INTRODUCTION
Bankruptcy is the legal status of an individual against whom an adjudication order has been made by the court primarily because of his inability to meet financial liabilities.
An adjudication order in bankruptcy is a judicial declaration that the debtor is insolvent and has the effect of imposing certain disabilities upon him or her and of diverting him of his property for the benefit of his creditors.
Bankruptcy must be distinguished from insolvency which may be defined as inability of a debtor to pay his debts as and when they fall due whether or not a person is insolvent is purely a question of fact thus a person can be insolvent without being bankrupt but he cannot be bankrupt for him to be insolvent.
Objectives of bankruptcy laws
1. To secure an equitable distribution of the property of the debtor among his creditors according to their respective rights against him.
2. To relief the debtor of his liabilities to the creditor and to enable him make a fresh start in life free from the burden of his debts and obligations.
3. To protect the interests of the creditors and the public by providing for the investigation of the conduct and his affairs and for the inquisition of punishments and for the imposition of punishments where there has been fraud and other misconduct on his part.
Reasons for growth in bankruptcy laws
1. The rise in importance of trading on credit and the need to encourage such trading for commercial purposes.
2. A change in outlook of society towards those who fail to pay their debts from regarding them as criminals to looking at them only as unfortunate
3. The need to protect creditors by giving them some relief though not as grace as justly entitled to rather than punishing debtors.
4. The benefit to the community as a while in that
a. The creditors should get something rather than lose all if the debtors could escape with the assets he has or is imprisoned so as to be able to obtain assets in future.
b. An opportunity is afforded to the debtor to make a fresh start.
Basic principles
1. The debtor must surrender all his properties to the creditors.
2. After payment of a percentage of his liabilities the debts may obtain a full discharge from his past debts.
3. The creditors may grant a debtor a dischargeable where the debtor pays them less than what is prescribed by the law.
4. The court is the arbitrator in all matters relating to bankruptcy.
5. Once discharged, a debtor is free from his financial obligations and reverts to his former position/status in the society.
Proceedings in bankruptcy
It begins with the presentation to the court of a bankruptcy petition. This petition asks the court for a receiving order to be made with respect to a debtor’s property.
The petition may be presented either by the debtor himself or by a creditor. If presented by the creditor, the petition must be founded or based on an alleged act of bankruptcy which has occurred within three months before the presentation of the petition. If the debtor himself presents the petition, then in itself constitutes an act of bankruptcy. Upon hearing the petition, the court may dismiss it if it has no merits or make a receiving order if found with merits.
The receiving order(RO) doesn’t make the debtors bankrupt but all it does is to place the property of the debtor in safe custody pending outcome of the proceedings. After the receiving , the first meeting of the creditors is then held at which it is determined whether a composition or scheme of arrangement if one is submitted by the debtor shall be accepted or whether application shall be made to the court to adjudicate the debtor’s bankruptcy.
If the creditors decide to apply to the court and do not agree on the arrangements then the court will decide. If the court decided to adjudicate the debtor’s bankruptcy it makes an adjudication order and the debtor will then become bankrupt.
The debtor’s property will then vest in his trustee in bankruptcy that will collect the property and distribute it to his creditors who have proven their debt. The bankrupt must also submit himself to a judicial public examination and at any time after the conclusion of this public examination the bankrupt can apply for his discharge.
The court makes an order of discharge. The bankrupt is discharged from all his debts with certain exceptions provable in bankruptcy and if freed from disabilities against some exceptions imposed against him.
Creditor and debtor
A creditor is any person who is entitled to enforce payment of a debt at law or in equity. A debtor is defined at section 3(2) of the Bankruptcy Act as to include any person whether domicile in Kenya or not who at the time when any act of bankruptcy was done or suffered by him:
a. Was personally present in Kenya or
b. Ordinarily resided or had a place or residence in Kenya or
c. Was carrying on business in Kenya personally or by his means of an agent or manager.
d. Was a member of a firm or partnership which carried on business in Kenya and includes a person against whom bankruptcy proceedings have been instituted in a reciprocating territory or who has property in Kenya?
Who may be adjudged bankrupt?
1. Infants
Generally apart from contracts for necessities, infants are not liable for debts that they had incurred. But if an infant fraudulently contracts debt during his infancy he will be liable for the debts and the creditor may claim in bankruptcy when he is attained the age of majority. This is per the Infant Relief Act of England 1814 which is a statute of general application in Kenya.
Cases:
Re a debtor ex parte commissioner of customs v the debtor
Re Jones ex p. jones
Re A & M
2. Insane persons(mentally disordered persons/lunatics)
They are also subject to bankruptcy proceedings; however, they cannot be adjudicated bankrupt without the consent of the court.
3. Married women
Section 117 of the Bankruptcy Act provides that every married woman shall be subject to a law relating to bankruptcy.
4. Aliens or persons domiciled abroad
They are also subject to bankruptcy proceedings as of section 6 of the Bankruptcy Act if within a year before the date of presentation of the petition has ordinary resided or has a dwelling houses or place of business or has been a member of a firm or partnerships of person which has carried on business in Kenya by means of a partner, agent or manager.
Read case Theopile v AG(1950)
5. Companies
Bankruptcy proceedings are not applicable to companies in Kenya. These are specifically dealt with under liquidation and winding up provisions of the companies act. Section 118 of the Bankruptcy Act provides that a receiving order shall not be made against any company registered under the companies act.
Case: Re Amina Haji(A debtor)
6. Partnership
Whether a partnership in general or limited is subject to the provision of Bankruptcy Act…See section 122 of the Bankruptcy Act. (N/B – s. 119 of the bankruptcy Act)
7. Deceased persons
There is a provision for administration in bankruptcy of estate of a deceased person under section 121 of the Bankruptcy Act. Section 107 of the Bankruptcy Act also enables proceedings already commenced to continue as if the debtor were alive. Where the debtor is dead a petition may be presented by his personal representative when its purpose is to obtain an administration order
8. Judgment debtor/bankrupt
The Bankruptcy Act doesn’t prevent an un-discharged bankrupt from creating valid debts and since may commit Bankruptcy Act institution of subsequent bankruptcy proceedings before he is discharged from a prior bankruptcy, is permissible. See section 44
Acts of bankruptcy
Provided under section 3(1) of the Bankruptcy Act
1st act: Conveying all property to a trustee for the benefits of creditors generally
If in Kenya or elsewhere a debtor makes a conveyance or assignment of his property to a trustee/trustees for the benefit of his creditors generally he commits an act of bankruptcy. To constitute an act of bankruptcy there must be a conveyance or assignment of the whole or substantially the whole of the debtor’s property. The assignment must be for the benefit of all the creditors generally and not just a class of creditors. A creditor who has recognized a deed of arrangements whereby the debtor has agreed on a plan of repaying the debts cannot rely on that deed as an act of bankruptcy.
2nd act: Fraudulent conveyance within the meaning of section 3(1)(b) of the Bankruptcy Act.
If a debtor makes a fraudulent conveyance, gift, delivery or transfer of his property or any part thereof he commits an act of bankruptcy. Under the Bankruptcy Act a conveyance is fraudulent if it conveys on one creditor an advantage which could not have under the bankruptcy laws or which tends to defeat or delay creditors irrespective of whether the latter had any dishonest intention. The transaction may be a conveyance a gift, a deliveryor transfer of property and this includes mortgages or pledges as well as actual conveyances and assignments. The conveyance need not be for the benefit of any creditor and such transfers are frequently made for example to amember of the debtor’s family the conveyance need not be of the whole of the debtor’s property. The principles for determining whether a conveyance is fraudulent under the Bankruptcy Act may be summarized as follows:
a. Whether the debtor transfers all his assets in payment on antecedent debt without receiving any present--- return for them and this --- necessarily defects or delays his other creditors and is a fraudulent conveyance even when the transaction is honestly entered into.
b. Where a debtor transfers all his assets for a full --- consideration. This is not considered fraudulent conveyance since the effect is merely to change the nature of the property to which the creditor took for satisfaction.
c. Where a debtor mortgages or otherwise charges all his property to secure an antecedent debt. this is conclusively presumed or fraudulent if against all the creditors---
d. Where a debtor transfers part of his assets in payment of an antecedent debt. The fraudulent intends must be proved and this will depend on several factors.
i. Whether or not there is sufficient property remaining after that transfer to enable the debtor to continue in business and thus satisfy his other creditors? This will depend upon whether the debtor is insolvent at the time.
ii. Depend on whether or not the conveyance has the effect of hearing him insolvent.
3rd act: Fraudulent preferences within the meaning of section 3 (1) (c)of the Bankruptcy Act as read with ---49(1).
If in Kenya or elsewhere he makes any conveyance or transfer of his property or part thereof or creates any charge which would under the Bankruptcy Act be void ---fraudulent preference if you were adjudged bankrupt this constitutes an act of bankruptcy. Every conveyance or transfer by any person unable to pay his debts as they come due in favor of any creditor with a view of giving such creditors or any-----guarantor. For the debt due to such a creditor in preference over the other creditors is deemed to be fraudulent and is void as against a trustee in bankruptcy.
4th act:Leaving Kenya, keeping house and similar acts
If a debtor departs from Kenya or of outside Kenya remains outside Kenya or departs from a dwelling house or begins to keep house all this constitute acts of bankruptcy.In order to establish this, the creditors must prove that it was the debtor’s intention to defeat or delay his creditors but it is not necessary to show that any creditor was actually defeated. The interest may be presumed if it is a natural consequence of the debtor’s act that the creditors will be defeated or delayed.
These acts of bankruptcy have three hints:
1. Departing from Kenya or remaining outside Kenya where a person domiciled in Kenya leaves the country after beingpressured for payment by his creditors their a strong presumption that his intention is to defeat his creditors. However, this is not so if the debtor held a permanent residence abroad at which he returns to.
2. Departing for a dwelling house or otherwise absenting one cell, the absenting must be from the debtor’s place of business or usual residence. It is an act of bankruptcy if the debtor having made an appointment to meet a creditor at a particular place fails to attend the appointment with intent to defeat it.
Re worsley KB 309
A married woman left her place of business without paying her creditors or notifying her change of residence and there was held to be an act of bankruptcy although she left at her husband’s request to live with him where else.
3. Beginning to keep house--- a debtor keeps house if he refuses to allow his creditors to see him or-----to some remote part of his house or business premises where ---could gain access to he----must be shown that some creditors has been denied access but the creditors must seek the debtor at a reasonable time.
5th act: levy execution against goods
When a judgment against a debtor remains unsatisfied the judgment creditors will usually seek to enforce it by levying execution on the debtor’s goods. This will constitute an act of bankruptcy available to any other creditors if the goods are sold by the auctioneers or retained by them for 21 days excluding the date when they were taken.
The petition founded on this act must be presented within 3 months thereof. The auctioneer is in possession for the purpose of this section written under a working possession he withdraw his office upon the debtor’s acknowledging that the goods has been seized and allows the debtor’s to continue normal trading in the goods provided that a limit is imposed on the value of the goods which can be dealt with in this way by the debtor
If a 3rd party makes a claim to any goods seized , the auctioneer must make out an in----summon to determine the ownership of the goods. The period occupied in dealing with these summons is not to be counted in this 21 days.
6th act: declaration of inability to pay debts
Here a formal declaration by the debtor that he is unable to pay his debts or a bankruptcy petition persuaded against himself constitute an act of bankruptcy upon delivery of documents to the proper official of the counts ----a declaration of inability to pay debts is required in form no. 2 of the bankruptcy rules while a declaration of bankruptcy petition is required to be in form no. 3 of the bankruptcy rules.
