Clause and effect – The arbitration backing Africa’s investment boom

As foreign investment into Africa grows, so does the demand for dispute resolution. We team up with Simmons & Simmons to assess how clients can get the best out of that crunch arbitration clause.

The attraction of Africa, and its abundance of natural resources, is undeniable. In 20 years, foreign direct investment (FDI) rose by 853% from just over $6bn in 1994 to $57.2bn in 2013, compared to a global average of 466% growth. It is unsurprising then that the increase in African-related arbitration has been robust. Where international investment goes, disputes invariably follow.

This can be seen in the rising number of referred cases to both the International Chamber of Commerce (ICC), which remains the most popular forum for major Africa-related international arbitrations, and the London Court of International Arbitration (LCIA), which continues to gain traction, particularly in Anglophone Africa (see tables).

The ICC leads the way and the number of African parties involved in ICC arbitrations has more than doubled in the past ten years, from 68 in 2005 to 163 in 2014. More dramatic growth, albeit at a much smaller scale, can be seen at the LCIA, where Africa-related arbitrations have climbed from two in 2002 to 30 in 2013, which accounts for 10% of its total arbitration caseload.

However, many African counterparties (typically state-owned entities) are increasingly attempting to avoid the traditional arbitral institutions and opt for an ad hoc route, including their own domestic African arbitration centres, or regional options such as L’Organisation pour l’Harmonisation en Afrique du Droit des Affaires (OHADA) in west Africa and the Cairo Regional Centre for International Commercial Arbitration (CRCICA) (see ‘Local Pride’).

At the very least, they try to have the ICC and LCIA arbitrations seated in their home jurisdiction, or a compromise venue, such as Mauritius, that is deemed more neutral than Paris or London. For parties on either side of the table, this is an increasingly important part of the negotiation stages because when a project goes wrong and the disputes clauses have been ignored, the costs can be significant.

‘I came across a contract in which the arbitration clause had Singapore as the place of arbitration,’ says Paul Bugingo, a Dubai-based projects partner at Simmons & Simmons, and co-chair of its Africa practice. ‘The parties were an African government and a Turkish investor. Neither party had picked this up; they had just used a contract from another project. The cost implications would have been much higher than other centres of arbitration.’

To obtain a better understanding of how lawyers and clients can best navigate this rapidly developing landscape, Legal Business teamed up with Simmons to survey more than 100 senior lawyers from a range of international companies doing business in Africa, of which three-quarters had been involved in one or more African arbitration matters in the past five years. We also interviewed senior in-house counsel and seasoned arbitrators with years of experience handling Africa’s most heavyweight disputes.

How many arbitration cases have you commenced or had to defend in the last five years?

What percentage of your disputes settle prior to the full arbitration hearing?

Which of these arbitral seats would you use?

Resource nationalism

The majority of the arbitration disputes in Africa are linked to energy and natural resources, or the infrastructure sector. In 2013, the oil and gas industry, and the broader energy and resources sector, were the two most active sectors for LCIA arbitrations, respectively accounting for 15% and 7% of disputes referred to the institution. Similarly, at the International Centre for Settlement of Investment Disputes (ICSID), which handles major investment treaty disputes often governed by bilateral investment treaties (BIT), oil, gas and mining accounted for 26% of its disputes, while construction, power, water and transportation accounted for a further 37% of its arbitration hearings.

For investors and contractors working on such projects in Africa, the counterparty is often the state, or a state-owned company. This can have a huge bearing on the direction any potential arbitration takes, and it usually starts at the contract negotiation stage. Whereas in the past many African states did not invest enough in their legal spend upfront, the more sophisticated parties are now increasingly aware of the importance of spending now to save later. These increases will often come directly from larger government legal budgets, or from initiatives such as the African Legal Support Facility, which was developed by the African Development Bank to support ‘African governments in the negotiation of complex commercial transactions since 2010’.

‘One of the problems that has led to an increase in arbitration is poor negotiation of contracts at the outset,’ says Bugingo. ‘Governments are usually more exposed as they may hire the wrong international law firms to advise them. This may be because they do not know the right law firms to retain or at times there may be undue pressure from third parties to use certain law firms which may not necessarily be the right law firms. The wrong lawyers will heighten the risk of the wrong advice being given which consequently will lead to disputes which trigger arbitration to become necessary.’

