For international commercial transactions the recognition and enforcement of a foreign arbitral award or a non-domestic award is important for the promotion of trade and investment amongst states. The importance thereof lies in parties to an international commercial transaction having piece of mind that an arbitral award rendered in one state against one of the parties to the transaction will be recognised and enforced by the courts of another state where enforcement is sought. This is especially important among economic groupings such as BRICS with an objective of encouraging further trade and investment among the member states of the economic block.
This objective is frustrated:
- when businesses from BRICS states are required to comply with additional domestic law requirements (of the specific BRICS state) for the recognition and enforcement of a foreign arbitral award in addition to the requirements of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention); or
- when restrictions are put in place by a BRICS state to the recognition and enforcement of a foreign arbitral award made in another BRICS state.
This practice does not foster trade and investment amongst BRICS states, as it creates an unfair bargaining power in respect of certain commercial issues (governing law, seat of arbitration and so on) regulated in commercial transactions and potentially increases the transaction cost for one of the parties.
Article V of the New York Convention sets out an exhaustive list of grounds contracting states may rely on to refuse the recognition and enforcement of a foreign arbitral award. Contracting states may only refuse the recognition and enforcement of a foreign arbitral award on the grounds set out in the New York Convention, unless a contracting state when signing, ratifying or acceding to the New York Convention restricted the application thereof by making a specific reservation. The New York Convention allows for two types of reservations by contracting states.
- The first reservation, known as the “reciprocity reservation” allows states to apply the New York Convention only to awards made in the territory of another contracting state. Thus, only foreign arbitral awards or non-domestic awards made in the territory of a contracting states will be recognised and enforced by such state imposing a reciprocity reservation.
- The second reservation, known as “commercial reservations” allows a state to apply the New York Convention only to “differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration”. Thus only matters considered as commercial under the law of a state were enforcement is sought will be enforced. Any matter not deemed “commercial” will be not be enforceable.
All five BRICS states (Brazil, Russia, India, China and South Africa) acceded to the New York Convention and thus one would expect that a foreign arbitral award made in any BRICS state would be recognised and enforced in another BRICS state, without the risk of such award being unenforceable. However, international commercial transactions between South Africa and India are faced with the following real risks:
- any arbitration clause governed by South African law (pursuant to a dispute) in terms of an international commercial transaction with an Indian counterparty will not be recognised by Indian courts; and
- any foreign arbitral award rendered in South Africa will not be recognised and enforced by the Indian courts.
India has imposed a specific reservation against South Africa in respect of the recognition and enforcement of foreign arbitral awards made in South Africa. The Official Government Gazette of India does not indicate that South Africa ratified or acceded to the New York Convention, despite South Africa having acceded to the Convention on 3 May 1976. As a result of this reciprocity reservation by India, any arbitral award rendered in South Africa or arbitration clause submitting a dispute to arbitration in South Africa will be unenforceable in India. In the case of Swiss Singapore Overseas Enterprise (Pty) Ltd v M/V Africa Trader, the High Court of Gujarat, Indian, (23/2005) the court refused to refer parties to arbitration in South Africa on the grounds that the Indian Official Gazette did not mention South Africa’s accession to the New York Convention.
This approach frustrates the promotion of trade and investment between these two BRICS states and increases the transactional cost of South African businesses contracting with Indian businesses. South African commercial parties will be materially prejudiced during commercial negotiations due to the automatic exclusion of South Africa as a seat of arbitration flowing from a commercial transaction with an Indian national (or any other national which has significant assets in India for purpose of securing performance). This goes against the Indian governments initiatives to develop an international arbitration system to serve BRICS nations as highlighted during the Conference on International Arbitration in BRICS: Challenges, Opportunities and Road Ahead on 27 August 2016 held in New Delhi.
The South Africa government must make a concerted effort to persuade the Ministry of Law and Justice of India to declare, through an official notification in India’s Official Gazette, that it recognises the Republic of South Africa to be a territory to which the New York Convention applies, for the purpose of recognition and enforcement of foreign arbitral awards. This is very important for, amongst other factors, (a) South Africa’s target to increase bilateral trade with India from the current $10 billion to $20 billion by 2018 and (b) the promotion of South Africa as a model law jurisdiction for international commercial arbitration through the planned adoption of an International Arbitration Bill.