Africa: The final investment frontier

Mitigating the risk in disputes arising from multi-jurisdictional contracts in Africa

Roger Wakefield, November 2013

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INTRODUCTION

Countries, including South Africa, are scrambling for African investment opportunities

Commercial cross-border disputes are on the increase – cross-border litigation is risky

Multijurisdictional contract = South African companies, or their African subsidiaries, contracting with companies from other African states

Risks mitigated by properly considered dispute resolution clauses

Discussion today-

Choice of law and choice of law clauses;

Submission to jurisdiction of courts and submission clauses;

Arbitration vs. litigation and arbitration clauses;

Failure to agree may lead to years of litigation on these aspects before the real dispute can be determined. Defendants can exploit to delay

Example for the purposes of today’s discussion: SA company concludes contract in Johannesburg with Nigerian company based in Lagos to build oil refinery in Angola. Payments to be made by SA company to the Nigerian company in Lagos

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CHOICE OF LAW

Most important aspect in multijurisdictional contracts

Parties may choose any law to govern their contract- even if entirely foreign

South African court or arbitrator is obliged to apply the chosen law

Problems arise when governing law is not expressed in the contract-

Each party will contend for the law which best suits their case;

Resultant risk: possibly years of litigation on the issue of which law governs before real dispute can be determined

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HOW A COURT DETERMINES WHICH LAW GOVERNS WHEN THE PARTIES HAVE FAILED EXPRESSLY TO AGREE IT Court must first determine if there is a tacit choice of

law. Looks at surrounding circumstances, references to a country’s statutes etc. to gauge intention of parties

If no tacit choice, court assigns a law to the contract – “the proper law of the contract”

Court determines which legal system most closely connected to the contract – usually of country where contract concluded or performed

Difficult process – leads to delay and can be further exploited by defendant

Rome 1 Regulation

Ensure governing law is expressed

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FACTORS TO CONSIDER WHEN AGREEING CHOICE OF LAW

Chosen law should have a real connection with the contract – not a requirement though

Law of the country where the contract was concluded (can be difficult to determine if signed in counterparts)

Most practical choice: law of country where most performance is to take place

South African party- should try and choose South African law

If counterparty insists on neutral law, agree English law-similar to South African substantive and procedural law

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Choice of law not absolute: will not override directly applicable statutes

Directly applicable statutes can apply expressly e.g. Section 47 of the Electronic Communications and Transactions Act –

“the protection provided to consumers in [Chapter 7 of the Act], applies irrespective of the legal system applicable to the agreement in question”

They can also apply impliedly: Basic Conditions of Employment Act – SA employer cannot avoid obligations under the Act by choosing another law

Exchange Control Regulations apply impliedly irrespective of chosen law

FACTORS TO CONSIDER WHEN AGREEING CHOICE OF LAW CONT.

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GOVERNING LAW CLAUSE

“GOVERNING LAW

This agreement shall in all respects(including its existence, validity, interpretation, implementation, termination and enforcement) be governed by the laws of Nigeria which is applicable to agreements executed and wholly performed within Nigeria”

Disputes about the validity of the contract? Add severability clause-

“this clause is severable from the other provisions of this agreement and shall remain in effect notwithstanding the termination or invalidity for any reason of this agreement”

Important qualification: “[chosen law] which is applicable to agreements executed and wholly performed [within the nominated country’s laws]” - avoids Renvoi

Choice of law alone does not confer jurisdiction

Submission to a court does not in itself amount to a choice of that court’s law

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SUBMISSION TO JURISDICTION OF COURTS

Jurisdiction = power of a court over litigants and to adjudicate their dispute

Residence = important concept in determining jurisdiction

South African courts have jurisdiction over persons (including companies) resident in their area or in respect of causes of action arising in their area

South African company deemed to reside at its principal place of business (place of control) or registered office

Branch office not sufficient to confer jurisdiction

Foreign companies – deemed resident if principal place of business in court’s area. If SA not principal place of business but foreign company conducts some business here - court has jurisdiction in relation to causes arising out of local activities

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HOW COURT’S ACQUIRE JURISDICTION OVER FOREIGN DEFENDANTS WITH NO PRINCIPAL PLACE OF BUSINESS HERE Example: SA company wants to sue Nigerian defendant

in South African court

To establish jurisdiction SA company required to attach asset of Nigerian company in South Africa. Attached asset can be of any value

If Nigerian company submits in contract – attachment unnecessary (and impermissible)

Tactical considerations

No submission – can be onerous to find asset of foreign defendant in South Africa, but attachment can secure claim

If substantial assets of foreign defendant are known to SA plaintiff, might be strategically advantageous for latter not to encourage submission to enable it to attach

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JURISDICTION WHERE BOTH PARTIES ARE FOREIGNERS

Example: South African company uses Angolan subsidiary to contract with Nigerian company

Submission alone will not confer jurisdiction on SA court

In addition a linking factor is required (conclusion or breach of contract in South Africa or performance here)

In the absence of submission, a linking factor is required AND foreign plaintiff is required to attach an asset in South Africa belonging to the foreign defendant

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CONSTITUTION, SECTION 34 – FUNDAMENTAL RIGHT OF ACCESS TO JUSTICE

Example: contract between South African company and Nigerian company contains clause requiring all disputes between them to be settled by arbitration in Nigeria in accordance with Nigerian law

SA company however sues Nigerian company in a South African court

SA court has a discretion whether to hear the matter. Nigerian defendant will have to show why SA court should stay the matter pending the outcome of the arbitration in Nigeria

Heavy onus for defendant to bear – courts will generally uphold mandatory arbitration clauses

Factors considered by court in exercising discretion: location of witnesses and evidence, convenience, the chosen law, is the court being used as a tactical ploy?

