This article examines the issue of arbitration in South Africa and outlines certain advantages to seating an international arbitration in the country. This position is demonstrated through a number of international and domestic arbitration law considerations discussed below.

The Place and the Seat of Hearing

Regardless of where the arbitration is held, the courts at the seat of the arbitration (ie the jurisdiction to which the arbitration is contractually connected) have jurisdiction in respect of the conduct of the arbitration. Therefore any court application relating to the conduct of the arbitration must be brought in the jurisdiction of the seat. For instance, if Paris is the seat but the hearings are held in Johannesburg, any court application relating to the arbitration must be made in the French courts.

Systems of law

Parties can agree that different systems of law govern various aspects of an international arbitration. The governing law of the contract does not have to be the same as the procedural law of the arbitration under that contract. Therefore, parties to an international arbitration in South Africa could choose any foreign law to govern the contract, South African arbitration law to govern the arbitration and a system of international rules, such as UNCITRAL or ICC rules to govern the arbitration.

Enforcement

If an award has to be enforced in South Africa, the parties to the relevant arbitration may choose between pursuing a foreign or domestic award. Generally, an arbitration award is deemed to have been made at the seat of the arbitration. Therefore, an award made in an international arbitration seated in South Africa, will be treated as a domestic award. An award in an international arbitration that is seated outside South Africa will be deemed to be a foreign arbitral award.

Defences to Enforcement

Given there are at least seven potential defences to enforcement of a foreign arbitration award in South Africa, a party seeking to enforce a foreign arbitral award potentially faces more defences to enforcement than a party seeking to enforce a domestic award.

Protection of Businesses Act 99 of 1978

Under this Act no arbitral awards made outside South Africa may be enforced inside South Africa without the consent of the Minister of Economic Affairs if the award arose from an act or transaction "connected with the mining, production, importation, exportation, refinement, possession, use or sale of or ownership to any matter or material, of whatever nature whether within, outside, into or from [South Africa]".

Given most awards relate to the ownership of ‘matter or material’, the Minister’s permission is needed in the vast majority of actions for the recognition and enforcement of a foreign arbitral award. This defence may be used to frustrate the enforcement of foreign arbitral awards beyond its intended scope. As a result, the South African Law Reform Commission has recommended reform in relation to the Protection of Businesses Act.

Quantification and interest

When a domestic award orders the payment of a sum of money, interest attaches to the relevant sum from the date of the award at the same rate as a judgment debt. However, a foreign arbitral award that orders the payment of money, expressed in a foreign currency, must first be converted to Rand for it to be enforceable in South Africa. The applicant therefore runs the foreign exchange risk.

South African Law Commission’s recommendations

The Law Commission identified certain limitations in relation to international commercial arbitration maintaining that the South African legislation does not contain provisions specifically dealing with international commercial arbitration. In order to create certainty, the Commission recommended the adoption of a Draft Bill closely aligned with the UNCITRAL Model Law.

Approach of South African courts

The Supreme Court of Appeal noted that since the early part of the nineteenth century, the courts of South Africa have consistently given due deference to an arbitral award (Telecordia Technologies Inc v Telkom SA Ltd 2007).

In addition, the Constitutional Court delivered a landmark judgment in March 2009 in Lufuno Mphaphuli and Associates (Pty) Ltd v Andrews and Another. In this case the advantages of flexibility, cost-effectiveness, privacy and the speed of arbitration in South Africa were recognised and affirmed. The Court further referred to the fact that there should be limited court interference in arbitrations in South Africa and, in particular, it held that it should be careful ‘not to undermine the achievement of the goals of private arbitration by enlarging the powers of scrutiny imprudently.’

Conclusion

Despite the fact that South African has not adopted the UNCITRAL model law, practice and case law demonstrates that the conduct of international arbitration and the enforcement of arbitral awards in South Africa is robust and certain. If the Law Commission’s recommendations are adopted, the conduct and enforcement of domestic and international arbitration will be further improved.

