Is a dispute resolution clause in a contract that came about as the result of fraud and misrepresentation regarded as invalid? This is a question that the South African Supreme Court of Appeal (“SCA”) recently considered in Namasthetu Electrical (Pty) Ltd v City of Cape Town and James Robert Garner NO.
In this case, Namasthethu had been awarded a contract to render services to the City of Cape Town through a tender process. However, there were later allegations that Namasthethu had made fraudulent representations during the process. As such, the City sought to cancel the contract, and Namasthethu disputed this. The sticking point was whether the dispute had to be adjudicated by arbitration in accordance with a clause in the contract, or whether this clause was invalid because the contract was induced by fraud. If invalid, then the dispute would need to proceed in court.
Logically, it would seem that if the contract is invalid because it was induced by fraud, then the clause referring any disputes to arbitration would also be invalid and the dispute should proceed to court. However, this presupposes that the allegations of fraud are true. If not, the contract – and the arbitration clause – would be valid and the dispute should have been referred to arbitration.
The SCA's decision
The court confirmed its previous approach that fraud invalidates the contract as well as the arbitration clause. It also restated the general principle that disputes regarding the validity or enforceability of contracts induced by fraud are not generally intended to be arbitrable.
However, the court (referring to English authority) held that in each case, it is a question of interpretation of the arbitration clause in order to determine if the parties intended that a dispute as to the validity of the contract in the face of fraud should be submitted to arbitration rather than court. If the parties intend this, the language of the arbitration clause would have to be very clear and unequivocal.
The court found that such a clear provision was not found in the contract in this case and that the referral to arbitration was invalid. As a result, it confirmed the previous decision to set aside the arbitration award.
It is clear from this case that if parties to a contract want disputes regarding the validity of the contract when fraud is alleged to be referred to arbitration rather than proceed to court, they should expressly provide for this in the contract, in clear and unequivocal wording.
Originally published 07 July, 2020
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.