7th act: bankruptcy notice
This is a notice issued by the courts and served on the judgment debtor calling upon him to pay the amount of the judgment debt or else satisfy the court that he has a counter claim, a set-off or cross demand which equals or exceeds the amount of the judgment debts. The debtors must also show that he could not set up his claim in the action in which the judgment was obtained. A bankruptcy notice must be preceded by a request to issue the notice and this is in the form no. 4 of the bankruptcy rules. If a debtor fails to comply with the provision of a provision of a bankruptcy notice within 7 days he commits an act of bankruptcy. A bankruptcy notice must be in the prescribed form and it must state the consequences of non-compliance. It can only be issued at the instance of a creditor who has obtained a final judgment in a Kenyan or ina foreign country that is recognized in Kenya. The period of 7 days for compliance applies where the notice is served in Kenya. If served abroad the court will fix the time for payment in order to give leave to serve it abroad.----the notice must require payments to be made in exact terms of the judgment, therefore if by agreement with a creditor payment is to be made by installments a notice cannot be issued on the failure to ---pay one installment for the whole of the unpaid balance. If a portion of the judgment debt has been paid, there being any agreement to take payments by installment the bankruptcy notice must issue for the balance unpaid and not for the whole debt.
But a bankruptcy notice will not be invalidated by reason only but the sum specified in the notice as the amount due exceeds the amount actually due unless the debtor within the time allowed for payment gives notice on the ground of such a misstatement. If the debtor does not give such notice he is deemed to have complied with the bankruptcy notice if within the time allowed he takes such steps as would have constituted a compliance with the notice had the actual amount due been correctly specified. It should be noted that 2 separate judgment debts cannot be included in one notice. A bankruptcy notice cannot be issued if execution of the judgment date has been stayed. The debtor after service of the notice may seek to have it set aside if he has a counter claim, set-off or cross demand which equals or exceeds the amount of the judgment debt. If the debtor does not successfully challenge the notice or and does not pay the debts or provide satisfactory security for it within the specified time he commits an act of bankruptcy which is available mot only to the conditions issuing the notice but to any other creditors provided that he obtains an affidavit of non-compliance from the creditors issuing the notice.
8th act: giving notice to creditors of suspension or intention to suspend debt.
A statement by a debtor that he has suspended or about to suspend payment or his debt needs no particular formality but the notice must be given in such a manner as to show that his intention was to give information that he has suspended or was about to suspend payment. This will constitute an act of bankruptcy i.e. notice a notice of suspension has been inferred a where e debtor summoned a meeting with his creditors with a view to proposing a composition. It has also been inferred where a debtor made a verbal statement to the managing clerk of the solicitors acting on behalf of his creditors that he was unable to pay his debtor. Anotice given on a without prejudice basis has been held to be admissible as proof of the acts of bankruptcy.
Application for a bankruptcy order
The application for a bankruptcy order can be made by the debtor, a creditor, or two or more creditors. The application is made to the high court, and it has to be base on a debt or debts owed by the debtor to the creditor or creditors.
APPLICATION BY CREDITOR(S)
Conditions for application
a) The amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the prescribed bankruptcy level. The bankruptcy level is provided for in the bankruptcy regulations, and this is subject to complex calculations that take into account the amount of assets of the debtor compared to the debts of the debtor.
b) The debt, or each of the debts, is for a liquidated amount payable to the applicant creditor, or one or more of the applicant creditors, either immediately or at some certain, future time, and is unsecured. For creditors who have secured their debts, they can only apply if:-
I. the application contains a statement by the person having the right to enforce the security that the creditor is willing, in the event of a bankruptcy order being made, to give up the security for the benefit of all the bankrupt’s creditors; or
II. The application is expressed not to be made in respect of the secured part of the debt and contains a statement by that person of the estimated value at the date of the application of the security for the secured part of the debt. For this purpose, the secured and unsecured parts of the debt are to be treated as separate debts.
c) There is no outstanding application to set aside a statutory demand in respect of the debt or any of the debts.
d) The debt, or each of the debts, is a debt that the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay. In order to determine whether a debtor is unable to pay a debt, it has to be shown that with regards to debts payable immediately:-
I. The applicant creditor to whom the debt is owed has served on the debtor a demand requiring the debtor to pay the debt or to secure or compound for it to the satisfaction of the creditor, at least twenty-one days have elapsed since the demand was served, and the demand has been neither complied with nor set aside in accordance with the insolvency regulations. The application may be made before the end of the twenty-one day period if—
(a) There is a serious possibility that the debtor’s property, or the value of any of that property, will be significantly reduced during that period, and the application contains a statement to that effect. However, the court will have to wait for the 21 days to elapse before making a bankruptcy order.
II. Execution or other process issued in respect of the debt on a judgment or order of any court in favour of the applicant, or one or more of the applicants to whom the debt is owed, has been returned unsatisfied either wholly or in part.
The debtor appears to have no reasonable prospect of being able to pay a debt if, but only if, the debt is not immediately payable and:-
I. The applicant to whom it is owed has served on the debtor a demand requiring the debtor to establish to the satisfaction of the creditor that there is a reasonable prospect that the debtor will be able to pay the debt when it falls due
II. At least twenty-one days have elapsed since the demand was served; and
III. The demand has been neither complied with nor set aside in accordance with the insolvency regulations.
Determination of the bankruptcy application
After the application, the court may:
a) accept the creditor’s application and issue a bankruptcy order, if all the requirements have been made, and if the court is of the opinion that the debtor is unable to pay his debts
b) dismiss the application if:
I. It is satisfied that the debtor is able to pay all his debts. This will be determined by the court by looking at the prevailing circumstances and by taking into account the debtors contingent and prospective liabilities. In determining what constitutes a reasonable prospect that a debtor will be able to pay a debt when it falls due, the Court shall presume that the prospect given by the information known to the creditor when the creditor entered into the transaction resulting in the debt was a reasonable prospect
II. If the debtor made a reasonable proposal or an offer for an arrangement to pay his debts, and it was unreasonably refused by the creditors. It is noted here that the debtor must submit the proposal to the court before the determination of the application.
c) Stay the application by a creditor for bankruptcy on such terms, and for such period, as it considers appropriate. However, If there is more than one bankruptcy application in respect of a debtor, and one application has been stayed by an order of the Court, the Court may make a bankruptcy order in respect of the application that has not been stayed, and shall dismiss the application that has been stayed on such terms as it considers appropriate.
d) If an application made by a creditor for a bankruptcy order relates to more than one debtor, the Court may refuse to make such an order in respect of one or some of the debtors without affecting the application made in relation to the remaining debtor or debtors
e) In some cases, debtor will appear in opposition to a creditor’s application in that the debtor does not owe a specified debt to the creditor or owes a specified debt to the creditor, but the debt is less than the prescribed bankruptcy level. In such case, the Court may, instead of refusing the application, stay the application so that the issue arising can be resolved at trial. However, the court may require the debtor to give security to the creditor for any debt that may be established as owing by the debtor to the creditor, and for the cost of establishing the debt.
f) The court may allow one creditor to be substituted for another, if the applicant creditor has not proceeded with due diligence, or at the hearing of the application offers no evidence. However, the substitute creditor must be owed two hundred and fifty thousand shillings or more.
Execution against the debtor’s property pending the courts determination
A creditor, who petitions the court for bankruptcy order, may not issue or continue an execution process against the debtor in respect of the property of the debtor to recover a debt on which the application is based. To do this, the creditor needs the approval of the court, and the court has to be satisfied that that the interests of the other creditors will not be detrimentally affected
To prevent further execution against the debtors property, the debtor himself, or any of the creditors can apply to the court for an order that stops the issue or continuance of any other execution process. The court can issue the order to stop the execution process, or an order allowing the execution process with conditions. It is to be noted that the other creditors are interested in the preservation of the debtor’s property pending the bankruptcy order.
The execution orders can be issued or stopped by any other court of competent jurisdiction, and not restricted to the high court.
If the bankruptcy petition is dismissed or withdrawn, the execution process will continue as if no bankruptcy petition were made. However, it should be noted that a bankruptcy petition cannot be dismissed or withdrawn without the leave of the high court.
APPLICATION BY DEBTORS
A debtor may make an application to the court for an order adjudging in self bankruptcy only on the grounds that he is unable to pay his debts. The application must be accompanied by the debtor’s financial position as at the date of the application. The financial statement must indicate the amounts and nature of assets and liabilities that the debtor has.The financial statements must be complete and correct; otherwise it will be rejected by the courts.
A debtor who makes an application for a bankruptcy petition must publish a notice of the application in a newspaper of nationwide circulation and in such other publications as may be prescribed by the insolvency regulations from time to time. The debtor must show to the court that the publication was made before the hearing can commence. The purpose of such a publication is to inform the debtor’s creditors of the debtor’s intentions and to inform the public of the debtor’s financial position/situation.
Two or more debtors who are partners in a business may make a joint application for a bankruptcy order.
DETERMINATION OF THE COURT
Upon hearing the debtor’s application, the court may issue a Bankruptcy Order (BO). The courts may refuse to issue an order if it is satisfied that:
a) That if a bankruptcy order were made, the total amount of the applicant’s debt could be less than the small bankruptcy level.
b) That if the bankruptcy orders were made, the value of the bankruptcy estates would be equal to or more than the minimum prescribed value.
c) That during the five years, immediately preceding the debtor’s application, the debtor has neither been adjudged bankrupt nor made a composition with the debtor’s creditors or a skim of arrangement of the debtor’s financial affairs.
d) That it could be appropriate to appoint an authorized insolvency practitioner to prepare a report indicating the financial position of the debtor. The insolvency practitioner may also indicate whether the debtor is willing to make a proposal or a voluntary arrangement. The insolvency practitioner is appointed by the court.
DUTIES OF AN INSOLVENCY PRACTITIONER
i. Prepare a report indicating the financial position of the debtor and indicating whether the debtor is willing to make a proposal for a voluntary arrangement.
ii. If the insolvency practitioner indicates that the debtor is willing to make a proposal, that practitioner shall also state whether in his opinion a meeting of creditors should be convened to consider the proposal.
iii. Issue the dates on which, and time and place at which the meeting of the creditors should be held.
APPPOINTMENT OF A TRUSTEE WITH RESPECT TO THE DEBTOR’S PROPERTY
After a creditor’s application has been made, the applicant creditor or any other creditor of the debtor may apply to the court for an order for the appointment of an authorized insolvency practitioner to act as an interim trustee in respect of all or a specified part of the debtor’s property. The purpose of an interim trustee is to conserve the debtors’ property pending the determination of the bankruptcy petition. The interim trustee is authorized to:
i. Take control of any property of the debtor.
ii. Sell any perishable property of the debtor that is likely to fall rapidly invalid.
iii. Control the affairs or property of the debtor as directed by the courts.
In order to effect its appointment, the trustees shall publisha notice of the appointment in one or more newspapers circulating in Kenya. It is to be noted that the appointment of the trustee does not take effect until such a notice has been published.
After the appointment of the interim trustee, any creditor of the debtor, may not issue or continue an execution process against the debtor in respect of the property of the debtor to recover a debt on which the application is based. To do this, the creditor needs the approval of the court, and the court has to be satisfied that that the interests of the other creditors will not be detrimentally affected.Caselaw
Re Herman ex parte Pharao& Co. (1915) HBR 41
Ngei v Official Receiver Civil Appeal No. 111 of 1990
Peter MainaWaihenya vs Co-op Bank of Kenya Ltd BC 63 of 2003
KNOWLEDGE TREE LAW NOTES
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Saturday, November 9, 2024
Bankruptcy Law Notes
Insurance Law Notes
Insurance
The Insurance Act (Chapter 487) (Insurance Act) is the principal legislation governing insurance and reinsurance business in Kenya. It establishes the Insurance Regulatory Authority (IRA), whose functions include the regulation, supervision and licensing of insurers and reinsurers in Kenya.
Insurance may be defined as a contract between two parties whereby one party called insurer undertakes, in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.
The insurance, thus, is a contract whereby
Certain sum. called premium, is charged in consideration
Against the said consideration, a large sum is guaranteed to be paid by the insurer who received the premium
The payment will be made in a certain definite sum. I.e., I lose or the policy amount whichever may be, and
The payment is made only upon a contingency
Since Insurance is a contract, certain sections of the Contract Act are applicable.
All agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and which are not hereby declared to be void.
Elements of Insurance Contract can be classified into two sections;
The elements of general contract and
The elements of special contract relating to insurance: the special contract of insurance involves principles: insurable interest, utmost good faith, indemnity, subrogation, warranties. Proximate cause, assignment, and nomination, the return of premium.
Elements of Insurance Contract
This Act says that all agreements are the contract if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and which are not at this moment declared to be void”.
