Court distinguishes between casual and piece work employees and circumstance when their terms of employment may be varied
Krystalline Salt Limited v Kwekwe Mwakele & 67 others
Civil Appeal 79 of 2015
Court of Appeal at Mombasa
A Makhandia, W Ouko & K M’Inoti, JJA
February 17, 2017
Reported by Nelson Tunoi
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Employment Law – contract of service – conversion of terms of employment – appeal against Employment and Labour Relations Court’s decision to convert terms of employment - whether the Respondents were employed by the Appellant on regular contracts of service or were piece-work employees – whether it was proper to convert the terms of employment of the Respondents from the piece rate work to term contract – whether the appeal had merit - Employment Act, 2007, sections 2, 18(1)(b), 35(1)(c), 37, 45 and 49(1)(a)(c)
The Respondents filed a claim at the Employment and Labour Relations Court for unfair termination of employment by the Appellant. They sought for the determination of the nature and terms of employment relationship with the Appellant. It was the Respondents’ case that, from their relationship with the Appellant, they were employed under a contract of service and maintained that they worked every day of the week without leave for many years and that their services were unfairly terminated without notice and without terminal dues to which they were entitled. They sought for one-month salary in lieu of notice, severance pay, leave pay and underpayment. On the other hand, the Appellant maintained that the Respondents were engaged on a piece-work basis and were not entitled to notice before termination of their service as their work depended on availability of raw material; that although they worked every day up to, and including Saturday, they had in 10 days, one unpaid day of rest or in 20 days 2 days of rest.
The Employment and Labour Relations Court found that the Respondents were piece rate workers and went ahead to convert their services in terms of section 37 of the Employment Act, to term contract, basing that decision on the fact that they were recruited by the Appellant, served for long periods of time, supervised and subjected to disciplinary process of the Appellant and they had no freedom to work elsewhere. The Court further held that the alleged piece-rate pay was only a formula for calculating the wages intended to motivate high yield. The Court awarded a total sum of Kshs. 2,219,191.77 to all the Respondents for unlawful termination and unpaid leave, but dismissed the claims for severance pay and underpayment.
Aggrieved by the decision, the Appellant lodged the instant appeal.
- What was the difference between casual and piece-work employees and under what circumstance could the terms of employment be varied?
- Whether it was proper for the Employment and Labour Relations Court to rely on section 37 of the Employment Act to convert the terms of employment of the Respondents from the piece rate work to term contract.
- The words under the Employment Act had specific meaning. Whereas the Employment and Labour Relations Court may have used the phrase in contradistinction with casual or piece work, any contract of employment for a period of time, whether oral or in writing, express or implied or even a contract of apprenticeship and indentured learnership, all qualified as contracts of service. The Employment and Labour Relations Court ought to have determined in which category of employment the Respondents were engaged.
- In Kenya, employment was governed by the general law of contract as much as by the principles of common law enacted and regulated by the Employment Act and other related statutes. In that sense employment was seen as an individual relationship negotiated between the employee and the employer according to their needs.
- The Employment Act recognized four main types of contracts of service; contract for an unspecified period of time, for a specified period of time, for a specific task (piece work) and for casual employment. Piece work form of employment was defined in section 2 of the Employment Act to mean
- In a piece work or piece rate arrangement, the emphasis was on the amount of work and not the time expended in doing it. The decision to elect which form of employment to go for, either as an employee or employer would depend on a number of factors, but the dominant consideration was, for the employee, the earnings and other physical conditions of employment, and on the other hand, savings for the employer. An employee under piece work arrangement, though not entitled to all or some of the benefits of the other forms of employment, was at least entitled to minimum wage.
- The Respondents were engaged in a piece work form of employment. On a daily basis they packed salt and were paid in accordance with the amount of salt packed. As a general rule, where a contract of service related to piece work and the work was not completed at the end of the day, the employee, at the option of the employer could either be paid for the task which had been performed at the end of that day, or be permitted to complete the task on the following day. The other alternative was for the employee to be paid at the end of each month in proportion to the amount of work which he would have performed during the month or on completion of the work, whichever date was earlier.
- By the very nature of such form of employment, the engagement could go beyond a day. If it did, then the employee had to be paid the next day and if, for a longer period the payment was on a monthly basis in the proportion of the task performed for that period. The emphasis was not on the days the task was accomplished, but the task itself.
- Under section 35 of the Employment Act, a contract of service could be terminated upon either party giving notice in the following three circumstances based upon the intervals of payment of salaries or wages:
- A contract of service in which wages were paid on a daily basis was terminable by either party at the close of the day without notice.
- Where wages were paid periodically at intervals of less than one month, the contract would be terminable by a notice of not less than one month;
- Where wages or salaries were paid periodically at intervals of or exceeding one month, a notice of 28 days would apply.
The Respondents did the same kind of work on the production line of packing salt for periods ranging from one to five years. It was however unanimously agreed that, out of choice, they received their wages on a weekly basis and which, by the nature of their engagement, depended on the amount of work completed, varied from person to person.
- From its plain language, section 37 of the Employment Act applied to casual, as opposed to piece work employees. The Act made a clear distinction between the two forms of employment. Casual employment entailed engagement for a period not longer than 24 hours at a time and payment made at the end of the day. The Appellant had employees in both categories. Parliament indeed intended to draw the distinction and that was why section 37 did not mention piece work employees. Therefore, the Employment and Labour Relations Court erred in equating the two forms of employment and converting piece work employees to casual employees.
- While the Court appreciated the Employment and Labour Relations Court’s concern that the Respondents having worked for long as piece rate workers, their terms ought to have reflected that fact, such a course was not foreseen by the makers of that law. If Parliament intended the piece rate workers to benefit from the conversion like casual workers, it would not have been such a difficult thing. The determination by the Employment and Labour Relations Court should have been made under section 18(1)(b) of the Employment Act, which deals with intervals of payment, as read with section 35(1)(c), which provided for the manner of termination of various forms of employment.
