Construction Arbitration in East Africa

Introduction

It would be erroneous to assume that East Africa is a homogeneous region from the perspective of international construction arbitration. It can be as diverse in this respect as in currency, language, politics and cuisine. However, a number of generalised trends relevant to major construction projects and the resolution of disputes can be seen across the countries making up East Africa.1

Given the number of jurisdictions involved (18 countries), this article does not seek to evaluate each one in detail. Rather, this article:

• considers foreign investment and economic trends across East Africa relevant to major construction projects;
• explores some of the key factors that commonly lead to disputes on construction projects;
• addresses the enforcement of arbitral awards, providing a flavour of the relevant laws in some jurisdictions in East Africa as examples;
• discusses which countries have (and have not) adopted legislation based on the UNCITRAL Model Law, and depicts how various countries in the region approach the treatment of foreign awards;
• provides an overview of investment arbitration in the region – a field that often involves construction disputes;
• briefly touches on the growth of arbitral institutions in East Africa; and
• posits some conclusions.

Relevant foreign investment and economic trends in East Africa

The prevalence of international construction arbitration self-­evidently depends on two key ingredients: international investment and construction projects. East Africa is brimming with both.2

East Africa remains the fastest growing sub-region in Africa and the leader in gross domestic product growth, a trend that is expected to continue into 2019.3 Even so, there has been a year-on-year decline in foreign direct investment into East African markets generally in recent years.4 That is not to say, however, that East Africa has become an unattractive destination for investment – it still carries considerable appeal. Over one-fifth of all foreign direct investment into Africa finds its way to East Africa.5

In terms of construction projects, nearly a quarter of all projects on the continent, having a collective value of US$32.6 billion, are in East Africa.6 Between 2016 and 2017 there was an increase of over 65 per cent in the total number of construction projects in East Africa, albeit that the aggregate value of those projects decreased.7 That indicates that smaller construction projects are effectively getting off the ground in the region.

The main sectors in which we find those construction projects remain constant: transport and energy. In 2016–2017, over 50 per cent of construction projects in East Africa were in the transport sector, and nearly 25 per cent in the energy sector.8 The strong focus on these two sectors will continue as a product of the ongoing urbanisation of Africa.

Who is involved in major construction projects in East Africa? The vast bulk of projects are owned by governments (90.1 per cent),9 which is a product of many East African governments having established national and regional infrastructure development plans. That a government entity is the owner on nine out of 10 construction projects in East Africa means that there is pervasive procurement rigour – as well as the opportunity for challenging contract awards, which can lead to disputes.

Particularly noteworthy is the continuing rise of Chinese investments in major construction projects. From a funding perspective, in 2016–2017 (as in the previous year), nearly a quarter of East African major projects received Chinese funding.10 Meanwhile, however, there has been a pronounced increase in the prevalence of Chinese contractors. In 2016–2017, over 53.5 per cent of construction projects in East Africa were being built by Chinese contractors,11 an increase of over 10 per cent from 2015–2016.12 This is consistent with China’s ‘One Belt, One Road’ initiative, which reaches into East Africa through the Mombasa port and on to Nairobi. But it is not only the Chinese who are the international players investing in construction projects in East Africa. Domestic companies account for only about 11 per cent of the contractors building these projects; the rest are international.13 East Africa also saw international development finance institutions take a greater slice of the funding for construction projects in 2016–2017 compared with African development finance institutions.14

While the aggregate value of construction projects in East Africa declined somewhat in 2016–2017, there continue to be very large projects in the region. The Grand Ethiopian Renaissance Dam, valued at US$4.1 billion, remains the largest-value project in the region.15 Unfortunately, the project has been stalled for months due to a dispute between Egypt and Ethiopia, which may be submitted to International Centre for Settlement of Investment Disputes (ICSID) arbitration for resolution.16 Further, in 2016–2017, ground was broken on a number of new mega-projects in East Africa. These include the Koysha Hydrolectric Dam in Ethiopia, valued at US$2.8 billion; Kigali Innovation City in Rwanda, valued at US$1.9 billion; and a new replacement central railway in Tanzania, valued at US$1 billion.17

The scale and volume of construction projects and the involvement of international players mean that East Africa is a region ripe for disputes. Any disputes between project participants need to be resolved, and the mechanism commonly agreed between parties in this regard is international arbitration for the reasons explained below.18 Like the continuing growth in gross domestic product in East Africa, so too the prevalence of international construction arbitration is expected to grow.

