As part of our webinar series collaboration, the Centre hosted a free Webinar for members of the ADR fraternity on 13th September 2023 titled “An Overview of Investment Treaty Arbitration” The panelists and the moderator were alternative dispute resolution experts, professionals, and academics who included the following.
a) Ank Santens -Partner , White & Case LLC
b) Mathew Drossos-Partner, White & Case LLC
c) Marie Talasova, Associate, White & Case LLC
d) Pauline Mcharo, Head of Legal Advisory-OAG and Department of Justice
e) Noella Lubano,-Moderator- Partner Oraro, and company advocates
Arising out of the main theme of the webinar, subtopics for each panel Speaker were shared in advance to enable proper planning. The subtopics included the following;
Ms. Ank Santens started the discussion by tackling the topic ‘’ Objectives of Investment Treaties’. She observed that there were over 525 Bilateral Investment Treaties (BITs) with African countries, including almost 50 intra- African BITs, in force and More than 30 multilateral treaties with investment protections giving the example of COMESA (Common Market for Eastern and Southern Africa) Treaty signed in 1993, OIC (Organisation of Islamic Cooperation) Investment Agreement signed in 1981, the Economic Community of the Western African States (ECOWAS) Supplementary Act for Common Investment Rules for the Community signed in 2008 and the Common Investment Code signed in 2019.
She observed that the amount invested in Africa in 2021 was US$ 83 billion with US$ 2.5 trillion worth of infrastructure projects estimated to be completed between 2020 and 2025. While not all of those projects will necessarily come to fruition – at the time of the report by McKinsey, 50% of projects were still in feasibility stages with a significant amount of growth planned in the region.
Despite the high promised investments, she noted that challenges do remain including Africa’s track record in moving projects to financial close being poor adding that 80 percent of infrastructure projects fail at the feasibility and business-plan stage. She noted that with time, investments into Africa were likely to grow with investors with an appetite for investing in Africa by location being 38% from the USA, 7% from UAE, 6% from China, and 6% from the UK according to McKinsey.
She gave examples of important African investor case law including World Duty-Free Company Limited v. Republic of Kenya, Cortec Mining Kenya Limited v. Republic of Kenya, Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, Compagnie International de Maintenance (CIM) v. Ethiopia and Houben v. Burundi.
In the case of World Duty Free, Ms. Santens explained that World Duty Free initiated proceedings against Kenya after Kenyan officials took over World Duty-Free’s Kenya outpost which was established through a bribe in 1989 to the former Kenyan President. She explained that if a claimant engages a state officer in bribery, even if the officer is the President, that claimant is not protected from subsequent changes in power that render prior agreements under bribery void. Even in instances when corruption or fraud is “common” in a country, investors must still comply with recognized international law principles and avoid entering into favorable contracts derived from bribes.
Before the Tribunal makes a decision, either party may request confidentiality of the proceedings without a specific showing. She explained that this case also supports the principle that investors have obligations to comply with domestic and international law in the host states in which they invest and shows how investor misconduct in certain circumstances can affect an investor’s legal rights vis-à-vis host states. The fact that World Duty Free was based on a contract between the Claimant and Kenya—as opposed to a bilateral investment treaty or other international investment agreement may, however, limit these principles’ applicability in other investor–state disputes.
Mr. Mathew Drossos followed up the discussion by tackling the topic of Investment Treaty Coverage Protection. He started by defining an investor noting that typically, an investor is defined by nationality. In the Switzerland- Zambia BIT (1994) an investor was defined as “natural persons who, according to the law of that Contracting party are considered to be its nationals. He added that an investor could also mean:
On the definition of an investment, he noted that according to (Ex. Netherlands– Kenya BIT (1970), Art.14), an investment can be a “Legal person”, “juridical person,” or an “enterprise”. He observed that Some treaties expressly exclude certain economic activities such as claims to money arising from the sale of goods or services, short-term debt, licenses, authorizations, permits, and similar instruments that do not create any rights protected under domestic law and judicial or administrative judgment.
On legality requirement, he noted that some treaties expressly limit protections to investments made “in accordance with” or “in conformity with” the laws of the host state adding that even where treaties do not contain an express legality requirement, tribunals have declined to extend treaty protections to unlawfully made investments, finding lawfulness to be an inherent requirement.
On the protection provided by investment treaties, he noted that investors and investments are given substantive and procedural protections. In Substantive protections: the State undertakes to apply certain standards of treatment with respect to a covered investor’s investment, while Procedural protection provides an investor the right of an investor to bring a claim against the State.
