High Court of South Africa affirms South Africa as a pro-arbitration jurisdiction

On 13 March 2023, the Kwazulu-Natal Division of the High Court stayed an application for the return of goods and the re-payment of substantial sums pending finalisation of arbitration proceedings in London (Lukoil Marine Lubricants DMCC v Natal Energy Resources and Commodities (Pty) Ltd (12583/21P) [2023] ZAKZPHC 31 (16 March 2023)).

The judgment affirms South Africa as a pro-arbitration jurisdiction and provides a welcome – and, for the time being, rare – example of the enforcement of South Africa’s International Arbitration Act 15 of 2017 (the "IAA").

Background

In 2016, the applicant Lukoil Marine Lubricants DMCC ("Lukoil") and the respondent Natal Energy Resources and Commodities ("Natal", and together with Lukoil, the "Parties") entered into a distribution and sales agreement for marine lubricants. Three years later, after various disputes had arisen, the Parties concluded a settlement agreement (the "Settlement Agreement") and further signed a separate agreement under which Natal stored and sold goods supplied to it by Lukoil (the "Service Provider Agreement"). Both the Settlement Agreement and the Service Provider Agreement included arbitration clauses which provided for disputes to be resolved through arbitration in London under the rules of the London Maritime Arbitrators Association and governed by English law.

Lukoil subsequently alleged that Natal had breached the Service Provider Agreement in various ways and purported to terminate the agreement. As a result, it commenced proceedings in the South African courts for the return of goods supplied to Natal under the framework of the Service Provider Agreement, together with re-payment of approximately US$ 500,000. In return, Natal raised two in limine points (i.e. specific technical legal points on a preliminary basis), including that under the arbitration clauses contained in the agreements signed by the Parties in 2019, the matter was to be resolved by arbitration in London (or, in the alternative, proceed to trial due to various disputes of fact).

Decision

The Kwazulu-Natal Division of the High Court (P C Bezuidenhout J) held that the application should be stayed pending the finalisation of arbitration proceedings in London in accordance with the Parties' agreements.

In coming to that conclusion, it was highlighted that Natal had consistently objected to the application on the grounds that the Settlement Agreement and the Service Provider Agreement required disputes to be resolved by arbitration in London. The High Court considered that because there was a dispute which could not be determined from the papers before it, the correct approach was for the matter to be decided in arbitration proceedings. Pursuant to the Supreme Court of Appeal’s judgment in Tee Que Trading Services (Pty) Ltd v Oracle Corporation South Africa (Pty) Ltd and Another (065/2021) [2022] ZASCA 68 (17 May 2022), the Parties’ choice of London as the seat of the arbitration – rather than South Africa – was no bar to the grant of the stay.

Comment

The decision of the High Court is to be welcomed as an affirmation of the pro-arbitration approach adopted by the South African courts in the context of the IAA. Given the limited number of decisions on the IAA to date, the judgment should give parties contemplating doing business in South Africa, or designating South Africa as their arbitral seat, further confidence in the national courts and thereby promote the country as a business and arbitration-friendly jurisdiction.

It is also a timely reminder of the principle of separability – a central tenet of the UNCITRAL Model Law as implemented in the IAA – which provides that an arbitration agreement is separate to and independent of the underlying agreement in which it is contained. In accordance with that principle, allegations that the Service Provider Agreement was invalid did not call into question the Parties’ agreement to resolve any dispute through arbitration. The decision in Lukoil thus aligns with international practice despite the Supreme Court of Appeal’s sidelining of the principle of separability in Namasthethu Electrical (Pty) Ltd v City of Cape Town and Another (201/19) [2020] ZASCA 74 (29 June 2020). In that case, the court considered that a contract induced by a fraudulent misrepresentation was wholly "unravelled" by fraud (with the finding of fraud and the non-IAA context distinguishing Namasthethu from Lukoil). In contrast, general international practice dictates that a dispute resolution clause will only be invalid if the fraudulent misrepresentation related specifically to that clause. Since it did not in Namasthethu, the dispute resolution clause should have remained valid.

Nevertheless, although the result reached in Lukoil is undoubtedly correct, it is to be hoped that future decisions follow the spirit of the IAA more faithfully. The High Court stayed the application because there were issues which it believed "could not" be determined from the papers before it, and considered that the stay was "the most feasible solution in the circumstances". As held in Tee Que, the IAA obliges the court to stay proceedings unless the arbitration agreement in question is null and void, inoperable or incapable of being performed. Put simply, the IAA leaves no room for judicial discretion or considerations of feasibility; a stay was the only correct solution.

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