Picture: ISTOCK
Picture: ISTOCK

Draft regulations under the Protection of Investment Act that govern the way disputes between investors and the government will be mediated are defective as they will deprive foreign investors of the right to seek mediation, since the government will have the right to veto any such referral.

This is the view of Herbert Smith Freehills co-chair and partner Peter Leon in a comment on the regulations published in the government gazette for public comment by the end of February.

Mediation can be sought only for disputes related to an action taken by the government that affects the investment of the foreign investor and is regarded as a breach of the protection provided for in the act.

Mediation was one of the hot topics of debate when the controversial act was deliberated in Parliament in 2016. The act came in the wake of the termination of SA’s bilateral investment treaties and established a uniform regime for foreign investment in the country.

It also eliminated the system of binding international arbitration of disputes provided for under the bilateral treaties and replaced it with a system of mediation or legal action.

Leon said his primary concern with the draft regulations was that they were inconsistent with the act itself.

"The regulations provide that mediation will be available only if the foreign investor and the government ‘have agreed’ to submit their dispute to mediation. No such requirement
is imposed by the act, which clearly articulates recourse to mediation as a right afforded to foreign investors.

"As they stand, the regulations effectively give the government a veto over any referral to mediation and thus deprive foreign investors of the only special protection provided by the act.

"Under the rule of law doctrine, which is foundational to the Constitution, the executive cannot prescribe regulations that are inconsistent with an act of Parliament. To the extent that the regulations are unlawful, they must be brought into harmony with the act, lest they are susceptible to judicial review."

Leon noted that internationally, mediation was regarded as a supplement to, not a substitute for, arbitration.

"This is important, as a key driver of good-faith participation in mediation, as well as compliance with its outcome, is the risk of a costly and lengthy arbitration, potentially producing an adverse award which will be binding and enforceable anywhere in the world.

"By viewing mediation in isolation, divorced from any potential recourse to international arbitration, the regulations could make the process counter-
productive by potentially wasting time and costs. This is exacerbated by the fact that the regulations do not fix a time frame for the mediation to be concluded — only the time within which it will commence — and do not prescribe any concrete outcome of the mediation process" such as a written and signed settlement agreement.

Leon also raised doubts whether the requirements regarding the competence and independence of mediators were adequate in the draft regulations.

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