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iv
2.3.2 Kenya's tax policies and measures affecting Kenya's constitution ... 25
2.4 Conclusion ... 28
Chapter 3: South Africa's experience with BITs ... 29
3.0 Introduction ... 29
3.1 Brief History of South Africa's BIT system ... 29
3.2 Factors that prompted South Africa's BIT review ... 31
3.3 South Africa's BIT review process ... 41
3.3.1 Risks inherent in South Africa's BITs ... 43
3.3.1.1 Individual analysis based on interpretation of the provisions ... 43
3.3.1.2 Analysis of South Africa's review process in the context of its
domestic legislative framework ... 45
3.3.2 The role of BITs in attracting foreign investment in South Africa ... 50
3.3.3 The level of protection afforded to investment ... 51
3.4 Measures implemented by South Africa after review ... 52
3.5 Conclusion ... 56
Chapter 4: Comparison between the Kenyan and South African BIT experience ... 58
4.0 Introduction ... 58
4.1 Comparison between Kenya's situation with BITs to South Africa's BIT
experience ... 58
4.2 Lessons that Kenya can learn from South Africa's experience ... 63
4.3 Conclusion ... 68
Chapter 5: Conclusion and Recommendations ... 69
5.0 Introduction ... 69
5.1 Summary ... 69
5.2 Recommendations ... 70
5.2.1 Review BITs ... 70
5.2.2 Terminate current BITs ... 71
v
5.2.3 Maintaining a BIT system... 71
5.2.3.1 Benefits of maintaining the BIT system ... 71
5.2.3.2 Manner in which BIT system should be drafted ... 72
5.2.4 Capacity-building ... 76
5.2.5 Alternative measures ... 77
5.2.6 Other recommendations ... 78
5.3 Final Remarks ... 78
Bibliography ... 79
vi
List of Acronyms
AILA
African International Legal Awareness
BEE
Black Economic Empowerment
BIT
Bilateral Investment Treaty
BRICS
Brazil, Russia, India, China, South Africa
B-BBEEA
Broad-Based Black Economic Empowerment Act 53 of 2003
COMESA
Common Market for Eastern and Southern Africa
CCIA
COMESA Common Investment Area
DTI
Department of Trade and Industry
EAC
East African Community
EPZ
Export Processing Zone
EPZA
Export Processing Zone Act
FDI
Foreign Direct Investment
FIPA
Foreign Investment Protection Act
FTA
Free Trade Area
GDP
Gross Domestic Product
HDSA
Historically Disadvantaged South Africans
ICSID
International Convention on the Settlement of Investment
Disputes
IISD
International Institute for Sustainable Development
IIA
International Investment Agreements
IMF
International Monetary Fund
IMC
Inter Ministerial Committee
ISDS
Investor-State Dispute Settlement
vii
MPRDA
Mineral and Petroleum Resource Development Act of 2004
MFN
Most Favoured Nation
NAFTA
North American Free Trade Agreement
NT
National Treatment
OECD
Organisation for Economic Co-operation and Development
PPIB
Promotion and Protection of Investment Bill
SADC
Southern Africa Development Community
Tralac
Trade Law Centre for Southern Africa
UK
United Kingdom
UNCTAD
United Nations Conference on Trade and Development
VAT
Value Added Tax
WBES
World Business Environment Survey
1
Chapter 1: Introduction
1.1 Background
A Bilateral Investment Treaty (BIT) is an agreement between two countries for the
reciprocal encouragement, promotion and protection of investments in each other's
territories by companies based in either country.
1
Most analysts believe that the
purpose of the BITs is to attract Foreign Direct Investment (FDI) to the host country
that is linked to economic growth while for the investor; the primary benefit is the
protection that the BITs provide from the risks associated with investing in a foreign
country.
2
Such protection will vary depending on the terms of a particular BIT but
most model BITs share six common core provisions that seek the protection from
expropriation or nationalisation, most favoured nation treatment, national treatment,
repatriation and investment of earnings, observation of contractual obligations, and
dispute resolution.
3
The first ever BIT was signed between Germany and Pakistan in 1959 and entered
into force in 1962.
4
Other states quickly followed the German-Pakistan example and
many BITs were signed during the 1960s using a similar pattern.
5
The BITs were
entered into mostly between developing and developed countries, but the trend
changed in recent decades as more BITs are being entered into between developing
countries.
6
Most BITs in existence in Africa were signed after the countries attained
their independence. For example, after 1994 the South African government entered
into a flurry of BITs with developed countries. These BITs were signed principally
with European countries that were equally keen to support South Africa's transition
1
United Nations Conference on Trade and Development (UNCTAD) `Investment Instruments Online' available
at http://www.unctadxi.org/templates/Page1006.aspx (accessed 20 February 2015).
2
Ginsburg T `International Substitutes for Domestic Institutions: Bilateral Investment Treaties and Governance'
(2005) 25 International Review of Law and Economics 108.
