Investing in Africa: Legal risks you should know about

Over the past few years, Africa has become a recognized investment destination worldwide: rich natural resources, large population, and an improving governance and policy environment have allowed an increasing amount of foreign investment and trade to pour into the continent.

According to data from the Ministry of Commerce, in 2018 alone, China's import and export volume with Africa reached 204.2 billion US dollars, up 20% year-on-year. China has set up more than 10,000 enterprises in Africa, and China has been Africa's largest trading partner for ten consecutive years.

However, opportunity is always accompanied by risk:

First of all, on the African continent law diversified phenomenon is very outstanding, because of historical and political development, on the African continent has both continental law system countries, such as Angola, Egypt and other countries, and belong to the Anglo-American law system countries, such as Ghana, Kenya, religion law such as islamic law and India law also constitutes a part of the African legal system.

In addition, on the African continent over half the country's official language is French, also includes some Arabic countries, strange language and cultural environment, as well as the instability of legislative environment, the judicial system of insecurity and uncertainty, a variety of factors has made numerous with the investment and trade cooperation of Chinese enterprises have the symptoms of "water", is also a frequent disputes with the investment and trade.

According to the judgments collected by courts and arbitration centers at home and abroad, as well as the case analysis contacted and consulted by the author, there are mainly the following legal risks in china-africa investment and trade at present:

(1) Disputes over project contracts

Currently, China's investment and trade cooperation with Africa mainly focuses on construction, mining, manufacturing and other fields. The first step of investment cooperation is to conclude a contract. Due to the lack of understanding of local trade procedures, policies and laws, contract disputes often occur.

The Cairo Regional Center for International Commercial Arbitration (CRCICA) in Egypt, for example, handled 77 cases in 2018, with construction contract disputes accounting for the largest number, accounting for a quarter of the total. This was closely followed by lease contract disputes, accounting for 16% of the total. Oil and gas-related disputes and disputes over sales contracts are also common. According to the online search cases of Chinese judgment documents, there were 41 cases involving overseas projects of Chinese enterprises, among which 16 cases were from African countries, accounting for 39%, and most of them were contract disputes involving construction projects.

Signing African countries in the engineering project in China, and part of the project is by the Chinese designer according to the Chinese construction quality standard construction, due to soil and water environment, architectural practices and characteristics, ethnic customs, local conditions and customs, architectural style, life habits and the way of building use, etc., there is a huge difference between China and the recipient countries, combined with the recipient journey faraway, living conditions, complex part of the country's political environment, security situation grim, the survey of the preliminary design does not accord with local conditions of phenomenon occurs frequently, and revision of the project for budget, contract performance brought uncertainty.

At present, according to the strategic deployment of One Belt And One Road in China, in the future, the number of construction projects of chinese-funded enterprises in non-business will increase, and the risk of relevant contract disputes will also increase accordingly.

Disputes between Letter of credit and Guarantee

In the contract of sale of goods between Chinese and African parties, there are many stipulations about the payment method of letter of credit. In the case of sino-African project contracts, the African country's contractors often require the Chinese contractors to provide the tender guarantee, advance payment guarantee and performance guarantee issued by the bank from the beginning of bidding.

As an important financial tool for enterprises' trade financing, project contracting and large equipment purchase, letter of guarantee plays an increasingly important role in the process of enterprises' "going global". The signing of these letter of guarantee documents in the early stage of the project and trade development can provide more guarantees for the smooth development of the project and the performance of the obligations of the trading parties through the form of bank guarantee, effectively ensure the realization of creditors' right of recourse, and significantly reduce the difficulty and risk of financing and investment for enterprises in non-trade. (Refer to the First Instance Civil Judgment on the Dispute over the Right of Recourse between China Development Bank Co., LTD. Sichuan Branch and Shenzhen Hanlihong Investment and Development Co., LTD., and Wu Haoxuan on China Judicial Documents website for details)

But due to many countries in Africa are the former French colony, many related to African countries or the national bank guarantee language is French writing more, such as the central African republic, Congo (gold), Togo, Burundi, guarantee of grammatical structures and the French also exists certain difference of orthodoxy, this to the enterprise and provide financing guarantee service for enterprises in the business of the bank audit process has a lot more difficult.

In most cases, the guarantees issued in international engineering and trade are independent guarantees payable on demand. This kind of independent guarantee is like a double-edged sword. It adopts the mechanism of "payment first, dispute later". While protecting creditor's rights and simplifying transactions, it is also hard to avoid the risk of fraudulent claims. Especially construction engineering practice, the government departments often require the use of contract demonstration text, guarantee format usually listed as appendix of demonstrative text especially construction engineering practice, the government departments often require the use of contract demonstration text, however, should be paid attention to the contractor or the bank of China is still from the form and content to improve the format letter of guarantee.

