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South Africa’s draft regulations for investor-state mediation require refinement to work effectively with international arbitration.

Interested parties have until 28 February 2017 to comment on draft Regulations on Mediation Rules (Regulations) published by South Africa’s Department of Trade and Industry (DTI) on 30 December 2016, under the Protection of Investment Act, 2015 (Act).

1.   Background

The Act, which is yet to come into force, followed South Africa’s unilateral termination of its bilateral investment treaties (BITs) principally with members of the European Union. The DTI indicated that the BITs were weighted unfairly in favour of foreign investors at the expense of domestic competitors, and unduly impeded the government’s right to regulate in the public interest. The countries affected so far are Belgium, Luxembourg, Austria, Denmark, France, Finland, Italy, Germany, Greece, the Netherlands, Spain, Sweden, Switzerland and the United Kingdom (historically South Africa’s largest single source of foreign investment).1

Any new investments originating from these countries after the effective date of termination will not qualify for BIT protection (for example, from expropriation or from discriminatory, arbitrary or abusive regulation). More significantly, the holders of any new investments will not be able to refer disputes under a BIT to binding investor-state arbitration on the international plane.2

The Act aims to reassure foreign investors that South Africa remains open for business and is committed to the rule of law under a justiciable Constitution. The Act, however, also affirms that foreign investors will no longer be afforded greater legal protection than their domestic counterparts and most importantly excludes recourse to binding investor-state international arbitration (which the DTI had criticised as lacking legitimacy, consistency and transparency).

In its place, the Act offers foreign investors the option to refer any investment dispute with the government to a mediation facilitated by the DTI (in addition to their ordinary right of recourse to domestic courts and statutory bodies).3 To this end, the Act requires the DTI to prescribe rules to govern such mediation. The Regulations are meant to meet this obligation.

It must be noted that the Act’s scheme of domestic investor-state mediation, to the exclusion of international arbitration, gives rise to certain anomalies that cannot be remedied by the Regulations. These are identified briefly below, as well as the principal shortcomings of the Regulations themselves.

2.   Effectiveness of mediation without arbitration

Compared with arbitration, which by its nature is adversarial, the more amicable environment of mediation can promote more efficient dispute resolution and even help repair the long-term relationship between the parties. Recognising this potential, the International Bar Association developed Rules for Investor-State Mediation (IBA Rules)4 in 2012 and continues to promote their use.

Importantly, though, the IBA Rules recognise mediation as a supplement, not a substitute, for international arbitration. This is important, as a key driver of good faith participation in mediation, as well as compliance with its outcome, is the risk of a costly and lengthy arbitration, potentially producing an adverse award which will be binding and enforceable anywhere in the world.5

By viewing mediation in isolation, divorced from any potential recourse to international arbitration, the Regulations could make the process counter-productive by potentially wasting time and costs. This is exacerbated by the fact that the Regulations do not fix a timeframe for the mediation to be concluded (only the time within which it will commence),6 and do not prescribe any concrete outcome of the mediation process (unlike the IBA Rules, which envisage a written and signed settlement agreement).

Further diluting the legal and practical value of the mediation facility, the Regulations make it available only where the investor and the government "have agreed" to submit their dispute to mediation.7 This effectively gives the government a veto over a foreign investor’s recourse to mediation, and thus contradicts section 13 of the Act, which is not conditioned on state consent. It is a fundamental tenet of the rule of law that the Executive is not empowered to make regulations which are in conflict with national legislation. It follows from this that the Regulations cannot lawfully allow the state to refuse to participate in mediation and to this extent are ultra vires.

3.   Competence and independence of mediators

The IBA Rules recommend crucial safeguards to ensure the competence and independence of mediators, which are regrettably lacking in the Regulations.

While the Regulations require mediators to have “recognised competence in the fields of law, commerce, industry or finance”,8 the IBA Rules go further and recommend: accreditation as a mediator by an internationally recognised organisation; regional or international stature; and experience with disputes involving states, particularly relating to the substantive field of the investment at issue.9

Likewise, the Regulations merely require a mediator to “exercise independent judgment”,10 without elaboration, whereas the IBA Rules require a mediator to sign a statement of independence and disclose “any facts or circumstances that might call into question the mediator’s independence or impartiality in the eyes of the parties”.11 Importantly, the IBA Rules also suggest “appointing a mediator of a nationality other than the nationalities of the parties”.12 Such a safeguard is conspicuously absent from the Regulations.

The failure to include the necessary standards could result in the integrity and credibility of the mediation process being open to doubt, which would in turn affect investor confidence.

4.   Recusal of mediators

Under the IBA Rules, if a party lodges a substantiated objection to a mediator’s continued appointment (whether relating to their competence, independence or any other reason), the mediator must attempt to resolve the objection. If this fails, the mediator must resign.13 This is vital, as mediation cannot be effective if the parties no longer have trust in the mediator, for whatever reason.

The Regulations, by contrast, allow a party to request a mediator’s recusal only on grounds relating to independence or impartiality (not competence). If the mediator refuses the request, the objecting party must approach the DTI to appoint another mediator to make a final decision on the recusal dispute.14 This convoluted process is incongruent with international mediation practice, and does not foster the necessary confidence for meaningful mediation.

5.   Conclusion

While international investment law is undergoing necessary global reform, the modern trend is towards greater clarity, credibility and procedural integrity, in an increasingly harmonised system of multilateral rules. South Africa should, in redesigning its foreign investment regime, ensure that it moves with this trend and not against it. The Act, and the Regulations in their current form, assume the absence of the international rules-based regime of international arbitration and seek to replace it with a fragmented and inadequate system of mediation.

This cannot be conducive to investor confidence, which requires that foreign businesses are assured of access to a familiar, fair and effective system of dispute settlement. South Africa can begin to give that assurance by bringing the Regulations into harmony with international best practice, such as the IBA Rules.

1     It should be noted that each of the terminated BITs contains a survival clause preserving the protection of any investments made before termination took effect (usually one year after the notice of termination) for between ten and twenty years.

2     International arbitration will, however, remain available to all foreign investors (after exhaustion of domestic remedies), under the Southern African Development Community Protocol on Finance and Investment, 2006 (which was ratified by South Africa in 2008 and entered into force in 2010) (“SADC Protocol”).

      In September 2015, the DTI indicated that the SADC Protocol would be amended during 2016 to conform to the Act.  An amendment has reportedly been approved by the requisite three quarters of SADC member states, but the terms of the amendment are yet to be publicly disclosed.

3     See section 13 of the Act.

4     See our Brief on the release of the IBA Rules:

5     156 states have ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

    See clauses 3(3), 7(1),7(5), 7(8) and 10(2)(b) of the Regulations.

7     See the Preamble to the draft Regulations.

8     See clause 6(2) of the Regulations.

    See appendix B to the IBA Rules.

10    See clause 6(3) of the Regulations.

11    See article 3 and appendix A to the IBA Rules.

12    See appendix B to the IBA Rules.

13    See article 5 of the IBA Rules.

14    See clause 13 of the Regulations.

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Peter Leon

Partner, London

Peter Leon
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Ernst Müller

Director, Johannesburg

Ernst Müller

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Peter Leon photo

Peter Leon

Partner, London

Peter Leon
Ernst Müller photo

Ernst Müller

Director, Johannesburg

Ernst Müller
Peter Leon Ernst Müller