Balancing the oppression remedy and arbitration agreements in South Africa

December 2024  |  SPOTLIGHT | LITIGATION & DISPUTE RESOLUTION

Financier Worldwide Magazine

December 2024 Issue

Along with the enactment of key pieces of legislation such as the International Arbitration Act (IIA), the South African courts have also adopted a very pro-arbitration stance when interpreting the 1965 (Domestic) Arbitration Act.

Despite these recent pro-arbitration developments, uncertainty persists around whether disputes brought in terms of the oppression remedy provided for in section 163 of the 2008 Companies Act, which are also subject to an arbitration agreement, are capable of being arbitrated.

Section 163 – a brief overview

Section 163 of the Companies Act provides a statutory remedy to shareholders who complain of oppressive conduct by another shareholder (the ‘oppression remedy’).

The oppression remedy provides a shareholder with a mechanism to apply to court for relief if any act or omission of the company leads to the business of the company being carried out in, or the powers of a director of the company being exercised in, a manner which is oppressive, unfairly prejudicial or which unfairly disregards the interests of the other shareholder.

To succeed, the aggrieved shareholder must show that the conduct complained of is either oppressive or unfairly prejudicial.

Under section 163, a court is granted broad powers in respect of the relief that it may grant. The relief contemplated under section 163(2) ranges from an order directing an issue or exchange in shares to setting aside or varying an agreement. A court may, under section 163, even require the company to commence business rescue proceedings.

Arbitration agreements under the Arbitration Act – binding in nature?

Although it is not as robust as the IAA, section 3 of the Arbitration Act provides a court with limited powers to interfere in the parties’ agreement to arbitrate. Only where ‘good cause’ is shown may a court set aside an arbitration agreement.

In circumstances where a party to an arbitration agreement bypasses this agreement and launches proceedings before the courts, section 6 of the Arbitration Act enables the party seeking to enforce the arbitration agreement with a mechanism to stay the proceedings pending arbitration, unless there exists sufficient reason as to why the dispute should not be referred to arbitration.

It is also worth noting that section 6(1) of the Arbitration Act draws no distinction between the different types of legal proceedings that should be stayed where the subject matter of the dispute falls under the agreement to arbitrate.

An outdated approach?

The interaction between the oppression remedy and the binding nature of arbitration agreements was dealt with by South African courts on a single occasion in 2013. In Peel and Others v Hamon J&C Engineering (Pty) Ltd and Others, the applicant brought proceedings under the oppression remedy contained in the Companies Act.

The respondents argued that the dispute at the heart of the application fell within the scope of an existing arbitration agreement and sought a referral of the dispute to arbitration. The court rejected the respondent’s submissions, reasoning that an arbitrator lacks the power to grant the wide-ranging relief available under section 163. Importantly, this decision was handed down under the Arbitration Act, and before the enactment of the IAA.

The International Arbitration Act – the missing piece?

In 2017, the South African legislature enacted the IAA which incorporates the UNCITRAL Model Law as schedule 1. In doing so, South Africa aligned itself with other pro-arbitration jurisdictions.

The IAA takes a firmer stance on the enforcement of arbitration clauses. Section 16(1), titled “Recognition and enforcement of arbitration agreements and foreign arbitral awards”, provides that: “Subject to section 18 an arbitration agreement and a foreign arbitral award must be recognised and enforced in the Republic...”

In addition, section 7(2) of the IAA provides that an arbitration agreement cannot be excluded simply because a particular law confers jurisdiction on a court over a matter subject to an arbitration agreement. The wording of this section makes it clear that it is not the IAA’s intention for arbitral agreements to be circumvented simply because an enactment such as section 163 confers jurisdiction on a court.

Since the IAA’s enactment, the Supreme Court of Appeal has held, in Tee Que Trading Services (Pty) Ltd v Oracle Corporation South Africa (Pty) Ltd and Another, that the Model Law adopts an international approach to commercial arbitration, requiring courts to stay legal proceedings and refer the matter to arbitration unless the arbitration agreement is deemed null and void, inoperable or unenforceable.

While the facts leading to the Peel judgement are unique, there exists one key factor which suggests the Peel judgement may be outdated, at the very least in respect of international arbitrations: the judgement was handed down prior to the enactment of the IAA.

While the Arbitration Act possesses clear wording requiring the enforcement of arbitration clauses, the IAA goes further. The IAA makes it clear that in instances such as Peel, oppression remedy proceedings are capable of being, and in fact must be, referred to arbitration, where the subject matter of the dispute falls within the four corners of the arbitration agreement.

A modern approach for South Africa?

The importation of the Model Law into the IAA seeks to align South Africa’s arbitral landscape with other pro-arbitration jurisdictions. Other jurisdictions, such as England, have dealt with similar interactions between the enforceability of arbitration agreements and their own version of the oppression remedy.

The English oppression remedy is couched in sections 994 to 999 of its 2006 Companies Act. Its 1996 Arbitration Act adopts a similar position to South Africa’s Arbitration Act which provides the courts with the power to stay proceedings pending arbitration.

In Fulham Football Club (1987) Ltd v Richards, the English Court of Appeal addressed the interaction between the oppression remedy and arbitration agreements. Lord Justice Patten noted that the unavailability of certain remedies to an arbitral tribunal does not render the “subject matter” non-arbitrable.

Put differently, the tribunal’s inability to grant specific relief does not prevent parties, in a shareholder’s agreement for example, from agreeing to arbitrate disputes among themselves. The Fulham judgement highlights the English courts’ support for enforcing arbitration agreements in intra-corporate disputes. Based on this ruling it is difficult to imagine a situation where claims under a shareholders agreement would be deemed non-arbitrable.

Applying this to the South African context, when one considers the broad range of relief under section 163, there are only a few examples of relief that only a court can grant, such as an order commencing business rescue proceedings on behalf of the company, or an order winding up the company.

There are many other forms of relief within section 163 that an arbitrator is empowered to grant – for instance, an order directing an issue or exchange of shares or an order requiring the payment of compensation to an aggrieved person. The arbitrator also remains competent to resolve the factual disputes between the parties, as agreed in the arbitration agreement.

In light of the wording of the IAA, where a party seeks relief that only a court is empowered to grant, this alone does not appear to be sufficient reason to disregard an arbitration agreement. The arbitrator remains competent to resolve the factual disputes between the parties, as agreed. The successful party is then able to approach a competent court requesting the desired relief available under section 163 based on the arbitrator’s findings.

Conclusion

Although South African arbitration law has seen positive developments, certain areas still require alignment with modern arbitration practices. The interaction between the oppression remedy and the enforcement of arbitration agreements is one such area.

While the Peel judgement remains biding legal precedent in South African law, the specific wording of the IAA appears to provide sufficient support for South African courts, in future, to follow the same approach as the English Court of Appeal in Fulham.

 

Jonathan Ripley-Evans is a partner, Fiorella Noriega Del Valle is a director and Kyle Melville is an associate at Herbert Smith Freehills. Mr Ripley-Evans can be contacted on +27 10 500 2690 or by email: jonathan.ripley-evans@hsf.com. Ms Del Valle can be contacted on +27 10 500 2691 or by email: fiorella.noriega@hsf.com. Mr Melville can be contacted on +27 10 500 2680 or by email: kyle.melville@hsf.com.

© Financier Worldwide

BY

Jonathan Ripley-Evans, Fiorella Noriega Del Valle and Kyle Melville

Herbert Smith Freehills

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