Tim’s Take

Break-ups are never easy, but...

June 2011

Hi all, it has been too long since the last Tim’s Take, let’s jump right in to a topic nobody wants to talk about when getting ready to engage Africa, “What happens if something goes wrong?”

My last piece tackled another classic gut-check question for those looking to invest in Africa, “What is my exit?” However, the reality is, those investing in Africa hope they have that problem because it assumes that the enterprise was successful and there is cash to move back to the investors. The tough question is what to do when the project never takes flight, disputes derail the effort, fraudulent behavior is discovered or any number of other scenarios that a seasoned entrepreneur is all too familiar with.

This is where my business¬†and law oriented mind can help. The business side only wants to see the potential, the victory, the success; asking “what are my exits” and assuming the profits. The lawyer (or accountant or financials expert) is out to “rain on the parade” and set him up for all the contingencies, stress cases, what-if’s and worst-case-scenarios that may befall the enterprise. However, like anywhere else in the world, neither party can be overlooked. As I mentioned last time, in Africa, the more thinking on this topic, the merrier — even experienced entrepreneurs are going to see curveballs they’re not used to.

So here is how it might play out; boy meets girl, instant spark, both want to spend all their time and money together, they formalize this desire, time passes, one thought the other would change or they hoped the other would not change (which they did or didn’t), and now they are looking for a divorce. There is no reconciling this matter. Sigh.

Of course we would bring in the counselors, mediators, and all other natural options to avoid the divorce; but assume we find ourselves faced with separating the property and giving what is due. The options: settlement, courts, arbitration. These are pretty standard, but depending where you come from, the options have different levels of comfort or reliability.

In my experience, settlement is often the way to go. The agreed, fixed sum and the confidentiality often provides the safest route for the parties. You will have to put your sense of justice aside and simply look at the numbers. Depending on the nature of the dispute, you may be forced into local courts and as a foreigner you will always have a more difficult time navigating that process than a local. The level of uncertainty, and the chance of a windfall ruling, make settling quickly and quietly an attractive option. The confidentiality also makes it easier to move on in the same community with other projects or relationships, avoiding long, drawn-out gossip in the close-knit communities of this region.

But let’s assume settlement fails. The project agreement should call for dispute settlement through either the courts of a selected country or arbitration. At this point in the region’s development I’d say we hope for the arbitration clause. However, the rules, place, and arbitration body the parties choose will dramatically affect this option. Arbitration at the large “renowned” bodies such as the International Chamber of Commerce (ICC) or London Court of International Arbitration (LCIA) can routinely cost $500,000 in fees just to crack open the file for a small case. And we’re not even talking about legal fees yet. For the type of Small and Medium Sized Enterprise (SMEs) that are the norm in this region, these costs can soar to double or triple the entire size of the project, and we haven’t even factored in whatever the panel declares for damages!

The parties should look at the region and determine if there is a developing arbitration body with some good references. Staying close to the project locale keeps travel costs down for arbitrators, witnesses, access to information and local arbitration center fees are lower. Here in Kigali, for instance, the law establishing the Kigali International Arbitration Center is in its last phase of promulgation. However, the center will still require the availability of veteran arbiters to gain the confidence of the business com munity, both in Rwanda and abroad. So in the meantime parties may consider Kenya’s arbitration center. With a little legal advice in structuring your dispute resolution clause and taking into account the local context, parties can make the process infinitely easier, more efficient and much fairer.

However, not all of your disputes may be the result of a contract you were able to craft to your own preferences. What happens if an employee feels they were wrongly fired? Or someone is injured during the course of the project? Depending on the laws and subject matter of your enterprise, the national courts may be your only choice.

The good news — the justice system is rapidly improving in East Africa with Rwanda leading the way. Many countries are heavily investing development dollars into the justice sector in Rwanda. As the immediate needs of hunger, war, and disease stabilize, the next step in development involves building institutions, with rule of law ranking near the top. Today, training for attorneys, judges, and enforcement agencies are a regular occurrence around Rwanda.¬† The recently formed Rwandan commercial courts are making great strides to defeat backlog. Overflowing case loads are a familiar problem in all court systems, but within a short time these courts have completed 81.5% of the cases referred to them. Out of the over 6,800 cases received, 3,300 were backlogged, some pending in other courts of law for more than 8 to 10 years. Since time is money, this dramatically improved timeline is a big step to a viable dispute resolution option. However, it is still a work in progress. For instance, a recent dispute between two telecomm providers was too technical for the court’s capacity and was referred to arbitration.

A robust national commercial court is vital as commerce becomes more integrated in the East African Community (EAC). The EAC Secretariat noted in May that they are creating a streamlined legal framework to protect investments and businesses. Now the newly institutionalized East African Court of Justice will work with national commercial courts to protect and enforce commercial activity in the region.

Outside these formal options, it is also wise to invest in the community surrounding your enterprise. As mentioned, the close-knit nature of East African business communities can be a blessing. If an outsider takes the time to build a network of people from the community — people who’ve known the employees, partners, and government stakeholders for years — they can go to bat for you in resolving issues before you’re faced with the aforementioned problems. And besides the business benefits, it’s always good to have friends different from you.

Break-ups are never easy, but they are a part of life. Investors will find that with a bit of planning and investment in the community around the enterprise, they can survive the process and move on to one of the other fish in the sea.

Tim Shirk is an attorney currently serving as an advisor to the Minister of Justice in Rwanda, advising on government contracts with international parties. He continues to work on foreign direct investment opportunities with Renew Strategies based in Washington, DC. He can be reached at tshirk@renewstrategies.com.

From the Archives:

March 2011 – Welcome to a new Africa