COVID-19: IMPACT ON BUSINESSES AND INVESTMENTS IN KENYA
The World Health Organization (WHO) categorized the severe acute respiratory syndrome Coronavirus 2 (COVID-19) as a pandemic and our Government has announced bold measures to contain the spread of the virus in Kenya.
We live in increasingly turbulent and unpredictable times, and whilst it is early, the impact on our already fragile economy and businesses will be significant.
In this briefing, we discuss the following potential legal issues that may arise as a result of the COVID-19 crisis on businesses operating in Kenya:
- The potential difficulty and impossibility in performing existing contractual obligations and the operation of the ‘force majeure’ provisions in mitigating liabilities resulting from delayed or non-performance of these contractual obligations.
- The effects of the crisis on existing employment relationships, our guidance for employers during the affected period and any possible government measures that may be implemented to mitigate the socio-economic effects of the crisis.
- The impact of the crisis on the operations of businesses in Kenya, our guidance for business owners during the affected period and any possible government stimuli to stabilize and maintain the integrity of the business/economic environment.
- The challenges businesses may face in complying with their tax obligations during the affected period and our guidance for businesses in mitigating potential tax liabilities.
- The imminent impact on the real estate sector, the relationships between landlords and tenants and our guidance for the parties likely to be affected.
- The handling of personal data and sensitive personal data by businesses as data controllers and processors, and our guidance on compliance with the provisions of the Data Protection Act.
- The impact of the crisis on the supply and pricing of essential goods owing to consumer panic and our recommended government action.
- The potential effects of the crisis on the telecommunication industry, due to increased traffic, resulting from changes in business operations and potential lockdown; and our guidance for both telecommunication and general businesses.
Owing to the travel, import, export, transport restrictions and other measures being taken by governments across the world, there is a high likelihood that contracts entered into by parties may either be temporarily or permanently impossible to perform. In general, non-performance of obligations under a contract amounts to a breach of contract under Kenya’s Law of Contract.
However, a ‘force majeure’ clause, operating under the common law doctrine of ‘frustration’ may offer relief to contractual parties subject to various conditions, which we discuss here. Force majeure is a clause commonly found in commercial agreements, which states that one or both parties will not be liable for any delay in performance or non-performance of its obligations upon the occurrence of certain supervening events. The clause acts as a shield for parties that are unable to perform their obligations. However, the burden of proof lies on the person alleging non-performance or delayed performance on grounds of force majeure. The affected party must demonstrate impossibility of performance, show that the impossibility is linked to COVID-19 and that they could not reasonably foresee its occurrence. Reliance on a force majeure clause does not necessarily mean termination of the contract altogether and depending on the drafting of the clause, the performance of the contract can be suspended or be otherwise postponed for a certain prescribed period. We note that this is not a concept enshrined in law but is borne out of the contractual terms and conditions agreed by the parties. Force Majeure provisions cannot be implied into a contract.
During contract negotiations, parties generally agree on the events that constitute a force majeure event and COVID-19 despite being declared a pandemic, may not necessarily be covered under existing contracts. Consequently, it is important that contractual parties undertake various measures to mitigate potential contractual liabilities in the event that the effects of COVID-19 makes the contracts temporarily or permanently impossible to perform.
Guidance for Contractual Parties
- New Contracts: Depending on your contractual position (for example, as a supplier or a customer), ensure that your new contracts have a boilerplate clause on force majeure and consider whether the clause should include pandemics or curtailment of transportation services or utilities as a supervening event. Ensure that the clause provides for a notification requirement and deals with the issues that may arise if a force majeure event (such as COVID-19) occurs e.g. care of the project pending completion works. On the other hand, you may also rely on breach of contract where the contract does not contain a ‘force majeure clause’ and the counterparty does not or delays the performance of their contractual obligations.
- Existing Contracts: Parties should review their existing contracts to identify whether their force majeure clause covers pandemics such as COVID-19 and the notification requirements and remedies agreed between parties. In the event that the contracts do not have provision for pandemics, parties should initiate mitigation measures such as amending/varying or entering into consensual agreements on potential liabilities that may arise. In addition, businesses should initiate the force majeure requirements under their existing contracts such as notifying their counterparties, in the event of delayed or impossibility of performance.
- Commercial Mitigation: Parties should take pro-active steps to mitigate their commercial risks as a result of COVID-19 event and prepare for the interruption of their operations or those of their commercial counterparties arising from impossibility to perform existing contracts.
