16 April 2015
Arbitration Measures Aim to Ease Resolution of African Trade Disputes
Despite the business opportunities emerging across Africa, many Asian businesses have been deterred from investing due to the uncertainties and costs involved in commercial disputes, but new mediation measures aim to change that.
The commercial opportunities in Africa may be attractive to Asian investors, but what happens when an agreement breaks down and the parties no longer see eye to eye? Firms trading in Africa may suddenly find themselves in unfamiliar legal territory and facing expensive cross-border litigation. Now, with the new Cape Town-based International Arbitration Institute launching this year, Chinese companies trading with African partners won't necessarily have to experience the horror stories of dealing with African courts.
Africa has long been seen as having the potential to be the next big global growth area, with many countries on the continent achieving GDP growth rates in excess of 7% a year. The International Finance Corporation (IFC), a global development corporation, however, has clear reservations.
Typically, the IFC's Doing Business reports single out sub-Saharan Africa as the region with the highest cost-to-claim ratio in the world, with a figure in excess of 50%. In other words, if a firm is seeking a US$100,000 claim award, it will cost $50,000 in legal fees to deliver this. Bronwen Kausch, COO of South Africa's Cape Chamber of Commerce and Industry, believes this is attributable to the inefficiencies evident in many African courts.
Internationally, alternative dispute resolution (ADR), which covers mediation and arbitration, is increasingly becoming a mainstream part of legal business processes. All indicators now point towards ADR playing a growing role in the legal process for overseas firms operating in South Africa. Highlighting this, Kausch says: "Studies have shown that, in Africa, there is a positive correlation between secure, enforceable contracts and an increase in international trade and investment."
The ADR process encourages contracts that contain a mediation clause, which may well make it easier for parties to avoid litigation, with all its potential ramifications. This is seen as especially important if a party to the contract is a government official, and who may have an influence on the judicial process.
Patricia Shaughnessy, a director of the Arbitration Institute of the Stockholm Chamber of Commerce, maintains that it is increasingly important to provide for ADR in commercial contracts when a company trades in Africa. One of the key aspects of managing risk is to anticipate the potential sticking points of any deal. With this in mind, she says: "There is always the risk that circumstances may change. If that happens, will your agreements – and your rights and obligations – actually be enforceable in reality in the legal environment your business operates in?"
To ensure that they are, Shaughnessy believes that a dispute-resolution mechanism for companies trading in Africa is essential – particularly if the business has any kind of ongoing obligations/transactions or is in partnership. Shaughnessy says that ADR is very popular with Asian businesses, many of which are familiar with the process and role of dispute boards.
Shaughnessy is on the board of the China International Economic and Trade Arbitration Commission, the largest arbitration institute in China, which recently opened a new office in Hong Kong. This, she says, reflects the recent surge of interest in ADR in the Hong Kong business community.
Mediation, which is well established in the Chinese international business environment, is partly a cultural phenomenon for mainland companies. It is often used to avoid potentially combative and destructive scenarios in an attempt to resolve disputes more pragmatically.
Pointing out the potential benefits, Shaughnessy says: "Unless it arranges a dispute-resolution clause in its contract, any business trading in an African country may find itself in the national courts. If that happens, the directors may well feel very uncomfortable for various reasons. They may, for example, cede home-town advantage to their adversary, they may have to hire local lawyers, and there is the risk that the issue will end up going public."
To mitigate these risks, she says the ADR process makes provision for the appointment of a mediator. Typically, this is one that is sensitive to the perspective of the Chinese (or other overseas) company involved in a dispute.
Where international companies are involved, it is often easier to get foreign arbitral awards recognised in other jurisdictions rather than court judgements. This is in large part thanks to the Convention of the Recognition and Enforcement of Foreign Arbitral Awards, to which both China (including, under special provision, Hong Kong) and South Africa are parties.
Africa's new International Arbitration Institute
Due to the absence of a credible and recognised arbitration institution in Africa, international companies doing business on the continent have previously had to rely on arbitration in institutions outside of Africa or be exposed to the whims of the domestic courts. Kausch believes this has a direct bearing on investment decisions by multinationals that may want to invest in the future of Africa, but are deterred by its legal environment.
