This is an appeal against the entire judgment of the High Court dismissing an application to set aside an arbitral award in terms of Article 34 of the Arbitration Act [Chapter 7:15] and registering the award instead.
FACTUAL BACKGROUND
The appellant is a non-resident company in the business of hospitality management providing hotel management services. The first respondent is a resident Zimbabwean company that leases hotels and lodges in Zimbabwe and is listed on the Zimbabwe Stock Exchange.
Sometime in 2015, the first respondent decided to outsource the management of some of its premium hotels and selected the appellant to manage its hotels.
On or about 18 September 2015, the parties entered into a management agreement (“the agreement”) to regulate their business relationship in terms of which the appellant was to render management services to the first respondent's hotels. The agreement was amended and re-signed on 10 October 2015.
Thereafter, the agreed services were delivered by the appellant.
Subsequently, about three years later, on or about 13 September 2018, the first respondent purported to terminate the agreement between the parties on the basis that the Reserve Bank of Zimbabwe (RBZ), as the Exchange Control Authority, had refused to accommodate the first respondent's continued position of incurring the obligation to pay fees in foreign currency to the appellant in terms of the agreement.
In addition to the Reserve Bank of Zimbabwe's refusal to countenance the obligation for payment of fees by the first respondent, the first respondent also sought to terminate the agreement on the basis that the appellant had refused to re-negotiate the terms and rates of payment in order to bring the parties agreement in conformity with the Reserve Bank of Zimbabwe's Exchange Control Regulations.
The first respondent indicated that it was unable to pay outside the Reserve Bank of Zimbabwe's directives, as it deemed that this would be illegal.
Further, the first respondent averred that the fact that the Reserve Bank of Zimbabwe refused to countenance the continued accrual of the foreign currency obligation made the fulfilment of its contractual obligation permanently impossible to perform.
The respondent averred that the impossibility to perform was through no fault of either party, but that a supervening impossibility barred the parties from performing the terms of the agreement.
The appellant was not amenable to the termination of the agreement and disputed the lawfulness of the termination by the respondent.
Dissatisfied with the purported termination by the first respondent, a dispute arose and the parties referred the dispute to the second respondent for arbitration.
PROCEEDINGS BEFORE THE ARBITRATOR
In its claim before the second respondent (the arbitrator) the appellant contended, that, the first respondent had unlawfully terminated the agreement as it should have given the appellant notice of the force majeure in terms of clause 25.12.3 of the agreement.
It averred, that, after being given notice of termination, only the appellant was entitled to terminate the agreement and not the first respondent, since it was the one alleging failure to perform due to the Reserve Bank of Zimbabwe directives.
The appellant claimed, before the arbitrator, that the termination was unlawful and invalid.
The appellant further claimed, that, there was no supervening impossibility warranting the purported termination of the agreement.
The appellant, in summary, sought an order in the following terms;
1. The purported termination was invalid and improper and should be set aside for non-compliance with the parties agreement.
2. There was no supervening impossibility, as refusal of authority to pay by the Reserve Bank of Zimbabwe (RBZ) only amounted to delay in payment, which did not excuse non-performance.
The second respondent found in favour of the first respondent.
His finding was based on the fact, that, the lack of approval of the agreement from the Reserve Bank of Zimbabwe (RBZ) signified the existence of force majeure. He stated that it was unlawful for two parties to enter into an agreement without the authority of the RBZ in terms of the Exchange Control Act [Chapter 22:05]. The resultant force majeure was detrimental to both parties, and, as such, the first respondent was equally entitled to withdraw from the agreement by operation of the law.
He issued an award in favour of the first respondent, effectively dismissing the appellant's claim.
PROCEEDINGS IN THE COURT A QUO
The appellant, dissatisfied with the arbitral award, approached the High Court in terms of Article 34(2)(b)(ii) of the Arbitration Act seeking to have it set aside.
The appellant averred, that, the award issued by the second respondent was contrary to public policy.
It was illogical as it was in conflict with substantive Contract Law and it abrogated the tenets of the pacta sunt servanda principle, which recognises the sanctity of contract and provides that once a contract is entered into freely and voluntarily it becomes sacrosanct and the courts should enforce it.
