State-owned entity's internal checks and balances do not justify failure to comply with adjudication award

This issue was recently raised in a case before the High Court in South Africa. Although the court did not have to rule on the point in the end, we have analysed what might happen if state-owned entities raised similar arguments in other cases and concluded that they would fail.

The legal position and background

Under South African law, an adjudicator's award is binding and enforceable as a matter of contractual obligation. Unlike arbitration proceedings, adjudication proceedings in South Africa are not regulated by statute leaving the successful party in those proceedings with no other option but to approach the courts to compel the unsuccessful party to comply with the adjudicator's award in the event that they fail or refuse to do so.

One of the common reasons cited by unsuccessful parties for their refusal to comply with an adjudicator's award is that they have notified their dissatisfaction with the award and believe that this undoes its binding effect and enforceability until the arbitration proceedings are finalised. However, the courts have routinely dismissed this as a legitimate basis for non-compliance after reviewing the relevant construction contract.

A more unusual attempt to escape liability and the enforceability of an adjudicator's award was raised in the recent case of Aveng (Africa) Pty Ltd v Eskom Holdings SOC Limited and Another, which came before the High Court in Johannesburg. In this case, Eskom advanced, amongst others, the argument that its implementation of the adjudicator's award in making payment to Aveng is conditional on the prior compliance and completion of its internal governance processes as a South African state-owned entity (the internal governance argument).

The specifics in this case

Aveng raised adjudication proceedings against Eskom to recover additional costs which led to various disputes being referred to adjudication. In the adjudication, Eskom conceded many of the additional costs claimed and the adjudicator awarded a sum of compensation due to Aveng. Eskom did not notify any dissatisfaction with the adjudicator’s award.

All of Aveng’s out-of-court attempts to recover payment of the compensation awarded, failed. As a result, Aveng initiated High Court proceedings in a bid to enforce the adjudicator’s award. In defence, Eskom raised, amongst others, the internal governance argument. Eskom further cited its accountability as a state-owned entity to the National Treasury and its obligations under procurement legislation such as the Public Management Finance Act No. 1 of 1999 (PFMA) which it claimed it was required to adhere to prior to making payment to Aveng.

Aveng disputed Eskom's arguments by, amongst other things, relying on the precedent set by the South African courts in earlier cases. Eskom subsequently conceded that its internal governance argument was not legally sustainable, and the court ruled that "to decline ordering Eskom to pay what is due in terms of the contract would undermine the contract itself".

Although Eskom ultimately conceded at the hearing of the application that the internal governance argument did not apply, the fact that it had raised the argument initially raises questions as to whether the argument may be raised again in other circumstances by state-owned entities and what the implications of that may be for businesses contracting with those entities or finding themselves seeking to enforce an adjudicator’s award before the courts.

A review of the legal arguments

The idea that a state-owned entity’s payment, whether under a construction contract or pursuant to an adjudicator’s award, is made conditional on the uncertain internal governance processes of a state-owned entity is problematic for a number of reasons.

Firstly and depending on the terms of the contract, if payment under the construction contract concluded with the state-owned entity or pursuant to the adjudicator's award were to be made subject to the uncertain internal governance processes of a state-owned entity, it could negatively impact a contractor’s cash flow and ultimately delay the project. Therefore, an aggrieved party or contractor claiming compensation or damages would be at the mercy of the state-owned entity's internal governance processes. This would undermine:

• the adjudicator's award;
• the alternate dispute resolution processes under the contract, which are aimed at resolving disputes speedily to address any risks to cash flow;
• orders of court, and;
• ultimately, the rule of law.

Secondly, claims that the PFMA applies would not be founded. The PFMA was enacted to, amongst other things, ensure accountability, fairness and prevent wasteful expenditure of government funds by state-owned entities in the procurement of goods and services. This legislation does not excuse those entities from their contractual obligations with third parties to make payment arising from the contracts they conclude with third parties or the adjudicator's award issued pursuant to such contract.

If the internal governance argument were to be accepted, this would permit state-owned entities to breach contracts with impunity.

The internal governance argument has major potential implications for construction contractors. Those contractors will welcome the court’s affirmation, in the case between Aveng and Eskom, that state-owned entities are equally bound by their contractual obligations and to the adjudicator’s award issued against them which they are required to implement immediately without delay. It is clear that the internal governance processes of a state-owned entity do not excuse non-compliance with an adjudicator’s award.

Co-written by Natalie Keetsi of Pinsent Masons. To contact Natalie, please email [email protected].