The insurance contract involves—(A) the elements of the general contract, and (B) the element of special contract relating to insurance.
The special contract of insurance involves principles:
Insurable Interest.
Utmost Good Faith.
Indemnity.
Subrogation.
Warranties.
Proximate Cause.
Assignment and Nomination.
Return of Premium.
So, in total, there are eight elements of the insurance contract which are discussed below:
General Contract
The valid contract, according to Section 10 of the Indian Contract Act 1872, must have the following essentialities;
Agreement (offer and acceptance),
Legal consideration,
Competent to make a contract,
Free consent,
Legal object.
Insurable Interest
For an insurance contract to be valid, the insured must possess an insurable interest in the subject matter of insurance.
The insurable interest is the pecuniary interest whereby the policy-holder is benefited by the existence of the subject-matter and is prejudiced death or damage of the subject- matter. The essentials of a valid insurable interest are the following:
There must be a subject-matter to be insured.
The policy-holder should have a monetary relationship with the subject-matter.
The relationship between the policy-holders and the subject-matter should be recognized by law. In other words, there should not be any illegal relationship between the policy-holder and the subject-matter to be insured.
The financial relationship between the policy-holder and subject-matter should be such that the policy-holder is economically benefited by the survival or existence of the subject-matter and or will suffer economic loss at the death or existence of the subject matter.
The subject-matter is life in the life insurance, property, and goods in property insurance, liability, and adventure in general insurance.
Insurable interest is essentially a pecuniary interest, i.e., the loss caused by fire happening of the insured risk must be capable of financial valuation.
No emotional or sentimental loss, as an expectation or anxiety, would be the ground of the insurable interest. The event insured should be one that if it happens, the party suffers financially and if it does not happen, the party is benefited by the existence.
But a mere hope or expectation, which may be frustrated by the happening to some extent, is not an insurable interest.
Utmost Good Faith
The doctrine of disclosing all material facts is embodied in the important principle ‘utmost good faith’ which applies to all forms of insurance.
Both parties to the insurance contract must agree (ad idem) at the time of the contract. There should not be any misrepresentation, non-disclosure or fraud concerning the material.
In case of insurance contract the legal maxim ‘Caveat Emptor” (let the buyer beware) docs not prevail, where it is the regard of the buyer to satisfy himself of the genuineness of the subject-matter and the seller is under no obligation to supply information about it.
But in the insurance contract, the seller, i.e., the insurer will also have to disclose all the material facts.
An insurance contract is a contract of uherrimae fidei, i.e., of absolute good faith both parties to the contract must disclose all the material facts and fully.
Material Facts
A material fact is one which affects the judgment or decision of both parties in entering into the contract.
Facts which count materially are those which knowledge influences a party in deciding whether or not to offer or to accept such risk and if the risk, is acceptable, on what terms and conditions the risk should be accepted.
These facts have a direct bearing on the degree of risk about the subject of insurance.
In case of life insurance, the material facts or factors affecting the risk will be age, residence, occupation, health, income, etc., and in case of property insurance, it would make him use the design, owner, and situation of the property.
Full and True Disclosure
The utmost Good Faith says that all the material facts should be disclosed in true and fill the form. It means that the facts should be disclosed in that form in which they exist.
There should be no concealment, misrepresentation, mistake or fraud about the material facts. There should be no false statement and no half-truth nor nay silence on the material facts.
The duty of Both the Parties
The duty to disclose the material facts lies on both the parties the insured as well as the insurer, but in practice the assured has to be more particular, about the; observance of this principle because it is usually in full knowledge of facts relating to the subject-matter which, despite all effective inspections of the insurer, would not be disclosed.
Facts need not be disclosed by the insured
The following facts, however, are not required to be disclosed by the insured (0 Facts which tend to lessen the risk.
Facts of public knowledge.
Facts that could be inferred from the information disclosed.
Facts waived by the insurer.
Facts governed by the conditions of the policy.
Principle of Indemnity
As a rule, all insurance contracts except personal insurance are contracts of indemnity.
According to this principle, the insurer undertakes to put the insured, in the event of loss, in the same position that he occupied immediately before the happening of the event insured against, in a certain form of insurance, the principle of indemnity is modified to apply.
For example, in marine or fire insurance, sometimes, a certain profit margin which would have earned in the absence of the event, is also included in the loss. In a true sense of the indemnity, the insured is not entitled to make a profit from his loss.
To discourse over insurance the principle of indemnifying it an essential feature of an insurance contract, in the absence of which this industry would have the hue of gambling, and the insured would tend to affect over-insurance and then intentionally cause a loss to occur so that a financial gain could be achieved. So, to avoid this international loss, only the actual loss becomes payable and not the assured sum (which is higher in over-insurance). If the property is under-insured, i.e., the insured amount is less than the actual value of the property insured, the insured is regarded his insurer for the amount if under insurance and in case of loss one shall share the loss himself.
To avoid an Anti-social Act; if the assured is allowed to gain more than the actual loss, which is against the principle of indemnity, he will be tempted to gain by the destruction of his property after getting it insured against risk. He will be under constant temptation to destroy the property. Thus, the whole society will be doing only anti-social acts, i.e., the persons would be interested in gaining after the destruction of the property. So, the principle of indemnity has been applied where only the cash-value of his loss and nothing more than this, though he might have insured for a greater amount, will be compensated.
To maintain the Premium at Low-level; if the principle of indemnity is not applied, the larger amount will be paid for a smaller loss, and this will increase the cost of insurance, and the premium of insurance will have to be raised. If the premium is raised two things may happen first, persons may not be inclined to ensure and second, unscrupulous persons would get insurance to destroy the property to gain from such an act. Both things would defeat the purpose of insurance. So, a principle of indemnity is here to help them because such temptation’ is eliminated when only actual loss and not more than the actual financial loss is compensated provided there is insurance up to that amount.
Conditions for Indemnity Principle
The following conditions should be fulfilled in full application of the principle of indemnity.
The insured has to prove that he will suffer a loss on the insured matter at the time of happening the event and the loss is an actual monetary loss.
The amount of compensation will be the amount of insurance. Indemnification cannot be more than the amount insured.
If the insured gets more amount than the actual loss, the insurer has the right to get the extra amount back.
If the insured gets some amount from the third party after being fully indemnified by the insurer, the insurer will have the right to receive alt the amount paid by the third party.
The principle of indemnity does not apply to personal insurance because the amount of loss is not easily calculable there.
Doctrine of Subrogation
The doctrine of subrogation refers to the right of the insurer to stand in the place of the insured, after the settlement of a claim, in so far as the insured’s right of recovery from an alternative source is involved.
If the insured is in a position to recover the loss in full or in part from a third party due to whose negligence the loss may have been precipitated, his right of recovery is subrogated to the insurer on the settlement of the claim.
The insurers, after that, recover the claim from the third party. The right of subrogation may be exercised by the insurer before payment of loss.
Essentials of Doctrine of Subrogation
A corollary to the Principle of Indemnity
The doctrine of subrogation is the supplementary principle of indemnity.
The latter doctrine says that only the actual value of the loss of the property is compensated, so the former follows that if the damaged property has any value left or any right against a third party the insurer can subrogate the left property or right of the property because if the insured is allowed to retain, he shall have realized more than the actual loss, which is contrary to principle of indemnity.
Subrogation is the Substitution
The insurer, according to this principle’, becomes entitled to all the rights of insured subject matter after payment because he has paid the actual loss of the property.
He is substituted in place of other persons who act on the right and claim of the property, insured.
Subrogation only up to the amount, of payment
The insurer is subrogated all the rights, claims, remedies and securities’ of the damaged insured property after indemnification, but he is entitled to gel these benefits only to the extent of his payment.
The insurer is, thus, subrogated to the alternative rights and remedies of the insured, only up to the amount of his payment to the insured.
In the same way, if die insured is compensated for his loss from another party after he has been indemnified by his insurer he is liable to part with the compensation up to the extent that the insurer is entitled to.
In one U.S. case it was made clear “if the insurer, having paid the claim to the insured, recovers from the defaulting third party in excess of the amount paid under the policy, he has to pay this excess to the insured though he may charge the insured his share of reasonable expenses incurred in collecting.
The Subrogation may be applied before Payment
If the assured got certain compensation, from the third party before being fully indemnified by the insurer, the insurer could pay only the balance of the loss.
Personal Insurance
The doctrine of subrogation does riot apply to personal insurance because the doctrine of indemnity does not apply to such insurance. The insurers have no right of action against the third party in respect of the damage.
For example, if an insured dies due to. the negligence of a third party his dependent has the right to recover the amount of the loss from the third party along with the policy amount No amount of the policy would be subrogated by the insurer.
Warranties
There are certain conditions and promises in the insurance contract which are called warranties.
Proximate Cause
The rule; is that immediate and not the remote cause is to be regarded. The maxim is “sed causa proximo non-remold-spectator”; see the proximate cause and not, the distant cause.
The real cause must be seen while payment of the loss. If the real cause of loss is insured, the insurer is liable to compensate for the loss; otherwise, the insurer may not be responsible for a loss.
Proximate cause is not a device to avoid the trouble of discovering the real ease or the common sense cause.
Proximate cause means the actual efficient cause that sets in motion a train of events which brings about result, without the intervention of any force started and worked actively from a new and independent source.
The determination of real cause depends upon the working and practice of insurance and circumstances to losses. A loss may not be occasioned merely by one event.
There may be concurrent causes or chain of causes. They may occur in a sequence or broken chain. Sometimes, certain causes arc excepted by (the insurance contract and the insurer is not liable for the accepted peril.
The efficient cause of a loss is called the proximate cause of the loss.
For the policy to cover the loss must have an insured peril as the proximate cause of the loss or also the insured peril must occur in the chain of causation that links the proximate cause with the loss.
The proximate cause is not necessarily, the cause that was nearest to the damage either in time or place but is rather the cause that was responsible for the loss.
Determination of Proximate Cause
If there is a single cause of the loss, the cause will be the proximate cause, and further, if the peril (cause of loss) was insured, the insurer will have to repay the loss.
If there are concurrent causes, the insured perils and excepted perils have to be segregated. The concurrent causes may be first, separable and second, inseparable. Separable causes are those which can be separated from each other. The loss occurred due to a particular cause may be distinguishing known. In such a case if any cause, is excepted peril, the insurer will have to pay up to the extent of loss which occurred due to insured perils. If the circumstances are such that the perils are inseparable, then the insurers are not liable at all when there exists any excepted peril.
If the causes occurred in the form of the chain, they have to be observed seriously.
If there is an unbroken chain, the excepted and insured peril has to be separated. If an excepted peril precedes the operation of the insured peril so that the loss caused by the latter is the direct and natural consequence of the excepted peril, there is no liability. If the insured peril is followed by an excepted peril, there is a valid liability.
If there is a broken chain of events with no excepted peril involved, it is possible to separate the losses. The insurer is liable only for that loss caused by an insured peril; where there is an excepted peril, the subsequent loss caused by an insured peril will be a new and indirect cause because of the interruption in the chain of events. The insurer will be liable for the loss caused by insured peril which can be easily segregated. Similarly, if the loss occurs by an insured peril and there is, subsequently loss by an excepted peril, the insurer will be liable for loss occurred due to the insured peril.
In brief, if the happening of an excepted peril is followed by the occurrence of an insured peril, as a new and independent cause there is a valid claim. If an insured peril is followed by the happening of an excepted peril, as a new and independent cause, there is a claim excluding loss or damage; caused by the excepted peril.
Assignment or Transfer of Interest
It is necessary to distinguish between the assignment of (a) the subject-matter of insurance, (b) the policy, and (c) the policy money when payable.
Marine and life policies can be freely assigned but assignments under fire and accident policies, are not valid without the prior consent of the insurers—except changes of interest by will or operation of law.
Moreover, assignments under fire and accident policies must be made before tine insured parts with his, interest. Once he has lost interest, the policy is void and cannot be assigned.
The life policies can be assigned whether the assignee has an insurable interest or not.
Life policies are frequently charged, assigned or otherwise dealt with, for they are valuable securities. The marine policy is freely assignable unless it contains terms expressly prohibiting assignment.