Submission to “exclusive jurisdiction” of one court will not oust jurisdiction of another South African court having jurisdiction

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SUBMISSION TO “EXCLUSIVE JURISDICTION” : EFFECT

Parties often agree in arbitration clauses to the “exclusive jurisdiction of a particular court in urgent proceedings

Such agreement does not confer jurisdiction if there is no linking factor and will not oust the jurisdiction of another South African court which has jurisdiction

SA court always has jurisdiction to hear urgent matter in its area – even where arbitration is mandatory

Agreeing on exclusive jurisdiction is unnecessary and confusing

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STANDARD SUBMISSION CLAUSE

“JURISDICTION

The parties hereby consent and submit to the jurisdiction of the South African court in respect of any dispute or claim arising out of or in connection with this agreement”

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IN SUMMARY:

Courts require a linking factor – submission alone will not confer jurisdiction

Where both plaintiff and defendant are foreign – submission alone will not confer jurisdiction, linking factor required

If no submission, in addition to linking factor attachment of asset in South Africa belonging to foreign defendant is required

Plaintiff South African, defendant foreign – submission by defendant sufficient for jurisdiction without need for attachment of its assets in South Africa

If no submission – South African plaintiff required to attach asset in South Africa belonging to foreign defendant (plaintiff’s residence in South Africa = sufficient linking factor)

Submission to “exclusive jurisdiction” does not oust jurisdiction of other SA courts having jurisdiction

Mandatory arbitration clauses will not always oust the jurisdiction of courts

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ARBITRATION VS. CONVENTIONAL LITIGATION

Internationally arbitration is preferred method of dispute resolution

Arbitration particularly appropriate for disputes arising from multijurisdictional contracts

Parties required to agree to arbitration. Litigation – no agreement required

Advantages of arbitration:

Most Western countries and African states party to New York Convention – reciprocal recognition of foreign arbitral awards

Neutrality

Flexibility

Cost

Speed

Enforceability

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FACTORS TO CONSIDER WHEN AGREEING ARBITRATION CLAUSE

Ad hoc vs. institutional arbitration

Ad hoc arbitration – administered by the parties who choose arbitrator and agree, venue, arbitrator’s powers, procedural rules and law

Institutional arbitration – administered by an institution such as AFSA or Africa ADR. Rules of the institution determine venue, procedure, arbitrator’s powers, applicable law and facilitate appointment of arbitrator

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AD HOC ARBITRATION CLAUSE

“ARBITRATION

Any disputes arising from or in connection with this agreement [it is important that this is stated as broadly as possible to embrace any conceivable dispute that arises from the contract] shall if so required by either party by giving written notice to that effect to the other party, be finally resolved by arbitration in accordance with the arbitration laws for the time being in force in the Republic of South Africa. The hearing of the arbitration shall be in camera. Save to the extent strictly necessary for the purposes of the arbitration or for any court proceedings related thereto, neither party shall disclose or permit to be disclosed to any person any information concerning the arbitration or award (including the existence of the arbitration and all process, communications, documents or evidence submitted or made available in connection therewith).”

Party declares dispute and discussions ensue about nomination of arbitrator, rules, laws and procedures to apply and venue. Disputes may arise

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AFRICA ADR

Typical Africa ADR dispute resolution clause –

“Dispute Resolution

Any dispute arising out of, or in connection with, this agreement shall be finally resolved under the Rules of Africa ADR and under the direction of its secretariat, by one or more arbitrators appointed according to its Rules”

Rules of Africa ADR provide for appointment of arbitrator by its secretariat

Rules based on UNCITRAL rules – internationally recognised and applied

Africa ADR arbitrations administered in Johannesburg but can be heard anywhere in Africa

Important requirement of Africa ADR – countries from which parties come must be party to New York Convention

Africa ADR recommended for disputes involving entities from different African countries

ICC arbitration appropriate for disputes involving African parties and other non-African parties – can be expensive

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AFSA ADMINISTERED ARBITRATION

“ARBITRATION

Any disputes arising from or in connection with this agreement shall, if required by either party, by giving written notice to that effect to the other parry, be finally resolved in accordance with the Rules of the Arbitration Foundation of Southern Africa (“AFSA”) by an arbitrator or arbitrators appointed by AFSA. There shall be no [or a] right of appeal as provided for in Article 22 of the aforesaid Rules”.

Provision can be made for expedited arbitration by adding-

“Each party to this agreement-

Expressly consents to any arbitration in terms of the aforesaid Rules being conducted as a matter of urgency; and

Irrevocably authorises the other party to apply, on behalf of all parties to such dispute, in writing, to the secretariat of AFSA in terms of Article 23(1) of the aforesaid Rules for any such arbitration to be conducted on an urgent basis”

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CONCLUSION

Express choice of law – try for South African law, or neutral English law

Institutional arbitration (e.g. Africa ADR) most appropriate

If arbitration not agreed, submission to the jurisdiction of the South African courts is advisable – avoids attachment

THANK YOU

Roger Wakefield

November 2013

Legal notice: Nothing in this presentation should be construed as formal legal advice from any lawyer or this firm. Readers are advised to consult professional legal advisors

for guidance on legislation which may affect their businesses.

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