- A piece rate worker would, in terms of sections 18(1)(b) and 35(1)(c) of the Employment Act, be entitled to a notice of 28 days before termination of service. Those were some of the reforms in employment relationship introduced by the Employment Act. Where an employee alleged that the termination was unfair, the evidential burden of proof shifted to the employer to demonstrate the existence of any of the circumstances enumerated under section 45 of the Act. The Appellant was expected to prove that the reason for termination was valid; that the reason was fair in so far as it related to the Respondents’ conduct, capacity or compatibility. The Appellant was similarly required to show that the termination was done in accordance with fair procedure.
- Whereas the Respondents argued that their services were terminated without any reason being assigned, the Appellant contended that they refused to work, demanding to be paid. The Court was not convinced that that was the true reason for termination. There was no evidence that the Respondents had been paid to warrant their refusal to work. The probable cause for termination of their service was the reduced operations at the Changamwe plant with the establishment of a new plant at Gongoni in Malindi. Therefore, the reasons for termination were not valid and termination was not done in accordance with fair procedure thus unfair. It did not, however, amount to a declaration of redundancy. Had the Respondents and Appellant worked out a proper transfer of service programme, the former would be willing to relocate.
- The remedies available for an unfair termination under section 49 of the Employment Act were varied and include the wages which the employee would have earned had the employee been given the period of notice to which he was entitled or the equivalent of a number of months’ wages or salary not exceeding 12 months based on the gross monthly wage or salary at the time of termination. Being piece rate work, the performance would vary from person to person. There was, however evidence that at the end of each day the Respondents would each be paid Kshs. 200, which would be consolidated and paid in lump sum on a Saturday as Kshs. 1,400, translating to Kshs. 5,600 per month.
- In terms of sections 35(1)(c) and 49(1)(a)(c) the Respondents were only entitled to be paid their wages for one month in addition to wages equivalent of a number of months not exceeding 12 months based on the gross monthly wage. The wages in question must be in tandem with the statutory minimum wage. The source or basis of Kshs. 467.20 per day used by the Employment and Labour Relations Court was not disclosed. The Employment and Labour Relations Court treated the Respondents as machine attendants as there was evidence that they used machines to seal and pack. The minimum wage per day for a machine attendant in Nairobi, Mombasa and Kisumu, according to the Regulation of Wages (General)(Amendment) Order, 2015 (May 1, 2015) was Kshs. 596.50. For each Respondent the one-month gross wage would have translated to Kshs. 17,895. But in the absence of cross-appeal, the Court could not disturb the ward based on Kshs. 467.20, as it did not have the rates for the period of the dispute.
Appeal allowed to the extent that the award for leave days set aside and substituted with an award of 3 months of the gross monthly wage in compensation in respect of the Respondents who had served for a period of 5 or more years. The awards subjected to statutory deductions pursuant to section 49 (2) of the Employment Act.
Case Updates Issue 005/2017
Court orders Cabinet Secretary for Devolution and Planning to appoint and gazette a commencement date for the Public Benefits Organisations Act, 2013
Trusted Society of Human Rights Alliance v Cabinet Secretary Devolution and Planning & others
Petition 351 of 2015
High Court at Nairobi
J L Onguto, J
October 31, 2016
Reported by Nelson Tunoi
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Constitutional Law – petition – petition seeking orders to gazette the commencement date for the Public Benefit Organizations Act, 2013 – whether the failure by the 1st Respondent to appoint a commencement date to bring into operation the Public Benefit Organizations Act was a contravention of the Constitution - whether the 1st Respondent by appointing a Task Force to review and suggest amendments to be effected to the Public Benefit Organizations Act prior to its commencement had acted in contravention of the principle of separation of powers - whether the petition had merit - Constitution of Kenya, 2010, articles 1, 10, 73, 94, 95, 116(2), 129 and 153(4); Constitution of Kenya (repealed), section 46
Statutes – legislation – legislation process – coming into force of statutes - when does the process of legislation come to an end for the implementation of a statute to commence – whether the failure to appoint a commencement date to bring into operation the Public Benefit Organizations Act was a contravention of the Constitution - Constitution of Kenya, 2010, articles 115 116
Parliament passed the Public Benefit Organizations Act, 2013 and it was assented to by the President on January 14, 2013. The 1st Respondent, a State Officer and a member of the Executive arm of government, was mandated by the Public Benefit Organizations Act, 2013 (Public Benefit Organizations Act) to appoint such date by way of a notice in the Kenya Gazette for the coming into operation of the Public Benefit Organizations Act. The 1st Respondent had not, since 2013, appointed the date for the commencement of the Public Benefit Organizations Act. On October 2014 the 1st Respondent appointed, through a Gazette Notice a Task Force of eleven persons to receive and review views on the proposed amendments to the Public Benefit Organizations Act, monitor the legislative process of amending the Public Benefit Organizations Act and also advice the 1st Respondent on the implementation of the Public Benefit Organizations Act. The said Task Force presented its report to the 1st Respondent on or about May 15, 2015.
The Trusted Society of Human Rights Alliance (the Petitioner), a non-governmental organization, filed the instant petition contending that Parliament having legislated and the President having assented to the Public Benefit Organizations Act 2013, the Respondents in failing or neglecting to gazette the commencement date of the Public Benefit Organizations Act 2013 were in violation of the Constitution. The Petitioner also contended that the delay in gazetting the commencement date was inordinate, unreasonable and inexplicable and the Respondents were consequently guilty of abuse of their offices and duties expressly extended to them by statute being the Public Benefit Organizations Act itself. The Petitioner further contended that the Respondents’ inaction was pursuant to an improper motive and ultra vires. The effect of the inaction had led to anomaly in the non-governmental organizations sector, which ought to be governed by the Public Benefit Organizations Act. The Petitioner submitted that the Respondents had no powers to decide the suitability or lack thereof of an Act of Parliament.