The appellant insisted that the agreement was lawful, and, therefore, the purported termination by the first respondent was invalid.
The first respondent, in turn, opposed the application and also made a counter application for the registration of the award.
The court a quo found that the award was not so illogical as to offend public policy, as the parties had not obtained the authority of the Reserve Bank of Zimbabwe, a pre-requisite in terms of the Exchange Control Act.
The court a quo reasoned, that, the award could not be said to be contrary to public policy as there was indeed a supervening impossibility since the agreement could not be implemented without the exchange control approval.
It then dismissed the application for the setting aside of the award and registered it instead.
Aggrieved by the finding of the court a quo, the appellant lodged the present appeal on five grounds of appeal.
GROUNDS OF APPEAL
1. The court a quo erred in failing to determine, that, the second respondent's arbitral award abrogated the pacta sunt servanda principle. The second respondent's award is inimical to public policy in that it irregularly excuses the first respondent from complying with express provisions of the contract relating to force majeure.
2. The court a quo erred in failing to hold, that, the second respondent's arbitral award went far beyond mere faultiness or incorrectness. The Reserve Bank of Zimbabwe had no ability to cause nor call for cancellation of the contract inter partes. Consequently, the court a quo ought to have found offence in the second respondent concluding that the Reserve Bank's suggestion that parties renegotiate their contract actuated force majeure.
3. The court a quo grossly misdirected itself in failing to find, that, the second respondent's adjudication was palpably anomalous in that it was predicated on non-existent datum such as the finding that the appellant had refused to negotiate with the first respondent. Any decision born of non-existent facts is inimical to logic and thereby impairs the conception of justice.
4. The court a quo also erred in failing to hold, that, the arbitral award offended acceptable moral standards and what fair minded persons would consider just. In conflating the Exchange Control approval of the agreement by the Reserve Bank, and the approval of payment, the court a quo erred in law and rewrote the contract between the parties.
5. The court a quo also ignores, that, in the circumstances, the second respondent's arbitral award is not only anomalous at law but goes on to actuate a sense of shock for a society in the midst of trying to court foreign investment in the ilk of the appellant. The registration of an award that negates what the parties agree in a contract eviscerates current law on exchange control and occasion dis-investment in the country is contrary to public policy and must be set aside.
ISSUES FOR DETERMINATION
Although there are five grounds of appeal, there are only two issues for determination, namely;
1. Whether the court a quo erred in not setting aside the award; and
2. Whether or not the court a quo erred in registering the award.
SUBMISSIONS ON APPEAL
Counsel for the appellant submitted, that, the court a quo erred in registering the arbitral award which was not only illogical but contrary to public policy. He argued that the termination of the agreement by the first respondent was unlawful and invalid. He further asserted, that, even if it was to be assumed that the first respondent was entitled to terminate the agreement, the termination was unlawful for want of giving notice.
He contended, that, in terms of clause 25.12.3 of the agreement, the respondent ought to have first given the appellant notice of the force majeure before terminating.
After such notice, it was the appellant who was entitled to terminate the agreement, and not the first respondent, as it was the one alleging failure to perform due to the Reserve Bank of Zimbabwe's directive.
He further submitted, that, there was no force majeure, contending that the termination was unlawful, and, as such, the arbitral award ought to be vacated.
Per contra, counsel for the first respondent submitted, that, the termination of the agreement was above board and was lawfully done.
He submitted, that, the agreement was registered with the Reserve Bank of Zimbabwe (RBZ) for one year, from 8 January 2016 to 7 January 2017. The yearly contract was not thereafter extended as the RBZ stated that the management fees had to be reviewed before the agreement could be renewed. He contended, that, the fact that the RBZ did not grant the relevant authority amounted to a supervening impossibility which had the effect of terminating the agreement.
It was further submitted, that, the respondent could not incur obligations to make a payment outside Zimbabwe without the Reserve Bank of Zimbabwe's authority in terms of clause 11(1)(b) of the Exchange Control Regulations, and, that without authority from the RBZ, the contract became not only unenforceable, but illegal.
