CASE IN POINT – DECEMBER 2022

IS IT THE COURT OR THE ARBITRATOR WHO DECIDES
THE VALIDITY OF AN ARBITRATION AGREEMENT?

1. In the judgment of the Supreme Court of Appeal (SCA) of Canton Trading 17 (Pty) Ltd t/a Cube Architects v Fanti Bekker Hattingh NO^[1] the SCA had to decide whether it is the court or the arbitrator that is best suited to consider how best to deal with the challenge as to the existence of an arbitration agreement, which, in turn, gave rise to the question as to whether or not the parties consented to the clause in the said agreement to have the dispute between them submitted to arbitration.
2. An account of the most salient facts appears below:
   1. A firm of architects, Canton Trading 17 (Pty) Ltd t/a Cube Architects (Canton) rendered professional architectural services to the Qwaha Trust (the Trust) in respect of various projects between 2011 and 2013;^[2] 
   2. During 2013, the Trust approached Canton to engage the latter’s services for an expansion of the Itau Mill in Bloemfontein (the Project).  Canton orally accepted the Trust’s offer to do so;^[3] 
   3. On 5 February 2014, Canton negotiated and concluded a Joint Building Contract Committee Series 2000 Standard Building Agreement (the JBCC Agreement) with a building contractor, Royal Anthem Investments 12 CC (the Contractor).  Canton concluded the JBCC Agreement as the principal agent and duly appointed representative of the Trust in terms of clause 42.4 thereof;^[4] 
   4. An ‘Appointment of Professional Service Provider’ document (the PSP) was prepared by Canton’s attorneys, and presented to the Trust during March 2014.  However, the PSP was not signed by either of the parties.  Nonetheless, Canton rendered services in respect of the project to the Trust, and was paid by the Trust upon presentation of its invoices;^[5] 
   5. As a result of defective work performed by the Contractor, the JBCC Agreement was terminated on the instructions of the Trust on 2 August 2014.  The Trust contended that Canton had failed to perform its duties as principal agent.  As such, it issued a letter of demand to Canton, inviting it to agree to the appointment of a mediator, failing which, to submit the dispute to mediation and arbitration in terms of clause 23.6 of the PSP;^[6] 
   6. A series of correspondence was exchanged between the parties’ respective attorneys during the period 15 September 2017 to 7 December 2017.  The parties were satisfied that retired Judge Hancke should be appointed as the arbitrator, and that the Trust would attend to prepare a draft arbitration agreement.  The parties further agreed that a pre-arbitration meeting would be held between them, without the arbitrator, on 24 January 2018.  The draft arbitration agreement was sent by the Trust to Canton for signature, in the event that same was satisfactory.^[7] 
   7. The pre-arbitration meeting was held on 24 January 2018, at which the parties discussed the draft pre-arbitration agreement.  They agreed to the appointment of Judge Hancke, the latter’s remuneration, as well as the parties’ respective liability for payment of his costs.  At the meeting, it was specifically requested by Canton that the following paragraph be inserted into the 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.’^[8] 
   8. On 30 January 2018, Canton’s attorneys informed the Trust’s attorneys that, according to Canton, the parties had not signed the PSP and that the arbitration provision in the PSP was unenforceable.  To this end, Canton invited the Trust’s attorneys to issue summons, should the Trust intend to proceed with the matter.  In response, the Trust afforded Canton seven days to sign the amended pre-arbitration agreement.  Since Canton contended that it does not recognise the existence of the arbitration agreement it declined to participate;^[9] 
   9. Consequently, the Trust applied to the High Court (the Court a quo) for an order compelling Canton to submit to arbitration in regard to the dispute as to whether or not the arbitration agreement existed.^[10]   The Trust relied on the PSP which contained an arbitration clause, albeit that same had never been signed.  The arbitration clause in the PSP referred to the AFSA^[11]  Rules (the AFSA Rules) which recognise the wide jurisdiction of the arbitrator to determine the dispute.  The AFSA rules vest the arbitrator with the power to rule on his/her own jurisdiction, including any dispute as to the validity or existence of the arbitration agreement.^[12]   Canton’s case was that it did not enter into any written agreement with the Trust, with the necessary agreed intention to be legally bound by the PSP to submit any dispute to arbitration.^[13]   This in turn gave rise to a material dispute of fact as to the existence of the agreement (the dispute of fact);
   10. The dispute of fact initially was adjudicated by the Court a quo, and later on by the Full Bench on appeal (the Full Bench<).  In dealing with the dispute of fact, both courts found that there was a valid and binding arbitration agreement, and ordered Canton to submit to arbitration.  In coming to their decision, they applied the ‘robust approach’ as per the SCA’s decision in Fakie NO v CCII Systems (Pty) Ltd.^[14]  In Fakie, Cameron, J summarised the ‘robust approach’ as follows:‘….. a respondent’s version can be rejected in motion proceedings, only if it is ‘fictitious’ or so far fetched and clearly untenable that it can confidently be said, on the papers alone, that it is demonstrably and clearly unworthy of credence’;^[15] 
   11. In upholding the court a quo’s decision, the Full Bench went further to find that in accordance with the AFSA Rules, which were referred to in the arbitration clause of the PSP, the arbitrator is vested with a wide discretion to rule on questions of jurisdiction, including the question as to whether or not an arbitration agreement exists.  It consequently found that the decision of such a dispute fell to be decided by the appointed arbitrator, and not by the court.  Its judgment was predicated upon the premise that the PSP constituted an agreement between the parties, in terms of which the parties agreed to submit their dispute to arbitration.^[16] 
