- IBA Lagos Conference 2013

Report
PROTECTION AGAINST ARBITRARY
POST INVESTMENT CHANGES
Afolabi Caxton-Martins
Adepetun Caxton-Martins Agbor & Segun
7 November 2013
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Africa - The New Frontier For Growth
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Africa is in sharp focus being the world’s fastest growing continent
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African governments have liberalized their economies to attract FDI
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The public sector dominates the economy in many African countries
- most of the major projects involve direct contractual transactions
with government
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However political instability and inconsistent adherence to the rule of
law creates significant risk in connection with government contracts
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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
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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
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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:
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A guarantee against wrongful expropriations
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A guarantee the investment will be accorded fair and equitable
treatment
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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
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An obligation to “observe any obligation” the government may have
entered into with regard to the foreign investor’s investment. An
“umbrella” clause)
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Resolution of investment disputes through international arbitration
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Right to repatriate the investment and returns related to it
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The Requirements of Nationality and Investment
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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
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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:
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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
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Incentives Guarantees & Assurances) Act
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
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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
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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
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• Political risk insurance
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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