Peter Leon, Partner and Co-Chair: Africa Practice, Herbert Smith Freehills LLP, Fifth Annual East Africa International Arbitration Conference (EAIAC), Serena Hotel, Kigali, Rwanda, Friday, 29 September 2017
Causes and Costs of Investor-State International Arbitration for African Governments
Background
Historically, in customary international law, a foreign enterprise that was wronged by a state in whose territory it had invested (“host state”) could seek redress only in the domestic law and courts of that host state.
If that resulted in a “denial of justice”, the investor’s state of nationality (“home state”) had the sovereign prerogative to exercise diplomatic protection over the investor, by exerting bilateral pressure on the host state.[1]
The injured investor itself, however, had no direct international recourse against the host state, as diplomatic protection was conditional on the exhaustion of any available domestic remedies and, importantly, on the political will and power of the home state to exert pressure on the host state (a question of realpolitik).
After the Second World War, the drive towards a rules-based system of international relations, as well as the decolonisation of Africa and Asia, led to the development of modern international investment law.
Many developing countries were anxious to attract capital from foreign investors, who in turn were anxious to secure their investments from political and even judicial unpredictability in such states.
Thus, these countries increasingly consented to be bound by a set of international standards for the treatment of foreign investments, enforceable through investor-state international arbitration. This consent could be expressed in several forms:
- a reciprocal treaty between two countries in respect of any investments by nationals of one state in the territory of the other (a bilateral investment treaty (“BIT”));[2]
- a similar treaty among three or more states (such as the Washington Convention);[3]
- an agreement directly between a foreign investor and a host state in respect of a specific investment (such as a public-private partnership (“PPP”) contract);
These expressions of consent proliferated across Africa (as well as elsewhere in the world)[4] in the second half of the 20th century:
- all African countries have concluded at least one BIT;[5]
- over 80 per cent of African countries have ratified the Washington Convention;[6] and
- many African states have consented to international arbitration in various sector-specific investor-state contracts, such as mine development agreements (“MDAs”) and petroleum production sharing agreements (“PSAs”).[7]
Less commonly, a country may express in its domestic law a general invitation (non-reciprocal consent) to international arbitration.[8] A collective expression of such consent was made by the SADC member states in the 2006 Protocol on Finance and Investment, which (until its recent amendment) allowed investors from anywhere in the world to enforce certain BIT-type standards of treatment by international arbitration against a SADC member state, after having exhausted all available domestic remedies.
Causes and costs of investment claims globally
According to UNCTAD, to date, worldwide, at least 817 treaty-based investor-state international arbitration claims have been instituted, of which at least 528 have been concluded.
Of the concluded claims: only 142 (26.9%) succeeded (i.e. were decided in favour of the investors); 206 (39.1%) failed; and 180 (34.1%) were settled or discontinued.
Of all the instituted claims, 157 relate to energy supply,[9] 133 (16%) relate to extractive sectors (minerals and petroleum), 122 (15%) to manufacturing, 82 (10%) to engineering and construction, 77 (9%) to financial services, and 44 (5%) to telecommunications.
Breaches of the following treaty provisions are most frequently alleged by investors:
- fair and equitable treatment, in 401 claims (49%);
- indirect expropriation, in 359 claims (44%);
- direct expropriation, in 89 claims (11%);
- full protection and security, in 206 claims (25%).[10]
The damages awarded have ranged from as little as US$ 0.3 million,[11] to as much as US$ 40 billion (the latter in a Yukos-related claim against Russia).[12] Over half of the successful claimants (77 out of 142) have been awarded between US$ 10 million and US$ 500 million in damages (excluding legal costs, which are normally substantial).
Adverse arbitral awards can thus have ruinous consequences for developing countries, especially those that rely on sovereign bonds, in which an “event of default” is often defined to include a failure to satisfy judgment debts in excess of US$ 100 million in the aggregate.[13]
Investment claims against African countries
Of the 817 investment claims instituted worldwide, according to UNCTAD, 92 (11.2%) have been instituted against African countries (though Egypt, Libya and Algeria account for 48 of these).[14] Of the 55 concluded claims against African countries, only 13 (23.6%) succeeded, 20 (36.4%) failed, and 22 (40%) were settled or discontinued.
The statistics do not, however, illustrate the frequency or effect of the threat of investor-state international arbitration, which (whether overt or covert) arguably exerts a potent inhibiting effect on developing countries.
Such a threat may, for example, induce a state to relax or even abandon regulatory reforms it otherwise would have implemented. Even if a threatened claim lacks credible prospects of success, the host state may not be able to afford the costs of defending it in international arbitration.
