By: Gerhard Rudolph1Gerhard Rudolph is a partner in Baker & McKenzie’s Johannesburg office. His practice primarily deals with commercial dispute resolution and arbitration for a broad range of areas of practice, including banking, insurance, construction and engineering, mining and resources, and general corporate and commercial issues. and Darryl Bernstein2Darryl Bernstein is a partner in Baker & McKenzie’s Johannesburg office. He regularly represents clients in international litigation and arbitration proceedings, often in the spheres of banking, insurance, information technology, mining and resources, and insolvency.
A. Legislation, Trends and Tendencies
A.1 Legislation
The law of arbitration in South Africa derives from common law, legislation and the Constitution of the Republic of South Africa 1996. It is primarily regulated by the Arbitration Act 42 of 1965 (the “Arbitration Act”).
In 2001, in the face of almost universal adoption of the UNCITRAL Model Law by countries in the process of updating their arbitration legislation and the ongoing development of international commercial law, the South African Law Reform Commission (the SALC) submitted a comprehensive report on the status of South African domestic arbitration3Project 94: Domestic arbitration report dated May 2001, available at www.justice.gov.za/salrc/reports/r_prj94_dom2001.pdf in which it was recommended, among other matters, that a new domestic arbitration statute be adopted, combining the best features of the UNCITRAL Model Law and the English Arbitration Act of 1996, while retaining otherwise effective provisions of the Arbitration Act.4P Ramsden, The Law of Arbitration 19. To date, however, the legislature has taken no steps to implement the SALC’s recommendations.
Recently, however, it appears that the government has developed a renewed appreciation for the broader commercial benefits of arbitration and the importance of international arbitration. As a result, there is renewed impetus to move forward with the reform of both domestic and international arbitration legislation. A draft bill, which has been waiting in the wings since 1997, has, for the first time in some 17 years, been resurrected. Pundits indicate that this bill has been revised by the SALC, bringing it up to date. Reports also indicate that a leading academic expert in the field has done immensely valuable work in doing so, and the Justice Department recently also indicated that the bill was expected to be submitted to Parliament in November 2015. So far, however, the bill has not been submitted, nor published for public comment, although we remain hopeful that these steps will indeed take place in 2016.
A.2 Trends and Tendencies
Commercial arbitration is a long-established mechanism for dispute resolution in South Africa. It has become increasingly popular in the last decade due to the relative speed and certainty with which resolution of disputes may be obtained, particularly in comparison to the staffing and resource constraints in the court system, which have resulted in backlogged court trial rolls and increasingly unaffordable access to courts. Arbitration is viewed in South Africa as a particularly flexible procedure for resolving disputes — the parties are at liberty to modify the procedure in accordance with the nature and extent of the particular dispute as well as the amount at stake.5Butler & Finsen, Arbitration in South Africa: Law and Practice 2.
Arguably the most significant development in recent years affecting cross-border commercial dispute resolution in South Africa was the October 2009 launch of Africa ADR, an initiative of the Southern African Development Community (SADC). Africa ADR is a regional dispute resolution forum for the determination of cross-border disputes within the SADC region, established in conformity with the resolutions of the General Assembly of the United Nations, which encourage the use of alternative and appropriate methods for the resolution of civil disputes.6Accessed via www.africaadr.com. It is hoped that this forum will result in substantial change in the manner in which cross-border arbitration agreements are concluded between parties within South Africa. Africa ADR is ready to commence its business operations. It has drawn up and confirmed its rules and procedures for arbitrations, mediations and conciliations. It is in the process of establishing local organizing committees in all the countries in which Africa ADR will operate.
B. Cases
B.1 Arbitrator To Decide on Jurisdiction Before Approach to Court
In Zhongji Development Construction Engineering Company Limited v. Kamoto Copper Company Sarl,7[2014] JOL 32421 (SCA). the Supreme Court of Appeal (SCA) was asked to determine whether an arbitration agreement between the parties applied as regards certain invoices in dispute between them and whether the High Court was correct in dismissing an application for a declaratory order that a particular dispute was arbitrable.
Interestingly, neither party before the courts was South African. The appellant, a Chinese company known as Zhongji Development Construction Engineering Company Limited was invited by a South African company, Bateman Minerals & Metals (Pty) Limited (“Bateman”), acting on behalf of a Congolese company known as DRC Copper and Cobalt Project SARL (the “DCP”), to tender for the supply and construction of piling and civil works at the DCP’s mining site near Kolwezi in the Democratic Republic of Congo.