- Whether the neglect or failure by the 1st Respondent to appoint a commencement date to bring into operation the Public Benefit Organizations Act was a contravention or violation of the Constitution.
- Whether the 1st Respondent by appointing a Task Force to bring, review and suggest amendments to be effected to the Public Benefit Organizations Act prior to its commencement had acted in contravention or violation of the principle of separation of powers and thus inconsistent with the 1st Respondent’s constitutional powers and obligations.
- Whether the Non-Governmental Organisations Board has been properly constituted and, if not whether its decisions were void.
- When does the process of legislation come to an end for the implementation of a statute to commence? Read More...
- The transformative nature of the Constitution of Kenya, 2010 dictated that history be considered even as one sought to interpret the various provisions of the Constitution. History would reveal that the coming into force of statutes passed by Parliament prior to the 2010 Constitution was occasionally delayed by both Parliament and the Executive. The Executive would take a while to assent to and cause the Act to be gazetted. Parliament too would postpone the coming into operation of the law indefinitely. Section 46 of the Constitution of Kenya (repealed) seemed to condone such approaches and was then accordingly abused.
- The Constitution of Kenya, 2010 under article 116 sought specifically to address the mischief by seeking to ensure that the legislative process once commenced followed the prescribed process to a reasonable and logical conclusion and within a reasonable period of time. Time was prescribed in all the processes. Any interpretation of article 116 of the Constitution would dictate that a purposive approach be adopted. The rather implicit purpose of article 116 was to ensure that the legislative process was completed sooner than later.
- Article 259 of the Constitution of Kenya, 2010 expressly placed an edict on its interpretation. The Constitution was to be interpreted, inter alia, in a manner that promoted its purpose, values and principles. It was also to be interpreted in a manner that contributed to good governance. Thus, article 116(2) of the Constitution was to ensure that the legislative process was concluded with reasonable expedition and the people of Kenya, on whose behalf Parliament exercised legislative powers, were not left in an indefinite suspension.
- Since the Constitution of Kenya, 2010 was the supreme law of the land against which all laws or conduct was to be tested, its provisions should always be examined with a view to extracting from it those principles or values against which such law or conduct could be measured. The Constitution itself provided such values and principles under article 10 and they include good governance, which is also referred to under article 259. A simple literal approach may not necessarily assist in having the Constitution fulfil its purpose of nurturing certain values and principles for a future Kenya.
- While the presidential assent under article 115 of the Constitution of Kenya, 2010 concluded the formal process by which Bills become law, it was not correct to assume that the assent also marked the end of the legislative process. Parliament was enjoined to legislate even when a Bill did not automatically come into force pursuant to article 116(2) of the Constitution to stipulate which date or time the Act would come into force after gazettement.
- Where the power to legislate was delegated to the Executive, it could not be said that the doctrine of separation of powers, which was evidently flexible, had been violated. There could be created a tension as to the supremacy of the Constitution which grants Parliament the power to legislate and parliament’s autonomy in deciding to delegate, but such tension must be treated in context to ensure that the Constitution was not subverted and that the integrity of the legislative process was protected and preserved. That was done by ensuring that unnecessary delegation was not allowed. The reason for the delegation, if it could be discerned, would assist to baggy the tension. For various reasons, delegated legislation was an inevitable feature of modern government. Pressure of Parliamentary time and technicality of subject matter of legislation were the most common and known reasons.
- In the context of implementation of statute, it was not uncommon to delegate to the Executive the power to not only legislate various implementation provisions but also the commencement date as there could exist various practical reasons why a new Act should not come into effect as soon as the Presidential assent was given and the Act was gazetted. Parliament was also not expected to deal with all matters concerning implementation.
- The texture of Kenya’s Constitution contained nothing which expressly prohibited delegation of legislation to other bodies. Indeed, article 94(5) of the Constitution allowed provisions having the force of law to be made by persons other than Parliament where the Constitution or legislation expressly allowed. Delegated legislation and powers were also themselves subject to judicial review especially where the delegatee had attempted to obtain from Parliament greater powers to legislate than should have been given.
- Parliament by virtue of article 116(2) of the Constitution had the powers to legislate and state or stipulate the commencement date. Read purposively, Parliament could legislate and publish an Act and then in the Act itself also determine (legislate) that it would come into effect at a later date. Good governance would dictate that such method of enacting suspended legislation be applied when other preparatory work needed to be done before the Act came into operation. However, what was clear in such instances was that both Parliament and the people of Kenya, on whose behalf Parliament legislates, had an expectation that the Act would come into operation and such expectation should not be denied or defeated.
- Parliament could stipulate an exact date for commencement of the Public Benefit Organizations Act. Parliament could also delegate the stipulation of such date to another entity, as it did to the Cabinet Secretary. There was nothing unconstitutional in such delegation and the 1st Respondent was now expected to exercise both administrative and politico-executive powers in determining and appointing the date and no more.
- In legislating particularly a future date of commencement of an Act, Parliament was not expected to defeat the intention of legislation. It was expected under the Constitution to stipulate a date or time when an Act came into operation. Legislation should not be suspended indefinitely as that was the mischief that article 116(2) of the Constitution sought to cure. Likewise when such power was delegated, it should be exercised lawfully and with the intention of putting the Act into operation when it was capable of being given effect. To act otherwise would run contrary to the Constitution.