Key factors on construction projects that commonly lead to disputes

It is nearly inevitable that there will be disputes arising out of major construction projects – which is why staged dispute resolution provisions have an uncontroversial home in commercial contracts relating to major projects. A relatively small number of those disputes are escalated through the dispute resolution process, ending up in arbitration for a final and binding determination. This is a long-standing global phenomenon that applies equally to East African projects.

Factors that commonly lead to disputes on international construction projects – and in turn to international arbitration – are also similar across the world, and again East Africa is no exception. This section considers three key factors that commonly lead to disputes on construction projects, including in East Africa. These concern local conditions, access to money and record-keeping.

Local conditions

Foreign project participants often lack an in-depth understanding of local conditions impacting the project, particularly where the project site is remote or in a location that represents a new frontier for the foreign party. As a result, some contractors make various assumptions relevant to jurisdictions with which they are more familiar when developing budgets and prices, procurement strategies, work methodologies and programmes. Those assumptions may bear little resemblance to the local conditions they then face.

This factor concerns a host of local conditions, including the following:

• the supply chain – the availability of competent, financially robust and technically qualified organisations and their likely cost;
• the productivity rates of locally sourced organisations in the supply chain, including labour providers, suppliers and subcontractors;
• local regulations for permitting and licensing as applicable;
• transportation and logistics for accessing the site and any necessary lay-down areas;
• geographical and climatic conditions; and
• politics, at all levels, with changes in government potentially leading to changes in policy that impact upon the project (possibly including the future of the project altogether).

Erroneous assumptions regarding the above local conditions can lead to significant impacts on budgets and the feasibility of programmes.

Access to money

At the heart of major construction projects is money, and in particular, cash flow. After all, it is commonly recognised that ‘cash flow is the life blood of the building industry’.19 This highlights the importance of the payment of money when it is needed or falls due, and in the relevant currency. That is an acute issue for all project participants at every stage of the project life cycle and at every level of the supply chain during the design and construction phases. Payers may feel incentivised to withhold payment for as long as possible, which creates tension with the payee. This is particularly so for government projects, where the available funds are dependent upon the health of the government’s budget and often subject to various bureaucratic requirements to secure the release of funds – particularly in circumstances where projects are running over their approved budgets. In resource-rich countries, the state of relevant commodities prices may also have a significant impact.

This issue is compounded by two particular challenges: the value of the local currency and any local restrictions on access to foreign currency. As to the first point, major construction projects may have been economically feasible for a project participant when the relevant contract was signed; however, radical fluctuations in local currency can quickly alter the equation. Those fluctuations might be market driven (for example, the value of the Zambian kwacha dropped significantly in 2015, largely because of a fall in the copper price) or the product of central bank intervention (for example, in 2017, the Ethiopian Central Bank devalued the birr by 15 per cent in order to boost exports).20 To insulate against the risks associated with local currencies, foreign project participants typically seek payment of the bulk of the contract price in a more stable foreign currency, often the US dollar. However, that strategy is underpinned by an assumption that the payer has access to sufficient stores of that foreign currency to pay. That is not always the case, which is where the second challenge noted above arises. For example, in 2016, Zimbabwe faced a crippling shortage of US dollars and so introduced ‘bond notes’ said to be equivalent in value (1:1) to US dollars.21 That shortage has continued into 2018, resulting in the rise of a parallel black market in foreign currency, where US$1 can fetch about US$18 in bond notes.22

In addition, some countries in East Africa have introduced foreign exchange controls to manage their store of foreign currency and the value of the local currency, which can add complications to the ability of a foreign investor to extract profit from a major construction project in East Africa. For example, in 2015, the Central Bank of Mozambique introduced limitations on the utilisation of foreign currency in domestic transactions. That made it impossible to transfer from a local foreign currency account to another local foreign currency account held by a corporation. Instead, the payment needed to be first converted into the national currency, the metical, which exposed the payee to fluctuations in the national currency.23 While Mozambique repealed those regulations in 2017, the new exchange control measures it then introduced still provide the Central Bank with broad authority to set conditions and limitations on the entry and exit of foreign currency and provide a list of transactions which are subject to the central bank’s pre-approval.24

These these issues can lead to a squeeze on cash flow and hence have the potential to lead to disputes, either with governmental authorities or other project participants, in particular concerning payment delays or defaults and force majeure invocations.