The upshot of this is that the Cape Chamber of Commerce and Industry is set to launch the Cape Town International Arbitration Institute in October 2015. The goal of this new institute is to provide businesses trading in Africa with an independent dispute-settlement environment. While the initiative will be initially focussed on the Western Cape, it will be rolled out to the rest of Africa, hopefully providing all businesses with the opportunity to settle commercial disputes without the headache and cost of going through the courts.
South Africa's judicial system supports and recognises the independence of the arbitration industry. In line with this, South Africa's new Arbitration Act, which is currently being finalised, is based on UN standards that are accepted worldwide. This will inevitably prove a boon for companies looking for efficient and effective resolution to commercial disputes.
Willie Pienaar, an advocate and a Director of Equillore, the South African dispute-settlement agency, expects a hugely positive international response to the institution's services. He says: "Chinese businesses are definitely interested. They don't like going through the domestic courts in Africa. They want a more flexible solution and a dispute-resolution mechanism that gives them control."
In terms of the specific advantages of the ADR mechanism, Louis van Wyk, Equillore's Chief Mediating Officer, believes it is down to the standardisation of the process. Regardless of which country they do business with, he points out, companies don't need to worry about the legal environment of Ghana one month and Gabon the next.
He says: "Agreements can often be reached by means of communication. It's cheaper than the legal process and it protects the parties' ongoing business relationship, which often breaks down when lawyers are involved. With ADR, the parties maintain control as decisions are not delegated to a legal team and a judge. It saves on cost, it saves time and it happens in a communicative environment. Overall, it's purpose-driven and confidential.
"It focusses on the needs of the parties rather than just their legal rights and obligations. You don't have to settle when you enter mediation, but it allows the parties to explore all the possibilities for resolution."
Van Wyk believes that overseas companies trading in Africa often fall into the trap of trying to enforce their rights through the courts in unfamiliar jurisdictions and, consequently, "often fail in unfamiliar legal territory with complex, and often murky, processes". By contrast, 70% to 80% of mediated disputes are settled during mediation or shortly afterwards.
He believes that the African business environment can be compared with that of Southeast Asia about 15 years ago – with rapid growth and opportunity accompanied by a distinct commercial risk. It's important, then, that when companies trading in Africa draw up contracts, they stipulate how and where disputes will be resolved and include a mediation clause.
Given its effectiveness, ADR is becoming less "alternative" and more mainstream. It is now the fiduciary duty of all companies in South Africa to attempt to resolve their disputes independently of the courts, where shareholders' money is often squandered in expensive legal fees. With the new act soon to be enforced, mediation will become an obligatory part of the legal commercial process in South Africa.
There are, however, instances when ADR may not be an appropriate or feasible legal mechanism for resolving disputes. Duncan Wild, a Senior Associate in the dispute-resolution unit of Webber Wentzel, a South African law firm, advises that this is most significant when there is a dispute with the state.
He says: "Although there are provisions in treaties or agreements that allow parties to arbitrate disputes with the state, many governments, including the South African government, are anti-arbitration. In particular, where a party wants to bring an administrative law review of state conduct, those disputes can only be resolved by a court. In addition, if an entity has the view that an applicable law or government action is unconstitutional, then it is only a court which has the power to declare such laws unconstitutional."
Wild points out that ADR is based on a willing agreement between parties. Although agreements with regard to mediation can be agreed upon at the outset of a commercial arrangement, if this is not done – or not done with sufficient clarity – then the parties cannot be compelled to mediate or arbitrate. Wild says: "In instances, where there is no agreement on ADR, or an insufficient agreement, then going to court is inevitable.
"Another important example is where third parties are involved. ADR requires the agreement of all parties. If third parties are involved in a dispute and they have not agreed to arbitration, it may be inappropriate – or even impossible – to compel those parties to use ADR. They can, however, be compelled to participate in court proceedings."
According to Kausch, the benefits of ADR are indeed far-reaching. Asian companies, she notes, are generally open to ADR and tend to be keen to include a dispute-resolution clause in their commercial contracts when doing business in South Africa. She says: "This is because they know that they might otherwise get tied up in complex cross-border litigation, which can literally take years to conclude. They are at the mercy and whim of a legal process they may not understand and which adds instability, risk, and, of course, cost.
"This is all on top of the general risk of doing business in Africa. With ADR, the control is in the parties' own hands and some disputes have been resolved – literally – in minutes."
Mark Ronan, Special Correspondent, Cape Town