3
Masamba M `Africa and bilateral investment treaties: to "BIT" or not?' available at
http://www.consultancyafrica.com/index.php?option=com_content&view=article&id=1697:africa-and-
bilateral-investment-treaties-to-bit-or-not&catid=82:african-industry-a-business&Itemid=266(accessed 20
February 2015).
4
Ghouri A A `The Evolution of bilateral investment treaties, investment treaty arbitration and international
investment law' (2011) 14 (6) Int. A.L.R 196.
5
Ghouri A A `The Evolution of bilateral investment treaties, investment treaty arbitration and international
investment law' (2011) 14 (6) Int. A.L.R 196.
6
Masamba M `Africa and bilateral investment treaties: to "BIT" or not?' available at
http://www.consultancyafrica.com/index.php?option=com_content&view=article&id=1697:africa-and-
bilateral-investment-treaties-to-bit-or-not&catid=82:african-industry-a-business&Itemid=266(accessed 20
February 2015).
2
from apartheid, back into the community of nations, with a view of encouraging
foreign investment in the new South Africa.
7
Many countries followed a similar
approach resulting in 1472 BITs being signed within the 1990s.
8
Many of these BITs
are still in force in this 21
st
century.
In recent years, there has been criticism regarding the BITs that were signed prior to
the 21
st
century that are still in force to date. As highlighted, by South Africa, for
example, in the desire to attract foreign investment, insufficient heed was paid to the
less obvious, and less attractive, consequences of those treaties.
9
It is also argued
that BITs restrict the policy space of a host state in favour of foreign investors.
10
Host
states have given up their sovereign right to pursue policy objectives due to the BITs
that they signed. In addition, BITs have also been regarded as affording investors
preference with corporate rights over public interest.
11
Some lawyers believe that the
first wave of BITs was signed too fast with text penned by a closely-knit group of
western lawyers.
12
Based on this belief, it is concluded that the majority of BITs
reflect the texts developed to promote the 1960s anti-communist, post-
decolonisation protection agenda for European investors.
13
In addition to the criticism of BITs that has been highlighted, it is also important to
include the fact that the number of cases brought to the International Convention for
the Settlement of Investment Disputes (ICSID) has also increased in the last decade.
7
Lang J `Bilateral Investment Treaties- a shield or a sword?' available at
http://www.bowman.co.za/FileBrowser/ArticleDocuments/South-African-Government-Canceling-Bilateral-
Investment-Treaties.pdf(accessed 20 February 2015).
8
Lang J `Bilateral Investment Treaties- a shield or a sword?' available at
http://www.bowman.co.za/FileBrowser/ArticleDocuments/South-African-Government-Canceling-Bilateral-
Investment-Treaties.pdf(accessed 20 February 2015).
9
Lang J `Bilateral Investment Treaties- a shield or a sword?' available at
http://www.bowman.co.za/FileBrowser/ArticleDocuments/South-African-Government-Canceling-Bilateral-
Investment-Treaties.pdf(accessed 20 February 2015).
10
Masamba M `Africa and bilateral investment treaties: to "BIT" or not?' available at
http://www.consultancyafrica.com/index.php?option=com_content&view=article&id=1697:africa-and-
bilateral-investment-treaties-to-bit-or-not&catid=82:african-industry-a-business&Itemid=266(accessed 20
February 2015).
11
Masamba M `Africa and bilateral investment treaties: to "BIT" or not?' available at
http://www.consultancyafrica.com/index.php?option=com_content&view=article&id=1697:africa-and-
bilateral-investment-treaties-to-bit-or-not&catid=82:african-industry-a-business&Itemid=266(accessed 20
February 2015).
12
Green AR `Bilateral investment treaties coming back to bite' available at
http://www.thisisafricaonline.com/Business/Legal-Bulletin/Bilateral-investment-treaties-coming-back-to-
bite(accessed 20 February 2015).
13
Green AR `Bilateral investment treaties coming back to bite' available at
http://www.thisisafricaonline.com/Business/Legal-Bulletin/Bilateral-investment-treaties-coming-back-to-
bite(accessed 20February 2015).
3
In the year 2000, there were less than 10 cases reported at ICSID but by the year
2013, investors had initiated at least 57 known investor-state dispute settlement
cases pursuant to International Investment Agreements (IIAs).
14
This number came
close to the highest number of cases that has ever been reported in a single year at
ICSID.
15
Some of the cases that were brought before the court included challenges
to a broad range of government measures, including changes related to investment
incentive schemes, alleged breaches of contracts, alleged direct or de facto
expropriation, revocation of licenses or permits, regulation of energy tariffs, allegedly
wrongful criminal prosecution, land zoning decisions, invalidation of patents and
many more.
16
The issues raised in these cases do not only indicate that BITs create
risks that may result in dispute settlement proceedings but also indicate the potential
for huge financial costs being incurred when disputes arise. The dispute mechanism
could also be viewed as an infringement of the host countries sovereignty as
disputes are settled in international tribunals and not the domestic courts.
17
In order to address concerns raised in some of these disputes, some countries have
embarked on reviewing their BITs. These countries include the USA, Norway,
Canada, South Africa and other states to mention a few.