Record-keeping

Inadequate record-keeping on construction projects is a well-trodden path towards disputes and arbitration. The lack of substantiation can lead to the rejection of claims for want of demonstration of entitlement, causation and quantification. For example, daily site reports consisting of a brief weather report alone (‘sunny’ or ‘afternoon rain’) are ineffective in demonstrating the consequences of disruption events in terms of productivity and, in turn, cost. Further, an owner (or a contractor working in relation to a subcontractor or supplier) might seek to rely upon the contractor’s failure to provide timely notice of circumstances that have an impact on time or cost to reject claims, asserting that the lack of notice has prejudiced the ability to take mitigation measures to its detriment.

The need for adequate records is particularly pertinent to government and development finance institution projects, where stringent procurement rules often prevent the acceptance of claims absent comprehensive, contemporaneous records that can withstand audit scrutiny. Given the prevalence of such projects in East Africa, this ought to be a focus for project participants in the region from the outset.

Enforcement of international arbitral awards in East Africa

As indicated above, around the world, international arbitration remains the preferred method of final dispute resolution where counterparties from different countries contract.25 The key reason for this is the increased likelihood of enforcement of arbitral awards, given the widespread ratification of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention),26 as well as foreign participants’ preference to avoid local courts. International arbitration provides commercial parties with a greater degree of certainty regarding the outcome of any future disputes, as well as the security of a final and enforceable decision. This is a crucial factor for a foreign investor in deciding where to invest across the globe.

Of course, it is important to check whether the country in which enforcement is likely to be sought (ie, where the counterparty’s assets are located) has ratified the New York Convention, and has (if necessary) implemented domestic legislation to put its terms into effect. Many countries within East Africa have ratified the New York Convention, starting with Madagascar in 1962. Since then other countries in the region have followed suit: Burundi, Comoros, Djibouti, Kenya, Mauritius, Mozambique, Rwanda, Tanzania, Uganda, Zambia and Zimbabwe. Countries in East Africa that have not signed the New York Convention, as at the date of writing, are Eritrea, Ethiopia, Somalia, Malawi, Seychelles and South Sudan. When contracting with a counterparty that has assets in these countries, the lack of accession to the New York Convention can create significant challenges for enforcement. For example, in Seychelles, the Court of Appeal recently denied enforcement of an International Chamber of Commerce (ICC) award rendered in favour of a company engaged to carry out construction works to build a resort on the island, given that Seychelles is not a party to the New York Convention.27 In a slowly moving development on this topic, Somalia is exploring accession to the New York Convention, having established a New York Convention Taskforce with this objective, as part of its attempts to attract foreign investment following a period of civil war.28

In terms of enforcement in East Africa, while generalisations across this heterogeneous region are difficult to make, in large part, the national courts of East African countries tend to take a pro-arbitration stance when considering the recognition and enforcement of international arbitral awards. That is not without exception, however. Set out below is a summary of recent case law in some of the jurisdictions that have ratified the New York Convention.

Kenya

In 1989, Kenya acceded to the New York Convention and subsequently implemented the Kenyan Arbitration Act. A party seeking enforcement of a foreign arbitral award must submit an application to the High Court providing both the award and the arbitration agreement.

