Arbitration Clauses in Commercial Contracts: Enforceable or a Trap?

When two businesses sign a contract, they rarely think about what happens if things go wrong. Buried in the boilerplate, an arbitration clause can quietly redirect any future dispute away from the courts and into a private process governed by a different set of rules. Sometimes that works in both parties’ favour. Sometimes it does not.

Arbitration clauses are common in South African commercial contracts, including in supplier agreements, shareholder arrangements, construction contracts, and professional services agreements. Yet many business owners sign them without understanding what they are agreeing to. This article explains what the law requires and when these clauses are enforceable.

What Is an Arbitration Clause?

An arbitration clause is a provision in a contract that requires the parties to resolve certain disputes through arbitration rather than through the courts. Instead of issuing a summons or launching a High Court application, a party initiates arbitration by serving a written notice on the other party in accordance with the agreement.

An arbitrator, a neutral third party, often a retired judge or an experienced attorney, is appointed to hear the dispute and issue a binding award. Bodies such as the Arbitration Foundation of Southern Africa (AFSA) and the Association of Arbitrators (South Africa) (AASA) administer arbitrations and can appoint arbitrators where the parties cannot agree.

What the Arbitration Act 42 of 1965 Requires

The Arbitration Act 42 of 1965 is the primary legislation governing domestic arbitration in South Africa. Under the Act, the following requirements apply.

• The agreement must be in writing. The Act defines an “arbitration agreement” as a written agreement providing for the arbitration of existing or future disputes. An oral arrangement is not sufficient.
• The subject matter must be arbitrable. Matters that cannot be resolved by arbitration in South Africa include divorces, criminal proceedings, questions of legal status (such as insolvency sequestration or the mental capacity of a person), and company liquidation applications. Commercial and contractual disputes are generally arbitrable.
• The clause must clearly identify the scope of disputes covered. Vague or ambiguous arbitration clauses create uncertainty about which disputes are subject to arbitration and which are not.
• Awards must be made an order of court for enforcement. An arbitration award is binding between the parties, but it does not automatically carry the force of a court order. A party seeking to enforce an award must apply to the High Court in terms of section 31(1) of the Act. Once made an order of court, the award is enforceable as any other court judgment.

Courts retain a limited supervisory role. Under section 3 of the Act, a court may, on good cause shown, set aside an arbitration agreement or order that a particular dispute should not be referred to arbitration. If legal proceedings are started despite a valid arbitration agreement, section 6 allows the court to pause those proceedings so that the dispute can be referred to arbitration. Courts have generally been reluctant to interfere with the arbitration process once parties have agreed to it.

When an Arbitration Clause Becomes a Problem

Arbitration clauses are not inherently disadvantageous, but they can work against a party that did not read them carefully. Common issues include:

• Unlike court proceedings, where the state bears the infrastructure costs, parties to an arbitration pay for the arbitrator’s fees, the venue, and the administration of the process. Arbitration can be more expensive than going to court, particularly for smaller claims.
• Limited grounds for appeal. Arbitration awards are generally final and binding. A court will not overturn an award simply because the arbitrator got the law wrong. The grounds for review are narrow: gross irregularity in the proceedings, misconduct by the arbitrator, or the arbitrator exceeding their authority.
• No precedent value. An arbitration award does not create legal precedent. Each dispute is resolved in isolation, which can be a drawback for parties in recurring commercial relationships.
• Poorly drafted clauses. A clause that fails to specify the procedure for appointing an arbitrator, the seat of the arbitration, or the applicable rules can create delays and disputes about process before the substantive issue is even addressed.

Practical Implications

Understanding arbitration clauses before signing a contract matters for the following reasons.

• You are giving up court access for specified disputes. Once you have agreed to arbitrate, it is generally not possible to litigate that same dispute in court without the consent of the other party.
• The clause needs to work when a dispute arises. A well-drafted arbitration clause specifies the appointing body (such as AFSA or AASA), the number of arbitrators, the seat of arbitration, the applicable procedural rules, and the language of proceedings.
• Domestic and international clauses operate differently. If your contract involves a foreign counterparty or a cross-border element, South Africa’s International Arbitration Act 15 of 2017 may apply rather than the Arbitration Act 42 of 1965, which mainly governs domestic arbitration. The procedural rules, court involvement, and enforcement mechanisms can therefore differ.
• Arbitration is not always cheaper or faster. It depends on the complexity of the dispute, the arbitrator’s fees, and how efficiently the process is managed. Parties should weigh these factors before agreeing to arbitration, particularly for smaller commercial claims.

Conclusion

Arbitration clauses in South African commercial contracts are enforceable when they meet the requirements of the Arbitration Act 42 of 1965: they must be in writing, cover arbitrable subject matter, and be drafted with sufficient clarity to guide the process when a dispute arises. The International Arbitration Act 15 of 2017 provides a more modern framework for cross-border commercial disputes, aligned with the UNCITRAL Model Law.

Arbitration is not a trap by design, but it can operate as one when a party agrees to it without understanding what it means. Before signing any commercial contract that contains an arbitration clause, obtain legal advice on the scope of the clause, the applicable legislation, and the practical implications for how any dispute would be resolved.

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