John Brand and Emmylou Wewege explore this topic in an article published by PLC Dispute Resolution, United Kingdom.

Is it safe to arbitrate in South Africa?

Status: Law stated as at 13-Nov-2009

Jurisdiction: South Africa

This article examines the pros and cons of arbitrating in South Africa, and concludes that, from the point of view of subsequent enforcement, there are advantages to seating an international arbitration in South Africa.

Conventional wisdom both in South Africa and abroad is that it is unsafe to have the seat of international commercial arbitration in South Africa. One reason for this is a 2005 report by Judge John Hlophe, the Judge President of the Cape Provincial Division of the High Court of South Africa in which he concluded that arbitration undermines judicial transformation in South Africa. Echoing this view, the South African Law Commission has also referred to the perception among some black lawyers that white lawyers use arbitration to enable them and their corporate clients to avoid courts which are increasingly staffed by black judges. A second reason for this is the failure by the South African Government to act upon the Law Commission's recommendations that South Africa reform its arbitration law to bring it into line with the UNCITRAL Model Law both in respect of domestic and international arbitration.

The result of this is a perception among international parties that a hostile black judiciary will interfere with arbitrations conducted in South Africa and will frustrate the enforcement of arbitration awards.

It has proved difficult in South Africa to deal with the negative perceptions about arbitration and to demonstrate that there is a world wide movement toward alternative dispute resolution that has nothing to do with race and everything to do with the inability of the civil justice systems of the world to deliver outcomes that are required by modern business. It may be true that some bigoted lawyers in South Africa use the arbitration process to avoid black judges but that, it is suggested, is the exception and not the rule. South Africa is part of the global economy and is subject to the same business pressures as apply in the rest of the world.

The perception that South Africa is a dangerous place for arbitration to take place is equally difficult to confront because it feeds into afro pessimistic sentiments in many quarters.

The purpose of this article is not to promote the virtues of arbitration and international arbitration in particular. The process will continue to flourish internationally whether South Africans support it or not. Instead, the purpose of the article is to demonstrate that, whatever the perceptions may be, South Africa is a relatively safe place to seat an international commercial arbitration. Furthermore, where an international arbitration involves South African parties, choosing a seat outside South Africa can present problems if it is necessary to enforce the arbitration award in South Africa.

In order to demonstrate this it is necessary to examine a number of aspects of international and domestic arbitration law.

Substantive versus procedural law

Different aspects of an international arbitration may be governed by different systems of law, and the substantive law of the contract does not have to be the same as the procedural law of any arbitration provided for in a contract.

The doctrine of party autonomy recognises that parties to an international commercial agreement are free to choose for themselves the laws or legal rules applicable to an agreement. Parties to an international arbitration in South Africa may elect a foreign law to govern the contract, South African arbitration law to govern the arbitration and a system of international rules, for example the ICC rules, to regulate the arbitration. Should there be no express choice of law, the arbitral tribunal will determine the appropriate laws by considering the implied choice of the parties and, if appropriate, by following the principles in the Rome Convention.

Seat versus place of hearing

Arbitrations must be seated in a particular jurisdiction. Most legal systems recognise the concept of the seat of the arbitration as the legal jurisdiction to which the arbitration is tied. The tribunal is free to hold hearings outside the seat of the arbitration.

Regardless of the location of hearings, the courts at the seat of the arbitration assume a supervisory role over the conduct of the arbitration and any court application in relation to the arbitration will have to be brought in the jurisdiction of the seat. Therefore, parties that elect London as the seat of the arbitration but hold their hearings in South Africa as a matter of convenience will still need to make any court application in respect of the arbitration in the English courts.

Enforcement

A South African court will apply different legislation in an application to enforce an arbitral award depending on whether the award is a domestic or foreign one:

• Domestic awards are regulated and enforced pursuant to the Arbitration Act 42 of 1965 (Arbitration Act).
• Foreign awards are regulated and enforced pursuant to the Recognition and Enforcement of Foreign Arbitral Awards Act 40 of 1977 (Foreign Arbitral Awards Act).

The latter Act was enacted to give effect to South Africa's obligations under the New York Convention.

If an award has to be enforced in South Africa the parties to an international commercial arbitration should carefully consider whether it would be preferable to make the award a domestic or a foreign award. This is not determined by the nationality of the parties but rather by the seat of the arbitration. Section 1 of the Foreign Arbitral Awards Act defines a foreign arbitral award as:

"an arbitral award (a) made outside the Republic; or (b) the enforcement of which is not permissible in terms of the Arbitration Act, 1965, but [it is] not in conflict with the provisions of this Act".

