Business Day | 17 June 2016
Investment act may clash with SADC treaty
by Mark Allix
LEGAL practitioners have been saying for some time now that SA’s Protection of Investment Act is not in sync with the country’s commitments under the Southern African Development Community Protocol on Finance and Investment (SADC Protocol).
This seems to refer to a simple statement of fact, which the government will have to address — and quickly — if it does not want to find itself on the losing end of international trade disputes in future.
Ever since the government unilaterally started cancelling 13 bilateral investment treaties with EU member states, the process of international arbitration in SA has come under fire. The draft Promotion and Protection of Investment Bill, which was signed into law in December, has removed the automatic right of recourse by foreign investors to international arbitration.
Meanwhile, the Cabinet has approved the introduction to Parliament of the draft International Arbitration Bill. This intends to improve access to justice for companies doing business outside the country and foreign companies in SA.
The bill will repeal the Recognition and Enforcement of Foreign Arbitral Awards Act and amend the Protection of Business Act. It will also be aligned with the Model Law on International Commercial Arbitration, which has been adopted by the United Nations Commission on International Trade Law.
Minister in the Presidency Jeff Radebe says “the process of international arbitration is an essential tool for doing business across the borders of the country”.
But to date, certain of the government’s stated policies in favour of black economic empowerment (BEE) — most emphatically, the notion of using expropriation to right past wrongs — have come up against investor protections that are still provided for in years to come, in the cancelled bilateral investment treaties. And foreign investors are not happy.
The recently formed EU Chamber of Commerce and Industry in Southern Africa warns that some European businesses in SA have put projects on hold, or are considering relocating to other African countries, following the uncertainty created by the Promotion and Protection of Investment Bill. The EU is SA’s largest trading partner and a major export destination.
The government — through the Department of Trade and Industry — argues that recourse to international arbitration, as provided in the bilateral investment treaties, which it terminated, is lengthy, costly and has not established a body of legal precedent.
More pertinently, it says that international arbitration does not give governments the space to implement public policies. In SA’s case, this often means BEE policies, and raises the spectre of possible expropriation in the minds of foreign investors.
Like many governments, the South African state fears that powerful multinationals — including those such as cigarette or alcohol producers — will litigate hugely in defence of their foreign assets and supposed rights. It believes foreign arbitration panels do not reflect domestic law and will possibly award outlandish penalties against it.
Earlier in June, the UN Conference on Trade and Development (UNCTAD) launched its annual review of investor-state arbitrations for 2015. A record high of 70 such cases were filed in the year. The overall number of publicly known claims reached 696. By the end of 2015, a total of 444 such proceedings had been concluded, with 36% of cases decided in favour of the state, 26% in favour of the investor and 26% of cases settled.
Following a recent trend, a high share of new cases — about 40% — were brought against developed countries. The majority of new cases invoked bilateral investment treaties, most of them dating back to the 1990s.
State conduct most frequently challenged by investors in 2015 included legislative reforms in the renewable energy sector, alleged direct expropriations of investments, alleged discriminatory treatment and revocation or denial of licences or permits.
With the brouhaha in SA’s mining industry, it is no wonder that the government is running scared. UNCTAD says the arbitral decisions adopted in 2015 touch upon a number of important legal issues concerning the scope of treaty coverage, the conditions for bringing of investor-state arbitrations claims, the meaning of substantive treaty protections and the calculation of compensation and other remedies.
On some issues, tribunals followed previous decisions, while on other issues they adopted approaches that departed from earlier decisions. Some of the prominent decisions concern investor nationality, ownership and control. An investor-state arbitration conference will be held in July at UNCTAD’s World Investment Forum 2016 in Nairobi, Kenya.
In 2009, after international arbitration against SA by foreign investors, the Department of Trade and Industry completed a review of its bilateral investment treaty policy framework.
Various private Italian mining companies had brought a court case against the government, stating that its positive racial discrimination laws violated bilateral investment treaties with other countries. They wanted €266m in compensation for the “expropriation” of their granite mining operations in SA.
The arbitration was settled in a hearing in The Hague in 2010. This allowed the companies to convert all its old-order mining rights for 5% black empowerment, bypassing the 26% BEE ownership required by the then mining charter.
Jackwell Feris, a director at law firm Cliffe Dekker Hofmeyr’s dispute resolution practice, says for a state to be bound by an international arbitration agreement, there must be “clear and unambiguous” consent by the state to an arbitration process.
He says that from a South African perspective, any international investment arbitration can only bind the South African government if it complies with the requirements of section 231 of the Constitution — adoption by Parliament. Failing this, any reliance on such an agreement, signed or not, for protection of an investment “will be misplaced”.
He goes on to say that a number of the bilateral investment treaties concluded between SA and other SADC member states are signed, but have never — as far as can be ascertained — been ratified, and will possibly never be, based on the government’s policy change in this respect.
To highlight some dangers in this, in 2014, the Permanent Court of Arbitration in the Hague found that Russia had deliberately expropriated Yukos Oil Company and awarded three former shareholders of the company about $50bn — a staggering sum. Russia then brought proceedings before the District Court in the Hague seeking to set aside the Yukos awards, as well as three interim awards.
Feris says that a number of courts in jurisdictions such as the US and Switzerland refused to enforce the Yukos arbitration award on the basis that there was no agreement to arbitrate the dispute with Russia.
Global Law firm DLA Piper says as a result, the war between the Yukos shareholders and Russia is being fought on two fronts: at the seat of the arbitration where the awards were made, and in the jurisdictions where the Yukos awards are being enforced — or not.
DLA Piper says the most significant battle to date came to a head in April. The Hague District Court, in a landmark decision, granted Russia’s application to set aside both the interim awards and the Yukos awards.
Feris says the Russian arbitration matter illustrates the importance of understanding whether or not investors can rely on a bilateral investment treaty for protection, if it has only been signed but not ratified.
This same principle applies to all African jurisdictions where both signature by the executive and ratification by parliament are required to bind the state. But Feris also says that where bilateral investment treaties or international investment arbitrations have been signed but not ratified, parties are under an obligation of good faith — in terms of customary international law — to refrain from acts that would defeat or frustrate the object and purpose of the treaties they have signed.
But now that SA is prohibiting international arbitration in respect of any new investment in terms of the Protection of Investment Act, Feris says there are inconsistencies that must be remedied before it comes into effect.
If these are not remedied, the provision of the SADC Protocol will override the Protection of Investment Act and leave the door open to foreign investors. They will argue that “clear and unambiguous” consent to investor-state arbitration against SA for any current or future breaches of the SADC Protocol still exists.
This means that despite the new investment act, SA remains open to challenges to its policies through international arbitrations from foreign investors who have a qualifying investment in the country.