In December 2025, the Supreme Court of Appeal held that an arbitrator has no power to declare a municipal construction agreement invalid for non-compliance with constitutional procurement requirements. Only a court may make such a finding under section 172 of the Constitution.
A property development company entered into a written agreement with a local municipality to construct access roads and water infrastructure for a shopping mall. Both parties knew the municipality lacked funds at the time and agreed that reimbursement would occur in future financial years. The municipality later raised defences against a claim for payment of R23 million which was referred to arbitration, including that the agreement was unlawful for non-compliance with competitive bidding processes required by section 217 of the Constitution and the Municipal Finance Management Act of 2003 which were upheld by the arbitrator.
The developer sought to review and set aside an arbitration award that declared the agreement invalid. It argued that the arbitrator exceeded their powers by pronouncing on constitutional invalidity, a matter exclusively reserved for courts.
The municipality contended that the arbitrator acted within the scope of the arbitration agreement, which required determination of all disputes between the parties, including the validity of the contract. The municipality argued that the arbitrator did not make a constitutional ruling but simply found the contract unlawful.
Section 217 of the Constitution requires organs of state to procure goods and services through a system that is fair, equitable, transparent, competitive and cost-effective. Section 172 provides that only a court may declare conduct inconsistent with the Constitution invalid and grant just and equitable relief.
The Supreme Court of Appeal reaffirmed that section 2 of the Arbitration Act must be interpreted to exclude an arbitral determination of any constitutional matter. Furthermore, section 109(2) of the Municipal Systems Act prohibits municipalities from submitting to arbitration any matter involving a decision on their status, powers, duties, or the validity of their actions or by-laws.
The Arbitration Act does not empower arbitrators to decide constitutional matters. The validity of public procurement contracts relates to the question whether administrative and executive actions are in conformity with the procurement standards which is solely a question which falls within the realm of public law over which the courts have exclusive competence to decide.
The court found that the arbitrator erred in assuming jurisdiction to declare the agreement invalid. The issue falls exclusively within the competence of courts. Consent by the parties to refer the dispute to arbitration could not confer powers on the arbitrator that the law does not allow. Consequently, the arbitration award was set aside.
This decision underscores the limits of arbitration in disputes involving public law and constitutional compliance. While arbitration can resolve private law issues, public law disputes, including municipal procurement issues, remain the domain of the courts. Parties should be cautious in this regard when drafting arbitration clauses in contracts involving organs of state.