THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT

Reportable

Case no: 201/19

In the matter between:

NAMASTHETHU ELECTRICAL (PTY) LTD
APPELLANT

and

CITY OF CAPE TOWN
FIRST RESPONDENT
JAMES ROBERT GARNER NO
SECOND RESPONDENT

Neutral Citation:
Namasthethu Electrical (Pty) Ltd v City of Cape Town
and Another (Case no 201/19) [2020] ZASCA 74 (29 June 2020)
Coram:
NAVSA, MBHA, MOLEMELA, PLASKET and NICHOLLS JJA
Heard:
13 May 2020
Delivered:  This judgment was handed down electronically by circulation to
the parties’ legal representatives by email, publication on the Supreme Court
of Appeal website and release to SAFLII. The date and time for hand-down is
deemed to be 09h45 on 29 June 2020
Summary: Contract- Application for declaration that contract pursuant to
tender vitiated by fraud validly terminated – arbitration clause in a contract
does
not
survive
termination
of
contract
induced
by
fraudulent
misrepresentation – determination by arbitrator following adjudication process
in terms of arbitration clause consequently liable to be set aside.

______________________________________________________________

ORDER
______________________________________________________________

On appeal from: The Western Cape Division of the High Court, Cape Town
(Boqwana J sitting as court of first instance): judgment reported sub nom City
of Cape Town v Namasthethu Electrical (Pty) Ltd and Another [2018]
ZAWCHC 150; [2019] 1 All SA 634 (WCC)
The appeal is dismissed with costs on the scale as between attorney and
client, such costs to include the costs attendant upon the employment of two
counsel.
______________________________________________________________

JUDGMENT
______________________________________________________________

Mbha JA (Navsa, Molemela, Plasket and Nicholls JJA concurring):
[1] This appeal turns on the question whether a dispute resolution clause
in a contract survives the termination of that contract on the ground of
fraudulent misrepresentations made during a tender process. More
specifically, it raises the following issue: Does the clause in the contract in
question requiring the parties to submit any dispute between them to
arbitration or other adjudication process, bind the aggrieved party in an
instance where the contract has been induced by fraud? The Western Cape
Division of the High Court, Cape Town (Boqwana J, sitting as court of first
instance), having found that the contract had been induced by fraudulent
misrepresentations by the appellant, held that a dispute resolution clause in a
contract did not survive the termination of the contract for fraud. Thus, the
High Court also set aside a determination made by the second respondent,
Mr James Garner (Garner), following an adjudication process in terms of the
dispute resolution clause in the contract. The appellant, Namasthethu
Electrical (Pty) Ltd (Namasthethu), appeals against these findings with leave
of the court a quo. The background is set out hereafter.

[2] On 7 March 2014 the first respondent, the City of Cape Town (the
City), advertised a tender for the supply, retrofit and installation of energy
efficient luminaries at the Cape Town Civic Centre. On 25 August 2014, the
City awarded the tender to Namasthethu. The tender had an estimated value
of R29 263 401.75, excluding VAT, and its execution was contemplated to
take 18 months. During November 2014 a written agreement following on the
tender was concluded between the City and Namasthethu. That agreement is
the contract at the centre of this appeal.

[3] On 17 September 2014 an unsuccessful bidder, Citrine Construction
(Pty) Ltd (Citrine), a competitor in the tender process, sought to appeal the
award of the tender to Namasthethu and called on the City to set aside the
award of the tender. Citrine complained that Namasthethu and its directors
had been convicted of fraud and corruption on 13 August 2013, arising from a
complaint by the Construction Industry Development Board (the CIDB). The
City was informed that Namasthethu and its directors were consequently
sentenced to a fine of R200 000 coupled with a wholly suspended sentence of
5 years’ imprisonment. This was the basis of the appeal.

[4] The significance of the complaint located in the appeal in relation to the
present dispute lay in the fact that in its tender submission, Namasthethu had
completed an official tender document declaring that neither it, nor any of its
directors, had in the past five years been convicted of fraud by a court of law.
If the allegations by Citrine were true, it would mean that Namasthethu was
guilty of a fraudulent misrepresentation. In terms of clause 36.1.3 of the
contract, the City was entitled to terminate it where Namasthethu had
committed a corrupt or fraudulent act during the procurement process, or in
the execution of the agreement.

