Think again before flouting domestic rules when investing abroad

A recent case before the International Centre for the Settlement of Investment Disputes, under the auspices of the World Bank, set a new precedent for companies flouting local laws while operating in a foreign jurisdiction.

In the matter between UK-owned Cortec Mining and the Kenyan government it was found that an investment will not enjoy any protection under a bilateral investment treaty if a company fails to comply with the legislation of the host country.

Cortec argued that its investment in Kenya was “nationalised” in 2013 after they had spent six years and millions of dollars in exploration and development.

However, the Kenyan government said the special mining licence issued to Cortec could not have been expropriated because it was illegally issued for mining in an area where mining was explicitly prohibited.

Ben Sanderson, the global manager of international arbitration practice at DLA Piper who acted for the Kenya government, says the Kenyan and UK investment treaty, unlike a number of similar treaties, did not include express wording requiring the company to prove that it had complied with Kenyan local laws.

Implied protection

However, the international arbitration tribunal agreed with Kenya’s arguments that even in the absence of the wording in a treaty, it is implied that an investment will only enjoy protection if the company complies with the local laws of its host.

Sanderson says arbitration is becoming much more prevalent in Africa, given the increased trade between companies and between companies and governments.

The growth in commercial arbitration (between companies) is in a wider variety of sectors than previously when it was mainly in natural resources.

It now stretches across telecommunication, real estate, construction and infrastructure. “Governments are quite savvy to this rise in disputes and arbitration, and some are even helping to set up arbitration centres,” Sanderson told Moneyweb from Madrid.

Centres have been established in Kenya, Ghana, Egypt, Rwanda and Nigeria.

Domestic legislation as substitute

South Africa reviewed its investment laws and regulations in 2007 and subsequently terminated several bilateral investment treaties to which it was a party. Law firm Webber Wentzel said in an e-alert that government sought to ‘substitute’ the treaty protections with domestic legislation, which ultimately led to the passing of the Protection of Investment Act.

The act explicitly grants the government the right to take regulatory measures in order to “redress historical, social and economic inequalities and injustices; uphold the rights, values and principles contained in the Constitution of the Republic of South Africa; promote and preserve cultural heritage, foster economic development, protect the environment; and achieve the progressive realisation of socio-economic rights”.

The act does not provide for compulsory investor-state arbitration, and subjects disputes to the South African domestic courts.

It states: “This is fundamentally different to the protections offered at international law through investment treaties, which not only enshrine generous protections in line with international law jurisprudence, but also ordinarily require disputes under the treaty to be submitted to a neutral arbitral tribunal.”

In its e-alert, Webber Wentzel says recourse to international arbitration has been explicitly removed in South Africa.

Sunset clauses

Sanderson says there are still some treaties that have not been terminated, and in many instances those that were terminated had sunset clauses, which still offer investor protection for another 10 to 20 years, depending on the treaty.

The Common Market for Eastern and Southern Africa (Comesa) is an existing free trade area with 21 member states where investors still enjoy protection.

When the trade agreement is breached by a state the investor still has a right to sue the state. South Africa is still a member of Comesa.

Sanderson says several countries have followed South Africa in terminating bilateral treaties due to perceived inequalities in the system, with the treaties only placing obligations on the state and nothing on the investors.

He explains that in the past when a foreign investor operated a mine in terms of an agreement with a government, and the government then introduced new regulations to charge an environmental tax on mining companies or introduced a minimum wage in the mining sector, it could “in theory” constitute a breach of the treaty.

This conflict between the rights of investors to have their investments protected and the right of a state to regulate continues to exist.

Sanderson referred to a “new form of bilateral treaty” that has been signed between Morocco and Nigeria. The treaty now places “positive obligations” on the investor in terms of employment rights and the protection of the environment. “It makes it clear that the state is able to regulate without exposing it to a claim against it.”

He says that with the proliferation of cross-border transactions, arbitration offers a neutral forum to resolve disputes.