On expropriation, he noted that a government taking of an investment is permissible only if it is in public interest, non-discriminatory and in accordance with due process of law; and accompanied by prompt, adequate, and effective compensation.
On full protection and security, he noted that Investments of nationals or companies of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party as articulated in the (Kenya – -United Kingdom BIT Art. 2). This may be in the form of physical protection including from injury by private parties within the host state, legal protection which may include protection from legal and regulatory injury and may also overlap with Fair and Equitable Treatment standard.
On national treatment, he noted that Neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Party to treatment less favorable than that which accords to investment or returns of its own nationals. (Kenya – United Kingdom BIT Art. 3(1)). National treatment refers to the treatment of investments and/or investors in comparative standard and requires like treatment of national and foreign investments/investors in like circumstances.
There is a need to identify the appropriate comparator (often challenging), domestic entity in a comparable situation and in the same economic sector. It also includes a level playing field for foreign investors vis-à-vis domestic investors.
On observation of undertaking, he noted that Each Party shall observe any obligation it may have entered into with regard to investments.” (Tunisia – USA BIT Art. II (3)). The scope of undertaking may include the Scope of application including contractual undertakings, and unilateral undertakings of the host State (e.g., legislation, decrees, regulations, administrative acts. A breach of such an undertaking is considered a breach of the umbrella clause in the treaty.
On free capital transfer, he observed that the free flow of investment-related funds from the country of investment to the investor’s home country or elsewhere should be allowed in freely convertible currencies at the market rate of exchange on the date of the transfer. It includes any form of capital, proceeds, payments, profits, interests, capital gains, royalties, or fees.
On procedural protection, he noted that treaties (domestic foreign investment law) provide a qualifying investor, with a qualifying investment, with a right to assert claim(s) against the State.
In the event of a dispute, he noted that ICSID Arbitration Rules are specially designed for disputes between foreign investors and States relating to investments. The other is the UNICITRAL arbitration with the UNCITRAL rules providing a comprehensive set of procedural rules, developed, and updated by the United Nations Commission on International Trade Law. The rules can be adapted and tailored to each dispute, pursuant to the agreement of the parties.
Ms. Talasova concluded the presentation on Investment Treaty Planning by observing that when there is no suitable investment treaty between the foreign investor’s state of incorporation and the host state, some investors choose to restructure their investments to ensure a sufficient level of investment protection. This is often done by inserting an entity established in a state that has an investment treaty in force with the host state into the ownership structure of the investment. While investment planning—such as tax optimization—is a legitimate tool, the timing of the (re-)structuring is key: Some tribunals have dismissed investment claims where the restructuring—presumably to gain protection under a treaty—has been carried out after a dispute with the state has arisen or become reasonably foreseeable.
Each Contracting Party however reserves the right to deny the benefits of an Agreement to an investor if the national of a third country owns or controls the investment. or if a national of a Contracting Party acquires the nationality of a third state for the sake of the benefit of an Agreement by establishing a legal entity, “(Ethiopia – United Arab Emirates BIT, Art. 20
Some treaties permit the host State to deny the benefits of the treaty to the investor and investment, if the investor is owned or controlled by nationals of a third State with which the host State does not maintain diplomatic relations or with respect to which the host State prohibits transacting (i.e., sanctions) and the investor has no substantial business activities in the territory of its home State.
She concluded by noting that not all treaties are alike, particularly with respect to procedural protections. It is important to ensure comprehensive and broad substantive protections as well as verify the presence of an effective and broad arbitration clause e.g. “If a dispute involving the amount of compensation resulting from expropriation, nationalization, or other measures having effect equivalent to nationalization or expropriation […] cannot be settled within six months […] it may be submitted to an international arbitral tribunal established by both parties “. (Mauritius – Cabo Verde BIT, Art. 8)
In winding up the discussions, Ms. Mcharo provided a perspective of case management from an in-house government lawyer’s perspective particularly in her role of leading government arbitration teams in investor trade disputes. She noted that a new framework is being developed for BITs to include investor obligations that comply with Corporate Social Responsibility requirements, Corporate Governance, ESG, and legality. This includes the obligation of an investor to protect human rights, protection of national security, compliance with environmental laws, and sustainable development. She noted the requirement of the investor to comply with the constitution and domestic laws including the protection of forests, mines, and natural resources. This will ensure a balance between investor obligation and investor protection.
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