Their main agreement contained an arbitration clause providing for arbitration to be administered by the Association of Arbitrators (Southern Africa) (“the Arbitration Association”) in accordance with the Arbitration Association’s Rules.
The works then became fraught with delays and other complications and were ultimately suspended pending merger talks between the DCP and the respondent, Kamoto Copper Company Sarl (“Kamoto”). All the while, the appellant (which had already incurred costs and commenced certain works) was instructed to continue to incur additional costs and expenses in relation to the works. Bateman naturally assured the appellant that all such costs, expenses and works performed would be reimbursed. An interim agreement was concluded to tide the appellant over, although this agreement, concluded under time pressure and on the simplest of terms, was silent on dispute resolution procedures.
The merger then transpired, with Kamoto assuming certain of the DCP’s obligations under the various agreements. Kamoto refused to make certain payments allegedly due to the appellant. Kamoto also refused to submit to arbitration, relying on the merger, the interim agreementʼs silence as to arbitration and the fact that neither party was South African and all aspects of the agreements and the works took place outside of South Africa.
The SCA, quoting with approval from the Constitutional Court’s decision in Lufuno Mphaphuli & Associates (Pty) Ltd. v. Andrews and another,82009 (4) SA 529 (CC). emphasized that the South African law of arbitration “is not only consistent with, but also in full harmony with, prevailing international best practice in the field.” The SCA went on to note that, just as London constitutes a convenient neutral forum for the conduct of arbitrations, so too does South Africa, and the courts in South Africa have a legal, a socioeconomic and a political duty to encourage the selection of South Africa as a venue for international arbitrations.
The SCA went on to find that under the Rules of the Arbitration Association, an arbitrator is able to decide matters relating to his or her own jurisdiction, including the validity or existence of an arbitration agreement. In the result, there was no reason why the dispute before it should not be decided by the arbitration tribunal prior to an approach to the courts. The SCA held that the process of arbitration must be respected and the appellant’s application was accordingly premature, perhaps unnecessary, even noting that it was in some respects ironic.
This approach has been recently followed by the High Court in Stieler Properties CC v. Shaik Prop Holdings (Pty) Ltd.9Stieler Properties CC (Registration number 2003/014057/23) v. Shaik Prop Holdings (Pty) Ltd. [2015] 1 All SA 513 (GJ). When considering whether or not to hear a dispute that was the subject of an arbitration agreement, the court confirmed that, while court proceedings were competent, the party resisting the referral of the dispute to arbitration carried a heavy onus in showing why the matter should not be referred to arbitration.
C. Costs
C.1 Allocation of Costs
The Arbitration Act provides that the award of costs in connection with the reference to arbitration and the award is in the discretion of the arbitral tribunal, unless an agreement provides otherwise.10Section 35 of the Arbitration Act. This discretion must be exercised judicially upon a consideration of all the facts, and in the absence of special circumstances, the basic principle in awarding costs is that a party that is substantially successful is entitled to be awarded costs. The applicable arbitration rules may also specify factors that the arbitral tribunal may take into account when exercising its discretion, in addition to the fact that an arbitral tribunal’s discretion to award costs may also be curtailed by a statutory provision.
An arbitral tribunal may tax (fix) the amount of the costs awarded. South African costs law provides for certain scales of costs calculated against a fee tariff for work performed, and the tribunal has the power to award costs on any of these scales. So-called “party and party” costs are generally awarded; these are the costs that have been incurred by a party to legal proceedings and which the other party is ordered to pay to it. They do not include all costs that a party to a suit may have incurred, but only such costs, charges and expenses as appear to the taxing master to have been necessary. Where the tribunal seeks to award punitive costs, or where the parties have agreed an entitlement to a higher scale of costs, so-called “attorney and client” costs may be awarded. These are the costs that an attorney is entitled to recover from his client and are payable against a higher tariff. When the arbitral tribunal fails to award costs but has the power to do so, the court may not impose its own order for costs, but must refer the issue back to the tribunal. Further, any agreement that has the effect that upon the referral of a future dispute to arbitration, any party will in any event pay its own costs for the referral of the dispute, is void.