[5] Citrine's complaint, however, was admittedly submitted outside of the
time permitted for appeals in terms of s 62 of the Local Government:

Municipal Systems Act 32 of 2000.1 The City therefore did not regard it as a
valid appeal. But it could not ignore the complaint.

[6] On 25 November 2014, the City sent a letter to the appellant, stating
that it had come to its attention that Namasthethu Electrical (Pty) Ltd t/a
Nationwide Electrical and/or its directors during August 2013 had been found
guilty on charges relating to fraud and corruption. Namasthethu was required
to respond.

[7] Namasthethu responded by letter dated 27 November 2014, written by
one S Chetty, indicated to be the chief executor officer of Namasthethu,
stating that neither it nor its sole director, S Chetty, had been convicted of
fraud and corruption during August 2013. The letter also confirmed that
Namasthethu was cited as a respondent in civil proceedings that had since
been finalised, but that no order had been made against it.

[8] The City replied to Namasthethu on 3 December 2014, stating that it
had now received information from the CIDB which indicated that
Namasthethu and/or its directors had on 13 August 2013 been found guilty, in
terms of a plea and sentence agreement, entered into under s 105A of the
Criminal Procedure Act 51 of 1977, on various charges of fraud and
corruption. The information indicated further that Namasthethu and/or its
directors were sentenced to a fine of R200 000 plus five years' imprisonment,
the latter of which was suspended on certain conditions. Namasthethu was
notified that the matter would be referred to the City's Forensics, Ethics and
Integrity Department (FEID) for further investigation and it was requested to
furnish a response within seven days. The FEID was formally instructed by
the City on 9 December 2014 to investigate the allegations against
Namasthethu.

1 Section 62(1) provides:
'A person whose rights are affected by a decision taken by a political structure . . . of a
municipality in terms of a power or duty delegated or sub-delegated by a delegating authority
to the political structure . . . may appeal against that decision by giving written notice of the
appeal and reasons to the municipal manager within 21 days of the notification of the
decision.'

[9] Namasthethu responded to the City's letter on 12 December 2014,
stating that the sole director of Namasthethu at the time of the tender was Mrs
Shamla Chetty. Reference was also made to an attached letter, ostensibly
written by one Colonel K Naidoo of the South African Police Service (SAPS)
Anti-Corruption Task Team, which recorded that no criminal conviction was
obtained against Namasthethu or Chetty under criminal matter PMB CAS
611/5/2012 or case number 41/66/2013, as well as that 'Shamla Chetty was
not an accused at the finalisation of the criminal matter . . .'.

[10] FEID's forensic investigation into Namasthethu took a long time and
was completed around the beginning of 2016. In its report to the City
Manager, dated 26 February 2016, FEID confirmed that there had been a
number of false misrepresentations and other fraudulent conduct on the part
of Namasthethu. It was inter alia stated in FEID's report that:
‘… Namasthethu and its directors (S Chetty and R Chetty) were criminally charged
with fraud and corruption [while] Namasthethu, under the trading name of Nationwide
Electrical and R Chetty, who at all relevant times acted as a director, were convicted
in the Commercial Crimes Court in Pietermaritzburg on 7 November 2013, less than
[a] year prior to the date of the tender application on 240Q/2013/2014.
… Shamla Chetty [the wife of R Chetty] made a prima facie misrepresentation to the
City when she stated in the negative on the tender declaration to the question
whether any of the directors or the company/entity has been convicted by a court of
law for fraud or corruption during the past five years. This amounts to fraud.
… S Chetty in her tender submission provided the City with a local business address
for Namasthethu as 7 15th Avenue, Kensington, which was discovered to be false.
Furthermore it was established that the service provider operates from three
containers located at the Civic Centre parking area on Hertzog Boulevard, Cape
Town.’
As a result of these findings, the FEID recommended the termination of the
contract. It also recommended the lodgement of a criminal case of fraud with
the SAPS against S Chetty, R Chetty and Namasthethu for the
misrepresentations relating to information contained in the tender submission.

