PROTECTION AGAINST ARBITRARY POST INVESTMENT CHANGES

Afolabi Caxton-Martins Adepetun Caxton-Martins Agbor & Segun 7 November 2013 &

Africa - The New Frontier For Growth

• Africa is in sharp focus being the world’s fastest growing continent • African governments have liberalized their economies to attract FDI • The public sector dominates the economy in many African countries - most of the major projects involve direct contractual transactions with government • However political instability and inconsistent adherence to the rule of law creates significant risk in connection with government contracts • Protection offered through investment protection legislation and Bilateral Investment Treaties (“BIT’s”). There are more than 2,500 BIT’s in force and over 500 BIT’s entered into with African countries. Nevertheless there has been a proliferation of Investor – State disputes

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INVESTMENT BASED DISPUTES ARE ON THE INCREASE

• 2012 was a record year with 62 new treaty based disputes filed at the International Centre for the Settlement of Investment Disputes (“ICSID”) • In 68% of the new cases the Respondents are developing or transition economies • Claimants challenged broad range of measures relating to; direct expropriations, revocation of licences, breaches of investment contracts, withdrawals of previously granted subsidies; changes to domestic regulating framework; tax measures, irregularities in public tenders, others • Presently 175 cases are pending at ICSID. In 33 of those cases the Respondent’s are African countries

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KEY CAUSES OF POST INVESTMENT CHANGES WHICH CAUSE THE RISKS

• Expropriation is the most common risk and can be both direct and indirect Indirect expropriation occurs where the government’s conduct interferes with the foreign investor’s contractual arrangements and undermines the project ‘s economic underpinnings • Changes to law or regulation • Non performance of contractual terms • Other changes may arise from civil unrest, violence, terrorism, war, coups

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KEY CHALLENGES IN AFRICA

• Government’s none adherence to contractual terms • Changes in government – including to bodies, personnel and policies • Fear of business consequences of challenging government • Frustration - caused by government bodies who impede the implementation of contracts • The domestic judiciary is often perceived as not being independent • Domestic enforcement of judgement against government • Identifying government assets outside the State to levy execution of judgement 4

Safeguards for Investments

• BIT’s – are agreements among contracting states which provide that nationals (corporate or individual) will be accorded certain rights and protections enforceable at international arbitration • Investment Protection Legislation, including legislative protection in the constitution • Contractual Safe Guards • Financial security in form of the use of LCs, guarantees or bonds, escrow accounts • Political risk Insurance 5

BIT’s Key Protections

BIT’s offer a range of protections to a national with an “investment” in the host state. In broad terms, these protections are: • A guarantee against wrongful expropriations • A guarantee the investment will be accorded fair and equitable treatment • A guarantee that the investment will not be accorded a treatment less favourable than that which a State accords to investments of its own nationals or nationals of third states • • An obligation to “observe any obligation” the government may have entered into with regard to the foreign investor’s investment. An “umbrella” clause) Resolution of investment disputes through international arbitration 6 • Right to repatriate the investment and returns related to it

The Requirements of Nationality and Investment

• • • • • • Article 25 ICSID Convention provides – ICSID’s jurisdiction extends to any legal dispute “

arising directly out of an investment between a Contacting State...and a national of another Contracting State”

In most BIT’s “investment” is broadly defined to cover “every kind of asset” whether fixed or movable, tangible or intangible Cases suggest that in ICSID arbitration tribunals will consider the ‘Salini test’ as a starting point in their analysis to determine if an “investment” exists Two separate tests are required to be fulfilled for an ICSID Tribunal to find that an investment exists First, whether a party has made an investment within the terms of any contract or BIT applicable to the matter Second, whether any investment exists within the meaning given in the ICSID convention 7

The Salini Criteria

• The ICSID Convention does not contain a definition of investment • In a line of cases beginning with Fedex v Venezuela decision on Jurisdiction 11 July 1999 and notably in Salini v Morocco decision on Jurisdiction, 23 July 2003 the tribunal identified 5 criteria indicative of the existence of an investment namely: • it was for a certain duration • it showed regularity of profit and return • involved assumption of business risk • it represented a substantial commitment • it had some significance for the state’s development

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Investment Promotion & Protection Legislation

• Many African countries have Investment protection legislation, including constitutional protection, to encourage FDI • The guarantees include; no expropriation/nationalisation without compensation; Right to freely repatriate investments and profits in a convertible currency; International arbitration to settle disputes • Specific investment legislation may also be enacted for strategic projects which exempts the project from taxes and levies and in addition offers guarantees, against expropriation or any form of interference with contract rights - In Nigeria an example is the Nigerian LNG (Fiscal Incentives Guarantees & Assurances) Act 9

Contracts With a Host State – Some Contractual Safeguards

• Presents an opportunity to reinforce protections provided under relevant treaties and legislation • Get government backing for the project with some form of a sovereign guarantee to ensure payments – including an express waiver of sovereign immunity – for direct recourse to the State for breaches • Government support agreements are key in infrastructure projects • Negotiate a comprehensive change in law clause to protect against adverse changes to government policy, changes to the requirements for the projects consents, or to any relevant legislation which negatively impacts the projects revenues. This will usually involve specific mechanisms for agreeing compensation to the investor by the host government or State owned entity 10

Contracts With a Host State – Some Contractual Safeguards (cont’d)

• Provide for “Material Adverse Government Action”, by any act or omission which adversely affects the investor’s ability to perform its obligations or exercise its rights and triggers measures to be taken to restore the financial position of the investor • Force Majeure definitions should exclude acts brought about by government or within government control • Staged payments, on the achievement of milestones, helps to reduces exposure – may suspend work • Require parliament to make the agreement to be part of the law – this can help reduce exposures to change in government issues. Many oil concession agreements are part of the domestic law of some countries • Make the appropriate government entity a contracting party, in order to enable more effective enforcement of obligations • Secure the participation of Multilateral financial institutions 11

CONCLUSION

• Understand the investment legislation in place in the State • Structure the investment to ensure protection under a BIT. Ensure the BIT is in force – some jurisdictions require ratification • Ensure adequate contractual safeguards, and financial securities • Consider having a local partner with knowledge of cultural and business environment • Political risk insurance 12

Afolabi Caxton-Martins 9th Floor, St. Nicholas House, Catholic Mission Street.

Lagos.

Tel: +234-1-4622094, 4622480, 7406743 Fax: +234 -1- 4613140 Mobile: +234 803 304 6616 D/Line: +234 -1- 4613142 Email: [email protected]

Thank You

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