International consensus is that an arbitration award is deemed to have been made at the seat of the arbitration. Therefore, an award made in an international arbitration seated outside South Africa will be deemed to be a foreign arbitral award. (Conversely, an award made in an international arbitration seated in South Africa, will be treated as a domestic award for the purpose of recognition and enforcement by a South African court.)

Defences to enforcement

It is important to consider whether it is preferable to enforce a domestic or a foreign arbitral award as the different applicable legislation stipulates different requirements for the validity and the enforcement of such awards.

For a domestic award to be valid it must be in writing and signed by all the members of the arbitral tribunal (though the failure of a minority member to sign will not invalidate the award.) The arbitral award must be made within the prescribed time period and be delivered to the parties being present or having been summoned to appear. Substantively, a domestic arbitral award must be certain, final and possible. It must deal with all matters submitted to the arbitrator and must be capable of being carried out.

A court will not enforce an award where the required action is illegal or contrary to public policy. Additionally, section 33 of the Arbitration Act sets out three instances when a domestic arbitration award may be set aside: where any member of an arbitration tribunal mis-conducted himself in relation to his duties as arbitrator or umpire; where an arbitration tribunal committed a gross irregularity in the conduct of the arbitration proceedings or exceeded its powers; and finally where an award was improperly obtained. An application to have an award set aside must be made within six weeks of the publication of the award to the parties.

A person wishing to enforce a foreign arbitration award in South Africa is required by the Foreign Arbitral Award Act to apply to a division of the South African High Court. The application is required to be accompanied by the original foreign arbitral award and the original arbitration agreement in terms of which the award was made, both authenticated for use in the High Court, together with certified copies of the award and the agreement.

There are at least seven potential defences to enforcement of a foreign arbitral award which may either be raised by the court on its own initiative, or may be raised by a party against whom the enforcement is sought.

The court may, of its own initiative, refuse enforcement if the subject matter of the dispute is not arbitrable as a matter of South African law. This would include, for example, matrimonial disputes or issues relating to status. The court may also refuse to enforce an award if enforcement would be contrary to public policy in South Africa.

In addition, the Foreign Arbitral Awards Act lists five categories of defences (corresponding to the defences identified in Article V.1 of the New York Convention) which would prevent the recognition and enforcement of a foreign arbitral award if successfully raised by the person against whom enforcement is sought.

In summary, a party seeking to enforce a foreign arbitral award potentially faces more defences to enforcement than a party seeking to enforce a domestic award. Further, there is uncertainty as some of the defences make reference to other legal systems with which the parties may not be familiar.

Protection of Businesses Act

When seeking to enforce a foreign arbitral award in South Africa due consideration must also be given to the Protection of Businesses Act 99 of 1978. This Act provides that no arbitral awards made outside South Africa may be enforced inside South Africa without the consent of the Minister of Economic Affairs if the award arose from an act or transaction "connected with the mining, production, importation, exportation, refinement, possession, use or sale of or ownership to any matter or material, of whatever nature whether within, outside, into or from [South Africa]".

The Act also provides that no arbitration award of the kind described above can be enforced, with or without the consent of the Minister, if it is connected with any liability arising from any bodily injury to any person resulting from the consumption or use of or exposure to any natural resource of South Africa unless the same liability would have arisen under South African law. This section prevents the recovery of multiple punitive damages, but compensatory damages would be enforceable with the Minister’s consent.

The wording of the Act is wide and could potentially be used to frustrate enforcement of foreign arbitral awards beyond its intended ambit. As most awards touch on the ownership of "matter or material", the Minister's permission is needed in nearly every action for the recognition and enforcement of a foreign arbitral award.

The South African Law Reform Commission has recommended reform in relation to the Protection of Businesses Act. Its 2006 report relating to Consolidated Legislation Pertaining to International Judicial Co-Operation in Civil Matters stated categorically that the Act should be repealed. It was suggested that new legislation should be enacted prohibiting the enforcement of awards granting punitive damages but expressing co-operation by the South African judicial system in other areas. This recommendation has not yet been implemented and accordingly, the Act is still in operation and should be a serious consideration for any party considering a foreign seat for an arbitration when the award has to be enforced in South Africa.

Quantification and interest

The final factor to consider in assessing whether it would be preferable to enforce a domestic or foreign arbitral award in South Africa is the quantification of the award and the running of interest. When a domestic award orders the payment of a sum of money, such sum shall, unless the award provides otherwise, carry interest as from the date of the award and at the same rate as a judgment debt.