[11] On 15 March 2016, the City wrote to Namasthethu informing it that the
contract was being cancelled with immediate effect because Namasthethu
had committed fraudulent acts during the tender process, which had resulted
in the tender being awarded to it. The City specifically referred to
Namasthethu's failure to disclose the conviction for fraud and corruption in
November 2013 in the Pietermaritzburg Commercial Crimes Court and the
fact that it had provided a local business address which was fictitious.

[12] Namasthethu disputed the cancellation in correspondence which it sent
to the City without, however, addressing or challenging the specific fraud
allegations against it, and thus the City's reasons for cancellation of the
contract. Its focus was to insist that the dispute surrounding the City's
cancellation of the contract be adjudicated in accordance with the dispute
resolution procedure specified in the contract. It is necessary, at this stage, to
have regard to the relevant clauses:
‘40.1 Should any disagreement arise between the employer or his principal agent or
agents, and the contractor arising out of or concerning this agreement or its
termination either party may give to the other to resolve such disagreement.
40.2 Where such disagreement is not resolved within ten(10) working days of receipt
of such notice it shall be deemed to be a dispute and shall be referred by the party
giving such notice to either,
40.2.1 Adjudication where adjudication shall be conducted in terms of the JBCC
Rules from Adjudication current at the time when the dispute was declared.
Or
40.2.2 Litigation…’

[13] In keeping with its stance that the dispute surrounding the cancellation
of the contract, which in its view was purely a legal matter, be adjudicated in
accordance with the dispute adjudication clause, Namasthethu suggested as
potential adjudicators three senior counsel at the Cape Society of Advocates.
The City, however, persisted in contending that the contract was validly
cancelled on 15 March 2016, and that Namasthethu's insistence on referring
the matter to adjudication, in the face of its fraudulent conduct, was
inappropriate. Thereafter Namasthethu approached the Association of

Arbitrators Southern Africa, which then appointed Garner, a construction
consultant and surveyor, as adjudicator.

[14] The dispute which Namasthethu purported to refer to adjudication, and
in respect of which the Association of Arbitrators was asked to appoint an
adjudicator, concerned the validity of the City's cancellation of the contract.
However, this dispute did not feature as a self-standing issue in
Namasthethu's Statement of Claim. Neither did it feature as a prayer for relief.
It was instead couched as a component of Namasthethu's claim for damages
in relation to a contract which it claimed to have cancelled lawfully in the face
of the City's alleged repudiation.

[15] Garner prepared a determination on the basis of the Statement of
Claim, and the documents sent to him by Namasthethu, but without hearing
evidence. In that determination, the second respondent upheld various claims
by Namasthethu and found the City liable to Namasthethu for damages in the
amount of R516 671.04, R1 483 210 and R499 559.40, including VAT.

[16] The principal issue to be determined in this appeal is, as stated above,
whether the adjudication clause in the contract survived the termination of that
contract by the City on the basis of fraud.

[17] An ancillary issue is whether the City should be held to have waived its
right to rescind the contract with Namasthethu, alternatively, whether the City
should be regarded as having elected not to do so, in both instances by virtue
of the time taken by it in investigating the allegations of fraud against
Namasthethu.

[18] The appellant's challenge against the High Court's findings can be
summarised as follows. It was contended that, on a proper construction of the
contract, the parties contemplated that the disputes regarding the cancellation
of the contract, including those involving allegations of fraud during the tender
process, were subject to the dispute resolution process agreed to by the
parties. It was submitted that the dispute resolution clause set out above is

widely worded so as to encompass disputes of whatever nature. All the more
so, it was argued on behalf of Namasthethu, if regard is had to clause 36,
which deals, inter alia with termination, after failure by the contractor to
comply with certain contractual obligations and on failure to cure the default,
after being put on terms. Clause 36 also permits, as stated earlier, the City to
terminate the agreement on the basis of corrupt or fraudulent acts by the
contractor. This, so it was submitted on behalf of Namasthetu, supported its
view that disputes of any kind were to be referred for adjudication in terms of
the dispute resolution clause.

[19] It was also submitted on behalf of Namasthetu that there was no
contractual or other basis cognisable in law for the judicial review of the
second respondent's determination, whose determination was in any event
not manifestly unjust.

[20] Furthermore, it was contended that the City had waived its entitlement
to terminate the contract and/or elected not to do so because of the
considerable amount of time taken by it in investigating the allegations of
fraud against the appellant and making a decision in relation thereto.

