By Dr. Kariuki Muigua, PhD (Leading Environmental Law Scholar, Policy Advisor, Natural Resources Lawyer and Dispute Resolution Expert from Kenya), Winner of Kenya’s ADR Practitioner of the Year 2021, ADR Publisher of the Year 2021 and CIArb (Kenya) Lifetime Achievement Award 2021*
According to UNCTAD, some of the issues raised by critics of the current ISDS system include: a perceived lack of legitimacy and transparency; inconsistencies between arbitral awards; difficulties in correcting erroneous arbitral decisions; questions about arbitrators’ independence and impartiality; and concerns about the costs and duration of arbitral procedures. Despite the earliest proponents of the ISDS system’s advantages, and as already pointed out, most of the developing world countries, especially in the African continent have in recent times complained about the unfair effects of the ISDS system on their domestic affairs.
Specifically, African countries have raised concerns about the traditional investor-state dispute settlement (ISDS) system including: lack of legitimacy and transparency; exorbitant costs of arbitration proceedings and arbitral awards; inconsistent and flawed decisions; the system allows foreign investors to challenge legitimate public welfare measures of host states before international arbitration tribunals, and governments are concerned about their sovereignty or policy space as they have discouraged governments from adopting public welfare regulations, resulting in regulatory chill. Regulatory chill is used to refer to a situation where governments do not enact or enforce legitimate regulatory measures due to concern about ISDS. It has been noted that using lawsuit threats as a bargaining chip, arbitration lawyers also encourage their clients to use the threat of investment disputes as a way to scare governments into submission.
In addition to the above challenges, divergent interpretation by arbitral tribunals of identical treaty clauses has also led to a fragmentation of ISDS case law, thereby undermining the confidence of many countries in the system. This lack of confidence has been exacerbated by the fact that cases are litigated and decided by a small professional community of arbitrators and counsels who generally hail from western countries and elite socio-economic backgrounds. Furthermore, the systematic use of ISDS has excluded national courts from the process of hearing disputes involving public law/policy matters. Notably, in a number of high-profile ISDS cases, host countries have been sued by foreign investors on the basis of a seemingly outdated treaty signed decades previously. Foreign Direct Investment into Africa is estimated to have climbed from $10 billion in 1999 to $41,8 billion in 2017.
It is also documented that there has been an unprecedented boom in the number of claims against African countries where, between 2013 and 2019 only, African States have been hit by a total of 109 recorded investment treaty arbitration claims which represents about 11% of all known investor-state disputes worldwide. It has also been noted that the sharp increase in the number of ISDS related cases filed between 1987 and 2014 took many countries by surprise, with developed countries having started to recalibrate the contents of their IIAs, and developing countries generally stopping to sign new treaties or even beginning to terminate existing ones. Indeed, as a result of the highlighted concerns raised by the developing countries, some states such as Indonesia and South Africa have gone as far as unilaterally terminating IIAs on a larger scale. Some players view ISDS as a system that “threatens domestic sovereignty by empowering foreign corporations to bypass domestic court systems” and “weakens the rule of law.”‘
The United Nations Conference on Trade and Development (UNCTAD) observes that national investment laws operate within a complex web of domestic laws, regulations and policies that relate to investment (e.g. competition, labour, social, taxation, trade, finance, intellectual property, health, environmental, culture). However, most of the times, it is the enforcement of these domestic laws against them that the foreign investors seek to challenge before the investor-state arbitration tribunals when they do not favour them or would result in higher operating costs.
Taking Kenya as an example, Kenya has been sued before international investment arbitration tribunals based on its Bilateral Investment Treaty’s (BITs) commitments. In 2013, when Kenya considered new changes in the mining sector to ensure its people benefit from its mineral resources, some investors sued the Government. In Cortec Mining Kenya Limited, Cortec (Pty) Limited, and Stirling Capital Limited v. Republic of Kenya, the claimants, Cortec Mining Kenya Limited (CMK), a private company constituted in Kenya, and its majority shareholders, Cortec (PTY) Limited and Stirling Capital Limited, two British holding companies, began to invest in a mining project in a niobium and rare earths exploration project located at Mrima Hill in Kenya in 2007, and obtained their Special Prospecting License (SPL 256) in 2008, which expired in December 2014 after two renewals.