Some argue that most recent investment claims seek compensation for regulation implemented by democracies, not expropriation by non-democracies, and that the claimants’ goal may not to be obtain compensation, but to impose costs on governments to deter their regulatory ambitions.[15]
After facing two investment claims in the 2000s, South Africa has become Africa’s foremost critic of investor-state international arbitration, having unilaterally terminated thirteen BITs between 2012 and 2015, replacing them with a domestic law disavowing investor-state arbitration, and then spearheading the removal of investor-state arbitration from the SADC Protocol on Finance and Investment in 2016/2017. Trade and Industry Minister Rob Davies explained this approach as follows:[16]
[I]nvestors are not challenging expropriation but challenging the rights of Governments to regulate in the public interest. […] BITs open the door for narrow commercial interests to subject matters of vital national interest to unpredictable international arbitration that may constitute direct challenges to legitimate, constitutional and democratic policy-making.
It is helpful to consider some other salient examples illustrating different experiences, namely those of the DRC, Tanzania and Zimbabwe.
The DRC
The DRC is a party to the ICSID Convention, and has signed eighteen BITs, four of which have entered in force (those with France, Germany, Switzerland and the US).
The DRC has been a respondent in four known international arbitration claims:[17]
In 1997, an ICSID Tribunal awarded a US investor US$ 9 million for damage to an automotive manufacturing plant caused by the military during the civil war.[18]
In 2004, an ICSID Tribunal awarded a US lawyer US$ 750,000 in damages for the military’s seizure (direct expropriation) of his premises and documents.[19] This award was, however, set aside by an ICSID Annulment Committee in 2006.[20]
In 2004, in a claim by a US investor alleging direct expropriation of its diamond mine, the parties settled on an amount of US$ 13 million in damages.[21]
In 2008, an ICSID Tribunal, on jurisdictional grounds, dismissed a claim by a US investor for debts allegedly owed under a construction contract, but did not make a costs award in favour of the DRC.[22]
Despite these claims, the DRC has disclosed no intention of terminating or renegotiating its BITs.
Domestically, the 2002 Investment Code entitles all qualifying foreign investors to a range of BIT protections, including recourse to international arbitration at ICSID or the International Chamber of Commerce in Paris.[23] The Investment Code explicitly excludes the mining sector from its ambit, but the 2002 Mining Code entitles mining sector investors to refer investment disputes to international arbitration.[24]
Tanzania
Tanzania is a party to the ICSID Convention, and has signed twenty BITs, eleven of which have entered in force (those with Canada, China, Denmark, Finland, Germany, Italy, Mauritius, the Netherlands, Sweden, Switzerland and the UK).
Tanzania has been the respondent in two known international arbitration claims:
In 2008, an ICSID Tribunal upheld a claim by a UK investor in a water and sewerage infrastructure project, arising out of seizure of its assets, takeover of its business and deportation of its senior management. The Tribunal found breaches of the BIT’s provisions on direct and indirect expropriation, fair and equitable treatment, among others, but awarded no compensation.[25]
In 2012, an ICSID Tribunal, on jurisdictional grounds, dismissed a claim by a UK investment bank arising out of an unpaid loan for the construction and operation of a power plant.[26] An application before an Annulment Committee is pending.
In recent months, however, several new international arbitration claims have been instituted against the Tanzanian government:
In March 2017, US Corporation Symbion Power instituted proceedings at the International Chamber of Commerce in Paris, claiming US$ 561 million for an alleged breach of a contract with Tanzania’s state power supplier TANESCO.[27]
In July 2017, following the introduction of an export ban on raw minerals in March, both AngloGold Ashanti and Acacia Mining have instituted international arbitration proceedings against Tanzania.[28]
Earlier this month, EcoEnergy instituted an ICSID claim under the Sweden-Tanzania BIT following the 2016 cancellation of a sugarcane plantation and ethanol production project.[29]
Meanwhile, in July 2017, Tanzanian President John Magufuli signed a raft of new laws aimed at (among other things) excluding the prospect of investor-state international arbitration in the mining sector.[30]
The Natural Wealth and Resources Contracts (Review and Re-negotiation of Unconscionable Terms) Act mandates the government to renegotiate or remove any terms from investor-state contracts that Parliament deems “unconscionable”, including those that “subject the State to the jurisdiction of foreign courts and forums”.
Similarly, the Natural Wealth and Resources (Permanent Sovereignty) Act provides (among other things) that natural resource related disputes “shall not be a subject of proceedings before any foreign court or tribunal” and shall only be adjudicated by Tanzanian judicial and statutory bodies.