[21] Finally, as far as the allegations of fraud against it were concerned, the
appellant argued that there was a material dispute of fact in respect of the
merits of these allegations and that its version should not have been rejected
by the court a quo. In effect, the appellant disputed that it was ever charged
and convicted as an accused for fraud and corruption.

[22] The City, on the other hand, submitted that the contract was void,
alternatively voidable, as a result of specified fraudulent misrepresentations
and non-disclosures by the appellant. Upon being satisfied that there had in
fact been fraud on the part of the appellant, on the strength of a
comprehensive forensic investigation, so it was contended, the City elected to
terminate or rescind the contract and validly did so. The one issue that was
not in contestation, so it was argued, was the conviction of Ravan Chetty, who

was a director of Namasthethu, within the five year period preceding the
advertisement of the tender. Fraud, so it was contended, unravelled all.

[23] It is common cause that when Ms Shamla Chetty, a director of the
appellant, completed and submitted the tender documentation on behalf of the
appellant on 1 April 2004, she expressly wrote 'NO' in the specified column of
para 1.3 of the declaration in schedule 4 of the documentation. This was in
response to the question specifically asked therein, namely, 'Was the tenderer
or any of its directors convicted by a court of law (including a court of law
outside of the Republic of South Africa) for fraud or corruption during the past
five years?'

[24] The appellant had denied the alleged criminal convictions for fraud and
corruption. However, it conceded that criminal charges of fraud and corruption
were indeed laid against Ms Shamla Chetty (accused number 1), Mr Ravan
Chetty (accused number 2) and Namasthethu Electrical (Pty) Ltd (accused
number 3) and that the charges against Ms Chetty were later withdrawn. It
then contended that Mr Ravan Chetty had pleaded guilty on charges of fraud
and corruption in his personal capacity, as well as on behalf of 'Nationwide
Electrical', a sole proprietorship, as opposed to Namasthethu trading as
Nationwide Electrical. Furthermore, as Namasthethu was only incorporated as
a company at a later stage, certain of the charges in respect of which there
was a guilty plea pre-dated the incorporation of Namasthethu as a company.
The appellant then submitted that, notionally, it was possible for the sole
proprietorship to have continued to trade even after Namasthethu had been
incorporated, whereas it was not possible for Namasthethu to have traded
before it was incorporated.

[25] In November 2013, the appellant’s director, Ravan Chetty, was
criminally convicted of fraud and corruption. That was a relevant and
undisputed fact. It is not necessary to interrogate the name change of the
company and whether it was an expedient measure. Nor is it necessary to
investigate any further the suggestion on behalf of the City that the relevant
charge sheet appears to have been suspiciously altered. The City and other

state entities are entitled to be concerned about the integrity of company
directors with whom they envisage doing business. It was entitled to know
whether persons who were corrupt or fraudulent had been directors during the
relevant window period. It is for that reason that the tender documents
required answers to questions about convictions related to fraud and corrupt
activities. Ravan Chetty’s conviction, which ultimately is common cause, is the
crucial element in this appeal. It is worth noting that Mr Ravan Chetty, who
purportedly resigned as a director of Namasthethu with effect from 12 May
2011, was however still involved with Namasthethu and the tender, as on 11
April 2014 he met with one Mr Wayne Thomas to discuss awarding 25 per
cent of the tender to the latter’s company as a local sub-contractor.

[26] There was no denial that the appellant had in its tender given a
fictitious business address as 7 15th Avenue, Kensington, Maitland, Cape
Town. As a result, the unavoidable inference is that this was done to give the
impression that the appellant had a local office. The explanation given in the
answering affidavit, that the premises were identified by an unspecified project
manager, whose confirmation affidavit is glaringly missing, and that the
appellant never took up those premises because the City provided space for
the premises in containers located at the site, is contrived and nonsensical
and was correctly rejected by the court a quo. Clearly, the appellant must
have known that a Cape Town business address was required, for otherwise
it would not have pretended that it had one and filled in a false address. There
is no gainsaying the fact that in a tender adjudication process, points get
awarded in respect of locality.2

[27] In the end, having considered the conduct of the appellant during and
after the tendering process, the court a quo was satisfied 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

2 Esorfranki Pipelines (Pty) Ltd and Another v Mopani District Municipality and Others [2014]
ZASCA 2; [2014] 2 All SA 493 (SCA) para 11.

effectively elected to rescind.3 I am unable to fault the court a quo in arriving
at this conclusion.

