Adjudicating a dispute on the validity of an arbitration clause
18 Mar 2022
The question of which dispute resolution institution and processes are applicable to disputes in respect of the validity of an arbitration clause recently arose in a matter before the Supreme Court of Appeal in Canton Trading 17 (Pty) Ltd t/a Cube Architects v Fanti Bekker Hattingh No [2021] Zasca 163 (01 December 2021).
Facts of the matter
Canton Trading (Canton) is a firm of architects who rendered professional architectural services to a Trust in respect of various projects. During 2013, the Trust approached Canton to engage its services for an expansion of the ltau Mill on plot 47 Qwaggafontein, Bloemfontein (the project). Canton orally accepted the offer.
On 5 February 2014, Canton negotiated and concluded the ‘Joint Building Contracts Committee Series 2000 Standard Building Agreement’ (the JBCC agreement) with a third party building contractor, Royal Anthem Investments 12 CC (the contractor), in its capacity as principal agent of the Trust in terms of clause 42.4 of the JBCC agreement.
An ‘Appointment of Professional Service Provider’ (PSP) was prepared by Canton’s attorneys and presented to the Trust during March 2014. However, it is important to note that the PSP was not signed by either of the parties. Nonetheless, Canton rendered services to the Trust in respect of the project and was paid by the Trust upon presentation of its invoices.
Canton and the Trust reached a point of dispute at around 2 August 2014 when Canton’s principal agency in respect of the Trust ended, and the Trust terminated the JBCC agreement with the contractor on the basis of defective work performed by the contractor. The Trust believed that Canton had failed to perform its duties as its principal agent and issued a letter of demand to appoint a mediator, failing which the dispute was to be submitted for mediation and arbitration in terms of clause 23 of the PSP.
Between 15 September 2017 and 5 December 2017, Canton had informed the Trust that it was in principle prepared to proceed with arbitration. The parties then agreed on the appointment of an arbitrator and to prepare a draft arbitration agreement. On 29 November 2017, the Trust communicated to Canton that Judge Haneke had agreed to serve as arbitrator and enclosed a draft arbitration agreement to be signed by Canton, in the event that the draft was satisfactory.
On 24 January 2018, a pre-arbitration meeting was held between Canton and the Trust. The arbitration agreement was discussed at this meeting, and the parties agreed to the appointment of Judge Haneke, his remuneration and their liability for payment. During the meeting, Canton specifically requested that the following paragraph be inserted into the pre-arbitration agreement:
“The pre-arbitration agreement is further subject to the condition that the Defendant (Canton Trading) must obtain the approval/consent of the Defendant’s insurer (in the event of it being the Defendant’s version that there is no signed agreement to submit to arbitration) of the arbitration agreement.”
It follows that on 30 January 2018, Canton adopted the view that the arbitration provision in the PSP was not enforceable as the PSP had not been signed by the parties. Therefore, Canton invited the Trust to issue summons should its client wish to proceed with the matter. Contrastingly, the Trust sought to enforce the arbitration provision in the PSP. Moreover, the Trust imposed that Canton sign the amended pre-arbitration agreement.
Legal issue to be decided
The legal issue on appeal was whether the court a quo was correct in ordering Canton to submit its dispute to arbitration on the basis that the PSP is enforceable.
Court’s approach
The Supreme Court (SCA) considered two opposing approaches which had hitherto been adopted by the courts. The first approach is based on the principle of separability which provides that an arbitration agreement is separate from the main agreement. In other words, the arbitration clause on its own gives expression to the intention of the parties on the question of whether the validity of the main contract is to be submitted to arbitration. An implication of what the parties consented to in a separate arbitration clause is that arbitration should be the starting point of determining the question of the validity of the main contract, and then the court should give effect to the parties’ consent. However, where there is no existing question of the validity of an arbitration clause, the court will require the parties to submit the existence or validity dispute to arbitration only.
The second approach is based on the principle of competence-competence, also known as ‘Kompetenz-Kompetenz’ of German origin, or the principle of ‘competence de la competence’ which operates in both a positive and a negative aspect. The essence of the competence-competence approach is to limit court adjudication by giving effect to the principle of judicial restraint, thus this approach favours arbitration proceedings.
The positive aspect of the competence-competence approach provides that arbitrators enjoy full jurisdiction over disputes concerning their power to determine disputes concerning the validity or otherwise of the arbitration clauses, and are not required to stay their proceedings to seek judicial guidance.
The negative aspect of the competence-competence approach provides that where a dispute has already been referred to an arbitrator, the court will not rule upon the validity, existence or scope of the arbitration agreement, but will leave these questions of jurisdiction to the arbitrator to decide. In the event that the dispute is not referred to an arbitrator, the court will be reluctant to hear the dispute unless the arbitration clause is void. Once the arbitrator has ruled and rendered an award, the courts may finally decide any issue of jurisdiction if the award is brought on review or enforcement of the award is sought.
Court’s finding
The SCA held that there is a dispute of fact between Canton and the Trust as to the existence or validity of the arbitration agreement. However, the SCA disagreed with the court a quo’s approach to refer Canton to arbitration in terms of the PSP and the commercial rules of the Arbitration Foundation of Southern Africa (AFSA), for reason that it was disputed by Canton whether it consented to any such submission.
The SCA held that the arbitrator would be warranted to adjudicate over the dispute in terms of AFSA rules if a separate arbitration agreement had been concluded between the parties, to submit the existing dispute to such arbitration.
The court a quo was therefore not in a position to enforce the rules of AFSA and refer the dispute to an arbitrator under those rules as it cannot be determined on the papers whether the arbitration clause in the PSP was intended to constitute a separate arbitration agreement. The question of whether there is a separate arbitration agreement needs to be referred to evidence by a court so as to decide on the issue. Therefore, the court a quo was incorrect to assume that the parties had consented to a referral to arbitration where such referral itself was in dispute.
Conclusion
At the core of this judgment is a focus on the appropriate institution and processes to adjudicate a dispute concerning the validity of an arbitration clause. The court specifically drew a contrast between arbitration proceedings and court proceedings as dispute resolution solutions that may be applicable to the legal issue at hand. Whilst the court left open the question of whether the parties had consented to arbitration, the crucial legal principle developed in this judgment is that only a court may adjudicate a dispute over the validity of an arbitration clause. The arbitrator cannot adjudicate over a dispute on the validity of an arbitration clause because there is in fact no arbitration clause until the court finds otherwise.
Written by Mathapelo Molapo.
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(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)