It assigned either before or after a loss. A marine policy may be assigned by endorsement thereon or in another customary manner.
In practice, a marine cargo policy is frequently endorsed in blank and becomes in effect a quasi-negotiable instrument.
Thus, it will be appreciated, adds considerably to the convenience of mercantile transactions as the policy can be negotiated through a bank along with other documents of title.
Assignment in fire insurance cannot be recognized without the prior consent of the insurer, change of interest in fire policies (unless by will or operation of law) are not valid unless and until the consent of the insurer has been given.
The fire policies are not like an assignment nor intended to be assigned from one person to another without the consent of the insurer. Assignment in fire insurance constitutes a new contract.
Return of Premium
Ordinarily, the premium once paid cannot be refunded. However, in the following cases, the refund is allowed.
By Agreement in the Policy
The assured may pay a full premium while affecting the insurance but it may be agreed to return it wholly or partly in the happening of certain events. For example, special packing may reduce risk.
For Reasons of Equity
Non-attachment of risk: Where the subject-matter insured or part thereof, has never ten imperiled, for example, term insurance with returnable premium where the premium is returned to the policy-holder if death does not occur during the period of insurance.
The undeclared balance of on open policy: The policy may be canceled and premium may be returned for short interest allowed provided there was no further interest in the policy.
The payment of Premium is apportionable. The apportioned part of -the consideration is refundable when a part of policy interest is not involved. For example, insurance may be taken for a voyage in stages, each stage being rated separately. In such a case if some stages are not completed the premium relating to the incomplete stage is returnable.
Where the assured has no insurable interest throughout the currency of the risk, the premium is returnable provided the policy was not attached by way of wagering.
Unreasonable delay in commencing the voyage may also entitle the insurer to cancel the insurance by returning the premium.
Where the assured has over-insured under an unvalued policy a proportionate part of the premium is returnable.
Over-insurance by Double Insurance
If there is over-insurance by double insurance, a proportionate part of the several premiums is returnable provided that if the policies are taken at different times and any earlier policy has at any time born the entire risk or if a claim has been paid.
On the policy in respect of the foil insured thereby, no premium is returnable in respect of that policy and when double insurance is affected knowingly by the assured no premium is returnable.
Various Clauses of Insurance Contract
The old form of policy is even used today, To make the standard policy suitable for the different types of contracts, suitable conditions are added to the policy.
Use conditions are inserted in the policy in the form of clauses. The clauses took the standard form with special meanings. They may be about Hull, Cargo, and Freight.
Types of Insurance Contract
Insurance may be defined as a contract between two parties whereby one party called insurer undertakes, in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.
The insurance contract may be divided into two forms — first life insurance contract and the second contract of indemnity.
Occurring of Event
The event, the death, in life insurance is certain, but the only uncertainty is the time when death will occur.
In indemnity insurance {in fire and marine insurances) the event may not take place at all or may take place in part.
Therefore, in life insurance, ordinarily every piece will become a claim sooner or later but it is not certain in indemnity insurance.
Subject-Matter
The subject-matter in life insurance is life.
Chances of death would increase along with the advance in age whatever precautionary measures may be taken for improvement of health whereas the property in other insurance can be repaired and replaced and may remain usually in good condition.
Related: Proximate Cause Principle of Insurance
Variance in Premium
In life insurance premium is not much variable whereas in other insurance premiums is variable in numerous forms.
Classification of Risk
The classification of risks is generally simpler in life insurance than in other types of insurance contracts.
In life contract, it would be standard, sub-standard and un-insurable but in other insurance, it may be several.
Read more: Levels of Risks
Period of Insurance
Generally, life insurance is taken for a longer period. Whereas the other forms of insurance are taken for not more than one-two years.
Related: Utmost Good Faith in Insurance
Protection and Investment
The life insurance contract protects against loss of early death and investment to meet the old age requirement.
Other forms of insurance do not provide investment because the premium paid is not returnable if the contingencies (hazards) do not occur within the period.
Other forms of insurance provide only protection against loss of the damage of the property against the insured perils.
Premium Payment
The mode of premium payment in life insurance is generally level premium whereas, in other forms of insurances, it is a single premium.
Insurable Interest
Insurable interest must be at the time of proposal in insurance but in property insurance, it must be present at the time of loss.
Insurance Policy Form
Since most of the insurance contracts are simple contracts, these need not necessarily be in writing.
The exceptions are fidelity guarantee contracts and marine insurance contracts which are required to be evidenced in writing because of the requirement of law.
However, as a rule, insurers do issue policies about all types of insurance contracts.
It should be known by the students that policy as such is not the contract in itself, it is simply evidence to the contract which already exists.
In practice, different insurers use different types of policies for the same class of business, and there is no standardization as such.
In some classes of business, it may be seen, however, that most of the wordings have been standardized and an example may be the standard fire policy.
Related: 4 Difference between Insurance and Assurance
Apart from this, another common feature that will be found in almost all policies is the appearance of a schedule, where all important information about the insurance is marshaled.
The advantage of such scheduled, policies is that one can easily find out the critical information from the schedule rather than taking the trouble of going through the whole policy wordings.
Various Clauses of Insurance Contract
The old form of policy is even used today, To make the standard policy suitable for the different types of contracts, suitable conditions are added to the policy.
Use conditions are inserted in the policy in the form of clauses. The clauses took the standard form with special meanings. They may be about Hull, Cargo, and Freight.
Hull Clauses
These clauses are mainly framed wife the insurances on vessels and are incorporated in hull policies. The clauses may be about losses resulting from a collision, standing, general average, etc.
‘All risks policy’ may be issued or certain risks may be excluded from the policy by inserting suitable clauses. ‘Inland or Port Risk Clauses’ may be incorporated in fee policy to determine the extent of the loss. These clauses are known as ‘Institute Time Clauses’.
Cargo Clauses
These clauses are used in the insurance of goods and are incorporated in cargo policies. Use clauses describe the nature, extent; and scope of the insurance and define comprehensive conditions and restrictions.
The additional marine perils against which cover may be sought or which are excluded from the policies are inserted through special clauses. The terms and conditions of Cargo insurance are specially incorporated in the policies.
‘With Average (W.A.) or With Particular Average, ‘Exposed during transit,’ etc., are the important clauses of cargo insurance.
The underwriting of cargo-risks depends upon the nature of goods, the susceptibility of the goods, intentions of the insurer and insured and willingness of the assured to pay the extra premium. This clause is known as the ‘Institute Cargo Clause.’
Freight Clauses
The clauses are framed in connection with the loss of freight due to maritime perils which may be insured for a period or a voyage. A person who paid the freight in advance and the person who will receive the freight on completion of the voyage are interested in covering the risk.
The General Average. (GA.), Particular Average (P.A.), etc. are used in the freight clauses. The clauses are known as Institute Freight Clauses’.
The clauses to be incorporated in the policy are taken from Lloyd’s Association. There are various clauses which are suitably inserted according to the nature and type of policies. Hull, cargo, and freight policies have different standard provisions.
In case of hull insurance, the clauses provide that if the insured vessel at the expiration of the policy is at sea or a port of refuge.
Generally, the ship may be covered until arrival at the port of destination. In case of cargo policies with Average,
Free of Particular Average or All Risks are generally used. There are standard clauses that are invariably used in marine insurance.
Firstly, policies are constructed in the plain, ordinary and popular sense, and, later on, specific clauses are added to them according to the terms and conditions of the contract. Clauses attached to the policy would override the printed wording in the policy.
Description of the Marine Clauses
The usual clauses which are or may be incorporated in a marine policy are:
Assignment clause,
Lost or not lost,
At and from clause,
Warehouse to warehouse clause,
Deviation, touch and stay clause,
Inchmaree clause,
Running down clause,
Sue and Labor clause,
Reinsurance clause,
Memorandum clause,
Continuation clause.
Let’s get an idea regarding them;
Assignment Clause
“The clause of assignment is as below …. as well as in his/their name as for and in the name and names of all and every other person or persons to whom the same doth mayor shall appertain, in part or all doth make assurance… and cause… and them and every of them, to be insured ….”
This clause makes it clear that the marine policy is freely assignable unless this is expressly prohibited. The policy can be assigned to anyone who may acquire an insurable interest in the subject- matter as soon as the assured parts with his interest.
Cargo policy is freely assignable, and no notice thereof is essential to be given to the underwriter.
But, in case of hull insurance die policy cannot be assigned freely, and the consent of underwriter is essential because the degree of risk of the subject- matter is materially changed when the management and ownership of the vessel are changed.
Since the owner of cargo has no control over the cargo in transit, the blank endorsement may be permitted. But in hull insurance, specific endorsement of an assignment is essential.
It is interesting to note that marine policy can be assigned even after h takes place, but the assignee does not get a better title than the assignor.
However, where the assured has parted with his interest in the subject, matter insured and has not, before or at time of so doing, expressly or impliedly agreed to assign the policy and subsequent assignment of the policy is inoperative.
Lost or Not Lost Clause
The clause is as to be insured, lost or not lost. The policy was taken in good faith. The meaning of the clause is that the insurer insures the subject-matter irrespective of the fact that it has already been lost or not lost before the issue of the policy.
It is taken in such a case where a merchant receives information of the shipment of his cargo very late after the sailing of the steamer and, therefore, when he submits the risk to the underwriter and effects insurance it was not known whether the subject- matter to be insured was lost or was not lost.
So, to provide full protection for shipment, the words, ‘Lost or not Lost’ are inserted. It means that the insurer undertakes to indemnify the insured whether the subject matter before the date of issue of the policy was already lost or not.
In this case, it is assumed that the assured and the underwriters are ignorant about the safety or otherwise of the subject- matter.
The policy terminates if it is proved later on that one of the two parties was aware of the subject-matter at the time of loss.
The introduction of this clause has a retrospective effect to provide for any loss which has occurred during the period from the date of shipment to the date of issue of policy.
This clause was most prevalent in olden times when the media of communication were not developed so much. Now, the clause has lost much of its importance.
At and From Clause
This clause is applicable in voyage policies insuring hull, and freight. It determines the time when the actual risk commences. As soon as the ship will arrive at the port, the risk will commence.
It means that the policy covers the subject-matters while it is lying at the port of departure and from the time the ship sails when the policy contains from only instead of “At and Form.”
From means, the risk commences from the time of departure of the ship and not previous to that. In the case of cargo policy, this clause is amended as the risk may commence boom the ‘time the cargo is loaded onto the vessel.
In voyage policy, if the ship is not at that place when the contract is concluded, the risk commences as soon as the ship arrives there in good safety. If the place of departure is specified by the policy, and the ship sails from another place than the specified one, the risk does not attach.
Termination of Risk.
The wordings of policy, in this case, are as follows:
“And upon the goods and merchandises until the same be there discharged and safely landed.” When the ship arrives at the port of destination, the goods must be landed within a reasonable time and if they are not landed the risk ceases.
The risk of landing within a reasonable time is permitted in most of the cases. But, where it is allowed with a standard policy, clauses such as craft, lighters, etc., are inserted into the policy.
Warehouse to Warehouse Clause
Underwriters are responsible for the risk commencing from the time of loading to the time of unloading the cargo. But, in certain cases, the risks are beyond these two limits, i. e., departing, and destination.
So, to cover the inland risks from the original place of departure to the port of sailing and from the port of discharge to the place of final destination are insured under ‘Warehouse to warehouse clause.’
Under this policy, the risk commences from the specified place and continues to the specified place of destination named in the policy. Thus, the risk of land, craft transport and transshipment are also covered under a single marine insurance policy.
Sometimes, time-limit is also inserted in the policy, and the extra cost is required from the insured to cover the remaining voyage. But, where goods are willfully detained, the underwriter shall cease his liability.
The clause has appeared in the Institute Cargo clause is as follows:
The risks covered by this policy attach from the time the goods leave the Warehouse and/or Store at the place named in the policy for the commencement of the transit and continue during the ordinary course of transit, including customary transshipment, if any, until the goods are discharged oversize from the oversea vessel at the final port.