Kenya has had a mixed record when it comes to enforcing international arbitral awards. There have been a number of instances where the High Court has refused enforcement on public policy grounds.29 Highlighting this is Tanzania National Roads Agency v Kundan Singh Construction Limited. The parties in that case entered into a contract for the construction of a nationally significant road. Tanzania National Roads Agency (TanRoads) received a favourable Stockholm Chamber of Commerce award and applied for enforcement against the Kenyan contractor before the High Court of Kenya. The High Court refused enforcement, however, citing public policy concerns. Specifically, the High Court determined that in rendering its award, the tribunal did not apply Tanzanian law (the contract’s governing law) and instead applied English law, albeit that both parties had accepted the applicability of English precedents in the proceedings. Due to this perceived error, the ‘award was arrived at in breach of the express terms of the agreement between the parties’. Enforcing the award, the High Court reasoned, would permit the Kenyan courts to be used to circumvent the governing law, which would constitute a violation of public policy. TanRoads was subsequently unsuccessful in its attempt to appeal the decision on jurisdictional grounds, and, before its request for permission to appeal to the Supreme Court was heard, its counterparty was placed in receivership.30

Conversely, there are more recent cases where the High Court has enforced international arbitral awards. Two years after TanRoads, the High Court was faced with a similar issue in Mohamed Salim v Trishcon Construction.31 There, the defendant objected to the enforcement of an arbitral award on grounds of public policy. Citing TanRoads, the defendant alleged that when deciding the case, the tribunal applied different legal principles than those envisaged by the parties, leading it to award the plaintiff excessive sums of money. However, unlike in TanRoads, the High Court rejected the defendant’s public policy objections, holding that public policy in fact compelled the court to enforce, rather than vacate the award. Similarly, in the recent decision of the High Court in Open Joint Stock Company Zarubezhstroy Technology v Gibb Africa Limited, related to enforcement proceedings, the High Court described this public policy as a set of norms, principles and values ‘that are deemed so essential that no departure therefrom can be entertained’ and that ‘it is essential that, when raised to resist recognition or enforcement, public policy is interpreted in a restrictive manner.’32 These cases appear to set a high bar for refusing enforcement on public policy grounds.

This growing pro-arbitration trend is consistent with Kenya’s 2010 Constitution, which places an obligation upon Kenyan courts to promote arbitration and alternative dispute resolution.33

Mauritius

Mauritius acceded to the New York Convention in 1996. The enforcement of foreign awards is governed by the Convention on the Recognition and Enforcement of Arbitral Awards Act 2001,34 which was most recently updated in 2013.35

In 2014, the Supreme Court rendered its first judgment addressing the enforcement of foreign arbitral awards under the new legislative regime. Cruz City 1 Mauritius Holdings v Unitech Limited36 concerned the enforcement of two London Court of International Arbitration (LCIA) awards. The underlying dispute arose out of a contract for the development of housing in Mumbai between Cruz City, a Mauritian company, and Unitech, an Indian company. After receiving favourable LCIA awards, Cruz City applied for enforcement before the Mauritius Supreme Court. Unitech, among other objections, argued that the 2001 Mauritius Arbitration Act unconstitutionally restricted the Supreme Court’s discretion over whether to enforce an award. It also claimed that enforcement of the awards would violate public policy due to an alleged fundamental error in the assessment of damages by the tribunal. The Supreme Court enforced the awards, rejecting Unitech’s challenges. In doing so, the Supreme Court emphasised that its role was not to review the award on the merits, but instead only to evaluate if refusal is warranted under the narrow circumstances set out in the Arbitration Act, which equate to article V of the New York Convention.

Rwanda

In 2008, Rwanda acceded to the New York Convention.

The courts of Rwanda appear to support the enforcement of arbitral awards. For example, in a recent decision concerning an objection to enforcement on the basis of the expiration of the time limit for the tribunal making its award as set out in the terms of reference, the courts rejected the objection and enforced the award. This was on the basis that the objecting party had continued to participate in the arbitration after the expiration of the time limit without complaint, thereby, said the court, tacitly agreeing to an extension of the deadline.37

Zimbabwe

Zimbabwe acceded to the New York Convention in 1994.

