A Constitutional Perspective of the Finality Principle in Arbitration
Publication: Journal of Legal Affairs and Dispute Resolution in Engineering and Construction
Volume 15, Issue 1
Abstract
Within the construction sector, arbitration remains widely used as an alternative form of dispute resolution, its attraction being that it enables disputing parties to reach a final, conclusive, and binding settlement of their dispute. However, reaching finality depends on both internal factors (such as the conduct of arbitration proceedings), and external factors such as legislative constitutional frameworks and the attitudes of judges toward these frameworks. Drawing upon relevant South African domestic and international comparative case law, we examine the nature of the interrelationship between the finality principle within construction arbitration and two constitutional provisions: (1) the powers of the courts to develop the common law, and (2) the requirement to consider and/or interpret domestic legislation in a manner that is consistent with international law. We find that while South African courts have adopted a more nuanced and cautious attitude toward their mandate to develop the common law, they have more readily embraced their international consideration law mandate. However, embracing their mandate to consider international law does not appear to have gone as far as developing the common law in a manner that allows for nonstatutory grounds, which features in international arbitration jurisprudence to impeach the finality principle.
Introduction
Context
Arbitration remains widely used to settle domestic disputes within the South African construction sector. This position is widely acknowledged by the South African courts and particularly so by the Constitutional Court of the Republic of South Africa (the Constitutional Court). This is despite an increasing interest in and availability of other alternative dispute resolution (ADR) mechanisms such as adjudication (Fuller 1978; Bahta 2009; Maritz 2009; Chuah and Chow 2010) and mediation (Feehily 2016; de Jong 2019). Arbitration is alternative in that the processes, methods and mechanisms it employs to resolve disputes are radically different from state or national court-based litigation. The use of the ADR mechanism in construction disputes is primarily voluntary in South Africa. As access to the courts is a constitutional right in South Africa under the auspices of Section 34 of the Constitution of the Republic of South Africa (the Constitution), instead of utilizing any ADR, disputing parties can seek to have their dispute settled in court either the Magistrates Court or the High Court with the option to appeal to the Supreme Court of Appeal and ultimately, to the Constitutional Court of South Africa (the Constitutional Court) without an earlier reference to or use of any ADR mechanism. This is different to the situation with labor disputes, which under the Labour Relations Act 66 of 1995, are subject to mandatory statutory arbitration via the Commission for Conciliation, Mediation and Arbitration (CCMA). Where the dispute is heard in court, the proceedings will be conducted according to the various court rules, either falling under the Magistrates Court Rules if in the magistrates’ courts (Department of Justice and Constitutional Development 2010) or under the High Court Rules if in the high courts (Department of Justice and Constitutional Development 2009).
Despite Section 34 rights under the Constitution being part of the framework of rights under the Bill of Rights, it is important to highlight that the courts in South Africa do make provision for ADR as part of court procedures. These provisions are set out, for example, in Rules 18 and 25 of Magistrates Court Rule (Department of Justice and Constitutional Development 2010), Rule 37 of the High Court Rules (Department of Justice and Constitutional Development 2009), and Section 38 of the Superior Courts Act 10 of 2013 (for the Supreme Court of Appeal and the Constitutional Court).
As we show later, there are different reasons why arbitration has remained an ADR mechanism of choice. However, one approach toward assessing its effectiveness is in its ability to have disputes resolved to the point of their finality, conclusive, and binding nature. Achieving this aim is dependent on a number of different factors. Some of these factors reside within the arbitration framework itself; an example of this is the nature of arbitration proceedings or its legal framework.
In South Africa, the primary legal framework for domestic commercial arbitration comes in the form of The Arbitration Act 42 of 1965 and specific provisions within the Constitution. More specifically, these constitutional provisions are found in Section 33 of the Constitution, which deals with the requirement for procedural fairness in any adjudication and Section 34 of the Constitution, which deals with the right of access to the courts. There are also factors that are external to either arbitration proceedings or its specific legal framework, which impacts the effectiveness of arbitration to resolve disputes to their finality, conclusive, and binding nature. In South Africa, these external factors include, among others, judicial attitudes to the finality principle and two specific provisions set out in the Constitution. The first relates to the powers and mandate of the courts to develop the common law. The second is the requirement of the courts to consider and/or interpret domestic legislation in a manner that is consistent with international law. With this in mind, this paper examines the interrelationship between the finality principle within arbitration as set out within Section 28 of The Arbitration Act 42 of 1965 and two constitutional provisions, namely the powers of the courts to develop the common law which is articulated in Sections 8(3)(a), 39(2), and 173 of The Constitution, and the requirement to consider and/or interpret domestic legislation in a manner that is consistent with international law, which is set out in Sections 39(1)(b)–(c), 232, and 233 of the Constitution. More specifically, we examine these two constitutional provisions drawing lessons from the approach taken by appellant courts (the United States Court of Appeals and the Supreme Court of the United States). Litigants seeking to impeach arbitration finality regularly rely on six grounds: (1) violation of essence, (2) manifest disregard of the law, (3) illegality, (4) arbitrary and capriciousness, (5) complete irrationality, and (6) when the award or procedure is contrary to public policy.
