Num v CCMA (Eskom) (JR388/14) [2016] ZALCJHB 508 ; [2017] 4 BLLR 405; (2017) ILJ 1869 ? (15 December 2016) per Lagrange J.

At the request of the trade unions the labour court reviewed an arbitral award concerning an interest dispute in an essential service, namely Eskom.  The terms of reference constrained the arbiter’s choice of outcome and affected the review on grounds of reasonableness.  Lagrange J held the outcome satisfied the reasonableness standard test, known as the Sidumo test.  Even if a process related review test applied it did not succeed on the facts.

Excerpts without footnotes

Introduction

[1]   This is an application to set aside a somewhat unusual arbitration award. The arbitration was conducted to settle a wage dispute between the parties, which is a dispute of interest in an essential service that may be referred to arbitration by either party if conciliation fails in terms of section 74(4) of the Labour Relations Act, 66 of 1995 (‘ the LRA’).

[2]   The arbitrator issued an award in which the increase awarded was the final offer made by Eskom prior to the commencement of the arbitration. The final offer comprised a wage increase of 5.6% across the board for the 2013/2014 period and a range of related increases of various allowances and benefits, which I will simply refer to collectively as Eskom’s package.

[3]   A fortnight after issuing his award the arbitrator issued a variation ruling in which he substituted paragraph 121 of his award. In his original award, he had made specific findings on the wage increases, increases in various allowance, extension of death benefits, variation of maternity leave and contingency to leave and the referral of certain items to workgroups.  In paragraph 121 of his award he also stated that, he made no order on the implementation of proposed changes to Eskom’s disciplinary procedure and bargaining unit conditions of service as he was “not certain what those changes are”.  In his variation ruling it appears that he had inadvertently overlooked the fact that the proposed changes were contained in annexure attached to Eskom’s referral form.

[4]   Consequently, his failure to make any finding on those issues was an omission based on a patent error and he sought to correct it in his variation order. He noted that, according to Eskom, the changes were intended to conform to legislation and market trends and to accommodate the changing requirements of the business.  He also noted that the unions did not lead any evidence on the proposed changes and he found that they were fair and reasonable.  Accordingly, he then substituted paragraph 121 of the original award with an order that Eskom’s conditions of service should be amended as set out in the Annexure to its referral form.

. . . . .

[6]   The arbitrator was tasked by the parties to ‘determine’ a number of issues, amongst others, in terms of the terms of reference drawn up by them under section 135 (6)(a)(ii) of the LRA. Some of those listed, that are pertinent to this matter: . . . .

. . . . .

The award

The arbitrator’s approach

[7]   The arbitrator considered what he characterised to be the two main approaches to interest arbitrations, namely the hypothetical outcome approach and the fairness based approach in the light of existing authorities as reflected in to arbitration awards. The hypothetical approach was characterised by Commissioner Levy in NEHAWU v Lifecare Health[1] as an objective one in which it is accepted that the parties

“…had final positions that were too far apart to allow for agreement, and that it is therefore the arbitrator’s role to anticipate where the bargain should have been struck, in the light of available data, had the bargaining continued to conclusion and in good faith.” (emphasis added)

By contrast, the fairness of approach is articulated in the decision of Commissioner Grogan in SA Municipal Workers Union v Water & Sanitation Services[2] in these terms:

“For better or for worse, the legislature has chosen arbitration as the substitute for industrial action…  Unlike industrial action and wall?, arbitration is a process of reason.  While the parties to Interest arbitration cannot point to rights to sustain their cases, they are obliged at least to persuade the arbitrator why in fairness their position should be accepted.  Only if both parties fail in that regard, may the arbitrator consider possible intermediate positions.  The approach I have adopted in the present arbitration is accordingly to ask, in the first instance, whether the parties have advanced sufficient reasons for acceptance of their respective positions.”

[8]   In this instance, the arbitrator decided that the latter approach was preferable and explained his choice as follows:

“I agree with Grogan and wish to add that, in my view it is not the function of an arbitrator in the interest dispute to extend the negotiation process.  Arbitration was a process based on reason and fairness by which the fairness and reasonableness of the respective positions must be determined.

Furthermore as was suggested by Mr Boda, the hypothetical outcome approach undermines collective bargaining in that it encourages parties to come with unrealistic positions in the hope that the arbitrator will give more than what was offered.  It gives too much emphasis to protecting the hypothetical outcome of powerplay and one cannot ignore the reality that arbitrators may have different approaches to the weight that they attached to the respective bargaining powers of the parties.  In essential services unions have much more power because if they strike that can cause much more destruction than it a non-essential service.

The very reason for essential service is to protect life, health and property.  As was suggested by Mr Boda, it is abhorrent to countenance an argument for higher wages where that argument rests on the potential to destroy human life, on property or it affects health.  If Eskom workers strike, hospitals may not function, which is a real and direct threat to life.