18
Other countries such as
Bolivia, Ecuador and Venezuela, have been very vocal in challenging investment
protection regimes and have either terminated their BITs or have even gone as far
as withdrawing from ICSID.
19
In March of 2014, Indonesia decided to terminate its
BIT with the Netherlands as of 1 July 2015 and has also indicated that it intends to
terminate all of its 67 BITs
.20
14
UNCTAD `Recent developments in investor-state disputes ISDS' Issue note number 1 April 2014 available at
http://unctad.org/en/publicationslibrary/webdiaepcb2014d3_en.pdf(accessed 20 February 2015).
15
UNCTAD `Recent developments in investor-state disputes ISDS' Issue Note number 1 April 2014 available at
http://unctad.org/en/publicationslibrary/webdiaepcb2014d3_en.pdf(accessed 20 February 2015).
16
UNCTAD `Recent developments in investor-state disputes ISDS' Issue Note number 1 April 2014 available at
http://unctad.org/en/publicationslibrary/webdiaepcb2014d3_en.pdf(accessed 20 February 2015).
17
Green AR `Bilateral investment treaties coming back to bite' available at
http://www.thisisafricaonline.com/Business/Legal-Bulletin/Bilateral-investment-treaties-coming-back-to-
bite(accessed 20 February 2015).
18
Green AR `Bilateral investment treaties coming back to bite' available at
http://www.thisisafricaonline.com/Business/Legal-Bulletin/Bilateral-investment-treaties-coming-back-to-
bite(accessed 20 February 2015).
19
Cotula L `Is the tide turning for Africa's investment treaties?' available at http://www.iied.org/tide-turning-
for-africa-s-investment-treaties(accessed 20 February 2015).
20
Hovells, Nesbitt, Gonzalez et al `Indonesia terminates its Bilateral Investment Treaties (BIT) with the
Netherlands from the 1
st
of July 2015 and may terminate all of its BIT's' available at
4
The majority of countries that signed the 1472 BITs that came into force in the 1990s
have not taken any action toward reviewing their BITs. Kenya is an example that
currently has four BITs that were signed prior to the 21
st
century and date back to as
early as 1970. These BITs have still not been subject to review. During the release of
the 2014 Trade and Development Report, the United Nations Conference on Trade
and Development (UNCTAD) Secretary General Dr Mukhisa Kituyi, urged the
Kenyan government to consider renegotiating decade-old bilateral agreements,
arguing that they favour foreign investors at the expense of locals.
21
In his speech,
Dr Kituyi indicated that South Africa had set an example by going full-blown in
throwing out decade-old agreements that favoured foreign investors thereby
enabling it to rethink the agreements in a way that favours local industries.
22
1.2 Problem Statement
The fact that some countries such as Kenya have not revisited the BITs that they
signed prior to the 21
st
century presents a problem in itself given all the criticisms
about the BITs highlighted above. Host countries need to be certain that the
agreements they entered into decades ago are still reflective of the very same
purpose that they sought when they signed the BITs. Moreover, the BITs should not
create consequences detrimental to the host country that they did not envision when
they signed the BITs. Countries such as Kenya should, therefore, revisit their BITs to
see whether there are any problems emanating from them that they need to address.
Given the fact that South Africa, among other countries, has already reviewed its
BITs, Kenya may have to learn from South Africa's experience in coming up with a
solution for its problems regarding its BITs. This thesis, seeks to highlight the
problems with Kenya's BITs that were signed prior to the 21
st
century while taking
lessons from South Africa's experience and recommending a course of action for the
Kenyan government.
http://www.lexology.com/library/detail.aspx?g=2a596886-3ad2-464b-a510-ab3b0cff503b (accessed 20
February 2015).
21
Kariuki J `Kenya told to review bilateral trade agreements' available at
http://www.nation.co.ke/business/Kenya-told-to-review-trade-deals/-/996/2452122/-/hwnj81/-
/index.html(accessed 20 February 2015).
22
Kariuki J `Kenya told to review bilateral trade agreements' available at
http://www.nation.co.ke/business/Kenya-told-to-review-trade-deals/-/996/2452122/-/hwnj81/-
/index.html(accessed 20 February 2015).
5
1.3 Significance of the study
BITs signed prior to the 21
st
century are problematic. Some countries with BITs signed
during this period have since reviewed those BITs and taken action to address the
disadvantages the BITs held for the host nation or have either resorted to eradicating
some of their BITs. In particular, developing countries that signed BITs with developed
nations seem to be disproportionately disadvantaged in these agreements. This thesis
highlights Kenya's current BIT situation and compares it in light of another developing
country, South Africa, with regards to its BIT experience. Given that South Africa has
undergone an extensive BIT review process and moves to change some of these BITs,
this thesis compares and contrasts the Kenyan and South African experience. The
study highlights the possible lessons that could be learnt from the South African BIT
review experience and provides recommendations for the Kenyan government
regarding its outdated BITs. The lessons and recommendations benefit not only Kenya
but also other countries that are still to review their BITs as it adds to the literature on
why it is important for countries with such BITs to revisit them and how best they can
go about the review mechanism. In addition, the study is also significant in that it raises
awareness of the use and effects of BITs, thereby enabling countries that enter into
such agreements to make informed decisions.