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As noted in a previous edition of Focus, our team has grown to reflect this continued interest in emerging markets and our recognition in the sector. We welcomed the addition of senior associate Kaushik Ray from Allen & Overy (London and Paris) with strong experience in project finance and Guy Jolly who has joined us from leading New Zealand firm Mayne Wetherell following a stint in Edinburgh to obtain his MSc in International Business & Emerging Markets.

Our top 5 highlights of the year:

1. We are proud to have been appointed to represent the lenders to the 300MW Turkana wind project (currently the largest of its kind in Africa). We believe that this underlines our growing reputation in the renewable energy sector and African market. We now act for lenders and developers in solar, wind, bioenergy and geothermal projects across more than 15 emerging market jurisdictions.
2. 2009 saw Trinity being formally recognised in the leading legal guide Chambers for its project finance expertise in Africa. Paul Biggs continues to be personally rated by Chambers as one of a very few leading practitioners in the highest rated division.
3. The projects on which we advised won a total of 5 high-profile awards including Project Finance International (PFI) and Project Finance Magazine power deal of the year (Project Rabai in Kenya) and infrastructure deal of the year (for the Lekki toll road in Nigeria).
4. We have sponsored a new Africa-focused publication, The Africa File: www.theafricafile.com.
5. We have enjoyed positive media coverage including upcoming articles for the Financial Times’ Africa publication (www.thisisafricaonline.com) and Project Finance International (www.pfie.com).

2010 looks like being a busy year with even further increased activity for us in the renewables sector in Africa and Europe. We also look forward to understanding the implications of the Copenhagen summit and what that will mean for development in Africa and emerging markets generally. Early 2010 will also see the launch of an exciting new online publication that demonstrates Trinity being at the forefront of thought leadership in the African legal sector.

If you’d like any more information in relation to Trinity or any of the topics covered in Focus, contact details are above and on our website.

In this edition of Focus, Simon Norris looks at the findings of a new study ‘Africa’s Infrastructure: A Time for Transformation’ that considers the US$93 billion-per-year need for basic infrastructure investment within Africa. In Legalese, we consider the pros and cons of international arbitration in South Africa which we hope will interest those clients active in the country or dealing with South African counterparties.

The post December update appeared first on Trinity International LLP.

A new study, published in November 2009, ‘Africa’s Infrastructure: A Time for Transformation’, a co-publication by Agence Française de Développement and the World Bank, highlights the findings of a 24-country study of four sectors, including energy, transport, ICT, and water. The study was conducted by institutions including the African Union Commission, African Development Bank, Development Bank of Southern Africa, Infrastructure Consortium for Africa, the New Partnership for Africa’s Development, and the World Bank.

The study highlights the findings of surveys that were conducted among 16 rail operators, 20 road entities, 30 power utilities, 30 ports, 60 airports, 80 water utilities, and over 100 ICT operators, as well as the relevant ministries in 24 countries on the African continent. The results were derived from detailed analysis of spending needs, fiscal costs and sector performance benchmarks.

The study concludes that an annual investment of US$93 billion is required to close the infrastructure gap with other parts of the world, meet the Millennium Development Goals, and achieve national development targets in Africa within a decade.

Positive and negative

Africa has taken large steps forward in terms of mobile telecommunications infrastructure over the last decade or so. More than half of Africa’s population lived in range of a GSM mobile phone signal in 2006. In the water and road sectors, the statistics also make for positive reading: five African countries have met the millennium targets for universal water access and 12 others are on-track to do so; and around 80 percent of Africa’s main road network is in good or fair condition.

Although these facts are encouraging, other statistics make for more sober reading. Only one third of Africans in rural locations has access to a usable road throughout all seasons; more than a fifth of the populations of Cameroon, Ghana, Mauritania, Niger, and Tanzania must travel more than two kilometres to their main water supply; African consumers pay twice as much for basic services as people elsewhere in the world; and a monthly basket of prepaid mobile telephone services costs US$12 in Africa, six times higher than in South Asia.

