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What developers and contractors need to know about their rights when it comes to building outside South Africa

4 March 2015

With the present economic growth and extensive opportunity in Africa, many developers, contractors and consultants are finding work north of the Limpopo. Contracting in another country other than the one where you are resident brings with it a host of potential issues from taxes and customs to the impact of local employment legislation. In this article Euan Massey takes a broader look at the various laws which impact on your rights when contracting in another African country.

Contracts, and the rights and obligations which flow from them are influenced by four potential areas of law. These are the law applicable to the contract (or governing law), the law of the courts which have jurisdiction over the contract, the mandatory law and the law of the arbitration agreement (if applicable). Considering these four potential areas it is quite possible to have a contract between a South African developer and Brazilian contractor for the construction of a new development in Mozambique where the applicable law is that of South Africa, it is agreed that the English courts have jurisdiction, the mandatory law is that of Mozambique and the law of the arbitration agreement is Swiss. This potential minefield introduces a myriad of rights and obligations and requires extensive consideration before diving headlong into a new contract.

The applicable law is the law which is applied to the interpretation of the contract and the rights and obligations contained therein. It is always advisable when contracting in another country, or with a party from another jurisdiction, to agree on an applicable law with which you are familiar. There is a tendency to automatically choose the law of South Africa when contracting in another country, or with a party from another jurisdiction, but often this is not acceptable to the other party. This leads to the option to either accept the other party’s proposed applicable law or to propose a “neutral” applicable law. Accepting a law with which you are unfamiliar can have disastrous consequences. For example choosing French law, or a derivative of French law (such as the law of Mauritius), as the applicable law may have unintended consequences for at least one the parties. The Napoleonic code introduces decennial liability into construction contracts which is effectively a 10-year warranty period over the works furnished by the contractor.

Outside of having knowledge of the applicable law, it is usually advisable to select the law of one of the common law countries (on the basis that these laws will share common characteristics as ours). Countries like Kenya, Botswana and Ghana will have legal systems and laws similar to ours. “Neutral” jurisdictions such as England also provide well-recognised laws and a familiar legal system.

The issue of jurisdiction is vitally important. A number of jurisdictions present logistical challenges and legal hurdles when it comes to enforcing your rights under a contract. Even though you might agree to arbitration, you may still require the assistance of the courts to enforce your rights. An excellent example of this is where the parties to a building contract agree to refer disputes, in the first instance, to adjudication. No country in Africa has introduced a statutory adjudication system which allows for adjudicator decisions to be enforced through the courts. Despite this, the South African courts have illustrated a robust willingness to enforce adjudicator decisions on the basis of the parties’ contractual agreement (see Stefanutti Stocks v S8 Property [2013] ZAGPJHC 249). There is no similar certainty that a court in another country will enforce adjudicator decisions on the same basis, particularly in civil jurisdictions such as Angola. Again if you are unable to agree to the jurisdiction of the South African courts then it is advisable to consider agreeing to submit to a “neutral” jurisdiction such as that of England and Wales.

The mandatory law is the law where the works are to be executed. No matter what you agree in your contract, you are unlikely to avoid the obligation to comply with mandatory law. The mandatory law includes the laws relating to employment, health and safety and the environment. With most African economies become more sophisticated it is imperative for the mandatory law to be understood before concluding the contract.

The law of the arbitration agreement is the law which is applied to the arbitration process. In South Africa this law would be the Arbitration Act 42 of 1965. This piece of legislation, like many others in Africa, has fallen behind modern developments in international arbitration. The upshot of this outdated legislation is that it may allow the local courts to interfere extensively in the arbitration process and may limit the parties’ rights to interim and conservatory measures, thereby blunting the effectiveness of the agreed arbitration process. Where contracting outside of South Africa, parties should consider agreeing to an arbitration law which is likely to assist the arbitration process. Good options here include Mauritius (which has recently opened a satellite court of the London Court of International Arbitration) and England and Wales.

When contracting internationally, arbitration is still the “only game in town”. Despite the process being expensive and time consuming, the New York Convention ensures that the holder of an arbitration award can enforce such award in countries who are signatories to such convention. It is therefore important to ensure that the party with whom you are contracting is a signatory to the New York Convention. Notable omissions include Angola and Swaziland. The full list of contracting states can be found at http://www.newyorkconvention.org/contracting-states/list-of-contracting-states.

If the parties to an arbitration agreement do not expressly agree the law of the arbitration agreement then there are a number of possibilities which could apply. A court may decide that the law of the arbitration agreement is the same as the applicable law (Sonatrach Petroleum v Ferrell International [2002] 1 All ER (Comm) 627) or the law of the arbitration agreement may be the seat of the arbitration (Dubai Islamic Bank v Paymentech 1 Lloyd’s Rep. 65). It is therefore recommended that this be dealt with in the arbitration clause.

As is clear from this article, the legal considerations to be taken account of when contracting in Africa, as with any other country internationally, are vast and should not be lightly considered.

Author: Euan Massey, director