1.4 Research Question
Based on the problem that has been highlighted above, and the underlying assumption
that Kenya needs to revisit its BITs, this thesis will answer the following primary
question: How should Kenya revisit its BITs and what is the course of action for Kenya?
In answering this question, other sub-questions will also need to be answered which
are:
i.
What are the legal problems with the current BITs in Kenya that were signed
prior to the 21
st
century and how may they affect Kenya?
ii.
What prompted South Africa to review its BITs and how did they proceed in
reviewing the BITs.
iii.
What were the results of South Africa's review process and what measures
were adopted?
iv.
What lessons could Kenya learn from the South African experience and what is
the recommended course of action for Kenya?
6
1.5 Methodology
The methodology used in developing this research is a desk and library literature
study. This research is a comparative study with South Africa as the comparator due
to the fact that South Africa is an example of a country that has reviewed its BITs
and could provide guidance on the review mechanism for Kenya as well as providing
lessons that Kenya could utilise in reviewing its BITs. The primary sources used in
the research are mostly the BITs of both Kenya and South Africa together with
several Acts of Parliament of both countries that have a bearing on the countries
respective BITs. The secondary sources include books on international investment
law, internet sources, journal articles and other publications.
1.6 Chapter Outline
This thesis comprises of five chapters.
Chapter 1
This chapter introduces the thesis with a background, the problem statement, the
significance of the study, the research questions, the methodology and the chapter
outline of the study.
Chapter 2
This chapter focuses on the BITs signed by Kenya prior to the 21
st
Century. There
are four BITs that Kenya signed during this period. Each BIT will be analysed
comprehensively in the context of Kenya's domestic legislative framework or
domestic policies. The aim of the analysis is to examine the potential for legal
problems that may arise from the BITs and how such problems might pose legal
challenges for Kenya.
Chapter 3
This chapter will briefly introduce South Africa's BIT history followed by a description
of the factors that prompted South Africa to review its BITs, the manner in which
South Africa reviewed its BITs and the measures that South Africa implemented after
review. The main focus will also be on the BITs that were signed prior to the
21
st
century by South Africa in order to provide a basis for comparison with the
Kenyan situation.
7
Chapter 4
This chapter will compare the situation that exists in Kenya now, which has a bearing
on its outdated BITs, to the situation that existed in South Africa prior to review. The
aim would be to identify the factors that could also prompt Kenya to initiate a review
process of its BITs. In addition, this chapter will highlight the possible lessons that
Kenya could learn from South Africa's experience.
Chapter 5
This chapter will provide recommendations and the course of action for Kenya. It will
also be the concluding chapter of the thesis.
1.7 Definition of keywords
Bilateral Investment Treaty: An agreement between two countries for the reciprocal
encouragement, promotion and protection of investments in each other's territories
by companies based in either country.
23
Foreign Direct Investment: The transfer of tangible or intangible assets from one
country to another for the purpose of their use in that country to generate wealth
under the total or partial control of the owner of the assets
24
International Investment Agreements: Treaties between states that exist in three
primary forms that are bilateral investment treaties, regional investment treaties and
chapters of integrated trade and investment agreements that can be signed at the
bilateral or regional level.
25
Promotion and Protection of Investment Bill: This proposed Bill is meant to provide
for the legislative protection of investors and the protection and promotion of
investment; to achieve a balance of rights and obligations that apply to all investors;
and to matters connected therewith.
26
23
UNCTAD `Investment Instruments Online' available at http://www.unctadxi.org/templates/Page1006.aspx
(accessed 20 February 2015).
24
Sornarajah M The International Law on Foreign Investment 3 ed (2012) 8.
25
Mann H `International Investment Agreements, Business and Human Rights: Key Issues and Opportunities'
2008 IISD 3.
26
The Protection and Promotion of Investment Bill (GN 1087 in GG 36995 of 1November 2013).
8
Chapter 2: Potential legal problems in Kenya's BITs
2.0 Introduction
This chapter focuses on the four BITs signed by Kenya prior to the 21
st
Century.
These BITs were signed with the Netherlands in 1970, Germany in 1996, Italy in
1996 and the United Kingdom (UK) together with Northern Ireland (hereinafter
referred to as the UK BIT) in 1999.
27
Each BIT will be analysed individually with
further comprehensive analyses in the context of Kenya's domestic legislative
framework or domestic policies. The aim of this analysis is to examine the potential
legal problems that may arise from such BITs and how such problems could pose
legal challenges for Kenya.
2.1 Brief overview of Kenya's BITs signed prior to the 21
st
Century
Kenya's model BIT makes provisions for generally the same terms and does not
deviate significantly from the typical modern BIT highlighted in the previous chapter.
Allee and Peinhardt point out that there is a fallacy promoted that BITs are uniform
when, in fact, each treaty has an internal balance that has been negotiated by the
parties.
