Investment act may clash with SADC treaty

© Jakub Jirsak – 123RF.com

Ever since the government started cancelling 13 bilateral investment treaties with EU member states unilaterally, the process of international arbitration in SA has come under fire.

The draft Promotion and Protection of Investment Bill, signed into law in December, has removed the automatic right of recourse by foreign investors to international arbitration.

Meanwhile, Cabinet has approved the introduction to Parliament of the draft International Arbitration Bill, which it says is intended 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 Businesses Act.

It will also be aligned with the Model Law on International Commercial Arbitration, which has been adopted by the UN Commission on International Trade Law.

But to date, certain of the government's stated policies in favour of black economic empowerment - most emphatically the notion of using expropriation to right past wrongs - have come up against investor protections that are provided for in the decade-long lapsing periods of cancelled bilateral investment treaties.

The government, through the Department of Trade and Industry, argues that recourse to international arbitration - as provided for in the bilateral investment treaties that it terminated - is lengthy, costly and has not established a body of legal precedent.

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.

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.

Unctad says the arbitral decisions adopted in 2015 touch on 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.

Jackwell Feris, a director in law firm Cliffe Dekker Hofmeyr's dispute-resolution practice, says that 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 bind the government only if it complies with the requirements of section 231 of the constitution. Failing this, any reliance on such an agreement, signed or not, for protection of an investment "will be misplaced".

He says a number of the bilateral investment treaties concluded between SA and other SADC member states have been signed but have never, as far as can be ascertained, been ratified, and possibly never will be, based on the government's policy change.

This same principle applies to all African jurisdictions in which 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.

Now that SA prohibits 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. This leaves the door open to foreign investors arguing 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.

Source: Business Day via I-Net Bridge