Energy has played an important role in developing the economy in African countries. This role has been inclusive of many traditional resources, including but not limited to gas, oil, and coal, along with the growing prominence of the renewable sources of energy, to which Kenya especially grounds itself to.
The heart of the international arbitration are the disputes related to natural resources and energy sector. With an increasing trend in the number of arbitrations in the international energy sector, in comparison to any other sector, it comes as no surprise that energy-related arbitrations have given rise to some of the highest valued awards, as seen in the history of arbitration till date. Energy disputes are seen to include controversial and complex security, autonomy, and public benefit issues.
For energy matters in Kenya, the substantial potential of power generation through the renewable energy sources has long been noted by the Republic of Kenya. Hence, efforts have been made by the Government to expand the renewable energy generation horizons through the implementation of power development plan for 2017 to 2037. The project aims to provide the installed power capacity of over 60% to the country, through renewable energy sources including Geothermal, wind, hydro, and solar, by the year 2037.
The Energy Act No. 1 of 2019 (the Energy Act) had been adopted by Kenya, mainly for the promotion of the renewable energy generation in the country. This Act directs the Cabinet Secretary for the Ministry of Energy and Petroleum, to make adequate efforts for the development, publishing, and review of the energy project plans, related to the aspects of renewable energy, to ensure that the delivery of such reliable energy services is done at the lowest costs. This also ensures that a conducive environment is developed for the energy infrastructure development and promotion of investments. The national and country governments, to promote more energy investments, are required to enable the procurement of land for energy infrastructure development.
The powers of the relevant authority have been made inclusive of their power to permit all activities and undertakings in the energy sector of the country through the proper issuance of licenses and their renewal; managing the tariff structures related to electric power; investigation of the tariff charges; formulations, enforcement, setting and review of the environmental, safety, health and quality standards for the sector; proper approvals of the electric power purchases and network service contracts for people engaged in this sector undertakings; investigation and determination of all disputes and complaints over energy licenses under the Energy Act, and finally, the imposition of appropriate fines and sanctions for any violation conducted.
Further, the Energy Act establishes a separate Tribunal to hear and resolve civil appeals and disputes arising from the Energy and Petroleum Regulatory Authority (EPRA) and other licensing authorities, in relation to the energy and petroleum sector. This Tribunal has been given the powers to grant justifiable reliefs, including but not limited to penalties, damages, injunctions, specific performance, and the power to review their past judgments and orders, either upon an application by any aggrieved party or through its own motion.
With such a vibrant energy sector, Kenya expects and should be ready for plenty of arbitration.
Global Legal & Institutional Framework for Energy Arbitration
Kenya joined the 2015 International Energy Charter and became the 83rd signatory on 20th March 2017.The Energy Charter Treaty (ECT), being a multilateral investment treaty, helps establish a legal structure for its member states in the investment, transit, and energy trading businesses. Therefore, a multilateral context is provided to the energy cooperation of the states, making the nature of the agreement unique, which further is capable of promoting long-term energy field cooperation. Energy is handled through geological prospecting to the final consumption in the ECT, which helps activities in the energy industry. For the protection of investments in the energy field, ECT is the only multilateral agreement that has continued its success over the years since its negotiation between July 1991 and December 1994.
ECT aims to simplify investments and transactions in the energy field by reducing regulatory and political risks. Part III of the ECT provides the contracting party obligations to help protect and promote investor investments. Hence, the contracting parties are required to commit to equitable and fair treatment through constant security and protection. They are not allowed to use any unreasonable maintenance measures, use, enjoyment, management, or disposal of the investments made in the projects.
Even though such obligations can be commonly found in all types of international investment agreements, the concepts of the sovereignty of natural resources have been stressed upon under the ECT. The provisions of ECT, even though envisage upon the sovereignty of the state and their rights over the energy resources, do not prejudice the rules that govern the energy resources ownership system. The contracting parties are free to decide upon the geographical areas within which the exploration and development of the energy resources shall take place, along with the decision of optimization and depletion or exploitation of the energy resources. They are further free to include the process of financial payments, royalties, and tax rates levied on such exploration and exploitation processes, according to the domestic rules and regulations.
