B. Langton Construction CC v Quipmore Business Finance (Pty) Ltd and Another (8201/2011) [2013] ZAKZPHC 23 (13 February 2013)

80 Reportability

Arbitration Law

Brief Summary

Arbitration — Jurisdiction — Review of arbitrator's ruling — Applicant sought to review and set aside the arbitrator's dismissal of its special plea regarding jurisdiction, claiming the arbitrator exceeded his powers by ruling on his own jurisdiction — The applicant contended that the arbitration clause in the sales agreement did not extend to disputes arising from an acknowledgment of debt, and that the arbitrator's ruling was a nullity — The court held that the arbitrator had jurisdiction to determine his own jurisdiction as agreed by the parties, and thus the application for review was dismissed.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an application in the KwaZulu-Natal High Court, Pietermaritzburg, to review and set aside an arbitration ruling (described in the papers as an “award”) made by the second respondent, who acted as arbitrator. The applicant sought the setting aside of the arbitrator’s order dismissing its first special plea in the arbitration, and contended further that the court should also dismiss the arbitration with costs. An alternative form of relief originally pursued was a stay of the arbitration pending the outcome of other proceedings.

The parties were B. Langton Construction CC (applicant) and Quipmore Business Finance (Pty) Ltd (first respondent). Mark Bingham was cited as the second respondent in his capacity as arbitrator, and indicated that he would abide the decision of the court.

Procedurally, the dispute originated in arbitration after the first respondent declared a dispute and delivered a statement of claim for payment. The applicant raised two special pleas, including a plea that the arbitrator lacked jurisdiction. The arbitrator dismissed the first special plea with costs. The applicant then approached the High Court to set aside that ruling. During the course of the High Court proceedings, the applicant’s pursuit of a stay based on lis pendens fell away because the High Court application relied upon for that relief had been dismissed with costs, making that aspect unnecessary to decide.

The general subject-matter of the dispute concerned the scope of an arbitration clause contained in a general sales agreement, and whether the arbitrator was empowered to determine jurisdiction (and then decide the special plea) where the applicant contended that the claim depended on a later acknowledgment of debt and that there had been no proper submission to arbitral jurisdiction in respect of that agreement.

2. Material Facts

The applicant and the first respondent concluded a general sales agreement containing an arbitration clause which provided that any dispute between the parties “in regard to this Agreement or any matter arising out of it” could, at the sole discretion of the first respondent (described in the clause as CAPITAL FORTY8), be submitted to arbitration for decision.

Subsequently, the applicant and MV Maintenance Services CC entered into an agreement described as an acknowledgment of debt, reflecting their joint and several indebtedness to the first respondent and recording the details of the indebtedness.

On 8 October 2010 the first respondent declared a dispute for arbitration and issued a statement of claim against the applicant for payment of R3 640 029,63. The applicant delivered two special pleas. The first special plea asserted that the arbitrator lacked jurisdiction because he could derive jurisdiction only from the arbitration clause in the sales agreement, while the first respondent’s claim was said to be founded, at least in part, on the acknowledgment of debt and its breach; on that basis, the applicant contended the acknowledgment of debt was not covered by the sales agreement’s arbitration clause. The second special plea raised lis pendens, alleging that High Court proceedings instituted by the first respondent involving the acknowledgment of debt were pending and that the validity of the acknowledgment of debt formed part of that dispute.

It was recorded in the arbitrator’s ruling that at a pre-arbitration meeting the parties agreed that the issue of jurisdiction would be determined first. On the papers before the High Court, there was a dispute in characterisation of what had been agreed: the first respondent contended that it was common cause the arbitrator was asked to decide whether he had jurisdiction; the applicant contended that it never consented to the arbitrator determining his own jurisdiction and that it consistently maintained the arbitration was a nullity for want of jurisdiction.

On 7 June 2011, the arbitrator dismissed the applicant’s first special plea with costs, concluding (after analysis) that the acknowledgment of debt could be treated as “a matter arising out of” the sales agreement within the meaning of the arbitration clause.

In later affidavits, the applicant stated that related High Court litigation had been dismissed with costs (removing the basis for the stay sought on lis pendens), and referred to further summons issued out of the Johannesburg High Court against Ms Langton personally and others, on agreements said to overlap with those relied upon in the arbitration. The first respondent did not respond to those supplementary averments. The High Court, however, treated the core dispute before it as turning on the arbitrator’s powers in relation to jurisdiction and the validity of the ruling on the first special plea.

3. Legal Issues

The central legal questions concerned whether the arbitrator exceeded his powers by determining his own jurisdiction and dismissing the first special plea, in circumstances where the applicant contended there was no proper submission to arbitral jurisdiction over that jurisdictional question itself.

Closely connected to this was the question whether, in the absence of a clear agreement, an arbitrator may finally determine the scope of his own mandate, particularly where the dispute between the parties is precisely about whether the arbitration clause extends to the claim founded on an acknowledgment of debt.

