THE AUTHOR:
Ashenafi Fisha Sendeku, Assistant Lecturer in Law at Bahir Dar University & Legal Researcher at International Arbitration Africa (“I-Arb Africa”)
Background
Based on the UNCTAD database on ISDS cases, out of 172 investment arbitration claims filed against African countries since 1987, 97% were initiated by investors outside the continent. Despite being a part of numerous trade and investment agreements, including Bilateral Investment Treaties (“BITs”) that are thought to promote economic growth and development, in recent times, Investor-State Dispute Settlement (“ISDS”) has faced significant criticisms from various countries, particularly from Africa. Among many critics, the inconsistent interpretation of treaty provisions, the high costs and lengthy duration of arbitration processes, the lack of transparency, the influence of political pressure, and the presence of institutional bias drive the need to reform the ISDS system.
As the African Continental Free Trade Area (AfCFTA) seeks to transform Africa into a leading global economic player, the Protocol to the Agreement Establishing the African Continental Free Trade Area on Investment (2023), which was adopted on 19 February 2023 and is still subject to ratification and implementation by AfCFTA State Parties, marks a significant milestone in promoting intra-African investment. According to Art 2(c), the protocol aims to create a stable and legally secure investment environment while offering mechanisms for resolving disputes between investors and host states.
Therefore, this article will examine the prevalent challenges associated with the ISDS system and subsequently analyze the Protocol’s provisions on dispute prevention and resolution, considering the ongoing reforms of ISDS at the international level.
Major Challenges and Reforms of ISDS
In contemporary international investment law, among different dispute settlement mechanisms, ISDS has established itself as the main option through which foreign investors can pursue claims they have against a host State, when state actions, such as regulatory changes or expropriation, impact their investments. On the other hand, the ISDS mechanism has been criticized for many reasons, including legal uncertainty, lengthy and costly procedures, overused experts, and concerns about arbitrators’ impartiality. From a financial perspective, ISDS mechanisms have imposed significant burdens on African nations, diverting resources from essential public services and straining national budgets. For example, in Funnekotter v. Zimbabwe, Zimbabwe was ordered to pay substantial damages during an economic crisis. Similarly, in Unión Fenosa Gas v. Egypt, Egypt was ordered to pay $2 billion in damages, exacerbating its fiscal challenges. Due to these criticisms, many countries, including African countries, have voiced concerns about the ISDS mechanism, and there is a move to exclude ISDS from investment agreements and terminate BITs. For instance, South Africa and Tanzania have reformed their ISDS mechanisms, albeit with differing approaches. The South African government terminated several BITs with many countries, including EU countries. To replace those terminated BITs, South Africa also enacted the Protection of Investment Act of 2015, which emphasized resolving disputes within domestic courts, allowing international arbitration only under specific conditions. Tanzania also, through the 2017 Natural Wealth and Resources (Permanent Sovereignty) Act, explicitly prohibits international arbitration for disputes related to natural resources and mandates that such disputes be resolved under Tanzanian law within its judicial bodies.
To reform ISDS, the United Nations Conference on Trade and Development (UNCTAD) has proposed an approach to handling investor-state disputes that focuses on resolving, avoiding, or preventing conflicts without relying on international arbitration. There are two main types: one addresses existing disputes using methods like mediation or negotiation, while the other focuses on preventing disputes by implementing policies to manage potential issues before they escalate, known as preventative ADR.
To address many criticisms of ISDS, another way of reform is to replace ISDS with an investment court system. An instance of this is the European Union’s Investment Court System (“ICS”), which was introduced in trade agreements of the EU with countries like Canada, Singapore, Vietnam, and Mexico. The EU’s ICS features a permanent tribunal with a two-tier structure, comprising a tribunal and an appeal tribunal, aiming to enhance consistency and impartiality in dispute resolution.
Dispute Resolution within the AfCFTA Investment Protocol
In line with the above UNCTAD’s recommendations, one of the key innovations of the protocol is dispute prevention through effective grievance mechanisms. Article 45 of the Protocol mentions the importance of “dispute prevention and grievance management,” which is critical in mitigating the risks of costly disputes escalating to arbitration. According to Article 45, State Parties are required to establish designated competent bodies to facilitate dispute prevention and grievance management. These bodies are tasked with receiving investor complaints, de-escalating potential disagreements, and assisting in resolving difficulties to avoid formal disputes. Should these efforts fail, Article 46 mandates that disputes be initially addressed through amicable means such as consultations, negotiations, conciliation, or mediation within the Host State. These ADR methods allow for more flexible, cooperative, and cost-effective resolutions. It also makes the investment activities in the host states sustainable, as there will be a win/win approach compared to ISDS. However, ADR is not without its challenges, notably the enforceability of decisions. To address this, establishing the competent bodies to oversee dispute prevention and grievance management within AfCFTA is a significant step. These will enhance the credibility and enforceability of ADR outcomes. Furthermore, the upcoming protocol’s annex on dispute resolution mechanisms should provide clarity on enforcement procedures, thereby strengthening the overall effectiveness of ADR within the AfCFTA context.
