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Namasthethu Electrical (Pty) Ltd v City of Cape Town [2020] ZASCA 74 (29 June 2020)

9 October 2020

This appeal considered the question of whether a dispute resolution clause in a contract survives the termination of that contract. The Supreme Court of Appeal (“SCA”) concluded that a dispute resolution clause in a contract does not survive the termination of that contract for fraud.

The Facts

During March 2014, the City of Cape Town (the “City”) awarded a tender to Namasthethu. A competitor in the tender process sought to appeal the award of the tender on the basis that Namasthethu’s directors had been convicted of fraud and corruption.

Namasthethu had completed a section on the tender document declaring that neither it nor its directors had been convicted of fraud in the past five years.

Shortly after receipt of the complaint, the City wrote to Namasthethu requiring a response on the allegation of fraud. Namasthethu responded that neither it nor its sole director had been convicted of fraud. Thereafter, the City received information from the CIDB which indicated that Namasthethu and its directors had been convicted. Accordingly, the City referred the matter to its forensics department for further investigation. The forensics department only reverted in February 2016 that there had been a number of false representations and fraudulent conduct by Namasthethu and recommended termination of the contract. In March 2016, the City terminated the Contract with immediate effect.

Namasthethu referred a dispute to adjudication per the dispute resolution clause of the contract claiming damages for an alleged repudiation by the City. The adjudicator found the city liable for damages.

Issue

Whether the adjudication clause in the contract survived termination thereof on the basis of fraud.

The parties’ submissions

Namasthethu contended that the parties had contemplated that disputes regarding cancellation of the contract, including based on allegations of fraud, were subject to the dispute resolution process agreed.

The City submitted that the contract was void, alternatively voidable, as a result of fraud and therefore the dispute resolution process agreed therein could not be applied.

The SCA’s analysis

It is trite in law that fraud is conduct which vitiates every transaction known to the law. An dispute resolution clause embedded in a fraud-tainted agreement cannot survive recission.

A circumstance in which a dispute resolution clause may survive is if the clause states that it applies even where there has been fraud so as to make the contract voidable. There needs to be, however, clear language to this effect. The court considered the dispute resolution clause (clause 40.1 of the JBCC) and determined that there is no suggestion that it covers fraud or that it includes an exception to the general rule.

Conclusion

The referral of the dispute to adjudication was invalid and unlawful and the court a quo was correct to set aside the determination following an unlawful adjudication process.