It cannot be denied that energy sector disputes dominate the international arbitration processes, wherein the highest number and value of arbitral awards arise solely from the energy-related arbitrations. This continues to remain unchanged even today. This is because the energy sector has an uncertain political landscape and the problems of cross-border investments and fluctuating price rates. This further creates an opportunity for the emergence of energy disputes globally, wherein arbitration is the key model used to resolve such disputes.
The Liquified Natural Gas (LNG) projects have shown recent growth in the world’s energy supply cycle. These projects are long-term projects with costly investment requirements that are supported with considerable economic, political, and technical risks capable of heightening the risk of disputes in the life cycle of the projects.
Lastly, emerging technologies have offered exciting times and incredible opportunities for the energy sector. The contracting parties are required to consider the potential emerging risk areas. They are further required to ensure thatappropriate contractional protections and liabilities are imposed for the effective imposition and enforceability of the contract.
Legal Framework for Energy Arbitration in Kenya
To govern the purpose of mediation and arbitration for the effective resolution of disputes between the parties, Kenya lacks any integrated and comprehensive legal framework. The framework in existence for arbitration and mediation, has largely been inspired from international practices and legal structures, which have further simply been reduced into guidelines and instructions by institutions, that commission mediation and arbitration in Kenya.
This has led to arbitration in Kenya being governed by multiple laws and legal structures, which are inclusive ofthe Constitution of Kenya,The Arbitration Act 1995 andthe Arbitration Rules, along with theCivil Procedure Act, and theCivil Procedure Rules 2010. Article 159(2)(c) of the Constitution of Kenya stipulates that for the proper exercise of judicial authority, it is important for the courts and tribunals to be adequately guided with the principles necessary for the promotion of alternate dispute resolution (ADR) methods, that must be made inclusive of mediation, arbitration, reconciliation, along with the traditional methods and mechanisms already in existence, conditional to clause (3) of the Article. Clause (3) has a notable role to play in this scenario, as it has further highlights that the traditional dispute resolution procedures and mechanisms must not be used, such that: they are in contravention with the Bill of Rights, or they are objectionable to the principles of morality and justice, or its outcomes are in repugnance with the principles of morality or justice, or it is at odds with the Constitution or with any written law currently in existence. This means that if any arbitration is carried out in a manner, such that it results in a constitutional failure, the arbitration itself can be deemed to be invalid in nature.
The economic and social rights have been enshrined in the Constitution of Kenya, which are inclusive of the right to attain the highest standard of health, the right to safe and clean water, the right to food, and the right to education. Further, adequate access to energy is vital for the realisation of most of these rights.Furthermore, the Constitution recognises energy as part of natural resources.Accordingly, it is the state that must ensure that they provide opportunities for sustainable exploitation of resources, through the adequate management, unitisation, and conservation of natural resources and the environment, which is inclusive of energy as well, along with ensuring that there is an equitable profit and benefit sharing accruing from such resources. The Constitution of Kenya has further identified sustainable development as one of the national principles and values, that are necessary to guide the country’s development agenda. Sustainable exploitation and utilisation of energy as a natural resource will guarantee energy justice by achieving intra and inter-generational equity.
Cooperation between the country and national governments, has been stipulated for underArticle 189 of the Constitution of Kenya. Clause (4) of the Article highlights those procedures that must be provided by the National Legislation, to help inter-governmental dispute settlement through ADR mechanisms, which shall be inclusive of mediation, negotiation and arbitration. Further,Section 59 of the Civil Procedure Act provides the procedure provided under the civil rules shall govern all references made to arbitration by an order in a suit. Lastly, it has been provided under Order 46 of the Civil Procedure Rules that the parties are free to apply to the court for an order of reference, in case of any difference, provided that they are not under any disability, and further provided that this application is made at any time before the pronouncement of the judgment.