Form and Manner of Arbitration
In South Africa, matters that can be subject to arbitration are articulated in Section 2 of the Arbitration Act 42 of 1965. This generally means that, before a matter is subject to arbitration (i.e., before a matter is arbitrable), there must be a dispute that is capable of resolution through arbitration. There is also a requirement for both or all parties to the dispute to have earlier (or at some point) agreed to resolve their dispute through arbitration (Gelinas 2016).
Arbitration proceedings are not conducted in the same manner as court-based litigation. In effect, irrespective of arbitration being construed as quasi-legalistic (Weidemaier 2010, 2011), judicialized, and court-like (Stipanowich 1987, 2010), there are fundamental differences between arbitration and court-based litigation (Kotler 2016). Appreciation of the differences between arbitration and court-based litigation is important because “the change from a court of law to an arbitration panel may make a radical difference in the ultimate result.” Broadly speaking, these differences are as follows. The first is the independence of disputants. Independence means that disputants participating in arbitration proceedings are generally allowed to pre-arrange the modalities of the process (Tobing et al. 2016). This will include determining, in a good number of instances, the place of arbitration (Webster 2014), applicable laws, and also the specific arbitrator, arbitral panel, or tribunal to adjudicate the dispute (Ababnch 2017). Second, arbitration differs from court-based litigation in terms of its flexibility of proceedings. In arbitration, disputants may decide on procedures for various aspects of its proceedings such as the extent of discovery and whether proceedings should entail either a full hearing or should be undertaken using written submissions (Burnett and Weiss 2016). Also, while most national legislation provisions stipulate that arbitration awards generally must be articulated in written form, there is no statutory or domestic case law or, in fact, international comparative case law which stipulates that an arbitrator must provide reasoned justification for their award. Third, unlike court-based litigation, arbitration is characterized by its informality of proceedings. Arbitration is also traditionally seen when compared to state-facilitated litigation as characterized by being less formal (Kaczmarek 2000) and free from legal technicalities (Tripp 1949). Fourth are differences based on speed and costs associated with proceedings. This is a key point recognized by the South African Law Commission (2001) who observed that “the objective of a domestic arbitration is to obtain the fair resolution of disputes by an independent arbitral tribunal without unnecessary delay or expense.” Studies have found that, when compared to litigation, arbitration is a much quicker and cheaper form of dispute resolution (Bull 2019; Srivastava 2020).
The fifth key difference between arbitration and court-based litigation relates to privacy and confidentiality. For example, while the principle of public hearings and open pronouncement of court judgements is a generally a constitutional right and requirement, a key feature of arbitration proceedings is that they are held privately (El-Awa 2016), with their proceedings and award deemed confidential (Bennett and Hodgson 2016) unless permitted by other disputants or a court.
Another key difference between arbitration and court-based litigation is in the applicable judicial standards. Although arbitration proceedings are quasi-legalistic (Weidemaier 2010, 2011), judicialized, and court-like (Stipanowich 1987, 2010), both academic literature (Massoud 2014; Weidemaier 2010, 2011) and the case law note that arbitration proceedings are not judicial in nature. In effect, arbitration is a quasi-judicial capacity. Thus, unlike in litigation, there is no requirement for legal accuracy in arbitration. Furthermore, judicial procedures apply to arbitration proceedings (Sturges 1960). Thus, for example, arbitrators are not obliged to follow strict rules of evidence. This means that, unlike the courts, they can take into consideration hearsay evidence.
Other differences exist between arbitration proceedings and court-based litigation. For example, arbitration does not adhere to any system of binding precedence. This means that arbitrators are not bound by the decisions of prior arbitral decisions. The manner of appointment and tenure of arbitrators also differs considerably from that of judges. Judges are appointed by the state and generally tend to hold tenure (Opeskin 2015). However, since arbitration is a creature of contract, arbitrators are nominated and appointed by the disputing parties (Kapeliuk 2010), unless the disputing parties have subjected themselves to institutionalized arbitration (Smit 1986).
