The Arbitration Act, 42 of 1965 (“the Act”), makes provision for the Court, on good cause shown, to:

• set aside an arbitration agreement; or

• direct that any particular dispute is not dealt with by arbitration.

Eskom SOC Limited took out a management liability insurance policy with AIG South Africa Limited, which provided liability cover to Eskom’s directors, officers and employees.

The policy included cover in relation to defence costs incurred by a director in the course of legal proceedings brought against the director.

In 2017, various legal proceedings were instituted against Mr Brian Molefe, the Group CEO of Eskom at the time.

Mr Molefe notified AIG of the proceedings and requested an indemnity under the policy in relation to the legal costs being incurred by him in opposing the legal actions.

The policy contained a clause to the effect that, if any payments made by AIG were found ultimately not to be covered by the policy, the insured person would be liable to reimburse AIG.

In response to Mr Molefe’s request for cover, AIG wrote a letter to Mr Molefe in October 2017 advising that AIG would advance funds to cover his defence costs on a without prejudice basis and on the basis that, if it was shown ultimately that he was not entitled to cover under the policy, he would refund the costs in full and on demand.

The policy expressly stipulated that defence costs outlaid by AIG, in relation to a matter where the court determined that the insured had gained a profit or an advantage to which he was not legally entitled, would be reimbursable to AIG.

AIG paid out amounts totalling approximately R4,4m in respect of Mr Molefe’s defence costs.

Ultimately, the Supreme Court of Appeal and the Constitutional Court found that Mr Molefe’s conduct had been unlawful. The findings against Mr Molefe were such as to disqualify him from cover under the policy and entitle AIG to claim reimbursement of the costs it had paid out.

The policy contained an arbitration clause which stipulated that all disputes regarding any aspect of the policy or any matter relating to cover under the policy, which could not be resolved by agreement within 30 days, fell to be determined by arbitration in terms of the Act.

High Court Action

Mr Molefe refused AIG’s request to reimburse it the R4,4m defence costs that it had paid on his behalf. In consequence, AIG instituted a High Court legal action against Mr Molefe for payment of the amount concerned.

AIG advanced its claim on three grounds:

• the clause in the policy stipulating that an insured was obliged to reimburse it for any costs in relation to a matter where the insured was found to have gained a profit or advantage to which he was not legally entitled;

• the October 2017 letter, which set out the basis upon which AIG had provided funding for Mr Molefe’s costs, namely that he would refund the costs if it was found that he was not entitled to an indemnity under the policy; and

• on the basis of unjust enrichment.

Mr Molefe defended the legal action and raised a special defence to the effect that AIG was obliged to pursue any claim against him by way of arbitration and not by way of court action in accordance with the policy terms.

High Court Application

This prompted AIG to launch an application in the High Court[1] for an order directing that its claim not be dealt with by arbitration as contemplated in the Act.

This was a sensible approach as it would have been unwise for AIG to run a protracted and costly court action only to find that at the end of the day the court ruled that AIG was obliged to have pursued its claim by way of arbitration proceedings and not court action.

Mr Molefe opposed the application on two main grounds:

• Firstly, that Eskom should have been joined as a party in the application proceedings, and, as such, the application should not be allowed to proceed. This was a dilatory defence as opposed to a substantive defence; and

• Secondly, that he was not bound by the policy because he had not signed it, and therefore the clause which provided for a reimbursement of costs did not apply to him.

The contradiction between this stance and his insistence on enforcing the arbitration clause in the policy seems to have escaped Mr Molefe.

AIG’s Case

AIG argued that, of the three grounds relied on by it to seek reimbursement of the costs from Mr Molefe, only one, namely the one based on the terms of the insurance policy, was subject to the agreement to arbitrate. Its claim, based on the other two grounds, the October 2017 correspondence and unjust enrichment, were not subject to any arbitration agreement.

AIG argued that it would be undesirable to have one of its claims dealt with in arbitration and the other two dealt with in High Court proceedings, and that it would be cost-effective and convenient for all three of its claims to be dealt with in a single action in the High Court.

This would obviate two different tribunals having to adjudicate on the same facts presented by the same witnesses, which might give rise to conflicting outcomes.

High Court Decision

The High Court noted that judicial precedent favours the avoidance of a multiplicity of proceedings in different fora, involving the same facts. This is particularly so when the same witnesses will be required to testify more than once on those facts.

In addition, the duplication of costs in arbitration proceedings and High Court proceedings was to be eschewed.

In all the circumstances, the Court held that AIG was entitled to sidestep the arbitration agreement and have all of its claims adjudicated in the High Court.

It granted an order directing that the disputes between the parties not be referred to arbitration and ordered Mr Molefe to pay the legal costs in the application, including the costs of senior and junior counsel.