Africa Focus: Arbitration in Africa - Managing risk in a growing market

by White & Case LLP

White & Case LLP

Today, many areas of the African economy are still growing despite challenges due to sharp reductions in the price of oil and other natural resources. Besides the industries related to the continent's natural resources, infrastructure projects, banking and telecommunications are also on the rise. In these areas and many others, Africa has a large untapped market with relatively low penetration and great potential for investment and business.

With development comes disputes, though, and litigation in Africa can be a complex affair. Procedures and substantive law derive from legal systems established during the pre-independence era. Broadly speaking, the legal systems across the continent are based on either common law or the codified civil law systems of the former colonial powers, sometimes mixing elements from both legal systems. Finally, Islamic and customary law can be heavily influential in some jurisdictions as well.

Frameworks for civil litigation exist in African jurisdictions; but litigation may be complex and time-consuming — hence costly. Even in the case of a favourable ruling, enforcement can be challenging. Enforcement of foreign judgements can be particularly difficult in some jurisdictions, especially if no reciprocity agreement exists with the jurisdiction in which the judgement was obtained. In cases where the counterparty is a state entity, that entity may furthermore benefit from enforcement immunity.

It follows therefore that investors and businesses are increasingly turning to arbitration as a sensible option to be used in the event of a dispute.

  • What is arbitration?
  • Where the disputes go
  • Conclusion

What is arbitration?

Arbitration is an alternative to state court litigation with the goal of obtaining a binding and enforceable decision rendered by legal and industry experts. The end product of arbitration proceedings is an 'award'. As a general rule, awards are more difficult to appeal and easier to enforce than domestic judgements, in particular in other countries, based on international treaties, such as the New York Convention on the Recognition and Enforcement of International Arbitral Awards (NYC) or the Riyadh Arab Agreement for Judicial Cooperation (RAAJC). Arbitration can be split into two main categories: commercial and investment arbitration. Although African states generally have some form of arbitration framework in place, in many cases, they are in the very early stages of development.

In commercial arbitration, which is by far the more relevant category for the resolution of disputes relating to business activities, the parties agree under a contract to submit their disputes to arbitration. Most commercial arbitrations are administered by arbitration institutions, such as the International Chamber of Commerce (ICC) or the London Court of International Arbitration (LCIA). Those institutions also provide the parties with procedural rules. Commercial arbitration permits parties to opt-out from state jurisdictions and mitigate legal risks (e.g., incomplete or non-existent local law, unspecialised state courts and political pressure on judges). Another advantage is that parties can select legal and industry experts who are the most qualified to resolve their disputes as their arbitrators.

Investment arbitration is a relatively rare but powerful creature when it comes to protecting investors against political risks. Investment arbitration permits a foreign investor to seek remedies against a state for breach of protections granted under a bilateral or multilateral treaty. Such treaties are concluded between states, whereby each state undertakes to ensure that investments made by investors of another state party to the treaty are protected against unreasonable or arbitrary state action. An investor seeking to pursue such remedy must show which specific protection guaranteed by the treaty has been breached due to state action. Investment arbitration is often relevant for unlawful state interference with large-scale projects, such as infrastructure, energy, mining, etc. An example would be the expropriation of a telecommunications provider without adequate compensation. Just as commercial arbitration, investment arbitration permits investors to bring their disputes with sovereigns to tribunals sitting outside the affected country and to obtain a binding and enforceable decision against the state. In addition to being enforceable inside and outside the affected state, many states confronted with adverse awards choose to pay voluntarily.

Africa accounts for about 836 Bilateral Investment Treaties (BITs). Virtually all Africa-related BITs have provisions for dispute settlement, and in the vast majority they refer to investment arbitration. Forty-five African countries have ratified the Convention of the International Centre for Settlement of Investment Disputes (ICSID). As of December 2016, 15 per cent of ICSID's case load of registered cases was against sub-Saharan African countries and 10 per cent against Middle East and North African countries. ICSID recently signed a collaboration agreement with the Lagos Regional Centre for International Arbitration. By this collaboration, ICSID arbitrations can now take place in Lagos, Nigeria.

Besides these BITs, there are also regional investment agreements like the Investment Agreement for the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC) Protocol on Finance and Investment, which contain provisions for investment arbitration. Other investment treaties, such as the Economic Partnership Agreement between the European Union and its member states and the SADC states (Botswana, Lesotho, Mozambique, Namibia, South Africa and Swaziland), provide only for a state-to-state arbitration dispute resolution system.

Concerns raised by civil society groups about transparency of investor-state arbitration proceedings and whether poor and heavily indebted states are significantly disadvantaged in disputes against well-funded investors have led to questions about the balance of power in these disputes. Some countries are renegotiating and even terminating BITs to avoid investor-state arbitration. South Africa, for instance, has recently replaced its BIT regime with a new domestic law that does not permit the use of investment arbitration. The SADC member states have also been considering changing their investment protection in the SADC Protocol on Finance and Investments by replacing investment arbitration with state-to-state dispute resolution.

