ARBITRATION CLAUSE DISPUTES

ARBITRATION – WHEN IS A DISPUTE ARBITRABLE?

It seems that many parties do not know when a dispute is arbitrable. This article is provided as insight into this elementary issue which vexes so many. Bridging dispute resolution disputes is invaluable legal acumen.

A dispute is arbitrable when the dispute is one which the parties agree to be arbitrated. This ‘agreement’ is usually contained in a clause which is part of a contract which the parties have entered into at some prior time. In other words, the dispute is arbitrable by agreement between the parties as a form as alternative dispute resolution, i.e. alternative to formal court proceedings.

A dispute can also be arbitrable in terms of statutory provisions such as in terms of the Labour Relations Act 66 of 1995, as amended, which provides for certain disputes to be arbitrated by law (as opposed to by agreement) under the auspices of the CCMA or Bargaining Councils.

In either of the aforementioned instances, the actual dispute to be arbitrated is determined by the scope of the arbitration clause in the prior agreement or by the relevant statutory provisions. Thus in the former instance, the parties’ contract could provide for arbitration if the dispute is one which is in regard to matters such as:

- quantification of damages,
- appointment of accountants to consider and/or determine certain financial calculations,
- or financial valuations of assets or businesses or future financial disbursements where the parties are in disagreement,
- or there is a deadlock in a company’s board of directors in regard to the company’s business or asset valuations.

In addition to the above, it sometimes occurs that certain kinds of ‘technical legal’ issues arise in regard to the arbitration actually taking place in the first place, despite the parties having an agreement which provided for arbitration.

- Essentially, these ‘technical legal’ disputes can be in respect of issues such as:
  - the arbitrator’s power or jurisdiction over the parties and/or the dispute itself,
  - or whether a particular dispute which has arisen is one which the parties contemplated to be arbitrable in terms of their prior contract. eg. If one party contends that the prior agreement is void or invalid in law, is the right to refer the dispute to arbitration compromised or unenforceable? Or can the arbitrator arbitrate this contention as part of the arbitration of the actual dispute, or is it only a court of law which can adjudicate upon that contention before the arbitration itself proceeds in regard to the dispute?

Stated differently, the ‘technical legal’ issue is whether or not the ‘dispute’ falls within the enabling clause of a contract which provides for referral of the ‘dispute’ to arbitration. In many instances, one or both of the parties challenge the referral to arbitration of the basis that the ‘dispute’ is not one which the parties agreed could be referred to arbitration in terms of the arbitration clause of the contract.

In addition, it may also occur that one of the parties challenges the jurisdiction of the arbitrator to determine certain aspects of the arbitration clause and/or the arbitration itself. An example is when one of the parties challenges the coming into existence of the contract itself on the basis that it is void ab initio or alternatively invalid in which case the party contends that by necessary implication the arbitration clause is unenforceable itself, unless the principle of severability A further implication of such a challenge is that such party will then contend or argue that the arbitrator cannot determine these fundamental issues himself or herself and that only a court of law can do so.

In many of these instances involving arbitration clause disputes, the other party will contend that the arbitration clause is not automatically unenforceable or that the arbitrator is not incapable of determining these issues because they want to proceed with the arbitration of the dispute as opposed to becoming embroiled in courtroom litigation.

Fortunately, the courts in South Africa have provided some authority for the determination of these problematic issues in regard to arbitration clause disputes.

In the matter of North East Finance (Pty) Ltd v Standard Bank[1], the Supreme Court of Appeal held that it is in principle possible for the parties to agree that the question of the validity or voidness of their agreement be determined by the arbitrator himself/herself as part of the referral to the arbitration, provided the contract contains a term to that effect.

Thus, in layman’s terms where the contract or agreement limits the powers of the arbitrator either expressly or by implication (or does not provide for such power at all), the arbitrator cannot exceed his or her powers to arbitrate issues which he or she is not empowered to arbitrate. This ultimately means that the drafting of the agreement is of the utmost importance to ensure that the parties’ intention is at all material times recorded precisely in the agreement.

In the recent cases of City of Cape Town v Namasthethu[2] and Seabeach Property Investment 28 v Nunn[3], the Western Cape High Court dealt with two arbitration ‘technical legal’ disputes.

In the former case, the parties were in dispute regarding the actual validity of their contract in the first place.

The question before the High Court was whether or not the legal ‘validity’ of their contract was an issue/dispute which they had contemplated to be one which was included in the clause enabling the arbitration of disputes arising from the contract.
In casu, it was alleged that the contract itself was induced by fraudulent misrepresentation.
The City of Cape Town contended that the validity of the contract was never an issue which was to be adjudicated upon, i.e. to be arbitrated, and that only a court of law could determine the validity of the contract.
Upon consideration of the contract and the arbitration clause in question, the Court found that it did not appear that the parties contemplated that the validity of the contract itself was an issue which would be arbitrable, thus the issue of the validity of the contract could not be adjudicated upon by the arbitrator.
The Court’s view was that if the validity of the contract itself was an issue/dispute which the parties intended to be resolved by adjudication or arbitration then the contract or the arbitration clause in the contract should specifically say so or the contract must clearly indicate as much from its terms.
The Court went further to state that it so was because the general position is clear that if there is a dispute as to whether the contract which contains the arbitration clause is legally valid (or in other words, has ever been entered into at all) then this is issue cannot go to adjudication or arbitration under that arbitration clause itself. This position would only change if the parties made a provision for such referral in the arbitration clause, and same would require very clear language in the arbitration clause itself.

In the Seabeach case, the parties were in dispute in regard to the whether or not the contract concluded between them was void ab initio. i.e from the outset.

- The Respondent contended that if the contract itself was void ab initio, then all clauses of the contract would likewise be void ab initio including the arbitration clause of the contract.
- Upon consideration of the contract and the arbitration clause, the Court found that the termination or invalidity of the contract did not affect the arbitration clause of the contract because the parties had intended at the time of concluding the agreement that all of their disputes (including whether or not the agreement was valid or not) would be referred to arbitration because of the wording of the arbitration clause itself.
- The Court went on to state that to view the arbitration clause differently would give the contract a commercially insensible meaning which could not have been intended on the facts.
- Furthermore, that the parties had intended to ring-fence their agreement to proceed to arbitration, with the effect that even if the underlying or main contract was invalid or void, this would not affect the validity or enforceability of the arbitration clause of the underlying contract.

If regard is had to the North East Finance (Pty) Ltd case supra and the two recent Western Cape decisions, we recommend that any contract which is to include a referral to arbitration clause, should at all times be considered, drafted and executed by an attorney who is familiar with such terms and the applicable law.

Article published courtesy of RexLex™ Mediations & Arbitrations

www.rexlex.co.za

010 300 0825

[1] 2013 (5) SA 1(SCA)

[2] 2019 1 All SA 634 (WCC)

[3] 2019 ZAWCHC 9