Legal tools foreign investors can adopt to mitigate risks

I recently attended a forum of investors where a foreigner with several investments in Kenya asked me about the security of his businesses pending the outcome of the 2017 elections.

He was especially concerned about contracts he had entered into with some State institutions and even county governments in the past. The main concern being the security of such investments in the event of a change in regime.

Many counties now have new governors in place, does this change in regime affect investments and more so, foreign investments? There are several risks that a foreign investor could face in any given host country not only Kenya. These include political risks, changes in law and even security.

When it comes to security, issues such as terrorism may affect foreign investment. However, my answer to the foreign investor was that his investment is guaranteed and secure. While not guaranteeing the physical safety of such investment or its performance against political risk, I assured him that Kenya has an adequate legal environment to protect foreign investments.

Foreign investments are governed by international laws, the investor-state contract (ISC) and the domestic laws of a country. For example, in Kenya, the Constitution guarantees several rights against arbitrary acquisition including property rights and so on. Other laws such as Foreign Investment Protection Act and Compulsory Acquisition Act guarantee the legal status of foreign investments.

However, in this article, I want to delve more into the ISC, which is the contractual tool that the foreign investor enters into with State agencies at the negotiation stage. Prevention is better than cure and therefore it is important to properly negotiate these contracts to hedge against some risks, especially since ISCs are long-term in nature.

There are contractual tools that can be used to mitigate risk. One is the arbitration and choice of law contract. In such a contract, the ISC provides for arbitration in a neutral country such that in the event of a dispute, the investor does not subject itself to domestic courts but to neutral jurisdictions.

A renegotiation clause allows parties to revisit the terms if certain factors change that may affect the economic equilibrium of the contract. In the case of Aminoil versus Kuwait, a renegotiation clause was invoked to compel Kuwait to renegotiate terms of an oil concession after it nationalised the oil concession to the detriment of the investor.

The Qatar Model of renegotiation clauses is commonly used in ISCs such that the investment is secure.

A stabilisation clause can also be used and it applies where the host country is contractually bound not to make changes in laws that may affect the investment.

However, this largely conflicts the principle of sovereignty of nations and its effectiveness may be limited.

In terms of the legal environment in Kenya in so far as investments are concerned, there is no need to worry as the laws are adequate.

Kenya is a signatory to several treaties and conventions on the same and our domestic laws protect investments.

The important thing to note is to have in place an effective ISC, which is only an additional legal tool for securing foreign investments and hedging against political risk.