The courts of Zimbabwe also appear to promote arbitration and support the enforcement of arbitral awards. For example, the courts have held that where parties have entered into an agreement containing a broad arbitration clause, the courts ‘should not be astute in trying to reduce the ambit of the arbitration clause’.38

The courts have also indicated a willingness to interpret arbitral awards flexibly in order to ensure that they are not unenforceable on public policy grounds. In one case, the Zimbabwe courts noted that public policy would render an award unenforceable if it provided for interest greater than the capital sum owing (the in duplum rule). However, in that case the court held that although the literal interpretation of the award would fall foul of public policy, the award was capable of being interpreted as being impliedly subject to the in duplum rule, and that the award should be recognised and enforced accordingly.39

In a separate case, the Zimbabwe courts noted that a mere factual error would not render an award unenforceable on grounds that it conflicts with public policy. In reaching that conclusion, the court held that the public policy defence to enforceability would apply restrictively and ‘only if some fundamental principle of the law or morality or justice is violated’, such that the award constituted:40

A palpable inequity that is so far reaching and outrageous in its defiance of logic or accepted moral standards that a sensible and fair minded person would consider that the conception of justice in Zimbabwe would be intolerably hurt by the award.

This high threshold was determined to have been reached where the arbitrator had accepted the figures sought by the claimant, without any evidence, on the basis the respondent did not suggest alternative figures.41

The reluctance of the courts to interfere with arbitral awards has been confirmed again more recently when the Harare High Court stated that: ‘[T]his court will be loath to interfere with the findings of an arbitrator unless there is a very good reason to do so’.42

Sanctity of arbitral awards in East Africa

The greater degree of certainty regarding the outcome of disputes between contracting parties that is brought about by international arbitration is also dependent upon the sanctity of the award; ie, that it will not be set aside by the national courts at the seat of the arbitration except against clear (and internationally recognised) standards.

The UNCITRAL Model Law on International Commercial Arbitration (the Model Law), adopted by the United Nations Commission on International Trade Law in June 1985, provides a template arbitration law that bestows on national courts only narrow grounds for setting aside an award – grounds that mirror those for refusing enforcement under the New York Convention. While the arbitration law in each jurisdiction requires individual consideration, those East African countries that have adopted the Model Law have accepted that there should be very limited grounds for setting aside arbitral awards.

Countries in East Africa with arbitration laws based on the Model Law are Kenya,43 Madagascar,44 Mauritius,45 Rwanda,46 Uganda,47 Zambia48 and Zimbabwe.49 Although Mozambique has not fully adopted the Model Law, its legislation has many similarities.50 Several countries that have not adopted the Model Law at least have longstanding arbitration legislation. For example, Malawi’s Arbitration Act has been in existence since 1967,51 and the Civil Code provisions that govern arbitration in Somalia have been effective since 1974.52

The table below summarises those states in East Africa that have adopted legislation based on the Model Law.

By way of contrast, set out in the next sub-section are summaries of the laws in three East African countries that have not adopted the Model Law, and the attitude of their national courts to setting aside arbitral awards. There is also a summary of the position in Uganda, which has adopted the Model Law but with key differences.

Ethiopia

The current Ethiopian arbitration legislation53 is not based on the Model Law. It is unclear whether the Ethiopian legislation applies to international arbitration or is confined to domestic arbitration, as, for the most part, the legislation does not distinguish between the two.

One of the key characteristics of the law is that there are multiple grounds on which an award may be appealed or set aside.

First, under the Ethiopian arbitration law, an award can be appealed in any of the following circumstances.54

• It is inconsistent, uncertain or ambiguous, or is wrong in law or fact. In National Mineral Corp v Danni Drilling,55 the Cassation Bench determined that the tribunal had erred in law. It was therefore open to the Bench to review the tribunal’s decision despite the existence of a contractual waiver of the parties’ right to appeal.
• The arbitrator failed to decide matters referred to him.
• Procedural irregularities have occurred, particularly where:
  • the arbitrator failed to inform the parties of hearing details; or
  • the arbitrator refused to hear the evidence of a material witness or heard evidence in the absence of one of the parties.
• The arbitrator has been guilty of misconduct, for example:
  • the parties were not given an equal opportunity to be heard;
  • the arbitrator was unduly influenced by one of the parties; or
  • the arbitrator had a conflict of interest.

Therefore, particularly as a result of the first ground of appeal, the parties to an international arbitration seated in Ethiopia regarding a major construction project may have concerns regarding the finality of the award.