In the case of ICSID, the costs can be prohibitive. ‘Because they don’t have very developed investment policies, there is a real danger of countries here in Africa being overwhelmed by ICSID claims,’ says one Nairobi-based arbitration specialist. ‘You only have to have four or five ICSID claims against you and you are facing a legal bill of $40m or $50m.’

For a country like The Gambia, with a GDP in 2013 of just $903m, the fact that last year it had to face two ICSID claims brought against it by the Australian company African Petroleum could have made a relatively large dent in its domestic budget. The disputes eventually settled when The Gambia agreed to reinstate and extend two offshore hydrocarbon exploration licences that were behind African Petroleum’s initial claims. In response to this sort of pressure some countries, such as South Africa, have cancelled their BITs in the belief that they put the investor’s rights ahead of the public interest.

‘Fifteen years ago all governments accepted that in order to attract foreign investors they needed to accept international arbitration clauses,’ says Yves Baratte, a Paris-based energy and infrastructure partner at Simmons. ‘More African governments have now had actual experience of arbitration proceedings against them, and the cost that those incur, so there is now a growing trend that governments shouldn’t accept international arbitration clauses as easily, and that they tend to backfire against local governments.’

Faced with this increased resistance, at least when it comes to state entities demanding local seats of arbitration, or turning their back on BITs, investors have a choice: do they accept the risk and push ahead, or do they show caution and risk losing the deal? Currently it is the African states that hold much of the bargaining power since the scramble for resources is highly competitive, many of those interviewed suggested that investors are prepared to compromise. In certain countries, such as Nigeria, their hand has been forced because in disputes with state-sector clients the state will often demand arbitration in a local centre such as the Regional Centre for International Commercial Arbitration – Lagos (RCICAL). Respondents are fairly open-minded on this front, with 72% saying that they would consider using a local or regional African arbitration centre, like OHADA or RCICAL.

‘This is just part of the risk that investors assume, and ending up in dispute is not an inevitable outcome in all cases,’ says Philip Norman, a disputes and infrastructure partner based in Simmons’ Qatar office. ‘You don’t know that you’ll go to dispute, you don’t know how much will be in dispute, so ultimately international companies will say: “Okay, we’ll sign it, we’ll have a seat in Lagos or Kampala or wherever it is.” The early stages of contract negotiations are concentrated on getting the deal done. Investors want to start the project and to get the infrastructure into commercial operation quickly. With the best will in the world, we lawyers sometimes focus too much emphasis on the potential outcomes and legal complexities of dispute resolution provisions, we have to remind ourselves that they are just one part of the overall commercial risk context and that dispute resolution clauses are often not deal breakers on major projects.’

Seats and institutions

The appropriate choice of institution or seat will depend on the scale and value of the underlying project and contract, its location, and the nature of the disputing parties. For the most part, respondents show the necessary pragmatism when it comes to the specific dispute resolution clauses that they will insert into their contracts: 57% say they will tailor the clause depending on where they might need to enforce an award, or depending on who the counterparty is.

In the case of OHADA, which has 16 member states, one in-house lawyer based in Turkey says: ‘Since some of the countries that we work in are not a part of New York Convention, we are required to accept, for example, OHADA.’

Just 4% said they were likely to accept a clause proposed by the other side. This is where the opposing parties’ ability to compromise is put to the test. When it comes to high-value projects, most local and regional institutions such as OHADA; the Arbitration Foundation of Southern Africa (AFSA); and RCICAL in Lagos, will be rejected in favour of the LCIA and ICC, with which western lawyers are much more familiar. The ICC in particular has an upper hand because its clauses are embedded into the Fédération Internationale des Ingénieurs-Conseils (FIDIC) contracts that dominate the construction and engineering industry.

The one area where local arbitration centres can also make sense is cost: 61% of our respondents expect arbitration to be less expensive than litigating in the courts of England, Paris or New York. Realistically, however, this is unlikely to ever happen with the big arbitrations. Indeed, for the largest cases, cost usually isn’t the main concern, it is more about finding an international forum that can confidentially deal with a dispute involving multiple, and competing, cross-border interests.

