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[2013] ZASCA 83
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Radon Projects (Pty) Ltd v N V Properties (Pty) Ltd and Another (528/12) [2013] ZASCA 83; [2013] 3 All SA 615 (SCA); 2013 (6) SA 345 (SCA) (31 May 2013)
THE
SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case No: 528/12
Reportable
In the matter between:
RADON PROJECTS (PTY) LTD
....................................................
Appellant
and
N V PROPERTIES (PTY) LTD
...........................................
First
Respondent
GARY STEPHEN MYBURGH
.......................................
Second
Respondent
Neutral citation:
Radon
Projects v N V Properties & another
(528/12)
[2013] ZASCA 83
(31 May 2013)
Coram:
NUGENT, LEACH and
PILLAY JJA and ERASMUS and SALDULKER AJJA
Heard:
14 MAY 2013
Delivered: 31 MAY 2013
Summary: Dispute resolution –
Principal Building Agreement of the Joint Building Contracts
Committee 4
th
ed March 2004 –
jurisdiction of arbitrator – duty of arbitrator when
jurisdictional objection taken.
___________________________________________________________
ORDER
___________________________________________________________
On appeal from Eastern Cape High
Court, Grahamstown (Da Silva AJ sitting as court of first instance).
The appeal is upheld with costs.
The order of the court below is set aside and substituted with an
order dismissing the application
with costs. The costs in each case
are to include the costs of two counsel where two counsel were
employed.
___________________________________________________________
JUDGMENT
___________________________________________________________
NUGENT JA (LEACH and PILLAY JJA
and ERASMUS and SALDULKER AJJA CONCURRING)
[1] Large construction projects
provide considerable scope for disputes of various kinds to arise,
both in the course of executing
the works and after the works have
been completed. Most construction contracts make provision for their
resolution. This appeal
concerns the manner in which disputes are to
be resolved under the Principal Building Agreement of the Joint
Building Contracts
Committee (JBCC) 4
th
ed March 2004.
[2] It arises from a contract
concluded in that form between NV Properties (Pty) Ltd (the first
respondent, which I will refer to
as the employer) and Radon Projects
(Pty) Ltd (the appellant, which I will refer to as the contractor)
under which the contractor
undertook to construct for the employer
what was to be known as the East London Convention Centre. The
contractor has asserted
various claims against the employer. The
employer disputes liability for the claims. At the instance of the
contractor an arbitrator
was appointed to resolve the disputes.
Contending that the arbitrator had no jurisdiction to consider and
rule upon the bulk of
the claims the employer applied to the Eastern
Cape High Court for an order to that effect. Da Silva AJ granted the
order and the
contractor now appeals with the leave of that court.
[3] Construction contracts most
often require disputes to be resolved by arbitration, but at the same
time postpone arbitration
until the works have been completed, so as
to avoid interruption. Earlier contracts in common use made an
exception in certain
limited circumstances. That was the case in
Britain under the JCT
1
Standard Form of Building
Agreement (1980 edition),
2
and in this country under the
General Conditions of Contract 1982 for use in connection with Works
of Civil Engineering Construction
(Fifth Edition).
3
In both cases an arbitration
could not be opened until after completion of the works, except on
limited issues that, by their nature,
demanded earlier resolution, in
particular disputes concerning payment certificates.
[4] It has now become common
internationally – in some countries by legislation
4
–
for disputes to be
resolved provisionally by adjudication. In
Macob
Civil Engineering Ltd v Morrison Construction Ltd
5
adjudication was described, in
the context of English legislation, as
‘…
a
speedy mechanism for settling disputes [under] construction contracts
on a provisional interim basis, and requiring the decision
of
adjudicators to be enforced pending the final determination of
disputes by arbitration, litigation or agreement. … But
Parliament has not abolished arbitration and litigation of
construction disputes. It has merely introduced an intervening
provisional
stage in the dispute resolution process.’
[5] The authors of
Hudson’s
Building and Construction Contracts
6
observe that under New Zealand
construction legislation
7
adjudication ‘is regarded
as essentially a cash flow measure implementing what has been
colloquially described as a “quick
and dirty” exercise to
avoid delays in payment pending definitive determination of
litigation’.
8
[6] In the present contract the
resolution of disputes is provided for in clause 40 as follows:
‘
40.1
Should there be any disagreement between the employer or his agents
on the one hand and the contractor on the other arising
out of or
concerning this agreement, the contractor may request the principal
agent to determine such disagreement by a written
decision to both
parties. On submission of such a request a disagreement in respect of
the issues detailed therein shall be deemed
to exist.
