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South Africa’s International Arbitration Bill 2016: Stepping-stone for increasing trade and investment

South Africa’s International Arbitration Bill 2016: Stepping-stone for increasing trade and investment

29 Mar 2017

Talkmore Chidede, tralac Researcher, comments on the transformation of South Africa’s international commercial arbitration law

On 1st March 2017, the South African Cabinet approved the International Arbitration Bill (the Bill) to be introduced in Parliament. In April 2016, the Cabinet first endorsed the Bill but suggested a few changes in certain provisions.[1] The Bill will be referred to relevant committees, the National Assembly and the National Council of Provinces for approval. Once approved, it will be sent to the President for assent. The Bill will enter into force on a date proclaimed by the President in the Government Gazette.

The Bill is indicative of the government’s intention to transform and align its international commercial arbitration practice with global standards on the resolution of commercial disputes; increase trade and investment; and position South Africa as an investor- and arbitration-friendly jurisdiction in the region and world at large.[2]

The transformation of South Africa’s international commercial arbitration law was long-overdue. In 1998, the South African Law Commission (SALC) issued a Report which recommended, inter alia, the enactment of an international arbitration legislation incorporating the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration (the Model Law); and the amendment of the Recognition and Enforcement of Foreign Arbitral Awards Act 40 of 1977 (REFAAA). SALC also proposed government accession to the Convention on the Settlement of Investment Disputes between States and Nationals of other States. Until now, these recommendations have not been implemented.

The Bill provides, among other things, for the following:

  • It incorporates, with amendments, the Model Law as the cornerstone of international arbitration[3] in the country. Domestic arbitration will continue to be regulated by the Arbitration Act 42 of 1965. Investor-state disputes will be governed by the Protection of Investment Act 22 of 2015 (not yet in force). The President is yet to proclaim the date of commencement of this Act.

  • It allows for contracting parties to settle their commercial disputes through conciliation proceedings in accordance with the UNCITRAL Conciliation Rules. This gives parties the flexibility to use conciliation to resolve their dispute in view of the substantial costs often associated with international arbitrations.

  • It repeals the REFAAA, and provides afresh for the recognition and enforcement of foreign awards. A foreign arbitral award will be binding between the parties to that arbitration, and enforced in the same as any judgment or order of court. However, an award is not recognised and enforced if it is not permissible under South African law, contrary to public policy or was made in bad faith. It may also not be enforced if the party pursuing enforcement of the award lacks capacity to contract; the arbitration is invalid; he or she did not receive the required notice on the appointment of arbitrator or the arbitration proceedings; and the arbitration process was not in accordance with the relevant arbitration agreement.

  • It amends the Protection of Businesses Act 99 of 1978 by deleting the words ‘arbitration awards’. This means that the Protection of Businesses Act will no longer be applicable to the enforcement of foreign arbitration awards.

  • It applies to and binds international commercial arbitrations to which public bodies (state departments, national or provincial government, municipality etc.) are party, to the extent not prohibited by the Protection of Investment Act.

The Bill reflects the government’s aim to increase access to justice through international arbitration for cross-border businesses operating within (and outside) South Africa.

The Bill is a development towards transforming South Africa’s outdated, and even limited, international commercial arbitration practice regulated by the 52-year-old Arbitration Act and 40-year-old REFAAA. These laws are limited in respect of international commercial arbitration practice. For instance, The Arbitration Act makes no distinction between domestic and international arbitration, and is not suitable for the changing and increasing international commercial arbitration. Secondly, the REFAAA does little more than provide for the recognition and enforcement of foreign awards, and has been criticised for its failure to make adequate provision for the enforcement of arbitration agreements as well as difficulties in enforcement of an award in foreign currency.

Further, the Protection of Businesses Act restricts the enforcement of certain foreign arbitration awards by prohibiting any form of international judicial co-operation by domestic courts. However, its ambiguous and over-detailed nature is perceived to signal a hostile and defensive attitude to international commercial arbitration.

The Protection of Investment Act suggests ‘hesitancy on the part of the South African government to embrace international commercial arbitration wholeheartedly’.[4] The Act does not provide foreign businesses with automatic recourse to international arbitration. Rather it offers dispute settlement models ranging from domestic dispute resolution to international arbitration subject to exhaustion of local remedies. Investors may settle their disputes through mediation facilitated by the Department of Trade and Industry (DTI). They may also approach any local competent court, independent tribunal or statutory body for the settlement of such dispute. This came after South Africa’s involvement in international investment lawsuits including the Foresti case. In this case, a group of Italian investors (successfully) challenged the country’s black economic empowerment policy in an international arbitration.

Such a legislative dispensation may dissuade foreign investors from selecting South Africa as a place to do business and a seat of arbitration. Foreign businesses typically consider the ability to resolve disputes through transparent and efficient means. This becomes an important factor when deciding to implement a commercial project.

International arbitration has become a widely accepted means of resolving disputes in trade and investment. It is, in addition, an incentive to cross-border commerce and investment. International arbitration based on the Model law should increase investor confidence and investments because of its neutrality, confidentiality, finality, enforceability, procedural flexibility and parties’ ability to choose (from a pool of experienced international) arbitrators. About 72 states have modernised their national arbitration legislations based on the Model law. Among these are SADC member states, Zimbabwe, Zambia, Mauritius and Madagascar.

The Bill will go some way to restore certainty and predictability as well as investor confidence that was damaged by the termination of BITs and the introduction of the Protection of Investment Act. The cancellation of BITs and the removal of direct access to international arbitration by the Protection of Investment Act raised serious concerns among foreign investors about the protection of their investments.

Moreover, the Bill will send a message to the international investment/business community that South Africa is a safe place to operate and that their disputes will properly be heard and dealt with in a manner consistent with international best practice. The legislation will also reduce avenues for delays and infractions of process that create procedural uncertainty, which is problematic for investors and a disincentive to use the South African legal system.

The adoption of this legislation could assist South Africa in becoming a regional and international arbitration centre. An example of this is Mauritius, which adopted the Model Law into its domestic law (International Arbitration Act of 2008) and has established a globally ranked international arbitration centre, the Permanent Court of Arbitration at the Mauritius Chamber of Commerce and Industry. Equally important, if South Africa becomes an arbitration venue, it benefits local business because this ‘would mean the use of local lawyers, hotels and other venues, transcription and similar services’.[5]

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[1] Keynote Address by the Deputy Minister of Justice and Constitutional Development, the Hon JH Jeffery, MP, at the International Arbitration – the Dawn of a New Era in South Africa Seminar, held at the Johannesburg Stock Exchange Auditorium, Johannesburg, 14 October 2016 http://www.justice.gov.za/m_speeches/2016/20161014-Arbitration.html#sthash.9GcJhjjM.dpuf

[2] Statement on the Cabinet Meeting of 1 March 2017 http://www.dirco.gov.za/docs/2017/cabinet0301.htm

[3] According to Article 1.3 of the Model Law, international arbitration refers to an arbitration between parties having their places of business in different states; if any part of obligations of the commercial relations is performed in outside the country of business; or if the subject matter of the arbitration relates to more than one country.

[4] Clyde & Co “SA takes steps to improve its attractiveness as an international commercial arbitration hub” http://www.lexology.com/library/detail.aspx?g=8a26973c-ffd7-4b8a-ac9a-476b629ffbf4

[5] T Baker “Overhauling arbitration in South Africa: South Africa needs law reform” International Arbitration Report 2014 available at http://www.nortonrosefulbright.com/knowledge/publications/121382/overhauling-arbitration-in-south-africa (accessed 12-08-2016).