[28] The question that must now be answered is whether, in the light of the
fraudulent and corrupt conduct of which the appellant was undoubtedly guilty,
the City, after validly cancelling the contract, can be compelled to submit to an
arbitration process in accordance with the dispute resolution clause in the
contract, an issue to which I now turn.

[29] It is trite law that fraud is conduct which vitiates every transaction
known to the law. In affirming this principle, this court, in Esorfranki Pipelines
(Pty) Ltd,4 referred with approval to Lord Denning's dicta in Lazarus Estates
Ltd v Beasley,5 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 . . .'.

[30] As regards an arbitration or similar adjudication clause contained in an
agreement which was found to have been induced by fraud, this court has
emphatically ruled that once the agreement had been rescinded by an
aggrieved party, the said arbitration clause cannot stand. The reason, this
court stated per Cameron JA in North West Provincial Government and
Another v Tswaing Consulting CC and Others,6 was because '. . . the
arbitration clause was embedded in a fraud-tainted agreement the province
elected to rescind' and 'cannot survive the rescission', for 'to enforce the

3 See Bowditch v Peel and Magill 1921 AD 561 at 572: 'A person who has been induced to
contract by the material and fraudulent misrepresentations of the other party may either stand
by the contract or claim a rescission.'
4 Op cit fn 4 para 25.
5 Lazarus Estates Ltd v Beasley [1956] 1 QB (CA) at 712.
6 North West Provincial Government and Another v Tswaing Consulting CC and Others
[2006] ZASCA 108; 2007 (4) SA 452 (SCA) para 13. See too Wayland v Everite Group Ltd
1993 (3) SA 946 (W); and Absa Bank Limited v Moore and Another [2016] ZACC 34; 2017 (1)
SA 255 (CC) para 39, where Cameron J warned that the maxim 'fraud unravels all' was '... not
a flame-thrower, withering all within reach'. He continued: ‘Fraud unravels all directly within its
compass, but only between victim and perpetrator, at the instance of the victim. Whether
fraud unravels a contract depends on its victim, not the fraudster or third parties'.

arbitration agreement, the tainted product of [the guilty contractor’s] fraud,
would be offensive to justice'.

[31] In North East Finance (Pty) Ltd v Standard Bank of South Africa Ltd7
this court had occasion to again consider the question of fraud in relation to
an arbitration clause and reiterated that the effect of fraud that induces a
contract is, in general, that the contract is regarded as voidable. This means
that the aggrieved party may elect whether to abide by the contract and
possibly claim damages, or to resile from it and regard the contract as void
from inception. The court held that the arbitration clause could not survive in
the face of allegations of fraud by one party, even though it expressly included
the phrase 'any question as to the enforceability of this contract'.8 Thus,
disputes regarding the validity or enforceability of contracts induced by
fraudulent misrepresentation and non-disclosures were not generally intended
to be arbitrable.9

[32] Relying on what was held in Heyman v Darwins Ltd,10 the court stated
that the position might only change if the parties specifically made provision in
the contract for such a dispute being referred to arbitration.  In Heyman, Lord
Peter expressed this as follows:
'… I see no reason why, if at the time when [the contracting parties] purport to
make the contract they foresee the possibility of such a dispute arising, they
should not provide in the contract itself for the submission to arbitration of a
dispute as to whether the contract ever bound them or continues to do so.
They might, for instance, stipulate that, if a dispute should arise as to whether
there had been such a fraud, misrepresentation or concealment in the
negotiations between them as to make a purported contract voidable, that
dispute should be submitted to arbitration’.11

7 North East Finance (Pty) Ltd v Standard Bank of South Africa Ltd [2013] ZASCA 76; 2013
(5) SA 1 (SCA).
8 Ibid para 26.
9 Ibid para 30.
10 Heyman v Darwins Ltd [1942] 1 All ER 337 (HL) at 357B-D.
11 Ibid.

