By Richard Hoal, Partner, Cox Yeats

It is not uncommon in disputes involving municipalities and other organs of state for the question of the validity of the underlying agreement to arise. Some contracts may not be concluded following a proper and lawful public procurement process in terms of Section 217 of the Constitution. Where the parties have agreed to refer their dispute to arbitration, does the arbitrator have the power to declare that agreement constitutionally invalid? This question came before the Supreme Court of Appeal in a judgment delivered on 4 December 2025.

The NAD Property Income Fund Judgment

On 16 February 2016, NAD Property Income Fund (Pty) Ltd ("NAD") and the Bushbuckridge Local Municipality concluded a construction agreement in terms of which NAD would build three driveway roads and water supply infrastructure to service a shopping mall known as the Dwarsloop Mall. NAD would fund the construction, and the Municipality would refund NAD from its budget in the following financial year or years. Both parties knew at the time of contracting that the Municipality did not have money in its budget to pay for the works.

When the Municipality failed to pay, NAD launched an action in the High Court claiming approximately R23.5 million. The Municipality raised a number of defences, including that the agreement contravened section 217 of the Constitution and the provisions of the Municipal Finance Management Act (MFMA) because no competitive bidding process had been followed. The Municipality also argued that its municipal manager had never been authorised to conclude the agreement and that no consensus had been reached on price. It filed a conditional counterclaim seeking an order that the agreement be declared unlawful and set aside.

The Arbitration

Rather than proceed to trial, the parties agreed to refer the dispute to arbitration and retired Judge President Bernard Ngoepe was appointed as the arbitrator. The critical initial issue raised was whether the Arbitrator was empowered to make a finding of constitutional invalidity in relation to the agreement.

The Arbitrator found that he was competent to do so. He reasoned that it would "be idle to suggest that being an arbitrator as opposed to being a court", he should countenance the enforcement of an agreement that was invalid and unlawful. He declared the construction agreement invalid, unlawful and unenforceable for non-compliance with the constitutional and statutory procurement framework. He further found that the Municipality had been unduly enriched by the construction of one of the three driveways and that NAD was entitled to payment for that road.

The High Court Review

NAD brought review proceedings in the Mpumalanga Division of the High Court, arguing that the Arbitrator had exceeded his powers under section 33(1)(b) of the Arbitration Act 42 of 1965. The High Court dismissed the review. Mashile J held that the arbitration agreement, read with section 2 of the Arbitration Act, conferred power on the Arbitrator to deal with the constitutional invalidity of the agreement and that the arbitration agreement did not specifically bar the Arbitrator from dealing with the central issue in dispute.

The Supreme Court of Appeal

The SCA upheld NAD's appeal and set aside the arbitration award. The Court found that the Arbitrator had exceeded his powers.

The Court acknowledged that an arbitrator's powers are derived from the arbitration agreement concluded between the parties. However, those powers are not unlimited. Section 33(1)(b) of the Arbitration Act provides that an arbitration award may be set aside where the arbitrator has exceeded his or her powers. The SCA confirmed that, following its earlier decision in Close-Up Mining v Boruchowitz NO, an arbitral determination of any constitutional matter is excluded from arbitration.

The Court turned to section 172 of the Constitution, which provides that when deciding a constitutional matter, a court must declare any law or conduct inconsistent with the Constitution to be invalid and may make any order that is just and equitable. The keyword is "court." Only a court can make such a declaration.

The SCA drew on the Constitutional Court's decision in Department of Transport v Tasima, which stated that the constitutionality of a contract falls outside an arbitrator's mandate. As the Constitutional Court put it: "Our Constitution confers on the courts the role of arbiter of legality."

The SCA found that the Arbitrator's reliance on the decision in Gobela Consulting CC v Makhado Municipality was misplaced. In Gobela, it was a court that declared the contract unlawful and invalid; that case never held that an arbitrator is endowed with such a power.