A foreign arbitral award that orders the payment of money, expressed in a foreign currency, must first be converted to Rand for it to be enforceable in South Africa. In terms of Section 2(2) of the Foreign Arbitral Awards Act, the award must be made an order of Court as if it were an award for payment of the equivalent amount in Rand on the basis of the exchange rate prevailing at the date of the award and not at the date of the order of enforcement. The Applicant therefore runs the risk of devaluation between the time of the award and the time of the order of enforcement.

South African Law Commission's recommendations

The Law Commission, following a review of South Africa's arbitration law, identified various shortcomings in respect of international commercial arbitration. In particular, South African legislation does not contain provisions specifically dealing with international commercial arbitration. In order to create certainty, the Commission recommended the adoption of a Draft Bill closely aligned with the UNCITRAL Model Law. It argued that this would improve South Africa's credibility in the field of international arbitration and ensure that South Africa becomes a sought after venue for international commercial arbitration.

Adopting the Law Commission recommendations would be of benefit to both domestic and international arbitration in South Africa. It would be particularly helpful in facilitating the effective enforcement in foreign jurisdictions of arbitration awards made in South Africa . However, the failure to do so does not render our existing law ineffective. The current South African law can operate as the law of arbitration for international arbitration. Parties may elect to rely purely on South African arbitration law or to use this law as the background to their alternative choice of procedural rules.

Approach of South African courts

There is a perception that South African courts are likely to interfere in the process of private arbitration conducted in South Africa. This perception has been fuelled by the apparent unwillingness of the South African legislature to adopt the Model Law which permits court interference in more limited circumstances than currently exist in the Arbitration Act. However, reference to South African case law suggests that these perceptions are unfounded.

In 1994 the Appellate Division, in the case of Amalgamated Clothing and Textile Workers Union of South Africa v Veldspun, stated that there are many reasons for commending those who elect arbitration as opposed to litigation. In Goldstone JA's opinion, the courts should not discourage parties from resorting to arbitration "and should deprecate conduct by a party to an arbitration who does not do all in his power to implement the decision of the arbitrator promptly and in good faith".

In Telecordia Technologies Inc v Telkom SA Ltd 2007, the Supreme Court of Appeal highlighted that since the early part of the nineteenth century, our courts have consistently given due deference to an arbitral award. The court noted that this development was not peculiar to South Africa:

"The 'concerns of international comity, respect for capacities of foreign and transnational tribunals, and sensitivity to the need of the international commercial system for the predictability in the resolution of disputes' have given rise in other jurisdictions to the adoption of 'a standard which seeks to preserve the autonomy of the forum selected by the parties and to minimise judicial intervention when reviewing international commercial arbitration awards'."

In this case, the Supreme Court of Appeal chose to show deference to the arbitral tribunal by refusing the application to set aside the award of an international arbitration tribunal seated in South Africa.

In March 2009, the Constitutional Court delivered a landmark judgment in Lufuno Mphaphuli and Associates (Pty) Ltd v Andrews and Another 2009 where it recognised and affirmed the role of private arbitration in South Africa.

O'Reagan ADCJ recognised some of the advantages in arbitration, in particular its flexibility, cost-effectiveness, privacy and speed. She held that "in determining the proper Constitutional approach to private arbitration, we need to bear in mind that litigation before the ordinary courts can be a rigid, costly and time consuming process and that it is not inconsistent with our constitutional values to permit parties to seek quicker and cheaper mechanisms for the resolution of disputes."

The court further referred to the fact that there should be limited court interference in arbitrations in South Africa. In particular, it held that it should be careful "not to undermine the achievement of the goals of private arbitration by enlarging the powers of scrutiny imprudently." It was emphasised that section 33(1) of the Arbitration Act provides three grounds for setting aside an arbitration award and that "the Constitution would require a court to construe these grounds reasonably strictly in relation to private arbitration."

 Conclusion

Despite South Africa's failure to adopt the UNCITRAL Model Law and scepticism by some lawyers about the role of arbitration in South Africa, the country remains a relatively safe place to conduct international arbitration hearings, seat international arbitration and enforce international arbitration awards. Furthermore, if the award has to be enforced in South Africa there are factors militating in favour of choosing South Africa as the seat.

"Reproduced from PLCArbitration with the permission of the publishers. For further information visit www.practicallaw.com or call 020 7202 1200."