Therefore, following a hypothetical outcome approach in essential services and arbitrator may tend to   predict a higher outcome because striking workers may cause more devastation than in non-essential services.  At the end of the day it is based on conjecture rather than reason, fairness and rationality which are the fundamental elements of arbitration-an approach that would be arbitra(ry) and irrational.  Hence, I am of the view the hypothetical approach is not the correct approach to take in this matter.”

. . . . .

[10]   Another pillar of the arbitrator’s approach to his task was encapsulated in the following paragraphs of his award:

“Equity, reasonableness and fairness

    1. Equity, fairness and reasonableness are the primary principles in interest arbitrations. Although equity, reasonableness and fairness are essentially relative concepts, they certainly suggest that regard must be had to all the circumstances of the matter and of the dispute that the arbitrator has to decide.  The question therefore is whether the demands or office of the respective parties are fair and reasonable in all the circumstances of the matter.
    2. Mr Boda argued that I should not consider the fairness and reasonableness of the bargaining items one by one, but as entire packages of the Union demands and Eskom’s offer.
    3. Save for the evidence of Mr Smal on the housing benefit and Mr Radebe on the office facilities for unions, no evidence was adduced by the unions which addressed any of the other items or for that matter the fairness of the Unions’ demands as entire packages. Although Dr Forslund suggested that the Unions’ demands are not exorbitant, he suggested that an increase of between 8 and 9% would be moderate.  I was not informed that the Unions have deviated from their demands and there is simply no evidence which substantiate[s] any of their demands as presented at this arbitration.  It is therefore not possible to weigh the Union’s demands up against the offer of Eskom on any item by item basis even as a package.  I will therefore look to the evidence adduced by Eskom and of course the evidence of Dr Forslund in so far as he suggested that the Eskom offer is not fair and reasonable and decide whether Eskom has convinced me that its offer is indeed fair and reasonable.  I will, however address the housing benefit and the union office facilities issues separately in so far as evidence was led by both parties.”

The arbitrator’s consideration of specific issues

. . . . .

[15]   On the matter of productivity, the arbitrator accepted that the evidence of Eskom’s expert witness showed that productivity was decreasing. He earlier noted that the union’s expert witness had conceded that wage increases had been slightly higher than productivity over the years.  He also was of the view that improved performance was a matter to be dealt with under an incentive scheme and not under general wage increases.  He did not deal expressly with disparities in the wage gap.

. . . . .

Evaluation

Alleged misconception of the nature of the enquiry

[19]   The first point that needs to be made is that, in the two arbitration cases in which the hypothetical and objective approaches were first discussed, the arbitrators were not bound by any written terms of reference agreed to by the parties, though both arbitrations were compulsory arbitrations in essential services. No specific criteria or methods of evaluation are prescribed by the LRA in dealing with interest disputes.

[20]   Section 74(4) which confers jurisdiction on the CCMA or bargaining Council to arbitrate essential service disputes, which include interest disputes, merely states:

“(4)           If the dispute remains unresolved, any party to the dispute may request that the dispute be resolved through arbitration by the council or the Commission.”

The special provisions dealing with the arbitration of interest disputes in section 139 of the LRA only deal with the conduct of the proceedings and not with the approach an arbitrator should adopt in dealing with an interest dispute.  The determination of an interest dispute through arbitration is therefore subject to the general requirements of section 138(1) of the LRA, viz: . . . .

“138   General provisions for arbitration proceedings

(1)   The commissioner may conduct the arbitration in a manner that the commissioner considers appropriate in order to determine the dispute fairly and quickly, but must deal with the substantial merits of the dispute with the minimum of legal formalities.”

However, the parties are also expressly invited to determine terms of reference for the arbitration in terms of section 135(6)(ii) of the Act :

“(6)(a)   If a dispute about a matter of mutual interest has been referred to the Commission and the parties to the dispute are engaged in an essential service then, despite subsection (1), the parties may consent within seven days of the date the Commission received the referral-

(i)   to the appointment of a specific commissioner by the Commission to attempt to resolve the dispute through conciliation; and

(ii)   to that commissioner’s terms of reference”.

In this matter, the parties did agree to terms of reference and accordingly, the correctness of the arbitrator’s approach depends primarily on the correct interpretation of those terms and he was not at large to simply elect which approach he would adopt, as the arbitrators did in the two cases mentioned.

[21]   On a very superficial reading of the terms of reference, it might be argued that both the objective and hypothetical approaches were equally weighted by the parties in drafting the terms of reference. Thus, the terms of reference clearly identifies values and objective factors in sub-paragraphs   8.1, 3.8.2, 3.8.4, 3.8.5, 3.8.6 and 3.8.7, which the arbitrator must consider.

