Brief Summary

Arbitration — Review of arbitration award — Powers of arbitrator — Whether arbitrator exceeded powers by declaring construction agreement invalid — Appellant sought review of arbitrator's award declaring agreement between it and the Municipality unlawful due to non-compliance with procurement laws — High Court dismissed review application — On appeal, held that the arbitrator did not exceed his powers as the issue of constitutional invalidity was within the scope of the arbitration agreement — Award reviewed and set aside, with costs awarded to the appellant.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were an appeal to the Supreme Court of Appeal of South Africa against a judgment of the Mpumalanga Division of the High Court, Mbombela, which had dismissed an application to review and set aside an arbitration award.

The appellant was NAD Property Income Fund (Pty) Ltd (NAD). The first respondent was Bushbuckridge Local Municipality (the Municipality). The second respondent was B M Ngoepe N O, cited in his capacity as the arbitrator (a retired Judge President) appointed by agreement between the parties.

The procedural history was that NAD initially instituted action in the High Court for payment arising from construction works performed under an agreement concluded with the Municipality. Instead of proceeding to trial, the parties referred the dispute to arbitration. The arbitrator made an award that included a finding that the underlying construction agreement was invalid and unenforceable. NAD then approached the High Court seeking review and setting aside of the arbitration proceedings/award, principally on the basis that the arbitrator lacked power to decide constitutional invalidity. The High Court dismissed the review application. NAD appealed, with leave of the Supreme Court of Appeal.

The general subject-matter of the dispute concerned municipal procurement and contracting, and specifically whether an arbitrator could decide the constitutional legality of a municipal procurement-related contract and declare it invalid, with consequential determinations including unjustified enrichment.

2. Material Facts

On 16 February 2016 NAD and the Municipality concluded a construction agreement in terms of which NAD undertook to construct three driveway roads and water-supply infrastructure that would serve as access to a shopping mall NAD was developing, the Dwarsloop Mall. A material feature of the agreement, as recorded by the Court, was that it was concluded despite both parties being aware that the Municipality did not have budgeted funds to pay for the infrastructure at the time. The agreement contemplated that NAD would initially meet the costs and that the Municipality would later refund NAD from its budget in the following financial year(s).

On 27 November 2017 NAD instituted action in the High Court claiming approximately R23.5 million from the Municipality for the construction of the roads and water infrastructure.

The Municipality raised defences that included allegations that the agreement was concluded in contravention of section 217 of the Constitution and sections 111 to 116 of the Local Government: Municipal Finance Management Act 56 of 2003, in that it was not preceded by a competitive bidding process and constituted an unsolicited bid that the Municipality was not obliged to consider under the statutory framework. The Municipality also pleaded that the municipal manager was not authorised to conclude the agreement and that there was no consensus on the price. The Municipality filed a conditional counterclaim seeking, among other relief, that the agreement be declared unlawful and set aside, and that the driveways be declared for NAD’s exclusive benefit.

The parties then referred the matter to arbitration and appointed the second respondent as arbitrator. At a pre-arbitration meeting on 28 October 2020 the parties agreed that NAD’s combined summons would stand as the statement of claim and the Municipality’s plea as the statement of defence. A dispute arose as to whether the arbitrator had power to determine the agreement’s constitutional invalidity or unlawfulness.

The arbitrator determined that he was empowered to decide invalidity/unlawfulness, and made findings including that the agreement was invalid, unlawful, and unenforceable due to non-compliance with the procurement regulatory framework; that NAD had not established unjustified enrichment in respect of two of the three roads; and that the Municipality had been unduly enriched in respect of one road, entitling NAD to payment for that road.

NAD brought review proceedings in the High Court, contending that the arbitrator exceeded his powers by declaring the agreement constitutionally invalid (and alternatively that gross irregularities were committed). The High Court held that the arbitration agreement, read with section 2 of the Arbitration Act 42 of 1965, permitted the arbitrator to decide constitutional invalidity because the arbitration agreement did not bar him from deciding that central issue.

3. Legal Issues

The central legal questions were whether the arbitrator exceeded his powers by declaring the construction agreement invalid and unlawful on the basis of non-compliance with section 217 of the Constitution and the Municipal Finance Management Act, and whether that rendered the award reviewable and liable to be set aside under section 33(1)(b) of the Arbitration Act 42 of 1965.

A related issue was the proper role of section 172 of the Constitution in the context of arbitration, specifically whether constitutional invalidity determinations and the granting of just and equitable relief following invalidity are confined to courts, and whether parties’ agreement to arbitrate could confer such powers on an arbitrator.

The dispute was primarily about law, namely the scope of arbitral power under the Arbitration Act when the pleaded defence is a direct constitutional procurement challenge, and the proper allocation of constitutional invalidity determinations under section 172 of the Constitution. It also concerned the application of law to the pleaded facts (that the invalidity challenge was based squarely on procurement law and constitutional compliance), rather than factual disputes about performance.