28
Based on this fact, the four BITs signed by Kenya have minor differences
indicating the varying interests or concerns of the parties that negotiated with Kenya.
The differences mainly emanate from the manner in which the same provisions are
phrased in the different BITs. There is also evidence of certain provisions found in
certain Kenyan BITs that are not found in the others. With this in mind, the following
section shall focus on analysing the provisions of the four BITs signed prior to the
21
st
century in order to determine potential problems for the Kenyan government.
2.2 Analyses of Kenya's BITs based on legal interpretation
This section will focus on the provisions relating to the definition of terms, the fair and
equitable treatment, the protection and security standard, the national treatment and
most favoured nation clause, the investor-state dispute resolution provision and the
provisions that refer to a contracting party's national legislation particularly focused
27
UNCTAD `Investment policy hub' available at
http://investmentpolicyhub.unctad.org/IIA/CountryBits/108(accessed 3 March 2015).
28
Allee T & Peinhardt C `Delegating Differences: Bilateral Investment Treaties and Bargaining Over Dispute
Resolution Provision' (2010) 54 International Studies Quarterly 2.
9
on the legal interpretation of the BITs. This analysis will search for potential problem
areas in Kenya's BITs entered into prior to the 21
st
century.
2.2.1 Definition of terms
The terms defined in Kenya's BITs are not uniformly provided neither are they
defined in similar terms. Despite such differences, all four BITs do, however, try to
define at least either the term `investment' or `investor'. The definition of the terms
`investment' and `investor' are important because, from the perspective of a capital
exporting country, the definition identifies the group of investors whose foreign
investment the country is seeking to protect through the agreement, including, in
particular, its system for neutral and depoliticised dispute settlement.
29
From the
capital importing country's perspective, it identifies the investors and the investments
the country wishes to attract and from the investor's perspective, it identifies the way
in which the investment might be structured in order to benefit from the agreements'
protection.
30
Only the Netherlands, Germany and Italian BITs define who the investor is.
31
These
three BITs define investor with reference to the term `nationals' or `natural person',
and `company' or `legal person'. The definition of the term `national' or `natural
person' in the three treaties merely requires that nationality be determined in terms
of the laws of the country that the national claims to be from. This proves problematic
in that it results in situations in which foreign investors who are not privy to the
original BIT may seek to exploit the shortcomings of this definition by altering their
nationality so that they benefit from the rights and protection offered under Kenya's
BITs. Examples of such situations have been evident in cases such as that of
Waguih Siag v The Arab Republic of Egypt.
32
This case involved a situation in which
an Egyptian national, who had investments in Egypt, lost his Egyptian nationality at a
time when he had acquired Lebanese and Italian nationality in a manner that
appeared to have been devised.
33
The said claimant went on to claim under the BIT
29
Yannaca-Small C `Definition of Investor and Investment in International Investment Agreements' 2008
OECD9.
30
Yannaca-Small C `Definition of Investor and Investment in International Investment Agreements' 2008
OECD9.
31
Netherlands 14 (a) & (b), Germany Article 1 (3) & (4) and Italy Article 1 (2),(3) & (4).
32
Waguih Elie George Siag and Clorinda Vecchi v The Arab Republic of Egypt ICSID Case No. ARB/05/15.
33
Qureshi K Q C `Bilateral Investment Treaties (BITs): The Essentials' available at
www.mcnairchambers.com/media/.../InvestmentTreatyEssentials_.pdf(accessed 3 March 2015).
10
that existed between Italy and Egypt as an Italian investor despite the fact that he
had been an Egyptian national at the time the investment was made. This indicates
that the manner in which the nationality requirement is phrased in Kenya's BITs has
loopholes that may allow foreign investors from other countries that do not have BITs
with Kenya to nonetheless benefit from Kenya's BITs. This presents a potential
problem that may affect the Kenyan government in the event that investors from
countries that do not have a BIT with Kenya devise methods to alter their nationality
so that they take advantage of the protection offered by the Kenyan BITs.
The UK BIT totally excludes the definition of the term `investor'. This gives rise to the
possibility of a broad range of interpretations of who may be considered as the
investor. Without the definition of such a term in the treaty, it would be difficult to
prevent investors from expanding the scope of International Investment Agreement's
(IIAs) protection beyond that intended by the parties to the treaty.
34
Article 1 (a) of the UK BIT, Article 1 (1) of the Germany BIT and Article 1 (1) of Italy
BIT define the term investment broadly by indicating that the term refers to any kind
of asset and further lists the assets that are considered as investments. Such
definitions conform to Peterson's view regarding some investment treaties that he
claims to have been crafted in deliberately vague language, so as to cover the
broadest range of investment situations.
35
All three definitions of the term investment
in Kenya's BITs further state that the highlighted list is not exclusive. Malik states
that, such a non-exclusive definition was developed by capital exporting states to
ensure that a wide variety of their investors' assets were protected in the territories of
their capital importing treaty partners.
36
This presents problems in that the non-
exclusive list could be interpreted to include anything from foreigners' money in a
bank account, a holiday home, a company's goodwill, even contracts for the sale of
goods manufactured by the investor in its home country, or services performed by
the investor in its home country and then sold to consumers in the host country, to
mention a few examples.
