business

ARBITRATION AND THE BOUNDS OF AUTHORITY: LESSONS FROM DISPUTE RESOLUTION -By Don Mahon

MGAdvocate Arbitration, Commercial Law, Don Mahon , , , , , ,

“Justice is not to be taken by storm. She is to be wooed by slow advances.”
— Benjamin Cardozo

The Role of Arbitration Agreements

Arbitration has become a cornerstone of contemporary dispute resolution, providing an efficient and flexible alternative to the often protracted and costly processes of litigation. Yet, the role of arbitrators and the limits of their authority remain subjects of significant scrutiny. Recent arbitration proceedings highlight the importance of procedural precision and the necessity for arbitrators to act strictly within the confines of their jurisdiction, as defined by the arbitration agreement and the pleadings of the parties.

Unlike courts, arbitrators possess no inherent jurisdiction. Their authority derives entirely from the arbitration agreement and the terms of reference delineated by the parties. As highlighted in Lufuno Mphaphuli & Associates (Pty) Ltd v Andrews and Another 2009 (4) SA 529 (CC), the Constitutional Court reaffirmed the primacy of party autonomy in arbitration, observing that arbitrators must act strictly within the parameters of the matters referred to them.

Central to arbitration is the principle of party autonomy. Parties engaging in arbitration enjoy considerable freedom to craft agreements that define the scope, terms, and procedural framework governing their dispute. These agreements, which are typically meticulously negotiated, form the foundation of the arbitrator’s jurisdiction.

The contractual nature of arbitration underscores its key distinction from judicial processes: arbitrators cannot adjudicate issues beyond those explicitly submitted to them. Any attempt to exceed this mandate risks invalidating the arbitral award, thereby undermining the purpose of arbitration as a mechanism for achieving final and binding resolutions.

The Importance of Pleadings in Arbitration

Pleadings are pivotal in arbitration, serving to define the issues for determination and providing the framework within which the arbitrator operates. They encapsulate the claims, defences, and counterclaims advanced by the parties, thus delineating the parameters of the dispute.

Unlike judicial proceedings, where courts may, in certain circumstances, address issues not expressly pleaded, arbitrators are bound by the issues identified in the pleadings unless the parties explicitly agree otherwise. This constraint ensures procedural fairness by preventing arbitral awards from being based on matters not addressed by the parties.

In Telcordia Technologies Inc v Telkom SA Ltd 2007 (3) SA 266 (SCA), the Supreme Court of Appeal emphasised that adherence to the issues defined in the pleadings is fundamental to the integrity of arbitration. The court recognised that deviation from these boundaries risks compromising the principle of fairness and the autonomy of the parties.

Deviating from Pleaded Issues

A recurring issue in arbitration arises when an arbitrator ventures beyond the scope of the pleaded issues. Such actions may render an award susceptible to being set aside under section 33(1)(b) of the Arbitration Act 42 of 1965. This provision allows for judicial intervention where an arbitrator has exceeded their powers or committed a gross irregularity in the proceedings.

The case of Hos+Med Medical Aid Scheme v Thebe Ya Bophelo Healthcare Marketing & Consulting (Pty) Ltd 2008 (2) SA 608 (SCA) illustrates the risks inherent in such deviations. In this matter, the Supreme Court of Appeal found that an arbitrator’s decision to stray beyond the matters referred to them was sufficient justification for setting aside the award. The judgment underscores the necessity of arbitrators confining themselves strictly to the issues outlined in the pleadings and within the ambit of the arbitration agreement.

Procedural Fairness in Arbitration

The success of arbitration as a dispute resolution mechanism relies on the fairness and impartiality of the process. Procedural fairness ensures that parties are afforded an equal opportunity to present their cases and that arbitrators confine their decisions to the matters properly before them.

A core component of procedural fairness is the arbitrator’s duty to remain impartial and objective, particularly in their evaluation of evidence and the application of legal principles. This is especially pertinent in cases where the arbitrator must navigate complex contractual frameworks or technical disputes, as procedural missteps can have far-reaching consequences.

The Supreme Court of Appeal’s decision in Close-Up Mining v Boruchowitz NO 2023 (4) SA 38 (SCA) underscores the importance of procedural integrity in arbitration. The court reaffirmed that arbitrators must operate within the bounds of the issues submitted to them, and any deviation from these parameters constitutes an overreach of authority. The case further highlights that procedural fairness is not merely a formal requirement but a substantive one, safeguarding the legitimacy of the arbitral process.

