The recently adopted AfCFTA Protocol on Investment will be followed by an Annex which will tackle the contentious issue of regulating trade and investment disputes without impinging on national sovereignty

On 19 February 2023, the African Union Heads of State agreed to adopt a Protocol on Investment (Protocol) to the African Continental Free Trade Area Agreement (AfCFTA). The Protocol aims not only to encourage intra-Africa investment flows and opportunities but also to protect the sustainable development of member states and to incorporate Environmental, Social and Governance (ESG) principles in a way that is relevant to Africa.

While the adopted Protocol is not publicly available, the final draft version provides insight into its objectives and how member states will seek to achieve them. Currently, foreign investment on the continent is regulated by a complex web of regional, bilateral, and national investment treaties. The Protocol seeks to replace bilateral investment treaties through the renegotiation of a regional investment treaty.

One of the Protocol's important stated objectives is to provide a sound legal framework for the prevention, management, and settlement of investment disputes. This issue has been rather contentious. While the latest draft Protocol includes provisions related to state-state dispute settlement (Article 44) and dispute prevention and grievance management (Article 45), it does not currently contain concrete provisions on dispute resolution when these measures have failed. Article 46, which deals with dispute resolution, indicates that rules and procedures governing dispute resolution will be negotiated and set out in an Annex which will be finalised and adopted within 12 months of the date that the Protocol is adopted.

It is not surprising that the Annex remains the subject of scrutiny and protracted negotiation between AfCFTA member states. The resolution of trade disputes between investors and states is a complex and thorny issue on the continent. Historically, investment treaties have included Investor-State Dispute Settlement or "ISDS" provisions. ISDS provisions provide that an investor from one country (the "home state") who has invested in another country (the "host state") can bring a claim directly against the host state in an arbitral forum, rather than in the domestic courts of the host state. Without ISDS, investors wanting to enforce their rights would have to seek the intervention of their home government, if the actions of a host state caused them harm or loss of profit or rely on actions in the local courts of the host state. ISDS provisions were a breakthrough, giving investors a direct right of recourse and protection. They were widely assumed to boost foreign direct investment.

However, because ISDS provisions give investors an almost unfettered power to institute proceedings directly against sovereign states, they have been criticised for limiting governments’ ability to regulate as they see fit. These regulations would relate to, for example, furthering public policy goals, protecting the environment or, in South Africa's case, advancing black economic empowerment. For this reason, both South Africa and Tanzania have passed laws steering investment disputes away from ISDS. Although the Annex on dispute resolution is still in draft form, it is anticipated, based on an earlier draft of the Protocol that included a first version of the Annex, that it will include the possibility of international arbitration. A statement by the Task Force responsible for finalising the Annex suggests that the relevant “dispute resolution mechanisms … could include, amongst others, utilising the Dispute Settlement Body established under the AfCFTA Protocol on Dispute Settlement or arbitration or domestic or regional courts".

If some version of arbitration is included in the Annex, it is encouraging that the latest available version of the Protocol seeks to balance investor protection with the right of member states to regulate their own affairs, especially sustainable development. For example, Article 13 provides that measures taken by member states that are "designed and applied to protect or enhance legitimate public policy objectives such as, but not limited to, public morals, public health, prevention of diseases and pests in animals or plants, climate action, essential security interests, safety and the protection of environment" should not be construed as a breach of the protections afforded to foreign investors. This approach is in keeping with AfCFTA's affirmation of the importance of ESG principles and objectives in a way that is relevant to Africa. It is also in line with a recommendation by the UNCITRAL working group on ISDS reform that investors' access to ISDS ought to be circumscribed in sensitive policy areas.

In addition, there is an entire chapter of the Protocol dedicated to Sustainable Development-Related Issues, which reaffirms the right of member states to regulate and adopt measures aimed at promoting sustainable development. Article 24 specifically provides that measures taken by member states to comply with international obligations under relevant treaties will not constitute a breach of the Protocol. This is especially important in the context of climate commitments such as the Paris Agreement and the need to phase out fossil fuels over time, a move that could otherwise breach investment protections. Linked to this, there has been a suggestion (based on what was included in an earlier draft of the Protocol) that the Annex is likely to include a mechanism that allows member states to file counterclaims. This would allow host governments to invoke relevant international treaties such as those relating to human rights, ESG imperatives and sustainable development in defending claims and would allow member states to counterclaim for breaches of investor obligations set out in the Protocol. 

The AfCFTA creates the largest free trade area in the world, in terms of geographical size and population, and it has the potential to radically transform trade and investment in Africa. As the Annex is negotiated, member states will need to engage with difficult question about whether or not to include ISDS, and how to ensure adequate investor protection more broadly. 

While the stakes are high, there is an opportunity for Africa to forge a new approach in this highly contested area.

Written by Chandni Gopal, Partner, Sarah McKenzie, Partner & Yael Shafrir, Consultant at Webber Wentzel