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Key issues in negotiating contracts with the government of Tanzania

In this fourth installation of our 11-part article on Tanzania government contracting, government contracts pose unique problems and challenges not encountered in contracts between private persons.

Contractors need to be aware of the idiosyncrasies of Tanzanian state-owned entities engaged in the procurement of big projects, particularly in the infrastructure sectors, from the initiation of any commercial relationship.

This is especially so, since, building infrastructure and developing natural resource projects in Tanzania demands huge investment of significant resources—time, money and energy—in the form of contracts with state-owned entities.

As a potential government contractor, how do you know that you are dealing with a state entity in Tanzania? This appears pretty straightforward, but it is not. Contractors need to be cautious and think about the legal capacity of the entity to enter into an arbitration agreement; this issue is particularly critical in the natural resources sector in view of the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017.

Additionally, contractors need to consider the ability of the Tanzanian state to raise a defense of the sovereign immunity subsequently (see, Kibuuka, Paul. ‘Effects of Tanzania sovereign immunity on gov’t contracting.’ The Citizen. September 16, 2019). A contractor should pay particular attention to any limitations on the waiver of state immunity and the approach of the courts to state immunity in Tanzania or other jurisdiction where a judgment or arbitral award may need to be enforced.

It is equally important that contractors deliberate on the available investment treaty protections that they may be able to invoke. On this, it is worth noting that the provisions of the Tanzania-Netherlands’ Bilateral Investment Treaty (BIT), which terminated upon Tanzania’s request as of April 1, 2019, remain in force until April 1, 2034 for investments made before April 1, 2019 and not thereafter.

The majority of Tanzania’s other existing BITs require disputes to be submitted to the International Centre for the Settlement of Investment Disputes (ICSID) under the 1965 ICSID Convention.

But would an ICSID award be enforceable in any ICSID contracting state in line with the ICSID Convention given Tanzania’s enactment of the Natural Wealth and Resources (Permanent Sovereignty) Act, 2017 which prohibits investors from resorting to international dispute resolution mechanisms?

Contracting with a state is inherently risky because the state’s actions can be swayed by political turbulence and the swinging of the pendulum of public opinion.

However, Tanzania is credited with building a reputation for long-standing peace and political stability and all living former presidents, vice presidents, and prime ministers reside in the country and are well-respected.

In addition to the risk of expropriation, a contractor may be subjected to legal and regulatory changes which directly affect contracting with the government and state entities, especially in infrastructure and energy projects.

A contractor may also suffer from the state’s failure to honour a guarantee or to fulfil any of its contractual obligations i.e. breach of contract.

Ignoring these risks may bring significant consequences for the contractor who may ultimately find that it is difficult to bring proceedings against the Tanzanian state or the public entity or to enforce a judgment or arbitral award against assets of the state.

The unique structure of the union of Tanganyika and Zanzibar, which together form present-day Tanzania, is also a key consideration when negotiating government contracts. The union was formed on April 26, 1964.

Essentially, Tanzania has enacted laws that apply to, and established entities in, each part of the union; and laws that operate at the specific level of each part of the union.

Moreover, within Mainland Tanzania, the government has established Export Processing Zones (EPZs) and Special Economic Zones (SEZs), which are non-union matters independently governed by the Export Processing Zones Act, 2002 and the Special Economic Zones Act, 2006, both of which explicitly state that they are applicable to the Mainland.

It is therefore crucial that a government contractor deals with and obtains approvals from relevant public entities before entering into a contract. Moreover, the contractor should be wary of latent uncertainties over the legal rights of the entity at issue.

Lilian Kyaruzi ([email protected]) is a legal director in Isidora & Company and an international development enthusiast. The views expressed here do not necessarily reflect those of  Isidora & Company.