On the other hand, sub-paragraph 3.8.3 describes the hypothetical approach, which seemingly invited the arbitrator to blend the two methods as he saw fit.  However, paragraph 8.3 as a whole must be read in the context of the preceding paragraphs, which laid down constraints within which he could apply the various factors in arriving at an appropriate award.

. . . . .

[24]   Accordingly, I am satisfied that the arbitrator did not misconceive the nature of the enquiry. It also follows that any other grounds of review must be evaluated on the basis that the arbitrator embarked on the correct enquiry. 

What this means is that in considering any of the other factors listed in paragraph 8.3, those factors must still be evaluated with reference to the overarching question of which proposal the arbitrator ought to have preferred, and not with a view to finding a via media.

This is a fundamentally different exercise from following the hypothetical approach because it means that the arbitrator might not agree with any of the proposals, but is nonetheless constrained to choose one.  Inevitably, this means it is difficult for the arbitrator to give as much weight to nuances in the conflicting evidence which can be done when the arbitrator ‘creates’ the award using the hypothetical approach.

It also means that the scope for a review based on irrationality is much more limited because the arbitrator’s freedom of choice and ability to explain the outcome has been already constrained by the parties own proposals.

The best the arbitrator can do is to adopt the proposal which seems most reasonable (or conversely, the least unreasonable) even if that is not an outcome the arbitrator would have arrived at using the hypothetical approach, or an objective approach.

[25]   It is for this reason that the arbitrator emphasised that it was necessary for the union’s to defend their own proposals and not merely to attack Eskom’s. Below I mention how this might affect questions of onus.

. . . . .

[28]   It may be correct that fairness in the sense of a fair outcome played less of a roll in his reasoning, but he did not ignore it and the fact it played less of a role was a consequence of the fact that, if properly construed, his terms of reference did not give him the discretion to arrive at an equitable outcome. Had the terms of reference been otherwise or even if the unions’ proposals had not been pitched at a levels which were so remote from the scope of a realistic settlement, fairness could have been expected to have played a more prominent role in his deliberation.

In the circumstances, even if it was competent on review to consider if the award also satisfied a fair process requirement, which required the arbitrator to make a finding based not only on reasonableness but also fairness, irrespective of whether it would affect the outcome, I do not think the arbitrator failed in this regard given the constraints imposed on him by the parties.

In view of this it is not necessary to decide if, as a matter of law, the process related review remedy as argued for by the NUMSA was still available to the applicants.

[29]   Further, it must be mentioned that any form of wage arbitration does not permit an analysis of factors which fits into a neat formula in which a number of requirements have to be met, unless the parties specify that in their terms of reference. To illustrate the difference with one example, an arbitrator evaluating the fairness of a dismissal for misconduct has to be satisfied inter alia that the dismissal meets the criteria for a substantively fair dismissal set out in Schedule 8 of the LRA.

By contrast, in a wage arbitration, the arbitrator is confronted with a number of variables to consider none of which are, in principle, necessarily decisive.  Also the arbitrator’s findings on one factor may not determine or even affect the findings on others.  At the end of the evidence, the arbitrator is confronted with a basket of factors some of which may favour the employees and others the employer.

The arbitrator has the difficult task of deciding, based on the circumstances of that arbitration, which ought to be given more weight and how that relates to the opposing demands on the table.   Because there is no ‘correct’ answer to an interest arbitration, the efficacy of review proceedings based on unreasonableness will unavoidably be diluted, and even more so when the outcome is one of a number of pre-determined ones.

In the context of arbitration of demarcation disputes, the LAC has recognised the difficulty of reviewing such determinations because of the complex nature of the decision.

The observations of Van Niekerk J in another matter, which the LAC endorsed in National Bargaining Council for the Road Freight Industry v Marcus No & others [1] apply with even more force in the context of an interest arbitration, where the factors to be considered are even more diverse in nature.  . . . . .

. . . . .

Alleged failure to consider material evidence

[31]   Affordability was one of the criteria the arbitrator was obliged to consider under his terms of reference. The applicants argued that the arbitrator failed to consider Professor Mohr’s statement that affordability was an unreliable factor because it could be manipulated, and that he failed to consider that affordability was also a function of political choices made by the state which could be changed.

[32]   Firstly, the arbitrator did consider Professor Mohr’s observations that affordability arguments were often used expediently by parties. In paragraph 81 of his award, the arbitrator stated:

“I got the impression that Professor Mohr is of the view that affordability is not a very reliable factor because parties can manipulate that.  I am of the view that it is a very importan[t] factor which is objectively determinable.  Hence the question is whether Eskom can afford to pay an increase above the offer.”