Arbitration and court-based litigation also differ in terms of how professional immunity is construed. The general position is that judges have absolute immunity from being sued for actions explicitly taken as part of their judicial role (Graver 2015). However, this immunity can be lost in circumstances where a judicial officer abuses their authority by means of malice. However, there is no uniform position of arbitrator immunity. For example, in the United Arab Emirates, federal law does not recognize the doctrine of arbitrator immunity. Conversely, arbitrators in England and Wales generally enjoy a degree of immunity similar to judges. South African case law opines that immunity extends to arbitrators although there are no provisions for such immunity under The Arbitration Act 42 of 1965.
Finality in Arbitration
The notion of finality in arbitration suggests that, on the conclusion of arbitration proceedings and at the point the arbitrator or arbitral panel pronounces its award, the matter will be deemed concluded with neither party being permitted to appeal the subject matter of the dispute again (Zaiwalla 2003; Wasco 2009; Leasure 2016). The finality principle is a key and essential attribute of arbitration that distinguishes it from other alternative dispute resolution mechanisms (Paulsson 2013). The finality principle draws on well-established legal principles relating to res judicata and estoppel. It is rooted in a philosophy that emphasizes the need to prevent never-ending hearing and rehearing of the same dispute. If allowed, this will defeat the primary aim of arbitration, which is to keep matters outside the courts as much as is possible, reduce the time, costs and resources expended to resolve disputes, maintain a commercial relationship between disputing parties, and maintain confidentiality of the subject matter of the dispute while, at the same time, ensuring the certainty that the dispute can be resolved to a conclusion. Emphasizing the finality of arbitration also ensures that attempts to utilize arbitration as a form of forerunner to court litigation is also avoided (Leasure 2016). In South Africa, the notion of finality in arbitration is a legislative provision under Section 28 of The Arbitration Act 42 of 1965. It has also received judicial approval in both historical South African domestic case law and recent case law of not only the Supreme Court of Appeal but also that of the Constitutional Court.
Arbitration in South Africa
South African Legal System
South Africa’s legal system is that of constitutional supremacy as articulated in Section 4 of the Constitution of the Republic of South Africa (the Constitution). Thus, the Constitution is supreme law. Areas of interest of the Constitution includes Section 165, which sets out that judicial authority in South Africa resides with the courts. Furthermore, Section 166 sets out the hierarchy of the courts (lowest to highest) as the Magistrates’ Courts, the High Court, the Supreme Court of Appeal, and the Constitutional Court. Sections 7 to 39 set out rights deemed as nonderogable, which are those rights that cannot be suspended even temporarily. Other specific areas of interest for the purpose of this study include Sections 8(3)(a), 39(2), and 173 (powers and mandate of the courts to develop the common law), and Sections 39(1)(b)–(c), 232, and 233 (the requirement to consider and/or interpret domestic legislation in a manner that is consistent with international law).
Arbitration Legislation and Finality
In South Africa, arbitration legislation is set out in four complementary pieces of legislation. These are (1) the Arbitration Act 42 of 1965, (2) the Protection of Investment Act 22 of 2015, (3) the International Arbitration Act 15 of 2017, and (4) specific provisions of the Constitution of the Republic of South Africa. However, as our interest is limited to domestic commercial arbitration (specific to domestic construction disputes), we confine our interest to the Arbitration Act 42 of 1965, which is the primary legislation for domestic commercial arbitration and specific provisions of the South African constitution.
Under South African law, the notion of finality can be impeached. For example, in terms of the Protection of Investment Act 22 of 2015, Section 13(5) of the Act contemplates international arbitration on investment matters where domestic remedies have not been satisfactory. In terms of the International Arbitration Act 15 of 2017, Chapter 7 (Article 34) of the act deals with the mechanisms by which the courts may set aside awards obtained via this legislation.
As relates to the Arbitration Act 42 of 1965, three specific sections provide for impeaching the finality principle. Section 20 makes provision for arbitrators/arbitral panels to refer points of law that arise during their proceedings to court. Section 28 provides that an arbitration award may be appealable if the providing contract or the arbitration contract makes provisions for such an appeal. Furthermore, although it sets very narrow ground for this, Section 33 stipulates that an arbitration award can be vacated by the courts. More specifically, Section 33(1)(a) refers to where there is evidence of misconduct by an arbitrator or members of an arbitration panel. Section 33(1)(b) cites where the arbitral proceedings have been found to be conducted in a manner considered grossly irregular. Finally, Section 33(1)(c) points to where it is found that an arbitral award has not been properly obtained.
In addition to the Arbitration Act 42 of 1965, the courts can also rely on constitutional provisions to vacate an arbitration award. Two specific provisions allow for this. These are Section 33 (“Everyone has the right to administrative action that is lawful, reasonable and procedurally fair”) and Section 34 of the Constitution (“everyone has the right to have any dispute that can be resolved by the application of law decided in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum”).