Given that there have been relatively mature independent guarantee applicable in the area of international commercial rules, such as the international chamber of commerce "see Mr. Pay guarantee uniform rules" (URDG758), the United Nations convention on independent guarantee and standby letter of credit, etc., considering the complexity of business transactions, generally suggest Chinese contractors for the related mature trading rules of demonstration, such as may be inconsistent with content of the letter of guarantee, the priority of the relevant provisions of the order problem and interpretation, is suggested in the letter of guarantee shall be clear.

(3) labor disputes

Labor legal risk is a typical legal risk that Chinese enterprises often encounter in overseas investment, mainly including strike risk and labor risk.

In 2011, for example, Chinese companies suffered the "longest strike" in the history of Zambian operations at CSM. Two thousand striking workers demanded an average increase of one thousand dollars per worker or they would not return to work. But if the company follows suit, its annual operating costs will rise by $37m, bringing the cost of producing a tonne of copper to about $8,600, more than the $7,000 price of copper. This also brings the huge management pressure to the Middle color non - mine.

Labor laws and regulations vary from country to country in Terms of labor risks. In some African countries, such as the Democratic Republic of Congo, the proportion of foreign workers is required to be no more than 2 per cent in some projects and, in some cases, up to 50 per cent with ministerial approval. For foreign employees working in the DRC, they need to sign a labor contract with a local enterprise, from which the enterprise can apply for a labor license from the DRC Labour Bureau, and then apply for a work visa from the DRC. But many Chinese companies operating in the DEMOCRATIC Republic of Congo do not follow the process to obtain work visas for their Chinese nationals who have worked in the country for more than six months, leaving them exposed to numerous risks and potential disputes. (For details, see Li Zhiguo, Legal Compliance: The Only Way to Localization and Internationalization, international Journal of Engineering and Labor, May 28, 2018.)

Whether for the management of local workers or foreign workers, Chinese enterprises need to do a good job in the relevant due diligence when investing in mergers and acquisitions, so as to avoid the delay of the project, or the illegal use of temporary work permits to Chinese workers in Africa suffer money or personal losses.

(4) environmental legal disputes

At present, African countries are attaching increasing importance to the protection of ecological environment and natural resources. Many countries regularly issue white papers and green papers on environmental protection, elevating environmental protection to the level of national policies. The governments of South Africa, Zambia and other countries require overseas enterprises to actively fulfill their social responsibilities in protecting local environmental resources.

Given the industrial characteristics of Chinese enterprises in Africa, where most of their investment is concentrated in construction engineering, natural resource development and manufacturing, fulfilling their obligations to protect the environment in Africa has also become a legal and social responsibility of Chinese enterprises. China has also issued a number of guiding documents on environmental protection. The code of Conduct for The Overseas Investment and Operation of Private Enterprises issued in 2017 requires that private enterprises should also pay attention to the protection of environmental resources in their overseas investment activities.

At present, the vast majority of central and private enterprises can strictly abide by the environmental customs, laws and regulations of the host country and the international environmental conventions they have signed in their investment in Africa. However, some Chinese enterprises fail to prepare for the compliance investigation of local environmental laws and regulations when they invest in Africa, and neglect environmental protection, which causes legal disputes and economic losses.

For example, Kenya's first coal-fired power plant, contracted by a central Chinese company, cost $2bn, of which $1.2bn was financed by an export credit from a Chinese bank. In 2016, the owners of the coal plant, Amu Electric, and the Kenyan National Environmental Authority, were sued by the Kenyan non-profit Kadiba Association, and the lawsuit has not been suspended since. The NGOS argue that the coal-fired power plant project failed to disclose key facts about the project plan and project to the public in accordance with the law, and did not fully consider regulations related to the climate Change Act. Finally, in 2019, the project was put on hold when Kenya's National Environmental Court ordered a moratorium and revoked its environmental impact assessment permit. A reassessment of the environmental impact and compliance with all necessary laws are preconditions for the project to restart, and delays or delays would put at risk $1.2bn of export credit financing from a Chinese bank.

(5) Transport disputes

Some African countries, such as South Africa, Egypt and Nigeria, occupy a very important geographical position in the international maritime transportation. Their ports, such as Durban and Cape Town in South Africa, Lagos in Nigeria and Alexandria in Egypt, have also become hubs for ships. Some of China's ocean-going vessels often stop at these ports or transit to other places, which has caused a large number of maritime disputes. In recent years, there have been a number of disputes over the seizure of Chinese ships in African ports.