In Professor Mohr’s evidence, he was critical of the way employer and union parties tended to use affordability arguments opportunistically.  For example, during bad years employers will focus on affordability as an important factor whereas unions will discount the significance of this factor in bad times but emphasise its importance when an employer is doing well.  He was also critical of the lack of substance that was often characteristic of employer arguments based on affordability and that union arguments on the issue were often lacking in substance and simply amounted to demands based on notions of entitlement.

In his concluding remarks, Professor Mohr did not altogether discount affordability as a factor to be considered, but contended that it was irrational for employees to argue that just because funds might be available for a certain increase, that was a justification for awarding a particular level of increase.  The arbitrator considered Professor Mohr’s standpoint, but decided that it was nonetheless important for him to address the issue as objectively as he could, which is what he proceeded to do.

. . . . .

Arbitrator’s treatment of inflation

[35]   In regard to the impact of inflation as a factor to be considered, the arbitrator found that Eskom’s offer exceeded the current rate of inflation and that awarding inflationary increases was not a cast iron rule but also subject to considerations of affordability. It is true that he did not expressly make reference to anticipated inflation but only to known inflation values.  Is that something which renders his award in some way so unreasonable that it stands to be set aside?

[36]   I fail to understand how having regard to historic and current data of the actual inflation rate immediately preceding the effective increase date, but disregarding estimates of future inflation must be necessarily be construed as an irrational approach.

In so far as it is relevant for wage increases to keep pace with inflation, it is self-evident that the most reliable method is to consider, to what extent real wages have been eroded since the last increase was awarded and to make an adjustment for that erosion where possible to maintain the value of real wages over time.

Basing an increase on estimates of future inflation during the course of the period to which the award is obviously a far more speculative approach to adopt and in my view it is within the arbitrator’s discretion in a multivariate determination of this sort to prefer to rely on more certain inflation indicators.

[37]   The applicants also argued that the arbitrator failed to consider that, above inflation increases would not impact on the country’s overall inflation rate and wage increases were not driving the inflationary trend. Firstly, it should be mentioned that the arbitrator was alive to the submissions of the unions’ expert witness Dr Forslund that wage increases played a small role in inflation.

However, in his analysis, the arbitrator disagreed and took the view that an increase of between 8 and 9% would have an impact on inflation.  The evidence of Professor Mohr had been that even though it could not be said that an above inflation increase by Eskom would directly accelerate inflation, because of its potential norm setting value it could impact on wage settlements throughout the economy which cumulatively would have an accelerating impact on inflation.

He also made the connection between the impact of an above inflationary increase to Eskom workers on Eskom’s costs which would have a bearing on future electricity price increases.  This evidence was not materially challenged.  Consequently, it cannot be said that it was irrational of the arbitrator to adopt a view that increases awarded by Eskom above the inflation rate would not have a neutral impact on the rate itself.

. . . . .

Changes in productivity as a criterion

[39]   The applicants contend that productivity had increased and that, because it was an important consideration in determining a fair increase, the arbitrator had failed to give due consideration to this factor. What emerged from the evidence before the arbitrator was contesting measures of productivity.  Dr Forslund preferred to use the average productivity increase for the economy as a whole rather than the measure adopted by Professor Mohr, which measured per capita output per employee.

. . . . .

[41]   Obviously there are various measures of productivity and labour productivity is only one such measure. In the context of factors relevant to determining a wage increase, it cannot be said categorically that the productivity of employees in the entity under consideration should be given less weight than general labour productivity in the economy as a whole, as the specific economic circumstances of the entity under consideration will always be directly relevant to the determination of appropriate wage levels in that entity whatever the weight attached to comparative measures in the broader economy or comparable entities.

That is not to say that measures of productivity in the broader economy could not arguably be a consideration an arbitrator might take account of, but the arbitrator’s decision to prefer to regard labour productivity in Eskom itself as the more important factor cannot be characterised as an arbitrary or irrational choice.  In that regard, at best for the unions the evidence showed that labour productivity had not improved.

[42]   In any event, the arbitrator was of the view that productivity as a factor should not play such a significant role in determining general wage increases, but that it was a factor that should rather feature in negotiations over incentive bonuses. Despite this, it is still clear from the arbitrator’s observations on the productivity argument that he did consider productivity to be of some relevance to the extent that it might diminish the cost impact of a wage increase, and by implication would be a consideration affecting perceptions of the affordability of an increase.

[43]   As mentioned above, the evaluation of the specific alleged deficiencies in the arbitrator’s reasoning above, must be understood in the context of the type of arbitration decision under consideration. In short, none of the shortcomings are ones that, even if they have some merit, are ones that would compel me to find that the arbitrator chose Eskom’s proposal as the more reasonable in circumstances where no other arbitrator could have chosen that outcome on the evidence before them.