Would an arbitration clause embedded in a fraud-tainted agreement also be invalid in South Africa?

However parties are entitled to challenge the validity of an arbitration agreement/clause contained in a commercial transaction. In that regard for international arbitration agreements/clauses, the International Arbitration Act, 2017 which incorporates the UNCITRAL Model Law on International Commercial Arbitration (Model Law) and provisions of the New York Convention, entitles a party against whom an arbitral award was rendered to challenge the enforcement of such an award on, amongst others, the basis that the arbitration agreement is invalid under the law to which the parties have subjected it, or where the parties have not subjected it to any law or that the arbitration agreement is invalid under the law of the country in which the award was made. There are no similar provisions found in the Arbitration Act, 1965 in relation to challenges to the validity of domestic arbitration agreement/clause, however a party would be entitled to approach a court to challenge the binding effect of a domestic arbitration agreement/clause on good cause shown.

The basis for challenging the validity of an arbitration agreement/clause is generally found under the law of contract in South Africa. Thus, the legal grounds for challenging the validity of a commercial agreement (ie such as mistake, fraud, misrepresentation etc.) also find application to arbitration agreements or arbitration clauses that form part of a main agreement. South African courts accept that if an agreement is void from the outset then all of the consequential clauses thereto, including exemption and reference to arbitration clauses, fail with it. This principle was most authoritatively enunciated by the Supreme Court of Appeal in North West Provincial Government & another v Tswaing Consulting & Others 2007 (4) SA 452 (SCA) where Cameron JA, as he then was, said that an arbitration clause “embedded in a fraud-tainted agreement” could not stand.

The judgment by the Supreme Court of Appeal is binding when interpreting the separability of arbitration clauses contained in domestic commercial agreements. However, the judgment is a departure from the internationally accepted principle, that an arbitration clause that is contained in a so-called “fraud-tainted agreement” is deemed to be separable from the main agreement (so-called separability presumption). Stripped to its bare bones, the principle of separability means that:

• the invalidity or rescission of the main agreement does not necessarily entail the validity or rescission of the arbitration agreement.
• The arbitration agreement must be treated as a ‘distinct agreement’ and can be void or voidable only on grounds which relate directly to the arbitration agreement.

The logic here is as follows: the fact that one party may have fraudulently misrepresented the quality of its goods, services, or balance sheet generally does nothing to invalidate the parties’ agreed dispute resolution mechanism, ie arbitration. As a consequence, only mistake, fraud, misrepresentation etc. directed at the arbitration agreement to arbitrate will, as a substantive matter, invalidate that arbitration agreement.

With the recent promulgation of the International Arbitration Act, the separability presumption is now part and parcel of South African law, at least insofar as international arbitrations are concerned. S6 of the International Arbitration Act read article 16(1) of the Model Law, provides that the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause/agreement which forms part of a main agreement is deemed to be an agreement independent of the other terms of the main agreement. Thus, the fact that the main agreement is invalid does not entail that the arbitration/clause agreement is also consequentially invalid.

As the International Arbitration Act only applies to international commercial disputes, it is important that harmonisation be achieved of South Africa’s arbitration laws, specifically when it deals with underlying fundamental principles, such as the principle of separability of arbitration clauses. There appears to be no basis for our law not to recognise that domestic arbitration clauses that form part of a so-called fraud-taunted main agreement survive such a challenge in order to allow an appointed arbitrator to decide whether such main agreement was in fact the product of fraud. South African courts will need to take the lead to ensure that the position enunciated in Tswaing Consulting is corrected, until such time as we wait for a new domestic arbitration Act to harmonise the basic fundamental legal principles of domestic and international arbitration in South Africa.