If the dispute is small and local, and cost saving is the main concern, then forums such as LCIA, ICC or ICSID would not be appropriate. Parties can either take the ad hoc United Nations Commission on International Trade Law (UNCITRAL) route, where they have to manage the mechanics of the arbitration themselves, or a local centre. For international arbitration specialists like Simmons’ London-based partner Jayne Bentham, there is no comparison.

‘The majority of arbitrations that I act in are institutional – ad hoc is definitely the exception rather than the rule and that is a reflection of the fact that sophisticated clients can see the benefits of having an institution behind the arbitration,’ says Bentham. ‘There is a perception that proceeding without an institution may represent a cost-saving measure, but without an institution sitting behind a tribunal you have no safety net: the relative cost saving is not really enough to justify foregoing this safeguard.’

The big question then is where the arbitration is seated. Arbitration proceedings do not have to be in the same place as the seat – for example, the tribunal for a London-seated arbitration could conduct most of its hearings in Dar es Salaam – but the seat does dictate the procedural law, which is important should parties wish emergency relief or to challenge an award. The numbers at the ICC point to the fact that despite some attempts by countries like Nigeria to keep disputes seated in Africa, in the case of the ICC most African disputes will go to Europe, typically London or Paris. Regardless of the fact that 163 African entities were parties to ICC arbitrations in 2014, only eight ICC arbitrations were actually seated in Africa. Admittedly there is a lag – so an arbitration clause that was agreed in 2014 is unlikely to reach dispute for several years – so there is still a chance those figures might improve. Yet, despite the positive backing that certain African seats and arbitration centres received in the survey, lawyers we spoke to do not feel there is likely to be a dramatic drift away from London and Paris in the foreseeable future.

‘You want to select a seat that is experienced and friendly to the arbitration regime,’ says Bentham. ‘Having decided to take your dispute out of the court process, you do not want to be seated in a jurisdiction where the court might needlessly interfere in the process.’

Which other forms of dispute resolution do you use?

What are the common challenges that you face when conducting arbitration in Africa?

Enforcement and immunity

Given that so many investment projects are agreed with state-owned entities, the issue of state immunity from prosecution or enforcement is certainly on people’s radar. Yet while it was a concern for 31% of those responding to the survey, 40% didn’t see it as a problem. For many, it is more of an inconvenience that prolongs the duration and expense of a dispute, rather than stopping a claim from being satisfied.

There have been notable successes with regard to enforcement in Africa in which local courts do end up supporting an international claimant’s award, even when it is against a state-owned company. One high-profile example was a dispute concerning an emergency power off-take agreement between the state-owned Tanzania Electric Supply Company (Tanesco) and Dowans Tanzania (and its international parent company Dowans Holding). When Dowans won the initial ICC arbitration in 2010, Tanesco resisted the enforcement of the $65m award, both in the UK courts and in Tanzania. Despite heated coverage in the Tanzanian press, in 2013 the local courts did ultimately find in favour of Dowans, forcing Tanesco to pay up. Key to Dowans’ success was its ability to prove that the arbitration process had been carried out properly. The enforcement proceedings did, however, add several years to the dispute process.

For those investing into countries that are not signed up to the New York Convention, of which there are 20 in Africa, the issue of enforcement is considerably more pressing. This is particularly relevant for the Democratic Republic of Congo, one of the biggest beneficiaries of the boom in African FDI, which rose from just $11.2m in 1999 to just over $2bn in 2013, but also one of the continent’s riskiest and most politically turbulent countries. Again, this forms part of the careful balancing of risk and reward that companies have to make.

One potential remedy for any dispute is to avoid arbitration altogether, and for 64% of survey respondents, mediation is something that they will engage in first. A further 49% of those surveyed say that half of their disputes will settle prior to the full arbitration hearing.

‘After mediation, parties usually get their heads banged together and they can often find a resolution,’ says Norman. ‘Generally sophisticated parties would rather keep control of the outcome of their dispute, than give it to a third-party arbitrator to decide.’

Given what is at stake with so many African infrastructure projects, it is ultimately in both parties’ interests to maintain good relationships rather than derail a hugely profitable venture. To be successful in this respect requires a large degree of tailored pragmatism at every stage of the negotiation process, as well as a finely honed ability to weigh up the risk and potential payoff of any given situation. Getting the right arbitration clause is one crucial factor that will help protect those rewards and alleviate the risks. LB