Potential arbitration claims arising from three acts affecting investors in natural resources projects in Tanzania
In July 2017, three new laws (the Acts) entered into force in Tanzania which could have significant repercussions for investors in mining, oil and gas and other natural resources projects in Tanzania. The Acts appear to give the Tanzanian Government (the Government) wide-ranging rights regarding existing contracts related to natural resources, including the right to re-negotiate and/or expunge "unconscionable terms" from existing contracts, to take or increase an interest in certain projects, and to increase royalty rates.1 Investors whose investments are harmed as a result of the Acts may be able to commence arbitration against the Government to recover compensation for such harm under (i) contractual arbitration agreements and/or (ii) Tanzania's open-ended consent to refer investment disputes to arbitration under an applicable bilateral investment treaty. We regularly achieve successful outcomes for our clients in such arbitrations.
SCOPE OF THE ACTS
The Natural Wealth and Resources Contracts (Review and Renegotiation of Unconscionable Terms) Act
The first Act enables the Tanzanian National Assembly (the National Assembly) to review all agreements (whether new or pre-existing) made by the Government on natural wealth and resources, and direct the Government, by resolution, to renegotiate any "unconscionable terms" found therein. Should an investor refuse to renegotiate such terms, or should the renegotiation fail or exceed a 90-day period, the so-deemed "unconscionable" terms shall cease to have effect and shall be treated as having been expunged from the agreement.
The State's ability to interfere in existing contracts is likely to be of concern to investors, as is the long and vague list of terms which may be regarded as "unconscionable"2. This includes terms which are "inequitable or onerous to the state"; which "secur[e] preferential treatment designed to create a separate legal regime to be applied discriminatorily for the benefit of a particular investor"; and which submit Tanzania to the jurisdiction of foreign laws and fora (i.e. arbitration or litigation outside Tanzania).
The Natural Wealth and Resources (Permanent Sovereignty) Act
Much of this Act is expressed in very broad terms, the effect of which is not entirely clear.4 For example, Section 6(1) provides that the making of "any agreement or arrangement for extraction, exploitation or acquisition of natural wealth and resources" shall be unlawful "except where the interests of the People and the United Republic are fully secured and approved by the National Assembly". The reference to "any agreement" could encompass not only contracts with the Government, but also between private parties. Since the interests of the Tanzanian people are not defined, whether or not their interests are secured appears to risk being a political assessment.3
Section 5(3) may also be of concern to investors since it states that all "activities and undertakings relating to the exploration of natural wealth and resources shall be conducted by the Government". It is unclear what impact this will have on existing exploration contracts. Further, Section 8 states that any authorisation for the extraction, exploitation or acquisition and use of natural wealth and resources shall ensure that the Government "obtains an equitable stake in the venture".
Section 10(2) imposes restrictions on the transfer of earnings outside Tanzania, "except where distributed profits are repatriated in accordance with the laws of Tanzania". In addition, Section 11(2) states that all disputes relating to natural wealth and resources are to be adjudicated by judicial bodies established in Tanzania and in accordance with Tanzanian law.
The Written Laws (Miscellaneous Amendments) Act
The third Act mainly focuses on the mining sector, through its amendment of the Mining Act 2010. Notably, it provides that the Government must have a free carried interest of not less than 16% in all mining projects, and shall be entitled to have a share of up to 50%, "commensurate with the total tax expenditures incurred by the Government in favour of the mining company" (the meaning of which is not entirely clear). In addition, mining royalty rates are increased.5 The third Act also amends the Petroleum Act 2015, requiring that agreements between the Government and the National Oil Company and its partners shall observe principles such as "conscionableness and fair dealing" and "compliance and non-derogation from the laws of the United Republic", and shall be approved by the National Assembly before entering into force.6 Changes are also made to the Petroleum Fiscal Regime sub-part of the Petroleum Act.7
POTENTIAL ARBITRATION CLAIMS
The Acts have the potential to have a far-reaching impact on existing projects. For those investors who suffer losses as a result of the Acts, there are two main avenues of recourse against the Government: (i) a contractual claim or (ii) a claim under an investment treaty. Choosing which to pursue is an important strategic decision. In certain circumstances, a claimant may pursue both options.