40.2 The principal
agent shall give a decision specifically in terms of 40.1 to the
employer and the contractor within ten (10)
working days of receipt
of such a request. Such decision shall be final and binding on the
parties unless either party disputes
the same in terms of [40.3]
40.3 Where there is
no principal agent or should the principal agent fail to give a
written decision within ten (10) working days
or either party
disputes the decision in terms of 40.2 by notice to the other and the
principal agent within twenty (20) working
days of receipt thereof a
dispute shall be deemed to exist
40.4 A dispute in
terms of 40.2 or 40.3 shall be submitted to:
40.4.1 Mediation
where the parties so agree
40.4.2 Adjudication
where practical completion in terms of 24.0 or practical completion
of the last section in terms of 28.2.2 has
not been achieved
40.4.3 Arbitration
where practical completion in terms of this n/s agreement has been
achieved or where expressly stated in terms
of the n/s schedule …
40.5 The dispute
referred to mediation in terms of 40.4.1, adjudication in terms of
40.4.2 or arbitration in terms of 40.4.3 shall
be:
40.5.1 Dealt with in
terms of the JBCC Dispute Resolution Procedures
40.5.2 Held in
abeyance over an annual holiday period where such period is noted in
the schedule
40.6 Reference of
the dispute for resolution in terms of 40.4 shall not relieve the
parties from liability for the due and timeous
performance of their
obligations
40.7 The
cancellation of this agreement shall not affect the validity of this
clause 40.0.’
[7] The Adjudication Rules issued
by the JBCC for use with the contract describe adjudication as ‘an
accelerated form of dispute
resolution in which a neutral third party
determines the dispute as an expert and not as an arbitrator and
whose determination
is binding unless and until varied or overturned
by an arbitration award’. An adjudicator is given wide
inquisitorial powers
that enable disputes to be resolved summarily
and expeditiously. He is empowered, for example, to determine the
dispute on the
basis alone of the documents submitted to him by the
parties, or on the basis alone of an inspection of the works. He may
make
use of his own specialist knowledge, he may open up and review
any determination or certificate or valuation related to the dispute,
and generally, he may ‘adopt the most cost- and time-effective
procedure consistent with fairness to determine the dispute’.
A
determination by the adjudicator is ‘binding upon the parties
unless and until such determination is overturned or varied
in whole
or in part by arbitration in terms of clause 40.5 of the Agreement’.
[8] When read together with the
Rules, I think it is plain that, in keeping with modern practice
internationally, adjudication under
clause 40 is designed as a
measure for the summary and interim resolution of disputes, subject
to their final resolution by arbitration
where appropriate. The
effect of clause 40, properly construed, is that the first port of
call for a contractor, where disagreement
arises with the employer,
is the principal agent.
9
The clause does not purport to
limit the time within which the principal agent may be called upon to
do so. But once he has been
called upon he must resolve the
disagreement within ten days. If he fails to do so, or if either
party disputes his decision within
20 days, a dispute is deemed to
exist. If he gives a decision, and it is not disputed within that
time, then his decision becomes
final and binding.
[9] Once a dispute is deemed to
exist either party may (but not must) submit the dispute for
independent resolution. Once again
the clause does not purport to
prescribe a time within which that must be done. But if a party wants
it resolved before practical
completion, it must be submitted to
adjudication. After practical completion it must be resolved by
arbitration. (I leave aside
the opportunity for mediation by
agreement. Needless to say, it is also open to the parties, after
practical completion, to agree
to adjudication.) An adjudicator’s
determination is clearly not exhaustive of the dispute. After
practical completion the
dispute might be submitted again to
arbitration for final resolution. Whether a dispute is to be resolved
by adjudication or by
arbitration, in other words, depends upon when
the dispute is submitted for resolution, and not upon the nature or
genesis of the
dispute.
[10] The contract defines
‘practical completion’ of the works as ‘the stage
of completion where, in the opinion
of the principal agent,
completion of the works has substantially been reached and can
effectively be used for the purposes intended’.
It is a
significant event because failure to reach practical completion by
the agreed date renders the contractor liable to penalties.
[11] The contract recognises that
delays might occur in the course of construction for any number of
reasons. Where the delay occurs
through no fault of the contractor
then generally the contractor will be entitled to revision of the
date for practical completion,
and in some cases also to adjustment
of the contract value. Delays that give rise to those entitlements
are listed in clauses 29.1
to 29.3 of the contract but need no
elaboration for present purposes.
[12] If the contractor
anticipates such a delay occurring he is required by clauses 29.4 to
29.6 to give the principal agent reasonable
and timeous notice of the
anticipated delay, to take steps to avoid or reduce the delay, and to
give notice to the principal agent,
within a stipulated time, of his
intention to claim a revision, failing which the principal agent need
not consider the claim.