- Powers to legislate when donated by Parliament were not conferred in the abstract. The purpose ordinarily ought to be discerned from the legislation that was the source of the power. In the instant case, the purpose of the legislature in conferring power to the 1st Respondent was to bring the Public Benefit Organizations Act into force at an appropriate time. It was not Parliament’s intention to indefinitely suspend the operation and commencement of the Public Benefit Organizations Act. At the same time Parliament never intended to put the Public Benefit Organizations Act into operation before it was capable of being given effect. When such power was donated it should be exercised consistently with the Constitution and not arbitrarily. It should also be objectively rational. That is what the rule of law, which was provided for under article 10 of the Constitution, was all about. Decisions should never be arbitrary but must always be made rationally and related to powers being exercised.
- Parliament intended that the1st Respondent brings the Public Benefit Organizations Act into force at an appropriate time. It could neither be brought into force prematurely nor delayed indefinitely. Although the decision which was to be undertaken by the 1st Respondent was not exclusively administrative, it fell somewhere between the law making process in so far as the 1st Respondent had to legislate (determine) a commencement date and the administrative process in so far as the 1st Respondent had to consider relevant factors to help determine a date. The fact remained that Parliament and, indeed, every Kenyan including the Petitioner had a clear expectation that the Public Benefit Organizations Act would come into operation. Essentially, the 1st Respondent had to act.
- In the context of Kenya’s constitutional democracy and supremacy, the Executive clearly did not enjoy absolute discretion when it came to delegated legislation for purposes of implementing statute and in particular bringing it into force. That was the principle even where one was dealing with a situation of parliamentary supremacy and an argument was advanced that delegated legislation was part of the legislature’s work and the court should exercise deference. Thus, the Executive could not act or fail to act and frustrate the will of Parliament, which was that legislation be implemented sooner than later. Where the Executive acted so or failed to act, the Court could intervene in appropriate case as the Constitution enjoined the Court to intervene.
- The 1st Respondent had not appointed and gazetted the commencement date for the Public Benefit Organizations Act. The delay runs over 1000 days. The 1st Respondent had the discretion to act and appoint a commencement date for the Public Benefit Organizations Act. It was common knowledge that exercise of discretion entail and permit the application of abstract and general rules to specific and particular circumstances in a fair manner. Not much seemed to have happened with a view to the 1st Respondent appointing a commencement date.
- Parliament did not empower the 1st Respondent to modify or amend or engage in the process of modifying or amending the Public Benefit Organizations Act. Parliament only empowered the 1st Respondent to stipulate a commencement date for the Public Benefit Organizations Act. The 1st Respondent had however actively engaged in the process of prompting amendments to the Public Benefit Organizations Act. Such active engagement in legislation process would amount to a violation of the doctrine of separation of powers where the Executive arm of the government had not been so empowered.
- Curiously, the Public Benefit Organizations Act which the 1st Respondent had actively engaged in the process of prompting amendments to was yet to come into force. The 1st Respondent was consequently acting unlawfully and contrary to the spirit and tenor of articles 94, 95 and 129 of the Constitution.
- The 1st Respondent’s reasons for not acting and deciding on a date for commencement of the Public Benefit Organizations Act were untenable in the circumstances. To insist that a review of the Public Benefit Organizations Act was being undertaken yet such power was never donated to the 1st Respondent was equivalent to superintending Parliament which the 1st Respondent could not do. It amounted to second guessing Parliament and acting outside the statutory powers, hence was unlawful and unconstitutional.
- The delay to act for over a period of 1000 days without good cause and indeed by reason of an irrelevant factor was unreasonable, irrational and arbitrary. The Constitution under article 73(2) expected objectivity on the part of State Officers and in the circumstance, there was no objectivity on the part of the 1st Respondent.
- The 1st Respondent in failing to appoint a commencement date for the Public Benefit Organizations Act within a reasonable time had not only been derelict in the duties of the 1st Respondent but had also acted in a manner inconsistent with the Constitution and contrary to the expectations of Parliament.
- The 1st Respondent was not empowered to engage in the process of amending the Public Benefit Organizations Act. While the appointment of the Task Force was consistent with the 1st Respondent’s duties, it was inconsistent with the Constitution and the 1st Respondent’s powers in so far as the Task Force duties were also tied to the appointment of a commencement date. The 1st Respondent did not have power to amend the Public Benefit Organizations Act prior to its commencement and the attempts to do so equate irrationality.
- The Public Benefit Organizations Act had never been operationalized. It was law but as long as the commencement date was not appointed yet, then all the provisions of the Public Benefit Organizations Act, except the provision empowering the 1st Respondent to appoint a commencement date, remained suspended. Effectively, the NGO Board was still regulated by the Non-Governmental Organizations Coordination Act. Any Board members appointed under the NGO Coordination Act were legally in office. Action and acts undertaken by the Board were not void unless specifically challenged and so found by a court of law.
- The 1st Respondent had a duty delegated by Parliament to appoint a commencement date for the Public Benefit Organizations Act. For irrelevant factors taken into consideration, the 1st Respondent had failed to act, which was quite contrary to the aspirations values and principles of the Constitution, and also contrary to the wishes of Parliament. The Public Benefit Organizations Act had a central role to play in the regulation of the NGO world in Kenya. The Public Benefit Organizations Act could have defects, patent and latent, but the defects could only be addressed after the Act had been operationalized and only through Parliament. The 1st Respondent in failing to act had effectively abused its discretion and had not advanced any plausible reason for the failure to act.
Petition allowed in the following terms:
- A declaration issued that the 1st Respondent’s failure to appoint a date for the coming into operation of the Public Benefit Organizations Act, 2013 was in violation of articles 1, 10, 73, 94, 116(2), 129 and 153(4) of the Constitution of Kenya, 2010.
- A declaration issued that the decision of the 1st Respondent to appoint a Task Force to amend and/or propose amendments to the Public Benefits Organizations Act, 2013 before bringing the Act into operation was illegal and ultra vires and otherwise in contravention of articles 10, 94, 116(2), 129 and 153(4) of the Constitution of Kenya, 2010.