But even then, as the House of Lords stated in Heyman, it may require very
clear language to effect this result.12

[33] In the present case, the question that must be answered is whether
there is clear and unequivocal language in the contract or even the arbitration
clause itself, providing for this kind of dispute to be addressed by arbitration or
adjudication. Alternatively, can it be inferred that the parties foresaw a
possible dispute regarding whether the agreement was induced by fraud, in
which event the City would be required to participate in certain dispute
resolution procedures? Needless to say, this must be determined in line with
the generally accepted approach to the interpretation of contracts, viz. by
having regard to the context in which the agreement was concluded.13 In
addition, the contract must be interpreted so as to give it a commercially
sensible meaning.14

[34] A simple reading of the arbitration clause 40.1 reveals that it merely
provides that one party may give notice to the other to resolve a disagreement
in the event of there being a disagreement 'arising out of or concerning this
agreement or its termination'. Clearly, this clause contemplates a dispute
arising out of the agreement when it was accepted to be valid from the outset.
There is no suggestion that it covers fraud, nor that it involves an exception to
the general rule enunciated above. Indeed, clause 40.7 provides that
recording of a dispute under clause 40.1 'shall not relieve the parties from
liability for the due and timeous performance of their obligations', thereby
indicating that the rest of the agreement is considered to be valid. In any
event, even the giving of 'notice' as stipulated in clause 40.1 would clearly not
apply to a situation of a contract which the aggrieved party has already validly
terminated or cancelled as a result of fraud.

12 See also Gutsche Family Investments (Pty) Ltd and Others v Mettle Equity Group (Pty) Ltd
and Others [2007] ZASCA 45; 2007 (5) SA 491 (SCA) para 14, where this court held that
where there is a dispute between contracting parties as to an arbitrator's jurisdiction, an
arbitrator may only finally determine his (or her) own jurisdiction if this is 'provided for
specifically, and in the clearest terms'.
13 See Natal Joint Municipal Pension Fund op cit at fn 3.
14 Ibid para 18.

[35] Clause 36 is of no assistance to Namasthetu. It deals with termination
for failure to meet contractual obligations, different from termination based on
fraud or corrupt activity. Notice of default has to be given in respect of breach
of contractual obligations before termination can take place. Fraud is provided
as a separate and distinct basis for termination. One can hardly be expected
to give notice to cure fraud or corrupt conduct. Disputes that arise for
adjudication in terms of an arbitration clause usually relate to a failure to
comply with contractual obligations and the consequences that follow.

[36] Clause 40 does not expressly, or by any necessary implication, provide
that an adjudication under that clause can determine the validity or
enforceability of the agreement when the City claims that it has been vitiated
by fraud. In other words, it does not enable an adjudicator to determine
whether the agreement was induced by fraud and void, or voidable, as a
result. Moreover, as pointed out above there can in any event not be any
dispute about Ravan Chetty’s conviction.

[37] As this court emphasised in North East Finance (Pty) Ltd,15 in order for
the validity of a contract terminated for fraud to be determined by reference to
adjudication, the contract must specifically say so, or otherwise clearly
indicate as much. In this case, the contract unquestionably does not.

[38] In the light of the conclusions reached above, it follows that the referral
of the dispute to the second respondent for adjudication was invalid and
unlawful and that the court a quo was correct in setting aside his
determination following on an unlawful adjudication process. Clearly, the
second respondent was not clothed with any authority to adjudicate the
dispute.

[39] There can be no question of waiver on the part of the City. It might
have acted with greater urgency but it appears to have been intent on
obtaining verified and accurate information.

15 Op cit at fn 9.

[40] The court below considered that the appellant’s conduct justified a
punitive costs order. I can see no fault with that conclusion. Our courts have
repeatedly recognised the widespread nature of fraud and corruption and its
corrosive effect on society. I am in agreement with counsel for the first
respondent that a punitive costs order on appeal is equally justified.

[41] The following order is made:
The appeal is dismissed with costs on the scale as between attorney and
client, such costs to include the costs attendant upon the employment of two
counsel.

