SA takes one step backwards in arbitration process


Recent years have seen several strong affirmations from the Supreme Court of Appeal (SCA) and the Constitutional Court that the era of courts exhibiting controlling and interfering tendencies towards arbitrations and arbitration awards is over, and that the integrity of the arbitral process will be shown due deference.

First in Telcordia Technologies Inc v Telkom SA Ltd, then in Lufano Mphaphuli and Associates (Pty) Ltd v Andrews and Another and further in Enviroserv Waste Management (Pty) Ltd v Wasteman Group (Pty) Ltd, the SCA and the Constitutional Court declined to enter into the merits of a matter in the absence of a reviewable irregularity – with a mere mistake, or alleged mistake, by the arbitrator not constituting a reviewable irregularity.

These decisions were victories for those who seek a more “hands-off” approach by the courts to arbitration proceedings, and went some way towards bringing the South African jurisprudence closer to international best practice, though we remain burdened by an outdated arbitration statute.

Viewed in the context of these progressive judgments, the recent decision of the SCA in North East Finance (Pty) Ltd v Standard Bank of South Africa Ltd is both puzzling and disappointing.

It seems to show that there is a limit to the courts’ ability to restrain themselves from charging into the fray, especially when it involves coming to the rescue of a party who cries the magic “f”-word.

The facts of the matter were briefly as follows: North East financed the acquisition of goods by its end users through rental agreements, which were then ceded at a discount to Standard Bank.

A dispute arose between North East and the bank over the collection of amounts owing by end users, and the debiting of North East’s account by the bank. This culminated in a settlement agreement containing an arbitration clause, providing that “any dispute of whatsoever nature arising between the parties (including any question as to the enforceability of this contract)” would be referred to arbitration.

After concluding the settlement agreement, the bank’s investigations led it to conclude that North East had induced the agreement through fraudulent misrepresentations and non-disclosures pertaining to financial and accounting irregularities.

The bank elected to resile or retract from the agreement and regard it as void ab initio, refusing to submit to arbitration on the question whether the settlement agreement had been fraudulently induced.

The bank maintained that the arbitration clause was void along with the rest of the settlement agreement, and that the inclusion of the arbitration clause was part of North East’s fraudulent strategy.

North East consequently launched an application for an order declaring that a dispute existed as to whether the settlement agreement was void ab initio, and that the dispute was arbitrable.

The high court found for the bank. Among its findings were that there were numerous disputes of fact regarding the fraudulent conduct of North East and the conclusion of the settlement agreement, which could not be resolved on the papers; that the arbitration clause had no separate existence from the settlement agreement, and was not severable from it; that the allegations of fraud were not wholly unfounded, on the bank’s version; and that the arbitration clause did not contemplate the question of fraudulent misrepresentations inducing the agreement, so that this was not an arbitrable issue.

In upholding the high court’s decision, the SCA took a somewhat opaque and even illogical approach. It held that there were only two issues for determination: “First, whether the particular arbitration clause should be construed so as to compel submission to arbitration on whether the bank was induced by North East’s fraud to conclude the settlement agreement; and if so, whether the allegations of fraud do not appear to be ‘wholly unfounded’.”

This formulation of the issues before the court appears to be wrong. If the finding on the first question were to be that the arbitration clause compels submission to arbitration on whether the bank was induced into the agreement by fraud, then the matter would have to be submitted to arbitration, and the (rather coyly worded) question of whether the allegations of fraud do not appear to be wholly unfounded, would never come before the court.

This error at the outset appears to have had a knock-on effect on the court’s reasoning, as the court appears throughout the judgment to have laboured under the assumption that it was not only indeed seized of the question as to whether the bank’s allegations of fraud were correct, but also that this question could be determined on the affidavits (despite the high court’s finding of “numerous disputes of fact” existing in this regard).

Furthermore, the SCA never questioned the reverse onus that had effectively been imposed on North East by the high court’s finding that the bank’s allegations of fraud “were not wholly unfounded” on the bank’s version. It is usually incumbent upon a party alleging fraud to prove it, not merely to show that its allegations are not wholly unfounded.

And what is one to make of the qualifier “on the bank’s version”?

Most litigation lawyers are capable of presenting their client’s case in a way that does not make the case appear wholly unfounded on the client’s own version. One would think that a slightly higher hurdle than that would have to be cleared in order to persuade a court that fraud had occurred.

The court appears simply to have assumed that the bank’s allegations of fraud were correct, and that the bank’s purported election to treat the settlement agreement as void from inception was, therefore, lawful rather than a potential unlawful repudiation of the settlement agreement.

This appears from paragraph 15 of the judgment (“The bank chose to treat the settlement agreement as void from inception, and when it made that election the contract effectively ceased to exist. It did not have to be cancelled or rescinded: it was void.”)

The court then proceeded to deal with the jurisprudential question regarding the ability of an arbitration clause to survive the demise of the main agreement, on the basis of this assumption.

In dealing with the question of whether an arbitration clause could survive the demise of the agreement in which it was located, such that the alleged fraudulent inducement of that agreement ought to be referred to arbitration, the court held that this was in principle possible, provided that the parties foresaw the possibility of such a dispute arising.

In order to determine whether the parties foresaw such a possibility, a purposive interpretation of the agreement would have to be undertaken – in other words, the court must look at the purpose for which the agreement was concluded.

In this case, the purpose of the agreement was held to be to resolve certain accounting issues, and from this it was inferred that the only envisaged role of an arbitrator would be to determine any accounting issues in dispute – and not to enter into the validity of the agreement itself.

It is unclear why a purposive interpretation was considered necessary or useful in circumstances where the arbitration clause explicitly states that it is intended to govern disputes regarding the enforceability of the main agreement. Granted that unenforceability and voidness are not the same thing, the wording of the clause nevertheless refers to “any dispute of whatsoever nature”. This, I submit, gives better insight as to the parties’ intentions regarding how a dispute about the validity of the agreement itself ought to be adjudicated, than a purposive interpretation of the agreement might.

In light of this confusing judgment, it is difficult to avoid the conclusion that the court has simply not yet completely let go of its residual paternalistic instincts vis à vis arbitration proceedings; or at least that insofar as allegations of fraud are involved, the court still perceives this as its exclusive domain. This situation will end if and when the draft arbitration bill (which has, frustratingly, now been in the legislative process for well over a decade) becomes law.

Clause 26 of the draft bill explicitly states that unless the parties agree otherwise, an arbitration tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement.

This would align South African arbitration law with other modern arbitral legislation that recognises an agreement to arbitrate, even if contained in another agreement, has a separate existence, and the fact that the main agreement may have been induced by improper means does not affect the parties’ intentions as to the dispute resolution mechanism.

After a long period, during which the draft bill was held in a sort of limbo, there were indications from the Department of Justice last year that it will, at last, be presented to Parliament during this year. We may hope that it will.

* Pierre Burger is director at Werksmans Attorneys.


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