- An order of mandamus issued compelling the 1st Respondent to within the next fourteen days appoint and gazette a date for the coming into operation of the Public Benefits Organisations Act, 2013 (Act No. 18 of 2013)
- Each party to bear its own costs of the Petition.
||Application for order to detain a person without a formal or a holding charge being preferred against them is unconstitutional
Michael Rotich v Republic
Misc. Criminal Application No 304 of 2016
High Court at Nairobi
L Kimaru, J
September 9, 2016
Reported by Nelson Tunoi
Constitutional Law – fundamental rights and freedoms – rights of an arrested person - application to detain the Applicant for 28 days pending investigations – where the Respondent was seeking the order of detention of the Applicant before he could formally be charged with a criminal offence - the Applicant was neither charged with any offence nor was there a holding charge preferred – whether the Applicant’s right to liberty was infringed by the Respondent – whether the application by the Respondent was constitutional - Constitution of Kenya, 2010, article 49(1)(f)(i)
Criminal Procedure – revision – application for revision of a trial court’s ruling – where the trial court allowed an application to detain the applicant for twenty-eight (28) days pending conclusion of investigations – whether the application was merited
The Applicant was the Team Manager of the sports team that Kenya sent to the 2016 Rio Summer Olympics in Brazil. On August 8, 2016, the Applicant was deported from Rio De Janeiro on allegation that he had been involved in subverting the doping procedure of athletes. On arrival the Applicant was arrested and detained by the police pending investigations. On August 10, 2016 an application was filed by the prosecution seeking to have the Applicant detained for a period of twenty-eight (28) days to enable the police conclude its investigations. The investigating officer deponed that due to the Applicant’s involvement in athletics management for the past forty (40) years, he was likely to interfere with investigations.
At the time the prosecution made the application, the Applicant was brought before Court in compliance with article 49(1)(f)(i) of the Constitution that required any arrested person to be brought to court within 24 hours of his arrest. The Applicant was neither charged with any offence nor was there a holding charge. The prosecution was seeking the order of detention of the Applicant before he could formally be charged with a criminal offence. The Applicant opposed the application stated that he had not been informed of the reason for his arrest, and further, the charge that was intended to be brought against him. The trial court allowed the application made by the prosecution. Aggrieved by the ruling of the trial court, the Applicant moved to the High Court to have the ruling revised.
- Whether an application seeking an order of detention of a person before he could be formally charged with a criminal offence was constitutional. Read More...
- The Constitution has put in place safeguards in the Bill of Rights to protect the right to liberty. The right to liberty was sacrosanct and it was the fundamental freedom upon which other rights were enjoined. For instance, without the right to liberty one could not enjoy the freedom of association, the right to privacy and the freedom of movement and residence.
- The Applicant had not been charged with the commission of any offence. In fact, it was not clear from the affidavit sworn by the investigating officer what charges would be brought against the Applicant. The Applicant had not been informed of the charges that he was likely to face since his arrest. In essence, the State wanted to place the Applicant in custody to enable it commence and complete its investigations.
- Article 49(1)(a)(i) of the Constitution required any arrested person to be promptly informed in a language that he understood the reasons for his arrest. In the instant case, it was evident that the State contravened the Applicant’s right to be informed of the reason of his arrest, particularly the charges that he was likely to face.
- The arrest and arraignment of the Applicant before Court without any charge being preferred against him breached his fundamental right to liberty and freedom as provided under article 29(a) of the Constitution and the fundamental right to be promptly informed of the reasons for his arrest as provided under article 49(1)(a)(i) of the Constitution. It was for that reason that the High Court had released the Applicant on bail on condition that he presented himself to the police on particular days to assist the police with investigations. The police should have concluded their investigations.
- (Obiter) “The recent trend where a person is arrested and arraigned in court within 24 hours specifically for the prosecution to seek extension of time to continue to detain such person, without any charge or holding charge being preferred against such person is unconstitutional. The police have no authority in law to arrest and detain any person without sufficient grounds. Those grounds can only be sufficient if the police have prima facie evidence which can enable such person to be charged with a disclosed offence. The fact that the prosecution has a prima facie evidence of a disclosed offence can be presented in court in form of a holding charge setting out the particular offence. Such holding charge will enable an accused person to know of the reason for his arrest as provided under article 49(1)(a) of the Constitution. It will not do for the prosecution to present a person who has been arrested in court and seek his continued detention without a charge or a holding charge being lodged in court. It is unlawful for the police to seek to have a person who has been arrested to continue to remain in its custody without a formal charge being laid in court. If this trend continues, it would erode all the gains made in the advancement of human rights and fundamental freedoms as provided in the Bill of Rights since the Constitution was promulgated in August 2010. A person’s right to liberty should be respected at all times unless there are legal reasons for such person to be deprived of his liberty. The police should only arrest a person when they have prima facie evidence that an offence has been disclosed which can result in such person being charged with a disclosed offence or a holding charge of the likely offence being presented in court. The police should do this because of only one reason: the Constitution says so.”
- The requirement that the Applicant is to present himself to the police is vacated.
- The police shall be at liberty to charge the Applicant with a disclosed offence if they have evidence.
- The Applicant shall not be arrested or detained by the police.
