Arbitration Clauses
In the normal course of events, an arbitration clause would continue to operate even though a contract seizes to exist. However, the position differs where the contract was induced by fraud.
This development was outlined in Namasthethu Electrical (Pty) Ltd v City of Cape Town and Another (Case no 201/19) [2020] ZASCA 74. Here the issue was whether a dispute resolution clause in a contract survives the termination of that contract terminated on the ground of fraudulent misrepresentation made during a tender process.
The high court found the contract to have been induced by fraudulent misrepresentation by Namasthethu Electrical (Pty) Ltd and subsequently held that a dispute resolution clause in a contract did not survive the termination of the contract terminated on account of fraud. This meant that the dispute resolution clause was terminated along with the contract. Namasthethu Electrical (Pty) Ltd appealed the High Court’s decision to the Supreme Court of Appeal (SCA).
The SCA held that once an agreement has been rescinded by an aggrieved party, the said arbitration clause cannot stand. The court held that the referral of the dispute to the second Respondent was invalid and unlawful, the second respondent was not clothed with any authority to adjudicate the dispute. Subsequently, the appeal was dismissed with costs.
In the above case, the SCA confirmed that agreements induced by fraudulent means are voidable at the instance of the aggrieved party, one cannot then seek protection from the very same contract.
Once an agreement has been cancelled at the instance of fraud an arbitration clause contained in that agreement will not survive the cancellation of the agreement. That would not be in the interest of justice. However, if the parties specifically make provision for dispute regarding fraud, misrepresentation or concealment of information required to be disclosed to be made subject to arbitration, the position would differ. But, this would have to be put in very distinct language.
Contributor: Agrippa Mpungose
Email: agrippa@atmd.co.za
Tel: +2733 815 1550
