Transition to Interest Rate-Based Monetary Policy in Tanzania
How the provisions of a contract are interpreted will depend on which country’s laws govern the agreement. The same clause may have different legal implications if the contract is governed by English law as it would under local law. This is particularly important when a party is trying to enforce the terms of the contract and there is some dispute as to the precise meaning of the language.
Parties are free to choose and agree the governing law of their contracts. It is not usually necessary for a contract to be governed by the laws of the country in which the investment takes place, or where one of the parties is based.
A large number of the transactions we advise on in East Africa concern relationships between foreign investors and local companies. This means we are often dealing with parties from different states, with different legal systems and differing interpretations of common legal principles found in investment agreements, such as warranties, indemnities and damages.
We frequently advise clients undertaking transactions in the region to opt for English law to govern their agreements. Some of the reasons for this are set out below:
The case for choosing English law
Certainty: The long history of common law developed over centuries of judicial decisions in the English courts means that there is a large body of caselaw dealing with a wide array of issues affecting investment agreements. The drafting of commercial contracts has evolved alongside developments in the law, giving parties certainty as to how each clause in an agreement will be interpreted.
Familiarity: a considerable number of East African countries (including Kenya, Tanzania and Uganda) have legal systems based on English common law, meaning legal principles are familiar to practitioners and commercial parties across the region. This saves time in negotiations and gives parties comfort that they are not being taken advantage of.
Independence: the reliability of English law is supported by the independence of the judiciary and the high quality of UK lawyers. These factors give parties confidence in judicial precedents and the consistency of the interpretation of commercial agreements.
Reputation: English law has a strong reputation in international commerce for providing fairness of outcome, meaning parties from around the world are generally amenable to the proposal.
Transparency: English law has a reputation for transparency and predictability, where the standards of behaviour expected of each party are objectively provided for and not subject to interpretation. A good example is the principle of “good faith”, which does not exist in English law. While in principle a good idea, the standard of “good faith” is subject to interpretation, particularly when transacting with parties from different countries with different traditional approaches to business transactions and can itself result in long disputes. Instead the principal of “caveat emptor” (buyer beware) places the onus on the buyer to conduct detailed due diligence and requires comprehensive contractual warranties.
Stability: East Africa is developing quickly, meaning there are frequent shifts in law and policy to keep up with changes and advancements. Conversely, the laws of England generally change in a more foreseeable manner, with many principles central to investment agreements remaining fixed.
When to discuss governing law
The governing law of an agreement has a fundamental impact on the legal drafting used to capture the rights and obligations of the parties. For this reason, the governing law should be discussed as early as possible and ideally agreed upon in the transaction term sheet.
Considering the governing law after negotiating a contract carries a significant risk that the contract will not be interpreted as anticipated by the parties.
Difference between “governing law” and “jurisdiction”
The governing law of a contract need not necessarily be the same as the country whose courts will have jurisdiction to determine disputes connected to the agreement.
For example, it is possible to include clauses which state that the agreement is to be interpreted in accordance with English law (governing law), but that disputes concerning the agreement will be heard in the courts of Kenya (jurisdiction). However, we usually advise clients to maintain consistency between their governing law and jurisdiction clauses (or to provide for dispute resolution by international arbitration). This is because where courts are required to resolve disputes concerning foreign laws, it will often be necessary to appoint expert legal witnesses, and proceedings can become complicated, uncertain and expensive. We will discuss this in more detail in our next article: “The case for international arbitration for cross-border transactions in East Africa”.
What happens if no governing law is specified in the contract?
It is important that the governing law is agreed between the parties and specified in the agreement.
In the event it is omitted, the court hearing the dispute will apply its own “conflict of law” rules (which differ from country to country) to determine the governing law in the absence of choice. These generally take into account where the parties are located and/or where the obligations are to be performed, but are often complex and the subject of lengthy legal proceedings.
Limitations on choice of law
Irrespective of the governing law agreed between the parties, there will invariably be certain matters connected to an investment agreement which are subject to the local laws of country in which the investment takes place. Common examples are the laws concerning the transfer of shares, registration of foreign loans, competition clearance, matters concerning land and tax implications. With that in mind, it is important that legal teams are composed of members qualified in all relevant jurisdictions.
There are certain circumstances in which the parties’ freedom to choose the governing law will be limited. For example, legislation enacted in Tanzania dictates that certain contracts with the Government concerning the exploitation of natural resources must be governed by the laws of Tanzania.
The governing law can often be addressed as an afterthought during contract negotiations, or not considered at all. We strongly recommend agreeing the governing law of a contract as part of the negotiation of the term sheet, to allow appropriate counsel to be appointed at the outset and ensure certainty as to how the agreement is intended to be interpreted.
Clyde & Co’s dedicated on-the-ground teams in Kenya and Tanzania are led by lawyers qualified in both English and local law, with deep-rooted market knowledge across East Africa. With over two decades of experience in Africa, Clyde & Co operates with a team of 130 employees stationed in our fully-integrated offices across the continent.