South Africa as a preferred arbitration venue on the horizon? June 2017

By REBECCA BROWNING, Published in Arbitration

As the world becomes more globalised, and as ongoing international investment interest and economic growth across Africa continues unabated, a sound international arbitration framework provides international and local businesses in Africa with a comfortingly familiar process. The process, if managed properly, can provide private, effective and cost effective dispute resolution for those venturing into new markets or growing in existing markets.

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The number of arbitral centres across the African continent is also growing in line with economic growth in Africa and arbitration users are slowly moving away from the traditional arbitration centres in London, Paris and New York. Unfortunately, still relatively few international arbitration cases are heard on African soil or use African arbitrators.

Many international arbitration institutions – such as the Nairobi Centre for International Arbitration, established in 2013, the Lagos Regional Centre for International Commercial Arbitration and the Mauritius International Arbitration Centre – have popped up and African law firms are developing specialist arbitration skills to service this growth in response. Africa is also gaining more recognition in the international arbitration fraternity, for example, the 2016 International Council for Commercial Arbitration Congress was held in Mauritius.

Another reason for international arbitration's increasing popularity in Africa is that international businesses may be cautious about litigating disputes in local African courts. They may cite inefficient or complex court procedures, hostility by local judges, language problems, unfamiliar law and difficulties in enforcing foreign court decisions in these states or even difficulties in executing local judgements.

In addition, in-house counsel for international businesses may prefer to adopt a standard set of dispute resolution procedures across branch offices, divisions or subsidiaries. Large standard commercial contracts may include standard foreign governing law, exclusive jurisdiction or international arbitration clauses in their dispute resolution boilerplates. However, different companies and investors may contract differently – the recent influx of investment from China, India and South Korea may lead to a different contracting approaches or other ADR methods. In terms of foreign court clauses or "exclusive jurisdiction clauses" – where a foreign court is given exclusive jurisdiction to hear a dispute – these are often notoriously difficult to enforce and may not be valid in some states, where local courts may hold that they retain exclusive jurisdiction despite these clauses.

Further, commercial arbitration and investment treaty arbitration is often the dispute resolution procedure of choice in the telecoms, natural resources, infrastructure/construction and financial industries. With African states' continuing to invest in infrastructure on the continent, the growth in construction ADR procedures (for example, under the NEC3 and FIDIC forms) will likely flourish. The recent uptick in commodity prices may also revive investments in mining and natural resources, and increase the number of disputes referred.

The reason for international businesses' preference for international arbitration is the relative ease of enforcing foreign arbitration awards under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The New York Convention obliges signatory states (subject to any reservations to the treaty) to recognise and give effect to arbitral processes undertaken in other signatory states, and allows for relatively simple enforcement of a foreign arbitral decision in a signatory's national courts. This is a definite advantage over a foreign court judgment – an international businesses' assets may lie in another jurisdiction and foreign court judgments can be notoriously difficult to enforce in a foreign state. In addition, the New York Convention has been adopted by more than half of all African states, although successful enforcement may differ among these states.

As international arbitration becomes more popular in resolving international business disputes, African countries can also attract significant business and income from being selected as the seat or venue of an arbitration and provide considerable prestige to a city's commercial reputation. A sound and modern arbitration framework – where a party could expect familiar arbitration rules and enforcement proceedings – is essential to attract the parties to a local arbitration institution. For example, AFSA recently launched a new international arbitration centre dedicated to the resolution of commercial disputes between Chinese and African parties – the China Africa Joint Arbitration Centre (CAJAC) in Johannesburg. With the promulgation of the International Arbitration Bill, South Africa hopes to become the preferred venue for international arbitration in Africa.

The International Arbitration Bill

After significant political controversy around the role of arbitration in South Africa, President Zuma's cabinet finally approved the International Arbitration Bill on 1 March. When it is enacted, the Bill will regulate international arbitration proceedings in South Africa and the enforcement of foreign arbitral awards. The Bill has progressed through stakeholder engagement processes and if all goes well in the legislature, government hopes it will be signed into law in the middle of 2017.

The overhaul is partly due to South Africa's current Arbitration Act of 1965, which governs both domestic and international arbitrations, no longer reflecting international best practice in international commercial arbitration proceedings. This was recognised by the Law Reform Commission in its recommendations on the reform of arbitration in South Africa but has only recently been implemented.

Of course domestic arbitration will still be covered by the current act as the Bill only applies to international arbitrations.

The UNCITRAL Model Law on International Commercial Arbitration – at last

In order to modernise the law relating to international arbitrations, the Bill will incorporate the South African Law Reform Commission's recommendation to incorporate the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (2006 Revision) into South African law. The Model Law has been adopted by numerous countries (including Zimbabwe) and is seen internationally as the gold standard for international and domestic arbitration. The incorporation of the Model Law will:

  • recognise and enforce foreign arbitral award provisions by giving effect to the New York Convention within its ambit – currently these provisions are contained in a separate Act in South Africa;
  • amend the Protection of Businesses Act 1978 to remove any reference to arbitration award from its ambit – currently the Minister of Economic Affair's permission is required for the enforcement of certain foreign arbitral awards. In practice, South African courts have the reputation of interpreting this law narrowly to permit enforcement;
  • exclude a public interest "veto" by government over the recognition and enforcement of foreign arbitration awards, with certain exceptions, for example, when the subject matter is not arbitrable in SA or the enforcement is against public policy; and
  • provides that international commercial arbitrations with public bodies will be possible. Investor-state arbitrations will be regulated by a special regime under the Protection of Investment Act, 2015 which, when a date is set for its commencement, requires that parties to an investor state dispute with the South African government first exhaust domestic remedies before a foreign investor can approach government to consent to international investment arbitration proceedings.

