A recent case dealt with by the Supreme Court of Appeal concerned the interpretation of an agreement to arbitrate and exactly what disputes the arbitrator was entitled to deal with.

BACKGROUND

The underlying dispute between the parties, Riversdale Mining Limited and Mr JJ Du Plessis, had its origins in a share subscription and loan agreement.

In terms of the subscription agreement:

• Du Plessis and certain other shareholders of a Mozambican registered company, Elgas SA, agreed to dispose of their shares in Riversdale to a Mauritian company, FTech Limited;
• Du Plessis was afforded the opportunity to acquire shares in a company to be formed in Mozambique to be called BPP Stage 1 Newco;
• this acquisition was made subject to a condition precedent that FTech acquired all of the shares in Elgas within seven days of the agreement’s conclusion;
• the acquisition was also made dependent on Riversdale lending $1m to Du Plessis on terms to be negotiated and agreed.

A dispute arose between the parties as to whether the condition precedent had been fulfilled.

The subscription agreement contained a clause providing for the referral of disputes to a referee mutually decided upon and, failing agreement, to the South African Institute of Chartered Accountants (clause 8).

The parties could not agree on a referee, and the SAICA declined to make an appointment on the grounds that it had no professional jurisdiction over legal practitioners.

This left the parties without an enforceable dispute resolution mechanism.

The parties then agreed to refer the dispute to arbitration and concluded an arbitration agreement which replaced clause 8 of the subscription agreement.

Chriso Eloff SC, a Johannesburg senior advocate, was appointed as the arbitrator.

The dispute resolution clause in the subscription agreement made provision for the referee to decide on the commercial terms of the loan agreement in the event of the parties failing to agree thereon.

The arbitration agreement did not expressly confer corresponding powers on the arbitrator.

The arbitrator held that the subscription agreement was unenforceable because it contained a clause which required the parties to negotiate and agree on the terms of the loan agreement. This amounted to an agreement to agree which our law does not treat as enforceable.

However, if a contract provides for parties to negotiate and agree on the terms of a contract and the contract at the same time provides for disputes between the parties to be resolved by arbitration, then that creates a deadlock-breaking mechanism and the agreement is nonetheless enforceable.

In this case Riversdale said that the arbitration agreement substituted clause 8 which contained a deadlock-breaking mechanism whereas the arbitration agreement did not.

The result, so Riversdale contended, was that the subscription agreement, shorn of clause 8, became an agreement to agree and was therefore unenforceable.

The arbitrator upheld Riversdale’s argument on this issue.

The court’s judgment hints at the fact that it did not entirely agree with the arbitrator’s approach. However, as mistakes of law and of fact for that matter by arbitrators do not amount to reviewable irregularities warranting the setting aside of arbitration awards, the arbitrator’s decision on the issue was inviolate.

Du Plessis tried to avoid the unhappy outcome of the arbitration award by contending that the arbitrator had exceeded his jurisdiction by interpreting the effect of the arbitration clause when what had been referred to him was the existing disputes between the parties connected with the subscription agreement only.

The court was unpersuaded and said:

“So, did the arbitrator exceed his jurisdiction in deciding the issue? The basic principle in the interpretation of arbitration clauses is that they must be construed liberally to give effect to their essential purpose, which is to resolve legal disputes arising from commercial relationships before privately agreed tribunals, instead of through the courts. When business people choose to arbitrate their disputes, they generally intend all their disputes to be determined by the same tribunal, unless they express their wish to exclude any issues from the arbitrator’s jurisdiction in clear language. There is thus a presumption in favour of ‘one stop arbitration’.”

The court held that Du Plessis’s fixation on the words “existing disputes” in the arbitration agreement was misplaced as the real dispute that had to be decided by the arbitrator was the validity, binding effect and enforceability of the subscription agreement which is what the arbitrator had done.

The issue concerning the effect of the arbitration agreement on clause 8 of the subscription agreement fell within the ambit of this dispute and the arbitrator was entitled to decide it.

The court also mentioned that in interpreting arbitration agreements the court aims to give them a sensible commercial meaning as opposed to a meaning which gives rise to an unbusinesslike and insensible meaning.

CONCLUSION

The judgment is a clear signal to our courts to interpret arbitration agreements so as to give them a “one stop shop” ambit of application unless explicit wording points to a different meaning.

ALASTAIR HAY
COX YEATS
Direct Tel: 031 - 536 8508
E-mail: ahay@coxyeats.co.za