The notion of finality in arbitration has long attracted the attention of the courts in South Africa. More recently, the South African courts, particularly the superior courts in the form of the Supreme Court of Appeal and the Constitutional Court, have also been required to hear disputes relating to this principle. Perhaps not surprisingly, due to its peculiar characteristics (see Aiyetan et al. 2011; Baloyi and Bekker 2011; Shivambu and Thwala 2019), a number of these finality cases heard in either the Supreme Court of Appeal or the Constitutional Court have been cases from the construction or other project-aligned sectors. More recent cases include Telcordia, Lufuno, and Cool Ideas 2. Both Lufuno and Cool Ideas 2 were eventually decided by the Constitutional Court.
Constitutional Mandates
Development of the Common Law
The Constitutional mandate to develop the common law is articulated in Sections 8(3)(a), 39(2), and 173 of the Constitution. More specifically, these provisions state:
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Section 8(3)(a) of the Constitution: “If necessary develop the common law when applying the Bill of Rights to the extent that legislation does not give effect to the right.”
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Section 39(2) of the Constitution: “When developing the common law or customary law, every court, tribunal or forum must promote the spirit, purport and objects of the Bill of Rights.”
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Section 173 of the Constitution: “The Constitutional Court, the Supreme Court of Appeal and the High Court of South Africa each has the inherent power to protect and regulate their own process, and to develop the common law, taking into account the interests of justice.”
The mandate to develop the common law is reflective of South Africa’s legal system, which entrusts judges to create precedent, and therefore the law. The Constitutional Court has opined that there are justifiable reasons to develop the law in such a manner, including that “The common law supplements the provisions of the written Constitution.” Furthermore, in the context of construction arbitration, the need to develop the common law is driven by a desire for the law to be able to respond and be aligned to ever-changing realities of construction disputes. Changing the legislative law via parliamentary procedures is a much lengthier process. However, despite an acknowledgement of its importance, the constitutional mandate to develop the common law does raise questions relating to judicial restraint. In the context of domestic commercial arbitration, overall, South African arbitration-related case law suggests that South African judges are very wary of radical developments of the common law, particularly if such case laws may impeach upon the finality principle in arbitration. Thus, there are numerous cases where the superior courts (i.e., either the Supreme Court of Appeal or the Constitutional Court) have called for restraint when considering the development of the common law to the extent that the finality principle in arbitration is to be impeached.
Consistency with International Law
The Constitutional mandate for judges to interpret domestic legislation in a manner that considers and/or is consistent with international law is set out in Sections 39(1)(b)–(c), 232, and 233 of the Constitution. More specifically, these provisions state:
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Section 39(1) (b)–(c) of the Constitution: “When interpreting the Bill of Rights, a court, tribunal or forum—(b) must consider international law; and (c) may consider foreign law.”
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Section 232 of the Constitution: “Customary international law is law in the Republic unless it is inconsistent with the Constitution or an Act of Parliament.”
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Section 233 of the Constitution: “When interpreting any legislation, every court must prefer any reasonable interpretation of the legislation that is consistent with international law over any alternative interpretation that is inconsistent with international law.”
These provisions therefore incorporate international law into the South African Constitution without the need for further parliamentary approval. Sections 39(1)(b)–(c) discuss international law and foreign law as two distinct concepts. International law refers to both treaty and customary law with treaty law implying international obligations which arise from treaties that South Africa is a signatory to. Conversely, reference to customary international law implies international obligations that arise from well-established international legal practice. Foreign law refers to comparative case law from other jurisdictions. Section 232 brings customary international law into the remit of domestic law in South Africa. van Rensburg (2020) observes that reference to consider and prefer in the text of Sections 39(1) and 233 suggests not only an acknowledgement of the importance of numerous international sources at the point in time of drafting of the Constitution, but also a recognition that these international sources on their own should neither represent primary legislation nor be able to satisfy South Africa’s international legal obligations. The Constitutional Court has opined in previous judgement that “There is […] no escape from the manifest constitutional injunction to integrate, in a way the Constitution permits, international law obligations into […] domestic law.” Furthermore, it has also ruled that while Section 233 makes an explicit reference only to the interpretation of legislation, its provision extends equally to the entirety of the Constitution as well. By implication, this means that these provisions apply to the entirety of South African law. In summary, international law provisions set out in Sections 39(1)(b)–(c), 232, and 233 of the Constitution have effectively blurred strict boundaries between domestic and international law. Furthermore, these provisions make international law binding on the South African courts. This leads to international law having a strong persuasive force in South African domestic commercial arbitration.
