Effective dispute resolution is important for foreign investors. It guarantees legal certainty and predictability in markets and provides remedies when rights are violated. The resolution of investment disputes has however become a puzzling topic in the Southern African Development Community (SADC) in the past few years. This is because of many factors: the demise of the SADC Tribunal; non-compliance with investment treaty obligations and non-enforcement of arbitral awards by SADC member states; the sudden changes of national investment laws by member states; and the amendment of the SADC Finance and Investment Protocol (SADC FIP).

SADC member states have undertaken commitments to protect nationals of one member investing in the territory of another. In the SADC Treaty (Art.21), state parties have agreed to adopt measures to cooperate in investment. They have also concluded a regional agreement on investment (and finance) regulation – the SADC FIP – and bilateral investment treaties (BITs) among themselves. These legal instruments contain legally binding obligations on state parties to protect foreign investors and investments within their territories. Foreign investors are guaranteed inter alia free movement of funds, no discrimination and expropriation, and recourse to dispute settlement.

The SADC FIP was signed in 2006, entered into force in 2010 and amended in 2016. The Amended Annex 1 of the SADC FIP entered into force (became legally binding on state parties)[1] on 24 August 2017, after being adopted by 3/4 of all state parties. Among other things, the Amended Annex has modified the dispute settlement mechanism.[2] It has replaced investor-state dispute settlement (ISDS) with international arbitration with ISDS via domestic courts or tribunals of the host state. Further, the Amended Annex now provides for inter-state dispute resolution in accordance with the SADC Tribunal Protocol (Art. 26). Art. 25 of the Amended Annex to the FIP stipulates:

state parties shall ensure that investors have the right of access to the courts, judicial and administrative tribunals, and other authorities competent under the laws of the host state for redress of their grievances in relation to any matter concerning their investment including but not limited to the right for judicial review of measures relating to expropriation or nationalisation and determination of compensation in the event of expropriation (Emphasis added).

Only SADC investors (see Art. 1.2) have recourse to dispute settlement provided in Art. 25. Non-SADC investors or domestic SADC investors do not qualify as investors under the Amended Annex. Non-SADC investors will have to rely on investment treaties, if any, between their host and home states or the national laws of the host state, if possible. Domestic investors and investments are protected by their national laws. Investment treaty protections are oriented towards foreign investors and investments.

Disputes covered by the Amended Annex must relate to expropriation/nationalisation of investment and determination of expropriation compensation. The Amended Annex prohibits expropriation except for ‘public purpose, under due process of law, on a non-discriminatory basis and subject to the payment of fair and adequate compensation’ (Art. 5.1). Fair and adequate compensation is assessed in relation to fair market value of the expropriated investment immediately before the expropriation happened (Art. 5.2). The calculation of such compensation must balance between public and investor interests taking into account: the current and past use the property; the history of its acquisition; the fair market value of the investment; the purpose of the expropriation; the extent of previous profit made by foreign investor through the investment; and the duration of the investment (Art. 5.2).

Expropriation related matters are not the only disputes that can be settled under the Amended Annex. Possible disputes between investors and host governments may arise from violation of investment protections enshrined in the Annex: free movement of funds (capital/profits), non-discrimination or access to dispute settlement. Inter-state disputes may involve (incorrect) interpretation or application of the SADC FIP. Also, the dispute settlement provisions under Annex 1 only apply to disputes that happened post 16 April 2010, when the SADC FIP entered into force.

Investor-state disputes shall be settled by national courts, or judicial or administrative tribunals or other competent authorities of the host state. Denying investors access to these forums for settling their disputes is a violation of this provision. However, limiting investor-state disputes to national courts (which are often believed to be subject to the influence of the host governments) can be worrisome to investors. Foreign investors are comfortable in investing in secure and predictable markets, where the is no corruption and the rule of law is upheld. That said, it is necessary for SADC member states to uphold the rule of law and maintain the impartiality and independence of domestic courts. They also need to invest ‘in the development of greater local expertise and experience in investment arbitration’ because this would provide them ‘with a strong pool of skilled practitioners, who could… litigate and arbitrate more cost effectively in investment disputes’.[3]

Nothing in the Annex precludes foreign investors from approaching their home state to seek diplomatic protection. This will lead to inter-state investment disputes which, according to Art. 26, will be settled in accordance with the SADC Tribunal Protocol. However, the SADC Tribunal is not functioning and the Protocol to reinstate it is not in force yet.

Further, nothing in the Amended Annex prohibits investors from using BITs between their home and host states (intra-SADC BITs) in settling their investment disputes. There are 17 intra-SADC BITs; 5 of which are in force – Mauritius-Mozambique BIT (1997), Mauritius-South Africa (1998), Mauritius-Tanzania (2009), Mauritius-Zambia (2015), and South Africa-Zimbabwe (2009). These BITs provide for ISDS through domestic courts and international tribunals like the ICSID and the UNCITRAL. The SADC FIP does not however contain any provisions on its coordination with other treaties including intra-SADC BITs. The COMESA Common Investment Agreement (Art. 32) and ECOWAS Supplementary Act (Art. 31), for example, provide that they shall not affect the rights and obligations of the member states under existing agreements to which they are parties. They even stipulate that in event of conflict between the agreements, the regional investment treaties shall prevail.

The silence of the SADC FIP on its relationship with other intra-SADC treaties raises questions. For instance, a dispute between South African investors and Zimbabwe or vice versa would be dealt with under the South Africa-Zimbabwe BIT or the SADC FIP? Further, other intra-SADC BITs, particularly concluded by Mauritius,[4] allow state parties to prefer applying other treaty (between state parties) more favourable to foreign investors. This will result in treaty shopping practice.

Multiple membership of SADC member states in other African regional economic communities (RECs) also poses a difficulty of overlapping investment obligations. Nine SADC member states are also COMESA members. Intra-COMESA investment matters will be regulated by the COMESA Common Investment Agreement upon entry into force. The Agreement provides for ISDS through national courts of the host state, COMESA Court of Justice, or international arbitration under ICSID, UNCITRAL or any other arbitration institution or under any other arbitration rules agreed by disputing parties (Art. 28). If not effectively dealt with, the multiplicity and overlapping of investment obligations will even exacerbate when the TFTA and AfCFTA Agreements enter into force.

SADC member states have also enacted national investment laws with access to dispute settlement provisions. For example, South Africa’s Protection of Investment Act 22 of 2015 (now in force) provides for ISDS through mediation or arbitration via domestic courts, tribunals or statutory bodies. The Act also contains a non-binding inter-state international arbitration provision (s 13).

The multiple, overlapping and inconsistent investment commitments can undermine SADC’s integration efforts in relation to investment. It may jeopardise the legal certainty and predictability which is needed by investors. Implementation of investment obligations must be consistent, less complicated and problematic as well as less time and resource consuming, this will be appealing to investors.

This tralacBlog is based on a chapter in the forthcoming tralac book on dispute settlement.

---

[1] All SADC member states, except Comoros, Madagascar and Seychelles.

[2] See an earlier tralac Discussion on this issue: https://www.tralac.org/discussions/article/11875-amendments-of-annex-1-to-the-sadc-finance-and-investment-protocol-are-they-in-force-yet.html

[3] See https://www.businesslive.co.za/bd/opinion/2017-10-06-africa-needs-to-resist-any-temptation-to-dump-investor-state-arbitration/.

[4] With the Democratic Republic of Congo, Malawi, Mauritius, Comoros, Madagascar, Swaziland, Seychelles, Zambia and Zimbabwe.