If investors from a State Party and the Host State are unable to amicably resolve a dispute through ADR mechanisms as per the protocol, they may refer to the dispute resolution mechanisms specified in an Annex to the Protocol. This Annex will detail the rules and procedures for dispute prevention, management, and resolution. As per Article 46(3) of the protocol, the annex will be negotiated following the adoption of the Protocol by the Assembly of Heads of State and Government of the African Union and is expected to be finalized within 12 months. Once adopted, the Annex will become an integral part of the Protocol. Although Article 46 of the Protocol stipulated that the Annex should be adopted within 12 months of the Protocol’s adoption in February 2023, negotiations among AfCFTA member states are still ongoing. Recent meetings, such as the 10th Committee on Investment held in Windhoek in October 2024, have focused on reviewing draft versions of the Annex. Then, the outcome of these negotiations will be crucial in shaping the future landscape of investment dispute resolution across the African continent.
Therefore, in shaping the dispute resolution mechanisms Annex of the AfCFTA Investment Protocol, it is crucial to balance the interests of both investors and host states. The writer believes that one way to achieve this is by establishing an Investment Court System (“ICS”)with a permanent tribunal and appellate mechanism, similar to the European Union’s Investment Court System. As a part of the AfCFTA organ, the AfCFTA Permanent Investment Court would enhance transparency, consistency, and legal certainty, addressing key concerns about the unpredictability and impartiality of arbitration panels. Similar to the EU Investment Court System, the AfCFTA Permanent Investment Court will face challenges regarding the enforcement of its decisions. For example, most scholars and practitioners agree that there is no established mechanism under the ICSID Convention; to enforce an award under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (1965) (“ICSID Convention”), it must result from arbitration proceedings conducted under both the ICSID Convention and its rules. Therefore, when establishing this investment court within the AfCFTA framework, the Annex should provide detailed provisions outlining how the decisions of this investment court will be enforced within the context of the AfCFTA. Also, having the appellate body within this court system will help mitigate the many criticisms of traditional ISDS, the lack of transparency and the appeal system. Moreover, to expedite the dispute settlement system, short timeframes for the proceedings of both bodies of this investment court should be included in the Annex of the protocol.
Conclusion
In summary, the AfCFTA Investment Protocol marks a significant opportunity for Africa to transform its investment landscape. To address existing challenges in ISDS, the Protocol must integrate more balanced, efficient, and transparent dispute resolution methods. By promoting Alternative Dispute Resolution (“ADR”) mechanisms—such as mediation and conciliation—and emphasizing proactive dispute prevention through effective grievance management, the Protocol can create a cooperative and cost-effective framework for resolving conflicts. Moreover, the establishment of a permanent investment court, similar to the EU’s Investment Court System, would enhance legal certainty and reduce the unpredictability associated with ISDS. Also, implementing a reformed dispute resolution mechanism within the AfCFTA Investment Protocol is a crucial step toward attracting significant investments and driving economic development across the continent. This transition not only addresses the longstanding critiques of traditional ISDS systems but also positions Africa as a leader in promoting fairness and transparency in investment. As investors increasingly prioritize stability and equitable treatment, the AfCFTA innovative approach to dispute resolution will set a compelling example for other regions to follow. Therefore, the development of a reliable and effective dispute resolution framework is vital for unlocking the ambitious potential of the AfCFTA, ensuring that investments benefit African nations and their citizens. So, member states of the AfCFTA Investment Protocol should consider the emerging global trend and explore how Africa can benefit while negotiating the protocol’s annex.
ABOUT THE AUTHOR
Ashenafi Fisha Sendeku is an Assistant Lecturer at the Law School of Bahir Dar University in Ethiopia, where he teaches International Trade Law, Private International Law, Contract Law, and other courses. He also serves as a Legal Researcher at International Arbitration Africa (“I-Arb Africa”), participating in legal research projects focused on International Commercial Arbitration, International Investment Arbitration, and International Maritime Arbitration. Moreover, he is the Founder of ABOUT-LAW, a digital legal platform with over 30,000 users, offering free access to laws, case decisions, and legal materials and information in Ethiopia.
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