Out-Law Analysis 3 min. read
21 Aug 2024, 1:55 pm
Businesses that agree to formally settle their disputes via agreement can enforce the terms of those settlement agreements before the courts in South Africa if those agreements have been endorsed by an arbitrator.
Clarity on the point was provided by the South African Supreme Court of Appeal (SCA) in the case of Krohne (Pty) Ltd v Strategic Fuel Fund Association
The case should encourage more businesses to provide for the potential settlement of disputes within their contract’s arbitration clauses.
Strategic Fund Fuel Association (Strategic Fuel) is a non-profit company which acquires, maintains and manages South Africa’s strategic energy feedstocks and carriers, to ensure energy security in the country.
For Strategic Fuel to perform its function, it issued a tender for the supply, installation and commissioning of a metering system. Krohne (Pty) Ltd (Krohne), an international manufacturer of custody metering systems, was awarded the tender in January 2012. Its duties under the tender included: the design, calibration and installation of metering cabinets, flow computers and master metering skids and all associated electrical reticulation, including necessary and associated equipment for the metering system, which is referred to as the KOG system.
A dispute arose between Strategic Fuel and Krohne over the accuracy of the KOG metering system, following which it was agreed that the dispute would be referred to arbitration as per their contract. After appointing an arbitrator, a settlement agreement was reached, wherein it was decided that the question of the accuracy of the KOG system would be determined by a third-party expert. The settlement agreement was then endorsed by the arbitrator, who issued it as an interim award.
The settlement agreement provided for the parties jointly nominating and appointing an appropriately qualified and experienced third-party specialist (‘the independent expert’) to assess the system to establish whether it operated within the specification agreed by the parties and set out in OIML R117-1 edition, section 2.4 Accuracy Classes and the South African National Standards. It was agreed that the finding of the independent expert would be final and binding. In the event that the independent expert found that the KOG system met the specifications, Strategic Fuel was obliged to pay Krohne R7 669 363.74 ($430,000) together with interest and the costs of the arbitration and the expert.
The independent expert issued his final report on 20 September 2019. It found that Krohne’s metering systems operated within the specification agreed by the parties. Krohne subsequently attempted to recover the amount owed. After receiving no response from Strategic Fuel, Krohne applied to the High Court seeking an order against Strategic Fuel to acquire payment on the basis of the expert report.
The High Court dismissed Krohne’s application. It found that the interim award made by the arbitrator that made provision for the expert report was in conflict with the Arbitration Act of 1965 (‘the Arbitration Act’) and did not constitute a final award which would be binding on the parties. The High Court, in this respect, found that Strategic Fuel did not have a valid cause of action for its claim.
Krohne appealed against the High Court before the SCA, which ruled in favour of Krohne. The SCA cited two main issues with the reasoning of the High Court.
Firstly, the SCA found that the High Court had erred by digressing from the main dispute in considering the validity of the interim award. In this respect, the SCA emphasised that the hallmark of arbitration lies in the fact that it is an adjudication which flows from the consent of the parties. The powers of the adjudication are defined by agreement between the parties, who may modify or withdraw that power at any time by further agreement.
Secondly, the SCA found that in instances where a settlement agreement has been reached on the main issues in dispute, it would render any further arbitration proceedings redundant, as there would not be a dispute to adjudicate. When considering whether this is the case, the SCA advised that the circumstances of each case relating to the key facets of the dispute would need to be considered.
The SCA found that as the parties had agreed in the interim award that the findings of the independent expert would be binding, the cause of action was founded on that report.
Accordingly, the SCA set aside the order of the High Court and awarded Krohne the payment owed, with costs.
The reasoning of the SCA illustrates that settlement agreements may act as an integral tool in arbitration proceedings, which can be recognised as enforceable by South Africa’s courts, as in the case of Krohne and Strategic Fuel.
This case illustrates that in order for settlement agreements to be enforceable as binding awards, they need to have been endorsed by an arbitrator. Courts are also cautioned against finding that settlement awards are not final and binding, on the basis that the awards were interim in nature. As outlined by the SCA, interim awards are treated as awards in terms of the Arbitration Act.
Co-written by Evaendren Naidoo and Kassandra Vercueil of Pinsent Masons.