Additional key distinguishing features of the UNCITRAL Model Law include:

  • a special legal regime geared to international commercial arbitration;
  • coverage of all stages of the arbitral process from the arbitration agreement to the recognition and enforcement of the arbitral award;
  • encouragement of a degree of procedural flexibility. The parties are free, within the confines of the Model Law, to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings;
  • limited court involvement in arbitrations. These instances include challenges to the appointment of an arbitrator and termination of his mandate, the jurisdiction of the arbitral tribunal, and the setting aside of the arbitral award. The Model Law also contemplates court assistance in taking evidence, the recognition of the arbitration agreement, including its compatibility with court-ordered interim measures of protection and recognition and enforcement of arbitral awards;
  • clarity on applications for interim measures, the power and conditions imposed on a tribunal to order interim and preliminary measures and the enforcement of such measures as provided by the 2006 amendment;
  • it adopts the principle of "Kompetenz-Kompetenz" and "separability" or autonomy of the arbitration clause. The arbitral tribunal may rule on its own jurisdiction and rule on any objections with respect to the existence or validity of the arbitration agreement – an arbitration clause can be treated as an agreement independent of the other terms of the contract;
  • that it does not determine which matters may or not be subject to arbitration – this is still governed by local law;
  • the provision that the parties shall be treated equally and each party shall be given a full opportunity to present his case;
  • a procedure to provide notice to a defaulting party; and
  • a list of limited grounds on which an award may be set aside.

The UNCITRAL website ( www.uncitral.org) provides guidance and case law to assist lawyers, courts and arbitrators in understanding the text. The body of existing case law, commentary and guidance will hopefully ensure a relatively smooth transition to the Bill's adoption and interpretation by both South African and international businesses and lawyers.

Government's decision to revisit its domestic legislation and bring it in line with international best practice should be welcomed. It is to be hoped that as the pros and cons of international arbitration as a dispute resolution mechanism become better known, it is more widely adopted by business and lawyers alike, and given recognition by the courts. It is clear that the Bill is being introduced with a view to giving international entities recourse against and by private or commercial, local or foreign enterprises in South Africa through arbitration seated in South Africa. Several challenges still exist. For example, the difficulties in appointing

appropriately experienced arbitrators and lawyers to assist on these often complex and drawn out cases is a practical issue. Better resourcing and training of lawyers conducting arbitrations and the appointment of more African arbitrators will hopefully alleviate these challenges. At least South African courts have a positive attitude towards arbitration, and case law indicates that generally local courts will not interfere in the arbitral process.

Whether South Africa does become an attractive international arbitration destination remains to be seen.

International investment law disputes – a side bar

International arbitration is also becoming the chosen path of recourse for the protection of foreign investor's rights across the continent. However, despite many recent bilateral investment treaties (BITs) being agreed to by African states, not all are happy with this development.

Since the 1990s, bilateral investment treaties have been a core element of many African states' foreign policies. BITs encourage investor confidence and certainty as to the business environment. Typically, they include an agreement by an affected state to submit to international arbitration tribunals when certain international standards for the treatment of foreign investment are breached.

However, within a more favourable international investment climate, some African states are questioning their participation in bodies such as the World Bank's International Centre for Settlement of Investment Disputes (ICSID) which may be the chosen forum for investor-state disputes in a BIT or may be agreed through agreement by a state adopting the additional facility on an ad hoc basis. The South African government has recently stated its intent to reverse its historic willingness to conclude BITs with more than 30 investor states, citing concerns about the infringement of its "policy space" if a dispute is decided by an international arbitral tribunal.

To this end, government passed the Protection of Investment Act in late 2015. Its principle aim is to strengthen South Africa's ability to attract foreign investment, increase exports and maintain a balance between the rights and obligations of all investors in South Africa.

At the time of writing, the Protection of Investment Act has yet to come into force. It will, by and large, replace the BITs between South Africa and other countries, which typically provide for investor-state arbitration as the preferred method of dispute resolution. Investor-state international investment law disputes will not fall under the International Arbitration Bill, if promulgated in its current form. They appear to fall solely under the Protection of Investment Act, although clarity on this point will be needed.

The Protection of Investment Act provides for mediation or state-to-state arbitration of foreign investment disputes after the parties have exhausted the remedies available in South African courts. The South African Department of Trade and Industry has published draft rules for mediation in investor-state dispute resolution under the Protection of Investment Act.

Browning is an Associate, Dispute Resolution Practice Group, Baker McKenzie (South Africa). The article was overseen by Gerhard Rudolph, Co-Managing Partner, Baker McKenzie (South Africa).