While these enactments do demonstrate official hostility to investor-state arbitration, they have no effect on Tanzania’s expressions of consent on the international plane, whether in its BITs or in investor-state contracts, which currently remain in force.
Zimbabwe
Zimbabwe is a party to the ICSID Convention, and has signed at least thirty-two BITs, eight of which have entered in force (those with China, Denmark, Germany, Iran, Russia, the Netherlands, Serbia and Switzerland).
Zimbabwe has been the respondent in three known ICSID claims, each brought by rural landowners aggrieved by Zimbabwe’s “fast-track land reform programme”:
In 2009, an ICSID Tribunal awarded Dutch claimants US$ 10.6 million (plus 10% interest compounded every six months) in compensation for breaches of the BIT’s provisions on direct expropriation.[31]
Zimbabwe was ordered to bear the Tribunal’s costs (US$ 450,000), but the Tribunal did not follow the general practice of ordering Zimbabwe to bear the claimants’ legal costs, as it “would not be completely appropriate, in the present case, taking into account the situation in Zimbabwe in 2001/2002”.
The unpaid debt, after applying interest, stood at US$ 25 million by the end of 2015, when a US District Court granted the claimants leave to execute the award against the US assets of several Zimbabwean state-owned entities.[32]
In 2015, in two consolidated claims instituted under Zimbabwe’s BITs with Germany and Switzerland, an ICSID Tribunal found breaches of the provisions on expropriation, fair and equitable treatment, denial of justice, and others.[33]
The Tribunal awarded damages (including moral damages) totalling over US$ 195 million (which may be reduced substantially if Zimbabwe makes restitution of the expropriated properties).
The Tribunal also ordered Zimbabwe to bear the claimants’ legal costs (GB£ 7.8 million plus US$ 18 million plus ZAR 662,000), as well as the Tribunal’s costs (US$ 1.3 million). Zimbabwe’s own legal costs came to almost US$ 2 million.
Zimbabwe has lodged a challenge against this award with an ICSID Annulment Committee, which remains pending.
Despite these defeats, Zimbabwe has not disclosed any intention of terminating or renegotiating its BITs. On the contrary, in his 2016 budget statement, Finance Minister Patrick Chinamasa announced that the government intended to conclude more BITs.
Concluding remarks
While many African states are understandably anxious to ensure that their sovereign power to regulate in the public interest is not unduly fettered, as well as to avoid the prohibitive costs of international arbitration, it is important to weigh the costs of discarding the system entirely.
It is helpful to recall that consent to investor-state arbitration formally releases a state, as a matter of international law, from its susceptibility to diplomatic protection from the home states of the protected investors. Thus, historically, opting into the system of investor-state arbitration helped to relieve participating states from three competing political pressures:
- the horizontal tension between the home state and the host state;
- the vertical tension between the home state and its nationals, whose requests for diplomatic protection may contradict or complicate its foreign policy; and
- the vertical tension between the host state and its nationals, whose democratic demands may be frustrated by diplomatic concessions extracted by an influential home state.
Withdrawal from the system of investor-state arbitration thus signals a regression from the rule of law to the rule of realpolitik, which is even less conducive to equity, consistency and transparency than arbitration, and may expose developing states to even greater coercion and interference from powerful foreign interests.
A better response to the risk of costly investor-state arbitration is for African states to build on their world-class international arbitration centres (notably those in Mauritius and here in Kigali) by investing in the development of greater local expertise and experience in international investment law. This in turn may provide African states with a strong pool of skilled negotiators (to aid the conclusion or renegotiation of more favourable treaties and contracts), as well as litigators and arbitrators.
[1] This could be achieved through the institution of state-state arbitration or more traditional diplomatic, economic or even military countermeasures.
[2] Investment provisions may also be found in a bilateral free trade agreement (“FTA”)).
[3] The Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States, 1965 (“Washington Convention”) has been ratified by 153 states, who have thus consented to investor-state arbitration at the International Centre for Settlement of Investment Disputes (“ICSID”).
[4] According to the United Nations Conference on Trade and Development (“UNCTAD”), countries across the world have concluded at least 2,951 BITs (2,361 of which are in force) and 373 other treaties containing investment provisions (307 of which are in force).
[5] The only possible exception is Western Sahara, whose statehood is not universally recognised. Mauritius has concluded the most (46 BITs, 28 of which have entered into force), while Somalia has concluded the least (three BITs, two of which have entered into force).
[6] Ethiopia and Namibia have both signed the Washington Convention but not ratified it. Angola, Cape Verde, Djibouti, Equatorial Guinea, Eritrea, Libya and South Africa have neither signed nor ratified it. Each of these countries has, however, consented to ICSID arbitration in at least one of its BITs.