Safeguarding the Integrity of Arbitration

The challenges discussed above highlight the critical importance of maintaining the integrity of arbitration through strict adherence to procedural rules and the principles of party autonomy. For arbitration to fulfil its promise as a fair and efficient mechanism for dispute resolution, arbitrators and parties alike must remain committed to upholding these principles.

For parties involved in arbitration, the following considerations are essential:

  1. Draft Comprehensive Arbitration Agreements: Clearly define the scope, terms, and procedural framework governing the arbitration to minimise ambiguities and prevent jurisdictional disputes.
  2. Prepare Detailed Pleadings: Articulate the issues for determination and the supporting evidence comprehensively, ensuring clarity and precision in framing claims and defences.
  3. Monitor the Arbitral Process: Maintain vigilance throughout the arbitration to ensure that the proceedings adhere to the agreed framework and that the arbitrator remains within their mandate.
  4. Advocate for Procedural Fairness: Raise concerns promptly if procedural irregularities or deviations from the agreed terms of reference arise, thereby safeguarding the fairness of the process.

Conclusion

Arbitration remains an invaluable tool for resolving complex disputes efficiently and effectively. However, its success is contingent upon the adherence of all participants—parties, counsel, and arbitrators alike—to the principles of fairness, procedural propriety, and party autonomy. Arbitrators must act within the confines of their jurisdiction, as defined by the arbitration agreement and the issues pleaded, while ensuring impartiality and procedural fairness throughout the process.

By respecting these principles, arbitration can continue to offer a trusted and final mechanism for resolving disputes, delivering outcomes that are not only just but also aligned with the expectations and agreements of the parties involved.

The extent of the preference afforded to employees under business rescue – By Don Mahon

MGAdvocate Business Rescue, Commercial Law, Companies, Company Law, Don Mahon, Employees, insolvency, Liquidations , , , , , , ,

“The way your employees feel is the way your customers will feel. And if your employees don’t feel valued, neither will your customers.” – Sybil F. Stershic

 

 

Section 135 of the Companies Act 71 of 2008 provides as follows:

“135     Post-commencement finance

  • To the extent that any remuneration, reimbursement for expenses or other amount of money relating to employment becomes due and payable by a company to an employee during the company’s business rescue proceedings, but is not paid to the employee –
  • The money is regarded to be post-commencement financing; and
  • Will be paid in the order of preference set out in subsection (3)(a).
  • …
  • After payment of the practitioner’s remuneration and expenses referred to in section 143, and other claims arising out of the costs of the business rescue proceedings, all claims contemplated –
  • In subsection (1) will be treated equally, but will have preference over –
  • all claims contemplated in subsection (2), irrespective of whether or not they are secured; and
  • all unsecured claims against the company; or
  • In subsection (2) will have preference in the order in which they were incurred over all unsecured claims against the company.
  • If business rescue proceedings are superseded by a liquidation order, the preference conferred in terms of this section will remain in force, except to the extent of any claims arising out of the costs of liquidation.”

There is seemingly a view held by certain business rescue practitioners (“BRP’s”) that a debt which becomes due and which becomes payable during the company’s business rescue proceedings is covered by the provisions of section 135, whereas a debt which is payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings is not covered by section 135. The rationale in seeking to exclude such employees is not clear.

APPLICABLE LEGAL PRINCIPLES

Preliminary Observations

Brief recourse must be had to the meaning of the words “due and payable” which appear in section 135(1):-

  • a debt is “due” when it is immediately claimable, that is, when it has matured and that, as its correlative, it is immediately payable.

See:            White v  Municipal Council Of Potchefstroom 1906 TS 47; Hmbmp Properties (Pty) Ltd v  King 1981 (1) SA 906 (N) At 909D

  • the word “payable” means “that which may be paid or may have to be paid” and denotes an obligation to pay, either immediately, or at some point in the future.

See:            Marine & Trade Insurance Co Limited v  Katz NO 1979 (4) SA 961 (A) At 975-976

  • therefore, a debt may be payable without yet being due but once a debt is due it must also be payable.