Second, an award can be set aside in the following circumstances:

• the arbitrator decided matters not referred to him or her, or the award was made pursuant to an invalid submission;
• if the reference was to two of more arbitrators, the arbitrators did not act together; or
• the arbitrator delegated part of his or her authority.56

Under the Model Law, by contrast, an award cannot be appealed and can only be set aside in a number of limited circumstances. These grounds are:

• invalidity of the arbitration agreement;
• lack of proper notice or inability to present one’s case;
• the dispute is outside the submission to arbitration;
• incorrect composition of the tribunal;
• the subject matter of the dispute is not arbitrable; and
• the award conflicts with the state’s public policy.57

As can be seen from the above, the grounds for challenge under Ethiopian law are different, and wider in scope, than the grounds under the Model Law. Most importantly, the Model Law does not permit a review of the merits of an award, in contrast to the position in Ethiopia regarding the appeal of awards.

Malawi

The primary source of arbitration legislation in Malawi is the Arbitration Act of 1967. The Arbitration Act preceded the Model Law and differs from it in a number of ways. For example, the Arbitration Act does not expressly provide for separability of the arbitration agreement,58 and the courts have expanded powers, including the ability to appoint arbitrators in the absence of the parties’ agreement.59

The grounds for setting aside an arbitral award are also more vague, and arguably wider, under the Malawi Arbitration Act than the Model Law. Under the former, the courts can set an award aside if the arbitrator has engaged in misconduct, or the arbitration or award has been improperly procured.60 In Pillane v Commercial Union Assurance Company plc,61 the Supreme Court of Appeal held that an error of law (there, failing to consider amendments to an insurance policy) justified setting aside the arbitral award, on the ground that this constituted ‘misconduct’ on the part of the arbitrator. The consequence is that awards rendered in Malawi are potentially subject to a merits review by the Malawian courts.

Nonetheless, despite having not adopted the Model Law (or the New York Convention), the policy of Malawian courts has typically been to encourage arbitration and to stay litigation commenced in contravention of an arbitration agreement.62

Tanzania

The Tanzania Arbitration Act is based on an outdated version of the English Arbitration Act, which predated the Model Law.63 The Tanzania Act bestows potentially broad grounds on the national courts to set aside an arbitral award. Specifically, an award may be set aside on grounds that the arbitrator misconducted the arbitration,64 or where the award was improperly procured.65 The national courts have, however, shown a willingness to apply a narrow interpretation of the grounds to set aside arbitral awards. This is illustrated by the following two example cases.

In Dowans Holdings SA (Costa Rica) and Dowans Tanzania Limited (Tanzania) v Tanzania Electric Supply Company Limited,66 the High Court of Tanzania dismissed a petition to set aside an ICC arbitration award. The High Court declared that ‘it would not be proper for this court to interfere with the findings of the ICC’s Arbitral Tribunal, for, in doing so, it would amount to re-opening and re-arguing of the issues of fact and issue of law that the parties, by their own agreement, submitted to the ICC Tribunal for its consideration and decisions.’67

Similarly, in Tanzania National Roads Agency v Kundan Singh Construction Ltd,68 the High Court of Tanzania rejected an application to set aside an arbitral award on the grounds that the petitioner had not complied with the mandatory procedural steps to present and file the final arbitral award with the High Court before challenging the arbitral award.

Uganda

Uganda adopted the Model Law through the Arbitration and Conciliation Act 2000.69 However, that legislation contains notable differences from the Model Law, for example:

• the parties may affirm, through a written agreement, the right to lodge an appeal on questions of law arising either from domestic arbitral proceedings or the awards;70
• the parties have limited rights with respect to interim measures of protection;71 and
• the time limits to request a correction or interpretation of an award, or an additional award, are shorter.72

Nonetheless, consistent with the Model Law, there are still only limited grounds available to the national courts for setting aside international arbitral awards in commercial (including construction) arbitration matters.73

For example, in Roko Construction Ltd v Mohammed Mohammed Hamid, the High Court of Uganda set aside a domestic arbitral award, based on a finding that the parties had not intended to submit the dispute to arbitration and that the arbitration agreement had been excluded from the main contract. The Court of Appeal reversed the High Court decision. On an appeal in 2013, the Supreme Court of Uganda found that the Court of Appeal bench had not been properly constituted and referred the matter back to the Court of Appeal. In 2015, the Court of Appeal confirmed the reinstatement of the arbitral award, finding that the arbitration clause had not been excluded from the parties’ agreement.74 The applicant then appealed again to the Supreme Court, which upheld the decision of the Court of Appeal.75 Unsatisfied with the result, the applicant then sought a review of the Supreme Court’s judgment and applied for a stay of execution.76 Although the application for an interim stay of execution was rejected, decisions on the permanent stay of execution and judgment review application remain outstanding. 77 Even if those challenges ultimately fail, this long running saga highlights the possibility of protracted delays when enforcing awards in Uganda, given the apparent ease with which the unsatisfied party can challenge court decisions and the risk of delays throughout the process.