- If a decision to charge him is made, he shall be summoned to present himself to court to take plea.
||Instance where the Statutory Mandate of Capital Markets Authority (CMA) to Approve and Issue Bonds to an Entity Conflicts with its Mandate to Undertake Investigation and Enforcement Proceedings Against that Entity
Alnashir Popat & 8 others v Capital Markets Authority
Petition No 225 of 2016
High Court of Kenya at Nairobi
J L Onguto, J
December 19, 2016
Reported by Teddy Musiga
Jurisdiction - jurisdiction of the Capital Markets Tribunal vis – a vis the jurisdiction of the High Court in determining disputes arising from the enforcement of the Capital Markets Authority Act – Capitals Market Authority Act, sections 5, 11, 35A
Constitutional Law – fundamental rights and freedoms – rights to equality & freedom from discrimination – right to access to information – right to fair administrative action – right to fair trial – claim challenging whether the inquisitorial and enforcement proceedings the Petitioners were being subjected to by the Respondent was in violation of the Petitioners’ fundamental rights and freedoms – Constitution of Kenya, 2010, articles 27, 35, 47, 50; Fair Administrative Actions Act, section
The Petitioners were directors of Imperial Bank Limited (in receivership). They filed the Petition challenging the administrative proceedings being undertaken by the Respondent (Capital Markets Authority) in respect of the bank’s receivership. They claimed that in carrying out its investigations, the Respondent had violated or was likely to violate the Petitioners fundamental rights and freedoms, in particular the right to equality and freedom from discrimination under article 27, the right to access to information under article 35, the right to fair administrative action under article 47 and the right to fair trial under article 50 of the Constitution of Kenya, 2010.
- Whether disputes arising from the enforcement of the Capital Markets Authority Act should be filed at the Capital Markets Tribunal or the High Court.
- Whether the inquisitorial and enforcement proceedings the Petitioners were being subjected to by the Respondent was in violation of the Petitioners’ fundamental rights and freedoms as alleged.Read More...
The Respondent (Capital Markets Authority) was a statutory body created under section 5 of the Capital Markets Act to regulate the capital markets in Kenya. From its objectives under section 11(1) of the Act, there was no doubt that the Respondent had a broad statutory mandate. In order to carry out its statutory functions, the CMA was endowed with wide powers under section 11(3) of the Act to enable it to undertake its statutory mandate.
- There was no doubt that the Respondent had the statutory power to regulate, promote and facilitate the development of an orderly and efficient capital market in Kenya. In doing so, section 11(3) of the Act conferred it with various powers which included carrying out investigations and imposing sanctions for breach of the provisions of the Act. Thus, it was clear that the CMA had the power to undertake the investigations subject of the instant petition.
- Section 11(3) (i) of the CMA Act gave the Respondent the power to inquire, either on its own motion or at the request of any other person, into the affairs of any person which the Authority has approved or to which it had granted a license and any public company the securities of which were publicly offered or traded on an approved securities exchange or on an over the counter market. That provision made the chief regulator of the capital markets, the power to inquire into the affairs of the bank regarding to security traded at Nairobi Stock Exchange (NSE).
- The Capital Markets Tribunal was established under section 35 A (1) of the Act. Its powers were set out under section 35(1) thereof. Further, the Tribunal had further functions under section 34 A (4). Thus a person could appeal to the Tribunal in regard to any decision made by the CMA in relation to any matter relating to the Capital Markets Authority.
- CMA had the power to inquire into the affairs of any company that it had approved to trade its securities in NSE. That matter fell within the provisions of the Capital Markets Act and any person aggrieved by its decision could appeal to the tribunal in accordance with section 35 A (4) of the Act. Likewise the CMA could itself prompt the Capital Markets Tribunal on the same matter and without dealing with it, and it would still not amount to an abdication of duty.
- The Tribunal had original jurisdiction. The original jurisdiction could however only be prompted by the CMA or by any of its ad hoc committees or any other person who exercised delegated authority for and on behalf of CMA by way of a reference. Once again, such a reference could relate to any matter under the Capital Markets Act. Therefore the Tribunal had both appellate and original jurisdiction.
- The appellate jurisdiction was triggered by way of an appeal by any aggrieved person. The original jurisdiction was triggered by the Authority, its adhoc committee or any person exercising delegated authority for and on behalf of the Authority through a reference.
- As a matter of practice in court of law or before any tribunal, when an inconvenient date was given, a party could appear before the body and request for an adjournment. There was no reason why such practice could not be extended and fetched upon any adjudicator or decision maker. Further, if the petitioners were so aggrieved with the hasty manner in which the date was imposed, they ought to have set up a challenge by way of an appeal against the decision of the Authority to the Capital Markets Tribunal which would have been properly seized of the matter.
- Section 9 of the Fair Administrative Action Act provided that generally, a party aggrieved by an administrative decision or action ought to apply for review of that decision to a tribunal with the requisite jurisdiction. The tenor and import of section 9(2) and (3) thereof was clear that where there was an alternative remedy prescribed under legislation, that procedure had to be first explored before invoking the jurisdiction of the Court. However. Section 9(3) granted special jurisdiction to the High Court in the sense that the Court could in exceptional circumstances exempt a party from exhausting the alternative statutory remedy.
- Applying the test given above to the present petition; the instant Court had been called upon to intervene in what the Petitioner alleged to be a breach of his fundamental rights and freedoms by the respondent. That would clearly be within the jurisdiction of the High Court by virtue of articles 22(1), 165(3)(b) and 3(d)(ii) of the Constitution. The Capital Markets Tribunal had no such original mandate. Further, the High Court’s powers under article 165 were not shared with the Capital Markets Tribunal. Thus, as far as it concerned the allegations of violations of the Constitution, the instant matter was properly before the Court.
- The Petitioners failed to prove that they were discriminated against by the Respondent. They also failed to prove, in the circumstances that there was arbitrary differentiation which imposed burdens, disadvantages and obligations not imposed on others. As a matter of fact, the differentiation appeared objective.
- Article 47 of the Constitution demanded an expeditious, efficient, lawful, reasonable and procedurally fair administrative action. The Petitioners were sufficiently informed of the nature of the proceedings the Respondent was undertaking; they were also informed that the Respondent was undertaking enforcement proceedings against them pursuant to the provisions of section 25 and 26 of the Capital Markets Act. It thus followed that the intended enforcement proceedings were administrative in nature under article 47 of the Constitution of Kenya, 2010 applied. Therefore, the Court was unable to find violation of article 47 of the Constitution in so far as expedition, lawfulness and reasonableness were concerned.
