Arbitration: Careful drafting applies as much to the arbitration agreement as to the pleadings

An agreement to arbitrate a specific issue will generally describe both the issue the arbitrator is required to decide and the arbitrator’s powers. The arbitrator has no power beyond the agreed terms of reference. The parties will then usually set out their respective claims or defences in documents referred to as pleadings. Unless the terms of reference are broad, for example allowing the arbitrator to decide whatever issues arise from the pleadings, the arbitrator may be restricted by what is in the terms of reference. Even if the terms of reference are broadly to deal with any dispute that arises on the pleadings, anything not “on the papers” would seem to be excluded.

9 May 2023 2 min read Dispute Resolution Alert Article

At a glance

  • An arbitration agreement defines the scope of the arbitrator's decision-making power, and the arbitrator's authority is limited to the agreed terms of reference.
  • Pleadings are documents where parties outline their claims or defenses, and the arbitrator's jurisdiction may be constrained by what is included in the pleadings.
  • In the Close-Up Mining case, the arbitrator correctly declined to consider a defense that was not pleaded, as the arbitration agreement did not grant the arbitrator discretion to entertain claims or defenses outside the pleadings. Parties should be meticulous in pleading their claims or defenses and clearly define the arbitrator's authority in the arbitration agreement.

The recent matter of Close-Up Mining (Pty) Ltd and Others v The Arbitrator, Judge Phillip Boruchowitz and Another (286/2022) [2023] ZASCA 43 concerned the arbitrator’s ability to entertain a defence not pleaded.

In the arbitration, Close-Up failed to plead that the Lutzkie Group had repudiated the agreements from which the disputes arose. The arbitrator held that the defence was not pleaded and therefore exceeded the scope of his jurisdiction. Close-Up took the arbitrator’s award on review claiming that he had “committed a gross irregularity” in the arbitration. The High Court held that because the defence had not been raised in the pleadings, the arbitrator correctly declined to entertain it.

Close-Up appealed to the Supreme Court of Appeal saying that the defence of repudiation had been raised in its heads of argument before the arbitrator and that he had a discretion whether or not to consider that defence. While heads of argument summarise the main arguments, they are not pleadings. The court found that parties to an arbitration agreement are free to provide the arbitrator with a discretion to entertain claims or defences not included in the pleadings, but in this case the parties had not done so. Close-Up then looked to the Rules of the Arbitration Foundation of Southern Africa for help, specifically Article 11.1 which, it argued, gives an arbitrator wide discretion to determine disputes raised in the proceedings and makes no reference specifically to disputes raised in pleadings.

The court then considered what it means for a dispute to have been raised in the proceedings, noting that in terms of the Arbitration Foundation Rules, disputes falling outside of the scope of the pleadings can be raised in the proceedings, and the arbitrator is empowered to decide issues in the proceedings. But the court nevertheless found that arbitrators don’t have the same power as courts and are limited by the arbitration agreement. The agreement in this case did not include a discretion to entertain disputes outside the scope of the pleadings and the review was dismissed.

There is an obvious lesson here – that parties should carefully plead all of the available claims, or alternatively all of the available defences. But equally important is taking care in crafting the reference to the arbitrator. It is so important to take time to consider what should be available for the arbitrator to decide, or even to take into account, and then to record that clearly and comprehensively in the arbitration agreement. Imagine how mortifying it must have been for Close-Up to identify the issue of repudiation, pivotal in the dispute, only to have it drift out of reach because it hadn’t been pleaded and was then excluded by the terms of the arbitration agreement.

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