The Court also considered whether it should itself make a referral order under section 20 of the Arbitration Act (stating a question of law for a court’s opinion), but treated this as a remedial/procedural question arising from the conclusion that the arbitrator lacked power.

4. Court’s Reasoning

The Supreme Court of Appeal approached the matter through the review framework in section 33(1)(b) of the Arbitration Act, which permits the setting aside of an award where the arbitrator committed a gross irregularity in the conduct of proceedings or exceeded his or her powers. The Court treated the decisive question as whether the arbitrator had jurisdictional competence to determine a pleaded constitutional procurement invalidity challenge.

The Court emphasised that the Municipality’s pleaded defence was, in substance, a collateral or reactive constitutional challenge to the legality of the agreement grounded in non-compliance with procurement obligations flowing from section 217(1) of the Constitution and the legislation that gives effect to that provision, including the Municipal Finance Management Act. Because the agreement was attacked as unlawful due to non-compliance with constitutionally mandated procurement standards, the dispute implicated the lawful exercise of public power by an organ of state rather than a purely private-law contractual controversy.

On that footing, the Court reasoned that challenges to the lawful exercise of public power, and the provision of remedies for unlawful conduct under the Constitution, fall within the supervisory and remedial competence of the courts, not private arbitration. It stated that the “general answer” to whether such matters can be decided by referral to arbitration is no, because courts are the constitutional arbiters of legality, operating within the legality doctrine and the review scheme contemplated by the Constitution and the Promotion of Administrative Justice Act 3 of 2000 (referred to by the Court as part of the broader public-law scheme).

The Court acknowledged that there may be circumstances where a question of compliance with public-law requirements arises only incidentally in arbitration, but it explicitly left that possibility open and held that this was not such a case. Here, the pleaded ground of invalidity was a direct, frontal public-law attack based on procurement legality, and thus fell within a domain over which courts have exclusive jurisdiction. The Court pointed out that if such a question arises during arbitration, the mechanism contemplated by the Arbitration Act is a referral in terms of section 20 of the Arbitration Act (a special case stated for the opinion of a court), and that section 20 is confined to questions of law arising “in the course of” the arbitration.

The Court held that the arbitrator erred by concluding—based on his reading of Gobela Consulting CC v Makhado Municipality—that he was competent to declare the agreement invalid and unlawful for constitutional non-compliance. The Supreme Court of Appeal explained that Gobela concerned whether a court may declare a contract invalid despite the organ of state not having brought a counter-application, and that the decision in Gobela was explicitly a decision by a court. It did not support the proposition that arbitrators may themselves declare contracts invalid for constitutional procurement non-compliance.

The Court also found the High Court’s reliance on Close-Up Mining v Boruchowitz NO misplaced. It explained that Close-Up dealt with the scope of an arbitrator’s ancillary powers within an arbitration agreement, and that Close-Up further recognised an exclusion, beyond the textual exclusions in section 2 of the Arbitration Act, namely arbitral determination of constitutional matters. On this basis, the Court held that section 2 of the Arbitration Act could not be read to authorise an arbitrator to pronounce on constitutional invalidity where the challenge is direct.

A central pillar of the Court’s reasoning was the Constitutional Court’s decision in Department of Transport and Others v Tasima (Pty) Ltd, which held that the constitutionality or legality of a contract extension fell outside an arbitrator’s mandate and was pre-eminently within the competence of a court. The Supreme Court of Appeal relied on Tasima for the proposition that constitutional challenges to the validity of law or conduct inconsistent with the Constitution must be made by a court, and that this function cannot be assumed by private or public parties through arbitration arrangements.

The Court then anchored the remedial point in section 172(1) of the Constitution, which obliges a court to declare law or conduct inconsistent with the Constitution invalid, and authorises a court to make an order that is just and equitable. The Court treated the “just and equitable” remedial discretion as a further reason why constitutional invalidity determinations belong to courts: only courts can provide constitutionally authorised remedies after declaring invalidity.

The Court additionally relied on section 109(2) of the Local Government: Municipal Systems Act 32 of 2000, which provides that a municipality may submit matters to arbitration other than matters involving a decision on its status, powers or duties or the validity of its actions or by-laws. The Court treated this as reinforcing the conclusion that a municipality cannot submit to arbitration disputes that require a determination of the validity of its actions, which in this case was directly implicated by the procurement legality challenge.

In dealing with the characterisation of disputes as public-law or private-law in the context of organs of state contracting, the Court referred to the distinction drawn in Cape Metropolitan Council v Metro Inspection Services (Western Cape) CC and Others, and the later treatment in Logbro Properties CC v Bedderson NO and Others. The Court used these authorities to illustrate that some contractual disputes involving organs of state may remain in the realm of private law, but distinguished the present case because the pleaded invalidity rested on constitutionally prescribed procurement norms binding the Municipality as an organ of state. Accordingly, the question was not simply the enforcement of contractual terms but the legality of procurement conduct.