Foreign Arbitration Law (South African Perspective)
Foreign Considerations
Under the Constitution of the Republic of South Africa, international law must be taken into consideration [Section 39(1)(b)] while foreign law may only be considered [Section 39(1)(c)]. The implication in the context of domestic commercial arbitration is that foreign law (in effect, comparative case law) should only have persuasive force in South African jurisprudence. Having no more than persuasive force does not negate the need for international comparative case law. As observed by the Constitution Court, “it will often be helpful for our courts to consider the approach of other jurisdictions to problems that may be similar to our own.” du Bois and Visser (2003) observe that a focus on and/or incorporation of international and foreign law in South African law represents a natural effort to develop a new constitutional jurisprudence in the country following democratic transformation. By being constitutionally empowered to refer to and rely on international and comparative case law, South African courts no longer needed to reinvent the wheel. However, reliance was not random. Instead, as evidence shows, South African judges have sought to make reference to international comparative case law from either jurisdiction upon which the framers of the Constitution relied or where, for some other reason and interest as in the United States case law, general awareness and interest has developed.
The primary legislation for arbitration in the United States is the Federal Arbitration Act of 1925. Section 10 sets out four specific grounds for arbitration vacatur as follows: Section 10(1) “Corruption, fraud, or undue means”; Section 10(2) “Evident partiality or corruption”; Section 10(3) “Arbitrator misconduct”; and Section 10(4) “Arbitrators exceeding or abusing their powers.” Over the years, starting with Wilko v. Swan heard before the Supreme Court of the United States, the courts have primarily drawn upon six potential grounds to impeach the finality principle. These grounds are (1) violation of essence, (2) manifest disregard of the law, (3) illegality, (4) arbitrary and capriciousness, (5) complete irrationality, and (6) when the award or procedure is contrary to public policy or public order. However, in the seminal case of Hall Street v. Mattel [at 1403], the Supreme Court of the United States ruled that disputing parties were not able, via contract, to expand upon the grounds for vacating arbitral awards. However, the court also observed that “The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable.” The problem, as noted by Jacobs (2009), is that the Supreme Court of the United States in Hall Street never really articulated what other alternatives were available under the common law for vacatur. This has created a situation where both judicial and scholarly opinion appears to suggest that the judiciary may be empowered to expand upon nonstatutory grounds for arbitration vacatur under the common law. We briefly expand upon these six grounds subsequently.
Violation of Essence
The first common law ground is where an award fails to draw its essence from the contract (Gentry 2018; Tompkins 2018). We refer to this ground as violation of essence. This will imply a situation where the arbitrator’s award does not draw its primary character (in effect, finality) from the contract to arbitrate between the disputing parties. In effect, this violation will occur at the point that the focus of the award strays beyond contractual parameters, or the fundamental obligation (Cheshire and Fifoot 1969) or main purpose of the arbitration agreement, or where the award does not represent a plausible interpretation of the contract. It occurs when the primary purpose of entering into a contract to arbitrate is defeated by the award. The violation of essence common law ground emerged from the case law of the Supreme Court of the United States in three arbitration cases: United Steelworkers of America v. Enterprise Wheel & Car Corporation, United Steelworkers of America v. Warrior & Gulf Navigation Company, and United Steelworkers of America v. American Manufacturing Company. More specifically, the Supreme Court of the United States observed in the first of the trio, United Steelworkers of America v. Enterprise Wheel & Car Corporation [at 597], that the award of an arbitrator “is legitimate only so long as it draws its essence from the collective bargaining agreement. When the arbitrator’s words manifest an infidelity to this obligation, courts have no choice but to refuse enforcement of the award.”
A number of challenges present with the violation of essence ground since it emerged from the Steelworker cases. For one, it is plausible to rely on this common law ground if Sections 10(3) and 10(4) of the Federal Arbitration Act of 1925 are read expansively. Furthermore, Gentry (2018) notes that numerous courts have unsuccessfully attempted to articulate a general consensus of what violation of essence really means. Thus, in some instances, violation of essence has been interpreted to imply when an arbitration agreement is “unfounded in reason and fact” or when an arbitrator has failed in “arguably construing or applying the contract.” Interestingly, there is evidence that the violation of essence common law ground has, at the least, been applied by a number of courts after Hall Street, although it was eventually overturned on appeal.
Manifest Disregard of the Law
The second common law ground is where there has been a manifest disregard of the law either during the arbitration process or in the award itself (Yates 2018). Although Tompkins (2018) opines that no element of manifest disregard of the law can be construed within any of the provisions of Section 10 of the United States Federal Arbitration Act of 1925, our contention is that an expansive reading of both Section 10(3) and Section 10(4) of the aforementioned legislation may be taken to consider this as common law ground for vacatur.
