South Africa: Enforceability Of Clauses Common To International Contracts

Last Updated: 30 September 2011
Article by Janine Lee

Most Read Contributor in South Africa, September 2018

Most contracts involving parties located in different countries include provisions relating to the choice of a particular forum for dispute resolution and identify the law to be applied.

The choice of law clause is intended as a means of achieving certainty on the legal niceties applicable to the performance of the parties' respective obligations and this is clearly a goal which all contracting parties share. This provision singles out the so-called "proper law" of the contract.

Much has been written about the desirability, in some instances, of arbitration over formal court proceedings, and some parties view arbitration as a preferable forum for the adjudication of all potential disputes arising from their contract. It is accordingly not uncommon for parties to select arbitration as their agreed forum, in the event of a dispute arising. The dispute resolution clause often goes further than the selection of arbitration over ordinary court process, since these clauses often confer jurisdiction on the courts of a named country, foreign to at least one of the contracting parties, or provide for arbitration in a specified jurisdiction. Such a provision is commonly referred to as an exclusive jurisdiction clause.

The choice of law clause does not, on its own, confer jurisdiction on the courts of the country which applies this law. In the absence of an exclusive jurisdiction clause, the courts of one country can be enjoined to apply the laws of another. The more conventional approach, however, is for the choice of law clause and the exclusive jurisdiction clause to be aligned.

When a dispute arises between the parties to such a contract, it may become evident to one or more of these parties that the chosen forum or the proper law of the contract is not, in the particular circumstances, the most advantageous one. This party may then seek advice on whether these clauses can be ignored or their effect limited in some way.

In this event two competing principles face off against each other. On the one hand it is important that contracting parties be kept to their bargain and that they should not be free to change the terms of their undertakings whenever this suits them. On the other hand the judiciary are wary of any attempts to oust their jurisdiction and may be suspicious of mechanisms whereby the legitimately conceived laws of the country can be avoided.

This article considers the impact of these clauses in circumstances where the proper law of the contract is identified as a legal system other than South African law, and where the chosen jurisdiction or forum for the resolution of disputes is something other than legal proceedings before a South African court.

The first issue to be considered is whether a local South African court may exercise jurisdiction over disputes arising from such an agreement, in contradiction of the exclusive jurisdiction clause that purports to oust the jurisdiction of South African courts.

At the outset the party who calls on the South African court to adjudicate on a dispute arising from such a contract would have to show that the relevant division of our local High Court (or Magistrates Court in matters involving smaller claims) has jurisdiction by virtue of the ordinary jurisdictional rules applicable to any case brought before such court.

South African law provides that, in order for a court to hear a case, there must be some link between the territory in which that court operates and the residence of the parties or the facts out of which the dispute arose Section 19 of the Supreme Court Act reads: "A provincial or local division shall have jurisdiction over all persons residing or being in and in relation to all causes arising and all offences triable within its area of jurisdiction and all other matters of which it may according to law take cognizance...".

The term "people" obviously also applies to legal entities and not only to natural persons. A company incorporated in South Africa 'resides' where its registered office is and also at the place where its general administration is located (for example at its head office where central management and control is situated). A company may accordingly reside in more than one jurisdiction simultaneously – the place where it has its registered address and the place where it carries on its principle business.

In terms of the common law, a claim arising from a contract can be tried in the court with jurisdiction over the place where the contract was concluded and/or the place where performance was carried out or was intended to be carried out. The parties may also voluntarily submit to the jurisdiction of the court.

Under South African law a contract is concluded at the place where the offer is accepted. Performance of obligations might take place, or might have been intended to take place in more than one jurisdiction. In that event it is sufficient, for the purposes of establishing jurisdiction, if a contract is to be partially performed within the court's territory.

In regard to a submission to jurisdiction it should be noted that where a person not otherwise subject to the jurisdiction of the court submits himself by positive act or negatively by not objecting to the judgement of that court, he may confer jurisdiction on that court. Our law recognizes a tacit submission to jurisdiction by conduct deemed inconsistent with any intention to challenge it, ie in circumstances where the only inference reasonably to be drawn from the facts was that the defendant intended to submit.

Even if the party who calls on the South African court to adjudicate on a dispute succeeds in proving one of the ordinary grounds on which jurisdiction of the court is based, the other party may seek to raise a technical defence, with the aim of persuading the local court that the exclusive jurisdiction clause in the agreement should be enforced, and the South African proceedings put on hold ie stayed.

The South African court has a discretion in these instances to either allow the case to play out to finality in South Africa (that is to exercise jurisdiction despite the exclusive jurisdiction clause purporting to oust the jurisdiction of this court) or to refuse to do so and in that event to grant a stay of proceedings. In other words the court is not obliged to recognize the agreement to refer any dispute to some other forum.

The exclusive jurisdiction clause does not have the effect of ousting the jurisdiction of the court, even though such clauses often include precisely these words. The court has a discretion not to uphold the reference to an alternative forum such as arbitration, although it seldom does so. Similarly a court has the discretion not to take cognisance of the choice of another foreign court.

This discretion is expressed, in the context of court proceedings instituted in respect of a dispute which falls within the scope of an arbitration clause, in section 6(2) of the Arbitration Act that provides that the Court "may make an order staying such proceedings subject to such terms and conditions as it may consider just" (my emphasis).

Factors which are considered by a court in these deliberations may include the effectiveness of any judgement which it may grant and the convenience of the parties. In certain instances arbitration would be prohibited by statute and in that event a court would have no difficulty overruling the directions found in an arbitration clause.

It is important to highlight that an objection to the jurisdiction of the court should be taken in limine and a party who fails, even through inadvertence, to object to the jurisdiction before close of pleadings may be assumed to have submitted to the jurisdiction of the court. At this point (after close of pleadings) the court cannot take the point of its own accord.

The inclusion of choice of law clauses in contracts involving South African entities, where proceedings may conceivably be adjudicated in South African courts, presupposes that a South African court adjudicating in a dispute will not be bound to apply only South African law. It is not uncommon for our courts to face the task of determining which law should be applied in matters involving a foreign element (such as the fact that the offer was made or accepted in a foreign jurisdiction, or that performance was to be in a foreign jurisdiction).

The proper law of the contract is determined at the outset. Our law gives effect to the choice of law exercised by contracting parties, subject to certain exceptions.

There are certain aspects which cannot be governed by the law chosen by the parties. A conceptual difficulty arises, for example, in applying the proper law chosen by the parties to determine whether particular transactions amount to agreement or not. If these transactions did not give rise to a binding contract, no proper law has been chosen which can govern the question. The author of a leading text (CF Forsyth: Private International Law at page 320) suggests that the approach adopted in English law ought to be applied in South Africa, namely to determine the question by application of the law which would have been the proper law had a contract been concluded. This question has not yet been adjudicated upon by a South African court.

In summary, South African courts have a discretion to adjudicate in a dispute despite an applicable exclusive jurisdiction clause, while our courts will not apply South African law where the parties have agreed that another law will apply.

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.

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