Construction agreements and what an arbitrator may decide upon

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Author: Stoffel Ackermann
Director STBB | Smith Tabata Buchanan Boyes

It is a requirement for arbitration hearings that the disputing parties clearly identify and agree as to what it is that they require the Arbitrator to make a finding on. The rationale for this requirement is fairness, in that a party needs to know what the case is that he has to meet.

But disputes are often alike to tipping an arrangement of domino pieces: one allegation can trigger various related issues, each which in turn sets off reliance on further (and probably also disputed) issues.  A vast majority of agreements found in the realm of construction law contain arbitration clauses, and it is therefore especially in this field of law that one encounters judgments regarding parties’ renewed litigation, during or after the arbitration, where a party disputes the arbitrator’s powers to make findings on alleged additional issues in the arbitration .
Recent case law

In the November 2012 judgment in OMM Design Workshop CC v Segal, the KwaZulu-Natal High Court provided some valuable pointers.  The facts were, briefly, that Mr Diamond (acting on behalf of Diamond Igoda View (Pty) Ltd) appointed OMM Design Workshop CC (OMM) to render architectural and related services in connection with the construction of an elaborate residence in East London.  The agreement provided that any dispute between the parties may be referred to arbitration (‘the initial agreement’).

A dispute arose between the parties regarding the amount of fees charged by OMM and this was ultimately referred for arbitration, Diamond noting in his communication to OMM that he will outline the scope of the dispute in due course, as the issues had not been defined yet.  At a pre-arbitration meeting, both parties agreed that their dispute fell within the ambit of their initial agreement and Diamond also furnished a general summary of the issues in dispute. The precise ambit of the disputed issues was accordingly not set out in the declaration of the dispute. The parties also agreed that the Standard Procedure Rules for the Conduct of Arbitration’ would apply to the proceedings.
Diamond later on delivered his statement of claim which set out his complaints relating to the Architect’s fees and incorporated a claim for a refund of fees paid.  Shortly before the date of the actual arbitration, Diamond gave notice of his intention to amend his claim. This involved a number of new claims, substantially increasing the value of the claim (by some R 4 million) as it included new claims relating to the alleged failure by the architect to perform its contractual services correctly.

OMM objected to the inclusion of the new claims and argued that they did not fall within the scope of the dispute that the parties originally declared.  This issue was argued before the arbitrator who made an interim award allowing Diamond to amend his statement of claim to introduce the new claims.  This triggered OMM’s application to Court for the review and setting aside of the arbitrator’s interim award.  It argued that whilst the new claims fell within the ambit of the initial agreement, the ambit became limited when Mr Diamond submitted his statement of claim. An amendment after that time, absent agreement by the parties to allow it, was contrary to the provisions of the Arbitration Act and the initial agreement.

The Court found in favour of Mr Diamond, holding that:

(i)  the evidence showed that the parties never circumscribed the ambit of their dispute with such precision as to warrant a refusal to amend it;
(ii)  Mr Diamond had reserved the right to define the scope of the dispute in his initial referral of the dispute and the amendment should therefore be allowed;
(iii) the Standard Arbitration Rules which the parties agreed would apply, allowed for such an amendment where the dispute was not precisely defined;
(iv) such amendment is also in line with the provisions of the Arbitration Act, as it allows a party who did not reserve the right to amend the claim later to add issues that are covered by the original arbitration agreement, unless there are reasons for refusing the amendment as provided for in the Arbitration Act; and
(v) in any event, the wording of the arbitration clause in the initial agreement was such as to allow the addition of further related issues in dispute.

Lesson learned
The Court’s finding highlights that once a dispute has been declared, all claims and counterclaims between the parties which would be covered by their agreement to arbitrate can be dealt with in one arbitration, subject to the usual discretion of an arbitrator to refuse an amendment and to terms specifically agreed upon in this regard.  It is, in addition, clearly advantageous to obtain expert assistance when defining disputes and also earlier on, when drafting the agreement in which the arbitration clauses are included.