3. The SCA viewed the matter differently: While the unsigned PSP incorporated a clause that imposed upon the parties to utilise arbitration proceedings for the resolution of disputes in accordance with the AFSA Rules, the dispute of fact was whether or not the PSP and, in turn, the arbitration clause, came into existence.  If it had not, the submission to arbitration in accordance with the AFSA Rules would not come into play.  If it did, then it would.  Put differently, the very agreement to submit the dispute to arbitration was being challenged.  In this regard, the SCA made reference to the following dictum in Heyman v Darwins Ltd,^[17]  viz: ‘[i]f the dispute is as to whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party that denies he has ever entered into the contract is thereby denying that he has ever joined the submission.’^[18] 
4. The SCA recognised that parties enjoy autonomy to agree that various categories of disputes that may arise between them will be submitted to arbitration for determination, rather than the court.  Ascertaining exactly what disputes are to be submitted to arbitration will inevitably involve the interpretation of the agreement.^[19] 
5. It was pointed out by the SCA that the question as to who decides whether a dispute goes to arbitration or to court, may arise at different stages.  Often it will commence before the arbitrator who has to decide it.  At other times, it may well have to be decided by the court on review or by way of an application for the enforcement of the arbitrator’s award.  On further occasions, such as the one in casu, the issue may arise at the commencement of the dispute.  In this regard, the SCA stated the following:‘A court faced with issues of this kind will want to steer clear a course between the discouragement of time-wasting obstructionism and protecting a party from being forced to arbitrate a dispute without their consent.’^[20] 
6. The SCA considered two opposing approaches which have been adopted by our courts in the abovementioned circumstances.  They are set out below.^[21] 
7. The first approach is premised on the doctrine of separability, which provides that an arbitration agreement is separate from the main agreement – in this case, the PSP.  On this interpretation, the court may well submit the dispute to arbitration.  However, this approach is subject to the proviso that there is no direct challenge by a party as to the validity or existence of the arbitration agreement.  If there is, then the principle of separability will not apply.
8. The second approach is based on the competence-competence principle.  This principle gives effect to judicial constraint by favouring the arbitral process.  There are positive and negative aspects to this principle.  The positive aspect is that it recognises that arbitrators enjoy the competence to rule on their own jurisdiction.  In such circumstances, the arbitral proceedings should not be stayed for the purposes of seeking judicial guidance.  However, the negative aspect of this principle is that where the dispute is already before the arbitrator, the court will not rule on a dispute as to the existence, validity or scope of the arbitration agreement.  Such dispute will be left to be decided by the arbitrator, at least initially, unless the arbitration agreement is manifestly void.  The court may finally decide on such dispute in the context of the jurisdiction of the arbitrator’s decision, if the latter’s award is brought on review or in circumstances where an application is being sought for the enforcement of the award sought.^[22] 
9. It is interesting to note that our courts have not as yet applied the competence-competence principle.  Nevertheless, the SCA pointed out that the principle has been of application in foreign jurisdictions.  It recognised that there is justification for our courts, in suitable cases, to apply the competence–competence principle.^[23]   In so doing, it referred to section 39(1)(b) and (c) of the Constitution of the Republic of South Africa^[24]  (the Constitution), which provides that, among other things, in interpreting the Bill of Rights, a court, tribunal or forum must consider international law, and may further consider foreign law.  ^[25] 
10. Pertinently, the principle has been adopted in our law in international arbitrations by virtue of the International Arbitration Act,^[26]  (the IAA) which embodies the UNCITRAL Model Law^[27]  (UNCITRAL).  In this regard, Article 8(1) and (2) of UNCITRAL provides as follows:
    ‘1.
    A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is real and void, inoperative or incapable of being performed.2.
    Where an action referred to in paragraph (1) of this article has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court’.
11. Turning back to the crisp issue before it, the SCA found that there was no scope for resolving the dispute of fact by means of the robust approach.  The papers clearly demonstrated that there was a real dispute of fact as to whether or not the parties concluded an agreement on the terms of the PSP which in turn incorporated an agreement to refer their disputes to arbitration.  The SCA’s view was that Canton’s evidence was not perfunctory, and accordingly, the dispute of fact could not be decided on motion on a balance of probabilities.^[28]  It disagreed with the approach to refer the dispute to arbitration under the AFSA Rules as Canton disputed that it agreed on such a process.  Contrastingly, it stated that a referral of the dispute to arbitration under the AFSA Rules would have been warranted if a separate arbitration agreement had been concluded between the parties to submit the dispute in casu to arbitration.^[29]   The question as to whether there was such a separate agreement to submit to arbitration, would be a matter which, in the SCA’s view, would best be served by a referral of such a dispute to evidence.^[30] 
12. Ultimately, the vital principle emanating from the SCA judgment is that only a court may decide a dispute over the validity of an arbitration agreement. Put differently, if the agreement incorporating an agreement to arbitrate is in dispute, it is for the courts to determine whether or not such agreement existed.