37
Such assets would have little to no contribution to the
34
Bernasconi-Osterwalder N & Johnson L `Belgium's Model Bilateral Investment Treaty: A Review' 2010
International Institute For Sustainable Development (IISD)9.
35
Peterson L `Bilateral Investment Treaties and Development Policy-Making' 2004 IISD27.
36
Malik M `Recent Developments in the Definitions of Investment in International Investment Agreements'
2008 IISD7.
37
Bernasconi-Osterwalder N & Johnson L `Commentary to the Austrian Model Investment Treaty' 2011 IISD 7.
11
host state's economy or sustainable development and yet would still benefit from the
heightened rights and protections offered by the investment agreement.
38
The Italian BIT sought to place a limitation on the interpretation of the definition of
investment by highlighting that the investment must be made in conformity with the
laws and regulations of a contracting party.
39
Yackee refers to such provisions as `in
accordance to' provisions and he is of the opinion that, relying on such provisions in
BITs to provide tribunals with authority to take account of the issues in dispute would
pose a number of interpretative and applicative uncertainties.
40
He goes on to point
out that such provisions typically do not mention which laws and regulations must be
complied with.
41
Kenya's Foreign Investment Protection Act (FIPA) is an example of
Kenyan legislation that may be used in interpreting the BIT provisions relating to
what constitutes an investment in Kenya. This Act provides that, for an investment to
be approved it has to promote the economic development of the country or would
need to be of benefit to Kenya.
42
The application of this Act in the event of a dispute
is not automatic not only because of the fact that it is not specifically mentioned in
the treaties but also because of the manner in which tribunals have interpreted the
`in accordance to' provisions in BIT arbitrations.
In the case of Saipem S.p.A v Bangladesh, the tribunal indicated that Article 1 (1) of
the BIT in issue that stated that investment had to be made in conformity with the
laws and regulations of the host state does not limit the definition of investment
under the treaty to investment within the laws and regulations of Bangladesh.
43
In
Tokios Tokeles v Ukraine, the tribunal refused the respondent states argument that
the technical defects in the restriction of the investment under Ukraine law denied
the investment protection of the treaty.
44
The dissenting arbitrator in the case of
Fraport v The Republic of Philippines in dealing with the `in accordance to' provision,
indicated that since the claimant's shareholdings constituted an investment covered
38
Bernasconi-Osterwalder N & Johnson L `Commentary to the Austrian Model Investment Treaty' 2011 IISD7.
39
Art 1 (1) Italy BIT
40
Yackee J W `Investment Treaties and Investor Corruption: An Emerging Defence for Host States?' (2011-
2012) 52 Va. J. Int'l L. 723740.
41
Yackee J W `Investment Treaties and Investor Corruption: An Emerging Defence for Host States?' (2011-
2012) 52 Va. J. Int'l L. 723740.
42
Foreign Investment Protection Act 35 of 1964 Article 3 (1) & (2).
43
Yannaca-Small C `Definition of Investor and Investment in International Investmnet Agreements' 2008
OECD77.
44
Malik M `Recent Developments in the Definitions of Investment in International Investment Agreements'
2008 IISD16.
12
by the BIT in issue, the requirement that the investment shall be accepted in
accordance with the Philippine law could not be interpreted as a jurisdictional bar.
45
All three of these cases indicate that the tribunal at ICSID may have jurisdiction
regarding issues that may not even be considered as an investment in Kenya. This
may be the case regardless of the fact that the majority decision in the Fraport case
dismissed the case on the grounds that the investment had not been made in
accordance with the relevant national laws.
46
There is no rule of binding precedent in
international investment law,
47
and as such, tribunals may reach their own
conclusions regarding the facts of a case. With such uncertainties, it is a risk for
Kenya to maintain the provision in its current phrasing since it may result in
interpretations that may not be in its favour.
To add to the complexity of such broad definitions or a failure to define the term
investment, it is important to highlight that foreign investors often make their
investments through subsidiary companies incorporated under the laws of the host
state.
48
Without a specific agreement to the contrary, a locally incorporated
subsidiary will not be able to bring a treaty claim against the host state.
49
However,
the foreign investor shareholder can bring a claim under an applicable treaty for
damages with respect to its shareholdings.
50
This has been evident in a number of
cases against Argentina including the case of CMS Gas Transmission Co. v
Argentina.
51
In this case, the ICSID Annulment Committee noted that `the definition
in the Argentina-US BIT which provided for "every kind of investment...owned or
controlled directly or indirectly...such as equity, debt..." was very broad, and
confirmed that investments made by minority shareholders are covered by the actual
language of the definition as is also recognised by ICSID arbitral tribunals in
45
Yannaca-Small C `Definition of Investor and Investment in International Investmnet Agreements' 2008
OECD77.
46
Yannaca-Small C `Definition of Investor and Investment in International Investmnet Agreements' 2008
OECD77.
