Tanzanian Courts Injunct ICSID Proceedings

On 23 April 2014, the Tanzanian High Court ordered both parties in on-going ICSID arbitration proceedings, Standard Chartered Bank (Hong Kong) Limited (SCB HK) and the Tanzania Electric Supply Company (Tanesco), to refrain from "enforcing, complying with or operationalising" a decision made by the Tribunal in those ICSID proceedings on 12 February 2014.

This injunction was granted on an ex-parte basis. It is a clear breach of the ICSID Convention and of Tanzania's international law obligations. If it is not reversed, it will be of significant concern to other international investors in Tanzania, and will likely discourage new investment.

One of the key advantages of the ICSID system is that it is self-contained and is intended to be insulated from interference by local courts.

This is made clear throughout the ICSID Convention, to which Tanzania is a party. Of most immediate relevance, the ICSID Convention provides that:

• consent to ICSID arbitration is "… deemed consent to such arbitration to the exclusion of any other remedy" (Article 26); and
• an ICSID Tribunal is "the judge of its own competence" (Article 41(1)).

Any attempt by Tanzania to punish a breach of its injunction would fall foul of ICSID Convention Articles 21 and 22 which give immunity from legal process to parties, lawyers and witnesses involved in ICSID proceedings.

The ICSID proceedings between SCB HK (represented by Herbert Smith Freehills) and Tanesco were commenced in 2010, and were brought pursuant to a Power Purchase Agreement relating to a power plant at Dar Es Salaam, Tanzania. SCB HK brought the ICSID arbitration as assignee of the agreement. The arbitration relates to the tariff payable under that agreement.

In the Power Purchase Agreement, Tanesco consented to ICSID arbitration. In a related agreement, the Government of Tanzania itself expressly approved Tanesco's consent to ICSID arbitration. After a lengthy process, in its "Decision on Jurisdiction and Liability" of 12 February 2014 the Tribunal (i) concluded that it had jurisdiction over the dispute, (ii) made a number of findings on the merits of the dispute and (iii) ordered the parties in the light of its findings to renegotiate the disputed tariff.

The ex-parte injunction of 23 April 2014 seeks to prevent the implementation of this decision and continuation of the ICSID proceedings. It is a clear breach of the provisions of the ICSID Convention highlighted above. As such the actions of the Tanzanian High Court (which forms part of the Tanzanian State for the purposes of international law) put Tanzania in breach of its international law obligations.

If the injunction is not lifted, two potentially serious consequences arise for Tanzania:

First, Tanzania would be in continuing breach of the ICSID Convention. Tanzania has consented to any disputes concerning the Convention itself being resolved by the International Court of Justice. Any other state party to the ICSID Convention could therefore commence proceedings against Tanzania at the International Court of Justice.

Second, it may have serious implications for investment into Tanzania. In the past, Tanzania's membership of ICSID as well as its network of bilateral investment treaties has provided considerable comfort and assurance to investors into Tanzania. Indeed, the Tanzania Investment Centre's Investment Guide refers to its membership of ICSID as an investment guarantee, and Tanzania's Investment Act states that investment disputes may be referred to ICSID.

Investors commencing arbitration proceedings against states tend to understand that enforcement of any award may take some time, even though the ICSID Convention sets up a system of recognition and enforcement of award that sits outside the New York Convention system and is generally seen as being even more effective. That is why most ICSID awards are eventually settled. However investors will be concerned that the Tanzanian injunction could spark a worrying trend. States have rarely if ever tried in the past to prevent ICSID arbitrations by issuing injunctions in the local courts, as the consequences for global trade and the international rule of law are seen as being too serious. Such injunctions carry no legal force in any country that has signed up to the ICSID Convention and accordingly the benefit to a state of issuing such an injunction will rarely if ever justify the difficulties that will be caused by a flagrant breach of the ICSID regime involved in issuing the injunction in the first place.

If investors understand that the Tanzanian courts are prepared to ignore the provisions of the ICSID Convention and Tanzania's international law obligations and injunct the ICSID process, Tanzania's membership of ICSID will provide limited if any comfort. This may have serious consequences for Tanzania at a time when it is seeking foreign investment to develop its energy market, and seeking to raise finance on the international markets.