Lucena v Craufurd: HL 1806
Before the declaration of war, against the United Provinces, His Majesty’s ships took possession of several ships belonging to Dutch East India men, and took them to St Helena. The Commissioners then insured the ships for their journey from St Helena to London. War followed shortly. The ships were declared as prizes to his Majesty, having ‘belonged, when taken, to subjects of the United Provinces, since become enemies.’ A loss occurred and the Commissioners sought to claim under the policies, saying the interest was in the King.
Held: An insurance taken out on the profits of a ship or other goods which was in its true nature a wager was merely an attempt to evade the 1745 Act. Even though the contract did not come within the word of the Act, it came within its spirit, and was avoided by the Act.
Lord Eldon rejected the argument based on moral certainty: ‘In order to distinguish that intermediate thing between a strict right, or a right derived under a contract, and a mere expectation or hope, which has been termed an insurable interest, it has been said in many cases to be that which amounts to a moral certainty. I have in vain endeavoured however to find a fit definition of that which is between a certainty and an expectation; nor am I able to point out what is an interest unless it be a right in the property, or a right derivable out of some contract about the property, which in either case may be lost upon some contingency affecting the possession or enjoyment of the party.’ and ‘That expectation [of the insured in the case], though founded upon the highest probability, was not an interest, and it was equally not interest, whatever might have been the chances in favour of the expectation . . If moral certainty be a ground of insurable interest, there are hundreds, perhaps thousands, who would be entitled to insure. First the dock company, then the dock master, then the warehouse-keeper, then the porter, and then every other person who to a moral certainty would have anything to do with the property, and of course get something by it.’
Lawrence J (advising their lordships) ‘A man is interested in a thing to whom advantage may arise or prejudice happen from the circumstances which may attend it; and whom it imports, that its condition as to safety or other quality should continue; interest does not necessarily imply a right to the whole or part of the thing, nor necessarily and exclusively that which may be the subject of privation, but the having some relation to, or concerning the subject of the insurance; which relation or concern, by the happening of the perils insured against. may be so affected as to produce a damage, detriment or prejudice to the person insuring. And where a man is so circumstanced with respect to matters exposed to certain risks or dangers, as to have a moral certainty of advantage or benefit, but for those risks or dangers he may be said to be interested in the safety of the thing. To be interested in the preservation of a thing, is to be so circumstanced with respect to it as to have benefit from its existence, prejudice from its destruction. The property of a thing and the interest devisable from it may be very different; of the first the price is generally the measure, but by interest in a thing every benefit and advantage arising out of or depending on such thing may be considered as being comprehended.’
Lawrence J, Lord Eldon
(1806) 2 Bos and Pul MR 269, [1806] EngR 12, (1806) 2 Bos and Pul 269, (1806) 127 ER 630
Marine Insurance Act 1745
England and Wales
Citing:
Appeal from – Lucena v Craufurd CEC 1802
Enemy ships which had been captured were insured for their return to England. A claim arose. The insurance provider said that the claim failed under the 1745 Act as a wager since the claimant had no insurable interest in the ships.
Held: . .
Cited – L Cras v Hughes 1782
Two Spanish register ships had been captured by a squadron of ships of war assisted by men at arms. . .
Criminal Procedure Law Notes
INTRODUCTION AND BACKGROUND TO CRIMINAL PROCEDURE IN KENYA
Criminal Procedure and practice is a branch of law concerned with the process by which persons alleged to have contravened penal laws are dealt with. Inevitably, the criminal trial itself is the crux of this branch of law but related aspects both prior and incidental thereto are equally important. It is a branch that is concerned with the procedural law as opposed to substantive criminal law.
Criminal Procedure seeks to strike a balance between two competing interests. On the one hand is the interest of society through the state to punish crime and the need to ensure that the rights and inherent dignity of the offender are respected on the other. Equally, beyond the traditional protagonists in the criminal justice process, there is a paradigm shift towards a victims centered process. This is exemplified by the requirement of victim impact statement pre-sentencing trial.
The criminal process is undertaken by the State, which investigates and prosecutes criminal proceedings. The criminal process is believed to attach on public interest as opposed to the civil process that attaches on individuals. Criminal proceedings are believed to be of a public nature. Whenever criminal acts are committed, the public generally is affected and the public needs to be protected from criminal activity.
Protection of public interest underscores the security that the general public would like to feel that the State has capacity to protect the public.
To secure the rights of the suspects and accused person, the Constitution under Bill Rights provides for the rights of arrested and accused persons. The right of the victim to crime is also to be considered. Increasingly there is need to recognize that the victim of crime has certain rights that need to be protected.
The parties to criminal proceedings are the State as the main complainant and therefore it is always the State versus the individual with the state representing all the citizens. The centrality of the state and the accused was re-stated in the case of Republic v Cap Van International Ltd and Another (2004) 2 KLR. It was held that there are only two parties recognised in law, the Republic and the accused persons.
Equally, there is room allowed under the Criminal Procedure Code for individual prosecution. Citizens who feel that the state is not willing to take up their cases and have to tender evidence in court can approach court and the court at its discretion has to agree to allow the person bringing the private prosecution whether to proceed. In criminal process there is the regime of criminal courts, the structure and jurisdiction of the courts are clearly indicated firstly within the constitution.
Players in the Criminal Proceedings
Criminal proceedings have various parties playing specific and defined roles. They include the following:
The State and Accused
These are the main parties in a criminal, expressed as ‘Republic Versus X’, where X represents the accused. This underscores the fundamental duty of the state to protect the rights and fundamental freedoms of its citizens. The centrality of the state and the accused in criminal cases was restated in the case of Republic v Cap Van International Ltd and another (2004) 2KLR, where it was held that there are only two parties who are recognised in law; the Republic and the accused person.
The prosecutorial authority in Kenya is vested in the Office of the Director of Public Prosecution. The office is established under article 157(1) of the Constitution. Under article 157(6) of the Constitution the DPP has the power to;
Institute and undertake criminal proceedings against any person before any court other than a court martial in respect of any offence alleged to have been committed.
Take over and continue any criminal proceeding commenced in any court that have been instituted or undertaken by another person or authority, with the permission of the person or authority.
Discontinue, with permission of the court, any criminal proceeding at any stage before judgment is delivered.
In Republic v Abdulahi Noor Mohamed, the Court in rejecting the withdrawal of murder charges after the families of victim and accused had reconciled noted that criminal trials are matters of public interest instituted in the name of the state. Therefore, arrangements between the accused person and the victim to withdraw the charges to the exclusion of the prosecution are inconsistent with constitutional provisions bestowing prosecutorial powers on the DPP. Other powers and authorities of the DPP are provided by the Office of the Director of Public Prosecutions Act, 2013.
Complainant
A complainant is a person who lodges a complaint with the police or any other lawful authority. A complainant may be a natural or juristic person. The complainant plays an integral role in the continuance, withdrawal or termination of criminal proceedings. Under section 202 of the Criminal Procedure Code, a criminal proceeding may be terminated where the complainant fails to attend court. Equally, a complainant may withdraw the complaint before the court makes a final order in the matter.
Police
The police play an integral role in the prevention, investigation and detection of crimes. The criminal justice process often begins with the police. In exercising their authority to prevent crimes, police officers arrest and process the suspect for purposes of arraignment before court. In their investigative role, the police get to process, evaluate and tender evidence that is crucial in criminal proceedings. They also play a crucial role in obtaining and processing witnesses.
Witnesses
A witness is a person who, as result of having present, observed, experienced or dealt with an event or thing, is able to give an account of it in a court of law. Witnesses play a crucial role as it is their testimony that aid the court to arrive at a decision
Judges or Magistrate
Judges and magistrates represent the authority and integrity of the judicial adjudicative process. Their role is to apply the law and ensure that justice is achieved in the criminal process.
JURISDICTION AND HIERARCHY OF COURTS
Introduction
The Courts in Kenya have jurisdiction over any criminal acts and omissions committed within the borders. Where an offence occurs partly within Kenya and partly outside, it will be treated as an offence under Kenyan law for which the courts have jurisdiction. Ordinarily, an offence should be tried within the local jurisdiction in which it is has occurred. In case it is unclear as to where an offence occurred, or offences occurred in more than one area, the offence may be tried by any court having jurisdiction over one of those areas.
Definitions
Jurisdiction is the right to use power of an official body to make decisions on questions of law.
Hierarchy is a system by which members of an organization are grouped and arranged according to higher and lower ranks.
Types of jurisdictions.
Geographical/ territorial- the jurisdiction to hear and determine cases is defined by law based on designated areas.
Pecuniary/ monetary- the jurisdiction to hear and determine cases is defined by law based on designated financial value -levels.
Original- the jurisdiction of a court to hear the case the first time.
Inherent-the jurisdiction for a specific court to hear specific types of cases
Appellate- the jurisdiction of a court to hear a case the second time (on appeal)
1st instance- the jurisdiction of a court to hear the case for the first time
2nd instance- the jurisdiction of a court to hear a case the second time (on appeal)
Limited- jurisdiction is restricted to certain conditions.
Unlimited- jurisdiction is the authority to adjudicate matters without conditions.
Hierarchy of Courts
Supreme Court
The Supreme Court is established under article 163 of the Constitution and consists of the Chief Justice, deputy Chief Justice and five other judges. The Supreme Court is properly constituted for proceedings when it has five judges. The decisions of the Supreme Court are binding to all Courts other than the Supreme Court. The jurisdiction of the Court is as provided to include:
Exclusive original jurisdiction to hear and determine disputes relating to the elections to the office of President.
Appellate jurisdiction to hear and determine appeals from the Court of Appeal and any other court or tribunal as provided by law.
The Court may give an advisory opinion at the request of the national government, any State organ, or any County government with respect to any matter concerning county government.
Criminal Jurisdiction of the Supreme Court.
The Constitution does not expressly allude to the Supreme Court as having criminal jurisdiction. Rather, under Art. 163(3) (b) as read with clauses (4) & (5) thereof, the Constitution vests general appellate jurisdiction on the Supreme Court to hear and determine appeals from:
The Court of Appeal;
Any other court or tribunal as prescribed by national legislation
As far as appeals from the Court of Appeal to the Supreme Court are concerned, they:
lie as of right in any case involving the interpretation or application of the Constitution; and
lie in any other case in which the Supreme Court, or the Court of Appeal, certifies that a matter of general public importance is involved.
Similarly, section 15 of the Supreme Court Act, 2011 provides that appeals to the Supreme Court shall be heard only with the leave of the Court. Leave to appeal shall be granted where the court is satisfied that it is in the interest of justice for the Supreme Court to hear and determine the proposed appeal. Some of the instances when it is in the interest of justice to hear the appeal include appeals involving a matter of general public importance or a substantial miscarriage of justice may have occurred or may occur unless the appeal is heard. The decision of the Court of Appeal in respect of application for leave may be reviewed by the Supreme Court and either affirmed, varied or overturned. An application determining leave to appeal may be heard by two or more judges.
In the case of Hermanus Phillippus Steyn v Giovanni Gnecchi-Ruscone the Supreme Court set out the principles governing certification of matter as of general public importance as follows:
For a case to be certified as one involving a matter of general public importance, the intending appellant ought to satisfy the court that the issue to be canvassed on appeal is one the determination of which transcends the circumstances of the particular case and has a significant bearing on public interest;
Where the matter in respect of which certification is sought raises a point of law, the intending appellant ought to demonstrate that such a point is a substantial one, the determination of which would have a significant bearing on public interest;
Such question or question of law must have arisen in the lower court and must have been the subject of judicial determination;
Where the application for certification has been occasioned by a state of uncertainty in the law arising from contradictory precedents, the Supreme Court could consider either to resolve the uncertainty as it may determine, or refer the matter to the Court of Appeal for its as determination;
Mere apprehension of miscarriage of justice in a matter most apt for resolution in the lower superior courts is not a proper basis for granting certification for an appeal to the Supreme Court. The matter to be certified for a final appeal in the Supreme Court ought to fall within the terms of article 163(4)(b) of the Constitution;
The intending applicant has an obligation to identify and concisely set out the specific elements of general public importance which he or she attributed to the matter for which certification was sought;
Determinations of fact in contest between parties are not by themselves a basis for granting certification for an appeal before the Supreme Court.
