South African court confirms arbitrator can rule on own jurisdiction

Although dismissing the appeal in this case, the SCA’s decision (34-page / 597KB PDF) provides useful and necessary guidance on an issue of increasing relevance given the emergence of arbitration as a viable dispute resolution mechanism in South Africa. It will generally be welcomed by both businesses and arbitration practitioners alike, as it takes a big step towards plugging holes that may exist in South Africa’s developing arbitration jurisprudence over the correct procedure where there is a challenge to the existence of an arbitration agreement. Contracting parties may not always appreciate the importance of properly recording the agreement to arbitrate along with the nature of the disputes to be referred to arbitration. Previously, parties would have found themselves in a precarious position if the existence of an agreement to arbitrate a particular dispute was challenged. The SCA’s judgment provides effective and straight-forward guidance on this issue.

Background to the dispute

In 2011, Cube Architects, the trading name of Canton Trading 17 (Pty) Ltd (‘Canton’), entered into an overarching agreement with the Qwaha Trust (‘the trust’) to provide professional architectural services on a number of its projects.

The dispute in this case arose in respect of 2013 project at a site in Qwaggafontein, Bloemfontien. Canton was approached by the trust to provide further services on this project, to be regulated by the JBCC Series 2000 Standard Building Agreement (‘the JBCC agreement’). In 2014, on conclusion of the JBCC agreement, a document described as the ‘appointment of professional services provider’ (PSP) agreement was prepared by Canton and sent to the trust. This document was not signed, but the parties acted in accordance with it.Under the JBCC agreement, Canton was the trust’s principal agent until 2 August 2014. On this date, the trust terminated the agreement on the grounds that Canton had failed to execute its duties as principal agent.Clause 23 of the PSP provided that any dispute between the parties should be resolved by mediation followed by arbitration. Accordingly, following unsuccessful attempts to mediate, the trust sought to refer the dispute to arbitration. Canton refused to submit to arbitration on the basis that the parties had not signed the PSP, and as a result the arbitration provisions in clause 23 were unenforceable.The trust approached the High Court for an order seeking to compel Canton to submit to arbitration in terms of the PSP and was successful. Canton appealed to the full bench of the High Court but its appeal was dismissed, as the judges did not consider it necessary for the PSP to be signed in order for it to be valid and binding. Canton then appealed to the SCA.

The SCA’s judgment

The majority of the SCA judges framed the main issue in the appeal as the ‘existence dispute’: whether the parties agreed to refer to arbitration their dispute as to whether there existed an arbitration agreement. If the parties had not so agreed, then the issue was whether the High Court was entitled to decide whether there was an agreement to refer the dispute to arbitration.

The first issue considered by the majority was whether it is competent for a court to decide whether an arbitration agreement has come into existence in the face of a dispute between litigants as to whether this is so.

The majority referred to precedent established in its previous judgments, including in the 2013 case of North East Finance (Pty) Ltd v Standard Bank of South Africa Ltd (16-page / 89KB PDF). It recognised that it is possible for parties to agree to refer a dispute as to the validity of an arbitration agreement to arbitration, even if the arbitration clause forms part of the agreement that is being challenged. This is because parties are free to agree categories of disputes between them that are to be arbitrated, rather than resolved in court. However, if there is a dispute about whether an agreement to arbitrate has been concluded at all then that issue cannot be referred to arbitration “for that party denies [it] has ever entered into the contract thereby denying that [it] has ever joined in the submission”.

The second issue was to do with how an existence dispute should be determined where this cannot be done by way of arbitration. The court found that there are two main approaches that can be followed:

• separability – the arbitration clause can be treated as separate from the main agreement where it is clear that the parties’ intention that certain issues pertaining to the existence of the main contract, containing the arbitration clause itself, to be referred to arbitration;
• ‘kompetenz-kompetenz’ – this German law concept, which is well established in international arbitration, refers to a tribunal’s ability to rule on issues of its own jurisdiction. Following this approach, a court may be inclined to allow an arbitrator to decide questions of jurisdiction without necessarily vacating its power to ultimately determine the question of the arbitrator’s jurisdiction, unless there is a manifest basis to find otherwise.

The practical effect of the kompetenz-kompetenz principle is that the court allows the arbitrator to make its determination and render an award while only intervening in the clearest instances of misdirection by the arbitrator. This principle, according to the majority, facilitates arbitration and restricts pre-emptive court challenges. The majority found that there was scope for the recognition of this principle in South African law, and that this was in line with the Court’s obligation to develop the common law in line with South African constitution.

According to the majority, the case authorities make plain that if parties consent to refer certain disputes, including existence disputes, to arbitration, then courts will respect that decision and not determine those matters. However, if the validity of such an agreement is challenged then the court is best placed to deal with that dispute.

Considering this, the majority held that given there was a dispute between the parties regarding agreement to the terms of the PDP, there was no submission to refer the existence dispute to arbitration in this case. An arbitrator could only be vested with jurisdiction if the parties concluded a separate agreement for this dispute to be arbitrated. It therefore upheld Canton’s appeal on this basis.

However, Acting Judge Phatsoane, dissenting found that the parties did in fact agree to refer the existence dispute to arbitration on the basis that the parties intended to reach agreement on the PSP, notwithstanding the absence of signatures by both parties. She did so by reference to commercial rules contained in the disputed agreement – something which the majority judgment found was based on a flawed premise.

The majority’s common-sense approach is consistent with South Africa’s contract law principles, as well as international practice. The separation principle recognises and preserves the parties’ right to freely agree a dispute resolution mechanism which suits them, while also enabling any disputes with respect to the existence of such agreements to be resolved in a practical way. The recognition of the kompetenz-kompetenz principle by a South African court is a further step in the right direction. It represents development of South Africa’s common law, and also affords sufficient protection to arbitration agreements without unduly limiting the jurisdiction of the courts.

While many of the principles in the minority judgment are uncontroversial, the position ultimately adopted presents challenges. Disputes on the existence of an arbitration agreement must be fully resolved before a party can be compelled to submit to arbitration. The minority judgment does not provide guidance on how those underlying disputes can otherwise be resolved.

Co-written by Tinyiko Ndlovu of Pinsent Masons