In a recent and controversial judgment, the High Court of South Africa set aside an attachment order authorising the attachment of an aircraft owned by the Tanzanian Government in satisfaction of a foreign arbitral award, on the ground that the award “ceased to exist” when it was converted into an order of the courts of the seat in Tanzania.
Twala J’s 4 September 2019 judgment in The Government of Tanzania v Steyn and Others sits uneasily with the strict mandatory enforcement regime for New York Convention awards introduced in South Africa’s revamped International Arbitration Act of 2017 (the “South African Act“). It also underlines the importance of clear drafting in any post-award settlement agreement to ensure that the parties retain the ability to enforce the terms of the original award in appropriate circumstances.
In this post, we examine the High Court’s reasoning and compare it with the approach that the English courts might take in similar circumstances under the Arbitration Act 1996 (the “English Act“). We conclude with some practical guidance for parties considering a post-award settlement.
The South African proceedings concerned an arbitral award obtained in 2010 by a Namibian national, Hermanus Philippus Steyn, against the Tanzanian Government. Mr Steyn was awarded over US$36.3 million in compensation for expropriation of his property.
In 2011, Mr Steyn succeeded in having the award declared as a decree of the Tanzanian High Court, enforceable as such in Tanzania. In July 2012, the parties concluded a settlement agreement under which Mr Steyn agreed to accept a reduced sum of US$30 million. The settlement agreement was made an order of the Tanzanian court shortly afterwards.
In 2018, the Tanzanian Government applied to the Tanzanian courts seeking a review of the 2011 decision, alleging that the settlement deed was “fraught with errors“. Phillip J dismissed that application, holding that the award was “non-existent as it was overtaken by events“.
Mr Steyn then obtained an ex-parte order of the South African High Court in August 2019 attaching a commercial airliner leased by Tanzania’s national carrier, Air Tanzania, which was subsequently seized in Johannesburg.
The Tanzanian Government applied to the High Court in Johannesburg to have the order set aside on the basis that, among other things, there was no award that could be recognised and enforced under the South African Act.
The decision of the Johannesburg High Court
The Tanzanian Government argued that “immediately the arbitration award was made an order or a decree of the Court, it ceased to exist. The arbitration award was made an order of Court, thereafter the parties concluded a compromise which was also made an order of Court.”
Twala J accepted that submission, concluding that “the arbitration award ceased to exist on the 3rd of May 2011 when it was made an order of the [Tanzanian] Court” and that “when the parties concluded the deed of settlement, the compromise, it was in relation to, or a compromise of the order of Court and not the arbitration award which was no longer in extant at the time“.
In reaching that conclusion, Twala J agreed with Phillip J in the Tanzanian High Court that “once the parties enter into a compromise, it means that the claim or award that existed before such compromise is entered into is abandoned and becomes not binding to the parties…”.
Twala J concluded that the South African court did not have jurisdiction to entertain the matter under the South African Act on the basis that there was no Convention award to enforce.
The effect of the post-award settlement agreement
The matter was further complicated by the terms of the post-award settlement agreement concluded in 2012, which was also made an order of the Tanzanian court.
In the South African proceedings, counsel for Mr Steyn argued that he was entitled to enforce the original award because the settlement contained a “clawback” clause effectively reviving the award in the event of default. The court disagreed. The clause in question read:
“Any delay in payment of any yearly tranches for more than six months shall constitute default and the Decree Holder shall be entitled to immediate enforcement of the Consent Order resulting from the Deed of Settlement less any amount already paid.”
The court (rightly) concluded that the effect of this clause was that Mr Steyn’s recourse in the event of a breach of the settlement agreement was to bring an action to enforce the terms of the consent order. In the absence of an express provision reviving the original terms of the award, Mr Steyn was not entitled to enforce the original award.
Did the South African court get it right?
The court was on fairly firm ground in its conclusion that, properly construed, the settlement agreement did not permit recourse against the original award. It must follow as a matter of basic contractual principle that, where the parties freely agreed to compromise the debt in the original award and to limit their recourse in the event of a breach of the settlement agreement, they should not be permitted to rely on the original terms of the award absent an express contractual right to do so.