The import of the foregoing is that the Supreme Court has appellate jurisdiction in criminal matters certified as involving a matter of general public importance or a substantial miscarriage of justice may have occurred or may occur unless the appeal is heard. The case of R v Ahmed Abolfathi Mohammed Petition 39 of 2018 is an illustration of the Supreme Court exercising appellate jurisdiction in criminal matters.
Court of Appeal
The Court of Appeal is established by article 164 of the Constitution as a superior court of record and has appellate jurisdiction in appeals from the high court and any other tribunal as may be prescribed by law. The Court of Appeal shall consist of a minimum of twelve judges. Section 3 of the Appellate Jurisdiction Act sets out the jurisdiction of the Court of Appeal to include;
Hear and determine appeals from High Court and any other court or tribunal prescribed by law in cases in which an appeal lies to the Court of Appeal under law.
For the purposes of and incidental to the hearing and determination of any appeal, the Court of Appeal shall have in addition to any other power, authority and jurisdiction conferred by the Act, the power, authority and jurisdiction vested in the High Court.
In the hearing of an appeal the law to be applied shall be the law applicable to the case in the High Court.
For the purpose of any final determination by the Court of Appeal other than the summary dismissal of an appeal, the number of judges sitting to hear the matter be an uneven number not less than three.
Criminal Jurisdiction of the Court of Appeal.
The Constitution does not expressly confer criminal jurisdiction on the Court of Appeal. Rather, the Constitution confers general jurisdiction on the Court of Appeal to hear appeals from:
the High Court; and
any other court or tribunal as prescribed by an Act of Parliament [Art. 164(3)].
The Appellate Jurisdiction Act, Cap. 9 elaborates
that the Court of Appeal has jurisdiction to hear and determine appeals from the High Court in cases in which appeals lie to the Court of Appeal under law; and
that the Court of Appeal has in addition to any other power, authority and jurisdiction conferred by the Act, the power, authority and jurisdiction vested in the High Court [Section 3(1)&(2)].
Section 5(1) of the Act empowers the Rules Committee to make rules of court for regulating the practice and procedure of the Court of Appeal with respect to appeals and also for regulating the practice and procedure of the High Court. Subsection 5(2)(c) introduces the issue of criminal jurisdiction by adding that the aforesaid rules may include rules for prescribing cases in which and the conditions upon which an appellant in a criminal appeal to the Court shall be entitled to be present at the hearing of the appeal.
The Court of Appeal Rules promulgated under the Appellate Jurisdiction Act make elaborate provisions vide Part III for Criminal Appeals from superior courts acting in both original and appellate jurisdiction in criminal cases and also stipulates the mode of invoking the appellate court’s jurisdiction in criminal matters.
The Court of Appeal also has jurisdiction to punish for contempt of court similar to the jurisdiction exercised by the High Court in that regard. Section 5(1) of the Judicature Act, inter alia, provides that the Court of Appeal has “the same power to punish for contempt of court as is for the time being possessed by the High Court of Justice in England”, and that such powers extend to upholding the authority and dignity of subordinate courts.
High court of Kenya.
Article 165 of the Constitution establishes the high court, as a superior court of record.
Its jurisdiction consists of;
Unlimited original jurisdiction in criminal and civil cases;
appellate jurisdiction in civil and criminal cases;
to determine whether a right or fundamental freedom in the Bill of Rights has been infringed, denied or threatened;
Jurisdiction to hear any question relating to the interpretation of the Constitution;
Supervisory jurisdiction over subordinate courts and any person, body, or authority exercising a judicial or quasi-judicial function.
section 362 of the criminal procedure code provides for revision of orders from the subordinate courts by the high court;
Section 4 of the judicature act provides admiralty jurisdiction in all matters arising on high seas, territorial waters, lake and other navigable waters in Kenya.
The High Court has five divisions namely:
Criminal division,
Civil division,
Judicial review and constitutional division,
Commercial and tax division, and
Family division.
Other Courts established under the Constitution with the same status as the High Court include, the Employment and Labour Relations Court and Environment and Land Court. The Supreme Court in R v Karisa Chengo & 2 Others held that the Environment and Land Court and the Environment and Labour Relations Courts cannot hear criminal matters.
Criminal Jurisdiction of the High Court.
The Constitution expressly confers original criminal jurisdiction on the High Court and such jurisdiction is unlimited [Art. 165(3) (a)].
The Criminal Procedure Code, Cap. 75 vests the High Court with appellate jurisdiction from decisions of subordinate courts of the first and second class made by those courts in exercise of their criminal jurisdiction and such appellate jurisdiction may be on matters of fact or law (Section 347).
The Judicature Act also vests in the High Court with admiralty jurisdiction in all matters arising on the high seas, or in territorial waters, or upon any lake or other navigable inland waters in Kenya (Section 4(1)).
Section 8(2) of the International Crimes Act, 2008 gives the High Court the jurisdiction to try crimes such as genocide, crimes against humanity and war crimes.
Subordinate Courts
The subordinate courts are:
the Magistrates courts,
the Kadhis’ court,
the Courts Martial and,
any other court or local tribunal established by an Act of Parliament.
Magistrates’ Courts
Section 5 of the Magistrates’ Courts Act, 2015 provides that a magistrate’s court shall be duly constituted when presided over by a chief magistrate, a senior principal magistrate, a principal magistrate, a senior resident magistrate or a resident magistrate. A magistrate’s court shall have and exercise such jurisdiction and power in proceedings of a criminal nature as may be conferred by the Criminal Procedure Code or any other written law.
Section 4 of the Criminal Procedure Code (Cap.75) provides that an offence under the Penal Code (Cap. 63) may be tried by the High Court, or by a subordinate court by which the offence is shown in the fifth column of the First Schedule to the Code to be triable. Equally, an offence under any law other the Penal Code (Cap. 63) shall be tried in the court mentioned by that law. Where no court is mentioned in the forgoing scenario, then the offence may be subject to the Criminal Procedure Code (Cap. 75) be tried by the High Court or by a subordinate court by which the offence is shown in the fifth column of the First Schedule to Code to be triable.
Unlike the High Court which may pass any sentence authorized by law for a criminal offence, a subordinate court may only impose a sentence depending on the rank of the presiding officer. The Judicial Service Commission may by notice in the Gazette extend the sentencing jurisdiction either generally or in relation to particular offences. Finally, a court may impose a lawful sentence combining any of the sentences which it is authorized by law to pass without offending its jurisdictional limit. The same applies in the case of imposition of consecutive sentences not withstanding that the aggregate punishment for the several offences may exceed the sentence that the court is competent to impose, provided that the aggregate does not exceed fourteen years imprisonment or double the usual length limit of that court.
Courts Martial
Courts Martial is established under article 169 (1) (c) of the Constitution. It shall consist of a judge advocate, at least five other members appointed by the Defence Court-martial Administrator if an officer is being tried and not less than three other members in any other case. The Court-martial may sit in any place, whether within or outside of the Republic of Kenya. The Court-martial tries cases against members of the Kenya defence forces and civilians subject to the Act for service offences.
International Criminal Court
The International Criminal Court is a permanent tribunal to prosecute individuals for:-
Genocide;
crimes against humanity;
war crimes;
The crime of aggression.
The court came into being on 1 July 2002, the date its founding treaty, the Rome statute of the International Criminal Court, entered into force. It can only prosecute crimes committed on or after that date.
The official seat of the court is in The Hague, Netherlands, but its proceedings may take place anywhere.
The court can generally exercise jurisdiction only where the accused is a national of a state party; or the alleged crime took place on the territory of a state party; or a situation is referred to the court by the United Nations Security Council. The court is designed to complement existing national judicial systems. It can exercise its jurisdiction only when national courts are unwilling or unable to investigate or prosecute such crimes.
The ICC accordingly determines under art.17(1) (a) and (b) of the Rome statute, the initial questions to ask are (1) whether there are ongoing investigations or prosecutions, or (2) whether there have been investigations in the past, and the state having jurisdiction has decided not to prosecute the person concerned.
In Joseph Kimani Gathungu v Attorney General & 5 others [2010] EKLR Ojwang J held that the ICC has jurisdiction in Kenya.
Resource Materials
Kiage P, Essentials of Criminal Procedure in Kenya, Law Africa Publishing (k) Ltd,2010.
Foster S, Criminal Law and Practice, Sweet and Maxwell, 2008.
Constitution of Kenya, 2010.
The Criminal Procedure Code Cap 75 Laws of Kenya.
The Penal Code Cap 63 Laws of Kenya.
The Supreme Court Act No.7 of 2011.
The Magistrates’ Courts Act, 2015.
The Kenya Defence Force Act, 2012.
The Appellate Jurisdiction Act Cap 9 Laws of Kenya.
Tuesday, October 8, 2024
LABOUR LAWS NOTES
Kenya Labour law: An introduction
What is Labour Law?
Labour law is a body of legislation under the Kenya employment act that defines your rights and obligations as workers and employers in the workplace. The Kenya Labour law (also spelled as "labor" law or called "employment law") mediates the relationship between workers (employees), employers, trade unions and the government. Collective labour law relates to the tripartite relationship between employee, employer and union. Second, individual labour law concerns employees' rights at work and through the contract for work. The labour movement has been instrumental in the enacting of laws protecting labour rights in the 19th and 20th centuries. Labour rights have been integral to the social and economic development since the Industrial Revolution. Employment standards are social norms (in some cases also technical standards) for the minimum socially acceptable conditions under which employees or contractors will work.
At Community level, labour law covers two main areas:
Working conditions, including working time, part-time and fixed-term work, and posting of workers
Information and consultation of workers, including in the event of collective redundancies and transfers of undertakings.
History of Kenya labour law
Kenya Labour laws arose due to the demand for workers to have better conditions, the right to organize, or, alternatively, the right to work without joining a labour union, and the simultaneous demands of employers to restrict the powers of workers' many organizations and to keep labour costs low. Employers' costs can increase due to workers organizing to achieve higher wages, or by laws imposing costly requirements, such as health and safety or restrictions on their free choice of whom to hire. Workers' organizations, such as trade unions, can also transcend purely industrial disputes, and gain political power. The state of labour law at any one time is therefore both the product of, and a component of, struggles between different interests in society.
The sources of Kenya labour law
The sources of labour law in kenya are found in statutes(Acts of Parliament), the constitution of kenya 2010, the common law and international treaties, principles and conventions.
the Acts of Parliament include the Kenya Employment Act, the Labour relations Act that regulates the relationship between trade unions and employers or employees and employers or employers' organisation, the Labour Institutions Act that creates the National Labour Board, the Commission of Inquiry, the Wages Councils (both the general and the agricultural wages council), the Directorate of Labour Administration and Inspection and the Employment Agencies under the Director of employments ambit.
the Constitution in its article 40 provides for the right to associate, article 41 right of workers, employers, trade unions and employers organisation and as well in its subsection 5 the right to collective bargaining. in its article 36 freedom of association, article 37 right to assembly, picketing and demonstration.
the common law principles also apply such as the tort of vicarious liability where the employer is responsible for the acts of an employee, civil actions in industrial accidents and also imposes a duty of the employer and employee such as confidentiality on the employee and the issue of compensation of part of the employer for injury or unfair termination of contract.
the Constitution in its article 2(5)(6)provides for the adoption of internationally generally accepted principles and the ratified treaties to for part of Kenyan law. these will include conventions of the international labour organization such as the minimum age convention, Equal Remuneration Convention etc. Customary law however does not apply.
The constitution of Kenya and labour laws
The KenyanConstitution contains several provisions of relevance to employment and labour law:
the right to equality;
protection of dignity;
protection against servitude, forced labour and discrimination;
the right to pursue a livelihood; and
protection for children against exploitative labour practices and work that is hazardous to their wellbeing.
It is important to interpret all labour legislation in light of the Constitution.
The Constitution deals specifically with labour relations, providing that everyone has the right to fair labour practices,and specifically the right
to form and join a trade union;
to participate in the activities and programmes of a trade union; and
to strike
Every employer, meanwhile, has the right
to form and join an employers’ organisation; and
to participate in the activities and programmes of an employers’ organisation.
Every trade union and every employers’ organisation has the right
to determine its own administration, programmes and activities;
to organise; and
to form and join a federation
Finally, every trade union, employers’ organisation and employer has the right to engage in collective bargaining.