47
Butler N `The State of International Investment Arbitration: the possibility of establishing an appeal
mechanism' (unpublished Ph.D thesis, The University of Leeds,2012) 97.
48
Malik M `Recent Developments in the Definitions of Investment in International Investment Agreements'
2008 IISD17.
49
Malik M `Recent Developments in the Definitions of Investment in International Investment Agreements'
2008 IISD17.
50
Malik M `Recent Developments in the Definitions of Investment in International Investment Agreements'
2008 IISD17.
51
Bernasconi-Osterwalder N & Johnson L `Commentary to the Austrian Model Investment Treaty' 2011 IISD 8.
13
comparable cases.'
52
The wording in this Argentina-US BIT is almost similar to that
found in Kenya's BITs. Argentina argued, in relevant part, that if the tribunals allowed
minority or indirect shareholders to bring claims for relief based on damage to the
company, host countries would be faced with a multitude of claims from different
shareholders, as well as claims by the company itself.
53
The tribunals, however,
rejected those arguments in favour of a broad definition of investments and in doing
so; they hung their decisions on the observation that there was nothing in the actual
text of the governing treaties that imposed such a limitation.
54
This indicates that
Argentina had no intention of including minority shareholders as investments in its
BITs and yet due to the phrasing of the definition of investment, the tribunal allowed
such minority shareholders to bring a claim against Argentina. Kenya could also be
subject to similar situations since Kenya's BITs that define the term investment,
provide the same broad definition of the term as that found in the Argentine-US BIT
that was at issue in the aforementioned case.
2.2.2 Fair and equitable treatment
The fair and equitable treatment is the second most important and common feature
of BITs after the expropriation clause that is found in almost every BIT.
55
The
Netherlands BIT provides that:
`each contracting party shall ensure fair and equitable treatment to the
investments, goods, rights and interests of nationals of the other contracting
party and shall not impair the management, maintenance, use, enjoyment or
disposal thereof by those nationals, by unjustified or discriminatory
measures.'
56
This provision is also similar to that of Article 2 in the Germany, Italy and UK BITs.
However, all four BITs fail to elaborate what the term fair and equitable treatment
entails.
52
Malik M `Recent Developments in the Definitions of Investment in International Investment Agreements'
2008 IISD18.
53
Bernasconi-Osterwalder N & Johnson L `Commentary to the Austrian Model Investment Treaty' 2011 IISD 8.
54
Bernasconi-Osterwalder N & Johnson L `Commentary to the Austrian Model Investment Treaty' 2011 IISD 8.
55
Malik M `Time for a Change. Germanys Bilateral Investment Treaty Programme and Development Policy'
(2006) 27 Dialogue on Globalisation Occasional Paper 22.
56
Agreement on Economic Co-operation between the Government of the Kingdom of the Netherlands and the
Government of the Republic of Kenya of 1970 Article 7.
14
According to Peterson, investment arbitration can be plagued by a troubling lack of
consistency in the interpretation of the substantive provisions in BITs from one case
to the next.
57
This is further supported by Schreuer, who states that with regards to
the fair and equitable provision, the meaning will often depend on the specific
circumstances of the case at hand.
58
In S.D Myers v Canada, Metalclad v Mexico
and Pope and Talbot v Canada, three tribunals provided three radically different
interpretations of the same North American Free Trade Agreement (NAFTA) fair and
equitable treatment clause.
59
With such uncertainties on how the provision in
Kenya's BITs may be interpreted in the event of a dispute, it is a risk for Kenya to
maintain the provision as it is without a further elaboration of the term.
Furthermore, in cases involving Ukraine and Argentina regarding the fair and
equitable treatment standard, the tribunals found that both governments had
breached the standard by undermining the legitimate expectations of the investors.
60
The conclusions reached in these cases involving the two governments indicate that
the governments were unaware of what the foreign investors' expectations were
regarding the interpretation of the fair and equitable clause. As such, it is evident that
without a clear explanation of what the fair and equitable treatment entails, the
Kenyan government risks legal action from investors whose expectations of the
provision may differ from what the Kenyan government envisaged when entering into
these BITs.
2.2.3 Protection and security clause
The Germany BIT in Article 4 (1) and the UK BIT in Article 2 (2) provide that
investments by nationals or companies of either contracting party shall enjoy full
protection and security in the territory of the other. Green is of the view that this
provision puts a hefty responsibility on the state to ensure that foreign investors'
57
Peterson L `Bilateral Investment Treaties and Development Policy-Making' 2004 IISD27.
58
Schreuer C `Fair and Equitable Treatment in Arbitral Practice' (2005) 6 The Journal of World Investment and
Trade
59
Butler N `The State of International Investment Arbitration: the possibility of establishing an appeal
mechanism' (unpublished Ph.D thesis, The University of Leeds,2012) 91.
60
Haftel Y &Thompson A When Do States Renegotiate International Agreements? The case of Bilateral
Investment Treaties(working paper, University of Maryland 2013) 10.
15
investments are protected.
61
There has been evidence of this huge responsibility on
host states from a number of cases including the Swiss case against South Africa in
which the South African government was mandated to compensate a Swiss investor
who had acquired a game reserve in South Africa that was later subject to poaching,
vandalism and theft.