As presently understood, manifest disregard of the law emerged from the case of Wilko v. Swan heard before the Supreme Court of the United States where it was stated that “the interpretations of the law by the arbitrators in contrast to manifest disregard are not subject, in the federal courts, to judicial review for error in interpretation.”
Wilko v. Swan is not an exception to citation of the judicially constructed grounds of manifest disregard of the law for arbitration vacatur. For example, in Union Carbide Agricultural Products Co. v. Costle the Supreme Court of the United States observed [at 601] that it “encompasses the authority to invalidate an arbitrator’s decision when that decision exceeds the arbitrator’s authority or exhibits a manifest disregard for the governing law.” Similarly, in his dissenting Supreme Court of the United States opinion in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Justice Paul Stevens noted that “arbitration awards are reviewable for manifest disregard of the law” [at 656]. Our point of interest is that, while in Hall Street v. Mattel the Supreme Court of the United States will rule on limits to the expansion of the grounds for arbitration vacatur [at 1403], by further stating that “The FAA is not the only way into court for parties wanting review of arbitration awards: they may contemplate enforcement under state statutory or common law, for example, where judicial review of different scope is arguable,” the court arguably left open the door for manifest disregard to be construed as a viable common law ground for vacatur. Thus the position taken by the United States Court of Appeals for the Fourth Circuit in the 2012 case, Wachovia Securities v Brand, was that “manifest disregard did survive Hall Street as an independent ground for vacatur.” This position has been reiterated in a number of cases, including the 2017 case of Frye v. Wild Bird Centers of America where the United States Court of Appeals for the Fourth Circuit noted that “before a reviewing court will vacate an arbitration award, the moving party must sustain the heavy burden of showing one of the grounds specified in the Federal Arbitration Act […] or one of certain limited common law grounds.”
Illegality
The third common law ground is illegality (Stalker et al. 2016; Polkinghorne and Volkmer 2017). Although illegality arguably can be read into Sections 10(1), (2), and (3) of the United States Federal Arbitration Act of 1925, the primary basis of the illegality ground is the ruling by the Supreme Court of the United States in McMullen v. Hoffman where it was stated that “no court will lend its assistance in any way toward carrying out the terms of an illegal contract. In case any action is brought in which it is necessary to prove the illegal contract in order to maintain the action, courts will not enforce it, nor will they enforce any alleged rights directly springing from such contract.”
Illegality is founded on the legal doctrine of ex turpi causa non oritur action, which implies that the law will not support any action that may arise from a dishonest cause. Illegality is particularly controversial because it “constitutes a vast, confusing and rather mysterious area of the law” (Strong 1961). In effect, what is construed as illegal has so many different meanings. Drawing from contract law, in the context of arbitration, illegality can represent a contract to arbitrate that is devoid of legal consequences or a contract to arbitrate over a matter that in itself is illegal. In international comparative case law, utilizing this ground to challenge and vacate arbitration awards emanates from the doctrine that the courts will, as a matter of principle, will not afford any disputing party to an arbitration proceeding the opportunity to benefit from an act that is illegal or against public morals (Stalker et al. 2016; Polkinghorne and Volkmer 2017). Other considerations may also relate to where there is evidence that the arbitration award was obtained by a process that was corrupt, by undue means, or where there is evidence of fraud (Marcantel 2008), where there is evidence of the arbitration process or arbitrators being either biased or corrupt (Stalker et al. 2016), and where the arbitrator may have exceeded their powers (Cole 2016).
Arbitrary and Capriciousness
International comparative literature also identifies arbitrary and capriciousness as a common law ground for impeaching the finality principle in arbitration (Hayford 1996). A decision is arbitrary if it “is not supported by fair, solid, and substantial cause, and without reason given.” Conversely, a decision is capricious if it “is to be so irregular as to appear to be ungoverned by law.” A consequence of the arbitrary and capriciousness ground in arbitration is that the award is likely to be irrational, leading to an award that is unfair. To this extent, it has similar features to the violation of essence ground. Although arbitrary and capriciousness is cited as a standalone common law ground for arbitration vacatur (Hayford 1996), acknowledgement of its existence appears limited in international commercial arbitration literature and case law. Notwithstanding, from a South African perspective, it is a topic that has attracted the attention of foreign courts, both in the United States and in England and Wales.
