Tanzania: Unconscionable Terms in Agreements with the Government by Amalia Lui*

The Government of Tanzania is now ‘serious’ in ensuring that the natural resources benefit all Tanzanians. You have undoubtedly heard about the new legislations which have shocked most investors. The legislations are the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017 (the Permanent Sovereignty Act) and the Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) Act, 2017 (the Unconscionable Terms Act).

Have these legislations come into force? Yes, since July 2017.

Snapshot of the legislations:

The Permanent Sovereignty Act

  • The underlying objective of this legislation is to re-state the ‘sovereignty’ of Tanzania as a State (in addition to what is stated in the Constitution), with the main focus on the ‘sovereignty’ of Tanzania and its People over the natural wealth and resources.
  • It states that the People of Tanzania shall have permanent sovereignty over all natural wealth and resources and that the ownership and control over the natural wealth and resources shall be exercised by and through the Government on behalf of all Tanzanians.
  • It further states that the natural wealth and resources shall be inalienable – meaning it shall always remain the property of Tanzanians and the Government shall undertake all activities and undertakings relating to natural wealth and resources on behalf of all Tanzanians.
  • Though the Government has the basic duty to undertake all activities relating to exploration and exploitation of natural wealth and resources, it may authorise any person to perform the functions of exploration of natural wealth and resources – which explains the licensing of private entities.
  • No exploitation of natural wealth and resources shall be undertaken unless it is for the benefit of Tanzanians and any arrangement or agreement for extraction, exploitation, acquisition and use of natural wealth and resources must have a guarantee of returns into the Tanzanian economy from the earnings accrued in the course of exploration, exploitation, acquisition and use of natural wealth and resources. This could mean that private entities may be required to invest a portion of their earnings within Tanzania. This seems to conflict with the Tanzania Investment Act which allows repatriation of profits, of course after paying all dues to the Government including taxes.
  • Participation of the Government and Tanzanians is asserted. It clearly provides that authorisation granted and arrangement entered into for extraction, exploitation or acquisition and use of natural wealth and resources shall ensure that the Government obtains an equitable stake in the venture and Tanzanians may acquire stakes in the venture as well. This explains the regulations requiring holders of special mining licences to be listed and the introduction of a minimum free carried interest payable to the Government.
  • Restriction of exportation of raw minerals and requirement to beneficiate all minerals within Tanzania prior to exportation. This aims to establish more processing industries in the country.
  • Requirement to retain earnings from disposal or dealings in natural wealth and resources in Tanzanian banks and prohibition of keeping such earnings in banks and financial institutions outside of Tanzania unless profits are repatriated legally. This is not a new provision as such – the Bank of Tanzania issued a circular in 1998 which prohibits Tanzanians and entities operating in Tanzania from having foreign bank accounts, unless with the permission of the Governor of the BOT.
  • Prohibition of subjecting the Government to foreign courts and tribunals because of ‘sovereignty’. This legislation states that all disputes arising from extraction, exploitation or acquisition and use of natural wealth and resources shall be adjudicated in Tanzania in accordance with Tanzanian laws. It further states that juridical bodies and Tanzanian laws shall be acknowledged and incorporated in any arrangement or agreement. This means that all agreements in which the Government is a party and which provided for foreign dispute mechanisms are now subjected to Tanzanian laws and Tanzanian courts. I am not sure where sanctity of a contract stands – given the Government had accepted such means of dispute settlement prior to enactment of this legislation.
  • All agreements and arrangements which provide for extraction, exploitation or acquisition and use of natural wealth and resources may be reviewed by the National Assembly. Is the National Assembly equipped to handle review of PSAs and MDAs which have technical terms requiring specialism? Will the parliamentarians have access to specialists who can explain/teach/elaborate the technical nature of these agreements prior to the National Assembly having the opportunity to review these agreements?
  • The big question is what is ‘natural wealth and resources’? it means all materials or substances occurring in nature including soil, subsoil, gaseous, water resources, flora, fauna, genetic resources, aquatic resources, micro-organisms, air space, rivers, lakes and maritime space, including the Tanzania’s territorial sea and the continental shelf, living and non-living resources in the Exclusive Economic Zone which can be extracted exploited or acquired and used for economic gain whether Processed or not. The applicability of the legislation does not end in mining and oil and gas, it extends to other natural resources as well.

