Towards a Model Investment Contract

Making Agricultural Investment Work for Africa, 4-5 October 2012, Cotonou, Benin

Henrique Suzy Nikiema and Carin Smaller, IISD

s.nikiema@iisd.org and csmaller@iisd.org

Agenda• Introduction:

• Contracts in context: The relationship between the sources of applicable law

• The problematique in a “pyramid”

• Good contracts: The scope of issues

• Implications and recommendations

Introduction• Move towards comprehensive national laws that will

make investment contracts unnecessary• IISD not trying to promote investment contracts or

bad investments• BUT… facing reality:

Frequent use of contracts in developing countries 2000-2009: 1,217 projects covering 83 million ha of land

• Scope of the study: 60 investment contracts, including 58 from Africa (most are problematic)

• IISD objective: Improve the quality of contracts

Three Relevant Sources of Law

• Domestic law of host state

• Investment contract

• Investment treaty

Domestic law

• Laws, regulations, constitutions• Common law/civil law/tribal and

community custom/Islamic law• Enforced in domestic courts or

other proceedings

Investment Contracts• State owns farmland in most developing

countries, although some important exceptions, including in West Africa

• Investment contract is therefore an international contract between the government and the foreign investors, not a private contract

• Can be governed by law of host state or by law of another state or by international law

• Often has international arbitration provision now

• Frequent use of stabilization provisions

Stabilization Provisions–Def’n: a provision that freezes all or part of the domestic laws for the duration of the contract–Consequences: changes to existing laws or introduction of new laws is either forbidden or investor must be compensated for any additional costsTwo types: –Fiscal issues: only fiscal laws are frozen (e.g. taxes and royalties). Often tolerated! –General issues: Any law that effects the investment is frozen (Environmental, worker health and safety, human health, etc…). Unacceptable!

Investment Treaties• Over 2700 exist today• Characteristic: treaty signed by two or

more States…but the direct beneficiaries are foreign investors

• Typical provisions:• Non-discrimination (national treatment and

most-favoured nation treatment)• Expropriation• Fair and equitable treatment• Investment liberalization (performance

requirement prohibitions• Investor-State arbitration

The Problematique: Relationship between the three sources of law, the right way

Relationship between the three sources of law, the wrong way

The Problematique: Treaties and Contracts can prevail

• Domestic law is generally not comprehensive in this field in developing countries– Land rights; water rights; environmental; health

and safety; labour rights; indigenous rights; investment rights, incentives, taxation; community rights and benefits; food and water security policies

• Therefore, both treaties and contracts can:– Guarantee right to all resources necessary to

fulfill investment goals– Restrict scope of changes that can be made to

domestic law applicable to the investment

GOOD CONTRACTS

PRINCIPLES:• Use global and regional initiatives as a

benchmark• Must relate to all issues• Must be inclusive of all actors in process• Must interact carefully with domestic law in host

State; set floors, not ceilings for obligations• Example: Model Mining Development

Agreement, International Bar Association, Mining Law Committee, April 2011 (www.mmdaproject.org)

Good Contracts

SCOPE:• Pre-contractual/pre-operational

obligations of investors– Impact assessments (resulting conditions

form part of contract)• Environmental impacts and management plan• Social impact • Human rights impact

– Business feasibility study and plan– Community agreement (free, prior and

informed consent)

Good ContractsSCOPE:• Land tenure

– Identification of land, time period– Purchase or lease rates– Payments to

landholders/users/communities– Does not extend to subsurface rights to

minerals, petroleum, gas, etc.

• Taxation and other fiscal provisions

Good ContractsSCOPE:• Common obligations

– Anti-corruption– Transparency of contracts and payments– Limitations on rights to export foods

during shortages – Possible requirements for constant sale of

local production in host State

Good ContractsSCOPE:• Water rights for investor

– Domestic water laws versus investment treaties and contracts

– Periodic reviews of water rights and allocations, including obligation to reduce water use

– Water fees and levies– No stabilization provision for water laws

and regulations

Good ContractsSCOPE:• Economic and social obligations of

investor– Transform principles to specific obligations;

legally binding and annual reporting– Minimum levels of local employment and

skills training– Local economic linkages: goods and services

suppliers, value-added industries– Technology transfer– Contribution to local community– Gender and indigenous peoples issues

Good Contracts

IMPLEMENTATION:– Capacity building for negotiations– Evaluation and monitoring needs– Community engagement and review– Transparency of contracts and annual

reporting

Implications/Recommendations

1. Not every situation can create a win-win; not every investment is a good investment

2. Good investment contracts for development in developing countries must reflect all issues and actors, not just private law tenure objectives of investors

3. Achieving development benefits happens by design, not by accident:

The design MUST be in the contracts and domestic law

Helpful resources

• IISD, Model Investment Treaty• UN Special Representative, Principles for Responsible Contracts• International Bar Association, Model Mining Development

Agreement• For contracts: Liberia, Grain• For treaties: UNCTAD

BUT…no perfect model or blueprint—depends on domestic context, laws and regulations