International competition

The study suggests that the inadequate state of the continent’s infrastructure (electricity, water, roads and information and communications technology) restricts national economic growth by 2% per annum and productivity by 40%. This marks not only a problem for Africans within Africa but also for Africa in terms of its ability to attract investors and to compete in world trade as the basic infrastructure needed to sustain competitive and effective commerce and an efficient and cheap route to market simply does not exist. Power shortages, the high cost of fixed-line telecommunications and broadband access in Africa further increases the cost of doing business on the continent.

The level of investment required by those countries with the weakest infrastructure exceeds one third of GDP, more than double the amount (in terms of percentage of GDP) spent by China. Of course, those countries with the greatest infrastructure gap tend to be those that are off the radar for most investors. The study supports the widely-held view of the investor community that the development of the continent’s infrastructure must be undertaken urgently.

Power sector

The power sector is essential to Africa’s further development and is a sector that requires enormous investment. 30 African countries suffer from terrible power shortages with only one quarter of Africans having access to electricity. The study says that almost half of the US$93 billion annual investment requirement is needed to improve Africa’s generation capacity. To achieve this, the financing to support the installation of new power generation capacity would need to be at the rate of seven times the annual average of the last 10 years. There is also a need to refurbish and maintain the existing non-operational power generation assets on the continent.

The study estimates that improving the operating efficiency of power utilities through reforms at the institutional level would save Africa US$2.7 billion a year. The study highlights that the lack of efficiency in the collection of payments from customers represents a significant lost opportunity in terms of revenue and, therefore, capital for further investment. In certain African states (Burkina Faso, Ghana, Niger and Uganda, for instance) uncollected power bills represent as much as 1% of GDP.

The study also suggests that increasing regional trade in power through the likes of the West African Power Pool and the Southern African Power Pool represents a potential saving of US$2 billion per year in energy costs.

Financing Infrastructure

The study states that Africa is already spending US$45 billion a year on infrastructure but suggests that much of this (about US$8 billion per year) is wasted through inefficiencies and poor management (excessive staffing, distribution losses, undercollecting revenue and inadequate maintenance, for example). African utilities are unable to collect around US$2.4 billion a year of services billed whereas the efficient use of existing resources could release an additional US$17.4 billion in finance for infrastructure per annum. If these efficiencies were achieved, it would leave a substantial funding gap of approximately US$31 billion.

A more positive angle

The study makes for a rather depressing read and it is clear that reducing the US$31 billion-per-year infrastructure funding gap is a daunting challenge.

However, on a more positive note, the massive need for basic infrastructure should ­ and does – represent a very attractive opportunity for all of those in the infrastructure development market: developers, equity investors, operators, construction contractors, banks and financial institutions and, indeed, the African public sector.

In the years leading up to the global financial crisis, foreign direct investment into Africa was strong and growing from US$4 billion in 2002 to $20 billion in 2007. National sources of finance during that time also grew, benefitting from the growth and high prices of natural resources, amongst other factors.

Although the global financial crisis has stemmed the growth of investment into Africa for now, as a law firm specialising in African infrastructure development and financing, we have certainly noticed an increase in the numbers of projects being tendered and undertaken.

It is also clear that there is no lack of interest or money from the development finance institutions and multilaterals as well as from the large number of debt and equity funds that focus on the continent when it comes to infrastructure projects.

With African-based commercial banks having been less affected by the financial turmoil, there is good evidence to show that the appetite of the commercial bank market is returning (though at relatively low levels still). The domestic capital markets, at least in certain African countries, also seem to be strengthening again as demonstrated by the success of the recent infrastructure bond issued by the Central Bank of Kenya. The Central Bank of Kenya received US$589 million in bids for the bond (more than twice oversubscribed) and has announced a plan for a third infrastructure bond.

These positive indicators do not make the challenge any less daunting but certainly suggest that there are those ready to rise to it.

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