62
Algeria was also taken to tribunals to pay damages related to
civil unrest during the civil war.
63
Congo also faced claims for riots on the streets of
Kinshasa.
64
This presents a problem for Kenya in that; Kenya has security concerns
that emanate from its neighboring country Somalia.
65
Most notable has been the
attack at Garrissa University College that occurred in April of 2015.
66
Also of note, an
attack in September 2013 on the prominent West Gate shopping mall that resulted in
damage to property and left 71 people dead.
67
Other security-threatening incidents
occurred in 2010 and 2011 in which there were grenade attacks on a Nairobi
nightclub, a bus station, refugee camps and towns near the Somalia border.
68
Reports indicate that to date, none of the attacks have been targeted at commercial
projects or installations.
69
In the event that such attacks are made on foreign
investor's property, Kenya may be obliged by its pre-21
st
century BITs to
compensate foreign investors. This presents a potential problem in that the attacks
emanate from a country that Kenya has no control over and so as such,
guaranteeing protection of investors' property is a huge responsibility for the state.
61
Green AR `Bilateral investment treaties coming back to bite' available at
http://www.thisisafricaonline.com/Business/Legal-Bulletin/Bilateral-investment-treaties-coming-back-to-
bite(Accessed 19 October 2014).
62
Lang J `Bilateral Investment Treaties- a shield or a sword?' available at
http://www.bowman.co.za/FileBrowser/ArticleDocuments/South-African-Government-Canceling-Bilateral-
Investment-Treaties.pdf (accessed 3 March 2015).
63
Green AR `Bilateral investment treaties coming back to bite' available at
http://www.thisisafricaonline.com/Business/Legal-Bulletin/Bilateral-investment-treaties-coming-back-to-
bite(accessed 3 March 2015).
64
Green AR `Bilateral investment treaties coming back to bite' available at
http://www.thisisafricaonline.com/Business/Legal-Bulletin/Bilateral-investment-treaties-coming-back-to-
bite(accessed 3 March 2015).
65
UNCTAD `An Investment guide to Kenya Opportunities and Conditions ' 3.
66
Brumfield B `Garissa University Attack: The Problems Plaguing Kenya's Security Efforts' available at
http://edition.cnn.com/2015/04/03/africa/garissa-attacks-kenya-security/ (accessed 3 April 2015).
67
U.S Department of State `Investment Climate Statement 2014' available at
http://www.state.gov/e/eb/rls/othr/ics/2014/index.htm (accessed 3 March 2015).
68
KPMG `Kenya country profile' available at http://www.atilimfuar.com/en/belge/kenya.pdf (accessed 3 March
2015).
69
KPMG `Kenya country profile' available at http://www.atilimfuar.com/en/belge/kenya.pdf (accessed 3 March
2015).
16
Any failure to provide protection by the Kenyan government could prove costly for
the country.
2.2.4 The national treatment and most favoured nation provision
Kenya's BITs under consideration include the national treatment (NT) and the most
favoured nation (MFN) clauses. The NT provision in Kenya's BITs requires the
contracting parties to provide no less favourable treatment to foreign investors than it
accords to its nationals. This provision applies regardless of the fact that the same
foreign investors may be privy to forms of favourable treatment such as subsidies,
tax holidays or regulatory exemptions that may not be afforded to local investors.
70
Not only does this create an unfair advantage to the foreign investors in this regard
but it also constrains the promotion of local industries in developing countries such
as Kenya which may need assistance to grow in order to compete with foreign
companies.
71
Moreover, the NT provision in Kenya's BITs does not contain the `like
circumstances' clause which arguably implies that foreign investments that are not in
like circumstances with the local investments in issue, could also be compared to
find out whether NT has been violated.
72
This presents a potential problem for Kenya
in that the provision limits the policy space of Kenya in relation to its local
investments and the provision may also be broadly interpreted to include unlike
investments in the event of a dispute.
The MFN clause in an investment treaty is fundamentally a promise between the two
state parties to the treaty that neither state will give to investors from any third state
more favorable treatment than that given to investors from the other state party to
the treaty.
73
This provision has been described as a core provision of international
investment agreements that provides a basic minimum for the establishment of
70
Canada's Coalition to end Global Poverty `Bilateral Investment Treaties: A Canadian Primer' available
athttp://www.ccic.ca/_files/en/what_we_do/trade_2010-04_investmt_treaties_primer_e.pdf (accessed 3
March 2015).
71
Khisa I `Talks on EAC-US trade, investment deal face hurdles' available at
http://www.theeastafrican.co.ke/business/-investment-deal-face-hurdles/-/2560/2451498/-/item/0/-
/qfferbz/-/index.html (accessed 3 March 2015).
72
Ranjan P `India and Bilateral Investment Treaties- A Changing Landscape' (2014) 29 ICSID Review 433.
73
Cole T `The Boundaries of Most Favored Nation Treatment in International Investment Law' (2012) 33
Michigan Journal of International Law 539.
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