Note: We believe that a proper assessment of the impact of COVID-19 on the contractual obligations of parties requires a case-by-case/contract-by-contract analysis and companies should conduct a full review of their contracts to assess their risk.
We believe that COVID-19 will have various effects on the existing employment contracts/relationships, as well as on independent contractor arrangements. We highlight the various legal issues that are likely to arise amid the outbreak as follows:
- Sick Leave: WHO and Government agencies have been recommending 14-day quarantine periods for people likely/suspected of having been in contact with the virus. The Kenyan Employment Act stipulates that only employees who have been in employment for two consecutive months are entitled to sick leave. It further provides for a 7-day sick leave with full pay and a further 7 days with half pay, each year. However, the Regulation of Wages (General) Order provides for up to 30 days sick leave on full pay and a further 15 days sick leave with half pay in each year. Employees may seek to rely on the more favourable provisions under the Order as opposed to the Act. If the Act is followed, it would mean that employees who self-quarantine will likely not be entitled to a fully paid sick leave during the period, as well as employees who have not been in employment for two consecutive months.
- Workplace Safety: The Occupational Health and Safety Act imposes a duty on employers to ensure the safety, health and welfare at work for all persons working at the work place. The Act imposes a legal obligation on employers to take various measures to protect their employees from the spread of COVID-19.
- Salary Reductions: An employer cannot unilaterally change the terms and conditions of an employee’s engagement where such a change is detrimental to the employee. If an employer wishes to implement salary reductions, it would need to obtain the employee’s written consent. Where an employer unilaterally implements such changes, the employee may succeed in a claim for constructive dismissal.
- Redundancy: It is likely that a number of employers will need to declare certain employees redundant. The Employment Act contains specific provisions on the procedure that must be followed when declaring employees redundant. The associated tax implications of any payouts would also need to be considered.
- Place of Work: The Employment Act requires that employment contracts should state the place of work and it is likely that many existing employment contracts have place of work provisions. Where employees opt to work from home or remotely from work because of the outbreak, they are likely to be in breach of this provision under their employment contracts unless it has been agreed upon between the employer and employee.
- Performance: Certain employment contracts may require their employees to travel for work and we anticipate that such employees may be unable or find it impossible to perform their employment obligations due to the travel restrictions and territorial lock downs across the world.
Independent Contractors: We do not have statutory requirements for contracts with independent contractors and general contract laws govern such contracts. Therefore, our guidance on these contracts is the same as the section above on contractual obligations.
Guidance for Employers:
- Sick Leave: Employers may enter into addendum contracts temporarily waiving the sick-leave provision and providing a fully paid 14-day sick leave for employees who may require to be in self-quarantine. We note that although this may affect employers’ cash flow, it is a necessary step to ensure that affected employees enter into self-quarantine and for both their safety and that of the workplace. Alternatively, employers may take the decision to rely on the Regulation of Wages (General) Order in payment of sick leave.
- Place of Work: Employers should waive their rights under employment contracts by entering into temporary agreements/addendums allowing employees to work at home to mitigate the risk of spread of COVID-19 at the workplace. In addition, as far as it is practical, employers should deploy online means of conducting business between its employees, and clients. However, we recognize that this guiding point may be difficult for employees who may not be able to work remotely such as industrial employees.
- Workplace Safety: Employers should conduct trainings, prepare information charts and regularly circulate safety/health information to its employees with respect to COVID-19. Employers should also provide health and safety materials at the work place such as sanitizers, for use by employees to be legally compliant with workplace safety laws.
- Redundancy: Employers must ensure that they follow the specific provisions outlined in law in effecting a redundancy. The most important part of a redundancy exercise is ensuring transparency throughout the process. Employers should bear in mind when considering declaring employees redundant that there are 2 distinct notices that must be issued, the first of which cannot be paid in lieu. Where employees are members of a trade union, a slightly varied procedure applies.
- Salary Reviews: To the extent possible, we would recommend no changes to a salary structure. If the employer has no option, the employer must obtain the employees’ consent to legally reduce their salary.
- Reduction in Hours of Work: To the extent such a reduction in working hours will be associated with a salary reduction, the employer must obtain the consent of its employees.
- Forced Leave: Depending on the employer’s policies and employment contracts, it may be possible to require employees to take annual leave at a specific time.
Recommended Government Action:
In the event that the Executive and Parliament pass policies and legislation to mandatorily require employment benefits such as enhanced sick leave, they should consider the impact of compliance on business cash flows and bottom lines by taking balancing measures such as payroll tax cuts or corporate tax cuts to offset the increased expenses.
