The fine print that matters: Dispute resolution in SME cross-border lending deals

Kenya's financial landscape has matured considerably in recent years, with cross-border capital flows now reaching entities that would historically have relied entirely on domestic financing.

Debt and equity investments are flowing in from funds domiciled across the world, a testament to Kenya's growing attractiveness as a regional investment destination.

Cross-border transactions are fundamentally different from domestic ones. The parties are separated not merely by geography but also by legal systems, each shaped by distinct commercial traditions, judicial cultures and statutory frameworks.

Despite these differences, parties need terms that are commercially sound and legally enforceable. Governing law and dispute resolution clauses, therefore, cannot be treated as boilerplate. They must be carefully negotiated, because when things go wrong, they determine everything.

In practice, the investing party originates the transaction documents which are usually standardised and utilised across various jurisdictions.

These documents naturally carry references to legal systems the fund is familiar with, ones where outcomes are predictable, judicial processes are established and investment instruments are well understood. Familiarity breeds confidence and confidence is especially valuable when deploying capital into markets perceived as higher risk.

This is where emerging markets, including Kenya, face a structural challenge. Domestic legal systems may not fully contemplate certain investment instruments, leaving courts with limited precedent and at times, insufficient guidance on how to adjudicate complex financing disputes.

A vivid illustration of this tension emerged recently in Kenya, where two High Court decisions on Section 974 of the Companies Act, arrived at diametrically opposite conclusions.

The Stichting Rabo Bank Foundation vs Ava Chem case sent shockwaves last year where the court's interpretation was that a foreign company is required to be registered in Kenya to have the ability to sue. Months later, in Bruton Gold Trading LLC v Anne Atieno Amadi & Others, the court held that registration is not a prerequisite to sue.

The proposed Business Laws (Amendment) Bill, 2025 attempts to address these ambiguities. Encouragingly, the Bill seeks to define what constitutes "carrying on business" in Kenya, which has historically been the source of much of the uncertainty. Though the Bill is yet to be enacted, its direction is the right one.

The preference of foreign funds for governing law, other than Kenyan law, creates a parallel set of enforcement challenges. Kenya’s Foreign Judgments (Reciprocal Enforcement) Act recognises judgments from only a limited number of designated jurisdictions, excluding many countries where investment funds are domiciled.

A judgment obtained in a New York court, for instance, cannot simply be enforced in Kenya. Instead, the judgment creditor would need to institute fresh proceedings in Kenya, relying on the foreign judgment as evidence of a debt.

While this does not amount to a full rehearing of the underlying dispute, the Kenyan courts may examine the judgement within parameters of recognised defences, introducing an additional layer of uncertainty, additional time, complexity and costs in the enforcement process.

This is precisely why arbitration has become the preferred dispute resolution mechanism for cross-border transactions in Kenya. However, arbitration is not without its own limitations, chiefly cost.

For SME financing in the $100,000 to $1 million range, a bracket that represents a significant and growing segment of cross-border lending, the expense of arbitral proceedings can be disproportionate to the amounts in dispute. Arbitrators' fees, legal representation and logistical costs can render the mechanism commercially unviable. A further consideration arises with security documents.

These realities sometimes push foreign lenders toward increasingly elaborate security structures, adding transactional costs related to perfection and enforceability and complexity in an attempt to cover all bases. The path forward requires action on three fronts.

First, foreign lenders should ensure that their security documents (where loans are secured) are structurally sound and that security over assets situated in Kenya is governed by Kenyan law.

Second, the Business Laws (Amendment) Bill, 2025 should be fast-tracked. Third, Kenya has a real opportunity to strengthen its institutional architecture. Done well, these would bridge the trust gap between Kenya's legal system and international capital and expand access to foreign funding for the SMEs that need it most.

Where borrowers are SMEs, whose collateral typically comprises receivables, inventory, and equipment rather than real property, lenders should leverage the Movable Property Security Rights Act. The framework offers a structured enforcement route, which, when read alongside the Insolvency Act’s treatment of secured creditor priority, provides foreign lenders with a reliable footing.

Paired with bespoke dispute resolution modelled on specialised forums like the (such as DIFC courts), Kenya would offer international investors both legal certainty and a sophisticated forum for resolving disputes.

The writer is a corporate and finance lawyer. Email:[email protected]