A US firm stripped of investment rights without notice

In 2005, the Government of Mozambique decided to withdraw the award of the Chifunde concession from the Alliance One. Which was formed out of a merger between the US-based companies Dimon and Stancom, both of whom held concessions in the Mozambican provinces of Niassa, Tete and Manica.

International observers find the government’s decision to switch the concession from Dimon to MLT illegal, since it violates existing investment agreements signed by the Government. According to Government’s officials, the reason is simply clear. The government wants tobacco processing to happen in Mozambique, and so urged all the concessionary companies to build processing plants. Adding that only MLT responded, and has built the second largest processing plant in Africa in Tete City. This explains that: its reward was the Chifunde concession (quoted from Savana Newspaper of May 2006).

The present article outlines the legal basis and requisites for a dispute settlement initiative in case of remedy and compensation for the claimants. It reviews different alternatives available for a conciliation / dispute settlement mechanism and suggests the most efficient process towards this goal.

The Legal basis for a conciliation / arbitration claim

There are different legal frameworks under which the investment dispute can be settled. The following instruments are, more or less, all relevant for this case which mainly relates to the protection of investment rights, including concession rights, and expropriation procedures:

The Chifunde Concession Agreement (between the Government of Mozambique and the tobacco companies: Alliance One viz. Stancom and Dimon). For the moment we do not have this document, which is the most important to understand the case. It should be obtained asap.

The Mozambican Investment code: Law No. 3/93 of June 24, 1993, on Investment and subsequent amendments contained in Decree No. 14/93 on July 21, 1993 and decree No. 36/95 on August 8, 1995.

The Mozambican law holds that “when deemed absolutely necessary for weighty reasons of national interest or public heath and order, the nationalization or expropriation of goods and rights…shall (result in the owner being) entitled to just and equitable compensation.”

The US-Mozambique BIT of December 1, 1998, which came into effect on March 3, 2005, and the Trade and Investment Framework Agreement (TIFA) signed on June 21, 2005, which establishes a Council on Trade and Investment charged with the task of holding consultations and work towards the removal of impediments to bilateral trade and investments. Since the investor is composed of US companies, the BIT is the major instrument which should be used for legal reference.

The Convention on the Settlement of Investment Disputes between States and Nationals of Other States also known as the ICSID Convention. This convention, which established International Centre for Settlement of Investment Disputes ((ICSID), was adopted on March 18, 1965 and entered into force on October 14, 1966, when it had been ratified by 20 countries. As on April 10, 2006, 143 countries have ratified the Convention to become Contracting States. It was ratified by both Mozambique and the USA, and entered into force for as follows:

(a) Mozambique ratification/accession to the convention (Resolution no. 10/92 of the Assembleia da República, Bulletim da República, 25 September 1992, I Série (39) pag. 197 (3) 2o Supplemento).

(b) The United States of America: ratification of the convention:

- Signature of convention on August 27, 1965
- Deposited the instrument of ratification on June 10, 1966
- Entry into force of the convention: October 14, 1966

The Convention establishing the Multilateral Investment Guarantee Agency – MIGA, concluded at Seoul (Korea), on October 11, 1985. It entered into force on April 12, 1988. Both the uS and Mozambique are members of MIGA.

Mozambique: ratification/accession to the MIGA convention (Resolution no. 9/92 of the Assembleia da República, Bulletim da República, Maputo 25 September 1992, I Série (39) pag. 197 (3) 2o Supplemento ).

MIGA, a member of the World Bank Group, routinely provides an umbrella of deterrence against government actions that could disrupt insured investments and helps resolve potential disputes to the satisfaction of all parties—both of which enhance investor confidence in the safety of investments and encourage the flow of foreign direct investment. In order to prevent a potential claims situation from escalating, MIGA provides free mediation services to all its clients. This service has been very effective to date, with all cases but three reaching an amicable resolution.

In addition to ensuring the safety of projects guaranteed by MIGA, the agency helps countries improve their investment climates by working to remove the obstacles to the flow of foreign investment. One of these obstacles is the existence of disputes between investors and the countries that host the investments.

Alternative dispute mechanisms

According to the US-Mozambique BIT, the arbitration mechanisms available are as spelled out in Article IX.2., which offers various arbitration alternatives:

(a) the national courts or administrative tribunals of the investment’s host country ;
(b) any other “ previously agreed dispute settlement procedures” ;
(c) the ICSID [see also article I (i) and (j)] if it is available, if ninety days have elapsed after the dispute arose, and if the claimant did not submit the dispute under mechanisms (a) or (b).
(d) the UNCITRAL Arbitration Rules
(e) any other arbitration institution as agreed by both parties or in accordance with any other arbitration rules.

It is noteworthy to observe that the aggrieved party may seek “interim injunctive relief, not involving the payment of damages, before the judicial or administrative tribunals” of the host party (article IX,3.b). It is not however a compulsory duty for the claimant to file a petition in the national courts.

According to an international expert’s assessment, to date the Mozambican judicial system has been largely ineffective in resolving commercial disputes. Instead most disputes among Mozambican parties are either settled privately or not at all. For disputes between international and domestic companies, the law closely follows UNCITRAL, the United Nations Commission of International Trade Law. In February 1999 the National Assembly passed alternative dispute resolution (ADR) legislation. The Center for Commercial Arbitration, Conciliation and Mediation (CACM), offers commercial arbitration. This channel is not recommended given the specific nature of the dispute between the government and an international investor covered by a BIT.

