REUTERS | Mike Hutchings

What is the future of investor state dispute resolution under the African Continental Free Trade Agreement?

On 1 January 2021, a significant milestone under the African Continental Free Trade Agreement (AfCTA) was achieved as trading began in the African Continental Free Trade Area. This portends exciting investment opportunities in Africa, for both local and foreign investors. However, it is imperative for investors to know and understand how disputes between states and private investors will be treated and resolved under AfCTA. AfCTA includes a protocol on dispute settlement which only applies to disputes between states, and not private investors. The AfCTA signatories plan to hold negotiations in the near future to outline a protocol on investment, addressing both foreign direct investment as well as intra-African investment (Investment Protocol). Although the precise contours of the Investment Protocol are as yet unknown, this Protocol presents an opportunity for the harmonisation and development of investment principles and dispute resolution in Africa.

First, in terms of harmonisation, the Investment Protocol will be binding on the AfCTA states. It therefore provides an opportunity to harmonise Africa’s approach to investment by establishing a set of principles that may become the benchmark for investment in Africa. This would provide welcome clarity and assurance for private investor. However, the task of harmonisation is complex as there are various treaties and templates governing investment in Africa. At present, there are approximately 860 bilateral investment treaties (BITs) involving at least one African nation and about 170 intra-African BITs. There are also various regional agreements and templates governing investment, such as the Economic Community of West African States (ECOWAS) Common Investment Code, the Southern African Development Community (SADC) Model BIT and the East African Community (EAC) Model BIT.

Apart from the sheer volume of investment treaties in Africa, the task of harmonisation is made more difficult by the fact that there is a great deal of disagreement between African states on how disputes with investors should be handled. Some states are set against investor-state arbitration and have opted for domestic remedies. For example, South Africa’s Protection of Investment Act 2015 forecloses participation in international investment arbitration in almost all circumstances. Regionally, special note to article 32 of the EAC Model BIT states that the “preferred option” is not to provide for investor-state dispute settlement (ISDS). The SADC Finance and Investment Protocol removes ISDS entirely. Other regions have made investor-state arbitration conditional on first exhausting domestic remedies, such as in the ECOWAS Supplementary Act, the ECOWAS Protocol on Energy, the COMESA Common Investment Agreement. It is not yet clear which attitude will prevail if any.

Second, it is important to note that disputes may not necessarily take the same shape under the Investment Protocol as there is a trend in Africa to modernise and innovate when it comes to using investor-state dispute resolution. For example, the Pan African Investment Code (PAIC) expressly reserves the right of states to institute counterclaims. This is an unusual practice. The PAIC also includes bespoke provisions focusing on human rights and natural resources, including new obligations for investors. Other African treaties, such as the ECOWIC, the SADC Model BIT and the EAC Model BIT, also place obligations on investors, not just rights.

Therefore, the modernisation of traditional investor principles in the Investment Protocol would not be surprising, as AfCTA expressly reaffirms in its preamble:

“The right of state parties to regulate within their territories and the state parties’ flexibility to achieve legitimate policy objectives in areas of public health, safety, environment, public morals and the promotion and protection of cultural diversity.”

The COVID-19 pandemic and reorientation towards sustainable development goals and “clean energy” in Africa will probably provide further impetus for the rebalancing of standards such as the “fair and equitable treatment” standard. Clearly, this will have an impact on how the substantive provisions of the Protocol are framed and how disputes arising out of these new policy objectives will be handled.

For now, investors will have to wait and see what form the Investment Protocol takes and whether ISDS is retained. Certainly, a balance will need to be struck. African states will be eager to reassure investors as the continent recovers from the pandemic. However, African states have signalled the importance of protecting their ability to make and remake laws and policies.

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