Where a claimant has entered into a contract (e.g. a concession agreement or mineral production sharing agreement) with the Government or a State-entity, and that agreement contains an arbitration clause, the claimant may be able to bring an arbitration claim. The features of the arbitration will be governed by the contract.
Contractual arbitration clauses typically allow the parties to bring claims arising under (or "in connection with") the contract. It is therefore critical to ask: has the State entity which is party to the contract breached its specific obligations under the contract? If so, will this lead to an adequate remedy under the contract?
Only the parties to the contract may commence arbitration under it. For example, where a local operating company has entered into a concession agreement containing an arbitration clause, only this company may commence arbitration under the agreement. Related entities and shareholders cannot do so, unless they are also party to the contract.
As noted above, the Acts purport to invalidate agreements by Tanzanian investors for dispute resolution outside Tanzania. It is doubtful, however, that an arbitral tribunal would pay heed to the Acts on this issue. Moreover, the agreements may contain "stabilization" clauses which protect the investor from substantial changes to the regulatory framework affecting the economics of the investments.
Awards rendered in the context of contractual arbitration will be enforceable in accordance with the New York Convention.
Investment treaty claims
Foreign investors in affected natural resources projects may be able to commence arbitration under an investment treaty between Tanzania and a third State.
There are currently eleven bilateral investment treaties (BITs) in force between Tanzania and other countries, including the U.K., the Netherlands, Germany, Canada and Mauritius. Mauritius in particular is often used as an investment conduit to Tanzania. These treaties give investors from the relevant contracting States a right of recourse to arbitration if Tanzania fails to comply with specified standards of investment protection in the applicable treaty.
The substantive and procedural rights contained in an investment treaty (including the host State's consent to arbitrate investment disputes) only apply to a qualifying "investor" with a qualifying "investment". These requirements are likely to be satisfied where the claimant is incorporated in one of the contracting States that has a BIT with Tanzania and has an ownership interest (including a minority shareholding) in a company whose business is affected by the Acts. Entities which have provided financing arrangements may also be protected investors.
The scope of the protections offered under BITs varies. Most, however, contain some form of right to "fair and equitable treatment" (which includes the protection of legitimate expectations), protection against expropriation, a commitment that the host State (in this case Tanzania) will observe any obligations it has entered into with regard to investments of the other state's nationals (known as an "umbrella clause" commitment), and a right to repatriate dividends.
The dramatic and sudden changes to the regulatory framework and to investors' contracts brought about by or pursuant to the Acts may undermine investors' legitimate expectations and result in a breach of Tanzania's FET commitments. To the extent an investor were to be substantially deprived of the value of any of its investments in Tanzania as a result of the Acts (e.g. because the contracts in which it has an interest were expunged), and did not receive any compensation from the Government, that would constitute breach of most BITs' expropriation provisions. If the Acts are found to breach the protections of an applicable BIT, the Government may be required to pay compensation or damages in the amount of the loss suffered by the investor.
Should Tanzania refuse to comply with the terms of its existing contracts as a result of the Acts, investors may also be able to bring umbrella clause claims against the State. Finally, since section 10 of the Permanent Sovereignty Act appears potentially to restrict the transfer of investment earnings, Tanzania may have breached its repatriation commitments.
Disputes between an investor and Tanzania under a BIT are to be resolved in accordance with the dispute resolution clause contained in that BIT. Most of Tanzania's BITs provide for disputes to be submitted to the International Centre for the Settlement of Investment Disputes (ICSID) under the 1965 Convention on the Settlement of Investment Disputes (the ICSID Convention). ICSID awards are enforceable in any ICSID Contracting State in accordance with the ICSID Convention.
There have been two previous investment treaty cases against Tanzania, including one in which the claimant was successfully represented by Allen & Overy (Biwater Gauff (Tanzania) Ltd. v. United Republic of Tanzania, ICSID Case No. ARB/05/22).