[7] Countries that have built international arbitration into their model PSAs include Angola, Equatorial Guinea, Ethiopia, Ivory Coast, Kenya, Liberia, Libya, Mozambique, Tanzania and Uganda. Those that have built it into their MDAs include the DRC, Ghana and Tanzania.
[8] See, for example, the DRC’s Investment Code, 2002, and Mining Code, 2002, both discussed below.
[9] Most (102) of these have arisen under the 1994 Energy Charter Treaty, concluded by several European and West Asian states.
[10] Investors also often invoke: umbrella clauses (i.e. breach of a separate contract between the investor and host state), in 114 claims (14%); national treatment, in 111 claims (13.5%); and most-favoured nation treatment, in 86 claims (10.5%).
[11] Yury Bogdanov v Republic of Moldova (III), SCC Case No. 114/2009.
[12] Hulley Enterprises Ltd v Russian Federation, PCA Case No. AA 226/2005 (claims arising out of a series of actions undertaken by Russia against Yukos Oil Company, including arrests, large tax assessments and liens, and the auction of the main Yukos facilities, among others, which allegedly led to the bankruptcy of Yukos and eliminated the value of the claimant’s shares in Yukos). This award was set aside in its entirety (along with two other awards in related matters) by the Hague District Court in the Netherlands on 20 April 2016. The matter is currently pending before the Hague Court of Appeal.
[13] See Alejandro E Leáñez Rieber, “The Collateral Effect of an International Arbitration Award: A Capital Markets View”, Kluwer Arbitration Blog, 5 February 2015.
[14] The Democratic Republic of Congo (“DRC”) and Burundi each have faced four claims; Madagascar, Senegal and Zimbabwe have each faced three; Tanzania, Morocco, Mozambique, Lesotho, Mauritius, Ethiopia, Ghana, Gabon and South Africa have each faced two; and Gambia, Kenya, Benin, Cameroon, Cape Verde, Equatorial Guinea, Nigeria, Sudan, Tunisia and Uganda have each faced one.
[15] See Krzysztof J Pelc, “What Explains the Low Success Rate of Investor-State Disputes?”, 5 International Organization 1 (2017).
[16] Minister of Trade and Industry Dr Rob Davies, National Assembly Debate on the Protection of Investment Bill, 2015, 17 November 2015.
[17] This is the highest of any African country after Egypt (29), Libya (11) and Algeria (8).
[18] American Manufacturing & Trading Inc v Republic of Zaire, ICSID Case No. ARB/93/1.
[19] Patrick Mitchell v Democratic Republic of the Congo, ICSID Case No. ARB/99/7.
[20] It is worth noting that the DRC had to make a deposit of US$ 200,000 to institute the annulment application, and was permitted to recover only half of this from the investor.
[21] Miminco LLC and Others v Democratic Republic of the Congo, ICSID Case No. ARB/03/14.
[22] African Holding Company of America Inc and Another v Democratic Republic of the Congo, ICSID Case No. ARB/05/21.
[23] Code des Investissements, Loi 004/2002, article 38.
[24] Code Minier, Loi 007/2002, article 319.
[25] Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania, ICSID Case No. ARB/05/22. US$ 20 million had been claimed but no causal link was found. Each party was ordered to bear its own costs.
[26] Standard Chartered Bank v United Republic of Tanzania, ICSID Case No. ARB/10/12.
[27] “U.S. firm seeks $561 million from Tanzania in power supply dispute”, Reuters, 21 March 2017.
[28] “Another miner sues Tanzania after passage of controversial legislation”, IA Reporter, 13 July 2017.
[29] “Tanzania faces arbitration over failed large-scale agricultural investment”, IA Reporter, 12 September 2017.
[30] The mining sector is explicitly excluded from the Investment Act 26 of 1997, article 23(2) of which entitles foreign investors to refer investment disputes to international arbitration. Although a review of this Act has been on the political agenda since 2013, to date there has been no sign of draft legislation in this direction.
[31] Bernardus Henricus Funnekotter and Others v Republic of Zimbabwe, ICSID Case No. ARB/05/6.
[32] See Funnekotter and Others v Agricultural Development Bank of Zimbabwe and Others, United States District Court for the Southern District of New York, Case No. 13 Civ. 1917 (CM), 17 December 2015. The other defendants were the Minerals Marketing Corporation of Zimbabwe, Zimbabwe Mining Development Corporation and Zimare Holdings Limited.
[33] Bernhard von Pezold and Others v Republic of Zimbabwe, ICSID Case No. ARB/10/15; Border Timbers Ltd and Others v Republic of Zimbabwe, ICSID Case No. ARB/10/25.
