MWAYERA
JA: 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 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 RBZ'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 renegotiate the terms and rates of payment in order to
bring the parties agreement in conformity with the RBZ's Exchange
Control Regulations.
The
first respondent indicated that it was unable to pay outside the
RBZ's directives, as it deemed that this would be illegal.
Further,
the first respondent averred that the fact that the RBZ 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 RBZ 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 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 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 RBZ, a
prerequisite 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 2nd
respondent's arbitral award abrogated the pacta
sunt servanda
principle.
The 2nd
respondent's award is inimical to public policy in that it
irregularly excuses the 1st
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 2nd
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 2nd
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 2nd
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 1st
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 parties.
5.
The court a
quo
also ignores that in the circumstances, the 2nd
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
disinvestment 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
Mr
Mafukidze,
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 RBZ'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,
Mr
Matinenga,
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 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 RBZ'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):
“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) 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, at page 10:
“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.” (underlining my emphasis)
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
CCZ 7/16 the Constitutional Court fluidly and in clear terms visited
the import of the doctrine of sanctity of contract. It stated the
following at p24-25 of the judgement:
“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) at para 15, 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
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 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 RBZ. After the lapse of one year, the Reserve Bank of
Zimbabwe refused to authorise the agreement and advised the parties
to renegotiate.
The
renegotiation 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.
In
compliance with guidelines outlined in Article 34(2)(ii) on what
constitutes an award that conflicts with public policy, the courts
have been scrupulous to interpret that provision narrowly. In doing
so, the courts have been cognisant of the need to protect the
principle of sanctity of contract.
The
sentiments of MATHONSI J (as he then was) in Harare
Sports Club v Zimbabwe Cricket
HH398/19 at p8 on the need to adopt a narrow interpretation as to
what constitutes conflict with public policy, are apposite. He
stated:
“…..
After all, it is the parties who voluntarily submit to arbitration as
an instrument for speedy and cost-effective means of resolving their
disputes. The courts are therefore more inclined to deprecate conduct
of a party intent on disrespecting the agreement by undermining the
process of arbitration agreed upon by the parties. Fanciful defences
against registration of arbitral awards and frivolous applications
seeking to set aside an award by inviting the court to plough through
the same dispute which has been resolved by an arbitrator in the
forlorn hope of obtaining a different outcome will not be
entertained.”
See
also Zimbabwe
Cricket v Harare Sports Club & Anor
SC 27/22.
It
is trite that parties to a contract are bound by the terms of the
contract.
If
parties contractually agree to arbitration as a means of dispute
resolution, then the court should be loath to interfere with
decisions made by arbitrators.
Intervention
is only resorted to if the decision reached is in contravention of
the Arbitration Act [Chapter
7:15]
and/or is so irregular and illogical to amount to moral turpitude on
the part of the arbitrator.
This
principle was emphatically enunciated by MALABA DCJ (as he then was)
in Alliance
Insurance v Imperial Plastics (Pvt) Limited & Anor
SC 30/17 wherein he stated, at p5 of the judgement:
“The
rationale behind the provision is that voluntary arbitration is a
consensual adjudication process which implies that the parties have
agreed to accept the award given by the arbitrator even if it is
wrong, as long as the proper procedures are followed. The courts
therefore cannot interfere with the arbitral award except on the
grounds outlined in Article 34(2). An application brought before the
court under this provision is in essence a restricted appeal and the
applicant should prove the grounds set out in order to succeed in its
application.”
The
cautionary approach was lucidly enunciated in Peruke
Investments (Pvt) Ltd v Willoughby Investments (Pvt) Ltd & Anor
2015 (1) ZLR 491 (S) and also Zimbabwe
Electricity Supply Authority supra.
See
also Clark
v African Guarantee and Indemnity Co Ltd
1915 CPD 68 at 77 and Tel
Cordia Technologies INC v Telkom SA Ltd
2007 (3) SA 266 at 302D-E, where Harms JA stated as follows:
“Likewise,
it is a fallacy to label a wrong interpretation of a contract, a
wrong perception or application of South African law, or an incorrect
reliance on inadmissible evidence by the arbitrator as a
transgression of limits of his power. The power given to the
arbitrator was to interpret the agreement rightly or wrongly; to
determine the applicable law, rightly or wrongly; and to determine
what evidence was admissible, rightly or wrongly…. To illustrate,
an arbitrator in a 'normal' local arbitration has to apply South
African law but if he errs, in his understanding or application of
the local law the parties have to live with it.”
From
the cases cited above, it appears settled that an arbitral award will
not be lightly set aside on the basis that a party considers that the
decision of the arbitrator is wrong.
The
court will not interfere with an award unless the reasoning of the
arbitrator constitutes a palpable inequity so outrageous and far
reaching in its defiance of logic or acceptable moral standards as to
cause a fair-minded person to regard it as hurting all sense of
justice and fairness. Article 34 is certainly not intended for the
court to reassess a dispute on the basis that the appellant views the
arbitrator's decision as wrong.
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 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.
The
arbitral award registered by the court a
quo
did not amount to creation of a new contract for the parties neither
did it interfere with freedom and sanctity of contract. Registration
of the award actually gave effect to the contract made and entered
into by the parties, contrary to the appellant's contention that
termination of the agreement fell foul of the maxim,
pacta
sunt servanda,
which recognises the sanctity of contract.
The
agreement itself was self-regulating as it contained a suspensive
condition. Once the authority to register the agreement was not given
and/or renewed, the agreement was brought to its knees.
DISPOSITION
Considering
the circumstance of this matter and the nature of the agreement
between the parties, the second respondent's finding that there was
a supervening impossibility and that termination was inevitable
cannot be said to be illogical and outrageous.
The
arbitral award was not so iniquitous as to violate principles of
justice and fairness. It does not at all conflict with public policy
and as such was properly registered.
The
management agreement was terminated for impossibility to perform. The
judgment of the court a
quo
cannot be faulted in that regard.
The
appeal is without merit and stands to be dismissed.
Regarding
the issue of costs, there is no reason why the costs should not
follow the result.
In
the result, it be and is hereby ordered as follows:
The
appeal be and is hereby dismissed with costs.
MAKONI
JA: I
agree
MATHONSI
JA: I
agree
Mawere
Sibanda,
appellant's legal practitioners
Gill,
Goldonton & Gerrans,
1st
respondent's legal practitioners
