Investment Arbitration & Soap Opera Fused

In recent months the four year old ICSID investment arbitration between European investors and the South African government, coined the Foresti case, was brought to a practically final but legally inconclusive finale.
The original 2006 claims were brought in terms of bilateral investment treaties (BITS) between South Africa on one hand, and Italy and Luxembourg, on the other. The investors hold rights to quarry stone which is then partly beneficiated in South Africa.
The investment treaties provide for reciprocal protection in each country for investments from the others. They also stipulate that where there has been expropriation or actions equivalent to an expropriation, affecting the economic value of an investment, the injured investor is entitled to ‘prompt, effective and adequate compensation’ from the host country.
At issue was the fact that South Africa’s black economic empowerment (BEE) laws and its mining legislation (the MPRDA) makes it mandatory for investors to undertake specific racial transformation programmes like equity divestiture, black employment and local BEE compliant procurement of inputs and services. The investors considered that these measures (introduced subsequent to the BITS) were equivalent to an expropriation and they initiated proceedings almost exactly 4 years ago today.
The matter was heard by the World Bank linked International Centre for the Settlement of Investment Disputes (ICSID), a well regarded arbitration forum. Note that the investors could also have used South Africa’s domestic law courts, but investors usually prefer international arbitration which is perhaps perceived as more neutral, and compensation potential greater. Interestingly all the arbitrators were from the USA or the UK and South Africa engaged its own foreign counsel. Sadly this might say something about the local assessment of the skills available within the ranks of the South African legal fraternity, and Africa more widely. Notably the investors used South African lawyers – and ‘look what happened to them’ some have jibed.
In short, the South African Mining Charter calls for formerly disadvantaged South Africans to own just over a quarter of the shares of companies that hold mining rights. However the exceptions due to conditions in the stone industry meant that the claimants operating companies have been able to reduce that quarter to between 11% and 5%, depending on the circumstances. This is mainly due to the use of so-called beneficiation offsets, or further processing domestically. Domestic beneficiation contributes to the South African economy in general, so the government is keen on it. Having conceivably assessed the merits (including costs) the investors finally decided that 11% was not too bad a compromise and withdrew their claim in 2009. The case was fraught with intrigue and action. This included: the (happy) inclusion of limited NGO participation initiated by the Centre for Applied Legal Studies at the University of the Witwatersrand; and the (unhappy) matter of bribery allegations involving local counsel and secret recordings of conversations – to date the like of which has only been seen on daytime soap operas. The source of these tiresome daily scripts is now finally known. Reading the tribunal report does indeed make for some entertainment. John Grisham is sure to cotton on to it soon.
Because the claimants decided not to pursue the substance of the case, the ICID tribunal had no reason to express a view on the merits of the claims and the South African government’s subsequent defence. This is somewhat of a pity as there remains no clarity as to the status of the South African mining laws, which on the face of it remain within a zone of conflict relative to its bilateral investment treaties.
This also reflects upon a wider systemic problem, aired vociferously at the 2010 Society of International Economic Law Conference, that international arbitration result are often unavailable – to practitioners who wish to learn from them as regards legal argument, but perhaps more importantly to the societies that have banked rolled the costs of their country’s representation. Credit to the South African government in that they have undertaken to release their own memorial in the near future. This said the costs report from the tribunal does provide a headline summary of each of the memorials, so the gist of the arguments can be followed.
In settling the costs matter, the tribunal took the approach that foreign investors who initiate investment arbitrations under bilateral investment treaties cannot expect to leave the opposing governments to bear the costs of defending claims that are later abandoned. South Africa thus managed to recover part of its costs, around 10%. This is a good principle as it is a discouragement to frivolous litigators who may simply want to engage in a bit of sabre rattling. The local taxpayers still bore a huge cost – that is the price of attracting investment to create local jobs in the grand scheme.
So, while practitioners still mull over the merits, what does seem clear is that any international investor, even one who technically has a good technical case, will be hard pressed under wider notions of international moral justice to take on any matter cloaked in the mantle of addressing global moral issues, like the legacy of apartheid. Rightly so say many South Africans.