Growth of Contract-Based Investment Arbitration in Africa: Fashion or Future?

Abstract

In the light of investment arbitration, the growth of contract-based investment arbitration in Africa has become more of a future trend than a fleeting one. Its growth in Africa has sparked intense debate among scholars, practitioners and legislators. But then, as foreign investments increase effectively in Africa, the use of contract-based arbitration as a means of resolving investment disputes becomes more pertinent globally. What is the current state of contract-based investment arbitration in Africa’s investment landscape, and how is it evolving?

Keywords: contract-based investment arbitration, Africa, foreign investment, dispute resolution, economic development.

Introduction

While the growth of contract-based investment arbitration in Africa may appear to be a fashion trend influenced by global investment patterns or rules, its increasing adoption, institutional support, and alignment with economic development goals unveils that it goes beyond fashion—it postulates a future-oriented approach towards a structured and reliable dispute resolution framework.

Africa is basically referred to as the birthplace of investment arbitration globally. The system for resolving disputes has been in place for over 50 years, asides from its impediments and quest for a reformation. But then, at the tick of time, Africa has witnessed a significant rise in contract-based arbitration as a mechanism for resolving disputes between investors and states. This trend has sparked debates over whether it is merely a passing fashion driven by short-term economic and political factors or a sustainable future for investment dispute resolution on the continent.

Contract-based Investment Arbitration: A New Trend in Africa

Meanwhile, contract-based investment arbitration is crucial as it allows foreign investors to resolve disputes with host states efficiently, ensuring protection of their investments [2]. Basically, contract-based investment arbitration refers to disputes arising from investment contracts between a foreign investor and a host state (or a state-owned entity). These disputes are resolved through arbitration, as stipulated in the contract, rather than through a Bilateral Investment Treaty (BIT) or Multilateral Investment Treaty (MIT). This trend tends to unveil a broader shift towards a more robust legal framework, indicating that contract-based arbitration is likely to continue shaping Africa’s investment landscape in the future, rather than being a temporary phenomenon [3]. Unlike treaty-based arbitration which relies on regulations and procedures of international treaties, such as a Bilateral Investment Treaties (BITs) to resolve dispute, contract-based investment arbitration is a dispute resolution mechanism where the terms and procedures for arbitration are explicitly outlined within a contract between an investor and a host state.

One might ask of the difference between contract-based arbitration and treaty-based arbitration. First, is on the source of content. This simply means that for an investment arbitration to be contract-based, the agreement to arbitrate must have directly been embedded in the investment contract between the parties. Whereas, the treaty-based arbitration derives its authority from international treaties where states consent to arbitration for disputes with investors from other signatory countries. Second, is on the scope of protection. While contract-based arbitration is confined to the terms and conditions specified in the contract, it also offers tailored protections relevant to the specific investment; treaty-based arbitration, on the other hand, provides broader protection under international law, against unfair and non-equitable treatment, expropriation, and other standards.

Comparison between Investment Arbitration and Contract-based Arbitration

Basically, the comparison between investment arbitration and contract-based arbitration is not far- fetched. While investment arbitration is a form of specialized form of arbitration focusing on disputes between foreign investors and states arising out of international law and Bilateral or Multilateral Investment Treaties concluded between states; the contract-based arbitration refers to a private dispute resolution mechanism arising from parties’ contractual agreement to arbitrate commercial or investment disputes outside the BITs or MITs, characterized by party autonomy

and procedural flexibility. In contract-based arbitration, the arbitral clause is mainly a consensual agreement between the two entities (often between two companies or a company and a state entity), unlike the investment arbitration, where its legal basis is mainly on international treaties, especially Bilateral Investment Treaties (BITs), Multilateral Treaties (e.g., Energy Charter Treaty), or investment chapters in FTAs.

Moreover, while investment arbitration increasingly emphasizes on transparency, where ICSID and UNCITRAL awards and submissions may be published, the contract-based arbitration generally emphasizes on confidentiality, unless the parties agree otherwise. The investment arbitration is, substantively, governed by international law and mainly on treaty obligations; whereas the chosen national contract law governs the parties in contract-based arbitration. Examples of an investment arbitration and a contract-based arbitration can be seen in certain cases like the CMS Gas Transmission Company v. Argentina [ICSID Case No. ARB/01/8 (Award, 2005), where the US investor claimed that Argentina violated BIT obligations by enacting emergency economic measures that hammed its investment. The tribunal held that Argentina breached the fair and equitable treatment (FET) standard in the US-Argentina BIT, making it an investment arbitration via the legal basis emanating from the treay. Unlike this contract-based arbitration case, Westinghouse v. National Power Corp. (Philippines) [ICC Case], on a contractual dispute over a power project. Westinghouse, the claimant, initiated ICC arbitration based on a contractual arbitration clause. The tribunal resolved breach of contract issues, not treaty violations.