It is Twala J’s finding that the award “ceased to exist” upon being made an order of the Tanzanian court that has attracted controversy. That finding sits uneasily with the mandatory enforcement regime for Convention awards introduced in the South African Act, which now obliges local courts to recognise and enforce Convention awards (where the previous act simply gave the courts the authority to do so).
It is difficult to see why a Convention award should cease to exist simply by virtue of being made an order of the court in the place of enforcement. If that were the case, the enforcing party would be limited to enforcing the award in a single jurisdiction and, having done so, the award would be ‘spent’ and could not subsequently be enforced elsewhere. The award creditor would (presumably) be left to enforce the order of the first enforcing court abroad.
That would fundamentally undermine the enforcement regime created by the New York Convention, the purpose of which is to enable parties to enforce arbitral awards efficiently, often in multiple jurisdictions, without engaging the many difficulties associated with the mutual recognition and enforcement of national court judgments.
It is also difficult to see how the original award could cease to exist as a result of the settlement agreement, as both Twala J and Phillip J appeared to suggest. If the settlement agreement were for some reason to be set aside (on account of a misrepresentation, for example), then the award creditor ought to be entitled to rely on the original award (their contractual agreement to the contrary having fallen away).
A court faced with a problem such as the one at hand may very well seek to rely on the public policy exception in Art V(2)(b) of the New York Convention, and conclude that the recognition or enforcement of a Convention award would be contrary to the public policy of South Africa in circumstances where the parties agreed that the award would not be enforceable. A decision along these lines would ensure the sanctity of the freedom to contract whilst ensuring that the standalone enforcement regime of the New York Convention remains intact.
A comparative view: how might the English courts approach a similar scenario?
It appears that the English courts have not yet confronted this precise situation before, although it is not difficult to predict how they might approach these issues applying the English Act.
A party seeking to enforce a Convention award in the English courts would ordinarily do so by seeking the permission of the court to have the award enforced in the same manner as a judgment or order of the court to the same effect, under s. 101(2) of the English Act. Where permission is given, the party may seek to have judgment entered in terms of the award under s. 101(3). Orders for enforcement are frequently given simultaneously under sections. 101(2) and (3).
An order under either provision does not, however, affect the existence of the original award. Under s. 101(2), the award is simply granted status equivalent to that of a judgment of the English court; it is not extinguished or replaced.
Where judgment is entered in terms of the award under s. 101(3), the conventional analysis is that the award is ‘merged’ into the judgment such that, for the purposes of enforcement in England and Wales, the enforcing party is entitled to proceed only on the basis of the judgment. This has a number of benefits, not least that a failure by the award debtor to honour the judgment may give rise to a contempt of court (the sanctions for which can be particularly persuasive in encouraging prompt payment). The award does not, however, cease to exist and the enforcing party is free to seek enforcement of it in other jurisdictions in the usual way.
Similarly, where the parties subsequently conclude a settlement agreement compromising the terms of the original award, the conventional analysis in English law is that the parties are contractually estopped from relying on the terms of the original award. However, the award remains in existence notwithstanding the settlement.
The enforcing party’s recourse in the event of a breach of the settlement agreement depends on the terms of the relevant agreement. In the absence of an express right to revive the original award, as a matter of construction it is likely that the non-defaulting party will be limited to an action to enforce the terms of the settlement agreement. That is, however, simply the effect of the parties’ agreement; it does not imply that the award has ceased to exist.
The unfortunate outcome in the South African proceedings might have been avoided by appropriate drafting. Parties to international arbitration proceedings should be careful to specify in any post-award settlement agreement what the non-defaulting party’s recourse is in the event of a breach of the agreement. If it is intended that the innocent party should be entitled to enforce the original terms of the award, then this should be spelled out clearly.
For more information, please contact Jonathan Ripley-Evans, Director, Marco de Sousa, Senior Associate, or your usual Herbert Smith Freehills contact.