Due to the globalization and interconnectedness of the business world today, the measures taken by governments across the world are likely to result in minimal movement of people and goods, affecting business operations in Kenya. As COVID-19 appears to have originated in China, often referred to as the “factory of the world”, the impact on supply chains is likely to be significant. It has already been estimated that imports from China into Kenya in the first two months of this year have reduced by US$ 580 million.
A reduction in the movement of people and goods means that we are likely to have reduced foreign investments, transactions and supplies. In addition, the low economic environment is likely to lead to business failures, insolvency cases, debt and mortgage repayment default, layoffs/redundancies, profit warnings by public companies as well as lack of credit access due to the strain caused on financial institutions by loan defaults and diminished cash flows/deposits. Further, we anticipate in a worst-case scenario the shutdown/slowdown of government services will make it difficult for businesses to obtain relevant permits, approvals and comply with other statutory obligations. Notwithstanding the potential shutdown/slowdown, we think that businesses may find it difficult to comply with statutory obligations such as annual reports and tax filings due to the strain on their operations and human resources.
We briefly highlight below measures that businesses can take and recommended rescue measures that the government can take to mitigate the ripple effects of COVID-19 on business operations:
Guidance for Businesses
- Conduct a proper review and assessment of your business to understand the risk and potential impact of COVID-19 on your operations and financials; and take appropriate mitigating measures.
- Review all your contractual obligations and communicate with your contract counterparties on the potential impact of the crisis on your performance of the contract obligations; and possibly reach a consensual agreement on future performance.
- Review your financial obligations under existing loan agreements and your ability to perform those obligations in light of an imminent reduction in revenue/profits; and engage with lenders on possible variation of existing terms.
- Review your cash flow practices, immediately take measures to ensure the survival of the business in a low business environment, and in what is likely to be a strained credit market.
- Ensure that you consult your relationship partner at Bowmans before taking any mitigation measures that may result in legal liabilities such as layoffs/redundancies, non-performance of contracts.
Recommended Government Action
Note: Due to the current state of the Kenyan economy, we do not anticipate an aggressive fiscal or monetary stimulus (if any), thus the following recommendations are subject to the discretion of Parliament and the Executive; and businesses should consider mitigating micro-economic measures within their control.
- Adopt a fiscal stimulus package for all businesses and special stimulus for business sectors likely to be heavily affected by the COVID-19 crisis. This may include a temporary reduction of corporate taxes, zero-rating of essential supplies, coordinated customs reduction, reduction/scrapping of excise duties/taxes on the flow of money and payroll tax cuts to prevent layoffs and enable businesses to improve their employee benefits during the crisis.
- Adopt a monetary stimulus to ensure that businesses will have available and affordable credit access to keep operating and pay their employees. This may include a temporary and statutory moratorium on debt/mortgage payments, increased overnight lending to banks and reduction of interest rates by the Central Bank, In addition, the government could set up an emergency business fund to empower local suppliers.
- Adopt and enhance online government services. This is the time for the government to implement the digital government services plans/policies to enable businesses to comply with their statutory obligations efficiently even in the event of a complete shut-down of government services in a worse-case scenario.
- Temporarily scrapping off late compliance penalties/interest and announcing a waiver of obligations, due to the potential increase in challenges in operations and human resources for businesses e.g. late payment interest and late filing penalties for tax filings, annual reporting, and renewals of licenses/permits/certificates.
- Vigilant monitoring by regulators. We anticipate attempts by businesses to engage in restricted trade practices at the detriment of other businesses amid the crisis and to ensure the integrity of the business environment, regulators such as the competition watchdog should stay vigilant. In addition, the looming strain on the financial markets needs the full vigilance of the financial regulators to prevent the collapse of our financial institutions, including regular worst-case scenario stress testing.
Notwithstanding the crisis, businesses are still required to comply with their tax obligations under the Tax Laws unless there is a change in law or policy by the government. We highlight various mitigating measures under the existing tax framework that businesses can take in order to be compliant:
Guidance for Businesses
- Extension of time to submit returns: Where a business is unable or foresees challenges in submitting tax returns due to operational challenges, the Tax Procedures Act (the TPA) allows for the extension of time to submit the returns. Businesses requiring this extension should make the application in writing to the Kenya Revenue Authority (the KRA) at least fifteen (15) days (for monthly returns e.g. employment taxes, Value Added Tax (the VAT), withholding (WHT)) and thirty (30) days (for annual returns e.g. corporation tax) before the due date. This further exempts the business from late submission penalties. However, we note that an extension of time to submit returns does not alter the date for payment of the taxes due.
