A CASE IN POINT – Kiki Bailey SC – Irregularity of Default Awards – April 2023

IRREGULARITY OF AWARDS GIVEN BY DEFAULT

1. In The Greater Tzaneen Municipality (the Municipality) v Siphiwe Engineering and Technologies CC (Siphiwe) the court, sitting as a court of appeal (the court of appeal), had to consider the regularity or otherwise of a default award that had been granted by an arbitrator in arbitration proceedings.
2. The case before the court of appeal related to two applications that were consolidated and heard by the court a quo. The first application was brought by Siphiwe against the Municipality to have an arbitrator’s award, which was issued by default in favour of Siphiwe against the Municipality, made an order of court in terms of section 31(1) of the Arbitration Act 42 of 1965 (the Act) (Siphiwe’s application).  The second application was brought by the Municipality to, inter alia, have the arbitrator’s award set aside and to compel the Association of Arbitrators (Southern Africa MPC) (the Association) to appoint a new arbitrator before whom the arbitration proceedings could be reconsidered in terms of section 33 of the Act (the Municipality’s application) (collectively referred to as the consolidated applications).^[1]
3. The consolidated applications were heard by the court a quo on 25 October 2021. It granted judgment in favour of Siphiwe by making the arbitrator’s award an order of court and by dismissing the Municipality’s application with costs (the judgment).  The arbitrator’s award, now effectively an order of court, directed the Municipality to make payment to Siphiwe the sum of R10 594 144.74 together with interest and costs.^[2]
4. The background facts are as follows:
   1. A dispute arose between Siphiwe and the Municipality arising out of a service level agreement concluded between them (the agreement). In terms of the agreement, it was agreed that disputes would be resolved by way of arbitration;
   2. the dispute related to moneys arising from services rendered by Siphiwe to the Municipality. Certain events transpired consequent upon which Siphiwe applied to the Association for the appointment of an arbitrator to determine the dispute;
   3. the Association appointed an arbitrator on 25 April 2017.^[3] Initially, the Association’s Rules for the Conduct of Arbitration: Standard Procedure Rules, Seventh Edition (2013), governed the arbitration^[4].  Thereafter, the Standard Procedure Rules, Eighth Edition (2018), were of application.  Both set of Rules incorporated Article 30 which formed an important issue in the matter in casu;^[5]
   4. a pre-arbitration meeting was held by the arbitrator and the parties at which they agreed on timelines for the exchange of pleadings;^[6]
   5. thereafter, and as a result of certain events, the parties agreed that the Municipality would deliver its statement of defence against Siphiwe’s statement of claim by 29 June 2018. It failed to do so timeously, and consequently the Municipality requested a further extension of five days to deliver same.  Siphiwe was prepared to afford the Municipality an extension of three days only.  The Municipality was therefore required to deliver its statement of defence by 4 July 2018;^[7]
   6. on the day before delivery of the Municipality’s statement of defence, namely on 3 July 2018, its attorneys of record withdrew from acting on its behalf. Its attorneys were replaced on the same day by M L Mateme Inc (Mateme Attorneys).  In view of the fact that it had only been instructed the day before the requisite delivery of the Municipality’s statement of defence, Mateme Attorneys sought an indulgence for the delivery of same.  The indulgence was declined by Siphiwe’s attorneys, Bazuka & Company Inc (Bazuka Attorneys);^[8]
   7. emanating from the above, Siphiwe delivered an application in terms of which it sought an award in its favour against the Municipality by default. Attached to its application was an affidavit deposed by one of its directors laying out the factual and legal bases upon which the award was sought (the notice)^[9];
   8. absent from the notice was any indication of the date, time and place where Siphiwe’s application for the default award would be made. The notice was seemingly delivered to Mateme Attorneys’ street address^[10]; and
   9. in consonance with the notice from Bazuka Attorneys, at a hearing on 11 July 2018, the arbitrator delivered the default award in favour of Siphiwe against the Municipality who was not represented at the hearing. Ultimately, the Municipality was unaware as to when, at what time and where the application for the award would be made^[11].
5. In the court a quo, the Municipality relied on several grounds under section 33 of the Act, for the setting aside of the default award. However, only one ground was examined and contemplated by the court a quo.  This ground related to Siphiwe’s alleged failure to comply with section 15(2) of the Act.  Inevitably, if any of the grounds upon which the Municipality relied were upheld, there would have been no basis for the default award to have been made an order of court.^[12]
6. As adumbrated above, the court a quo’s focus was on section 15(2) of the Act, which provides as follows:‘If any party to the reference at any time fails, after having received reasonable notice of the time when and place where the arbitration proceedings will be held, to attend such proceedings without having shown previously to the arbitration tribunal good and sufficient cause for such failure, the arbitration tribunal may proceed in the absence of such party.’ (My emphasis.)
7. The court a quo disagreed with the Municipality’s contention that in the absence of the reflection of a specific date in the notice for the hearing of the default application, the making of a default award by the arbitrator amounted to an irregularity. The court a quo reasoned that section 15(2) of the Act contemplates the final hearing date in the arbitration proceedings.^[13]  In rejecting the court a quo’s reasoning, the court of appeal (per Farber, AJ) stated that many discrete issues may arise in arbitration proceedings that require decisions to be made before the matter becomes ‘trial ready’.  Examples of such disputes arising are ones relating to discovery, the separation of issues, jurisdiction, compelling of further particulars and the like.^[14]  In the circumstances, the learned judge reasoned that in enacting section 15 (2), the legislature did not intend to confine the operation of the notice to the ultimate hearing date in arbitration proceedings.
