A contractual clause can’t cure fraud

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Namasthethu Electrical[1] learnt the hard way that it could not enforce a contractual right it had secured through its fraudulent conduct.

The SCA not only confirmed that the City of Cape Town correctly terminated Namasthethu’s tender, but ordered punitive costs when it held that the arbitration clause on which Namasethethu relied did not survive the termination of the contract which was induced by fraudulent misrepresentation.

In so doing the SCA quoted with approval from Lord Denning’s dicta in Lazarus Estates Ltd v Beasley, when he said:

‘No court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved it vitiates judgments, contracts and all transactions whatsoever . . .’

The facts before the SCA were that the City of Cape Town awarded a tender to Namasthethu, and entered into a contract which provided that, in the instance where the agreement was terminated, the dispute should be resolved by way of arbitration.

The City cancelled the contract after discovering that Namasthethu had misrepresented the facts when it declared in its tender submission that neither it nor any of its directors were convicted of fraud by a court of law during the past five years.

The facts showed that Ms Shama Chetty, a director, denied any criminal conviction when completing the tender document. However she had full knowledge that Mr Ravan Chetty, a fellow director, had been criminally convicted of fraud and corruption, and the company had been sentenced to a fine of R200,000 during the five year period in question. Namasthethu further provided a fictitious business address in the tender document to create the impression that it had an office in the city.

Unhappy with the cancellation, Namasthethu relied on the arbitration clause in the contract.

The City persisted with its contention that the contract was validly cancelled and that Namasthethu’s insistence on referring the matter to adjudication in the face of its fraudulent conduct, was inappropriate. Despite that, Namasthethu approached the Association of Arbitrators to appoint an adjudicator.

The arbitrator was required to determine whether Namasthethu was entitled to damages because the City had cancelled the contract. The arbitrator dealt with the matter on the papers and found in favour of Namasthethu, awarding it substantial damages.

However, the SCA found that the court a quo had correctly concluded that all the “requirements of fraudulent misrepresentation had been met which rendered the contract voidable at the instance of the city, which it then validly and effectively elected to rescind.”  [27]

 

In determining “whether the adjudication clause in the contract survived the termination of that contract by the City on the basis of fraud” [16], the SCA concluded that the arbitration clause did not provide for “this kind of dispute to be addressed by arbitration or adjudication” [33] as the clause contemplated “a dispute arising out of the agreement when it was accepted to be valid from the outset” [34].

It further held that the clause was intended to apply to instances where the termination of the contract would flow from a “failure to meet contractual obligations” which was completely “different from termination based on fraud or corrupt activity” [35].

In the circumstances the SCA held that the referral to arbitration was invalid and unlawful, and that the arbitrator “was not clothed with any authority to adjudicate the dispute” [38].

The importance of this judgment: This judgment makes it clear that no subsequent contract between the parties will protect a successful bidder who won a tender through misrepresentation or fraud.

[1] Namasthethu Electrical (Pty) Ltd v City of Cape Town and Another (201/19) [2020] ZASCA 74 (29 June 2020)