Having concluded that the arbitrator lacked power to decide constitutional invalidity, the Court held that NAD’s consent or acquiescence in referring the dispute to arbitration could not confer on the arbitrator a power that he did not have in law. It followed, in the Court’s view, that the arbitrator exceeded his powers and that the award had to be set aside under the review provisions.

The Court further held that, because the arbitrator’s invalidity finding could not stand, the consequential findings and relief—relating to lack of authority and unjustified enrichment—also could not stand as part of the impugned award.

On the question whether the Supreme Court of Appeal should itself order a referral under section 20 of the Arbitration Act, the Court declined to do so, indicating that in light of the order it proposed to make, it would be for the parties to engage on how to proceed, and that a section 20 referral would be inappropriate in the circumstances.

5. Outcome and Relief

The Supreme Court of Appeal upheld the appeal.

It set aside the order of the High Court and substituted it with an order reviewing and setting aside the arbitration award published on 7 June 2021.

The Municipality was ordered to pay the costs of the review application in the High Court, and the appeal was upheld with costs, in both instances including the costs of two counsel where so employed.

Cases Cited

Telcordia Technologies Inc v Telkom SA Ltd 2007 (3) SA 266 (SCA); [2007] 2 All SA 243 (SCA); 2007 (5) BCLR 503 (SCA).

Gobela Consulting CC v Makhado Municipality [2020] ZASCA 180; 2020 JDR 2796 (SCA); 2020 JDR 2796 (SCA).

Close-Up Mining v Boruchowitz NO [2023] ZASCA 43; 2023 (4) SA 38 (SCA).

Department of Transport and Others v Tasima (Pty) Ltd [2016] ZACC 39; 2017 (2) SA 622 (CC); 2017 (1) BCLR 1 (CC).

Hos+Med Medical Aid Scheme v Thebe Ya Bophelo Healthcare Marketing and Consulting (Pty) Ltd and Others [2007] ZASCA 163; 2008 (2) SA 608 (SCA); [2008] 2 All SA 132 (SCA).

Independent Development Trust v Bakhi Design Studio CC and Others [2023] ZAGPPHC 363; 2023 JDR 1750 (GP).

Cape Metropolitan Council v Metro Inspection Services (Western Cape) CC and Others [2001] ZASCA 56; 2001 (3) SA 1013 (SCA); 2001 (10) BCLR 1026 (A).

Logbro Properties CC v Bedderson NO and Others [2002] ZASCA 135; [2003] 1 All SA 424 (SCA); 2003 (2) SA 460 (SCA).

Legislation Cited

Constitution of the Republic of South Africa, 1996, section 172.

Constitution of the Republic of South Africa, 1996, section 217.

Arbitration Act 42 of 1965, section 2.

Arbitration Act 42 of 1965, section 20.

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

Local Government: Municipal Finance Management Act 56 of 2003, sections 111 to 116.

Local Government: Municipal Systems Act 32 of 2000, section 109(2).

Promotion of Administrative Justice Act 3 of 2000.

Preferential Procurement Policy Framework Act 5 of 2000.

Rules of Court Cited

No rules of court were cited in the judgment.

Held

The Court held that an arbitrator is not empowered to determine a direct constitutional procurement legality challenge by declaring a municipal procurement-related agreement invalid and unlawful on the basis of non-compliance with section 217 of the Constitution and the Municipal Finance Management Act. Such determinations fall within the competence of courts under section 172 of the Constitution, including the power and duty to declare invalidity and the discretion to grant just and equitable relief.

It further held that party agreement to arbitrate cannot confer constitutional adjudicative powers on an arbitrator where the law does not permit such powers, and that the arbitrator therefore exceeded his powers, rendering the award reviewable and liable to be set aside under section 33(1)(b) of the Arbitration Act.

LEGAL PRINCIPLES

A pleaded challenge that a municipal contract is unlawful for non-compliance with constitutional and statutory procurement requirements engages the exercise of public power and implicates constitutional legality, which is ordinarily subject to judicial supervision rather than private arbitral determination.

Under section 172(1) of the Constitution, only a court may declare law or conduct inconsistent with the Constitution invalid and may grant just and equitable relief following such a declaration; this remedial competence cannot be exercised by an arbitrator.

Section 33(1)(b) of the Arbitration Act 42 of 1965 permits review and setting aside of an award where the arbitrator exceeded his or her powers, and an arbitrator exceeds those powers by determining matters that the law reserves for courts, including direct constitutional invalidity determinations.

Where a question of law arises in arbitration that properly requires judicial determination, section 20 of the Arbitration Act provides for a special case to be stated for the opinion of a court; however, the appropriateness of such referral depends on the circumstances and the order ultimately made.

Section 109(2) of the Local Government: Municipal Systems Act 32 of 2000 confirms that municipalities may submit matters to arbitration except those involving decisions on the validity of their actions or by-laws, reinforcing limits on arbitral competence in disputes requiring determinations of the validity of municipal action.

NAD Property Income Fund (Pty) Ltd v Bushbuckridge Local Municipality and Another (422/2024) [2025] ZASCA 184 (4 December 2025)