The Court emphasised that public procurement is not simply a matter of contract law. When the Municipality contracted with NAD, it was exercising its public powers as an organ of state. Municipalities are bound by section 217 of the Constitution and the determination of whether procurement principles have been complied with must be undertaken before the courts, not in private arbitration proceedings.

The SCA further noted that section 109(2) of the Local Government: Municipal Systems Act expressly provides that a municipality may submit to arbitration any matter "other than a matter involving a decision on its status, powers or duties or the validity of its actions or by laws."

Importantly, the SCA rejected the High Court's reasoning that NAD's consent to the referral conferred jurisdiction on the Arbitrator. The Court held that NAD's consent or acquiescence could not confer on the Arbitrator a power he did not have in law. Because the Arbitrator lacked the power to declare the agreement invalid, the consequential relief he granted on unjust enrichment and lack of authority could not stand either.

The SCA declined to make a referral order under section 20 of the Arbitration Act, leaving it to the parties to engage one another as to how they wish to proceed.

Conclusion

The judgment is an important reminder for arbitrators and professionals in the built environment that an arbitrator's powers, whilst derived from the agreement between the parties, are subject to hard constitutional limits.

An arbitrator may not declare a state contract invalid for non-compliance with section 217 of the Constitution or procurement legislation. Only a court may do so and only a court may grant just and equitable relief under section 172. The consent of the parties cannot expand an arbitrator's jurisdiction beyond what the law permits and municipalities are expressly prohibited by statute from submitting the validity of their actions to arbitration.

Where a question of constitutional invalidity arises during arbitration, the proper course is for the arbitrator to invoke section 20 of the Arbitration Act and refer the question of law to the court for its opinion. Getting this wrong, as this case demonstrates, can result in years of costly litigation and an award that is ultimately set aside in its entirety.

ENDS

About Richard Hoal

Richard is a lead partner in the construction and insurance law teams. He has practised as an admitted attorney in South Africa for over 25 years and has an extensive litigation and business law experience. He has developed a unique speciality in construction and project work, as well as complex insurance casualty claims.

He has advised clients on a range of project development, construction and engineering contracts, including major infrastructural projects undertaken in Southern Africa. He has represented clients in litigation and arbitration proceedings relating to building, engineering and commercial contracts and insurance contracts. He has also represented and assisted main contractors and subcontractors in putting together tenders, reviewing contractual conditions, contract risk assessments and claims formulation, as well as contract and project negotiations with employers. He has also advised a range of clients on commercial transactions and acquisitions.

As a result of this expertise in the construction industry, Richard has been appointed by national insurance companies to advise on issues relating to Occupational Health and Safety investigations, large casualty claims and professional indemnity claims. He has investigated a number of structural collapses and appeared in formal Inquiries.

His insurance practice includes professional indemnity work in the built environment as well as general professions and director and officer liability. He also deals with complex indemnity and recovery claims.

He is a committee member of the Association of Arbitrators Southern Africa and conducts adjudications and arbitrations in the field of construction and engineering law as well as insurance law and professional indemnity claims. He is a member of the International Bar Association Committee on International Construction Projects. He is also a Commissioner in the Small Claims Court. Find out more about Richard here: https://coxyeats.co.za/people/richard-hoal/

About Cox Yeats

Founded by Graham Cox in 1964, Cox Yeats is a full-service South African law firm with offices in Durban, Johannesburg, and Cape Town. The firm is known for its partner-led, collaborative approach and its ability to deliver legal advice that is closely aligned to clients’ commercial objectives. The firm and several of its professionals have also been recognised in national, continental, and international legal directories such as Legal 500, PMR Africa, the African Legal Awards, and Best Lawyers®. This includes being named the 2023 Insurance Law Firm of the Year by Best Lawyers®. Through its membership of TAG Alliances, Cox Yeats also supports clients on cross-border matters across more than 100 jurisdictions worldwide. Visit www.coxyeats.co.za or follow us on LinkedIn for more information.