Thus, for example, the United States Court of Appeals for the 11th Circuit has stated that an award is arbitrary and capricious where it is found that the award is not related to or derived from the facts of the case. As presently understood, the arbitrary and capricious ground was also the subject matter of the MRI Trading AG v. Erdenet Mining Corporation LLC (MRI case) heard by the courts in England and Wales in 2012 and 2013. The High Court (England and Wales) had found in 2012 case (MRI 1) that the award by an arbitral panel was “somewhat surprising if not bizarre” [at 27]. Thus, on that ground, it vacated the award. On appeal, in the 2013 case (MRI 2), the Court of Appeal (England and Wales) upheld the High Court’s judgement “given the judge’s view that no reasonable tribunal correctly applying the relevant legal principles could have reached the conclusion that the contract was unenforceable.” It appears reasonable to suggest that in finding the arbitrators’ award bizarre, the courts in MRI 1 and MRI 2 determined the case to represent a type of instance that justified vacatur on the basis that the arbitrators or arbitral panel had “gone so wrong in its conduct of the arbitration that justice calls out for it to be corrected.”
The controversy over this common law ground for arbitration vacatur is that it is marred by being open ended and of imprecise content (Breger 1995). Hayford (1996) observes that some courts had treated the arbitrary and capriciousness ground as similar to the public policy ground (which is discussed subsequently). Furthermore, the courts have not been able to articulate either a unifying perspective of what it means or clear standards for its assessment (Virelli 2014).
Complete Irrationality
The fifth judicially constructed (common law) ground is where there is evidence that the award has been marred by complete irrationality (Hayford 1996, 1998b, a). Drawing from the case law of the United States Court of Appeals for the Fifth Circuit and that of the Ninth Circuit, the complete irrationality ground is satisfied where the arbitral award fails to draw its essence from the arbitration agreement. In effect, it exists where there is a violation of essence. What precisely we mean by irrationality can be gleaned from English case law—more specifically, that of Council of Civil Service Unions v. Minister for the Civil Service—where irrational was defined as “a decision which is so outrageous in its defiance of logic or of accepted moral standards that no sensible person who had applied his mind to the question to be decided could have arrived at it.” Reuben (2009) observes that the complete irrationality ground implies that the award has failed the violation of essence. The finality of an arbitration award will not be impeached by the courts even on the occasion that the court opines that the level of legal reasoning is below par. In the jurisprudence of the United States, rationality exists where an arbitrator is able to “offer even a barely colourable justification for the outcome reached.”
The review of the limited academic literature on the complete irrationality ground appears to suggest that this judicially constructed (common law) ground for commercial arbitration vacatur emerged from the case law of the United States Court of Appeals for the Third Circuit in Swift Industries v. Botany Industries, where the court observed that “although the complete irrationality of an award is a basis for setting it aside, the irrationality principle must be applied with a view to the narrow scope of review in arbitration cases.” In his analysis of the case, Hayford (1996) observes that, in deciding Swift Industries v. Botany Industries, the United States Court of Appeals for the Third Circuit literally made no reference to nor sought to rely on Section 10 of the United States Federal Arbitration Act of 1925. Instead it sought to rely on the Supreme Court of the United States decision in the Steelworker trilogy.
Public Policy
The sixth common law ground is where the award is deemed to have either engaged or run contrary to public policy (Becker and Kleyn 1989; Arfazadeh 2002; Drummonds 2012; Badah 2016). A review of the literature suggests much vagueness surrounding the concept of public policy (Hollander 2016). Being vague means that public policy is largely subjective and heavily laden with bias (Coffin 1988). Public policy was recognised as a ground for impeaching the finality principle by the Supreme Court of the United States in W.R. Grace v. Local Union 759 when it observed [at 766] that, “As with any contract, […] a court may not enforce a collective-bargaining agreement that is contrary to public policy […] If the contract as interpreted violates some explicit public policy, we are obliged to refrain from enforcing it.” The question is whether, following the decision of the Supreme Court of the United States in Hall Street v Mattel [at 1403], public policy still serves as a means of impeaching the finality principle. Our understanding of the principles set out in Hall Street is that public policy can no longer be relied upon to impeach the finality principle as it is not a statutory ground for vacatur. Furthermore, unlike illegality, it is rather difficult to read public policy into any of the provisions of Section 10 of the Federal Arbitration Act of 1925. However, this understanding is refuted by Watt and Petrick (2021) who reported on a number of cases decided at the various circuits of the United States Court of Appeals since Hall Street in 2008 that have relied on public policy to impeach the finality principle.