________________
B H Mbha
Judge of Appeal

APPEARANCES:

For appellant:
S Rosenberg SC

Instructed by:

Anand-Nepaul Attorneys, Durban

Honey Attorneys, Bloemfontein

For respondent:
P Farlam SC

Instructed by:

WJ Da Grass Attorneys, Athlone

Holmes Attorneys, Cape Town
THE SUPREME COURT OF APPEAL
REPUBLIC OF SOUTH AFRICA

MEDIA SUMMARY – JUDGMENT DELIVERED IN THE SUPREME COURT OF APPEAL

Namasthethu Electrical (Pty) Ltd v City of Cape Town and Another (Case no 201/2019) [2020]
ZASCA 74 (29 June 2020)

From:
The Registrar, Supreme Court of Appeal

Date:
29 June 2020

Status:
Immediate

The following summary is for the benefit of the media in the reporting of this case and does not
form part of the judgment of the Supreme Court of Appeal

Today the Supreme Court of Appeal (SCA) handed down judgment in an appeal against an order of the
Western Cape Division of the High Court, Cape Town (Boqwana J, sitting as court of first instance).
The appeal was dismissed with costs.

The matter concerned the validity of a contract concluded between the first respondent, the City of Cape
Town (the City), and the appellant, Namasthethu Electrical (Pty) Ltd (Namasthethu), following on the
City’s award of a tender to it in 2014.  In issue was whether the City was within its rights to terminate
the agreement and in fact validly did so, or whether, as the appellant contended, the disagreement
between the parties was a dispute which fell to be decided in the manner provided for in the contract.

The City had advertised a tender in March 2014 for the supply, retrofit and installation of energy efficient
luminaries at the Cape Town Civic Centre. Namasthethu was the successful bidder and was awarded
the tender in August of that year. A contract was subsequently concluded between the City and
Namasthethu during November 2014.

The contract included, amongst other things, a clause regulating the settlement of disputes. It provided
that any ‘disagreement’, arising out of or concerning the tender agreement or its termination, if not
resolved between the parties within ten days after either party having given the other party notice
thereof, was to be regarded as a ‘dispute’ and then referred to either adjudication or litigation, in both
alternatives at the instance of the party giving such notice. The contract also made provision for the
circumstances in which the contracting parties could lawfully terminate the agreement. One such

instance was the City’s right to cancel in the event of Namasthethu having committed a corrupt or
fraudulent act, either during the procurement process or in the execution of the contract.

Less than a month after awarding the tender to Namasthethu, the City’s decision was challenged by
one of the unsuccessful bidders through an internal appeal. Therein it claimed that Namasthethu and
its erstwhile directors, Mr Ravan Chetty (R Chetty) and his wife, Ms Shamla Chetty (S Chetty), had
been convicted of fraud and corruption in 2013. The City subsequently instructed the Forensics, Ethics
and Integrity Department (FEID) to investigate the allegations against Namasthethu. The City regarded
this as serious for, if it were true, it meant that Namasthethu had been guilty of a fraudulent
misrepresentation. In the declaration of past supply chain management practices it was explicitly
required of each tenderer to indicate whether it, or any of its directors, had been convicted by a court
of law for fraud or corruption during the past five years. Namasthethu answered that question in the
negative. It also confirmed this choice by marking as ‘not applicable’ the space provided for the details
of any such convictions.

The City informed Namasthethu of the information that had come its attention and requested a response
on the accuracy of the allegations made against it. S Chetty, who was indicated to be the chief executive
officer of Namasthethu, replied by stating that neither her nor Namasthethu had been convicted of fraud
or corruption in August 2013, nor of any other charge during any other period. However, the City was
provided with further information from the Construction Industry Development Board (CIDB) which also
indicated that Namasthethu and/or its directors had been found guilty and sentenced. Namasthethu
responded with a letter, ostensibly from Colonel K Naidoo of the South African Police Service (SAPS)
Anti-Corruption Task Team, confirming that no conviction was obtained against Namasthethu or Chetty
under the relevant case numbers. The allegations were however ultimately confirmed by the findings of
the FEID.

S Chetty had thus been guilty of three separate misrepresentations during the precontractual phase of
the tender process: First, when she falsely stated that neither the company nor any of its directors had
been convicted by a court of law for fraud or corruption during the past five years; secondly, when she
included Namasthethu’s CIDB certificate in the tender application while knowing that her husband, R
Chetty, admittedly obtained it through corrupt and fraudulent means; and, thirdly, when she indicated
in the tender bid that the local business address of Namasthethu was 7 15th Avenue, Kensington,
Maitland, which was later discovered to be false.