The contractor must also submit any such
claim to the principal agent, incorporating certain specified
information, within 60 days
of the delay ceasing, failing which the
claim is forfeited.
[13] Within 20 working days of
receiving such a claim the principal agent is required by clause 29.7
to
‘
29.7.1
Grant, reduce or refuse the period claimed
29.7.2 Determine the
revised date for practical completion in relation to the working days
granted
29.7.3 Identify each
circumstance and relevant subclause for each revision granted or give
reasons for amending or refusing such
claim’.
If the principal agent fails to
act in accordance with that clause the claim is deemed to have been
refused (clause 29.8).
[14] The agreed date for
practical completion in this case was 17 October 2008 and the
contractor was liable to a penalty of R35 000
for every day
thereafter until practical completion was reached.
[15] The present dispute concerns
claims by the contractor for revisions to the date for practical
completion (and related revisions)
in consequence of delay. During
the course of construction a number of such claims were submitted to
the principal agent under
clause 29. Those that were granted, in
whole or in part, extended the date for practical completion to 9
March 2009. The project
was brought to practical completion only on
14 December 2009, in consequence of which the contractor incurred
penalties amounting
to a little more than R6 million.
[16] After practical completion
the contractor submitted to the principal agent what was called a
‘consolidated claim’
– a consolidation of a number
of individual claims – for revisions of the contract on account
of delay. According to
the contractor these were claims made in the
course of construction, but revised in the light of information that
subsequently
came to hand. The principal agent failed to respond to
the consolidated claim and, says the contractor, it was therefore
deemed
to have been refused, as contemplated by clause 29.8. On 4
August 2010 the contractor called upon the principal agent to
‘determine
the disagreement’ (with regard to the validity
of the claims) under clause 40.1, which the principal agent failed to
do.
At the request of the contractor the second respondent (who has
played no role in the proceedings) was then appointed by the
Association
of Arbitrators to resolve the dispute.
[17] The contractor subsequently
abandoned some of the claims. Those that it pursues were pleaded in a
statement of claim. In addition
to claims for revision in consequence
of delay, the contractor pleaded three other claims. It has given
notice of its intention
to abandon one of those claims, and the other
two, which are claims for interest, are of no consequence for present
purposes.
[18] I have found the formulation
of the objections to the jurisdiction of the arbitrator in the
founding affidavit to be rather
confusing but on close analysis the
objections really come down to two. Both are founded upon the
employer’s contention that
the contractor is purporting to
revive claims that were disposed of finally in the course of
construction.
[19] The employer alleges that
most of the claims now being advanced are claims that were submitted
to the principal agent in the
course of construction and were
refused, whereupon the contractor called upon the principal agent to
resolve the disagreement under
clause 40.1. It is alleged that the
principal agent did so, and the contractor failed to dispute his
decision within 20 days, in
consequence of which his decisions became
final and binding, and no dispute came into existence. On that basis,
so it was submitted,
there is no dispute between the parties capable
of being submitted to arbitration.
[20] The employer went on to
allege that even if a dispute came into existence it is not competent
to submit it to arbitration,
because the dispute arose before
practical completion, and is thus required to be resolved by
adjudication. As the objection was
expressed in the founding
affidavit, ‘[the contractor] was obliged to have submitted the
disputes to adjudication and …
it is not entitled to now
attempt to refer disputes, which should have been adjudicated, to
arbitration …’. And later:
‘[W]here a dispute,
properly established in terms of the relevant procedural requirements
manifests prior to practical completion
it falls to be dealt with in
accordance with the adjudication procedures’.
[21] The latter objection can be
disposed of at once. I have already explained at some length that the
question whether a dispute
is to be resolved by adjudication, or
whether it is to be resolved by arbitration, depends upon when it is
submitted for resolution,
and not upon when the dispute arises. A
contractor is not obliged to submit a dispute to adjudication. He may
choose instead to
complete the works and submit it then to
arbitration. If the present disputes can indeed be said to have
arisen before practical
completion that would be no bar to their
resolution by arbitration.
[22] But both objections founder
on more fundamental grounds because they misconceive the nature of
the claims that are now being
advanced. The case made out by the
contractor in its answering affidavit is that it was entitled to
revise and update its earlier
claims in the light of information that
came to hand after completion of the works, and that the principal
agent was obliged to
consider the revised claims, and allow those
that qualified for extensions of time. The contractor has advanced
various reasons
for that alleged entitlement to submit revised claims
but I need not go into them. It is those revised claims that are now
sought
to be pursued before the arbitrator, and not the initial
claims that were refused in the course of construction.