In addition, where a party is obliged to apply to court in order to have an arbitration award made an order of court, and the agreement provides for it, the court can grant an order of costs in its favor, but if a party applies to court unnecessarily to have the award made an order, that party must bear the costs on the High Court scale, even though the jurisdiction of dispute was within the jurisdiction of the lower courts. In these circumstances, the onus will fall on the party opposing the application to show that the application is unnecessary. An arbitral tribunal may also award qualifying fees for an expert witness, but these costs are not recoverable unless they are specifically awarded pursuant to a specific application.
C.2 Security for Costs
The court has certain general statutory powers that it may exercise in support of arbitration proceedings pursuant to an arbitration agreement. The extent of these powers is the same as in relation to court proceedings and includes the power to make orders in respect of security for costs. Where arbitration rules give the arbitral tribunal the power to grant security for costs, a court is likely to be slow to exercise its statutory power when effective relief can already be obtained from the arbitral tribunal. As regards third party funding agreements, there has not yet been any significant development in funding arbitrations in this manner, and there is no record of a tribunal granting security for costs under these circumstances.11PricewaterhouseCoopers Inc. and others v. National Potato Co-operative Limited 2004 (6) SA 66 (SCA).
Recently, the court heard an application in which the applicant, a domestic incola (resident) of the court, sought an order directing the respondent, a peregrinus (foreigner to the court), to put up security for costs in the arbitration proceedings.12Blastrite (Pty) Ltd. v. Genpaco Ltd.; In re: Genpaco Ltd. v. Blastrite (Pty) Ltd. [2015] JOL 33333 (WC). The respondent contended that the common law practice in terms of which a peregrinus may be ordered to furnish security for costs was inconsistent with the spirit, purport and object of the Bill of Rights and that it violated the right to equality and equal protection of the law. In response to this argument, the court opined that, in deciding whether a party should furnish security, a court has a judicial discretion, having regard to the particular circumstances of the case and considerations of fairness and equity to both the incola and the peregrinus. The court refused to adopt a predisposition in favor of or against granting security, and it ultimately held that the common law practice by which a nonresident plaintiff who does not own immovable property in South Africa is called upon to give security for the costs of a lawsuit was consistent with the Constitution.
C.3 Recovery of Costs
Legal practitioners will charge their clients according to agreed rates, but recoverable costs are determined by way of a tariff and are assessed by the taxing master having jurisdiction over the seat of the arbitration. Usually, the parties agree to share the costs of the tribunal, arbitration venue and transcriber on the basis that the unsuccessful party will reimburse the successful party its share, and in practice, successful parties can expect to recover up to nearly half of their actual costs of arbitration. Provided that they form part of the award, these costs would include tribunal fees and expenses, expert and witness fees, and expenses and the costs of counsel, as well as the costs of two or more counsel where the tribunal expressly orders this. It is open to question whether the costs of a party’s in-house counsel can be recovered.
Except if there is a contrary provision in the arbitration agreement, a court may tax the costs of an arbitration, if the arbitral tribunal has no discretion as to costs or if the tribunal has a discretion and has directed any party to pay costs but does not tax or settle such costs at once, or if the arbitrators cannot agree in their taxation. The parties’ designated rules may also permit the arbitral tribunal to appoint a professional taxing service to tax the costs in certain circumstances.
The Arbitration Act does not limit the kind and amount of costs that are considered recoverable. However, it should be kept in mind that one of the requirements for the enforcement of an arbitration award is that the enforcement must not be contrary to public policy. In addition, the Contingency Fees Act13Contingency Fees Act, 66 of 1967. provides for two forms of contingency fees agreements that attorneys and advocates may enter into with their clients. The first is a “no win, no fee” agreement and the second is an agreement in terms of which the legal practitioner is entitled to fees higher than the normal fee if the client is successful. Higher fees may not exceed the normal fees of the legal practitioner by more than 100 percent, and in the case of claims sounding in money, this fee may not exceed 25 percent of the total amount obtained by the client in consequence of the proceedings, excluding costs.14PricewaterhouseCoopers Inc. and others v. National Potato Co-operative Limited 2004 (6) SA 66 (SCA).
For recovery purposes, a bill of costs is prepared, with the duty of taxing the costs and expenses awarded to any party by the court or tribunal. It is open to question as to whether third party funding agreements have to be disclosed. Generally, a clerk of the court has to decide whether the services billed for have been performed, whether the charges are reasonable or according to the tariff, and whether the disbursements that are properly allowable have been made. Taxation, however, does not override an enforceable contract between the parties relating to fees and does not bind a person who is not a party to the taxation.