Bill to limit arbitration for foreign investors

Source: Business Day

IN A move likely to cause jitters among South Africa’s already skittish foreign investors, the government will exclude any recourse to international arbitration in the draft Promotion and Protection of Investment Bill, which will be published in the Government Gazette on Friday.

Department of Trade and Industry deputy director-general of international trade Xavier Carim. Picture: SUNDAY TIMES

Department of Trade and Industry deputy director-general of international trade Xavier Carim.

Instead, they will only have recourse to South African courts, domestic arbitration or the mediation services of the Department of Trade and Industry.

Furthermore, the draft bill’s provision for compensation in the event of expropriation will copy that of the constitution.

It will not guarantee full market value, as provided for in South Africa’s bilateral investment treaties with European Union countries, which are in the process of being cancelled. Cancellation notices have already been issued to Belgium, Luxembourg, Spain, the Netherlands and Germany.

Trade and industry officials have been tight-lipped about the contents of the draft bill — approved by the Cabinet last week for public comment — pending its publication and a media conference that Trade and Industry Minister Rob Davies is scheduled to hold on Monday.

Deputy director-general for international trade and economic development Xavier Carim was quick to give the reassurance on Wednesday that investors covered by existing or already cancelled bilateral investment treaties would continue to have recourse to international arbitration during the transition period of the treaties, which extended 10 to 20 years beyond their termination date.

However, new investors and existing US and Japanese investors not covered by bilateral investment treaties would only have recourse to South Africa’s courts once the law came into effect.

Webber Wentzel partner Peter Leon described the removal of international arbitration as a “retrogressive step” that was out of line with international best practice. Access to international arbitration, he said, “provides investors with further certainty and contributes to investor confidence in the jurisdiction”.

While director-general Lionel October and Mr Carim both stressed that the draft bill merely replicated the constitution’s provisions for expropriation and compensation, Mr Leon pointed out that this was a lower form of protection than that provided for in the treaties, which stated that compensation had to be at full market value.

The constitution states that compensation must be “just and equitable” and that market value is just one of the factors to be considered. Other factors are the current use of the property; the history of its acquisition and use; the extent of direct state investment and subsidy in its acquisition and capital improvement; and the purpose of the expropriation.

In its 2009 review of bilateral investment treaties, the department noted that they allowed the legal and business community to challenge regulatory changes which the government considered to be in the public interest.

Mr October said the badly drafted treaties had been open to abuse by parties opposed to government policies such as the Mineral and Petroleum Resources Development Act.

Trade Law Centre of Southern Africa researcher Sean Woolfrey noted that “from the point of view of foreign investors, a guarantee of full market value compensation is certainly more reassuring than a guarantee of ‘just and equitable’ compensation, the exact determination of which is likely to be less predictable and more open to political influence”.

On the issue of international arbitration, he said it offered a way around the fact that many countries did not have a transparent, efficient and well-functioning domestic legal system.

“The general perception is that the current system of international arbitration tends to be somewhat biased towards the commercial interest of investors. Conversely, national courts are probably more likely to be sympathetic towards the public interest arguments often made by states in disputes with investors.”

Mr Carim noted that there were serious problems with international arbitration because of its ad hoc nature. Different arbitration panels came up with different interpretations, and there was no consistency in the membership of the panels and no established precedents, he said.

“Each panel can interpret the provisions in its own way.”

The bill proposed to level the arbitration playing fields.

Mr Leon pointed out that international investors would be covered by the Southern African Development Community protocol on finance and investment, which South Africa ratified in June 2008 and which came into force in April 2010. This provided for full market value compensation for the expropriation of any investments made since this date as well as for international arbitration. A barrier was that the protocol required all local remedies to be exhausted before a resort to arbitration.

 

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