CASE IN POINT – JUNE 2024

DOES AN ARBITRATOR HAVE THE DISCRETIONARY POWER TO DECIDE A DISPUTE WHICH HAS NOT BEEN PLEADED?

1. In the case of Close-Up Mining (Pty) Ltd and Others v The Arbitrator, Judge Phillip Boruchowitz and Another,^[1] the Supreme Court of Appeal (SCA) had to consider, in the main, whether or not a discretionary power vests in an arbitrator to determine a dispute that is not contained in the pleadings.  The SCA also had to determine whether the commercial rules of the Arbitration Foundation of Southern Africa (AFSA), which were applicable in the arbitration proceedings before it, permitted the exercise of such a discretion.
2. The most salient facts in this case, as derived from the SCA’s judgment (the SCA judgment) therein, are:
   1. The second respondent, i.e., the Lutzkie Group of Companies (Pty) Ltd (Lutzkie Group), instituted arbitration proceedings against the appellants, i.e., Close-Up Mining (Pty) Ltd, Willem Pieter Tenner and Close-Up Machinery and Plant Hire (Pty) Ltd (collectively referred to as Close-Up Mining) concerning the conclusion of two agreements;^[2]
   2. retired judge Phillip Boruchowitz (the arbitrator) was appointed by the parties.  In the arbitral proceedings, Close-Up Mining raised a defence that the Lutzkie Group repudiated the agreements (the repudiation defence).  Although Close-Up Mining raised the repudiation defence in its heads of argument before the arbitrator, the repudiation defence itself had not been pleaded;^[3]
   3. the arbitrator declined to consider the repudiation defence because it had not been pleaded.  He accordingly found that it fell outside his jurisdiction;^[4]
   4. Close-Up Mining maintained that the arbitrator failed to recognise that he enjoyed a discretion to entertain the repudiation defence even though it was not pleaded.  It contended that in not recognising such a discretion, the arbitrator misconceived the nature of the enquiry thereby exceeding his powers and committing a gross irregularity;^[5]
   5. in claiming that the arbitrator’s decision was consequently erroneous, Close-Up Mining brought a review application in terms of section 33(1) of the Arbitration Act 42 of 1965 (the Arbitration Act) for the setting aside of the arbitrator’s award.  The court a quo held that disputes in arbitral proceedings are those disputes which have been raised in the pleadings between the parties.  In the result, it found that the arbitrator was correct in deciding that he lacked jurisdiction to entertain the defence of repudiation as it had not been raised on the pleadings.  Consequently, the review application was dismissed with costs;^[6] and
   6. on appeal to the SCA, Close-Up Mining persisted with, among others, its argument that an arbitrator is vested with the competence to exercise a discretion to adjudicate something that has not expressly been pleaded.  In addition, it contended that AFSA’s rules, which were applicable to the arbitral proceedings, vested the arbitrator with the widest discretion to give latitude to a party to raise in such proceedings a defence that had not been pleaded.  Close-Up Mining relied on the principle of a general discretion which is vested in a trial court, as illustrated in the case of Shill v Milner,^[7]  as well as on the interpretation of the applicable AFSA rules.^[8]
3. Firstly, while recognising the principle of party autonomy, namely, that parties can agree to confer upon an arbitrator the capability to decide a matter that has not been pleaded, the SCA stated that it must be acknowledged that such a competency is derived from the arbitration agreement concluded between the parties and not from any inherent power akin to the power a court enjoys to protect and regulate its own process, as illustrated in Shill v Milner.^[9]  It referred to the Arbitration Act in which an arbitration agreement is defined to mean a written agreement that provides for the referral to arbitration of any existing or future dispute relating to a matter specified in the agreement.  Whether or not an arbitrator can entertain a general discretion to adjudicate on a matter that is not pleaded, must be clearly interpreted as such from the arbitration agreement itself.^[10]
4. Secondly, the SCA considered whether or not AFSA’s rules themselves permitted the arbitrator to exercise a discretion as the one advanced by Close-Up Mining.  After construing the relevant provisions thereof, it concluded that such rules do not vest the arbitrator with any such a general discretion.^[11]
5. In reaching the aforesaid conclusion, the SCA interpreted the AFSA rules according to the triad of text, context and purpose.^[12]  In so doing, it found, among other things, that: 
   1. The AFSA rules envisage the exchange of pleadings in order to define disputes between the parties;^[13]
   2. an arbitrator does not, according to the AFSA rules, enjoy a general discretion to adjudicate a dispute not raised in the pleadings;^[14]
   3. if the pleadings exchanged between the parties fail to sufficiently reflect a dispute, the AFSA rules require an amendment of the pleadings;^[15]
   4. the power conferred on an arbitrator to adjudicate a dispute is derived from the arbitration agreement;^[16]
   5. while, in accordance with the autonomy principle, the parties can agree to bestow upon an arbitrator a discretion to decide a dispute that has not been pleaded, the AFSA rules do not confer such discretionary power on the arbitrator;^[17] and
   6. if the parties permit and agree that an arbitrator can extend the reach of his/her own jurisdiction, such intention ought to be made plain.^[18]
6. In the circumstances, the SCA held that Close-Up Mining failed to establish that the arbitrator committed a gross irregularity.  Accordingly, the appeal was dismissed with costs and the court a quo’s decision was upheld.

ADV. K. BAILEY SC FAArb (SA)

Member of the Johannesburg Bar

May 2024

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^[1]     2023 (4) SA 38 (SCA).
^[2]    SCA judgment, para [1].
^[3]    Ibid., para [2].
^[4]    Ibid., paras [2] and [8]
^[5]    Ibid., para [3].
^[6]    Id.
^[7]    1937 (AD) 101 (A) at 105
^[8]    SCA judgment, paras [8], [11], [20], [21] and [22].
^[9]    Ibid., paras [10], [11] and [13].
^[10] Ibid., paras [12] and [15]. See also Lugedlane Developments (Pty) Ltd and Another v Mjejane Parent Game Reserve Homeowners Association and Others, case number (017197/2022) [2024] ZAGPJHC 1681 (10 April 2024) at para [48].
^[11]    SCA judgment, paras [18] to [31].
^[12]   Ibid., para [23]; see also Lugedlane at para [49]..
^[13]    Ibid., para [32].
^[14]   Ibid., para [33].
^[15]    Ibid., para [34].
^[16]    Ibid., paras [35] and [26] to [33].
^[17]    Ibid.
^[18]    Ibid