The remedies in investment arbitration is mainly on breach of international treaty obligations, state conduct and regulations, while in contract-based arbitration are on contractual obligations, e.g., damages for breach of contract, specific performance and so on.

Advantages of Contract-Based Arbitration

Meanwhile, why contract-based arbitration? What are the benefits of initiating a contract-based arbitration?

1. İt promotes greater flexibility and Party Autonomy: with the advent of the contract-based arbitration, parties can define the arbitration process, select arbitrators, and set procedural rules that best suit their needs, leading to a more customized dispute resolution mechanism.

2. A Unique Tailored Arbitration Clauses: under the contract-based arbitration, parties are free to include specific clauses that address unique aspects of the investment, such as choice of law, confidentiality agreements, and proceedings timelines, ensuring that the arbitration proceedings align closely with the parties’ expectations.

3. It increases the potential for more efficient and cost-effective dispute resolution: contract-based arbitration can streamline the dispute resolution process by pre-defining procedures and rules, potentially reducing time and costs compared to the more rigid frameworks often associated with treaty-based arbitration.

   
   

Moreover, recent cases have been held under the process of contract-based arbitration in Africa, such as, Zhongshan Fucheng Industrial Investment Co. Ltd. Vs. Nigeria; where the dispute arising from a 2007 contract to develop a free trade zone in Nigeria’s Ogun state, the Chinese company initiated arbitration proceedings after the contract was terminated in 2015. The arbitral panel presiding over the case awarded Zhongshan over $60 million, leading to enforcement actions including the temporary seizure of a Nigerian presidential jet in 2024. Also the case of BP vs. Kosmos Energy, where in 2024, an arbitration ruling favored the plaintiff, BP, affirming its position as the sole buyer of liquefied natural gas from the Greater Tortue project offshore Senegal and Mauritania. The decision was based on the contractual agreements between the parties, highlighting the role of contract-based arbitration in resolving investment disputes in Africa.

Nevertheless, some initiatives and projects have been established promoting contract-based arbitration in investment dispute resolution in Africa. This includes the Organization for the Harmonization of Business Law in Africa (OHADA), in other words referred to as the OHADA Reforms, has undertaken significant reforms to its Uniform Act on Arbitration and the Rules of the Common Court of Justice and Arbitration, the Africa Arbitration Association (AfAA), African Continental Free Trade Area (AfCFTA), ICCA Working Group on African Arbitral Practices and so on. These reforms aim to enhance the framework for contract-based arbitration within its member states, promoting a more conducive environment for resolving investment disputes through contractual mechanisms.

Despite challenges such as limited awareness and understanding of contract-based arbitration, lack of infrastructure and resources, and inconsistent and unpredictable application of arbitration laws and rules, contract-based investment arbitration in Africa presents immense opportunities, such as increase in foreign investment and economic growth, improved dispute resolution mechanisms and reduced risk of lengthy court battles. By addressing these obstacles and strengthening arbitration systems, Africa can boost investor confidence, attract more investment, and enhance its global economic standing.

Conclusion

The expansion of contract-based arbitration in Africa is a positive step toward strengthening her investment environment. As arbitration institutions grow and local expertise develops, contract- based dispute resolution will likely reduce reliance on foreign arbitration centers, keeping investment-related disputes within the continent. In the long run, this shift will enhance the credibility of African economies, promote economic growth, and ensure fair and efficient dispute resolution mechanisms.

References

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Anabuike Jeremiah Kosisochukwu, ACArb

Final Year Law Student in the University of Nigeria, Enugu Campus, Nigeria

A current member of the Young ICCA, and an associate member of the Nigerian Institute of Chartered Arbitrators. He has acquired prestigious certifications in various programs and institutions, mainly in the University of Leiden on International Arbitration. He is also a Young member of the London Court of International Arbitration, LCIA.

LinkedIn profile link: https://www.linkedin.com/in/anabuike-jeremiah-k-acarb-1b5143233/