In terms of trade, in order to increase the inflow of foreign exchange in 2016, the Angolan government issued regulations allowing the release of imported goods arriving in Angola without documents. A number of African countries are also considering the policy of releasing goods without orders, which will undoubtedly lead to more maritime disputes. China's foreign trade enterprises that are going abroad should also do their homework on such problems and reasonably avoid risks.

In particular, the coVID-19 outbreak in 2020 has seriously affected the entire shipping market. Port equipment is in short supply, transportation routes are forced to be changed, special surcharges are imposed, ports in many countries and regions impose control measures on ships from China, and transportation routes are greatly reduced. Transport disputes in trade between China and Africa have increased as a result.

Disputes over land property rights

Due to regime change and historical issues, it is difficult and confusing to identify the land property rights in some African countries.

In the process of building modern countries, many African countries have failed to complete a complete land registration system and have no practical system of land ownership and land transfer. In some countries, a piece of land is sold to different holders through multi-sectoral management.

In addition, in some federal African countries, such as Nigeria, the lack of a clear definition of land jurisdiction between the federal and state governments, coupled with customary law sales and transfers of land not registered with the government, has resulted in a substantial state of DE facto possession.

Foreign investors are often in a passive position in such a situation of multiple sales, conflicting rights and ownership, and difficulty in distinguishing authenticity. At present, a large number of Chinese companies are investing in construction projects and land projects in African countries, and the legal risks caused by land property rights issues are also increasing.

In the case of the New City project in Lagos, Nigeria, the developer signed a public-private partnership agreement with the Federal government of Nigeria, paying the franchise fees and handing over the management of the project to the Federal government after 30 years.

In the course of the project, the developer found that the surrounding area of the land it operated was constantly occupied by Lagos residents. The squatters, however, had legal possession certificates issued by the Lagos State Land Administration. The developers found that evicting the squatters was based on the argument that the Lagos state government had no jurisdiction over land demarcated by the federal government, which was rooted in the conflict between federal and state laws in Nigeria. In Nigeria, foreign investors are often interrupted by disputes over land rights. (Refer to Cui Yan, Risk Warning of Real Estate Development in Africa, international Journal of Engineering and Labor, May 6, 2016)

(vii) Exchange rate risk

Due to the relatively small market in a single African country, Chinese enterprises' going abroad is mostly a pan-African expansion, with different currencies and foreign exchange policies in different countries, and the exchange rate fluctuates greatly, which is an unavoidable risk for enterprises' business activities. At present, the common forms of exchange rate risks mainly include: the host country's currency depreciates sharply against the major international currencies, resulting in the overall shrinkage of contract income; The exchange rate fluctuations of the host country's currency and the euro against the RMB cause the exchange gains and losses of currency exchange and project account translation

At the same time, there is also a certain risk to exchange controls, African countries, foreign exchange control situation is widespread, and obtained the contractor in the local profits remitted, under contracted projects often require government approval, and a longer time limit for examination and approval, plus the owner signed certificate and test in the final validation books often delay, will affect the contractor in the schedule. In the case of exchange rate fluctuations, it is extremely easy to cause exchange losses.

But the welcome new trend is that most African countries have converted some of their reserve currencies into renminbi following the renminbi's inclusion in the Special Drawing Rights basket. Some countries, such as Zimbabwe and Angola, have recognised the yuan as legal tender. More African countries have chosen to sign currency swap agreements with China.

(8) Compliance risk

Anti-corruption compliance has always been the focus of global attention, enterprises in the process of overseas operations, to maintain a high degree of vigilance. Anti-corruption should not only take into account the regulations of host countries, but also take into account the supervision of corruption in global and regional organizations, other countries and China.

In their investment and trade cooperation with Africa, Chinese companies should pay special attention to anti-corruption compliance. On the one hand, many African countries are still in the early stage of development, and their judicial systems are not yet transparent and fair, which is prone to corruption. On the other hand, the laws and regulations of African countries are still imperfect and lack proper monitoring mechanisms. Both directly condone individual local government officials seeking personal gain in the normal course of events.

A number of cases have shown that the risk of liability for breach of international legal requirements, such as the FCPA or the World Bank, occurs at times for transnational corporations and their officers, directors, employees, agents or shareholders. At the same time, in recent years, many African countries have been improving their governance and stepping up efforts to crack down on illegal practices such as corruption.

In the face of the broad jurisdiction of foreign laws such as FCPA and the restrictions of the host country's government, Chinese enterprises operating overseas need to enhance compliance awareness to prevent the risk of violating anti-corruption laws abroad and in the host country.