NAD Property Income Fund (Pty) Ltd v Bushbuckridge Local Municipality and Another

On 16 February 2016, NAD Property Income Fund (Pty) Ltd (NAD) entered into a construction agreement with Bushbuckridge Local Municipality (the Municipality) to construct three driveway roads and water supply infrastructure for a shopping mall. The parties were aware the Municipality lacked budget to pay for the works. NAD would meet the costs and the Municipality would refund it in the following financial year(s). NAD claimed approximately R23.5 million for the construction work. The Municipality raised defences including that the agreement was concluded in contravention of s 217 of the Constitution and ss 111-116 of the Local Government: Municipal Finance Management Act 56 of 2003 (MFMA) as it was not preceded by competitive bidding, the municipal manager lacked authority to conclude it, and no consensus was reached on price. The Municipality filed a conditional counterclaim seeking a declaration that the agreement was unlawful and should be set aside. Instead of proceeding to trial, the parties agreed to refer the matter to arbitration before retired Judge President Ngoepe. The Arbitrator found he had power to determine constitutional invalidity and declared the agreement unlawful and invalid for non-compliance with s 217 of the Constitution and the MFMA. NAD applied to review and set aside the award on the basis that the Arbitrator exceeded his powers. The high court dismissed the application.

• Whether an arbitrator in arbitration proceedings is empowered to declare a contract invalid in terms of s 172 of the Constitution for non-compliance with s 217 of the Constitution and the MFMA
• Whether the Arbitrator exceeded his powers under s 33(1)(b) of the Arbitration Act 42 of 1965
• Whether parties can by agreement confer on an arbitrator the power to determine constitutional invalidity
• Whether procurement disputes involving organs of state constitute public law matters that must be determined by courts rather than arbitrators
• The appropriate remedy where an arbitrator has exceeded his powers

The appeal was upheld with costs, including costs of two counsel. The order of the high court was set aside. The arbitration award published on 7 June 2021 was reviewed and set aside. The Municipality was ordered to pay the costs of the application, including costs of two counsel.

Only courts, and not arbitrators, have the power under s 172 of the Constitution to declare conduct or agreements invalid for inconsistency with the Constitution. Public procurement by organs of state under s 217 of the Constitution involves the exercise of public power, and disputes concerning compliance with constitutional and statutory procurement requirements are public law matters over which courts have exclusive jurisdiction. Parties cannot by agreement confer on an arbitrator powers to determine constitutional validity that the arbitrator does not possess in law. An arbitrator who determines the constitutional validity of a contract concluded by an organ of state exceeds his or her powers under s 33(1)(b) of the Arbitration Act 42 of 1965, warranting review and setting aside of the award. Section 109(2) of the Local Government: Municipal Systems Act 32 of 2000 prohibits municipalities from submitting to arbitration matters involving the validity of their actions.

The Court noted that there may be circumstances in which conformity with legal requirements of public law is an incidental question that arises in arbitration, but left open how that should be dealt with within the remit of arbitration. The Court also observed that section 20 of the Arbitration Act may permit referral to a court if a question of law arises in the course of arbitration, but this power can only be exercised by the arbitration tribunal itself. The Court indicated it would be inappropriate to make a referral order in terms of s 20 in this case, leaving it to the parties to engage one another on how to proceed. The Court acknowledged that while there may be cases where disputes relating to conduct of organs of state could be resolved by arbitration, this was not such a case because the question of legality raised a direct question of invalidity concerning compliance with s 217 as a norm of constitutionally compliant procurement. The Court noted the distinction between cases where organs of state act in purely contractual capacities (as in Cape Metropolitan Council v Metro Inspection Services) and cases involving exercise of public powers.

This judgment clarifies the limits of arbitrators' powers in South African law, particularly in relation to constitutional matters and public procurement disputes. It establishes that: (1) Arbitrators do not have power to declare contracts constitutionally invalid under s 172 of the Constitution, regardless of party consent; (2) Public procurement disputes involving compliance with s 217 of the Constitution are public law matters that must be determined by courts; (3) The determination of whether an organ of state has exercised public power lawfully is exclusively within the jurisdiction of courts; (4) Section 172 of the Constitution, read with s 2 of the Arbitration Act and s 109(2) of the Municipal Systems Act, prohibits arbitrators from determining the validity of governmental conduct; (5) Parties cannot by agreement confer on arbitrators powers they do not have in law, particularly in relation to constitutional matters. The judgment reinforces the constitutional principle that courts are the arbiters of legality and constitutional compliance, especially in relation to the exercise of public power by organs of state. It has significant implications for dispute resolution involving municipalities and other organs of state, particularly in procurement-related disputes.