Contribution by Dr. Joseph 0loka-Onyango*
Chapter 5, February 1992)
This paper outlines the history of the evolution
of foreign direct investment in developing countries and of the contractual
relationship between investors and these companies.
In many, if not most cases, particularly in Africa, the territories which
became sovereign independent States after the colonial period had previously
been tied to the legal and trading system of the metropolitan Power. The
flow of investments into these territories had followed the interests
of that Power, and the investors' rights and duties were defined essentially
by the law of their home countries. In effect, the investor was not a
foreigner dealing with foreign authorities, rather he was a citizen dealing
with his own government that was administering a territory abroad.
After the achievement of independence, some vestiges of the traditional
relationship between newly independent developing countries and former
administering Powers lingered on. Inspired by the ideal of development
the newly sovereign governments believed that investment by foreigners
in ambitious projects would be the key to economic advancement and did
not look too cortically at the nature of the projects to be undertaken
or at the contractual stipulations entered into with the foreign investors.
Predictably, many of the investment schemes proved to be disappointing
failures, and in many instances the governments of the developing countries
concerned that, under the contracts they had concluded, they had little
or no remedy or recourse against their contractual partners. There was
usually no provision for the settlement of disputes by arbitration, and
in many cases the governments concerned tended to be mistrustful or even
unaware of the possibilities offered by non-national arbitration or adjudication.
Nor was nationalization or indigenization an easy way of escaping from
contractual obligations. In cases where governments of developing countries
resorted to arbitrary methods of repudiating obligations, their creditworthiness
suffered and inward investment diced up.
In this contributor's opinion the questions now calling for careful thinking
are: what kind of investments should be directed towards the developing
countries; how these countries can protect themselves against bad investments;
and what remedy is available to them if an investment should turn out
to be bad. It is in this connection that attention is drawn to the potential
usefulness of arbitration and to the function of the lawyer in the preparation
of the contractual instruments relating to a particular project. It is
for the lawyer to draft the vitally important arbitration clause on which
the parties will eventually rely if a dispute should arise concerning
the performance of their respective obligations.
Because historically governments of developing countries have usually
been in a weaker negotiating position vis-a-vis foreign investors and
have learned some bitter lessons from past experience, they now tend to
be wary in dealings with these investors. At the same time they are beginning
to appreciate the valued standard international rules and procedures,
including arbitration procedures, for the settlement of disputes concerning
e.g. alleged low performance by a foreign investor of commitments entered
into by contract. It is in their interest, moreover, for them to be associated
with any review or reformulation of these rules and procedures in the
light of developments. The form and nature of the arbitration machinery
should, of course, be acceptable to them, and arbitral awards in cases
arising between developing countries and foreign investors should be given
Dr. Joseph Oloka-Onyango (Uganda) - From 1989 to the present,
Dr. Oloka-Onyango has been a Lecturer of International Investment
Law, Banking and Corporations, and International Human Rights at
the Faculty of Law, Makerere University and also Research Director
of the recently established Human Rights and Peace Centre. From
1987 to 1988, Attorney, Lawyers Committee for Human Rights. From
June 1986 to September 1986, Legal Consultant, at the United States
Committee for Refugees. Born in 1960, Dr. Oloka-Onyango obtained
a doctorate in juridical Science from Harvard Law School in 1989.
Dr. Oloka-Onyango is the author of several books.
above author profile was written in February 1992)