HOW DO YOU OBTAIN AND ENFORCE AN AWARD AGAINST A FOREIGN DEBTOR WITH NO ASSETS IN SOUTH AFRICA?

The short answer is an unfortunate one that discourages the growth of international commerce: with a fair measure of difficulty and at a premium. This article looks at the challenges of debt recovery where no ships or cargo owned by the debtor can be located – a regular problem faced by our clients.

In the past, it was possible to institute a claim by arresting a debtor in person if he entered South Africa and detaining him until he put up security for the claim. However, in 2010 the Constitutional Court declared this type of arrest (called an arrest tanquam suspectus de fuga) unconstitutional.

Creditors are thus left in the unenviable position of litigating in a foreign country, which is often an expensive and lengthily exercise. The South African legal system, which has been subject to some criticism for delays in matters being heard, is a model of efficiency compared to the problems faced in many other jurisdictions. For example in  2005, Transparency International and the Delhi based Centre for Media Studies, a research firm, undertook the India Corruption Study in which it found 59% of respondents paid bribes to lawyers, 5% to judges, and 30% to court officials.

International contracts often try to avoid these issues by providing for arbitration in London or New York for example; but in order to enforce arbitration award, litigation in the country where the debtor’s assets are found is still necessary.  Often the merits of the claim have to be rehashed in order to have the arbitration award recognised. This point is illustrated by considering the approach of South African courts to enforcing foreign arbitral awards. Many of the matters decided by a foreign tribunal will not be reconsidered by our courts; but our courts must be satisfied in respect of issues such as whether the parties had capacity to contract and the validity of the contract.

In the case of The MV Cos Prosperity the Western Cape High Court refused to recognize a London arbitration award holding that “by no stretch of the imagination” could it be said that a valid and binding contract for carriage had been concluded between the parties. According to DHL, it made a booking for the carriage goods from China on behalf of Bateman Projects. While it is true that there were negotiations between DHL and Bateman regarding the urgent shipping of certain machinery, Bateman submitted that no final contract came into being due to DHL’s tardiness in providing them with a written contract containing certain requested terms which could be signed by them as per their strict stipulations. Alternative arrangements were subsequently made to ship the cargo. DHL had in the meantime gone ahead with booking the cargo with Phoenix Shipping, and the same was recorded in a booking note. The booking note contained terms which had never been contemplated by Bateman, including the term providing that all disputes would be referred to arbitration in London. Therefore no valid contract was concluded and the Court accordingly refused to recognize and enforce the award.

Though based on sound principle, the judgment highlights the difficulties of international debt enforcement and furthermore, principles of international comity and cooperation did not find application in this case, and were not discussed. An international arbitration bill has recently been published for comment that aims to facilitate the use of arbitration as a method of resolving international commercial disputes. However, the bill contemplates that those on the receiving end of an application to enforce an arbitration award would be able to raise issues such as validity of the contract and contractual capacity, meaning that many of the existing enforcement challenges will persist.

The challenges of debt recovery call to mind the adage prevention is better than cure. We recommend regularly reviewing and improving your business’s risk management strategies. Some possibilities to consider are: carefully considering the best jurisdiction clauses to include in contracts; securing contracts by means of suretyships and pledges of assets; and vetting potential customers.

This article first appeared in the Sunday Tribune