Employment Act
The Kenya labour laws of 2007(Employment Act, Labour Institutions Act, Labour Relations Act, Occupational Safety and Health Act and Work Injury Benefits Act) replaced the Kenya Employment Act and Regulation of Wages and Conditions of Employment Act. lt establishes minimum terms and conditions of employment. Unlike the repealed Act, the new one defines a number of common terms – probationary contract, migrant workers, worst forms of child labour, dependant, forced or compulsory labour and HIV.
lt also provides for prohibition against forced labour, discrimination in employment on the basis of race, colour, sex, language, religion, political or other opinion, nationality, ethnic or social origin, mental or HIV status and sexual harassment.
lt deals with payment, disposal and recovery of wages, allowances and deductions of an employee. The major changes are that the employer cannot deduct employees wages exceeding two thirds. The previous law provided for deductions up to 50 per cent. Further, all employees are entitled to itemised payslips or salary statements. The law also provides for basic conditions of a contract of service – hours of work and annual, maternity and sick leave, housing, water, food and
medical attention. In the new provision, an employee is entitled to three months’ maternity leave. However, the employee shall not forfeit annual leave. The law introduces a 14-day paternity leave.
The legislation deals with termination and dismissal. For the first time, the law provides for payment of service pay for every year worked to an employee whose contract has been terminated. Further, the legislation provides that the Labour minister may require an employer to insure his employees against redundancy through an employment insurance scheme.
The employers are also required to justify termination of employment. The law introduces the concept of unfair dismissals. lt also regulates the engagement of children in employment. lt prohibits employment of children in any activity that constitutes child labour. It also sets the minimum age and conditions of employment of a child.
Employers are required to keep records and make them available for inspection. They are also required to notily the Director of Employment of vacancies, termination and abolition of offices. The law also outlines requirements for a foreign contract and sets out complaint procedures and jurisdiction in cases of disputes between the employee and
employer.
Labour Institutions Act
The law establishes institutions and organisations for the administration and management of labour relations the national Labour Board, the industrial Court, Committee of Inquiry, Labour Administration and Inspection, the Wages Council and Employment Agencies.
The law, however, does not apply to the Armed Forces, Kenya Police, Prisons Service, Administration Police and the National Youth Service.
National Labour Board
The members are appointed by the Minister for Labour and drawn from the most representative federation of trade unions and employers, independent members and Government officials. The boards role is to advise the minister on employment and labour, legislation, trade unionism and codes ofgood conduct.
It also advises on ILO issues, international or regional associations, systems of labour inspection and the administration of labour Acts, public employment service, productivity, appointment of wages councils and members of the Industrial
court.
Other issues include setting compensation benelits, manpower development, registration, suspension and cancellation of registration of trade unions and employers organisations.
Kenya Labour Laws: Minimum Employment Rights and Benefits under the Employment Act.
Hours of work – An employee is entitled to at least one rest day in every period of seven days.
Maternity Leave Provisions
Maternity Leave is for 3 months with full pay. Annual leave not forfeited on account of an employee having taken her maternity leave
Sick Leave in Kenya
Sick Leave in Kenya only available after 2 months of employment.
The minimum period of entitlement is seven days with full pay and seven days with half-pay for every twelve months, subject to production of a certificate of incapacity to work duly signed by qualified medical practitioner.
Paternity Leave in Kenya
Paternity leave in Kenya is two weeks with full pay. Paternity leave is only applicable to a man whose recognised wife delivers a baby. What this means is that paternity leave is not open to any man, but only those who are married and whose wives are recognised by the employers. "A male employer shall be entitled to two weeks paternity leave with full pay."
Annual Leave in Kenya
Annual leave in Kenya is 21 days with full pay. Annual leave is exclusive of public holidays, weekly rest days or any leave days stated by law (paragraph 9 of the Regulation of Wages (General) Order, subsidiary to the Regulations of Wages and Conditions of Employment Act).
Public Holidays in Kenya
Public holidays and weekly rest days (one per week) on full pay in addition to leave days. Where employees work on public holidays they are entitled to payment at double their wage rate in addition to their normal wage.
Public holidays in Kenya are;
New Year’s Day - January 01
Good Friday - April
Easter Monday - April
Labour Day - May 01
Madaraka Day - June 01
Mashujaa Day (Heroes Day) - October 10
Kenyatta Day - October 20
Jamhuri Day (Independence Day Kenya) - December 12
Christmas Day - December 25,
Boxing Day - December 26
The Evolution of Labor Law in Kenya
The genesis of labor law and practice can be traced to the 19th century when need arose for the colonial government to pass legislation to ensure adequate supply of cheap labor to service the emerging enterprises in agriculture, industry and in the service sector. Terms and conditions of employment were regulated by statutes and the common law. The law of contract in Kenya was originally based on the Contract Act, 1872, of India, which applied on contracts made or entered into before 1st of January 1961. The Indian Contract Act applied to the three countries Kenya, Tanzania and Uganda . Since then the Kenyan law of contract has been based on the English common law of contract, under the Kenyan Law of Contract Act (Cap. 23), section 2 (1).
With industrialization, towards the middle of the 20th century, an organized trade union movement was well established.
The first wage earners’ associations in Kenya can be traced back to the early 1940s and soon after the Second World War.
The first trade union regulation was made in the introduction of Ordinance No. 35 of 1939 that required all crafts organizations to apply for registration which they could be granted or denied depending on whether they had legitimate dealings consistent with government policy. The Ordinance also permitted any group of seven people to form a trade union and operate as one upon registration. Cancellation of registration under the Ordinance was not subject to appeal or open to question in a court of law (Aluchio 1998, 3).
In 1948, in order to gain complete hold on the wage earners organizations the government brought in a Trade Union Labor Officer, to be attached to the Labor Department with the duty to foster "responsible" unionism (Ananaba 1979, 3). In 1952 a more detailed piece of legislation was enacted for Trade Unions but again with significant omissions. It lacked necessary provisions for effective operation of trade unions. It did not legalize peaceful picketing or provide immunity against damages as a result of strikes. On the other hand, the government encouraged creation of staff associations and works committees since they fitted in its interests to confining workers’ organization to economic imperative alone and also lacked strike powers.
This rigid control of trade unions was maintained by the colonial government until the end. This notwithstanding, the movement was able to grow both in numerical strength and power. At independence the total number of following was about 155,000, 52 trade unions, with four centers formed and registered, namely, East African Trade Union Congress (EATUC), Kenya Federation of Registered Trade Unions (KFRTU), Kenya Federation of Labor (KFL) and Kenya Africa Workers Congress (KAWC).
Industrial confrontation arose not merely from traditional trade union activities, but also from the movement’s political role in the struggle for freedom from colonial domination, particularly after individual political leaders had been arrested and placed in detention.
On the threshold of independence however, both employers and trade unions, felt that it was vital for the infant nation to make economic process that capital and labor should work together in harmony: the incidence of strikes and lockouts had to be drastically reduced.
As a result, in October 1962, a landmark was established with the signing of the Industrial Relations Charter by the government of Kenya, the Federation of Kenya Employers and the Kenya Federation of Labor, the forerunner of COTU (K), the Central Organization Of Trade Unions (Kenya).
The Industrial Relations Charter spelt out the agreed responsibilities of management and unions and their respective obligations in the field of industrial relations, it defined a model recognition agreement as a guide to parties involved, and it set up a joint Dispute Commission.
The Industrial Relations Charter has been revised twice since then, but remained the basis for social dialogue and labor relations in Kenya throughout the years. Currently the “Charter” is under review again; the parties have already produced a draft Charter in 2001 that might be signed in the context of the overall Labor Law review.
With the set up of an Industrial Court in 1964, one additional basic cornerstone was laid for the development of amicable conflict resolution in Kenya.
The Labor Law Reform Agenda In May 2001 a Taskforce to review the Labor Laws was appointed by the Attorney General (Gazette Notice No. 3204), within an International Labor Organization project. The terms of reference for the Taskforce were:
To examine and review all the labor laws including the Employment Act (Cap.226); the Regulation of Wages and Conditions of Employment Act (Cap. 229); the Trade Unions Act (Cap. 233), the Trade Disputes Act (Cap. 234), the Workmen’s Compensation Act (Cap. 236), the Factories Act (Cap. 514) and make recommendations for appropriate legislation to replace or amend any of the labor law statutes; To make recommendations on proposals for reform or amendment of labor laws to ensure that they are consistent with the Conventions and Recommendations of the International Labor Organization to which Kenya is a party; and To make recommendations on such other matters related to or incidental to the foregoing. Major points of concern were:
Extension of the application of protective labor regulation into the informal sector; Harmonization of the Kenyan labor legislation within the East African Community; Merging and redrafting the different Acts in order to produce a user-friendly and comprehensive labor legislation for benefit the people; The elimination of remaining colonial heritage in employment relations and contracts; The introduction of an Industrial Court of Appeal to overcome contradicting jurisdiction between the High Court and the Industrial Court; Review registration procedures and trade union monopoly based on the Trade Unions Act (Cap. 233) in view of the ratification of the ILO Freedom of Association and Protection of the Right to Organize Convention, 1948 (No. 87); Review regulations on casual employees; Setting up of an administration system which promotes involvement and democratic participation of the social partners (role of the Labor Advisory Board, possible involvement of civil society concerned in specific fields, etc.); Review possible limitations of excessive powers and influence of the Minister for Labor in industrial relations; Creation of an efficient labor administration system (inspection pp.) which is capable of effectively enforcing the laws; Review the election procedures for trade union officials, and implement a system of directly elected workers’ representatives; The establishment of an affordable, not contribution based, workers social insurance scheme, complementing the National Social Security Fund; Promote equity and equality in employment by incorporating anti-discriminatory (gender, HIV/AIDS) provisions into the Employment Act (Cap. 226), and as well as provisions against discriminating sexual harassment. The tripartite Taskforce, comprising of members from the government, the trade unions (COTU) and the employers organization (FKE), officially handed over five new texts to the Attorney General in April 2004. The five drafts, when they reach their final version, will replace the existing legislation on Labor Law. These drafts relate to the following matters:
Draft on the Labor Relations Act: an act to deal with the registration, regulation, management and democratization of trade unions and employers organizations or federations, to promote sound labor relations through the protection and promotion of freedom of association, the encouragement of effective collective bargaining and promotion of orderly and expeditious dispute settlement, conducive to social justice and economic development and related matters. Draft on the Labor Institutions Act: an act for the establishment of Labor Institutions, to provide for their functions, powers and duties. This text introduces a system of labor courts with exclusive jurisdiction on labor matters. The act establishes Subordinate Labor Courts, as well as a National Labor Court. The latter is a superior court having the same authority, inherent powers and standing in relation to matters under its jurisdiction, as the High Court. Appeals on decisions from Subordinate Labor Courts lie in the National Labor Court. Second appeals lie in the Court of Appeal. This text also creates a National Labor Board, whose main duty is to advise the Minister on labor legislation and matters. Draft on the Employment Act: an act to declare and define the fundamental rights of employees, to provide basic conditions of employment of employees and to regulate employment of children. This act contains provisions on freedom from discrimination and from sexual harassment. Provisions on freedom from forced labor expressly domesticate ILO Forced Labor Convention, 1930 (No. 29) and the Abolition of Forced Labor Convention, 1957 (No. 105), both ratified by Kenya in 1964. Draft on the Occupational Health and Safety Act: an act to provide for the safety, health and welfare of persons employed, and all persons lawfully present at workplaces and related matters. Draft on the Work Injury Benefits Act: an act to provide for compensation to employees for injuries suffered and occupational diseases contracted in the course of employment, for insurance of employees and related matters. These texts do now have to follow the path towards adoption, which will hopefully be completed by the end of 2004. Other sources of labor regulationEmployment relations in Kenya are regulated by a number of sources: constitutional rights, as mentioned above; statutory rights, as set out in statutes and regulations; rights set by collective agreements and extension orders of collective agreements; and individual labor contracts.