He submitted, that, the respondent conducted itself in accordance with the suspensive condition clause and the force majeure clause.
Counsel argued that the court a quo properly registered the arbitral award which was not contrary to public policy. He urged the court to dismiss the appeal with costs.
THE LAW
Article 34 of the Model Law (Schedule to the Arbitration Act [Chapter 7:15]) prescribes the procedure for setting aside an arbitral award and the substantive grounds upon which it may be set aside by the High Court.
In terms of Article 34(2)(b) of the Model Law:
“An arbitral award may be set aside by the High Court only, if it finds that the subject matter or dispute is not capable of settlement by arbitration under the law of this country or the award is in conflict with public policy of Zimbabwe.”
Article 34(5) of the Model Law goes further to set out what would ordinarily be regarded as being contrary to public policy. It states:
“For the avoidance of doubt, and without limiting the generality of paragraph (2)(b)(ii) of this article, it is declared that an award is in conflict with public policy of Zimbabwe if:
(a) The making of the award was induced or affected by fraud or corruption; or
(b) A breach of the rules of natural justice occurred in connection with the making of the award.”
These provisions were considered in Zimbabwe Electricity Supply Authority v Maposa 1999 (2) ZLR 452 (S) where the Court set out the approach to be adopted when considering whether an award is contrary to public policy.
GUBBAY CJ, at 465D, made the following remarks:
“In my opinion, the approach to be adopted is to construe the public policy defence, as being applicable to either a foreign or domestic award, restrictively, in order to preserve and recognise the basic objective of finality in all arbitrations, and to hold such defence applicable only if some fundamental principle of the law or morality or justice is violated.”
He further stated, at 466E-H:
“An award will not be contrary to public policy merely because the reasoning or conclusions of the arbitrator are wrong in fact or law. In such a situation, the court would not be justified in setting the award aside.
Under Article 34 or 36, the court does not exercise an appeal power and either uphold or set aside or decline to recognise and enforce an award by having regard to what it considers should have been the correct decision.
Where, however, the reasoning or conclusion in an award goes beyond mere faultiness or incorrectness and constitutes a palpable inequity that is so far reaching and outrageous in its defiance of logic or accepted moral standards that a sensible and fair-minded person would consider that the conception of justice in Zimbabwe would be intolerably hurt by the award, then, it would be contrary to public policy to uphold it.
The same consequence applies where the arbitrator has not applied his mind to the question or has totally misunderstood the issue, and the resultant injustice reaches the point mentioned above.”
Force majeure, which is also known as vis major in contract, means that a superior force has occurred, disabling a party from performing contractual obligations due to a circumstance(s) beyond their control.
A force majeure clause in a contract excuses a party from performing some, or all, of its obligations.
The case of Standard Chartered Bank Zimbabwe Limited v China Shougang International 2013 (2) ZLR 385 (S) is apposite in illustrating what constitutes force majeure.
The Court made reference to the case of Peter Flamman and Company v Kokstad Municipality 1919 AD 427, in which SOLOMON ACJ said;
“Nor is it necessary to consider generally what are the circumstances in which it can be said a contract has become impossible of performance. The authorities are clear, that, if a person is prevented from performing his contract by vis major or casus fortuitus, under which would be included such Act of State as we are concerned with in this appeal, he is discharged from liability.”
See also the case of Firstel Cellular (Pvt) Ltd v Net One Cellular 2015 (1) ZLR 94 (S) in which the Court, when dealing with suspension of contractual obligations on the basis of a vis major or causa fortuitus, held that…,.:
“It is trite that the courts will be astute not to exonerate a party from performing its obligations under a contract that it has voluntarily entered into at arm's length. Thus, the suspension of a contractual obligation by dint of vis major or casus fortuitus can only be allowed in very compelling circumstances.
The courts are enjoined to consider the nature of the contract, the relationship between the parties, the circumstances of the case, and the nature of the alleged impossibility.
See also Watergate (Pvt) Ltd v Commercial Bank of Zimbabwe 2006 (1) ZLR 9 (S) at 14B-F.”…,.
The Latin maxim pacta sunt servanda aptly refers to the sanctity of a contract to the effect, that, a contract freely and voluntarily entered into is sacrosanct and should be given effect by the courts.
