as necessary and to facilitate their work under the auspices of the institution it named as the Permanent Court of Arbitration (PCA). In particular, Article 20 of the 1899 Convention stated that “[w]ith the object of facilitating an immediate recourse to arbitration for international differences which it has not been possible to settle by diplomacy, the signatory Powers undertake to organize a Permanent Court of Arbitration, accessible at all times and operating, unless otherwise stipulated by the parties, in accordance with the rules of procedure inserted in the present Convention.” In effect, the Convention set up a permanent system of international arbitration and institutionalized the law and practice of arbitration in a definite and acceptable way.

As a result, the Permanent Court of Arbitration (PCA) was established in 1900 and began operating in 1902. The PCA as established consisted of a panel of jurists designated by each country acceding to the Convention with each country being entitled to designate up to four from among whom the members of each arbitral tribunal might be chosen. In addition, the Convention created a permanent Bureau, located in The Hague, with functions similar to those of a court registry or secretariat. The 1899 Convention also laid down a set of rules of procedure to govern the conduct of arbitrations under the PCA framework.

The second Hague Peace Conference in 1907 saw a revision of the 1899 Convention and improvement of the rules governing arbitral proceedings. Today, the PCA has developed into a modern, multi-faceted arbitral institution perfectly situated to meet the evolving dispute resolution needs of the international community. The Permanent Court of Arbitration has also diversified its service offering alongside those contemplated by the Conventions. For instance, today the International Bureau of the Permanent Court of Arbitration serves as a registry in important international arbitrations. In 1993, the Permanent Court of Arbitration adopted new “Optional Rules for Arbitrating Disputes between Two Parties of Which Only One Is a State” and, in 2001, “Optional Rules for Arbitration of Disputes Relating to Natural Resources and/or the Environment”.

Reference

PCA Website: https://pca-cpa.org/en/about/introduction/history/ (accessed on 25^th May 2023).

News & Analysis

Former KCB Company Secretary Sues Over Unlawful Dismissal

Published

4 months ago

January 19, 2023

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Former KCB Group Company Secretary Joseph Kamau Kania who has sued the Bank for Unlawful Dismissal

Former KCB Group Company Secretary Joseph Kamau Kania has sued the lender seeking reinstatement or be compensated for illegal sacking almost three years ago. Lawyer Kania was the KCB Group company secretary until restructuring of the lender in 2021 that saw some senior executives dropped.

Through the firm of Senior Counsel Wilfred Nderitu, Kamau wants the court to order KCB Group to unconditionally reinstate him to employment without altering any of the contractual terms until his retirement in December 2025.

In his court documents filed before Employment and Labour Relations Court, the career law banker seeks the court to declare the reorganization of the company structure a nullity and amounted to a violation of his fundamental right to fair labour practices as guaranteed in Article 41(1) of the Constitution. He further wants the court to declare that the position of Group Company Secretary did not at any time cease to exist within the KCB Group structure.

He further urged the Employment Court to declare that the recruitment and appointment of Bonnie Okumu, his former assistant, as the Group Company Secretary, in relation to the contemporaneous termination of his employment, was unprocedural, insufficient and inappropriate to infer a lawful termination of his employment.

“A declaration that the factual and legal circumstances of the Petitioner’s termination of employment were insufficient and inappropriate to infer a redundancy against him, and that any redundancy declared by the KCB Group in relation to him was therefore null, void and of no legal effect and amounted to a violation of his fundamental right to fair labour practices as guaranteed in Article 41(1) of the Constitution,” seeks lawyer Kamau.

Kamau says he was subjected to discriminatory practices by the KCB Bank Group in violation of his fundamental right to equality and freedom from discrimination as guaranteed in Article 27 of the Constitution and the termination of his employment was unfair, unjustified, illegal, null and void.

Lawyer Kamau further seeks the court to declare that the Non-Compete Clause in the 2016 Contract is unenforceable by the KCB Group as against him and is voidable by him as against the Bank ab initio, byreason of the termination of the Petitioner’s employment having been a violation of Articles 41(1) and 47(1) and (2) of the Constitution, and of the Employment Act.

He also wants the Employment Court to find that finding that KCB’s group legal representation by Messrs of Mohammed Muigai LLP Advocates law firm in respect of his claim for unlawful termination of employment resulted in a clear conflict of interest by reason of the fact that a Founding and Senior Partner at the said firm lawyer Mohammed Nyaoga is also the Chairman of the CBK’s Board of Directors.

“A Declaration that the circumstances of KCB’s legal representation by Messrs. Mohammed Muigai LLP Advocates resulted in a violation of the Petitioner’s fundamental right to have the employment dispute decided independently and impartially, as guaranteed in Article 50(1) of the Constitution,” seeks lawyer Kamau.

Kamau is seeking damages against both KCB Group and Central Bank of Kenya jointly and severally for the violation of his constitutional and fundamental right to fair labour practices.

He wants further wants court to declare that CBK is liable to petitioner on account of its breach of statutory duty to effectively regulate KCB Group to ensure that KCB complied with the Central Bank of Kenya Prudential Guidelines and all other Laws, Rules, Codes and Standards, and that, as an issuer of securities, it complied with capital markets legislation.

Kamau through his lawyer Nderitu told the court that he was involved in Shareholder engagement in introducing the Group aide-mémoire that significantly improved the management of the Annual General Meetings, including obtaining approval without voting through the Memorandum and Articles of Association of Kenya Commercial Bank Limited among others.

He said that during his employment at KCB Bank Kenya and with the KCB Group, he initially worked well with former KCB CEO Joseph Oigara until 2016 when the CEO allegedly started sidelining him by removing the legal function from his reporting line.

He further claims he was transferred from the Group’s offices at Kencom House to its offices Upper Hill under the guise that the Petitioner was merely to support the KCB Group Board.

He adds that at that point his roles were given to Okumu for reasons that were not related to work demands. He stated that Oigara at one time proposed that he should leave his role in the KCB Group and go and serve as the Company Secretary of the National Bank of Kenya Limited, a subsidiary of the Group, a suggestion which he disagreed with to Oigara’s utter annoyance.

Kamau stated that his work was thenceforth unfairly discredited, leading to his being taken through a disciplinary process whose intended outcome failed miserably, and the Petitioner was vindicated.

“More specifically, the Petitioner contends that the purported creation of a new organizational structure towards the end of 2020 was in fact Oigara’s orchestration targeted to remove certain individuals by requiring them to undergo interviews in the pretext that new roles were created, and amounted to a further violation of the Petitioner’s fundamental right to fair labour practices under Article 41(1) of the Constitution,” said in his court documents.

He further adds that this sham reorganization demonstrates how the role of the KCB Group Company Secretary purportedly ceased to be and was then very briefly replaced with a new role of the KCB Group General Counsel. The role of KCB Group Company Secretary then ‘resurfaced’ immediately thereafter, in total violation of legal and regulatory requirements.