According to the investors, they were also granted Special Mining License 351 (SML 351) in March 2013 based on SPL 256. However, in August 2013, the newly elected Kenyan government investigated and suspended several hundred “transition period” mining licences, including the investors’ SML 351, due to “complaints regarding the process.” According to the investors, this amounted to a revocation of their licence. In 2015, the investors filed a request for an investor-state arbitral tribunal established under a bilateral investment treaty (BIT), where they claimed that Kenya’s revocation of their SML 351 (their “key asset”) constituted a direct expropriation contrary to the United Kingdom–Kenya BIT. The Kenyan Government’s position was that “there was no expropriation of the “purported licence [SML 351]” by the Government because the licence was void ab initio for illegality and did not exist as a matter of law, as held by the Courts in Kenya. As a result, the Government argued, “where there is no protected investment, there can be no expropriation.”
The International Centre for Settlement of Investment Disputes (ICSID) Tribunal held it lacked jurisdiction to hear a dispute concerning a mining project that the tribunal found did not comply with domestic environmental law. The tribunal thus confirmed that both the ICSID Convention and the BIT protected only “lawful investments”. It held that non-compliance with the protective regulatory framework was a serious breach.” Concluding both on jurisdiction and merits that SML 351 was not a protected investment, the tribunal dismissed all of the investors’ claims. The tribunal ordered the investors to pay half of the costs claimed by Kenya, in view of the unsupported “corruption objection” allegation and other blameful conduct by Kenya during the arbitral proceedings. The Claimants in the Cortec case have, however, since applied for annulment of the award, seeking partial annulment of the Award on two grounds: (i) that the Tribunal manifestly exceeded its powers (ICSID Convention, Article 52 (1)(b))’ and (ii ) that the Tribunal failed to state the reasons on which the Award was based (ICSID Convention, Article 52(1)(e)).
The application for annulment was, however, dismissed in a decision delivered on 19th March 2021 and the applicants condemned to pay the costs of the application and the stay of enforcement of award previous granted was lifted. On its part, the award raised significant issues of public international law, including how questions of investor compliance are considered in investor-state dispute settlement and the legal implications of investor noncompliance. Had the Claimants in this case succeeded in their application for annulment, it is would have most likely added to the complexities surrounding the ability of host countries to regulate the investors’ activities that are likely to interfere with their duties under the sustainable development agenda and other regulatory laws, relating to human rights, economic, social and environmental concerns. Thus, the abuse of Investor State Dispute Settlement System by the foreign investors and the adverse effects on host countries go beyond the huge financial burdens that it can potentially place on the losing state to affect its sovereign ability to regulate the investors’ activities in protection of public interests and welfare as well as meeting its sustainable development goals.
*This article is an extract from the Book: Settling Disputes Through Arbitration in Kenya, 4th Edition, Glenwood Publishers, Nairobi, 2022 by Dr. Kariuki Muigua, PhD, Kenya’s ADR Practitioner of the Year 2021 (Nairobi Legal Awards), ADR Publisher of the Year 2021 and ADR Lifetime Achievement Award 2021 (CIArb Kenya). Dr. Kariuki Muigua is a foremost Environmental Law and Natural Resources Lawyer and Scholar, Sustainable Development Advocate and Conflict Management Expert in Kenya. Dr. Kariuki Muigua is a Senior Lecturer of Environmental Law and Dispute resolution at the University of Nairobi School of Law and The Center for Advanced Studies in Environmental Law and Policy (CASELAP). He has published numerous books and articles on Environmental Law, Environmental Justice Conflict Management, Alternative Dispute Resolution and Sustainable Development. Dr. Muigua is also a Chartered Arbitrator, an Accredited Mediator, the Africa Trustee of the Chartered Institute of Arbitrators and the Managing Partner of Kariuki Muigua & Co. Advocates. Dr. Muigua is recognized among the top 5 leading lawyers and dispute resolution experts in Kenya by the Chambers Global Guide 2022.
References
Muigua, K., Settling Disputes Through Arbitration in Kenya, 4th Edition, Glenwood Publishers, Nairobi, 2022, p. 308 to 315.