Generally, the arbitral proceedings and the procedure to how arbitral awards are to be enforced by the national courts, has been included withinThe Arbitration Act 1995.Section 3(1) of the Arbitration Act has attempted to define arbitration and its scope, wherein arbitration has been made inclusive of any arbitration, irrespective of whether it has been administered by a permanent arbitral institution or not. Thus, a wide variety of arbitration matters come within the scope of the Act. The Arbitration practice, as has been developed in Kenya over the years, has seen an increasingly cumbersome and formal approach, especially due to the lawyers’ entries within thispractice of arbitration. This has further resulted in more disputes being referenced to the national courts, due to the dissatisfaction of the disputants. The procedural and substantive aspects of arbitration are what these referrals have been based on.
Energy has been recognised as a critical component of the Kenyan economy, through theNational Energy Policy, wherein energy has also been recognised as a component in the national security and the standard of living. This Policy is aimed at achieving various objectives, including but not limited to making energy services more affordable, competitive, and reliable; and for the promotion of energy conservation and efficiency, and for the promotion of diverse energy supply sources in the Kenyan region, to ensure the safety of such supply. Further, several strategies and policies for the use, conservation, and development of energy sources (including coal resources, electricity, and renewable energy) has been set out in this Policy. Lastly, energy conservation and efficiency measures have been included in the Policy, so that there is a reduction in the energy consumption without affecting the productivity or costs.
Settlement of Disputes in The Energy Sector in Kenya
There have been added benefits with arbitration for the major infrastructure and energy companies, that are operating in Kenya. Arbitration has provided an opportunity for these companies to have greater control over legal matters. This is especially beneficial, considering that the court system can sometimes result in a lack of expertise in technical matters related to the energy industry.
In the process of arbitration, you are free to appoint an arbitrator having technical expertise in the energy sector, along with someone who has some knowledge about the company and the issues between the parties. This becomes a major advantage, considering that energy-related issues are of high-value and sensitive. Therefore, it is important for the arbitrator to be cognisant of both the sides in the dispute, along with being aware of the technical things.
Sometimes, local courts can decide some aspects of the disputes, relating to the energy contracts between the parties. However, when contracting parties are inclusive of foreign parties as well, generally, international arbitration is used for the resolution of the disputes. This is because foreign investors prefer arbitration procedure to be well-governed by the well-known international arbitral institutions. Hence, most energy sector agreements have their arbitration clauses leading them to the International Chamber of Commerce (ICC), the American Arbitration Association/International Centre for Dispute Resolution (AAA/ICDR), the London Court of International Arbitration (LCIA), or the United Nations Commission on International Trade Law (UNCITRAL) Rules. Further, it is typically preferred by the foreign parties to undergo arbitration proceedings outside of the host state, and outside of Africa, in regions such as London, Switzerland, and Paris, that are common seats of African energy projects arbitrations.
By dint ofArticle 2(5) of the Constitution of Kenya, 2010, the foreign laws and contracts subject to them are enforceable in Kenya and binding to parties given that Kenya ratifies an enabling law pertinent to it.
Emerging Issues in Energy Arbitration in Kenya
Kenya has been experiencing an increase in the inflow of foreign direct investment in recent years, which has resulted in improvements in the Kenyan economy. Increased commercial activities have resulted in arbitration becoming the preferred dispute resolution process, especially for foreign investors. However, the confidential nature of commercial disputes has made it difficult to ascertain the specific disputes concerning the Kenyan parties or disputes where the forum for dispute resolution has been included in Kenya.
Nevertheless, it has been made clear that preferability towards arbitration has seen an increase over the recent years, in opposition to the classic court system. This can be seen in the light of the institutions and laws set up for arbitration to run efficiently.The Arbitration Act, passed in 1996, was subject to anamendment in 2009. The Act has been modelled on theUnited Nations Commission on International Trade Law (UNCITRAL) Model Laws on International Commercial Arbitration of 1985 (also known as the UNCITRAL Model Law). In addition to this, in 2013, the Nairobi Centre for International Arbitration (NCIA) was established, which continues to be governed by theNCIA Act of 2013. This has been recognised as another forum for the arbitral proceedings. Lastly, theChartered Institute of Arbitrators (CIArb) continues to train all interested in the dispute resolution process, specifically arbitration.