[23] Whether or not the
contractor was indeed entitled to submit revised claims is not a
matter that we need to consider. It might
well be that there is no
merit in its contention that it was entitled to do so but that is not
material for present purposes. If
the contention has no merit then
the claims will fail but that is no reason why the arbitrator has no
jurisdiction to consider
them. It means merely that the employer
might have a good defence to the claims. It ought to be trite that
the question whether
a tribunal has jurisdiction to consider a claim
is not dependent upon its merit or otherwise. The question is only
whether the
claim as formulated in the pleadings falls within the
scope of his jurisdiction to consider.
[24] That was made clear by this
court when rejecting a similar jurisdictional objection in
Makhanya
v University of Zululand
.
10
That case concerned the
jurisdiction of a court, but the principle applies as much to the
jurisdiction of an arbitrator. This court
said the following:
‘
[51]
The submissions that were made before us by counsel for the
University, when examined, came down to asserting that [the court
had
no jurisdiction because the claim is a bad claim]…. Her
submission, in short, was that the court had no power in the
matter
because the University had a good defence to the claim.
[52] I have pointed
out that the term ‘jurisdiction’ … describes the
power of a court to consider and to either
uphold or dismiss a claim.
And I have also pointed out that it is sometimes overlooked that to
dismiss a claim (other than for
lack of jurisdiction) calls for the
exercise of judicial power as much as it does to uphold the claim.
[53] The submission
that was advanced by counsel invites the question how a court would
be capable of upholding the defence (and
thus dismissing the claim)
if it had no power in the matter at all. Counsel could provide no
answer – because there is none.
[54] There is no
answer because the submission offends an immutable rule of logic,
which is that the power of a court to answer
a question (the question
whether a claim is good or bad) cannot be dependent upon the answer
to the question. To express it another
way, its power to consider a
claim cannot be dependent upon whether the claim is a good claim or a
bad claim. The Chief Justice,
writing for the minority in
Chirwa,
11
expressed it as
follows:
12
“
It
seems to me axiomatic that the substantive merits of a claim cannot
determine whether a court has jurisdiction to hear it
.
”’
[25] I will accept for present
purposes that decisions made by the principal agent under clause 40.1
in relation to the initial
claims that were refused in the course of
construction became final and binding and no dispute capable of being
submitted to arbitration
came into existence in relation to those
claims. But those are not the claims that are now in issue. I have
said that the contractor
alleges an entitlement to submit revised
claims to the principal agent, which it did when submitting its
‘consolidated claim’.
Those are the claims that became
disputed once the principal agent failed to respond to the
contractor’s request for a decision
under clause 40.1 in August
2010. A dispute thereupon arose as to the validity of those claims,
which was one ‘arising out
of or concerning the agreement’
– it is only because the agreement exists that the dispute has
arisen – that
is subject to resolution by arbitration. The
application ought thus to have failed and the appeal must succeed.
[26] There is a further issue
that I think I ought to deal with lest further jurisdictional
objections arise in the course of the
proposed arbitration.
[27] When confronted with the
employer’s objection the arbitrator’s response was that
he was bound to enter upon the
arbitration nonetheless, and that the
objection should properly be raised in the pleadings and dealt with
accordingly, but the
matter was taken out of his hands, because it
was said he had no power to ‘determine his own jurisdiction’.
[28] The response of the
arbitrator cannot be faulted. When confronted with a jurisdictional
objection an arbitrator is not obliged
forthwith to throw up his
hands and withdraw from the matter until a court has clarified his
jurisdiction. While an arbitrator
is not competent to determine his
own jurisdiction that means only that he has no power to fix the
scope of his jurisdiction. The
scope of his jurisdiction is fixed by
his terms of reference and he has no power to alter its scope by his
own decision (in the
absence of agreement to the contrary).
[29] But that does not preclude
him from enquiring into the scope of his jurisdiction, and even
ruling upon it, when a jurisdictional
objection is raised. He does so
at the risk that he might be wrong – in which case an award he
makes will be invalid –
but in some cases it might be
convenient to enter upon the arbitration nonetheless. As it is
expressed in the fifth edition of
Keating
on Building Contracts
13
(before the Arbitration Act
1996), in reliance on
Christopher
Brown Ltd v Genossenschaft Oesterreichischer etc
:
14
‘
If
the arbitrator's jurisdiction is challenged he should not refuse to
act until it has been determined by some court which has
power to
determine it finally. He should inquire into the merits of the issue
to satisfy himself as a preliminary matter whether
he ought to get on
with the arbitration or not, and if it becomes abundantly clear to
him that he has no jurisdiction then he might
well take the view that
he should not go on with the hearing at all.’
