The Folly of Foreign Choice of Law Clauses in Investment Agreements in Uganda

The hallmark of choice of law in commercial contracts is anchored on the common adage of party autonomy, which essentially allows parties freedom to select the proper law to govern the contract. The general rule is that choice of law clauses, often inter-linked with forum-selection clauses or exclusive jurisdiction clauses, must be obeyed by the contracting parties. However, when it comes to Investment Agreements involving foreign Investors, the norm, especially in developing countries like Uganda, appears to be that the laws of the investor’s country of origin, will govern the transaction.

Concerns about this norm being informed by capitalist considerations with overarching bargaining power in favour of the stronger party, usually the Investor, are often silenced by the paramountcy of party autonomy argument. In my view, for a good litmus test to determine whether the foreign law selected to govern an Investment Agreement for an Investment in Uganda, is the proper law, one must travel beyond the arguments of party autonomy, which tend to be legally sound but practically simplistic and academic. This test should also be amplified above the procedural advantage that the foreign investor is perceived to gain from his choice of law.

I must emphasize that certainty about the proper law to govern the Investment Agreement is very critical. The proper law should be the main system of law applied to all aspects of the contract including its formation, validity, interpretation and performance. This is allied to the concept of “closest and most real connection” which speaks to the legal system with which a transaction is closely related i.e. where the contract is performed, where the business has a permanent place of establishment or domicile, where the parties are resident etc.

But the reality on the ground is that a significant number of foreign-led Investment Agreements in Uganda, are pervaded by foreign choice of law clauses. These clauses have turned out to be irrelevant to the performance of the Investment business, and yet they continue to comfortably reside in many Investment Agreements. It is axiomatic that Ugandan law is the proper law of the Investment Agreement because it is the law with closest connection to the Investment business done in Uganda. Ugandan law is also the one which provides the domestic legal system, conferring validity to the Investment Agreement in the first place.

In the Investment Code 2019, you find the domestic law in Uganda which typically regulates investment relations, defines legal frameworks, protects investor rights and provides state support for Investment. That law requires every foreign investor in Uganda to first register with the Authority before engaging in any Investment activities and it invariably obliges all investors, foreign or local, to observe and adhere to the laws of Uganda (see S.18 & 19 Investment code).

It is therefore counterintuitive for anyone to refuse to observe and adhere to the laws of Uganda, on account of a foreign choice of law clause, even when it basically remains a redundant clause in the Investment Agreement. The truth of the matter is that no Investor will be able to operationalise its business in Uganda without adhering to the laws of Uganda. It is common knowledge that all business licences, company resolutions, bank accounts, credit facilities, employment contracts, etc, will be governed by various laws of Uganda.

There is no justification for any foreign Investor in Uganda to avoid themselves of the laws of Uganda which regulate and protect their investments and insist on a foreign law, which has no force of law or application in Uganda. The common practice of transposing Investment Agreements from London, New York or Beijing, straight into Uganda and blindly adopting them, complete with foreign choice of law clauses, should be blamed on the contracting parties and their army of timorous white collar lawyers. It should be clear that the wrong choice of law is a great legal risk which can interfere with the success of the Investment. For it creates an unnecessary conflict of laws which negatively impacts the rights and obligations of the parties, while compounding any disputes that may arise.

We should avoid the folly of foreign choice of law clauses in Investment Agreements in Uganda.