The Kenyan branch ofCIArb revealed their revised Arbitration Rules in 2020, which have prospectively come into force from 1st October 2020. The revised rules now provide a more comprehensive procedure than the 2012 Arbitration Rules, which now stand repealed.The rules now focus on the addition of flexibility and efficiency of arbitrations, as administered by CIArb, along with changes such as consolidation, fast track procedures, and reduction in time and costs for dispute resolutions.
However,changes in the African energy sector have resulted in having its reflections on the arbitration procedures:
- Resource Nationalism
Resource Nationalism, or the political policy for the promotion of greater state intervention in resources, for the development of the socio-economic wealth, can lead to unwanted conflicts between the international and government bodies.
There have been multiple African energy sector-related arbitrations that have arisen due to state actions that treat the energy resources as sovereign resources, which are vital for the country’s economic development. This has resulted in claims being made, particularly in theinvestment treaties.
- Local content regulations
There have been multiple African governments, including Kenya, that have amended their energy rules and regulations. Further, the bidding process requirement to include particular‘local content’ requirements has resulted in an increasing need to comply with the regulations in place.
Therefore, the number of disputes in relation to compliance with such requirements has increased in recent times, affecting large-scale energy projects.
- Commodity price volatility
The unpredictability of oil and gas sector prices has further resulted in increasing disputes, especially in cases where the commercial viability of the projects is under threat. The recent oil price drops can increase disputes in the economy, especially for governments dependent on hydrocarbon revenues, like Kenya. This is because oil price drops can increase the damaging effects on the state’s budget due to unfavourable arbitral awards.
Further, a situation of sustained price falls can introduce new taxation regimes or situations where the contractual terms and arrangements are negotiated between the parties to increase the project revenues received.
On the other hand, the International Oil Companies (IOC’s) are also capable of reducing their capital expenditure or operating costs, to reduce the risks or cancel the projects altogether. This can further lead to risks in implementing production sharing agreements (PSA’s), dealing with the development and exploration of the resources. Lastly, there can be problems in the cash calls and payments of invoices, leading to increasing disputes.
As Kenya seeks to use national laws to protect its natural resources and increase revenue from its development, the question that lies is how can energy companies protect their investments while respecting the transformational needs of host states? Nevertheless, anyone considering making investments in Kenya needs to be aware that there are a number of regional treaties to be complied with to benefit from investment protection.
It is equally pivotal that Kenya comes up with a comprehensive legal framework on arbitration that will give assurance for the protection of the interests of international investors in the country in matters of energy given that it is a fast-growing field. International arbitration has been often misunderstood and poorly supported in much of Africa. This is especially the case with disputes in the oil and gas sector, where high financial stakes combine with national interest and a mix of nationalities. Distrust has resulted from the lack of insight into arbitration proceedings conducted by non-African, private tribunals outside of the continent. This distrust has manifested itself in domestic court interference in arbitration, which can significantly prolong or even derail the resolution of disputes.
About the Authors
Mr. Trevor Omondi Oduor is a Lawyer from Nairobi, Kenya.
Ms. Muskaan Aggarwal is a 3rd Year Law Student from Jindal Global University (JGU), Sonipat, and an Associate Editor at IJPIEL.
Managing Editor: Naman Anand
Editors-in-Chief: Jhalak Srivastav & Aakaansha Arya
Senior Editor: Muskaan Singh
Associate Editor: Muskaan Aggarwal
Junior Editor: Joseph Antony Paddikala
Preferred Method of Citation
Trevor Omondi Oduor and Muskaan Aggarwal, “Energy Arbitration in Kenya” (IJPIEL, 17 January 2022).