The facts

In brief, the Department of International Relations and Co-operation (DIRCO) appointed Neo Thando/Elliot Mobility Proprietary Limited (Neo Thando) via a service-level agreement (SLA) to store and manage household goods of officials who are transferred abroad. Under the SLA, Neo Thando was required to take possession of goods that were with DIRCO’s previous service provider, AGS Frasers/Gin Holdings (AGS Frasers). AGS Frasers refused to hand over the goods to Neo Thando.

Neo Thando issued a letter of demand to DIRCO claiming over R53 million in damages and stating that if DIRCO did not pay, Neo Thando would prefer to submit the matter to arbitration and asked DIRCO to confirm within 30 days whether it agreed to arbitrate, failing which, Neo Thando would issue summons out of the High Court.

DIRCO did not respond within the time period in the letter of demand and Neo Thando unilaterally referred the matter to arbitration.

In its response to the letter of demand, sent 28 days after the time-period stipulated for a response in the letter of demand, DIRCO indicated that it did not believe there was any dispute to arbitrate and accordingly did not agree to arbitration, as required by the SLA. DIRCO further indicated it would appear before the appointed arbitrator only to challenge their jurisdiction to entertain the alleged dispute.

DIRCO challenged the arbitrator’s jurisdiction on  inter alia the following bases:

• The SLA outlined the circumstances under which a matter could be referred to arbitration, which required that both parties expressed a wish to refer the dispute to arbitration, but Neo Thando had done so unilaterally. Neo Thando also had not alleged the existence of a “difference or dispute” in its letter of demand that it wished to refer to arbitration.
• The SLA further provided that a party wishing to refer a dispute to arbitration must provide written notice to the other party identifying the dispute to be arbitrated. No such notice was given by Neo Thando. Its letter of demand merely sought payment of damages.

The arbitrator concluded that he had jurisdiction, confirmed in an interim award, and proceeded to make a final award against DIRCO.

The SCA’s legal analysis

DIRCO unsuccessfully challenged the awards in the High Court, prompting DIRCO’s appeal to the SCA.

The SCA held that the period of time that had elapsed (58 days between the letter of demand and the purported referral) was insufficient to infer on a balance of probabilities that DIRCO intended to reject the demand. Moreover, the SCA held that, due to the drafting of DIRCO’s letter of demand, DIRCO’s delay in response may have, if anything, warranted Neo Thando’s institution of summons against DIRCO, not arbitration proceedings. Nevertheless, the SCA emphasised that DIRCO’s delay in response could not be deemed to be an agreement to Neo Thando’s preference that the matter be arbitrated. 

The SCA overturned the High Court judgment and set aside the arbitration awards on the following bases.

1. A dispute must exist before arbitration can be triggered

The SCA emphasised that arbitration is a mechanism designed to resolve disputes, and arbitration agreements, including clauses in contracts, require an existing dispute before arbitration can occur. A demand for payment, by itself, does not constitute a dispute.

Neo Thando’s letter of demand did not expressly identify any “difference or dispute”. It merely demanded payment and stated a preference to arbitrate in the event that DIRCO did not pay as demanded. When Neo Thando proceeded to arbitration a month later, no dispute had crystallised due to the failure of the parties to express differing views

2. Neo Thando could not unilaterally refer the matter to arbitration

The SLA provided for arbitration “if the parties wish to arbitrate”. The SCA held that this wording required mutual agreement between the parties to arbitrate a dispute, not unilateral referral by one party. Reading the clause as permitting one party to force the other into arbitration would be “unbusinesslike”.

3. No “difference or dispute” was identified in Neo Thando’s letter of demand

Even if a dispute had existed, Neo Thando failed to issue written notice identifying the “difference or dispute” to be arbitrated, which was an express contractual requirement under the arbitration clause.

Strategic lessons: Arbitration is not automatic

This case confirms the well-known principle that not every claim or issue arising from a contract containing an arbitration clause is automatically arbitrable. Parties often insist on arbitration clauses to secure advantages in dispute resolution, such as:

• confidentiality;
• expedited process (often with an agreed timetable);
• (normally) no right of appeal unless agreed; and
• possibility of a joint appointment of an arbitrator.

However, these benefits only materialise if the issue is one that can lawfully be arbitrated.

Crucially, if arbitration is pursued without proper jurisdiction, the process wastes time and costs and may, in a worst-case scenario, even result in the claim prescribing while the parties are engaged in what ultimately turns out to be an invalid arbitral process.

How to ensure you have an arbitrable dispute

If a party wishes to trigger arbitration, they must first ensure that a crystallised dispute exists and then they must follow the contractual procedure, including any pre-arbitration steps that are required (such as the parties first meeting to try and resolve matters) and ensure that there is a valid referral to arbitration. If there is doubt as to whether a dispute exists, a useful first step is to write to the counterparty demanding the performance or payment owed. If the counterparty disputes the demand in their response, a dispute arises, at which point arbitration can validly be pursued.

This approach ensures that the party seeking arbitration does not stumble into the jurisdictional trap highlighted by the SCA.

Key takeaways

• An arbitration clause is not automatically applicable: Not all claims or issues arising from a contract are automatically susceptible to arbitration.
• Mutual consent may be required: Where the contract requires agreement between the parties to arbitrate, a party’s unilateral referral may undermine the jurisdiction of the arbitrator and render the process invalid.
• Choosing the incorrect forum has real risks: Proceeding to arbitration prematurely or without the requisite jurisdiction may lead to wasted costs, invalid awards and – in a worst-case scenario – potential prescription of the claim.
• Be strategic when triggering arbitration: It is sometimes necessary to first generate a clear dispute before initiating arbitration.
• Act carefully at the outset: Determining the correct forum (court vs arbitration) at the outset is critical to preserving rights, and avoiding delay and unnecessary costs.