Chapter 1

Part A: Law and the regulators

Introduction to law

Last updated November 20265 sectionsabout 9 min read

Key takeaways

Law is the body of rules, enforceable by the state, that governs conduct; public law covers the state and individuals, while private law (contract, tort, property and agency) covers relationships between individuals and entities.
The Constitution of Kenya, 2010 is the supreme law, and every other source, legislation, case law, common law and equity, customary law and international law, is tested against it.
A valid contract needs offer, acceptance, consideration, capacity and an intention to create legal relations; breach of a condition allows the innocent party to repudiate, breach of a warranty gives damages only.
A stockbroker, a fund manager and a Central Depository Agent are all agents acting for a principal, and apparent authority can bind the principal even where actual authority was withheld.
An agent who discloses the agency is generally not personally liable on the contract; one who hides it or exceeds their authority can be.

Every rule covered later in this paper, licensing, listing, AML obligations, is ultimately an application of general legal principle to the financial markets. This chapter sets out that foundation: what law is, where it comes from in Kenya, how it is applied, and the two private-law areas (contract and agency) that underpin almost every transaction a market intermediary carries out.

Nature, purpose and classification of law

Law is the body of rules, enforceable by the state, that governs conduct within a society. Its purposes include:

Maintaining order.
Resolving disputes fairly and predictably.
Protecting rights and property.
Enabling economic activity, contracts, company formation, securities trading, that depends on enforceable rules to function at all.

Public law

Governs the relationship between the state and individuals: constitutional, criminal and administrative law.

Private law

Governs relationships between individuals and entities: contract, tort, property and, central to this chapter, agency.

Substantive law

Defines rights and duties themselves, for example what makes a contract valid.

Procedural law

Governs how those rights are enforced, for example how a claim is brought before a court.

Sources of law

The Constitution of Kenya, 2010: the supreme law, against which every other source is tested
Legislation: Acts of Parliament and subsidiary legislation (regulations, rules) made under them, including the Capital Markets Act and the regulations this paper is built on
Case law (judicial precedent): decisions of superior courts that bind lower courts in future similar cases
Common law and doctrines of equity: inherited principles, particularly in contract, agency and trusts, that continue to apply except where displaced by statute
Customary law: recognised where applicable and not repugnant to justice and morality
African customary law and Islamic law: applied in defined personal-status matters
International law: treaties and conventions Kenya has ratified, relevant later in this guide's AML chapter, which is built substantially on international convention obligations

The court system

Supreme Court

The apex court, with jurisdiction over presidential election petitions and appeals certified as raising a matter of general public importance.

Court of Appeal

Hears appeals from the High Court and equal-status courts; the highest purely appellate court below the Supreme Court.

High Court

Unlimited original jurisdiction in civil and criminal matters, including judicial review and constitutional interpretation; the Capital Markets Tribunal's decisions may ultimately be appealed here.

Employment and Labour Relations Court

Equal status to the High Court, with exclusive jurisdiction over employment and labour disputes.

Environment and Land Court

Equal status to the High Court, with exclusive jurisdiction over environmental and land matters.

Magistrates' courts

Subordinate courts with jurisdiction limited by the value of the claim (civil) or the severity of the offence (criminal).

Kadhi's courts

Subordinate courts with jurisdiction limited to questions of Muslim personal law (marriage, divorce, inheritance) where all parties profess the Muslim faith.

Tribunals

Specialised, quasi-judicial bodies created by statute for a defined subject area, of which the Capital Markets Tribunal is the example most relevant to this paper.

Fundamentals of the law of contract

A contract is a legally binding agreement, and almost every transaction a market intermediary handles, a brokerage mandate, an underwriting agreement, a fund management agreement, is a contract. Its rules matter directly to this paper because a licensed intermediary's obligations to clients are contractual as much as regulatory.

Formation

Requires offer, acceptance, consideration (something of value exchanged), capacity of the parties, and an intention to create legal relations.