- Procedural fairness was an aspect of both article 47 and article 50 of the Constitution. Procedural fairness was embedded in the age old natural justice requirements that no man could be a judge in his own cause, no man should be condemned unheard and that justice should not only be done but seen as done. Effectively, procedural fairness required that decisions be made free from a reasonable apprehension of bias by an impartial decision maker.
- A well informed and fair minded observer given all facts would conclude that there existed a possibility of bias in the circumstances of the instant case. If the particulars as outlined in the notices to show cause were to be aligned to the statutory provisions as well as all the process that the regulator went through prior to granting its approval to a bond issue and handed over to the well informed fair minded observer, the fair minded observer would not conclude that the Respondent in the instant case would approach the decision making process with the impartiality appropriate to the decision. Thus, the circumstances denoted a reasonable apprehension of bias.
- That notwithstanding, deference ought to always be accorded to statutory bodies with statutory mandates. Such bodies must however operate within the confines of the Constitution and Article 47 of the Constitution invited procedural fairness upon such bodies as well. A complaint of premeditated bias or perceived bias would be enough to trigger the mandate of the instant court where a petitioner added that the right to an impartial adjudication process had been violated or was about to be violated.
- In the instant circumstances, the Petitioners were not being subjected to criminal proceedings but civil proceedings. The Petitioners were being invited to appear before the Respondent’s board as directors of the Bank, and in their capacity as such. They were to be heard on the circumstances prevailing before and after the Bank’s bond issue and the allegations that have been attributed to them pursuant to Section 26(8) of the Act. It followed that the Petitioners’ allegations as regards the violation of various rights founded on the provision of Article 50(2), including the right to be informed of a charge in sufficient detail, right to be presumed innocent, right to adduce and challenge evidence presented in the trial, right to be given sufficient reasonable time to prepare their defence and right to legal representation had to be rejected as they were not applicable. All those alleged rights applied in criminal trial and not in civil proceedings or proceedings of an administrative nature as the one concerning the Petitioners.
- There was no doubt that the Respondent was the statutorily mandated regulator of capital markets in Kenya. The nature of the administrative proceedings and enforcement proceedings to be undertaken by the Respondent had to be however distinguished from those that could be undertaken by the independent Capital Markets Authority Tribunal. In the instant case, the Respondent as the regulator it was involved in the bond transaction. It was the body that approved the issuance of the bond. It was then conducting enforcement proceedings against the Petitioners.
- Whereas it was clear that the Respondent had the statutory mandate to regulate the capital markets including approving securities to be listed on the NSE, under the Act it was vested with both investigative and enforcement powers in relation to the same mandate it exercises. In the present case, the Respondent as the industry regulator approved the bond issue by approving the information contained in the final information memorandum. It had then sought to investigate the circumstances that led to the approval of the bond issue. In the notice to show cause, it stated that; “the authority had accordingly noted that there were various shortcomings with respect to the conduct of the oversight and governance role of the Board in relation to the issue of the bond”.
- Under Article 50(1) the Petitioners would have a right to be heard in public before an independent and impartial tribunal or body. The Petitioners in the instant case were being subjected to an administrative process and thus the provisions of Article 50(1) would not be applicable. Rather, the provisions of Article 47 would be. The Petitioners grievances were with the administrative processes they were being subjected to and only the provisions of Article 47 were relevant and applicable.
- Access to information was fundamental to the realization of the rights guaranteed in the Bill of Rights. Access to information was crucial to the right to freedom of expression which included the freedom to receive or impart information or ideas. For a person to enforce the right of access to information, he had to establish that he had sought the information and access to such information had been denied.
- In the instant case, and from the evidence availed to the Court on record, the Petitioners admittedly requested for information. The Respondent provided the Petitioners with a complete list of documents that it would rely on at the hearing and provided copies thereof vide its letter of 23 May 2016. In the circumstances therefore, the Petitioners were provided with all the essential documents necessary to enable them attend the show cause hearing. In any event, the Respondent admitted that some of the documents requested were not in its possession but were in control of the CBK and KIDC. While the Court was in agreement with the Petitioners that the Respondent had powers to summon the production of those documents, it did not think that it could demand that of the Petitioners yet. The hearing was yet to commence. It was thus the Court’s finding that the Respondent had not unduly hindered the Petitioner in preparation of their defence in the intended hearing by failing to provide crucial information.
- Ultimately, the Respondent had the option of choosing whether or not to execute its mandate and over which entity. Under the Capital Markets Act, the Respondent could delegate its functions to other persons including a recognized self-regulatory organization bodies (see Section 11A). Likewise, the Respondent could file a reference to the Capital Markets Tribunal on any matter relating to the Capital Markets Act (see Section 35A (4) of the Capital Markets Act). It could therefore not be argued that the Respondent’s regulatory mandate would be hampered and voided where it was found, as in the instant case, that the Respondent was conflicted. There was no doubt that the legislature, in its wisdom, did not provide for delegation as well as reference by the Respondent to the Capital Markets Tribunal without reason or good cause. Instances like the present one were anticipated.
Petition partly allowed with the following orders to the extent of the success of the Petition;
- A declaration that the Petitioners’ rights under Article 47(1) of the Constitution were under a threat of violation when the Respondent sought to undertake and proceed with the administrative and enforcement action against the Petitioners yet the Respondent who sought to execute its statutory mandate was apparently conflicted in the circumstances of this case.
