NOVATION OF EMPLOYMENT CONTRACTS IN KENYA IN CASES OF MERGERS AND ACQUISITIONS
DOCTRINE OF NOVATION IN EMPLOYMENT CONTRACTS
Definition:
Novation is not expressly provided for in the Employment Act 2007; however legal jurisprudence has intervened to clarify on grey areas. Novation is defined under section 62 of the Indian Contract Act, 1872 as “if the parties to the contract agree to substitute a new contract for it or to rescind it or alter it, the original contract need not be performed.” The new party replaces the old party and hence the latter is completely released from his obligations. There is a proposal under the 2019 Employment Act Amendment Bill to introduce this provision.
Common reasons for Novation include:
· Change of business strategy such as production methods or financial structures
· Take overs/ mergers and acquisitions/ insolvency
· Avoidance of job losses through redundancies
· Outsourcing of non – core functions
What is the difference between a novation agreement and an assignment?
· A novation agreement transfers both the benefits and the obligations of a contract to a third party. In contrast, an assignment does not transfer the burden of a contract. This means the outgoing party remains liable for any past liabilities incurred before the assignment.
Legal Considerations:
Section 2 Employment Act 2007
“contract of service” means an agreement, whether oral or in writing, and whether expressed or implied, to employ or to serve as an employee for a period of time, and includes a contract of apprenticeship and indentured.
Section 9(2) An employer who is a party to a written contract of service shall be responsible for causing the contract to be drawn up stating particulars of employment and that the contract is consented to by the employee in accordance with subsection (3).
A contract of service shall include any collective agreements which directly affect the terms and conditions of the employment including, where the employer is not a party, the person by whom they were made, and;
What is variation of a contract? Section 9 & 10 Employment Act 2007
(5) Where any matter stipulated in subsection (1) changes, the employer shall, in consultation with the employee, revise the contract to reflect the change and notify the employee of the change in writing. This shall take into account consultation with a trade union where one exists. It is important to note that in the event of failure to agree on a proposal for novation of a contract of employment redundancy may be contemplated as stipulated under Section 40 of the Employment Act. Mutual separation may also be considered as an alternative.
Practical considerations
· The original contracting party who is replaced by the new party with the novation is excused by the novation, and therefore the original party who is replaced gives up any rights it has against the other original party to the contract. Both original contracting parties must agree to the novation. Legal advice is recommended in drafting the agreement.
· Not all changes to a contractual relationship amount to an effective or valid variation. Sometimes the changes are such that the end result is not a varied contract but a new one.
· When considering alternatives to redundancy, employers may consider that employees are more likely to agree to changes in their terms where this avoids redundancies.
· Good and transparent communications with staff will be critical even where collective consultation under the Employment Act and Labour Relations and an appreciation of previously negotiated benefits.
· Employees to be granted adequate time to understand the proposed changes and to seek necessary legal advice.
COURT DECISIONS
Kennedy Muriithi Riungu v Sanlam Investment Limited [2019] eKLR
Background:
1. The Claimant sued the Respondent for alleged unfair termination from employment and for discrimination, non-payment of his salary and terminal benefits. Initially he had been employed by the respondent as a Senior Portfolio Manager and later promoted to the position of Chief Executive Officer. However soon after the respondent informed him of an intended redundancy and that his position was amongst those affected and that the respondent had transferred its business to Sanlam Investment East Africa Limited (SIEAL) and in the alternative offered the Claimant employment on the same terms and conditions as his employment with the Respondent.
2. The Claimant declined to take up the offer citing that the position novated to the new entity was two grades below his previous job and it was a business development role on the retail side to which he was not an expert and that is why he did not accept the offer.
3. The court however did not find fault with novation nor redundancy and held that the Claimant’s claim having largely been unsuccessful only allowed for the re-computation of leave earned with interest plus costs of the suit.
Dated and delivered at Nyeri this 17th day of December 2019 - Nzioki wa Makau – JUDGE
ELIZABETH WASHEKE and 62 Others v AIRTEL NETWORKS (K) LTD & another [2013] eKLR
This is a claim dated 23rd August 2012, filed by 63 claimants against the 2 respondent seeking their terminal due and benefits and further that they were unfairly terminated by the 1st Respondent and or unfairly declared redundant without due process or payment of severance pay.
The 1st and 2nd Respondents had entered into a novation agreement under which the employees of the 1st Respondent were to be transferred to the 2nd Respondent without loss of benefits and guaranteed continuity of service and were further offered a two-year period to rescind the new offer and could resume services with the first Respondent.
However, on assumption of services with the 2nd Respondent they realized some of the terms and conditions negotiated with the 1st Respondent had been withdrawn or not transferred. Growth was not guaranteed/ Training opportunities were not guaranteed.
Other issues included late remittances of salaries and the claimants with bank Standing Orders suffered penalties for late remittances and in late repayment of their loans which were charged a penalty noting the already higher rate loans noting that while the 1st Respondent guaranteed loans which were offered at lower negotiated rates while the 2nd Respondent did not provide the same and the loans were revised to commercial rates.
The court observed:
The Employment Act, 2007 has now created a framework for the regulation of labour relations in a changed political dispensation. Since 2007 the Industrial Court has used its equity jurisdiction to judicial labour relations by setting out in its decisions in what acceptable labour practices are. These pronouncements effectively are revolutionizing labour relations in Kenya, and have led to the fleshing out of the concept of the fair labour practices. Unfair labour practices have traversed the entire terrain of individual dismissal law and collective bargaining law. By constitutionalizing an entitlement to fair conduct is somewhat problematic as traditionally Bill of Rights were intended to regulate legislation and government power, not the conduct of employers.[2] Indeed such a right as fair labour practice is unique to the Kenyan constitutional regime.
The court made the following declaration:
1. A declaration that the 1st respondent unfairly terminated the claimant\'s contract of employment;
2. The1st respondent shall pay the claimant the following
a) Compensation for unfair termination at Kshs. 17,500,254.00
b) Notice pay at Kshs. 8,931,272,00
Dated this 24th day of May 2013.
M. MBARU – JUDGE
Sources: Kenya Law Reports
The
author Dan Omondi is a currently an Associate Consultant with Career
Options Africa Group is a former District Labour Office and also
Executive Officer – Industrial Relations with the Federation of Kenya
Employers. The contents of this newsletter do not constitute legal
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Novation of Employment Contracts