[30] The position was fully
explained by Devlin J in that case as follows:
15
'It is clear that at
the beginning of any arbitration one side or the other may challenge
the jurisdiction of the arbitrator. It
is not the law that
arbitrators, if their jurisdiction is challenged or questioned, are
bound immediately to refuse to act until
their jurisdiction has been
determined by some court which has power to determine it finally. Nor
is it the law that they are bound
to go on without investigating the
merits of the challenge and to determine the matter in dispute,
leaving the question of their
jurisdiction to be held over until it
is determined by some court which had power to determine it. They
might then be merely wasting
their time and everybody else's. They
are not obliged to take either of those courses. They are entitled to
inquire into the merits
of the issue whether they have jurisdiction
or not, not for the purpose of reaching any conclusion which will be
binding upon the
parties – because that they cannot do –
but for the purpose of satisfying themselves as a preliminary matter
whether
they ought to go on with the arbitration or not. If it became
abundantly clear to them, on looking into the matter, that they
obviously
had no jurisdiction as, for example, it would be if the
submission which was produced was not signed, or not properly
executed,
or something of that sort, then they might well take the
view that they were not going to go on with the hearing at all. They
are
entitled, in short, to make their own inquiries in order to
determine their own course of action, and the result of that inquiry
has no effect whatsoever upon the rights of the parties.’
[31] In short, what is called for
when confronted with a jurisdictional objection, is sound judgment by
the arbitrator on the course
that should be followed, based on his
view of the strength of the objection, and the circumstances that
present themselves in the
particular case. Mustill and Boyd:
The
Law and Practice of Commercial Arbitration in England
16
and
Russel
on Arbitration
17
provide helpful assistance as to
the manner in which an arbitrator should exercise his judgment.
[32] The appeal is upheld with
costs. The order of the court below is set aside and substituted with
an order dismissing the application
with costs. The costs in each
case are to include the costs of two counsel where two counsel were
employed.
__________________
R W NUGENT
JUDGE OF APPEAL
APPEARANCES:
For
appellants: J G Wasserman SC
C
J McAslin
Instructed
by:
Ooteman
Attorneys, Johannesburg
Webbers,
Bloemfontein
For
respondents: E A S Ford SC
D
J Taljaard
Instructed
by:
Netteltons,
Grahamstown
Lovius
Block, Bloemfontein
1
Joint
Contracts Tribunal.
2
Clause
41, in
Keating on Building Contracts
5 ed (1991) by Sir Anthony May, at 673-5.
3
Clause
69(3), in P C Loots
Engineering and
Construction Law
(1985) at 338.
4
It
is also provided for in the 2011 edition of the JCT Standard Form of
Building Agreement. See clause 9, in
Keating
on Building Contracts
9 ed (2012) by
Stephen Furst and Sir Vivian Ramsey para 20-398.
5
Macob
Civil Engineering Ltd v Morrison Construction Ltd
[1999]
B.L.R. 93
at 97, cited in
Keating on
Building Contracts
9 ed, para 18-018.
6
Hudson’s
Building and Construction Contracts
12 ed (2010) eds Nicholas
Dennys QC, Mark Raeside QC and Robert Clay.
7
Construction
Contracts Act 2002.
8
At
1375, citing
Concrete Structures (NZ) Ltd v Palmer
[2006]
NZHC 342.
9
The
JCT Standard Form of Building Agreement does not require that
preliminary step. As pointed out by P C Loots, above, at 341,
in
relation to the comparable requirement in the General Conditions of
Contract 1982, ‘in the great majority of cases the
reference
to the engineer [now the principal agent] is little more than an
irritating and time-wasting formality, since his decision
is likely
to be a foregone conclusion, having previously been indicated to the
contractor or employer when the claim was first
advanced and the
dispute arose’.
10
Makhanya
v University of Zululand
2010 (1) 62 (SCA).
11
Chirwa
v Transnet Ltd
and others
[2007] ZACC 23
;
2008 (4) SA 367
(CC).
12
Para
155.
13
Above,
at 392-3.
14
Christopher
Brown Ltd v Genossenschaft Oesterreichischer etc
[1954] 1 QB 8.
15
At
12-13.
16
Sir
Michael J Mustill and Stewart C Boyd
The Law and Practice of
Commercial Arbitration in England
2 ed (1989) at 574-576.
17
Russell
on Arbitration
22 ed (2003) by David St. John Sutton and Judith
Gill paras 5-075 to 5- 089.