Overview

In recent years, South Africa has reviewed its BITs on the basis that it believed that the BITs were too restrictive and outdated. As a result, South Africa has, since 2012, terminated its BITs with many European countries, including Denmark, Spain, Belgium, Luxembourg, Switzerland and the Netherlands.[1] This led to the promulgation of the Protection of Investment Act in 2015 (“the Act”), which came into effect on 13 July 2018.

Purpose and application of the Act

The Act aims to protect investments in South Africa in accordance with, and subject to, the Constitution, while balancing the rights and obligations of investors. The Act applies to all investments in South Africa that are made in accordance with the Act.

It is the intention that the Act will eventually replace all BITs. The Act does not, however, replace enforceable BITs to which South Africa is a party.[2] Consequently, these BITs will be upheld, regardless of the Act’s commencement. As of March 2020, South Africa remains a party to 12 BITs which are currently in force (see HERE). These BITs contain substantive protections for investors and remain the most attractive avenue for foreign investors who suffer from government interference.

Protections under the Act vs BITs

The protections afforded to investors under the Act differ significantly to those under BITs.

Protection and Security of Investment

The Act provides that foreign investors and their investments must be accorded a level of physical security as would be generally provided to domestic investors in accordance with minimum standard of customary international law and subject to available resources and capacity. Consequently, the extent of security is limited in the sense that it is conditional on the availability of resources and level of capacity, only applies to physical security and not legal and commercial security and the level of protection need only meet the minimum standards of customary international law.

Expropriation

Section 10 of the Act provides that investors have the right to property in terms of section 25 of the Constitution. Section 25 of the Constitution provides that property may only be expropriated for a public purpose or in the public interest and subject to compensation, the amount of which and the time and manner of payment of which have either been agreed to by those affected or decided by a South African court.

In addition to this, the payment must be “just and equitable”, having regard to a number of circumstances including, inter alia, the history of the acquisition of the property, the current use of the property and the purpose of the expropriation.

This is at odds with expropriation provisions under most BITs which provide for compensation that must be adequate, prompt and effective.

National Treatment and Most Favoured Nation

The Act does not contain a most favoured nation treatment standard.

The Act includes a national treatment standard and provides that foreign investors and their investments must not be treated less favourably than South African investors “in like circumstances.” What constitutes “in like circumstances” will include a consideration of factors such as the effect of the foreign investment in South Africa, the sector that the foreign investments are in and the aim of any measure relating to the foreign investments.

This differs from the standard national treatment provisions found in BITs which do not qualify the standard of treatment.

Dispute Resolution

Importantly, the Act does not provide for investor-state international arbitration as is the case under BITs and, accordingly, all disputes relating to investments that fall under the Act are subject to South African courts. Where an investor has a dispute in relation to an investment, the investor may, within six months, request that the Department of Trade and Industry facilitate the resolution of the dispute by appointing a mediator. In addition to this, an investor may approach any competent court, independent tribunal or statutory body within South Africa for the resolution of the dispute.

Although provisions of the Act allow for the government to consent to international arbitration, this can only be done where the investor has exhausted all domestic remedies and both South Africa and the home state of the investor have consented to conducting the international arbitration. It is important to note, however, that the arbitration will then be between the two states and not between South Africa and the investor.

Fair and Equitable Treatment

The Act does not contain a fair and equitable treatment provision.

Conclusion

The Act has faced some criticism on the basis that it may not afford investors the type of protection traditionally offered under BITs, and restricts their ability to pursue international arbitration claims. For that reason, claims under investment treaties remain attractive to foreign investors, notably because they can be pursued before international tribunals without having to exhaust local remedies.

That being said, the Act has retained the core principles of BITs and has not imposed any new obligations on investors. Given that the Act only recently came into effect, its long-term effects remain to be seen.

 

[1] South Africa is also a party to various Multilateral Investment Treaties (“MITs”), including the Free Trade Agreement between the EFTA and SACU States, the Cotonou Agreement between, inter alia, EU member states and African states and the Trade, Development and Cooperation Agreement between European Community States and South Africa.

[2]  It should be noted that BITs that have been terminated may still operate for a period of time after such termination. This is because many BITs contain sunset clauses.

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