THE UNITED REPUBLIC OF TANZANIA PROPOSES ARBITRATION REFORMS TO PLACATE FOREIGN INVESTORS. WILL IT WORK?

Authors: Emma Schaafsma and Kemi Wood

Introduction 

In 2017, the Tanzanian government introduced a raft of legislative reforms to the natural resources sector. Through the reforms the new government looked to ensure that investor disputes were resolved locally and that the Tanzanian government would not be subjected to international arbitrations. The new government showed a particular hostility towards international arbitration (especially in the mining and oil and gas sectors) arguing that it was inherently biased against developing countries, with no neutral ground in international arbitration.¹ There followed a swathe of international arbitrations commenced against the Tanzanian government over parts of the legal reforms that cancelled the retention licences of foreign investors and transferred rights to the Tanzanian government. In response, by early 2020 the Tanzanian National Assembly passed a bill to enact a new Arbitration Act.² The bill now awaits Presidential assent before being passed into law. This note looks at the background to the new bill and its key features, and what the potential impact could be on foreign direct investment into Tanzania.

2017 – Looking inwards: Tanzania turns away from international arbitration

As recently as 2014, following the signing of a number of Bilateral Investment Treaties, the United Nations Conference on Trade and Development identified Tanzania as a top destination for foreign direct investment in East Africa.³ However, following the election of President John Magufuli in 2015, a number of legislative reforms were introduced into Tanzania’s natural resources sector which made it a significantly less attractive prospect for foreign direct investment. The legislative reforms included limiting the use of international arbitration to resolve disputes in respect of Tanzania’s natural resources. Article 11 of the Natural Wealth and Resources (Permanent Sovereignty) Act 2017⁴ prohibited investors from resorting to international dispute resolution mechanisms, such as international arbitration, where the subject matter of the dispute concerned natural resources:

“(1) Pursuant to Article 27(1) of the Constitution, permanent sovereignty over natural wealth and resources shall not be a subject of proceedings in any foreign court or tribunal.
(2) For the purpose of subsection (1), disputes arising from extraction, exploitation or acquisition and use of natural wealth and resources shall be adjudicated by judicial bodies or other organs established in the United Republic and accordance with laws of Tanzania.
(3) For the purpose of implementation of subsection (2), judicial bodies or other bodies established in the United Republic and application of laws of Tanzania shall be acknowledged and incorporated in any arrangement or agreement.”

The Tanzanian government also passed legislation in September 2018 prohibiting international arbitration as a method for resolving investor-state disputes. Under Section 22 of the Public-Private Partnership Act (Amendment) Act 2018⁵ , any disputes arising under a PPP contract “shall in case of mediation or arbitration be adjudicated by judicial bodies or other organs established in Tanzania and in accordance with its laws.”

These reforms inevitably increased the risks and costs associated with investing in the Tanzanian natural resources sector (including oil, gas and mineral extraction). Somewhat ironically, the restrictions on investors themselves prompted a wave of new arbitration claims, including by several multinational mining companies over revoked retention licences.

2020 – Looking outwards: Tanzania seeks to make local arbitration more attractive

Just a few years since the introduction of restrictions in 2017, the Tanzanian government has taken (an albeit limited) U-turn on its hostility towards international arbitration. On 28 January 2020 the government tabled the Arbitration Bill 2020 (the “Bill”)⁶ before the Tanzanian National Assembly. According to the public notice issued with the Bill, it is aimed at creating a friendly regime that will encourage alternative dispute resolution in Tanzania, and establish a more conducive framework for enforcement of arbitral awards.

However, restrictions on the use of international arbitration for disputes relating to the natural resources sector remains. Under the Bill, arbitration can be used in the context of natural resource related disputes only where the law and seat of the arbitration is that of the United Republic of Tanzania. The introduction of the Bill to replace its antiquated predecessor therefore appears to be an effort to make local arbitration a more attractive proposition to foreign investors.

Notable features of the Bill

The Bill is divided into thirteen parts and appears to have been broadly modelled on the English Arbitration Act 1996.
The Bill, if passed, will:

• Repeal and replace the Tanzanian Arbitration Act 1931 (Section 91(1));
• Provide a definition of both ‘domestic commercial arbitration’ and ‘international commercial arbitration’ (Section 3);
• Apply where the seat of arbitration is Mainland Tanzania (Section 5);
• Introduce provisions on the enforcement of foreign arbitral awards (Section 78);
• Establish the Tanzania Arbitration Centre (“TAC”) for the conduct and management of arbitration (Section 77). The TAC would also maintain a list of accredited arbitrators and provide education for arbitrators.

The Bill, as currently drafted, requires any arbitration arrangements concluded in the past but which have not yet materialised to be renegotiated to comply with the requirements of the proposed law (Sections 91(3) and 91(4)). The same requirement is also imposed on any pending arbitral proceedings. This could pose a significant practical challenge for entities with multiple arbitration agreements, who would prefer consistency across their contract suite.

Potential Impact of the Bill

While the proposed law has largely been welcomed by local and international commentators, there are those who have expressed concern that the Bill does not more closely align with the UNCITRAL Model Law and makes no mention of the New York Convention, as well as affording a multiplicity of opportunities for court intervention in the arbitration process.⁷ It remains to be seen whether it will in fact make local arbitration more attractive to foreign investors. While Tanzania is now offering the ‘carrot’ of an updated arbitration regime, the ‘stick’ of prohibitions on international arbitration introduced in 2017 will likely still sit heavily on investors’ minds.

1. https://www.theeastafrican.co.ke/business/Tanzania-cites-bias-as-it-changes-laws-governing-arbitration/2560-4763234-timkl6z/index.html
2. Available at: https://www.bunge.go.tz/polis/uploads/bills/1580219386-The%20Arbitration%20Bill.%202020.pdf
3. United Nations Conference on Trade and Development (2014), World Investment Report 2014, New York and Geneva, United Nations Publication, p.37.Available at: https://unctad.org/en/PublicationsLibrary/wir2014_en.pdf
4. Available at: https://tanzlii.org/tz/legislation/act/2017/5-0
5. Available at: http://parliament.go.tz/polis/uploads/bills/acts/1553699390-Amendment%20of%20PUBLIC%20PRIVATE%20PARTNERSHIP%2012%20SEPTEMBA,%202018%20CHAPA.pdf
6. Available at: https://www.bunge.go.tz/polis/uploads/bills/1580219386-The%20Arbitration%20Bill.%202020.pdf
7. iResolve (2020), Comments on the Arbitration Bill 2020. Available at: https://www.iresolve.co.tz/webmak2/wp-content/uploads/2020/02/iResolve-Comments-on-Arbitration-Bill-2020.pdf

For more information, please contact Emma Schaafsma and Kemi Wood or your usual Herbert Smith Freehills contact: