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International arbitrators appear to have ruled against Ghana’s constitutional provisions designed to ensure the country's parliament signs off major contracts, and have awarded a foreign investor a huge settlement. Luke Peterson reports.

It is unusual for a country’s constitution to require that significant international contracts with foreign investors undergo parliamentary scrutiny. Too often, state contracts – whether in energy, mining, telecoms – are negotiated and signed in relative secrecy. Key bureaucrats and ministers will see such documents, of course. But backbench politicians, the media and the public are often kept in the dark about the details of massive projects that could have a major impact on the public purse.

This is why Ghana stands out. Burnt in the past by secretive contracts and loans arranged by individual government agencies, those drafting Ghana’s 1992 Constitution inserted an unusual provision. Article 181(5) requires that international business and economic transactions must obtain parliamentary approval before they become binding.

At least, that is what the constitution says. In practice, this provision has not always had teeth. In a recent dispute between a foreign-owned logistics company, Bankswitch, and Ghana’s customs authorities, a panel of international arbitrators allowed the investor to detour around the fact that its contract had never been tabled in parliament, much less approved by it.

The tribunal ruled that various officials had led the investor to believe a contract signed in 2007 was valid and binding, and thus when the ministry stopped performing its obligations, the investor was justified in suing Ghana for financial damages.

The extra mile

It was undisputed that the investor had worked in good faith for several years in a pre-launch phase, and spent upwards of $6m. But the project itself (a system to modernise scrutiny of goods moving across Ghana’s borders) never went into operation.

A disinterested observer might have assumed that Ghana would be forced by arbitrators to pay $6m to compensate for the money poured into the project. Or that the arbitrators would decline to do even that since the 2007 contract was never tabled before parliament, much less approved by that body.

Instead, the arbitrators went a lot further. They acknowledged the contract was governed solely by Ghanaian law and that Article 181(5) clearly applied to contracts such as this one. While the investor could not likely persuade a Ghanaian court to look past the country’s constitutional provisions, the arbitrators reasoned that a higher principle was at stake here: that of pact sunt servanda (agreements must be honoured).

The arbitrators ruled that they could read international law into the picture, and find a basis for preventing Ghana from relying on the provisions of its own constitution. The panel went on to determine that the business deal would have been profitable – if not prematurely killed by authorities – and that the investor should be paid a whopping $87m of taxpayer money for its lost future profits.

A question of honour

Seen through the narrow lens of the 'agreements must be honoured' rule, this is a resounding victory for the protection of foreign investor rights. Viewed, however, through a wider lens, the arbitrators’ ruling – which surfaced only recently, despite having been issued in 2014 – is more disconcerting.

The decision harbours some sobering lessons for governments of developing countries, where better governance in relation to investor-state contracts is sorely needed. While arbitrators must apply the law, notoriously woolly concepts from international law are not clearly codified or uncontroversial.

In the Bankswitch case, the arbitrators stressed that certain fundamental principles common to all “developed” legal systems should be applied as a matter of “international public policy”. Such principles included one that prohibits a government from entering into a contract, treating it as binding for a time and then later insisting that the contract is void.

That is a laudable principle, and makes perfect sense where the state has lawfully entered into a contract, and later seeks to renege on such promises. However, in murkier real-world situations, developing country agencies and ministries routinely engage in secretive borrowing – witness recent news out of Mozambique that the country quietly racked up debts of $2bn – or they sign contracts that have not been publicly vetted.

In an effort to ensure that all foreign contracts are signed by the government with eyes wide open, Article 181(5) of Ghana’s constitution sets out a clear rule: significant international contracts must be approved by parliament. If a country has enshrined such a bright-line rule, then on what reasonable basis should a foreign investor be allowed to invoke contracts that failed to comply with this rule?

A loophole to look at

Unfortunately, the reasoning of the aforementioned arbitrators, while bringing comfort to the aggrieved foreign investor (with whom I have some sympathy) also opened a gaping loophole through which government officials can continue to 'go rogue' and contract with foreign investors while keeping parliament out of the loop.

There is some irony here. Lately, lawyers in the international commercial arbitration world, who specialise in resolving such contract-based disputes, are looking over their shoulder out of fear that the recent backlash against trade and investment agreements, such as the public outcry in Europe over CETA, the Canada-Europe trade agreement, might infect other corners of international commerce and law.

Yet on the evidence of the recent developments in the Bankswitch v Ghana arbitration, closer public and media scrutiny appears sorely needed in order to ensure respect not only for contracts, but for laudable constitutional principles as well. 

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com, an online news and analysis service focused on foreign investment legal disputes.

This article is sourced from fDi Magazine
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