Facts

On 26 February 2016, NAD Property Income Fund (NAD) and the Bushbuckridge Local Municipality (Municipality) concluded a construction agreement. In terms of the agreement, NAD was to construct three driveway roads and water supply infrastructure to service a shopping mall development at its own cost and the Municipality would reimburse NAD in future budget cycles. Both parties were aware that the Municipality lacked budgetary allocation for the project at the time. Disputes arose between the parties and NAD instituted action proceedings against the Municipality for payment of approximately R23,5 million. Instead of proceeding to trial, the parties agreed to refer the disputes to arbitration.

Arbitration

The parties agreed that NAD’s combined summons would stand as the statement of claim and the Municipality’s plea would stand as the statement of defence. The Municipality’s defence was that the agreement was unenforceable due to non compliance with section 217 of the Constitution and the Municipal Finance Management Act 56 of 2003 (MFMA). In its counterclaim, the Municipality sought an order that inter alia the agreement be declared unlawful and set aside.

An issue arose as to whether the arbitrator had jurisdiction to make a finding of constitutional invalidity or unlawfulness in relation to the agreement. The arbitrator made a finding that he had jurisdiction as the dispute relating to the issue of the validity and lawfulness of the agreement was one of the disputes that were referred to him. He proceeded to make a finding that the agreement was invalid, unlawful and therefore unenforceable, and that it was unlawful because of noncompliance with the legal regulatory framework governing public procurement. The arbitrator opined that it would be idle to suggest that he should support the enforcement of an agreement that is invalid, unlawful and thus void on the basis that he is an arbitrator and not a court.

High Court

Dissatisfied with the outcome, NAD launched review proceedings. The ground for the review was that the arbitrator had exceeded his powers and committed gross irregularities by deciding on the constitutional validity of the agreement. The High Court decided that the arbitration agreement, when considered in light of section 2 of the Arbitration Act 42 of 1965 (Arbitration Act), empowered the arbitrator to deal with the issue of the constitutional invalidity of the agreement. Section 2 of the Arbitration Act excludes certain types of matters from reference to arbitration. These are matters relating to matrimonial cause and matters relating to status. The Arbitration Act does not exclude matters such as the one in dispute.

SCA

The SCA identified the question for determination to be whether the lawful exercise of public powers and the remedies for their unlawful exercise are matters that can be decided by a referral to arbitration. The SCA held that while an arbitrator’s powers derive from the arbitration agreement between the parties, those powers are limited by law. It held further that NAD’s consent for the dispute to be referred to arbitration could not confer on the arbitrator a power he did not have in law. Constitutional questions concerning the exercise of public power, and in particular compliance with section 217 of the Constitution and the MFMA, fall within the exclusive jurisdiction of the courts. As such, the SCA held that the arbitrator had indeed exceeded his powers by deciding on issues that fall exclusively within the jurisdiction of the courts. The arbitration award was accordingly reviewed and set aside.

Key takeaways

This case is critical in enforcing that while an arbitrator’s authority comes from the arbitration agreement, there are limitations which may be prescribed by law. Where questions of law arise during the arbitration proceedings the arbitration tribunal only has the powers to make a reference in accordance with section 20 of the Arbitration Act. This provision allows an arbitrator (and ultimately the parties) to obtain an opinion of the court on the issue. The opinion becomes binding on the arbitrator and the parties.

It would be expected that the court’s application would also apply to similar alternative dispute resolution mechanisms and would ultimately limit negotiations and settlement discussions between a private party and an organ of state in instances where they hope to resolve a dispute about payment and the legality of an agreement which had been entered between the parties.

The decision serves as a cautionary reminder to private entities contracting with organs of state that disputes about constitutional compliance must ultimately be resolved by the courts, regardless of the powers conferred on arbitrators in terms of respective arbitration agreements.