South Africa Issues Draft Bill on Investment Protection without General Recourse to International Arbitration for Foreign Investors

On 1 November 2013, the South African Department of Trade and Industry made public a draft "Promotion and Protection of Investment Bill" (the "Draft Bill"). The Draft Bill is intended to promote investment by modernizing the current investment regime and giving investors, whether foreign or local, equal protections when investing in South Africa.

The Draft Bill comes at a time when South Africa recently decided to cancel its bilateral investment treaties ("BITs") with certain States, notably with Belgium, the Netherlands, Luxemburg, Germany, Spain and Switzerland.

Under the Draft Bill, and unlike what is usually provided for in BITs, foreign investors would not benefit from a general right to recourse to international arbitration to settle their investment disputes with South Africa. Instead, foreign investors would have to rely upon mediation with the Department of Trade and Industry, local courts or arbitration under the South African Arbitration Act 42 of 1995 (which, for the latter, assumes the existence of a valid arbitration agreement).

South Africa's decision not to provide for a general right to have recourse to international arbitration is unusual in a global context where arbitration is often relied upon by investors and States to settle investment disputes. Amongst the reasons put forward by South Africa are the alleged uncertainty of international arbitration because of the apparent lack of established precedents, the possibility that different arbitration panels will come up with different interpretations of the same BIT, and the perception of a bias towards investors.

The Draft Bill also appears to narrow expropriation safeguards that are generally available to investors under BITs. Where BITs often provide that investors should be compensated at "full market value", the Draft Bill provides for "just and equitable" compensation, designed to achieve a balance between the public interest and the interests of those affected.

No mention is made of "fair and equitable treatment", a right contained in most BITs, which essentially requires a State to maintain a predictable investment environment consistent with reasonable investor expectations.

The Draft Bill is open for public comments from any stakeholders for a period of three months. If adopted, existing and future foreign investors will need to carefully review its impact on the protection of their investments in South Africa.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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