Claimants tend to extrapolate the economic benefits they have lost had a commercial contract run its full course.
Claimants must be compelled to provide macroeconomic assumptions underlying their claims, which are subjected to interrogation by both the arbitrator and the respondent(s).
Some of the arbitral awards in Kenya have been outright ludicrous and lack economic merit. Two cases come to mind. First, is the Synergy Industrial Credit Limited versus Cape Holdings Limited case. The parties entered into a sale agreement for office blocks for Sh703,200,000. Synergy made a down-payment of Sh577,200,000.
During the period of development, Synergy declared a dispute and invoked arbitration.
A sole arbitrator was appointed and awarded Synergy Industrial Credit a collective Sh1,666,118,183. A compound interest at the rate of 18 pecent per annum in respect of the whole or the unpaid part of the Sh1,666,118,183 from January 1, 2015, until full payment is made was also awarded.
Cape Holdings appealed to the High Court, which set aside the award on the grounds that the arbitrator acted outside the scope of reference. Until now, Synergy is claiming upto Sh5.5 billion from Cape Holdings.
The second high profile case is the Nyutu Agrovet Limited versus Airtel Networks Kenya Limited. The parties entered into a distributorship where Nyutu was to distribute telephone handsets belonging to Airtel Networks Kenya.
A dispute arose when one of Nyutu’s agents placed orders for Airtel’s products totalling Sh11 million for which the said agent presented a contested bank deposit slip, as proof of payment to Airtel Networks. Consequently, Airtel Networks terminated the distributorship and called on Nyutu’s payment guarantees. Nyutu declared dispute, which was referred to arbitration.
Upon conclusion, an award of Sh541,005,922.81 was made in favour of Nyutu. Nyutu had demanded Sh2.6 billion.
The two cases, all stemming from a breach of commercial agreements, make use of the doctrine of opportunity cost. For instance, if you asked an economist about his/her thoughts on strawberry smoothies. Well, the answer will depend on how good the kiwi flavour is instead, plus a range of other choices.
Essentially, opportunity cost is the value of the next-best alternative. It's what is given up. In these commercial disputes, the claimant is basically attempting to claw back the economic benefits accruing if the commercial agreement(s) had not been ended prematurely.
Discounting rules
Claimants tend to extrapolate the economic benefits they have lost had a commercial contract run its full course. However, these arbitral awards assume a ceteris paribus economic scenario; that is, macroeconomic conditions will remain favourable.
What if the economy suffered an uncontemplated shock, such as the Covid-19 pandemic?
As a result, claimants must be compelled to provide macroeconomic assumptions underlying their claims, which are subjected to interrogation by both the arbitrator and the respondent(s).
Second, the monetary quantification does not seem to factor in the time value of money. If a claimant is awarded, that award, in strict sense, represents a future value, which then needs to be discounted to the present time.
So, arbitrations need some rules around discounting of arbitral awards to reflect the present value of money.
PAYE Tax Calculator
Note: The results are not exact but very close to the actual.
