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4. Rational Dispute Resolution
4.1 Rule of Law
4.2 Enforcement of Contracts
4.3 Commercial Dispute Resolution
In-Country Assessment

4. Rational Dispute Resolution

Businesses generally do not trust the public justice system to resolve their disputes. Costs of dispute resolution through the commercial courts are unaffordable to MSEs and most rely on trust based on previous transactions and reputation rather than on written contracts. This prevalence of informal transactions especially between property owners and tenants means that there is no recourse for tenants in case of wrongful evictions or other conflicts. In fact, evictions are quite common with owners involving agents who do not comply with procedures laid out by law.

The police who are supposed to enforce and uphold the rule of law are known to be corrupt. City council officers (askaris) also are notorious for abuse of power with numerous cases of evictions carried out under the cover of night. Enforcement of contracts is slow and expensive. Lease contracts are subject to frequent disputes where vigilante groups are hired to assist in forcibly resolving property rights and contract disputes.

 

Goal – An efficient institutional framework that balances the rights of the public, owners, lenders and borrowers in the event of a dispute or loan default
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4.1 Rule of Law

Core Question: Do all market participants abide by the rule of law and have confidence in the courts and the ability of police to control crime? No – Very Weak, Businesses do not trust public institutions in solving commercial disputes.

Impartiality
4.1.1 What is the confidence level of the strength and impartiality of the police, courts and contract enforcement? Very Weak – Percentile Ranking – 16.6 Trend ↑

Source:Governance Matters 2010, World Bank,

http://info.worldbank.org/governance/wgi/sc_chart.asp

Independent Judiciary
4.1.2 Can members of the judiciary be held accountable for their actions? No – Score 32 out of 100 – Very Weak ↑ Source:Global Integrity Report – http://report.globalintegrity.org/Kenya/2009

Costs of Crime
4.1.3 What are the business costs of crime and violence? High costs – Ranking 118th out of 139, Score 3.5 out of 7 – Very Weak Trend ↑

Source:The Global Competitiveness Report 2011-12, World Economic Forum

www.weforum.org/issues/global-competitiveness
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4.2 Enforcement of Contracts

Core Question: Are systems in place for timely and efficient enforcement of contracts?Commercial – No – Weak, although judicial reforms are ongoing

4.2.1 – Judicial Enforcement
Commercial – Weak – Ranking 127th out of 183 Trend ↓

4.2.1.1 What is the number of procedures involved in resolving a commercial dispute? 40

4.2.1.2 What is the time between the filing of a lawsuit and resolution in judicial enforcements? 465 days

4.2.1.3 What is the cost of judicial enforcements as a percentage of debt value? 47.2%

Source:Doing Business 2012 – www.doingbusiness.org/data/exploreeconomies/kenya

4.2.2 – Summary Proceedings
SQ 10: Summary proceedings are alternative dispute resolution processes where creditors can apply for a direct court order in property disputes. What is the time between notice of intent to foreclose and loan collection in summary proceedings if available to lenders? Not available – Very Weak

SQ 11: What is the cost of summary proceeding if available to lenders as a percentage of property value? Not available – Very Weak

4.2.3 – Power-of-Sale
SQ 12: Power-of-sale agreements give creditors to power to sell properties after notice to the borrower without court intervention. What is the time between notice of intent to sell and loan collection for power-of-sale agreements if available to lenders? 239 days – Strong SQ 13: What is the cost of power-of-sale agreements if available to lenders as a percentage of property value? 3.96% – Very Strong

Source:Financing Homes 2008, World Bank and International Housing Finance Corporation, www.ifc.org/ifcext/sme.nsf/AttachmentsByTitle/financinghomes/$FILE/FinancingHomes.pdf

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4.3 Commercial Dispute Resolution

Core Question: Can commercial disputes be resolved efficiently and fairly without exorbitant expense and delay? No – Weak, there is a shortage of judges and judicial officers and a severe backlog of cases.

Survey Questions
Commercial Courts
SQ 14: Do specialized commercial courts exist for the handling of property disputes and foreclosures? Yes – Weak, Commercial Courts exist but are ineffectual.

Source: Judiciary of Kenya www.judiciary.go.ke/website/index.php

Alternative Dispute Resolution

SQ 15: Are alternative dispute resolution mechanisms in place including commercial arbitration, private mediation and community based processes?

Yes – Weak – Kenya is a member of both New York Convention and the International Center for the Settlement of Investment Disputes but arbitration not used by lenders.

Civil Society Resource: Chartered Institute of Arbitrators Kenya www.ciarbkenya.org/

Commercial Treaties
SQ 16: What bilateral, regional and international commercial treaties exist concerning business between countries? Strong – a member of WTO, the Common Market of Eastern and Southern Africa (COMESA) and preferential agreements with the U.S. and EU.

Source: Kenya Investment Authority www.investmentkenya.com/

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In-Country Assessment

FQ19: To what extent do small businesses trust public institutions to support contract enforcement?

Political interference often derails the execution of the rule of law in Kenya. The cost of solving a case at the commercial courts is prohibitive for MSEs. Legal fees are very high. The police are known to be corrupt and City Council Askaris (local security officers) do not follow the law. There are numerous cases of evictions being carried out under the cover of night by Askaris.

FQ20: To what extent are alternative dispute resolution procedures used and trusted by small businesses?

The Constitution has provisions for the use of alternative methods of dispute resolution that include reconciliation, mediation, arbitration, and traditional dispute resolution mechanisms, e.g. Barazas (community-based councils).