Investment arbitration in East Africa

Investment arbitration is as relevant to major construction projects as it is to other sectors or areas of commerce. Given the prevalence of government-owned major construction projects in East Africa and foreign project participants, the latter ought to be aware of the potential availability of this avenue of dispute resolution – against the state directly. Foreign project participants would be wise to consider structuring their investments in major construction projects to maximise access to available investment protection treaties – as an insurance policy should the investment later be prejudiced because of unreasonable action taken (or reasonable action not being taken) by the state.

The efficacy of such remedies requires consideration of whether there is both a breach of an obligation owed by the state to the investor and an available forum to determine a dispute regarding that breach.

As to the first element, the grounds for a claim against a state might arise under bilateral or multilateral investment treaties, domestic legislation, or by way of contract, such as investment agreements. Regarding bilateral investment treaties (BITs), Kenya, for example, has entered into 19 BITs,78 of which 11 are in force,79 whereas Eritrea has only one BIT in force, out of four that have been signed.80 As a point of comparison, the Netherlands has 90 BITs in force at present and the United Kingdom has 95 BITs in force.81 This comparison indicates that East African countries remain behind the curve when it comes to bilateral investment treaties,82 although as explained above, this does not appear to have substantially dampened enthusiasm for foreign investment in the region.

There is also a vast difference between the number of intra-East Africa BITs and the number of BITs signed by an East African country and a country outside East Africa: 16 versus 235. This reflects a general trend across Africa to enter into bilateral treaties outside of the continent, a continuation of the historical tendency for colonial countries to enter into agreements with their former sovereigns upon gaining independence.83

However, one must not forget that in addition to the BITs, East African states are party to several relevant multilateral agreements. For example, Kenya has signed seven multilateral treaties containing investment provisions, six of which are in force. Eritrea has signed six such agreements, five of which are in force. In addition, the Common Market for Eastern and Southern Africa Treaty (COMESA) has 19 member states including 14 East African countries: Burundi, Comoros, Djibouti, Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Uganda, Zambia and Zimbabwe.84 Seven East African states are also party to the South African Development Community Protocol on Finance and Investment (SADC), namely Malawi, Mauritius, Mozambique, Seychelles, Tanzania, Zambia and Zimbabwe.85 Furthermore, Comoros, Djibouti, Mozambique, Somalia and Uganda are also members of the Organisation of Islamic Cooperation (OIC),86 the second largest inter-governmental organisation after the United Nations with a membership of 57 states spread over four continents. In 1981, the OIC member states entered into a multilateral agreement for the promotion, protection and guarantee of investments, which contains provisions commonly found in BITs.

Also, recent years have seen African countries gradually signing more investment treaties with each other, or entering ‘South-South’ agreements with countries such as China and India as they increasingly invest in the continent.87

Overall, 2017 was an important year for the development of BITs involving East African states. Kenya concluded two BITs, one with Korea and one with Japan. Rwanda entered into a BIT with the UAE, while Burundi and Mozambique both signed a BIT with Turkey.88

However, there have also been developments that might raise the question of whether certain East African states will whole-heartedly stand by their investment treaty commitments. In 2017, Zimbabwe’s reputation was tainted when it did not satisfy an award of US$240 million in an arbitration involving the seizure of lands following President Mugabe’s land reform programme.89 Tanzania is seeking an annulment of the US$148 million award rendered against it and the state-owned energy company Tanesco in Standard Chartered Bank (Hong Kong) v Tanzania Electric Supply Limited,90 with the Tanzanian High Court having issued an injunction ordering the parties to refrain from complying with the award in the meantime.91 Of course, these cases are fact-sensitive, and do not provide a basis for suggesting that there is any trend away from compliance with investment treaty commitments.

