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South Africa seeks to exclude recourse to international arbitration for foreign investors


04 November 2013

The South African government has announced plans to limit the right of foreign investors to commence international arbitration against the Government.  

This bulletin considers the announcement, the reasons behind it and the implications for existing and potential foreign investors and their rights to initiate international arbitration proceedings against South Africa.

The government has prepared a draft bill which will limit the rights of foreign investors to resort to international arbitration. The Promotion and Protection of Investment bill, limits foreign investors’ recourse to resolve disputes concerning investments in South Africa to local courts, domestic arbitration or the mediation services of the Department of Trade and Industry. Furthermore, the draft bill attempts to align compensation for expropriation with the South African Constitution by determining that foreign investors will be entitled to "just and equitable" compensation, a departure from the "fair market value" standard currently provided in South Africa’s bilateral investment treaties (BITs) with European Union countries. The government has already served termination notices for some of these treaties.1

There appears to be three main reasons motivating the proposed legislation. The government has cited the ad hoc nature of international arbitration, lack of consistency in the membership of arbitral tribunals and the absence of the doctrine of precedence, as problems with international arbitration which it seeks to overcome with the draft bill. It has complained that under the current system, different tribunals can come up with differing interpretations of an investment treaty. The government is of the view that the draft bill will level the arbitration playing field when it enters into force. This is an interesting observation because South Africa, unlike the Latin American states that have terminated a number of their BITs,2 has faced a limited number of international arbitrations despite concluding a large number of BITs.3 Although there has been some suggestion that the draft bill seeks to curb a potential floodgates of cases against South Africa as the government continues to introduce and implement statutes as part of its affirmative action Black Economic Empowerment Policy. Indeed, the redistributive aspects of the Black Economic Empowerment Policy could result in allegations of breaches of the fair and equitable treatment, expropriation and most-favoured-nation protections in existing BITs.

The effect of the proposed legislative change on the right of foreign investors, operating in South Africa, to commence international arbitration will depend on the nationality of the investor. There appears to be three groups of foreign investors affected by the proposed bill; nationals of countries with a BIT with South Africa; nationals of state parties to the SADC Protocol on Finance and Investment (the SADC Protocol);4 and foreign investors with a contract with the government providing for international arbitration who they do not fall within the first two groups.

The impact of the draft bill on the first group of foreign investors will be limited because they will still be able to commence international arbitration proceedings against South Africa until the termination and/or expiry of the relevant BIT. Whilst foreign investors who are nationals of a state party to the SADC Protocol will be able to bring international arbitration proceedings against South Africa pursuant to Article 28 of Annex 1 of the Protocol. However, foreign investors in the second group will not be able to rely on the provision for disputes which arose before 16 April 2010, the date the Protocol entered into force, and they must also exhaust domestic remedies before initiating international arbitration proceedings.

Foreign investors who fall within the final group will be in a precarious position. This is because they may have a contractual right to resort to international arbitration against South Africa to resolve any disputes which arise. However, they would not benefit from the protection of an existing BIT or the SADC Protocol. Therefore, their ability to seek recourse through international arbitration pursuant to their contractual rights will depend on the legal impact of the draft legislation on those contractual provisions giving rise to international arbitration. Foreign investors falling into this group should seek further guidance on the legal implications of their existing contracts with the government from local counsel.

The decision by South Africa to introduce the draft bill raises interesting legal issues that existing and potential foreign investors will need to address, including the need to review how their existing and any future investments are structured, the extent to which their rights are adequately protected by existing BITs or the SADC Protocol, and the impact of any further developments pursuant to South Africa’s Black Economic Empowerment Policy.



1 Such as BITs with Spain, Belgium and Luxembourg.
2 Ecuador, Bolivia and Venezuela have all terminated a number of BITs and some have withdrawn their consent to arbitrate disputes through the International Centre for the Settlement of Investment Disputes (ICSID) following a large number of high profile cases brought against them.
3 There appears to have been only three investment treaty arbitration cases brought against South Africa and of which one was settled during the early stages of proceedings.
4 The SADC Protocol protects foreign investors who are nationals of a member state of the Southern African Development Community which consists of the following states: Angola, Botswana, Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia, Zimbabwe.



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