A further issue arose as to the proper procedural characterisation of the applicant’s challenge: whether it was governed by the six-week time period referred to in section 33(2) of the Arbitration Act 42 of 1965 as a review application, or whether the applicant’s case was more accurately that the ruling was invalid and a nullity because it was made without jurisdiction. This led to a further question whether the court could grant declaratory and setting-aside relief as “further or alternative relief” on the papers.

The dispute primarily concerned the application of legal principles to facts (the existence and scope of consent to arbitral jurisdiction, and whether the arbitrator’s conduct fell within the submission), and the legal consequences flowing from an arbitrator acting beyond the powers conferred by the submission and the arbitration clause.

4. Court’s Reasoning

The court approached the matter on the footing that an arbitrator’s authority and the binding force of an arbitral award depend on the submission and the powers conferred by the parties’ agreement. The court accepted, with reference to the authorities relied upon in the arbitration, that an arbitrator cannot widen the scope of jurisdiction by holding that matters fall within the submission when, on a proper construction, they do not. Where parties disagree about the ambit of the arbitrator’s powers, the ultimate decision on that ambit rests with a court, not with the arbitrator.

The judgment noted that the arbitrator correctly referred to the relevant authorities and expressed an understanding that he may not arrogate jurisdiction to himself beyond that conferred by the arbitration clause. The court nevertheless found that, despite this stated understanding, the arbitrator proceeded to determine whether the acknowledgment of debt constituted “a matter arising out of” the sales agreement and then summarily dismissed the first special plea with costs. In doing so, the court held, the arbitrator failed to give consideration to the applicant’s contention (which the arbitrator had acknowledged in the ruling) that he had no power to decide whether he had jurisdiction in the first place.

On the evidence, the court accepted that there was substance in the applicant’s contention that it had consistently maintained that the arbitrator lacked power to decide his own jurisdiction. The judgment specifically referred to the fact that the arbitrator’s ruling mentioned the applicant’s heads of argument in which it unequivocally asserted that an arbitrator cannot determine his or her own jurisdiction, and that the arbitrator recorded that the applicant relied on decided cases supporting that proposition.

Applying these principles, the court concluded that by deciding the jurisdictional question himself and then deciding the merits of the first special plea, the arbitrator acted ultra vires. On that basis, the ruling dismissing the first special plea fell to be set aside under section 33(1)(b) of the Arbitration Act 42 of 1965, which permits setting aside where an arbitration tribunal has exceeded its powers.

The first respondent also argued that the application (as a review) was out of time under section 33(2) of the Arbitration Act. The court dealt with this by accepting that the more appropriate relief, in the circumstances presented, was not framed strictly as review relief but rather as a declaration that the award was invalid and the setting aside of the award. The court held that such relief could be granted under a prayer for further or alternative relief, provided it was not inconsistent with the substantive relief, the factual and legal basis for it was laid in the papers, and the respondent had dealt with it in answer. The court relied on authority recognising this approach.

5. Outcome and Relief

The court declared that the arbitration award (the ruling of 7 June 2011 dismissing the applicant’s first special plea) was invalid and set it aside.

The court ordered the first respondent to pay the costs of the application.

The judgment did not grant the applicant an order dismissing the arbitration itself, and the alternative stay relief based on lis pendens was not determined because it had become unnecessary on the applicant’s own supplementary allegations.

Cases Cited

McKenzie N.O. v Basha 1951 SA (3) NPD.

Gutsche Family Investments (Pty) Ltd and Others v Mettle Equity Group (Pty) Ltd and Others 2007 (5) SA 491 (SCA).

Goodwin Stables Trust v Duohex (Pty) Ltd and Another 1998 (4) SA 606 (CPD).

Queensland Insurance Co Ltd v Banque Commerciale Africaine 1946 AD 272.

Tsosane and Others v Minister of Prisons 1982 (2) SA 55 (C).

Legislation Cited

Arbitration Act 42 of 1965, section 33(1)(b) and section 33(2).

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The court held that, despite recognising the general principle that an arbitrator cannot enlarge the scope of his mandate, the arbitrator in this matter nonetheless decided the question of his own jurisdiction and then dismissed the applicant’s first special plea. This was treated as an exercise of power beyond what the arbitrator was entitled to do in the absence of a clear agreement conferring such power.

On that basis, the ruling dismissing the first special plea was declared invalid and set aside, and the first respondent was ordered to pay the costs of the High Court application.

LEGAL PRINCIPLES

An arbitrator’s jurisdiction and the binding force of an award depend on the submission and the powers conferred by the parties’ agreement; an award deciding matters not within the submission is a nullity and cannot be made binding by the arbitrator’s own view of his powers.

Where parties disagree about the ambit of the arbitrator’s authority, the ultimate determination of that dispute lies with a court; absent clear agreement in the clearest terms, an arbitrator cannot finally determine and thereby expand the area of his own jurisdiction, particularly where that is the very dispute between the parties.

If an arbitrator exceeds his powers, the award may be set aside under section 33(1)(b) of the Arbitration Act 42 of 1965.

A court may grant further or alternative relief (including declaratory relief as to invalidity) where it is not inconsistent with the substantive relief, the basis for the relief is set out in the papers, and the opposing party has had an opportunity to address it, so that no unfair prejudice results.