As the African Continental Free Trade Area (AfCFTA) sets the stage for a new era of economic integration across the continent, it also faces the challenge of crafting investment rules that balance the need for foreign capital with the sovereign right of states to regulate in the public interest. Central to this challenge is the investor-state dispute settlement (ISDS) mechanism, a controversial system that allows foreign investors to sue host governments over regulations that may affect their investments. While ISDS can provide investors with confidence that their rights will be protected, it has also been criticised for limiting states’ regulatory space and undermining their sovereignty.
The debate over ISDS is not new; it has played out in numerous international forums and agreements, from NAFTA to the European Union’s trade agreements. Critics argue that ISDS grants excessive power to foreign investors, enabling them to challenge a wide range of government actions, including those taken for public health, environmental protection, and social welfare. High-profile cases, such as Philip Morris suing Australia over plain packaging laws for tobacco products and Vattenfall challenging Germany’s decision to phase out nuclear power, have fueled public outcry and calls for reform. These cases illustrate the potential for ISDS to be used against governments that are enacting policies in the public interest. The fear is that the threat of costly arbitration and substantial damages could create a “regulatory chill,” deterring governments from pursuing necessary regulations. For Africa, which is at a critical juncture in its development, the risk of regulatory chill poses a significant threat to the continent’s ability to achieve its social and economic goals.
The AfCFTA Investment Protocol, which is currently being drafted, offers Africa a unique opportunity to design a dispute settlement mechanism that reflects the continent’s priorities. Unlike older agreements that often prioritised investor protections without adequately considering the public interest, the AfCFTA can set a new standard that balances the rights of investors with the need to protect state sovereignty. One of the key provisions that African negotiators should consider is the incorporation of the police powers doctrine into the AfCFTA Investment Protocol. The police power doctrine is a well-established principle in international law that recognises a state’s right to regulate for legitimate public purposes, such as protecting health, safety, and the environment, without being deemed as expropriation. This principle has been upheld in several landmark cases, providing a strong legal basis for states to defend their regulatory actions.
In Chemtura v. Canada, for example, the tribunal upheld Canada’s ban on a pesticide as a legitimate exercise of its regulatory powers in the interest of public health. Similarly, in Methanex v. United States, the tribunal found that California’s ban on a gasoline additive was a bona fide environmental regulation and did not constitute an expropriation. These cases demonstrate that when regulations are non-discriminatory and enacted in good faith, they should not be subject to compensation claims under ISDS.
To protect the regulatory autonomy of African states, the AfCFTA Investment Protocol must explicitly incorporate provisions based on the police powers doctrine. Specifically, the Protocol should include clear language affirming that non-discriminatory regulations enacted in the public interest—such as those for health, safety, and environmental protection—do not constitute expropriation. This would ensure that states are not penalised for taking actions that are necessary to safeguard their citizens and natural resources. Moreover, the Protocol should provide detailed guidance on what constitutes indirect expropriation, clearly stating that legitimate public welfare measures are excluded. This clarity would help reduce the scope for investor claims that challenge fundamental state functions. By explicitly defining the boundaries of expropriation, the AfCFTA can protect states from the expansive interpretations that have plagued ISDS cases in other regions.
Another critical aspect that the AfCFTA Protocol should address is the limitation of tribunal remedies. In many ISDS cases, tribunals have awarded remedies beyond monetary compensation, such as ordering states to amend or repeal regulations. Such remedies can significantly undermine state sovereignty by interfering with a government’s ability to make decisions in the best interest of its population. To safeguard against this, the AfCFTA Protocol should explicitly limit tribunal remedies to monetary damages and restitution of property. This approach ensures that states retain their sovereign right to regulate, without external interference in their legislative or administrative decisions. By setting clear limits on the powers of tribunals, the Protocol can create a more balanced ISDS mechanism that respects both investor rights and state sovereignty.
Transparency is another area where the AfCFTA Investment Protocol can make significant improvements. One of the most common criticisms of ISDS is its lack of transparency, with proceedings often conducted behind closed doors and without public access to key documents. This secrecy can lead to a lack of accountability and a perception that the system is biased in favor of investors. To address this, the Protocol should adopt the UNCITRAL Rules on Transparency, which mandate open hearings and the publication of key documents, such as notices of arbitration, pleadings, and tribunal decisions. By making ISDS proceedings more transparent, the AfCFTA can build greater public trust and ensure that the system operates in a fair and accountable manner. Additionally, the Protocol could incorporate mechanisms for public participation, allowing affected communities and civil society organisations to submit amicus curiae briefs or participate as observers. This would give a voice to those who are directly impacted by the disputes and ensure that a broader range of perspectives is considered in the decision-making process.
Reforming access to ISDS is another crucial step in ensuring that the system operates in a balanced and fair manner. The AfCFTA Protocol should include provisions that limit access to ISDS by requiring investors to exhaust local remedies before resorting to international arbitration. This approach encourages the use of domestic courts and promotes respect for national legal systems, reserving ISDS as a last resort. Furthermore, the Protocol should promote the use of Alternative Dispute Resolution (ADR) mechanisms, such as mediation and conciliation, as initial steps before arbitration. ADR can provide a less adversarial and more cost-effective means of resolving disputes, helping to reduce the number of cases that escalate to full arbitration. By incorporating ADR into the dispute settlement process, the AfCFTA can create a more cooperative and flexible framework for resolving investment disputes.
One of the major flaws of the current ISDS system is the lack of an appellate mechanism, which leads to inconsistencies in tribunal decisions and undermines the legitimacy of the process. The AfCFTA Investment Protocol has the opportunity to address this issue by establishing a structured appellate mechanism that allows for the review of tribunal decisions. The European Commission’s Concept Paper on ISDS reform and the TTIP negotiations propose a permanent investment court system with a Tribunal of First Instance and an Appeal Tribunal. This model aims to enhance consistency by providing a formal mechanism for appeals, ensuring that legal errors can be corrected and that a coherent body of jurisprudence is developed. Adopting a similar approach in the AfCFTA Protocol would strengthen the credibility and predictability of the dispute settlement system.
The AfCFTA Investment Protocol represents a pivotal opportunity for Africa to redefine ISDS in a way that aligns with the continent’s development priorities and values. By incorporating robust safeguards, enhancing transparency, limiting tribunal powers, and establishing an appellate mechanism, the Protocol can create a dispute resolution system that supports sustainable investment while protecting state sovereignty. Africa’s journey toward economic integration and growth should not come at the expense of its right to regulate in the public interest. By taking a proactive approach to designing the AfCFTA Investment Protocol, African states can set a new standard for ISDS that balances the rights of investors with the needs of the people, ensuring that investment serves as a tool for development rather than a constraint on sovereignty. As the Protocol continues to take shape, African leaders must remain steadfast in their commitment to protecting the continent’s regulatory space and securing a fair and just system for all.
*Ramaphane is an attorney who has been practicing law in Botswana for the past four years.
