African Natural Resources Agreements: Stabilisation Tricks and Traps for the Unwary
| Published date | 01 November 2017 |
| DOI | 10.3366/ajicl.2017.0213 |
| Author | |
| Date | 01 November 2017 |
| Pages | 579-589 |
There have been many examples in Africa over the last ten years of changes in the law affecting natural resources contracts. A number of these relate to capital gains tax on disposals. For example, the proposal to pass a new law by the government of Mozambique to impose capital gains tax on the public takeover of Cove Energy Plc by PTT Exploration and Production in 2012 with a large offshore gas field in Mozambique led to the parties agreeing to pay capital gains tax on the disposal. Under the existing Mozambique law, Cove would have paid no capital gains tax as capital gains tax did not apply to the sale of non-Mozambique companies with assets in Mozambique. Other changes in law that sponsors are typically aware of are expropriation of an asset or, if through a series of actions, ‘creeping expropriation’ of an asset. However, there are many changes in law that may significantly adversely affect sponsors; examples of potential issues include: a change in interpretation of a law or regulation, an enhanced fee schedule to an existing law, new local content requirements, new health and safety and environmental laws necessitating onerous capital investments or with strict penalties for non-compliance or a new requirement to build social infrastructure such as a school or road. A sponsor needs to have considered and addressed appropriately the risks for all these changes in the law.
African governments sometimes raise arguments about stabilisation provisions affecting their sovereignty or fettering their discretion to pass new or amend existing laws. Sponsors respond with the need for legal certainty for the contractual provisions, that the government is in control of whether or not laws are passed and to prevent a unilateral change of law undermining the agreed contractual provisions and appropriate allocation of risk.
While one continent, the laws in each African country vary so it is vital to examine carefully the local laws and international treaties relevant to that individual African country. Indeed, there is undoubted asymmetry between African countries on how to address stabilisation issues.
African laws vary hugely. Some are common law, others civil law, some subject to Ohada law, others relying on case law from elsewhere such as the UK and US to fill the void of a lack of local in-country jurisprudence and others are heavily influenced by the country of the advisors who assisted with drafting the laws! However, one aspect they all have in common is that there is very little case law on stabilisation clauses in Africa or indeed worldwide. To the extent a case ever comes before an arbitration tribunal and is not settled in advance (which it often is due to the adverse publicity for a government and the investor's desire to undertake further business in a country), the judgement is often subject to confidentiality restrictions.
In analysing the stabilisation position, the starting point should usually be the local law of the country in which the natural resources project is taking place as the contract – whether a production sharing contract, mineral development agreement, concession or other licensing contract granting long-term contractual rights to the sponsor to develop and exploit the mineral resources – will usually be subject to local law. Therefore, one needs to understand what the local law of the relevant African country provides in relation to changes in law.
In many cases, the local law itself provides little protection. However, there are certain legal concepts that can be relevant in certain jurisdictions, particularly civil law jurisdictions. These may include concepts similar to stabilisation. For example, there may be a right to ‘financial equilibrium’, which is a right to compensation for the sponsor where the state imposes a unilateral modification to a contract. This is manifested in certain civil law jurisdictions by the ‘fait du prince’ principle (while subject to various conditions, if the government's action is unforeseen, is beyond the scope of the contract and is specific to the operator, it may give rise to a right to relief). Another civil law principle giving rise to compensation is the ‘imprévision’ principle (large, exceptional and unforeseen changes in economic conditions that render execution of the agreement financially hazardous). However, while detailed local legal advice is needed particularly in civil law jurisdictions, these concepts often do not apply and in any event are often vague as to their precise meaning with little jurisprudence or practical application. The international sponsor should normally require a full stabilisation provision in the contract to help address the risk and mitigate against changes in law.
Other issues include the legal hierarchy of laws within a country and the interface between contractual obligations and statutory provisions. In particular, a sponsor needs to understand whether the contract has to be ratified by the legislature to be binding on the host African government and whether, following ratification, it becomes a law itself. For example, in Liberia, Ghana and, in the past, Mali the production-sharing contract itself becomes a law. Even if it becomes a law, one still needs to understand the place of the contract in the hierarchy of laws. Does it replace all prior laws, whether they be acts, laws, regulations, orders, ordinances, decrees, etc.? What happens if the contract is silent or does not entirely address an issue covered by a law – does the law still prevail?
In any event, there are often mandatory provisions of law that cannot be overridden by contract in many jurisdictions. In particular, it is always prudent to look closely at any written Constitution as these provisions, unlike others, cannot normally be overridden by contract and are inalienable so will still apply. Certain rights may be protected in the Constitution which may be relevant to stabilisation depending on how any...
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