- Extension of time to pay tax: Where a business is unable or foresees challenges in paying their taxes in time, the TPA allows for the extension of time to pay the taxes. Businesses requiring this extension should apply in writing to KRA seeking for either an extension of time or an arrangement to pay the taxes in instalments to avoid incurring late payment interest.
- Objections/Appeals to Tax Decisions: We note that the TPA imposes time limits for the lodging of objections against KRA’s tax decisions and appeals to both the High Court and Court of Appeal. While there is a directive by the Chief Justice (CJ) on the suspension of operations of the Judiciary (including Tribunals) with the exception of urgent matters, there is yet to be guidance on what constitutes an urgent matter. We therefore recommend that aggrieved tax payers should attempt to lodge their cases subject to further directions by the respective registries.
- Execution/Enforcement measures by KRA: The CJ has directed the suspension of executions, specifically with respect to KRA. However, we note that the TPA does not give the CJ the power to direct the KRA on its tax enforcement measures and we recommend caution on the part of tax payers. It remains to be seen whether the KRA will issue a statement on this directive and other tax related matters in the interim.
We believe that the effects of the COVID-19 will be felt in the Kenyan real estate sector. We anticipate the following issues to arise for both landlords and tenants; and highlight various mitigation measures below:
- Closure of the Lands and Collateral Registries: This will have an impact on transactions due to challenges in the registration of instruments/documents and related matters. Further, borrowers may see delays in obtaining facilities from banks, as the bank will not be able to perfect the securities obtained from the borrower.
- Default of Lease/Rent Obligations: The crisis may lead to the country being potentially locked down and accordingly, commercial tenants may not be able to access their leased premises. In such a scenario, would commercial tenants have the right to withhold payments of their rental obligations? In order for a commercial tenant to withhold payment of rental obligations, they would need to prove frustration. There would need to be clear cut events which would allow the tenant to rely on the doctrine of frustration, to withhold the payment of rental obligations. Nonetheless, the ability of the commercial tenants to rely on the doctrine of frustration would be governed by the terms of the underlying lease.
- Suspension and Keep Open Clauses: In some commercial leases, there may be direct clauses with respect to suspension of rent upon the occurrence of a certain event. In addition, the leases may contain “keep open” clauses, which the tenant may not be able to perform during a lockdown.
- Landlord representations: We also note that landlords should err with caution in making representations to their tenants during this time, owing to the doctrine of promissory estoppel. For example, a landlord making a representation on the possibility of suspension of rent during the subsistence of a lockdown, would be bound by such a representation and may not later claim for unpaid rent from the tenant.
- Construction: The effects of the crisis will likely lead to difficulties in the performance of construction contracts and businesses in the construction will need to undertake mitigation measures to eliminate or reduce potential losses and liabilities.
Guidance for Businesses
- It would be advisable for commercial tenants to review the terms of their lease, to see if there are any clauses with respect to either withholding or suspension of rent. If the leases provide for either the withholding of rent or suspension of rent, then the provision would need to be analyzed to assess if it can be operationalized during this time. If the leases are silent on this, it is advisable for commercial tenants to continue to perform their obligations, to avoid being in breach of the terms of the lease.
- Landlords should seek legal advice from their relationship partner at Bowmans before making any representations to their tenants, as these may become binding due to the doctrine of promissory estoppel.
- The terms of existing building contracts would need to be reviewed to see if the force majeure events cover pandemics and assess if, in particular COVID- 19 may directly make it impossible for the parties to perform their obligations. For new building contracts, parties may include provisions to deal with the allocation of risk of delays caused by pandemics. For new JCT contracts, it may be wise for parties to include bespoke amendments to allocate the risks of any delays caused by pandemics or rely on the existing time extension clause, allowing the contractor extra time to complete construction works, in the event the government or local authority exercises statutory powers that may directly affect the execution of works.
