Arbitration awards - fallible or infallible

© Elena Schweitzer – za.fotolia.com

While there are many benefits to opt for arbitration as a mechanism for resolving disputes (such as the parties' right to choose arbitrators based on their experience, which is particularly useful when it comes to specialised disputes) there are also disadvantages. One of the disadvantages being that, because arbitration is designed to resolve disputes rapidly, parties often do not provide for a right of appeal, which may result in undesired consequences.

Ideally arbitrators would never be wrong and always arrive at correct conclusions. Successful parties would deserve victory and losing parties would accept defeat graciously. However, in the real world, arbitrators are fallible human beings.

If parties do not agree on a right of appeal in their arbitration clauses under commercial agreements, arbitration awards will be final and binding, even if such awards are wrong - unless one can prove a gross irregularity.

Limited options

Parties aggrieved by arbitration awards have very limited options available to challenge such awards. Where an arbitrator committed a gross irregularity in the proceedings or exceeded his powers, the aggrieved party may apply to court to have the arbitration award set aside under s33(1) of the Arbitration Act, No 42 of 1965.

To succeed with such application is not an easy task. In the past, parties have consistently failed to persuade our courts to set arbitration awards aside on the basis of alleged gross irregularities or transgressions of power.

In Kolber and Another v Sourcecom Solutions (Pty) Ltd and Others [2001] (2) SA 1097 (C), the court found that where an arbitrator has given fair consideration to a matter it would be impossible to find that he had been guilty of misconduct merely because he had made a bona fide mistake of either law or fact. As such, an aggrieved party has to go further and prove moral turpitude or mala fides on the part of the arbitrator before a court would be prepared to upset his award.

In Total Support Management (Pty) Ltd and Another v Diversified Health Systems (SA) (Pty) Ltd and Another [2002] (4) SA 661 (SCA), Smalberger ADP found that misconduct in the required sense would not be easily inferred on the part of a professional arbitrator. Similarly, Harms J made it clear in Telcordia Technologies Inc v Telkom SA Ltd [2007] (3) SA 266 (SCA) that an arbitrator had the right to be wrong on the merits of a case. Gamble J in Marble Classic Exclusive Warehouse for Natural Stones Cape (Pty) Ltd v A.R. Sholto-Douglas SC & Another (Western Cape High Court, case number 3521/14) reaffirmed that alleged mistakes of law do not disclose a basis for a review under the Arbitration Act.

Clear principle

The principle seems to be clear: once an arbitration award is made, it is extremely difficult to avoid bits enforcement, driven (it seems) by the need for finality even where an incorrect award may give rise to an unjust result.

Although our courts have consistently refused to set potentially wrong arbitration awards aside under s33(1) of the Arbitration Act, courts must still decide whether or not to allow its enforcement, by making it an order of court under s31 of the Arbitration Act.

In Cool Ideas 1186 CC v Hubbard and Another [2014] ZACC 16, which was handed down on 5 June 2014, the Constitutional Court was divided on the question of whether or not an arbitration award should be enforced. The facts of the matter are briefly as follows: Cool Ideas 1186 CC carried on business as a property developer.

It entered into a building contract with Hubbard, agreeing to construct a residential dwelling for Hubbard. Cool Ideas in turn enlisted the services of a sub-contractor, Velvori Construction CC, to execute the building work. A dispute arose between Hubbard and Cool Ideas regarding the quality of the work and the payment of the balance of the contract price. Hubbard invoked the provisions of the arbitration clause and instituted a damages claim against Cool Ideas. Cool Ideas, in turn, instituted a counterclaim for payment of the balance of the contract price. The arbitrator found against Hubbard and ordered that the balance of the contract price be paid to Cool Ideas.

Not a registered builder

Hubbard refused to satisfy the arbitration award where after Cool Ideas applied to have the award made an order of court, in terms of s31 of the Arbitration Act. Hubbard contended that Cool Ideas was not entitled to receive remuneration under the building contract as it was not registered as a homebuilder under s10 of the Housing Consumers Protection Measures Act, No 95 of 1998. Accordingly, Hubbard opposed the application on the basis that the court would be sanctioning a contravention of the Housing Protection Act if the arbitration award was made an order of court.

Hubbard did not seek to have the arbitration award set aside in terms of s33(1) of the Arbitration Act, nor did she seek the remittal of the arbitration award to the arbitrator in terms of s32(2) of the Arbitration Act. Under s32(2) of the Arbitration Act, the court has the power to remit the arbitration award to the arbitrator for reconsideration on grounds of good cause shown. This is intended to give an arbitrator an opportunity to reconsider and change the arbitration award in certain circumstances.

The High Court was of the view that Hubbard's defence was effectively an appeal and accordingly was not permitted to raise same at such a belated stage. For that reason, the High Court made the arbitration award an order of court and allowed Cool Ideas to enforce it. However, the Supreme Court of Appeal (SCA) found that it was an offence to contravene s10 of the Housing Protection Act and that the enforcement of the arbitration award would provide legal sanction to an offence which the Housing Protection Act sought to prevent. The issue under consideration was not whether the arbitration award should be set aside, but rather whether it would be legally tenable to make the arbitration award an order of court (where doing so would sanction the breach of a clear statutory prohibition).

The SCA found that it would be untenable to do so, and upheld Hubbard's appeal. Wallis J dissented and held that a refusal to enforce the arbitration award would give rise to an unjust result.

Constitutional Court's judgment

Dissatisfied with the judgment, Cool Ideas appealed to the Constitutional Court and inter alia argued that the SCA's refusal to make the arbitration award an order of court infringed upon Cool Ideas' constitutional right of access to court (s34 of the Constitution). In addition, Cool Ideas contended that the refusal to enforce the arbitration award amounted to an unlawful deprivation of its property, in the sense that it would be deprived it of its right to payment for work that was properly and fairly done.

In the majority judgment (written by Majiedt AJ, with Moseneke ACJ, Skweyiya ADCJ, Khampepe J and Madlanga J concurring) the Constitutional Court found that Cool Ideas was afforded a full and proper opportunity to have all the issues ventilated in the High Court and the SCA, and that its right of access to courts was accordingly not infringed. The Constitutional Court further held that the enforcement of the arbitration award would be inimical to public policy, since it would undermine the principle of legality and sanction a criminal offence. It was held that the refusal to enforce the arbitration award did not amount to an arbitrary deprivation of Cool Ideas' property as it was done for a rational purpose. Accordingly, the Constitutional Court dismissed the appeal and refused to make the arbitration award an order of court, effectively rendering it unenforceable.

However, Froneman J, Cameron J, Dambuza AJ and Van der Westhuizen J disagreed with the majority judgment and held that the appeal should have succeeded. In the minority's view, Cool Ideas was deprived of its right to payment for work fairly and properly done. The minority held that this constituted an unjustifiable deprivation of property within the meaning of s25 of the Constitution and that, based on considerations of fairness and prejudice, Cool Ideas should have been allowed to enforce the arbitration award.

Although our courts will generally enforce arbitration awards, even where they may be wrong, the SCA and Constitutional Court have created a precedent in terms whereof arbitration awards that sanction a breach of a statutory prohibition will not be enforced. However, where arbitration awards will not have the effect of sanctioning an illegality, our courts will be loath to interfere with an arbitration award, even when it might have been decided incorrectly.