Discussions

The first international arbitration case under the SADC Finance and Investment Protocol: Lesotho v Swissbourgh Diamond Mines case

The first international arbitration case under the SADC Finance and Investment Protocol: Lesotho v Swissbourgh Diamond Mines case

01 Nov 2017

Gerhard Erasmus, tralac Associate, and Talkmore Chidede, tralac Researcher, discuss dispute settlement issues in SADC

On 14 August 2017, the Singapore High Court revoked an arbitral award rendered against Lesotho by the Permanent Court of Arbitration (PCA) Tribunal in the case concerning Lesotho v Swissbourgh Diamond Mines.[1] This is the first international arbitration case under the SADC Finance and Investment Protocol (SADC FIP), which was signed in August 2006 and entered into force in April 2010.

Background

In this case, a South African businessman (Mr Van Zyl), together with his associated companies[2] (investors), acquired mining leases in respect of five regions of Lesotho in the late 1980s. Later, when the Lesotho Highland Water Project was built, Lesotho expropriated the areas subject to the mining leases. The investors unsuccessfully sued Lesotho for unlawful expropriation (without compensation) in Lesotho’s domestic courts. Mr Van Zyl, a South African businessman, requested diplomatic protection from the government of South Africa but was denied.[3]

In June 2009, the investors initiated legal proceedings in the SADC Tribunal against Lesotho for violating its obligations under the SADC Treaty by unlawfully expropriating the investors’ mining leases. However, the SADC Tribunal was disbanded by the SADC Summit in 2011 – after it ruled against Zimbabwe’s land reform[4] – before it determined the investors’ case against Lesotho. Lesotho approved the Summit’s decision to dissolve the SADC Tribunal.

In 2012, the investors then initiated international arbitral proceedings against Lesotho in the PCA Tribunal pursuant to Article 28 of Annex 1 of the SADC FIP (Annex 1). The Article recognises the investors’ right to submit investor-state disputes to international arbitration after exhausting local remedies. In particular, the investors pursued ad hoc arbitration conducted under the UNCITRAL Arbitration Rules. The parties chose Singapore as both the seat of arbitration and the hearing venue. The investors claimed that Lesotho had contributed to and facilitated the demise of the SADC Tribunal without providing alternative means to settle the investors’ expropriation claim. In doing so, Lesotho violated its obligations to provide fair and equitable treatment, and access to courts and tribunals under the SADC Treaty (Article 6 (1)), SADC Tribunal Protocol (Articles 14 and 15) and Annex 1 of the SADC FIP (Articles 6 (1) and 27). The investors therefore requested the arbitral tribunal to grant such relief and compensation as could have been granted by the SADC Tribunal, along with interest on the sums awarded and costs.

In April 2016, the arbitral tribunal ruled in favour of the investors; and directed Lesotho and the investors to establish a new tribunal with the same jurisdiction as the SADC Tribunal to hear the expropriation claim. Subsequently, in October 2016, the arbitral tribunal ordered Lesotho to pay the arbitration costs.

However, Lesotho applied to the Singapore High Court to reverse the investor-state arbitral award (to establish an ad hoc tribunal to hear the compensation claim de novo) in accordance with the Singapore International Arbitration Act and UNCITRAL Model Law on International Commercial Arbitration. Lesotho requested the court to set aside the arbitral award on several jurisdictional grounds. First, Lesotho argued that the arbitral tribunal did not have jurisdiction over the expropriation dispute because the expropriation happened before the entry into force of the SADC FIP (16 April 2010). Secondly, Lesotho alleged that the arbitral tribunal lacked jurisdiction because the dispute did not meet various requirements set out in Article 28 (1) of Annex 1 – that is, the dispute must involve an obligation in relation to an investment which is admitted in the host state. Thirdly, Lesotho alleged that the arbitral tribunal lacked jurisdiction over domestic investors which do not qualify as investors under Annex 1 and, thus lacked standing capacity to commence the arbitration. In addition, Lesotho claimed that the investors did not exhaust all local remedies in relation to the dispute as required by Article 28 (1) of Annex 1.