Classification

Contracts may be written or oral, bilateral (both sides promise) or unilateral (one side promises in exchange for an act), and simple or made under seal (a deed).

Terms of a contract

Conditions are terms so fundamental that breach entitles the innocent party to repudiate the contract; warranties are less central terms whose breach gives a right to damages only.

Vitiating factors

Circumstances, mistake, misrepresentation, duress, or undue influence, that undermine genuine consent and can make a contract voidable or void.

Illegal contracts

Contracts whose formation or purpose breaches the law or public policy are unenforceable, regardless of what the parties agreed.

Discharge of contracts

A contract ends by performance, agreement between the parties, frustration (an unforeseen event makes performance impossible), or breach.

Remedies for breach

Damages (financial compensation), specific performance (a court order to perform), injunction (a court order to stop an act), and rescission (unwinding the contract).

Limitation of actions

A claim for breach of contract must be brought within a fixed statutory period, after which the right to sue lapses even if the breach is genuine.

Fundamentals of the law of agency

Agency law matters directly to this paper because a stockbroker executing a client's order, a fund manager acting on an investor's behalf, and a Central Depository Agent maintaining accounts are all, legally, agents acting for a principal.

Nature of agency

A relationship in which one party (the agent) is authorised to act on behalf of another (the principal), creating legal relations between the principal and third parties.

Formation of agency

Arises by express appointment, by implication from the parties' conduct, by ratification (the principal later adopts an unauthorised act), or by necessity (emergency circumstances).

Authority of agents

Actual authority is what the principal genuinely gave the agent; apparent (ostensible) authority is what a reasonable third party would believe the agent had, based on the principal's own representations, and can bind the principal even where actual authority was withheld.

Duties and rights of principals and agents

An agent owes duties of good faith, obedience to lawful instructions, reasonable skill and care, and accounting for the principal's property (directly underpinning an intermediary's client-money obligations); the principal owes duties to remunerate the agent and indemnify them for authorised acts.

Personal liability of agents

An agent who discloses that they act for a principal is generally not personally liable on the contract; an agent who fails to disclose the agency, or exceeds their authority, can become personally liable.

Termination of agency

Ends by agreement, completion of the purpose, revocation by the principal, renunciation by the agent, death or incapacity of either party, or frustration.

Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (Court of Appeal)

A company whose board allowed a director to act as managing director without ever formally appointing him was bound by his contract with architects: the board had held him out as having authority, and the architects had relied on it. Apparent (ostensible) authority binds the principal even where actual authority was never given, directly grounding the authority-of-agents point for the stockbroker or fund manager who deals with a client relying on the intermediary's apparent standing to act.

The cases below are genuine, reported Kenyan or English authorities; an English decision applies in Kenya as persuasive authority under section 3(1)(c) of the Judicature Act (Cap 8).

Exam tip

This chapter is general law, but every concept resurfaces later under a market-specific label: agency becomes the intermediary/client relationship in the chapter on market intermediaries, and contract remedies underpin the enforcement powers covered from the chapter on capital markets regulation onward. Learn the general rule once and recognise its market application rather than treating them as separate topics.

Self-check

(a) Distinguish public law from private law, and state which category agency law falls under. (3 marks)

(b) State the five elements required to form a valid contract. (5 marks)

(d) A stockbroker discloses that they act for a client when placing an order, but a fund manager fails to disclose that they are acting as an agent at all. State the consequence for each regarding personal liability. (3 marks)

Show worked answer

(a) Public law governs the relationship between the state and individuals (constitutional, criminal, administrative). Private law governs relationships between individuals and entities (contract, tort, property, agency). Agency law falls under private law.

(b) Offer, acceptance, consideration, capacity of the parties, and an intention to create legal relations.

(c) Actual authority is what the principal genuinely gave the agent. Apparent (ostensible) authority is what a reasonable third party would believe the agent had, based on the principal's own representations, and can bind the principal even where actual authority was withheld.

(d) The stockbroker, having disclosed the agency, is generally not personally liable on the contract. The fund manager, having failed to disclose the agency, can become personally liable.