South Africa terminates its bilateral investment treaty with Spain

Herbert Smith Freehills LLP | August 21 2013

South Africa terminates its bilateral investment treaty with Spain: second BIT terminated, as part of South Africa’s planned review of its investment treaties

Nicholas Peacock and Hannah Ambrose

On 23 June 2013, South Africa served a notice of termination in respect of its BIT with Spain, thus ensuring that the investment treaty will terminate on 23 December 2013. Pursuant to Article XII of the BIT, the treaty entered into force for a period of 10 years from 23 December 1999, and thereafter for consecutive 2 year periods, unless terminated by 6 months’ notice before the date of expiry.

Investments made or acquired prior to 23 December 2013 will, however, continue to benefit from protection until 23 December 2023, by virtue of the survival clause in the BIT.

Those wishing to invest in South Africa should include contractual investment protection mechanisms, consider carefully how their investment is structured, and keep appraised of developments further to South Africa’s redistributive Black Economic Empowerment policy.

Background

In 2007, investors from Luxembourg and Italy investor brought a claim against South Africa under the ICSID additional facility rules, arguing that South Africa’s Mining and Petroleum Resources Development Act (MPRDA) contained provisions that expropriated their mineral rights. The MPRDA forms part of South Africa’s Black Economic Empowerment (BEE) Policy (an affirmative action policy), and requires, among other things, equity in mining companies to be partly owned by ‘Historically Disadvantaged Persons’. In 2010, the parties settled the claim, and in the immediate aftermath of the settlement, South Africa launched its review of its BITs. Concluding that BITs ‘pose risks and limitations on the ability of the government to pursue its constitutional-based transformation agenda’, South Africa terminated its BIT with Belgium and Luxembourg.

The South African cabinet decided that all ‘first generation’ BITs (those concluded in the immediate post-apartheid period) should be reviewed with a view to termination. The South African Department of Trade and Industry (DTI) has raised concerns about investor-state arbitration as a dispute resolution mechanism, and has mooted the formulation of a new model BIT without such provisions.

The South African Trade and Industry Minister has stated that South Africa will continue to protect foreign investment, but will do so through a legislative framework rather than through ‘old-style, dated, antiquated bilateral investment treaties’. The international reaction to this has been tepid, with EU trade commissioner Karel de Gucht stating: ‘Investors are watching developments very carefully. It only takes a critical mass of measures before investors decide to defer investments in South Africa.’ Canada, which has attempted to strengthen its African trade ties, has likewise reacted unfavourably, with the minister for international trade describing the move as ‘very disappointing’.

Implications

Investors may consider that South Africa’s stance towards BITs reflects a desire to advance its broad-based BEE policy. The redistributive aspects of this policy could be incompatible with the expropriation and fair and equitable treatment provisions in most BITs. It is likely that South Africa is adopting a targeted approach to its termination of BITs. Publically available information suggests that it has not yet sought to terminate any other BITs, even where it is entitled to do so. However, as is good practice investors should consider various methods of protecting their investments. These include:

- The conclusion of a well drafted investment agreement with the government, incorporating stabilisation clauses and effective dispute resolution provisions;
- The selection of an appropriate JV partner;
- Choosing an appropriate investment structure;
- Keeping fully appraised of the political drive for redistributive BEE policies.

source: Lexology