Information that will be collected will include information about the health status of an individual (data subject) including whether they tested positive or negative, travel information, information about those individuals who have self-isolated and in certain instances, information about family members who have self-isolated or who have shown symptoms. This information will be considered as personal data under the Data Protection Act of Kenya (DPA) and the health data collected is considered as sensitive personal data under the DPA. The collection and processing of personal data and in particular sensitive personal data will be subject to various legal restrictions that businesses must adhere to. Under the DPA, businesses should only process personal data if they have in place appropriate safeguards and the processing is done for legitimate purposes. In addition, where health data is collected, it should only be processed by or under the responsibility of a health care provider or by a person subject to the obligation of professional secrecy under any law. Under the DPA we note however, that this condition may be met if it is necessary for reasons of public interest in the area of public health. Lastly, the processing of sensitive personal data out of Kenya should only be effected upon obtaining the consent of a data subject and on obtaining confirmation of appropriate safeguards although businesses may be exempt from this obligation under the public interest exemption.
Although the DPA provides for this public interest exemption, which we consider the COVID-19 pandemic is covered under, it does not exempt business from compliance with the data protection principles and as such, we recommend the following guidance for businesses:
Guidance for Businesses
- Businesses should only collect information of their employees if it is strictly necessary and essential to its operations and safety of the work place.
- Where businesses collect the health information of their employees, they should ensure that they have in place appropriate data security measures such as encryption to protect the data collected.
- Where businesses wish to transfer the health data of their employees outside the country, they should ensure that they have appropriate data security measures for the transfer and that the recipient of the data has appropriate safeguards and commits to the security of the data.
- Businesses should check their privacy notices and employment contracts to ensure that the proposed collection and processing activities align with their contractual documentation. In the absence of any documents, privacy notices should be put in place to address the proposed activities.
In the various countries where there has been an outbreak of COVID-19, there has been consumer panic that has led to a run on essential products. We believe there is also a likelihood of suppliers overpricing essential goods, creating artificial shortages of supplies to the detriment of fair competition among businesses. These actions are likely to hurt businesses that depend on the affected supplies leading reduced profitability, supply chain disruptions, et al. To ensure that the business environment remains competitive and there is fair dealing between business parties, we recommend government action as follows:
Recommended Government Action
- The government should invoke the Price Control (Essential Goods) Act passed in 2011 to allow them to regulate the prices of essential commodities, to maintain the integrity of the market with respect to the sale/supply of essential goods in the market. We note that the Act allows the National Government to declare any goods to be essential commodities.
- The Competition Authority of Kenya should vigilantly monitor the market especially for, unjustified price hikes, hoarding and essential goods, and take regulatory action against businesses engaging in restricted trade practices. The CAK has already taken its first action today in respect of price escalations at a supermarket. Suppliers of goods (at manufacturing, wholesale and retail level) should be very cautious of increasing prices of goods.
Increased home stays and remote conduct of business and transactions due to the COVID-19 pandemic means that the country’s telecommunications sector will be burdened and strained in the coming weeks. We are likely to see increased phone calls, messages, use of the internet and heavy media consumption. This may result into operational strains for telecommunication businesses in their compliance with the statutory duty to provide quality service and may invite the jurisdiction of the Communications Authority of Kenya.
Guidance for Telecommunication Businesses
- Telecommunication businesses should monitor their networks and traffic to ensure that they comply with the statutory license conditions on quality of service.
- Telecommunication businesses should stay in constant communication with the Communications Authority on any abnormal spikes of traffic and work together with the Authority to mitigate any potential network failures/outages.
Guidance for General Businesses
- Where a business implements ‘work-at-home’ policies and online means of business, it should ensure that existing contracts with telecommunication/internet companies offer adequate performance warranties to ensure their continuity and minimizes disruptions in operations during the affected period.
- Businesses that do not have existing contracts should enter into new agreements for the provision of internet/telecommunication businesses with the necessary warranties to ensure their continuity and minimizes disruptions in operations during the affected period.
Recommended Government Action
The CA should remain vigilant and conduct worst-case scenario stress testing of the country’s telecommunications sector to ensure that even in the worst case, subscribers can remain connected and continue conducting business. In addition, the CA should work closely with the Central Bank to ensure that the mobile payment systems interconnected with the telecommunication sector do not pose a huge system risk to the national financial market.
We have only discussed a few consequences of the COVID-19 on the Kenyan business environment. As our world copes with this pandemic, developments on legal issues affecting business will occur rapidly. Our dedicated teams at Bowmans, in Kenya and in our offices in Africa, will keep you updated on the impact of COVID-19 in the coming days and weeks, as the developments occur.
As per His Excellency Uhuru Kenyatta’s directive, the government and private sector should work together to develop and implement response measures to the COVID-19 crisis both innovatively and constructively. This is not a time for businesses to panic, but a moment for businesses to build resilience and work together to ensure a stable business and economic environment.