In Barkhuizen v Napier 2007 (5) SA 323 (CC) the maxim pacta sunt servanda was succinctly defined as meaning that parties to a contract have freedom to contract and assent to whichever terms they wish to and the court should only intervene and oversee when such contract contravenes another set of legal rights.
In Makani and Ors v Arundel School and Ors CC07-16 the Constitutional Court fluidly, and in clear terms, visited the import of the doctrine of sanctity of contract. It stated the following…,:
“It is trite that a contract concluded in contravention of the written or unwritten law, or one that is contrary to public policy, is susceptible to being struck down and rendered of no force or effect. The doctrine of sanctity of contracts is obviously subject to constitutional limits. As was observed in Bredenkamp and Ors v Standard Bank of South Africa Ltd 2010 (4) SA 468 (SCA) at para 39, every contract or institutional rule must pass Constitutional muster.”
Again, in Barkhuizen v Napier 2007 (5) SA 323 (CC)…, it was emphasised that:
“All law, including common law of contract, is now subject to Constitutional control. The validity of all laws depends on their consistency with provisions of the Constitution and the values that underlie our Constitution. The application of the principle pacta sunt servanda is, therefore, subject to constitutional control.”
APPLICATION OF THE LAW TO THE FACTS
The appellant's main contention is that the arbitral award ought not to have been registered as it was illogical and offends the public policy of Zimbabwe.
To buttress this contention, the appellant relied heavily on the contention that the award goes against the pacta sunt servanda principle which is at the heart of contractual agreements.
In order to determine whether the arbitral award offends public policy, as contended by the appellant and vehemently disputed by the first respondent, due consideration to the agreement entered by the parties ought to be made.
A close look at the contract reveals, that, the parties entered into a management agreement which needed exchange control approval as Legacy Hospitality Management Services Limited is a foreign company. The parties, in due recognition of this legal position, included a suspensive condition in their contract, in clause 5, which provides:
“5.3 This agreement is subject to the following suspensive conditions -
5.31…,.
5.32…,.
5.33 That both parties receive all statutory and regulatory approvals necessary for the legal fulfilment of all requirements attendant to this management agreement.”
The exchange control approval relates to approval to enter into a liability to pay a foreign company which has to be paid in foreign currency.
When the Reserve Bank of Zimbabwe (RBZ) declined to authorize the agreement, in terms of the Exchange Control Regulations, this constituted a supervening impossibility to the performance of the contractual obligations as it would have been unlawful to proceed without the authority of the regulatory Board.
It is apparent from the record that the parties received a year's approval from the Reserve Bank of Zimbabwe. After the lapse of one year, the Reserve Bank of Zimbabwe refused to authorize the agreement and advised the parties to re-negotiate.
The re-negotiation did not work out.
The court a quo's finding was that when the parties entered into the contract, they subjected themselves to fulfilment of statutory and regulatory requirements.
In this case, there was no regulatory authority approval thus termination of the contract was inevitable.
The force majeure affected both parties such that termination, at the instance of either of the parties, without giving notice, was appropriate.
The court a quo, having made a finding that the refusal of the Exchange Control authority to register the agreement fell squarely within a force majeure event, as defined in clause 25.12.1 of the agreement, found no fault in the arbitral award setting aside the contract.
The court a quo's findings in that regard cannot be faulted....,.
The court a quo's conclusion, that the arbitrator's finding that the parties subjected themselves to a suspensive condition in conformity with the exchange control regulations, cannot be faulted.
The continuity of the management agreement was centred on Reserve Bank of Zimbabwe approval.
When the Reserve Bank of Zimbabwe (RBZ) declined to authorise the obligation to incur a foreign liability, the contract was rendered illegal and incapable of performance, regard being had to the fact that the appellant is a foreign entity.
This constituted a vis major.
It is apparent that the suspensive condition could not be fulfilled and this rendered continuity of the agreement unlawful and impossible.
The sanctity of contract was not in any manner interfered with by the registration of the award by the court a quo.
The fact that the contract was impossible of performance meant that either of the parties was entitled to terminate it on that basis.