Practically, the first remedy available to the claimant is to lodge a plaint / an administrative appeal (if it was not done before) against the Government’s decision. This should be in respect with the Concession Agreement concluded between the Government and the investor.

The next channel for an immediate legal remedy, before any judicial recourse, should be a conciliation / consultation process which is provided for under both the US-Mozambique BIT (Article X.1.) and the ICSID Convention (article 28).

Local tribunals and courts: the first competent institution should be the national courts and tribunals. In Mozambique, the national courts are competent to adjudicate any disputes arising from illegal government’s decisions. However, given the state of independence and competence of judicial officers, it would be a strategic mistake to seek redress in the national courts, hence the necessity to pursue the following alternatives.

The US-Mozambican Council on Trade and Investment was established under the TIFA of 2005. This is a high level diplomatic mechanism which is optional, and not compulsory. Its decision would be some how very slow, but would be most compelling given the level of cooperation and the need for protection of US investments in Mozambique.

The International Centre for Settlement of Investment Disputes. The ICSID Convention stipulates in its article 25.1. that “The jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre. When the parties have given their consent, no party may withdraw its consent unilaterally.”

The settlement of the dispute under the Multilateral Investment Guarantee Agency – MIGA. Both the US and Mozambique are members of MIGA. However investments are covered by MIGA according to specific request by members and specific areas of interest. It remains necessary to ask the claimant if the investment under dispute is covered by the MIGA insurance, since with limited information, we are unable to ascertain these facts. The MIGA conciliation mechanism is free and very effective.

The main issues raised by the arbitration initiative

Obviously, apart from the US-Mozambique BIT conciliation mechanism as a priority option, the ICSID is the most advisable alternative for the settlement of such as dispute. The review of past and current ICSID cases is very instructive when it comes to the ultimate decision for the case under review. This cases include the World Duty Free Company Ltd. v. The Republic of Kenya, a $500 million arbitration case concerning the illegal cancellation of a concession for duty free services at the international airport in Nairobi (JKIA) which started in January 15, 2001. This is why we believe that some specific concerns need to be studied further for this alternative

1. Investments covered: (is the claimant entitled to legal protection under the ICSID ?)

According to article I (d) of the US-Mozambique BIT, investments covered include “every kind of investment owned or controlled directly or indirectly by that national or company, and includes investments consisting or taking the form of :

(iii) contractual rights, such as ……… concessions, or other similar contracts”

2. The consent of the parties to the dispute for an ICSID arbitration

ICSID rules require in article 25, the consent of both parties. For this case, the US-Mozambique BIT has already included provisions where both parties have consented to the ICSID arbitration mechanisms. It would however be necessary to inform the Government of Mozambique of the decision to seek dispute settlement through ICSID.

3. The issue of time limit for filing a petition:

Unless the concession agreement (or the investment authorization issued by the Government of Mozambique) has established other dispute resolution procedures and specific time limits, there is no pre requisites for lodging an investment petition. There is no time limit for submitting a preliminary petition to the ICSID Secretary General. However after the appointment of the tribunal by the ICSID, time limits are imposed for subsequent procedures.

Conclusion

The 2005 decision by the Government of Mozambique to withdraw the award of the Chifunde concession from the Alliance One was an act of discretionary powers. But the Government’s decision remains a violation of legally awarded investment rights (according to the Concession agreement). The Alliance One consortium was formed out of a merger between the US-based companies Dimon and Stancom, both of whom held concessions in the Mozambican provinces of Niassa, Tete and Manica.

The national laws and international agreements offer various remedies to the illegal cancellation of investment rights. The national investment code provides for compensation even in case of expropriation for weighty national interests or other compelling health or environmental reasons.

It is advisable to initiate as soon as possible, all available administrative appeal, conciliation mechanisms, and mediation under the US-Mozambique BIT before any other judicial and international dispute resolution procedures. The judges and arbitrators would like to ascertain that all legally available channels were used to settle the dispute before reaching the highest and more expensive dispute resolution mechanisms.

In case all mediation / administrative appeal and related initiatives fail, other international mechanisms would be then justified. For a serious and most compelling dispute settlement mechanism, it is advisable to file a petition with the Secretary General of the ICSID for conciliation and later if not successful, for arbitration. For this mechanism, no time limit is required.

However, the US-Mozambique BIT (in its article IX.2. c) requires that no petition can only be submitted to the ICSID conciliation / arbitration, if ninety days have elapsed after the dispute arose, and if the claimant did not submit the dispute under other mechanisms (national courts or other available conciliation mechanisms).

Considering the high costs involved in the ICSID conciliation / arbitration procedure, it is a priority option to consider the mechanism defined under the TIFA (US-Mozambique council). Also alternatively, it would be useful contact the office of the Resident, World Bank, Maputo, for a prior MIGA conciliation process. It would be also cost effective to agree with the competent government’s department on which alternative should be used as agreed by both parties. In case there would be no response, the BIT is very clear on the dispute settlement mechanisms already agreed on.

The author, is a lecturer and an International Consultant on Trade and Investment, Director of InterConsult Mozambique and is the Representative of Emerging Market Focus (Pty) in Mozambique. This insight paper is aimed at advising investors and business people involved in international trade by providing them with accurate legal data on the institutional and legal framework of Mozambique and the Southern African region.

While we take the utmost care to verify the information we provide, we do not endorse any responsibility for undesired or unpredictable consequences arising from decisions made on the basis of this article. Commentaries are encouraged -contact of the author is < interconsultgroup@yahoo.ca >
For professional legal assistance on specific issues, please visit EMF website at http://www.emergingmarkets.co.za

Tags: , , , ,

Related Posts