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

NAD Property Income Fund (Pty) Ltd (NAD) concluded a construction agreement with Bushbuckridge Local Municipality (the Municipality) on 16 February 2016 in terms of which NAD undertook to construct three driveway roads and water supply infrastructure for the Dwarsloop Mall. NAD met the costs with the understanding that the Municipality would refund it from future budgets. When the Municipality failed to pay, NAD issued summons for approximately R23.5 million. The Municipality raised defences based on non-compliance with s 217 of the Constitution and ss 111–116 of the Local Government: Municipal Finance Management Act 56 of 2003 (MFMA), lack of authority by the municipal manager, and absence of consensus on price. It also conditionally counterclaimed for an order declaring the agreement unlawful and invalid. The parties agreed to refer the dispute to arbitration before retired Judge President Ngoepe (the Arbitrator). At arbitration, the Arbitrator held that he was empowered to determine the constitutional validity of the agreement and declared it invalid, unlawful and unenforceable for non-compliance with the constitutional and statutory procurement framework. He also declared that NAD had failed to make out a case for unjustified enrichment in respect of two roads, but that the Municipality had been unduly enriched in respect of one road. NAD then applied to the Mpumalanga Division of the High Court to review and set aside the arbitration award on the basis that the Arbitrator had exceeded his powers. The high court dismissed the application, holding that the arbitration agreement conferred the necessary power on the Arbitrator. NAD appealed to the Supreme Court of Appeal with leave.

• Whether an arbitrator is empowered to declare a construction agreement invalid for non-compliance with s 217 of the Constitution and the MFMA, thereby exercising powers reserved to courts under s 172 of the Constitution
• Whether the arbitration agreement could validly confer upon the arbitrator jurisdiction to decide constitutional invalidity
• Whether the high court was correct to determine the Municipality's conditional counterclaim and to set aside the agreement when the Arbitrator had only determined the main claim and not the counterclaim
• Whether the Supreme Court of Appeal should make a referral order in terms of s 20 of the Arbitration Act

The appeal was upheld with costs, including the costs of two counsel where so employed. The order of the high court was set aside and substituted with an order that: (a) the arbitration award published by the second respondent on 7 June 2021 is reviewed and set aside; and (b) the first respondent (the Municipality) is ordered to pay the costs of the application, including the costs of two counsel where so employed.

An arbitrator does not have the power to declare an agreement invalid for non-compliance with s 217 of the Constitution and the MFMA, because such a declaration constitutes the exercise of powers reserved exclusively to courts under s 172 of the Constitution. Public procurement by a municipality involves the exercise of public power, and challenges to the legality thereof are public law disputes within the exclusive domain of courts. An arbitration agreement cannot confer upon an arbitrator a power that the law does not permit. Where an arbitrator exceeds his or her powers under s 33(1)(b) of the Arbitration Act 42 of 1965, the award is liable to be reviewed and set aside.

The court observed that there may be circumstances in which conformity with legal requirements of public law arises as an incidental question in arbitration, and left open how that should be dealt with within the remit of arbitration. The court also noted that there may well be cases in which disputes relating to the conduct of organs of state could be resolved by arbitration, but that this was not such a case. Additionally, the court expressed the view that a referral order under s 20 of the Arbitration Act would be inappropriate given the order it proposed to make, leaving the parties to engage on how they wished to proceed.

The judgment reaffirms the exclusive jurisdiction of courts over constitutional matters, particularly the validity of public procurement contracts concluded by organs of state under s 217 of the Constitution. It clarifies that an arbitrator cannot exercise the powers conferred by s 172 of the Constitution to declare conduct or agreements invalid, and that parties cannot by agreement confer such adjudicative power on an arbitrator. The decision reinforces the distinction between private-law disputes suitable for arbitration and public-law challenges to the exercise of public power, which must be adjudicated by courts.