Findings of the Singapore High Court

The Singapore High Court set aside the investor-state arbitral award in terms of Article 34 of the UNCITRAL Model Law and section 24 of the Singapore International Arbitration Act. The court held that the real dispute submitted to international arbitration was not about expropriation but about the fact that the decision to disband the SADC Tribunal had resulted in denial of Mr Van Zyl’s right to access to justice; which arose after the SADC FIP came into force.

The Singapore High Court found that the investors’ right to submit disputes to the SADC Tribunal did not qualify as an investment under Annex 1. The court interpreted the definition of investment under Annex 1 to mean only rights or property acquired in the host state under its domestic laws. The court perceived that the dissolution of the SADC Tribunal concerned a (secondary) right to bring disputes before the Tribunal, not investment in mining leases. In other words, the right to bring claims did not derive from the rights created by the mining leases, but had been conferred by the SADC Treaty and SADC Tribunal Protocol. That is, the investors’ right to refer disputes to the SADC Tribunal was not a right they acquired by virtue of their investment, but one conferred by the SADC Treaty, SADC Tribunal Protocol and SADC FIP.

The court concluded that while the obligations to provide investors with fair and equitable treatment as well as access to courts and tribunals might be understood in relation to the mining leases, the relevant investment for the demise of the SADC Tribunal was the secondary right to bring a claim before the SADC Tribunal. Thus, the dissolution of the SADC Tribunal did not constitute any obligation of Lesotho in relation to the claimed investment – the investors’ right to submit claims to the SADC Tribunal.

The court also held that investors (Swissbourgh and the Tributees[5]) that were incorporated in Lesotho do not qualify as ‘investors’ for the purposes of Article 28 (1) of Annex 1. The court concluded that though Annex 1 does not expressly discriminate between domestic and foreign investors, various protections under the SADC FIP are meant for foreign investors only as opposed to domestic investors. Therefore, such national investors lacked standing to bring the claim and the arbitral tribunal did not have jurisdiction over them. The Singapore High Court held that national investors cannot bring claims against their own state under Annex 1. The court reasoned that if the definition of ‘investment’ in Annex 1 is applied to local investors it ‘would invariably include every national who had ever purchased property, acquired company shares or acquired licences to exploit natural resources’.[6]

The court also found that the investors did not exhaust all available domestic remedies, particularly a tortious claim for pure economic loss (known as an “Aquilian” action). The Singapore High Court held that the closure of the SADC Tribunal amounted to a loss of opportunity, which could be addressed by any remedy that compensates for the loss of that opportunity. Article 28 (1) of Annex 1 requires disputes to be submitted to international arbitration only after local remedies have been exhausted. It is important to note that the exhaustion of local remedies in the Swissbourgh case was in reference to the dispute on the closure of the SADC Tribunal, not the expropriation claim. As such, the investors’ claim for compensation claims in the domestic courts were irrelevant for the purposes of the exhaustion of domestic remedies. There was no evidence that domestic remedies with regard to the dispute on the closure of the SADC Tribunal had been exhausted by investors.

It is important to note that Annex 1 to the SADC FIP has been amended to, among other things, apply only to investors from SADC member states investing in another member state, and to remove investors’ recourse to international arbitration for settlement of investor-state disputes. Investor-state disputes will now be resolved through domestic courts or tribunals of the host state, while inter-state disputes will now be settled in terms of the SADC Tribunal Protocol. These amendments have entered into force on 24 August 2017.

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[1] Lesotho v Swissbourgh Diamond Mines (Pty) Ltd and Others (2017) SGHC 195 (14 August 2017).

[2] Including Lesotho companies incorporated by Mr Van Zyl that were named after the regions in which they carried out diamond mining operations.

[3] Van Zyl and Others v Government of Republic of South Africa (2008) 1 All SA 102 (SCA).

[4] See Mike Campbell (Pvt) Ltd and Others v Republic of Zimbabwe (2/2007) [2008] SADCT 2 (28 November 2008).

[5] Lesotho companies incorporated by Mr Van Zyl that were named after the regions in which they carried out diamond mining operations.

[6] Lesotho v Swissbourgh Diamond Mines para 333.