A debt can only become payable if, despite any uncertainty as to when it may fall due or the amount which is owed, payment of an amount on a future date is, nonetheless, a certainty. The obligation to pay (as opposed to the amount of or date for payment) must be unconditional.

It is accordingly submitted that even if the debts in question were payable prior to the commencement of business rescue proceedings but payment only fell due after the commencement of business rescue proceedings, such employees would nonetheless be afforded protection under section 135 of the Act. The section contemplates a debt as having become due and payable once it is bothdue and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i) of the Act.

Interpretation

The proper approach to interpretation of statutes, as set out by Wallis JA in Natal Joint Municipal Pension Fund v  Endumeni Municipality 2012 (4) SA 593 (SCA) is, by now, well-known. The point of departure is the language of the relevant provision itself, read in context and having regard to the purpose of the provision and the background to the preparation and production of the document.

It is accordingly necessary to consider each of the component parts which make up section 135(1) of the Act:-

  • The claim must be for remuneration, reimbursement for expenses or other amounts of money relating to employment;
  • The amount claimed must have become due and payable by the company to an employee during the company’s business rescue proceedings;
  • Alternatively, the claim must arise from employment services carried out during the company’s business rescue proceedings.

Remuneration or other amount of money relating to employment

According to the Oxford English Dictionary (2ndEd, Revised), “remuneration” means:

“n. [mass noun] money paid for work or a service”.

It has been held that remuneration:

  • means a quid pro quofor services rendered in terms of an agreement.

See:            Commissioner, South African Revenue Service v  Dyefin Textiles (Pty) Ltd 2002 (4) SA 606 (N) at 612G

  • includes commission earned by employees.

See:            Small v  Noella Creations (Pty) Ltd 1986 ILJ 614

Due And Payable During Business Rescue

A preliminary examination of section 135 of the Act discloses two possible meanings, namely:

  • a debt which becomes due and which becomes payable during the company’s business rescue proceedings; or
  • a debt which may be payable prior to the commencement of business rescue proceedings but which transforms into a debt which is both due and payable during the business rescue proceedings.

For the reasons set out below, it is submitted that the section contemplates both of these scenarios.

Moreover, it would be more reasonable and business-like, to attribute a meaning to section 135 which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). One would, on such an interpretation, regard a debt as having become due and payable once it is bothdue and payable. Therefore, if the moment at which both criteria are met (that is, the debt being both due and payable) occurs during the company’s business rescue proceedings, then the claim will be preferent in terms of section 135(3)(a)(i). An employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2). This is dealt with more fully below.

Section 135: Purpose and Context

Section 135 of the Act must be interpreted in light of the object, purpose and context of the Act as a whole.

Section 5 of the Act provides that the Act must be interpreted and applied in a manner that gives effect to the purposes set out in section 7.

The purposes of the Act, as set out in section 7, include:

  • to reaffirm the concept of the company as a means of achieving economic and social benefits; and

See:            section 7(d) of the Act

  • to provide for the efficient rescue and recovery of financially distressed companies, in a manner that balances the rights and interests of all relevant stakeholders.

See:            section 7(k) of the Act

In terms of section 128 of the Act:

“’business rescue’ means proceedings to facilitate the rehabilitation of a company that is financially distressed by providing for—

  • the temporary supervision of the company, and of the management of its affairs, business and property;
  • a temporary moratorium on the rights of claimants against the company or in respect of property in its possession; and
  • the development and implementation, if approved, of a plan to rescue the company by restructuring its affairs, business, property, debt and other liabilities, and equity in a manner that maximises the likelihood of the company continuing in existence on a solvent basis or, if it is not possible for the company to so continue in existence, results in a better return for the company’s creditors or shareholders than would result from the immediate liquidation of the company.”

Thus, the provisions of section 135 must be interpreted in light of the purposes of the Act provided for in section 7 and the definition of business rescue:-

  • The Act gives recognition to the interdependent relationship between a company and its stakeholders, and to the fact that a company’s ability to create value for itself depends on its ability to create value for others (including its employees, as material stakeholders).

See:            The International Integrated Reporting Council, The International <IR> Framework, (13 December 2013), p 10[1]

  • An organisation becomes attuned to the opportunities and challenges posed by the context in which it operates by having regard to the needs, interests and expectations of material stakeholders (including employees).