- An order of certiorari to remove into the court and quash the Notice to Show Cause letters issued by the Respondent to the Petitioners on 6 May 2016.
||Tests for determining the categorization of license fee as either a capital or revenue expenditure for purposes of tax assessment
Commissioner of Income Tax v Kencell Communications Limited (now Airtel Kenya Ltd)
Income Tax Appeal No 272 of 2015
High Court of Kenya at Nairobi
Commercial and Admiralty Division
F Tuiyott, J
November 17, 2016
Reported by Teddy Musiga
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Tax Law – assessment of tax – assessment of tax payable – licence fees – principles to be applied in ascertaining the nature of license fees payable – whether license fee should be treated as a capital or revenue expenditure for purposes of assessment of taxes – Income Tax Act, sections 15, 16; Income Tax (Appeals to the High Court) Rules Rule 3
The background to the instant appeal was that the Respondent (Kencell/ now Airtel) when preparing its books of account deducted the payment of the initial license fee as revenue expenditure. The appellant (Commissioner for income tax) disallowed the deductions and issued additional assessment treating the fee as capital expenditure not deductible as revenue expenditure. The Respondent being unhappy with the decision of the Commissioner of Income tax (appellant) lodged an appeal against it at the Local Committee of Nairobi South. The Local Committee was established under section 82 of the Income Tax Act. The Committee agreed with Kencell’s contention that the license fee is not capital cost but revenue expenditure hence the instant appeal to the High Court.
- What are the legal principles to be applied in ascertaining the nature of the licence fee payable?
- Whether license fee should be treated as capital or revenue expenditure for purposes of assessment of tax.Read More...
- The jurisdiction of the High Court to hear and determine the instant appeal was derived from section 86(2) of the Income Tax Act. That provision provided that persons dissatisfied with decisions under section 89(1) of the Income Tax Act could appeal to the High Court upon giving notice of appeal to the other party or parties to the original appeal within 15 days after the date on which a notice of such decision had been served upon him. Appeals to the High Court under that sub section could be made only on questions of law or of mixed law and fact. In the instant case, the appeal was on the legal principles to be applied in ascertaining the nature of the expenditure. That was a question of mixed law and fact and thus the High Court was properly seized of it.A reading of sections 15(1) and 16(1) of the Income Tax Act led to a conclusion that tax was to be imposed on profits as opposed to gross income earned by a tax payer. Just because there was a demand for fees for renewal did not in itself debunk the appellant’s argument that the initial fees should for all practical purposes including of the assessment, be treated as a one-off payment.The approach to be taken in differentiating between capital and revenue expenses was as follows;
- First, the general principle was that the Court had to look closely at the purpose of the expenditure and ascertain whether or not such expenditure created a new asset, strengthened an existing asset or opened new fields of trading/ business not hitherto available to the tax payer, in which case such expenditure would be capital and not revenue in nature.Second, the Court looks at specific guidelines which elaborate on the first principle. In other words, the Court now looks at the various tests to determine whether or not an item of expenditure has created a new asset, strengthen an existing asset or opened new fields of trading. In particular the Court should have regard to the following guidelines (bearing in mind that the categories or guidelines are not closed);
- The manner of the expenditure: a one-time expenditure, as opposed to recurrent expenditures, would tend to suggest that the expenditure is capital in nature, although this factor is not conclusive; and
- The consequence or result of the expenditure: if the expenditure strengthens or adds to the tax payer’s existing core business structure, it is more likely to be capital in nature. The concept of “core business structure” refers to the permanent (but not necessarily perpetual) structure of the tax payers business which is used for the generation of profits. However, where the expenditure is for assets, which are themselves stock-in -trade of the business (or which comprise the cost of earning that of income itself), such expenditure is more likely to be revenue in nature.
- While the specific facts were important in applying the various guidelines under the second principle, the underlying principle remained the purpose of the expenditure (detailed in the first principle above), viz that the expenditure must have either created a new asset, strengthened an existing asset or opened new fields of trading for the taxpayer. In other words, the categorization of expenditure as being of capital or income in nature was not just a factual inquiry but an integrated one whereby the applicable legal rules and principles were applied to the facts at hand.While the integrated approach was that various facts were taken into account, the primal inquiry was the purpose of expenditure so as to ascertain whether that expenditure created a new asset, strengthened an existing asset or opened new fields of business for the tax payers. Needless to say, the inquiry as to purpose had to be objective as the tax collector and the taxpayer could take the subjective but opposed positions.For all practical purposes, the initial payment for the license was a one off payment because it was made once for 15 years. Unlike a recurrent payment a lump sum payment tends to suggest that the expenditure is capital in nature. However, the fact that the payment was lump sum was relevant but not determinative. It was nevertheless a factor to be considered alongside others. The license fee paid was US$55 million. That was substantial by Kenyan standards. However, there was no evidence of the bidding process and that the court could not be able to tell whether the price was purely as a result of the forces of competition or was partly influenced by a reserve price fixed by the government of Kenya. In the face of insufficient evidence, the court could not consider the price of the license as a factor one way or another.A consequence of the payment of the license fee was that Kencell (the respondent) had a right to access the Kenya Telecommunication market through allocation of GSM spectrum or band. The license enabled Kencell to provide a mobile radio-communication service and public payphone services. Thus, there was no doubt therefore that the expenditure on the license gave Kencell lawful authority to commence operations in mobile radio communication services and public pay phone services. In that sense it created a new asset or in the very least opened new fields of business hitherto not available to Kencell in the country.
- The distinction in differentiating the initial license fee of US$55 million from the annual fee of 0.5% of the annual gross revenue was justified. It was not difficult to see why the annual fee should be treated as an expenditure on revenue. The annual fee was a fee that allowed the tax payer to perform its income earning operation and was made annually. It was not one that was made so as to give it an enduring benefit. It was so intimately related to profit earning process of the tax payer hence it was worked as a percentage of the audited annual gross revenues billed by the licensee for the license.
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