ADV. K. BAILEY SC FAArb (SA)

Member of the Johannesburg Bar

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^[1]   2022 (4) SA 420 (SCA).

^[2]   para [3]

^[3]   para [4]

^[4]   Ibid

^[5]   Ibid

^[6]   Ibid, paras [5] and [6].

^[7]   Ibid, paras [6], [7] and [8].

^[8]   Ibid, paras [8] and [9].

^[9]   Ibid, para [10]

^[10]  Ibid, paras [11], [12] and [23]

^[11]  Arbitration Foundation of Southern Africa NPC.

^[12]  SCA Judgment, para [40].

^[13]  Ibid, para [17].

^[14]  2006 (4) SA 326 (SCA).

^[15]  Fakie, para [56].

^[16]  SCA Judgment, paras [26] and [30].

^[17]  [1942] 1 All ER 337 (HL) at 343 F

^[18]  CA Judgment, para [30]

^[19]   Ibid, para [29]

^[20]  Ibid, paras [32] and [33]

^[21]   Ibid, paras [35] and [36].

^[22]  Ibid, para [35].

^[23]   Ibid, para [36].

^[24]  108 of 1996.

^[25]   Ibid, para [11].

^[26]   Act 15 of 2017.

^[27]   United Nations Commission on International Trade Law.

^[28]   SCA Judgment, para [39].

^[29]   Ibid, para [41].

^[30]   Ibid, para [43].