Towards a Model Investment Contract

1. 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

2. 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

3. 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

4. Three Relevant Sources of Law • Domestic law of host state • Investment contract • Investment treaty

5. Domestic law • Laws, regulations, constitutions • Common law/civil law/tribal and community custom/Islamic law • Enforced in domestic courts or other proceedings

6. 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

7. 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 costs Two 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!

8. 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

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

10. Relationship between the three sources of law, the wrong way

11. 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

12. 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)

13. 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)

14. Good Contracts SCOPE: • 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

15. Good Contracts SCOPE: • 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

16. Good Contracts SCOPE: • 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

17. Good Contracts SCOPE: • 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

18. Good Contracts IMPLEMENTATION: • Capacity building for negotiations • Evaluation and monitoring needs • Community engagement and review • Transparency of contracts and annual reporting

19. Implications/Recommendations • Not every situation can create a win-win; not every investment is a good investment • Good investment contracts for development in developing countries must reflect all issues and actors, not just private law tenure objectives of investors • Achieving development benefits happens by design, not by accident: • The design MUST be in the contracts and domestic law

20. 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