Turning to the benefits of investment treaties, the case of Biwater Gauff (Tanzania) Ltd v United Republic of Tanzania92 demonstrates how these treaties may provide a forum to a foreign investor in relation to a major construction project. The relevant project in that case concerned repairs, upgrades and an expansion of Dar es Salaam’s water and sewerage infrastructure. The investor brought claims against Tanzania under the United Kingdom-Tanzania BIT and the Tanzanian Investment Act, arguing that its interest in the project had been expropriated. The tribunal determined that the cumulative effect of the acts of the state (as distinct from the contractual steps taken by the investor’s counterparty), including the withdrawal of a VAT exemption on purchases, the occupation of the investor’s facilities and usurpation of management control, and the deportation of management staff, constituted an expropriation.93

As to the second element, namely an available forum, the most common forum for investment cases is ICSID, being a neutral forum created pursuant to a multilateral treaty in 1966 (the ICSID Convention). Since its inception, the ICSID Convention has proven attractive in East Africa. Burundi, Kenya, Malawi, Madagascar, Mauritius, Somalia and Uganda all ratified the ICSID Convention in the 1960s. Comoros, Mozambique, Rwanda, Seychelles, Tanzania, Zambia and Zimbabwe followed suit in subsequent decades. At the time of writing, the most recent newcomer in the region is South Sudan, which became party to the ICSID Convention in 2012. The only countries in East Africa not to have signed the ICSID Convention are Djibouti and Eritrea.94 Further, although Ethiopia signed the ICSID Convention in 1965, it has yet to ratify it.

Rise of arbitral institutions

The growing popularity of arbitration is evident in the burgeoning number of arbitral institutions in East Africa. Many countries in East Africa now have at least one such institution. For example, at the end of 2016, Kenya launched its first regional arbitration centre, the Nairobi Centre for International Arbitration (NCIA), which is an initiative supported by the government.95 In September 2017, a Cooperation Agreement was concluded between the Permanent Court of Arbitration and the NCIA; it establishes a framework for the two organisations to work together, including the possibility of holding hearings and meetings at the other’s premises and working together to promote arbitration.96 Mauritius is now home to several arbitral institutions, including the local outpost of the Permanent Court of Arbitration, the Mauritius Chamber of Commerce and Industry’s Arbitration and Mediation Centre, and the LCIA-MIAC Arbitration Centre. Discussions are currently under way regarding the opening of an arbitration centre in Djibouti.97 This initiative is supported by the Intergovernmental Authority on Development, which promotes arbitration reforms in its member states, namely Djibouti, Ethopia, Eritrea, Kenya, Somalia, South Sudan, Sudan and Uganda.98 As a final example, Rwanda hosts probably the most successful arbitral centre in the region, the Kigali Centre for International Arbitration. Since 2012, the centre has had 66 cases registered. In 2016-2017, its caseload increased by 117 per cent and reached 26 cases.99

A challenge for these organisation is finding a way to flourish in a market where there are a plethora of competing arbitral institutions. East Africa may benefit from the consolidation of arbitral institutions so that there can be a concentrated focus on quality of service and international recognition.

Conclusion

East Africa is a heterogeneous region, making it difficult to generalise across the various jurisdictions when it comes to international construction arbitration.

However, a number of general themes are evident across the 18 countries making up East Africa. The first is that, as a region, there is growth in terms of gross domestic product and, importantly for this article, construction and infrastructure investment. A second is that foreign investment has played a critical role in that growth. Inevitably, disputes will arise, and that creates the opportunity for international arbitration to assist parties in resolving those disputes. A third theme – which is not without exception as between or within individual countries – is that East African countries generally recognise and support international arbitration. There are well-developed arbitration laws, consistent with international norms, in many jurisdictions and the national courts of various countries in East Africa have demonstrated their support of international arbitration by promoting enforcement of foreign awards and acknowledging strict limits on setting aside grounds. That approach provides foreign investors with a degree of comfort that there will be certainty and finality to their chosen mechanism of dispute resolution for projects in or with participants from East Africa, even when the arbitration is locally seated – and that in turn promotes foreign investment in the region.