The Unconscionable Terms Act

  • The National Assembly is empowered to review arrangements or agreements made by the Government on natural wealth and resources. It requires reporting to the National Assembly of all arrangements and agreements entered into by the Government on natural wealth and resources. If the National Assembly finds that the relevant arrangement or agreement contains unconscionable terms, it will advise the Government to initiate re-negotiation in order to rectify the unconscionable terms.
  • The power of the National Assembly to review the unconscionable terms extends to agreements and arrangements entered into by the Government prior to the coming into force of this Act.
  • If the National Assembly recommends a review of the arrangement and the agreement, the Government shall within 30 days send a notice to the other party with the intention to commence negotiations of the terms which are identified as unconscionable.
  • The Unconscionable Terms Act goes further to list items which are deemed unconscionable e.g. terms which aim to restrict the right of the State to exercise full permanent sovereignty over its wealth, natural resources and economic activity, terms which are inequitable and onerous to the State, terms which restrict periodic review of the agreement/arrangement and which purport to last for a life time, terms which create a separate legal regime for the particular investor (e.g. stabilization clauses), terms which subject the State to the jurisdiction of foreign laws and forum etc.
  • Once the notice is sent by the Government to the investor, the parties should be able to re-negotiate better terms (which are not unconscionable) within 90 days (unless extended by mutual agreement of the parties). If the parties fail to reach an agreement within the 90 days, the unconscionable terms shall have no effect and shall be treated as expunged.
  • The definition of ‘natural wealth and resources’ is slightly different from the Permanent Sovereignty Act. The Unconscionable Terms Act defines it as ‘all materials or substances occurring in nature such as soil subsoil, gaseous and water resources’ and flora’ fauna, genetic resources’ aquatic resources’ micro-organisms, air space, rivers, lakes and maritime space, including the Tanzania’s territorial sea and the continental shelf living and non-living resources in the Exclusive Economic Zone any other natural wealth and resources as the Minister may by notice in the Gazette prescribe which can be extracted, exploited or acquired and use for economic gain, whether processed or not. There is an amendment of this Act which is now being worked on amending the definition of ‘natural wealth and resources’ by adding mineral resources, petroleum resources;
  • The Act further defines ‘Unconscionable term’ as any term in the arrangement or agreement on natural wealth and resources which is contrary to good conscience and the enforceability of which jeopardises or is like to jeopardise the interests of the People of the United Republic. It’s as wide as it can get.

Are the two Acts a blessing or a curse?

I personally believe that the Government is trying to ‘clean house’ and it intends to retain current investors and invite future ones. There are agreements and arrangements which are currently unfavourable to Tanzania and Tanzanians but may have been favourable at the time they were entered. The world is changing daily, terms which were economically profitable to Tanzania five years ago are not going to ‘work’ now. This issue has been lingering over our heads for a while. Several parliaments in the past have had strong debates about some agreements needing review but nothing was done, until now. I suppose the best way to look at this is to have a positive attitude. Being called on the table to re-negotiate terms gives both parties an opportunity to discuss terms which they think need to be reviewed including terms which should be added or removed from the relevant agreement. Who knows, the investors may also get better deals out of the re-negotiations.

What should investors do?

It is prudent for investors to have a head start by reviewing their agreements with the Government internally to identify provisions which (a) may be deemed as unconscionable and (b) the investor wants to re-negotiate with the Government or which should be added or removed. I have attended some of these negotiations and although the discussions may start-off tough and difficult, eventually parties reach into an agreement which is favourable for both.

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* Senior Associate, Clyde & Co. Tanzania

Further advice should be taken before relying on the contents of this summary. I, my family and employer accept no responsibility for loss occasioned to any person acting or refraining from acting as a result of material contained in this summary. No part of this summary may be used, reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without my prior written permission.

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