South Africa to overhaul its international arbitration regime

Recent legislative and policy changes to the protection of foreign direct investment in South Africa have been the source of some concern to the international business community. A draft International Arbitration Bill and proposed amendments to the process for recognition and enforcement of foreign international arbitration awards may ease these concerns and help attract foreign direct investment.

In issue 4 of this report, we discussed South Africa’s changing approach to international investment protection. We highlighted South Africa’s termination of several bilateral investment treaties (BITs) and the development of legislation – the Promotion and Protection of Investment Bill – to regulate the protection of investment, including international investment, in South Africa. That Bill raised a number of red flags to prospective international investors. It set out to promote and protect investment in a manner “which reflected public interest and which struck a balance between the rights and obligations of all investors”. However, foreign investors were apprehensive that the protections afforded to foreign investors under the Bill would be less favorable than those under the BITs, including what would amount to expropriation and how equitable compensation for any such expropriation would be determined.

As a result of public comment, in 2015 a revised Bill was released and later promulgated as the Protection of Investment Act. The commencement date for this Act is yet to be announced.

The definition of expropriation and the quantification of compensation for expropriation have been removed entirely from the Protection of Investment Act and instead form the subject of a new Expropriation Bill also released in 2015.

The Protection of Investment Act however continues to elicit concern. Many perceive it as less favorable to international investors than the BITs it is intended to replace because it provides foreign investors with less certainty as to how their rights will be safeguarded. Those concerns centre on the need for effective investor-state dispute settlement mechanisms.

South Africa’s cancellation of BITs means that (save for grandfather clauses) the Government of South Africa is no longer bound to submit to investor-state international arbitration. The Protection of Investment Act instead provides that the South African Government consents to state-state international arbitration in respect of investments covered by the Act, subject to the exhaustion of domestic remedies. As such, investors are losing a right of direct action against South Africa. Instead, arbitration would be conducted between the Republic of South Africa and the home state of the applicable investor. There is only a provision for mediation between an investor and the Government of the Republic of South Africa. Draft rules for the proposed investor-state mediation process have recently been published for public comment.

Presently all arbitrations in South Africa, whether domestic or international, are governed by the Arbitration Act of 1965. The Arbitration Act has been in force for over 50 years and is long overdue for revision. It is widely considered to be inadequate, outdated and unsuitable for international commercial arbitrations.

A new draft Arbitration Bill has been introduced which removes international commercial arbitrations from the ambit of the Arbitration Act and incorporates most of the main provisions of the UNCITRAL Model Law as the cornerstone of the international arbitration regime in South Africa. This brings the South African international arbitration regime in line with the international system and should offer international investors more certainty as to the dispute resolution process to be followed in South Africa.

It is envisaged that aspects of the UNCITRAL Model Law will be further adapted to accommodate local circumstances, as provided in Part Two of the Model Law. Such proposed amendments will be taken back to Cabinet for noting and endorsement before the amended draft Bill is introduced to Parliament. It is anticipated that the amended Bill will be introduced before the end of 2017.

South African courts have generally upheld arbitration agreements, however, the anticipated new legislation further circumscribes the role of the courts in relation to setting aside arbitration agreements or arbitral awards, in line with the UNCITRAL Model Law (which is more restrictive than the Arbitration Act).

The draft Arbitration Bill provides anew for the recognition and enforcement of foreign arbitral awards by repealing the current Recognition and Enforcement of Foreign Arbitral Awards Act of 1977 and enshrining a new process which closely mirrors the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards in terms of the procedure for enforcing foreign arbitral awards and the grounds for refusing recognition and enforcement of such awards.

The draft Arbitration Bill also amends the Protection of Business Act of 1978 insofar as it applies to foreign arbitral awards. That Act is also considered to be outdated, including by requiring prior permission, in certain circumstances, from the Minister of Trade and Industry to enforce a foreign arbitral award in South Africa. This permission will no longer be necessary.

The draft Arbitration Bill is to have retrospective application to international commercial arbitration agreements concluded before its enactment, although it will not apply to proceedings already instituted.

The proposed changes to the international arbitration regime should give comfort to the international investment community that South Africa is a safe place to do business and is a jurisdiction where international investors can expect to have their disputes swiftly dealt with and with limited interference by the local courts. Indeed in a keynote address at an international arbitration seminar in October 2016, Deputy Minister John Jeffery of the Department of Justice and Constitutional Development expressed the hope that the draft Bill would establish South Africa as a regional arbitration centre and encourage direct international investment in South Africa.

The draft Bill has been a long time in the making and is a very welcome addition to the South African legislative process insofar as international investment protection is concerned.