Redflag provisions in the South African Arbitration Act may hinder swift and efficient arbitrations

In recent years there has been increased reliance on use of arbitration to resolve commercial disputes. The hallmark of arbitration is that it enables the parties to a dispute to determine the manner in which the parties will attempt to resolve the dispute, including the rules and duration. In South Africa arbitration is particularly attractive because courts are inundated with cases. Litigants often have to wait months or even years before a matter goes to trial. When a matter is eventually tried it involves a formal, rigid, lengthy and costly process. In courts, litigants have a right, amongst others things to call expert witnesses and request discovery, all of which involves a considerable amount of time and money. Moreover, even once a judgment is rendered the winning party faces the uncertainty of having to incur costs of a possible appeal.

Arbitration presents a viable alternative. However, in order to reap the benefits of arbitration, an arbitration agreement must ensure that the arbitration will be conducted in a manner that eradicates, as much as possible, any opportunity for parties to the dispute to hinder the speedy and final resolution of the dispute.

The Arbitration Act No. 42 of 1965 (“the Act”) provides a basic framework for conducting arbitrations under South African law. The Act grants arbitrating parties wide discretion to design an arbitral process that yields a speedy and final resolution of their dispute.

Section 28 of the Act is a key provision and provides that as a general rule, unless the arbitrating parties agree otherwise, an arbitral award is final and binding on the parties and cannot be appealed against. The provision entrenches one of the most attractive features of arbitration, namely finality. The Act also only recognises three very narrow grounds for challenging the validity of an arbitral award namely, where there has been an egregious procedural irregularity, where there has been misconduct by the arbitrator or where the award was improperly obtained.

However, it is insufficient for arbitrating parties to rely solely on Arbitration Act’s rules to result in a swift and cost–effective arbitration. Certain loopholes in the Act may provide an opportunity for a party to delay and frustrate the arbitral process even before an award is rendered.

Section 3 of the Act states that on application of any party to the arbitration, and upon good cause having been shown, a court may set aside an arbitration agreement or order that a particular dispute shall not be referred to arbitration.  The provision effectively gives parties to an arbitration the right to challenge the validity of an arbitration agreement in court. Consequently, before parties even make it to the arbitration they may find themselves before a court called on to decide whether the arbitration agreement is valid or whether a particular aspect of their dispute falls within the terms of the arbitration agreement.

Although the court may find that good cause has not been shown to challenge the validity of the agreement or that the nature of the parties dispute does indeed fall within the scope of the arbitration agreement, the court would still have had to consider the merits of the application and the parties would have lost time and incurred the cost of having gone to court, and possibly briefed counsel, before additionally incurring the costs of the actual arbitration that follows.

Section 20 of the Act is another redflag provision. It allows a party to the arbitration to request that the arbitrator state any question of law arising during the arbitration for the opinion of the court or counsel. The opinion rendered by the court or counsel is then binding on the arbitrator and cannot be appealed.

The provision has no qualification on the right of referral. Therefore, a party requesting a referral is not expressly required to “show good cause” for their application. Secondly, if counsel is called upon to provide the opinion, the Act makes no provision for deciding how counsel is to be appointed. The Act also does not state who is responsible for the cost of obtaining the opinion. Arguably, the party requesting the opinion should bear the cost of the opinion, however this is not the stated position under the Act.

Lastly, and most importantly, a particular issue which the parties may have initially agreed should be determined by an arbitrator (possibly with expert knowledge of the industry to which the dispute relates) may ultimately be determined by counsel.

Useful guidelines

Arbitrating parties can avoid some of these setbacks by making provision for the following in their arbitration agreements:

  • Clearly define the nature of the disputes that will be arbitrated. It is advisable to make the terms of the arbitration agreement as wide as possible to limit challenges that can be raised regarding whether a particular aspect of the dispute falls within the scope of the arbitration agreement.
  • Expressly grant the arbitrator the authority to determine the validity of the arbitration agreement itself and to determine whether a particular matter falls within the scope of the arbitration agreement. This removes the opportunity for a party to stall the arbitration and request a court to make these determinations.
  • Expressly exclude the right to refer a question of law for the opinion of the court or counsel; and lastly for the sake of certainty, reiterate and expressly exclude the right of appeal or the right to remit the matter for reconsideration.

Note: The original of this article appears on Ashersons Attorneys website, here.