As a result of its findings, the FEID recommended amongst other things that the City terminate the
contract with Namasthethu. Thus, on 15 March 2016 the City wrote to Namasthethu informing it that
the contract was being cancelled with immediate effect due to the fraudulent acts committed during the
tender process, which had resulted in the tender being awarded to it. Namasthethu disputed the City’s
right to cancel the contract. It insisted that the dispute be adjudicated in accordance with the dispute

resolution procedure provided in the contract. It approached the Association of Arbitrators Southern
Africa who then appointed Mr James Garner, the second respondent, a construction consultant and
surveyor, as adjudicator. Mr Garner decided the issue on the papers and other documents supplied to
it by Namasthethu, but without hearing evidence. Various claims of were upheld against the City.

The principle issue for determination by the SCA was thus whether the dispute resolution clause of the
contract survived the termination of that contract by the City for fraud. An ancillary issue was whether
the City should be held to have waived its right to rescind the contract with Namasthethu, alternatively,
whether the City should be regarded as having elected not to do so, in both instances by virtue of the
time taken by it in investigating the allegations of fraud against Namasthethu.

Namasthethu contended that the dispute resolution clause was widely worded so as to encompass
disputes of whatever nature. According to it the City had, in any event, waived its entitlement to
terminate the contract and/or elected not to do so because of the considerable amount of time taken by
it in investigating the allegations of fraud against Namasthethu and making a decision in relation thereto.
The City’s view was that the contract was void, alternatively voidable, as a result of the specified
fraudulent misrepresentations and non-disclosures by Namasthethu. When it was satisfied that there
had in fact been fraud on the part of Namasthethu, on the strength of a comprehensive forensic
investigation, it elected to terminate and validly did so.

The SCA held that the City and other state entities were entitled to be concerned about the integrity of
company directors with whom they envisaged doing business. It found this to be the reason that the
tender documents required answers to questions about convictions relating to fraud and corrupt
activities. It agreed with the finding of the high court that all of the requirements of a fraudulent
misrepresentation had been met. This had rendered the contract voidable at the instance of the City,
which it then legitimately elected to terminate.

On whether the City could be compelled to submit to an arbitration process in accordance with the
dispute resolution clause in the contract, the SCA began by reiterating the principle that fraud vitiated
every transaction known to the law. It held that an arbitration or similar adjudication clause could not
stand once an agreement that was found to be induced by fraud had been rescinded by the aggrieved
party. In general, disputes regarding the validity or enforceability of contracts induced by fraudulent
misrepresentation and non-disclosures were not intended to be arbitrable. Only where specific provision
was made, using very particular language, could contracting parties be said to have made provision for
the submission to arbitration of a dispute as to whether the contract ever bound them or continues to
do so.

Having regard to the wording of the dispute resolution clause in issue and taking into account the context
in which the agreement was concluded, the SCA held that the dispute resolution clause clearly

contemplated a dispute arising out of an agreement that was accepted to be valid from the outset. It
found that there was no suggestion that the clause covered fraud or that it involved an exception to the
general rule as stated above.

The SCA distinguished the situation of fraud or corrupt activity from other instances of breach for the
failure to perform a contractual obligation. While the right to terminate the contract for breach of a
contractual obligation necessitated a prior notice of default, this was held not to be case in respect of
fraud, which was a separate and distinct basis for termination. The SCA found that an innocent
contracting party cannot be expected to give notice to the fraudulent counterpart to cure the fraudulent
or corrupt conduct. The dispute resolution clause did not enable an adjudicator to determine whether
the contract was induced by fraud and, if so, whether it was void or voidable as a result.

The SCA held that the referral of the dispute to Garner was invalid and unlawful and that the court a
quo was correct in setting aside his determination. It found that the City had not waived its entitlement
to terminate the contract due to the considerable amount of time taken to investigate the allegations
against Namasthethu; it was merely intent on obtaining accurate information before making a final
decision. The SCA noted the widespread nature of fraud and corruption, and its corrosive effect on
society, and found that a punitive costs order on appeal was justified.

In the result, the appeal was dismissed with costs on the scale as between attorney and client, such
costs to include the costs attendant upon the employment of two counsel.