Despite this scepticism, there has been a steady increase in investments in these areas, and an increase in the number of bilateral investment treaties signed by African states, as well as an increasing number of investment codes that incorporate protections for investors. Investment arbitration cases involving African state respondents are significantly on the rise as well. COMESA for example plans to update its arbitration rules to enhance investment protection.

Similarily, in March 2017, the Organisation of Islamic Cooperation (OIC), which accounts for 27 African member states out of 54 in total, and the International Islamic Centre for Reconciliation and Arbitration (IICRA), headquartered in Dubai, signed a Memorandum of Understanding (MOU) aimed at establishing partnership between the two parties on investment and trade conflicts. Under the MOU, the OIC and IICRA will promote arbitration as a means to protect investments in member states.

Where the disputes go

Parties are encouraged to assess carefully what institutions are best suited to handle a future dispute.

The growth of arbitration across Africa is supported by legal reforms across the continent. Several countries have modernized their arbitration laws, and 36 out of 54 African states have ratified the NYC, the most recent to accede being Angola, in March 2017.

Africa-related commercial disputes have traditionally been arbitrated in Paris or London under the ICC or LCIA rules. Africa-related disputes accounted for 5.5 per cent of the ICC's case load in 2015. It is also noteworthy that sub-Saharan Africa accounted for the highest percentage of state and state- owned entities who were parties to ICC-arbitrations. Regarding the LCIA, Africa accounted for 6.4 per cent in 2015, with disputes from Nigeria alone accounting for 2.1 per cent. The LCIA has also entered into a joint venture with Mauritius in 2012 to create the LCIA-Mauritian International Arbitration Centre (LCIA-MIAC). The LCIA-MIAC has its own set of rules that are based on the LCIA Rules and conceived for parties who are familiar with arbitrating through the LCIA but want to resolve their disputes in Africa. It is important to note that the strong ties to Paris and London are by no means conceptually required, but may result simply from language conveniences. Parties are well advised to consider whether it is possible to obtain the same level of protection outside the traditional hubs.

Meanwhile, a number of home-grown African arbitration centres have also emerged. Arbitration lawyers and arbitrators are progressively calling for Africa-related disputes to be heard in Africa rather than 'exported' to international centres. The Cairo Regional Centre for International Commercial Arbitration (CRCICA) and the Lagos Regional Centre for International Commercial Arbitration are such Africa-grown institutions with an international reach. In Francophone Africa, OHADA (Organisation pour l'Harmonisation en Afrique du Droit des Affaires – the Organization for the Harmonization of Business Law in Africa) is a supranational organisation aimed at harmonising commercial law among its 17 member states (see Figure 4) and increasing investment in the West and Central African economic zone. OHADA also provides for an arbitration institution, the Cour Commune de Justice et d'Arbitrage (CCJA) which is based in Abijan, Côte d'Ivoire. Arbitral awards rendered under OHADA are final, binding and enforceable among its member states. This is particularly useful because five OHADA member states are not signatories to the NYC (Chad, Congo, Guinea-Bissau, Equatorial Guinea and Togo).

Another popular alternative for international investors in Africa is the Dubai International Finance Centre (DIFC). One of the key attractions of Dubai for parties contracting in Africa is the availability of enforcement under the RAAJC. Eight out of the 20 RAAJC member states are African countries, and three among them are not members of the NYC (Sudan, Somalia and Libya).

Although there may be reasons to choose a local African arbitral institution, established arbitral institutions have a proven track record in efficiently administering large arbitrations: They possess the necessary infrastructural facilities required for the smooth conduct of proceedings. Moreover, these international institutions have professionals with several years of experience in administering large and complicated cross-border disputes. Thus, parties are encouraged to assess carefully what institutions are best suited to handle a future dispute.

Figure 1: ICSID signatories

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Figure 2: OIC signatories

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Figure 3: NYC signatories

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Figure 4: OHADA signatories

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Figure 5: RAAJC signatories

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If a party wishes to arbitrate its disputes in Africa, it must choose a seat where the judiciary is known to be proactive and trained in the practice and procedure of arbitration, so that they support the arbitration process and enforce arbitration agreements and awards. It is also highly recommendable to arbitrate in a country with modern arbitration legislation. Security, political stability and corruption indices are other important factors that must be considered. It is equally important to choose an institution which has both adequate infrastructural facilities and technology and well- trained professionals who are able to administer the dispute efficiently. Finally, the party should consider using legal counsels with experience with Africa-related arbitrations who know how to manage the dispute.

This article is based upon material first published in the April 2017 edition of 'Into Africa'

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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