Conclusions
Presently, the main ethos of arbitration is that because, for a range of reasons, disputants choose it as their preferred dispute resolution mechanism, its finality should not be extirpated through appeals and judicial review. Finality resides on the premise that once arbitration proceedings are settled, findings are made and awards issued, neither party—unless in very exceptional and limited instances—will be allowed to appeal or litigate the matter again. In balancing an emphasis on the need for arbitral finality against the need for judicial oversight, considerable risks are present. Appealing arbitration awards can frustrate the advantages of arbitration. However, appeals do serve as a critical means of the judiciary maintaining an element of oversight of the arbitration process. Such oversight is required since, because the courts are ultimately responsible for enforcing arbitral findings and awards, they (the courts) have an obligation to ensure that the very findings and awards they seek to enforce have been finalized in a manner that is not unjust. That offers two possible approaches that can be examined as part of efforts to (1) develop the common law, and (2) meet the requirement to consider and/or interpret domestic legislation in a manner that is consistent with international law. One approach that may be considered will include embracing these common law grounds. A good reason will be that the common law plays a significant role in terms of how the law is understood. For example, it is through the common law that the commentary that illuminates legislative provisions is drawn. The common law also serves an important role in providing the interpretation required for constitutional obligations to be fulfilled. Despite the fact that the effect of Hall Street was to limit the impeachment of the finality principle to legislative provisions, it could be argued that embracing these common law grounds will enrich South African jurisprudence with case law that extends back to at least 1953 when Wilko v. Swan was decided, arguably, a little over a decade before South Africa’s current domestic commercial arbitration law (the Arbitration Act 42 of 1965) came into effect. However, we recognize that there may be reasons (apart from an emphasis on the finality principle) for why the courts may be—and have been—hesitant to develop the common law in a more radical manner. One reason may be resource considerations, in that the courts are of the view that they have limited resources to deal with a potential floodgate of vacatur cases if such common law grounds are embraced. Furthermore, developing the common law is associated with a number of risks. One such risk is that the common law is inherently contestable.
The other approach that could be considered is the possibility of placing the six nonstatutory grounds for arbitration vacatur on a statutory footing. This would bring three critical advantages to the development of the common law in South Africa. Of particular importance is that it brings about certainty in the law. Second, it will allow for both a restatement and consolidation of the law. This is particularly important noting that, in reality, while domestic arbitration practice has dramatically changed over the last few years in South Africa, existing primary domestic commercial arbitration legislation in the form of the Arbitration Act 42 of 1965 was framed almost exclusively on the basis of very antiquated legislation promulgated between 1889 and 1904. The Arbitration Act 42 of 1965 has remained in force for over 55 years without any major amendments. We are also aware that there was no progress with the process of reform of domestic arbitration law in South Africa following the 2001 report by the South African Law Reform Commission. All the indications suggest that, by 2011, a draft bill for domestic arbitration had been approved by the South African government with a view to present it for enactment to Parliament. However, at a certain point, and without any explanation, it will appear that a decision not to do so was made and no reason for not presenting the draft bill to Parliament was ever put forward. Instead, the government promulgated the International Arbitration Act 15 of 2017, which is largely framed upon the UNCITRAL Model Law. The problem with this approach is that in South Africa there is now a dual arbitration system, in which provisions and text are couched in fundamentally different legal language. Mindful of these, our proposal for change entails adopting the first option that was discussed by the South African Law Reform Commission. This option provided for retaining core provisions of arbitration legislation while focusing on improving aspects of the legislation that presented the greatest challenges in terms of arbitration practice and jurisprudence. As our paper focuses on the finality principle, we call for the improvement of the current Arbitration Act 42 of 1965 with updates that reflect international comparative law as relates to common law grounds for vacatur and, as far as possible, placing these common law grounds on a statutory footing. Doing so limits the potential disruption to practice that can emanate from the promulgation of brand-new legislation.
Data Availability Statement
No data, models, or codes were generated or used during the study.
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List of Statutes
Arbitration Act 42 of 1965 (South Africa).
Arbitration Act of 1889 (United Kingdom).
Arbitrations Act, 1898 (Act No. 29 of 1898) of the Cape of Good Hope.
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Justice Laws Rationalisation Act 18 of 1996 (South Africa).
Labour Relations Act, 66 of 1995 (South Africa).
Natal Arbitration Act 24 of 1898 (South Africa).
Prevention and Combating of Corrupt Activities Act 12 of 2004 (South Africa).
Transvaal Ordinance Act 24 of 1904 (South Africa).
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Journal of Legal Affairs and Dispute Resolution in Engineering and Construction
Volume 15 • Issue 1 • February 2023
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© 2022 American Society of Civil Engineers.
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Received: Mar 22, 2022
Accepted: Aug 4, 2022
Published online: Oct 6, 2022
Published in print: Feb 1, 2023
Discussion open until: Mar 6, 2023
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