See:            Robert G. Eccles and Tim Youmans, “Materiality in Corporate Governance: The Statement of Significant Audiences and Materiality”, Harvard Business School, Working Paper 16 – 023, September 3, 2015

  • The devastating effect of liquidations on a nation’s economy has been recognised by our courts.

See:            Oakdene Square Properties (Pty) Ltd And Others v  Farm Bothasfontein (Kyalami) (Pty) Ltd And Others 2012 (3) SA 273 (GSJ)

  • Therefore, the primary aim of business rescue in facilitating the continued existence of a company in a state of solvency is not to be considered in vacuo– the underlying motive behind the continued state of solvency is to afford protection to its stakeholders. Indeed, this is supported by the fact that the alternative aim of business rescue is to provide a better return for creditors (which would include employees if the company is not to continue) than they would derive from a liquidation (in which event employees would be preferent under section 98A(1)(a)(i)of the Insolvency Act 24 of 1936(“the Insolvency Act”).

It is for this reason that employees are afforded special protection under the rubric of business rescue. Not only are employees integral to the proper functioning of the company, making them pivotal stakeholders in the company, but almost invariably, their livelihoods (and that of their families) depend on the company. Moreover, the impact of the failure of companies is felt most keenly by its employees who lose their jobs and benefits.

The acceptance of this interpretation of section 135 does not necessitate a finding that employee protection is its primaryobjective. It merely necessitates an acknowledgement of the existence of such an objective.

Such an interpretation seeks to balancethe rights and interests of all relevant stakeholders. There is no reason why the conferment of a preference should be an obstacle to the continuation of the company on a solvent basis.

Indeed, in Oakdenethe court expressed the view that the new provisions in the Act were in line with modern trends in corporate rescue regimes in that they attempted to secure and balance the competing interests of creditors, shareholders and employees, and envisaged a shift away from only having regard for creditors’ interests, and are predicated on the belief that to preserve a business and the experience and skill of its employees, might, in the end prove to be a better option for creditors and enable them to secure a better recovery of their debts from their debtor.

See:      Oakdene Square Properties (Pty) Ltd And Others v  Farm Bothasfontein (Kyalami) (Pty) Ltd And Others 2012 (3) SA 273 (GSJ) at para [12]

Because of their dual role of both primary benefactor and beneficiary of the company’s existence, employees are afforded preferent status. Such status is afforded to employees, either by section 144 of the Act (which provides protection to employees whose claims became due and payable before business rescue) or by section 135(1) of the Act (which provides for protection to employees whose claims became due and payable after the commencement of business rescue.

A contrary interpretation of section 135(1) would have the effect of arbitrarily excluding from such protective umbrella, employees who rendered services to the company but whose claims became due after the commencement of business rescue. This could never have been the intention of the legislature.

By way of illustration, employees’ claims against a company in business rescue can logically fall into one of three categories, namely:

  1. employees who rendered services prior to business rescue and in respect of which services remuneration became both due and payable prior to the commencement of business rescue;
  2. employees who rendered services after the commencement of business rescue and in respect of which services compensation became due after the commencement of business rescue; and
  3. employees who rendered services prior to the commencement of business rescue but in respect of which services compensation became due after the commencement of business rescue proceedings. In other words, where a business rescue has intervened in between the rendering of the services and the due date for payment.

If a contrary interpretation is given to the section, the employees referred to in paragraphs 1) and 2) above, would be afforded protection in terms of the Act under sections 144 and 135 respectively but employees referred to in paragraph 3) above would be excluded from such protection. Neither a literal nor a purposive approach to the interpretation of the Act inclines one to such a conclusion. On the contrary, there is no reason why the legislature would have seen fit to afford special protection to employees under a business rescue but then seek to exclude one category of employees from such protection.

On the interpretation advocated in this article, the employees referred to in paragraph  1) above are afforded preference under section 144 whereas employees who fall into the categories referred to in paragraphs 2) and 3) above, are afforded protection under the provisions of section 135(1).

It is eminently more reasonable andbusiness-liketo attribute a meaning to section 135 of the Act which is directed at the preservation of employees’ claims which do not fall within the purview of section 144(2). An employee who has not been paid must either fall within the provisions of section 135(1) or section 144(2) of the Act.

[1]Available at http://integratedreporting.org/resource/international-ir-framework/