Overturning a judgment of the High Court, the Supreme Court of Appeal (SCA) recently held that an interim award issued by an arbitrator following a settlement agreement agreed between the parties is a valid cause of action for enforcing the obligations under that settlement agreement.
Accordingly, the SCA has confirmed that interim arbitral awards have the same effect as ordinary arbitral awards on the merits of a dispute.
The facts
Khrone (Pty) Ltd (Khrone) and the Strategic Fuel Fund Association (SFFA) concluded an agreement in terms of which Khrone agreed to supply, install and maintain metering systems to measure the volume of crude oil that SFFA would discharge into tanks and subsequently export (contract).
The meters provided by Khrone were required to operate within a particular accuracy specification. The contract further provided that SFFA was to make payment to Khrone in tranches, with the last 10% payment tranche being retained as a performance retention fee, payable on certification that Khrone’s meters performed in terms of the accuracy standards provided for in the contract.
When payment of the 10% retention tranche became due, SFFA contended that Khrone’s meters were not compliant with the accuracy standards and resisted payment (dispute).
The arbitration agreement
As provided for by the contract, the parties referred the dispute to arbitration before a sole arbitrator. The parties initially agreed to refer the accuracy of the meters to an independent third-party expert for determination. The terms of this settlement agreement were subsequently endorsed by the arbitrator and captured in terms of an interim award issued by the arbitrator (interim award).
In terms of the interim award, the parties agreed that, should the independent third-party expert determine that Khrone’s meters were compliant with the relevant accuracy levels, SFFA would make payment of the outstanding 10% payment tranche.
The parties duly appointed a third-party independent expert who issued various reports regarding the accuracy of the meters. Khrone’s attorneys claimed that the expert’s finding was in Khrone’s favour and demanded payment under the terms of the interim award issued by the arbitrator.
When no payment was forthcoming, Khrone launched application proceedings in the High Court claiming payment of the outstanding 10% payment tranche based on the expert report, and in turn, the settlement agreement that formed the basis of the interim award. In essence, the application made by Khrone was for the enforcement of the interim arbitral award.
The High Court ruling
In the High Cout, SFFA contended that the expert determination did not assess the operation of the meters, but rather only the design and installation of the meters. Despite this, the High Court determined the matter on an ancillary argument, only raised in argument by the SFFA as a point in limine, being whether Khrone was precluded from founding a cause of action on the interim arbitral award.
In this regard, the High Court found that the interim award conflicted with the Arbitration Act 42 of 1965 (Act) in that it (assumedly by pre-incorporating the expert determination) was in conflict with the definition of ‘arbitration proceedings’ in the Act, which provides for ‘proceedings conducted by an arbitration tribunal’ (our emphasis).
Moreover, the High Court found that the interim award made no provision for the determination by the expert to be made an ‘award’ as provided for in section 24(1) of the Act, which provides that all awards shall be in writing and must be signed by the arbitrator(s).
The High Court therefore held that Khrone had no valid cause of action to claim payment of the final 10% payment tranche.
The SCA ruling
Before dealing with the merits of the appeal, the SCA reaffirmed the foundational concept that the resolution of disputes by arbitrations is the product of agreement between parties (ie the principle of party autonomy), which, once agreed upon, cannot be terminated without further agreement of all the parties.
In this regard, the SCA noted that both Khrone and SFFA had not only agreed to the arbitration clause in the contract, but that they had also agreed to enter into the settlement agreement, which was later made an interim award. The arbitrator’s powers to do so were therefore a product of agreement between the parties.
On the merits of the appeal, the SCA held that the High Court should not have decided the matter on the point in limine raised by SFFA, but rather on the defences raised in its answering affidavit. The SCA further held that the High Court erred in holding that the expert determination was not binding upon the parties as envisioned in the interim award. In light of this finding, the SCA held that the expert determination did indeed constitute a valid cause of action on the basis of the settlement agreement and the interim award.
Importantly, the SCA further held that the High Court erred in finding that the interim award did not comply with the provisions of the Act. In this regard, the SCA noted that section 1 of the Act expressly includes interim awards in the definition of an award. Moreover, the SCA reaffirmed its previous decision in Bidoli v Bidoli and Another 2011 (5) SA 247 (SCA), in terms of which it held that a settlement agreement recorded by an arbitrator held the same power as an award at common law. An agreed award therefore has the same effect and status as any other award on the merits of a matter. On this basis, a settlement agreement made an award by an arbitrator is enforceable as an ordinary arbitral award.
The SCA therefore set aside the High Court’s order and referred the matter back to the High Court to deal with the merits.
Key takeaways
This judgment is another positive example demonstrating that the South African courts continue to maintain a pro-arbitration stance and that they will strictly uphold valid arbitration agreements (and any settlements achieved under those agreements) concluded between consenting parties.
