By Eric Leikin (Associate at Freshfields Bruckhaus Deringer)
In the landmark case, Cool Ideas 1186 CC v Hubbard and Another [2014] ZACC 16 (5 June 2014), the South African Constitutional Court refused to enforce an arbitral award on public policy grounds. This decision is of note not only because it is a relatively rare example of a successful public policy challenge to the enforcement of an arbitral award, but also because the stance of South Africa’s highest court will likely have a major effect on how the country’s judiciary treats arbitral awards going forward. Before discussing the case, a brief background of South Africa’s arbitration legislation is necessary.
Legislative Scheme for the Enforcement of Arbitral Awards
South Africa has acceded to the New York Convention, and gave effect to its ratification by enacting the Recognition and Enforcement of Foreign Arbitral Awards Act of 1977 (REFAA Act) to govern the enforcement of all foreign arbitral awards. However, despite a number of proposals, South Africa has yet to adopt legislation based on the UNCITRAL Model Law, and the Arbitration Act (No. 42 of 1965) continues to govern the enforcement of all domestic arbitral awards—including where the arbitration involved international parties. Section 31 of the Arbitration Act lays out the procedure for enforcing an arbitral award through an order of court. Section 33 of the Arbitration Act provides three grounds for setting aside an award: (1) where there is misconduct by the arbitrator, (2) gross irregularity in the arbitral proceedings, or (3) where an award was improperly obtained. The Arbitration Act—unlike the REFAA Act—does not explicitly mention public policy as a ground for setting aside or refusing to recognise an arbitral award. Nonetheless, under South African common law principles, it is well established that courts have the authority to refuse to enforce an award that is contrary to public policy (see e.g. Sasfin (Pty) Ltd v Beukes [1988] ZASCA 94; Barkhuizen v Napier [2007] ZACC 5 at para 29; and Bredenkamp and Others v Standard Bank of SA Ltd [2010] ZASCA 75 at para 43).
Facts of the Case
In February 2006 Ms Hubbard (the applicant) entered into a building contract with Cool Ideas (the respondent), a property developer, to undertake the construction of her home (the Building Contract). Cool Ideas hired a construction company to carry out the building work, which was completed in October 2008. Following completion, Ms Hubbard took issue with the quality of the work and refused to make final payment to Cool Ideas. She instituted arbitration proceedings in terms of an arbitration clause in the Building Contract, claiming the costs of remedial works. Cool Ideas counter-claimed for the balance of the contract price. The sole arbitrator found in favour of Cool Ideas. After Ms Hubbard refused to comply, Cool Ideas sought to enforce the domestic arbitral award by having it made an order of court under Section 31 of the Arbitration Act. Ms Hubbard opposed the application on the basis that Cool Ideas had not registered as a home builder in terms of the Housing Consumers Protection Measures Act of 1998 (the Housing Act) as was required, and therefore enforcing the arbitral award would be tantamount to sanctioning this violation.
The Decision
In a 7-4 decision, the Constitutional Court of South Africa (the Court) found in favour of Ms Hubbard and refused to enforce the arbitral award against her. Initially, it agreed that Cool Ideas’ failure to register under the Housing Act was a criminal offence which rendered it ineligible to seek compensation for building work done in terms of the Building Contract. The majority judgment then announced the principle that “it will often be contrary to public policy for a court to enforce an arbitral award that is at odds with a statutory prohibition, [b]ut it will not always be so.” Determining whether enforcement was contrary to public policy, the Court weighed the force of the prohibition in question against the important goals of private arbitration (e.g. flexibility, cost-effectiveness, privacy and speed). Here, two factors appeared to have tipped the scale against enforcement in the eyes of the majority. First, the award was not merely “at odds” with a statutory prohibition, it in fact “constitute[d] a criminal offence.” Second, because this matter concerned an application to make an arbitral award an order of court (i.e., confirmation), rather than a motion to set the award aside (i.e., annulment), the Court acted with “greater caution”—meaning more aggressive oversight of the arbitrator’s decision, and with less deference towards the parties’ autonomy in choosing arbitration.
Analysis
So what is the wider impact and import of this decision? As an initial note, while this case involved the attempted enforcement of a domestic arbitral award under the Arbitration Act, the approach it sets forth would appear to apply with equal force to the recognition and enforcement of foreign awards. The Court’s statement that the REFAA and the UNCITRAL Model Law “tell against” enforcement because “[b]oth empower a court to refuse to enforce an arbitral award if to do so ‘would be contrary to public policy’ in South Africa” indicates that the outcome would likely have been the same had the case arisen in the context of recognizing a foreign award.
This leads to the question of whether Cool Ideas should be seen as a harbinger of increased judicial scrutiny of arbitral awards in South Africa generally. In the only other Constitutional Court case directly addressing this issue, Lufuno Mphaphuli & Associates (Pty) Ltd v Andrews and Another [2009] ZACC 6, the majority judgment had rather effusively praised “the value of arbitration as a speedy and cost-effective process.” Indeed, that opinion suggested that “courts should be careful not to undermine the achievement of the goals of private arbitration by enlarging their powers of scrutiny imprudently” and held that “the Constitution would require a court to construe the grounds [for setting aside an award] reasonably strictly in relation to private arbitration.” The majority judgment in Cool Ideas found Lufuno Mphaphuli distinguishable, as it “concerned the setting aside of an arbitration award in terms of section 33(2) of the Arbitration Act” rather than the confirmation of an award in terms of Section 31 of the Arbitration Act. Given that Cool Ideas did not repudiate the approach in Lufuno Mphaphuli, and that it was concerned with a situation where enforcement of the award “constituted a criminal offense”—presumably not a common fact pattern—it may be an overstatement to see the decision as a seismic shift in the Court’s attitude towards arbitration.
Nonetheless, the judgment in Cool Ideas does seem to indicate that the Court will not be too hesitant to substantively review arbitral decisions. Moreover, the Court’s statement that it will adopt a less deferential standard when faced with an application for an order to enforce the arbitral award than with a challenge to set aside the award seems at odd with the prevailing international approach. For example, the grounds pursuant to which an award can be set aside under Article 34 of the UNCITRAL Model Law parallel the grounds for non-recognition under Article 36 of the UNCITRAL Model Law.
As the dissenting judgment in Cool Ideas suggests, because a refusal to enforce an award through a court order and a ruling setting aside an order are essentially opposite sides of the same coin, it makes sense that the same analysis should apply in either case. The majority’s finding otherwise in Cool Ideas may create perverse incentives and open the door to gamesmanship by parties who lose in arbitration. The (unintended) strategic lesson could be that losing parties are better off choosing not to affirmatively bring suit to have the award set aside—but rather simply refusing to pay, and thereby forcing the victorious party to seek a court order enforcing the award. This way, the losing party would reap the benefit of the reviewing court acting with “greater caution” before deciding to enforce the award. It will be interesting to see whether such a shift in party behaviour in fact occurs.
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