These legal sources are interpreted by the Industrial Court, and in some cases by the ordinary courts (see above). A particularly important role to play has the tripartite Industrial Relations Charter that laid the foundation for an industrial relations system already prior to Kenya’s independence in 1963. International standards, especially ILO Conventions ratified by Kenya are used by the government and courts as guidelines, even though they are not binding.
Acts of Parliament in the realm of civil and criminal law, which have provisions that may have impact on individual and collective labor relations include the Contract Act, Local Government Act, Public Service Commission Act, the Children Act, laws concerning the Armed Forces, and legislation dealing with the establishment of parastatals.
The following Acts of Parliament form the labor legislation framework for the country: Employment Act (Cap. 226); Regulation of Wages and Conditions of Employment Act (Cap. 229), - Industrial Training Act (Cap. 237), - Workmen’s Compensation Act (Cap. 236), - Shop Hours Act (Cap. 231), - Mombasa Shop Hours Act (Cap. 232), - Factories Act (Cap. 514), - Trade Unions Act (Cap. 233),- Trade Disputes Act (Cap. 234); Companies Act (Cap. 486); Bankruptcy Act (Cap. 53); Merchant Shipping Act (Cap. 389); Export Processing Zone’s Act (Cap. 547); Immigration Act (Cap. 172); Pension Act (Cap. 189); Retirement Benefits Act (No. 3 of 1997); National Social Security Fund Act (Cap. 258); National Hospital Insurance Act (Cap. 255); Provident Fund Act (Cap. 191); Public Health Act (Cap. 242). In individual labor cases British common law is applicable up to now. The Judiciary Act (Cap. 16) of 1967, section 3(1) states: “The jurisdiction of the High Court and of all subordinate courts shall be exercised in conformity with:
a) The Constitution; b) subject thereto, all other written laws; including the Acts of the Parliament of the United Kingdom (…);
c) subject thereto and so far as the same do not extend or apply, the substance of the common law, the doctrines of equity and the statutes of general application in force in England on the12th August 1897, and the procedure and practice observed in courts of justice in England at that date:
Provided that the said common law, doctrines of equity and statutes of general application shall apply so far only as the circumstances of Kenya and its inhabitants permit and subject to such qualifications as those circumstances may render necessary.”
EMPLOYEE RIGHTS AND OBLIGATIONS
To obey reasonable orders. An employee is under Kenya law required to obey lawful and reasonable orders from his employer. Failure to do so is a ground for dismissal. In Konig v Kanjee Naranjee Properties Limited [1968] EA 233, Law JA noted that, ‘a master is entitled to dismiss his servant summarily for willful disobedience of his master’s lawful and reasonable orders, which is his duty to obey.’
In Karimi v KCB & Another, (2005) eKLR, the plaintiff declined to take up a transfer ordered by his employer and was dismissed. Kasango J held that this was a clear disobedience of his master’s lawful and reasonable orders and action taken by the employer to terminate the contract was appropriate. See also Njeru v Agip (K) Ltd [1986] KLR 480 where a failure to obey lawful instructions on how to work was held appropriate ground for dismissal
Where obedience of that lawful and reasonable order places the employee at grave risk to his person, dismissal for such a failure to obey would be inappropriate, see Ottoman Bank v Chakarian [1930] AC 277
RIGHTS AND OBLIGATIONS IN CONTRACTS OF EMPLOYMENT
Employees under Kenya law enjoy implied and statutory rights and owe implied and statutory obligations to their employers
Employers likewise have implied and statutory rights and owe obligations to employees
Employees rights are the employer’s obligations and vice versa
Duty of Obedience
In Pepper v Webb [1969] 1 WLR 514, a gardener used some expletives with words indicating lack of intention to obey the employer’s instructions. The refusal was held to be a breach of contract.
Obedience is required only for a lawful order; if it is not lawful, he need not obey it.
Orders that are reasonable have to be obeyed. Unreasonable orders need not be obeyed. To determine the reasonability of an order, principles of good human relations may be taken into account.
Duty of Care and Competence
To exercise reasonable care and competence in performance of his duties. Failure to exercise care and competence may lead to dismissal under Kenya law for incompetence.
“ When a skilled laborer, artisan or artist is employed, there is, on his part, an implied warranty that he is of skill reasonably competent to the task he undertakes, - spondes peritiam artis. Thus if an apothecary, a watch-maker, or an attorney be employed for reward, theye ach impliedly undertake to possess and exercise reasonable skill in theier several arts,” See Harmer v Cornelius (1858) 5 CBNS 236 at 246
It is an implied term of the contract of employment that an employee will exercise skill and care in the performance of his duties, and a breach of that term entitles the employer to claim damages in respect of the negligent performance of the work.
In Lister v Romford Ice [1957] AC 555 an employee of a company negligently injured a fellow employee in the course of their work. The injured employee sued the company and was awarded damages. The company’s insurers sued the employee under the right of subrogation in the company name. The court held that there was a breach of this duty and the company was entitled to indemnification from the employee for breach of this contractual duty
Duty of Trust and Confidence
An employment relationship is based on trust and confidence. An employee is required not to act in a way to destroy the trust and confidence inherent in the relationship
Thus, an employee must not disclose confidential information about the employer’s business to an unauthorised person.
STATUTORY REQUIREMENTS OF A CONTRACT OF EMPLOYMENT
All contracts of service must satisfy the requirements of the Employment Act, 2007. They must be written.
S. 9(1)(a) of the Employment Act requires that a contract of service for a period or a number of working days which amount in the aggregate to the equivalent of three months or more; or (b) which provides for the performance of any specified work which could not reasonably be to be completed within a period or a number of working days amounting in the aggregate to the equivalent of three months shall be in writing.
The employer is responsible to ensure that the contract is written, and contains the particulars of employment and ensure that the employee consents in the manner provided under the Act.
Written contract must contain (s.10) particulars of employment to be given within 2 months of service
Particulars required under Kenya law are:
• The name, age, permanent address and sex of the employee
• The name of the employer
• Job description of the employment
• The date of commencement
• The form and duration of the contract
• The place of work
• The hours of work
• The remuneration and details of other benefits
• Intervals of payment of remuneration
• Date on which the employee’s period of continuous employment began
Others required are:
• Any terms of conditions on leave, incapacity to work and pension and pension schemes
• Length of notice for termination
• The period of employment
• Details on place of work
• Any collective agreements which directly affect the terms and conditions of employment
Employer is required to keep records on particulars for 5 years after termination
Under s. 12, statement on the disciplinary rules applicable to the employee required, and must specify the person whom employee may apply incase of dissatisfaction in decision of the disciplinary body or any grievance
ESSENTIALS OF A CONTRACT OF EMPLOYMENT
Statute envisages oral or written, express or implied contracts of service, see s. 2 of the Employment Act
Essentially it is a contract, governed by the general rules of contract under common law, hence subject to ordinary rules of construction for contracts.
Law of contract however may be inappropriate for employment cases. Contracts are normally a single transaction documents – limited to a specific transaction. Employment cases concern a continued relationship for a long period of time with elements of trust and confidence.
Employment contracts thus are formed in the same manner as ordinary contracts.
Like other contracts under Kenya law, there must be an offer and an acceptance. The offer and acceptance may be subject to conditions
Wishart v National Association of Citizens’ Advice Bureaux Ltd, [1990] IRLR 393, claimant offered a job ‘subject to receipt of satisfatory references.’ References received were not satisfactory hence the offer was withdrawn. It was held that this was a conditional offer of employment and the defendants had an obligation to consider the references in good faith. The question of being ‘satisfactory’ was subjective.
There must be an intention to create legal relations, consideration and absence of vitiating elements e.g. mistake, illegality, misrepresentation.
If the terms of the contract are designed to avoid payment of income tax, the contract is illegal. See Mohammed Ghias Quereshi & Another Versus Paramount Bank Limited High Court Civil Suit No. 1557 of 1997 (Nairobi)
EXPRESS TERMS OF A CONTRACT OF EMPLOYMENT
Express terms are contained in the contract of employment entered into by the parties. These may include wages, salaries, commissions, bonuses, hours of work, nature of the duties, holidays, overtime, sick pay, pension schemes, insurance etc.
Variation – of the express terms of contract of employment require mutual consent. Express terms, like express terms of a contract cannot be unilaterally varied
Promotion to another level without change of any express terms of the contract does not mean a revision of the express terms of the contract of employment, See Chase v Barclays Bank [1990] KLR 595
Express terms are found in the individual contract of employment, statute and a collective bargaining agreement applicable to the employee. S. 28(1) sets out the minimum time allowable for annual leave in any contract of employment at not less than 21 working days; 29(1) sets maternity leave at 3 months, etc.
Breach of a contractual term may result in dismissal – s. 44 (3) empowers the employer to dismiss an employee “summarily when the employee has by his conduct indicated that he has fundamentally breached his obligations arising under the contract of service.” Fundamental breach is a factual assessment, with recourse to a Labour Officer allowed under s. 47(1) for complaint within 3 months
CONTRACT OF SERVICE
There must be a contract, either express or implied.
Why do we need a definition? Tort law doctrine of respondeat superior holds employer liable for the torts of an employee; while taxation statutes require employers to deduct certain taxes from wages/salaries to employees
Various tests formulated to establish existence of a contract of service under Kenya law
Control test
To what extent is a person under the direction and control of the other person with regard to the manner in which the work is done?
Formulated in Performing Right Society, Limited v. Mitchell and Booker (Palais de Danse), Limited [1924] 1 KB 762, where McCardie J opined at p.767 that, “It seems, however, reasonably clear that the final test, if there be a final test, and certainly the test to be generally applied, lies in the nature and degree of detailed control over the person alleged to be a servant .”
Ready Mix Concrete vs Minister of Pensions [1968] 2 QB 497, ‘control includes the power of deciding the thing to be done, the means to be employed in doing it, the time when and the place where it shall be done’ at 515.
Works best in contemporary employment situations.
E.g. CPC Industrial Products (K) Limited versus Samuel Kirwa Kosgei High Court Civil Appeal 7 of 2003 (Eldoret) “the place of work was the premises of the appellant; the work was assigned by an employee of the appellant, Mr. Wendo; and the supervision of the work was also done by the same employee of the appellant.”
See the definition of an employee under the Income Tax Act, Cap 470 – “… employer has the power of selection and dismissal of the employee, pays his wages or salary and exercises general or specific control”
Issues – what about professionals? Doctors, lawyers etc?
Integration Test
Formulated due to the pitfalls in the control test where the employee possesses skill that the employer does not have.
Stevenson, Jordan and Harrison Ltd v MacDonald and Evans [1952] 1 TLR 101 “Under a contract of service, a man is employed as part of the business and his work is done as an integral part of the business.” Denning L.J.
Useful for those instances of specialised employees e.g. doctors and nurses in hospitals where control test is inappropriate, e.g. in Cassidy v Ministry of Health (1951) 2KB 598, a resident surgeon in a hospital was held to be an employee, so that the hospital was liable for his negligence.
Multi Factor Test
No single factor is dispositive in defining employment status of a person
As the needs and practices at the workplace change, so too must the tests to be used in defining employment status.
Ready Mix Concrete (South East) Ltd v Minister of Pensions and National Insurance laid out three conditions necessary for a contract of service to exist.
• Provision of own work and skill in a performance of service for an employer
• Element of control exercisable by the employer
• Other terms of the contract are not inconsistent with the existence of a contract of employment
Multi Factor Test
1. The power of selection, the payment of wages, income tax, holidays and leave, power to suspend and dismiss
2. Mutuality of obligation and control and an irreducible level of personal service.
3. Factors such as
• Contractual provisions
• Degree of control exercised by the employer
• Obligation of the employer to provide work
• Obligation of the employee to do the work
• The duty of personal service
• Provision of tools, equipment, instruments
• Taxation arrangements
• Opportunity to work for other employers
• Welfare provisions
• Degree of financial risk assumed etc
Economic Reality or Entrepreneural Test
Analysis from a self-employed perspective – Is he in a business of his own?
Who bears the risk – the economic risk of being in business
Market Investigations vs Minister of Social Security [1969] 2 QB 173 – A company employed women on a part time basis to do market research. They could work as they chose, but according to a set pattern. Held to be employees
All relevant factors must be considered, none of the factors used are dispositive