8. Naturally, the parties need to be heard before a decision can be made by the arbitrator of any disputes or number of disputes that might be heard by him or her in the proceedings. Inevitably, adherence to fairness is the underlying basis of the principle of audi alteram partem in legal proceedings.  In turn, this requires that notice of any such proceedings be furnished by the initiating party to the other party.^[15]
9. Farber, AJ, further stated that the wording of section 15 (2) does not support the restrictive construction applied by the court a quo. To this end, words such as ‘arbitration proceedings’ are themselves of wide import and encompass all facets of such proceedings.  In the circumstances, and applying the criterion of fairness, the learned judge found it difficult to conceive why the legislature would seek to confine the procedural fairness criterion to the ultimate or final hearing and not to any other proceedings that may arise throughout the course of the arbitration.  This is supported by the words ‘at any time’ in the subsection which denote the notion of continuity.^[16]. The court of appeal found further that had the legislature intended to limit the criterion, it would have done so in the clearest of language.
10. Consequently, the aforesaid approach of the court a quo was found to be wrong by the court of appeal. Furthermore, as Farber, AJ indicated, the notice did not stipulate the date, time and where the application for a default award would be made; and, hence, it was found that the notice amounted to no notice at all as per the requirements of section 15(2) of the Act.  In the result, the court of appeal found that the making of the default award by the arbitrator amounted to an irregularity thereby tainting the arbitrator’s award with a nullity.  A fortiori, the default award ought to have been set aside with the resultant effect of also dismissing Siphiwe’s application.^[17]
11. The court of appeal further found that the arbitrator was vested with a discretion in the conduct of the arbitral proceedings. To this end it considered the Association’s Rules which were of application to the arbitration proceedings.  In terms of Article 30 of the Rules:‘1.
    If, within the period of time fixed by these Rules or the arbitral tribunal, without showing sufficient cause:(a)
    The claimant has failed to communicate its statement of claim, the arbitral tribunal shall issue an order for the termination of the arbitral proceedings, unless there are remaining matters that may need to be decided and the arbitral tribunal considers it appropriate to do so;
    (b)
    The respondent has failed to communicate its response to the notice of arbitration or its statement of defence, the arbitral tribunal shall order that the proceedings continue, without treating such failure in itself as an admission of the claimant’s allegations; the provisions of this subparagraph also apply to a claimant’s failure to submit a defence to a counterclaim or to a claim for the purpose of a set-off.
    2.
    If a party, duly notified under these Rules, fails to attend a hearing or other meeting, without showing sufficient cause for such failure, the arbitral tribunal may proceed with the arbitration or meeting.
    3.
    If a party, duly invited by the arbitral tribunal to produce documents, exhibits or other evidence, fails to do so within the established period of time, without showing sufficient cause for such failure, the arbitral tribunal may make the award on the evidence before it.’^[18]
12. In the circumstances set out above, the arbitrator must have regard to and determine whether or not the defaulting party has demonstrated sufficient cause for the default. The arbitrator must ensure that all steps have been taken for the default to be remedied.  In the absence of the defaulting party showing sufficient cause, the arbitrator may proceed by default^[19].
13. In the arbitration proceedings in casu, the Municipality was not afforded the opportunity. It participated in the pre-arbitration meeting, entered into agreements with Siphiwe regarding the filing of papers, instructed Mateme Attorneys to act on its behalf on the same day that its erstwhile attorneys withdrew from the matter and sought extensions of time for the delivery of its statement of defence.  Despite its participation in the aforesaid instances, Siphiwe obtained a default award against the Municipality without affording the latter notice of the date, time, when and the place where the default relief was going to be sought.  Neither did the arbitrator furnish such information to the Municipality nor did he seek an explanation for the Municipality’s default.  In the result, the court of appeal found that in entering of the default award, the arbitrator acted beyond his competence.  Neither section 15(2) of the Act nor Article 30 of the Rules were complied with.  Consequently, the arbitral award was null and void and of no force and effect.^[20]
14. Section 33 of the Act, under which the Municipality launched its application, permits a matter to be submitted to a new arbitration tribunal constituted in the manner directed by the court. By virtue of its finding that the default award ought to be set aside, the court of appeal also found that the Municipality was also entitled to this additional relief.^[21]
15. In the result, the court of appeal ordered the dismissal with costs of Siphiwe’s application to make the default award an order of court, and also ordered that the dispute be referred to a new arbitrator as agreed to by the parties, alternatively as nominated by the Association.
16. The judgment clearly constitutes a instructive lesson to all arbitrators to act cautiously when dealing with any matter or dispute in which a default award is sought in the arbitration proceedings before him or her.

ADV K BAILEY SC FA Arb (SA)

Sandton

17 April 2023

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^[1]     The judgment: para [1].
^[2]     Ibid.
^[3]     Ibid.
^[4]     Ibid: para [18].
^[5]     Ibid: paras [18] and [19].
^[6]     Ibid: para [3].
^[7]     Ibid: para [4].
^[8]     Ibid: para [5].
^[9]     Ibid: para [6].
^[10]   Ibid.
^[11]    Ibid.
^[12]   Ibid: para [8]and footnote 3.
^[13]   Ibid: para [10].
^[14]   Ibid: paras [11] and [13].
^[15]   Ibid: para [12].
^[16]   Ibid: para [14].
^[17]   Ibid: paras [16] and [17].
^[18]   Ibid: para [20].
^[19]   Ibid: para [21].
^[20]  Ibid: paras [22] and [23].
^[21]  Ibid: paras [25] to [28].