Courts can’ undo consent deals when parties go for arbitration

By Nyakundi Nyamboga

For two years, all was well between Century Oil Trading Company Ltd, a reseller, and oil giant, Kenya Shell Ltd.

After all, the parties were still faithful to a reseller agreement entered on June 30, 2000.

The oil giant was later to terminate the contract purportedly on account of Century Oil Trading Company’s decision to sell, at its outlets, oil products of Kenya Shell’s competitors.

It is not disputed that the agreement between the parties was terminated upon expiry of the two-year period, but was extended for six months.

This marked the beginning of what has turned out to be a drawn-out legal battle.

Century’s initial reaction was to move to the High Court for redress.

Kenya Shell did not like the idea and instead initiated negotiations that culminated in a mutual agreement to refer the matter to an arbitrator.

no arbitration clause

However, the reseller agreement did not provide an arbitration clause in the event that a dispute arose.

With the advice of Muriu Mungai Advocates for Kenya Shell and Nyachoti and Company Advocates for the reseller, the parties executed two consent agreements, referring the dispute to arbitration. In the consent agreement on December 5, 2006, the parties would be at liberty to amend their pleadings in court before the matter could be heard by the arbitrator.

The arbitrator was to determine the issues on the basis of the new set of pleadings as well as "pleadings in suit no HCCC No 988 of 2002 and appeal".

Another clause in the consent agreement on November 27, 2006, stated that the arbitrator’s award "is to be final" and neither party shall be entitled to challenge the decision of the arbitrator on any ground other than fraud and or misconduct on the arbitrator’s part.

At the arbitration, Century sought Sh314 million from Shell. And in a counterclaim, Kenya Shell sought Sh256 million from the reseller.

Lawyers Philip Nyachoti and Lydia Kariuki for Century put their best foot forward during arbitration, culminating in an award of Sh258 million in favour of their client.

Kenya Shell’s counterclaim, through Njoroge Mungai of Muriu Mungai Advocates, fell by the wayside.

It later turned out that it was too soon for Century to celebrate its success.

Its bid two months later to have the court recognise the award and enter judgement in its favour, in terms of the arbitral award, ran into rough seas.

Kenya Shell appointed Hamilton Harrison and Mathews (HHM), who sought, on October 23, 2007, to set aside the arbitral award on August 31, 2007.

Arbitral award

Lawyers Kimani Kiragu and Mich Kirimi from HHM filed an application in the High Court to challenge the arbitral award.

The grounds in support of the application included but were not limited to the following: That the arbitrator erred in considering the two consent agreements entered into after the initial two-year reseller agreement; the arbitrator should not have considered matters pleaded by the parties but which were not within the contract that defined the business; the arbitrator should not have relied on the Evidence Act to award the reseller Sh73,926,262/90 even though the parties made reference to the Act during the arbitral proceedings; interest of Sh97,944,103/20 awarded the reseller was in error because the reseller agreement did not provide for it and; rebates of Sh38.3 million and security charges of Sh2.7 million ought not to have been awarded in favour of the reseller because there was no such clause in the reseller agreement, the lawyers argued. Century Oil did not take these claims lightly.

Through lawyers Nyachoti and Waweru Gatonye, it opposed the application and successfully defended the arbitrator’s conduct and decision.

Set parameters

The lawyers told the court that in the absence of an arbitration clause in the business relationship between the parties, it was the parties who set the parameters of what was to be determined by the arbitrator.

They argued the two consent agreements had the contractual force, were valid and binding on the parties unless set aside on account of fraud, mistake and misrepresentation.

"The parties to these proceedings were advised by eminent advocates and, therefore, the issue of misapprehension of the law should not arise," Gatonye told the court.

Kenya Shell should forever shut up because it never raised any objections during the arbitration as to the manner they were being conducted, he argued.

Determine disputes

Said Nyachoti: "The applicant cannot be heard to challenge issues which they themselves had referred to arbitration".

The lawyer said the arbitrator was not obliged to determine the dispute in accordance with the original agreement but rather in accordance with the two consents the parties filed in court and the pleadings before arbitration.

He said the issue of interest was one that the arbitrator was required to make a finding, adding that the arbitrator breached no law in awarding interest at commercial rates.

The lawyer urged the court to dismiss the application with costs. Justice Kimaru was persuaded by submissions of both lawyers for the reseller and declined to set aside the arbitral award.

In a 42-page ruling, the judge held thus: "The applicant’s application dated November 23, 2007, lacks merit and is hereby dismissed with costs".

Judge Kimaru held that the arbitrator was bound to make a comment on the Evidence Act because it had been raised in the applicant’s submission.

Awarding interest based on evidence presented by the parties was not against public policy.

The judge also held that the parties were bound by their agreement that the decision of the arbitrator would be final.

However, he agreed with Kenya Shell that the arbitrator should not have taxed the costs due to a successful party in the arbitration.