Fraudulently obtained contractual advantages

The arbitration clause in contracts have been a popular topic of debate and have stirred the litigation pot for some time now. An arbitration clause requires parties to a contract to resolve their disputes through an arbitration process as opposed to in-court litigation.

In a Supreme Court of Appeal matter, Namasthethu Electrical (Pty) Ltd v City of Cape Town and Another (Unreported case no 201/19, 29-6-2020), the question whether a dispute resolution clause in a contract survives the termination of that contract on the ground of fraudulent misrepresentation was considered.

Namasthethu contemplated that the disputes regarding the cancelation of the contract including the allegations of fraud were subject to the arbitration process agreed to by the parties in the contract and that the arbitration clause was widely worded to encompass disputes of whatever nature.

The Court made reference to three other judgements made in the Supreme Court of Appeal in which it confirmed that it is trite law that fraud is conduct which vitiates every transaction known to the law and that once an agreement had been rescinded by an aggrieved party, the said arbitration clause cannot stand because the arbitration clause was embedded in a fraud-tainted agreement. An aggrieved party may elect whether to abide by the contract and possibly claim damages, or to resile from it and regard the contract as void from inception.

The Court ultimately agreed with the previous court in arriving at the conclusion that the requirements of fraudulent misrepresentation had been met, which rendered the contract voidable allowing the City to validly rescind the contract. The parties were not obligated to go to arbitration in terms of the arbitration clause.
What needs to be considered regarding arbitration clauses is whether there is clear and unequivocal language in the contract or whether the arbitration clause itself provides for a specific kind of dispute to be addressed by arbitration. In the alternative, whether the parties could have foreseen a possible dispute regarding fraud or any other specific dispute. These must always be determined in line with the generally accepted approach to the interpretation of contracts and commercial sensibility.

For more information relating to Contracts kindly email us on info@hjw.co.za.

Written by Meegan Reddy – Candidate Attorney

This article is provided for informational purposes only and should not be substituted for legal advice on any specific matter. Any opinions expressed herein are subject to the law as at the time of writing and will change in accordance with any change in the law. We recommend that you contact HJW Attorneys at info@hjw.co.za directly for advice applicable to your specific matter.