Arbitration and governing law clauses: An analysis of whether subsequent agreements replaced or rendered clauses inoperative

November 1st, 2022
x
Bookmark

In the recent Supreme Court of Appeal (SCA) case of Tee Que Trading Services (Pty) Ltd v Oracle Corporation South Africa (Pty) Ltd and Another (SCA) (unreported case no 065/2021, 17-5-2022) (Dambuza JA (Mocumie and Dlodlo JJA, Meyer and Smith AJJA concurring)), the SCA dealt with the question of whether subsequent agreements can supersede or render clauses inoperative in all previous entered into agreements. The SCA ordered that the arbitration and governing law clauses in the licence agreement and the sub-licence agreements remained valid and operative and the appellant contended that the subsequent agreements superseded the licence agreements.

Background

I-Flex, a company based in India entered into a licence agreement with Tee Que (TQ) a company based in South Africa (SA), which granted TQ the right to licence a software system to the South African Post Office (SAPO). Subsequent to that agreement, TQ entered into a sub-licence with SAPO. The licence agreement and the sub-licence agreement both contained arbitration and governing law clauses.

These clauses were in conflict. In the licence agreement, all disputes would be referred to the international arbitration in London and would be determined in terms of the laws of England and interestingly, the disputes pertaining to the sub-licence agreement would be dealt with in accordance with the South African laws and the rules of arbitration of the International Chamber of Commerce (ICC). It is worth noting that both of these agreements had a non-variation clause meaning that the agreement constituted the entire agreement, and that no variation either would be binding on the parties unless reduced in writing.

This was seemingly sound between the parties because each party knew that should a dispute arise in the licence agreement, the matter would be referred to London and that should a dispute arise in the sub-licence agreement, the dispute would clearly be dealt with in accordance with the South African laws.

However, the confusion began in 2005 when Oracle acquired I-Flex business, and Oracle became I-Flex’s successor in title in respect of the licence agreement. Oracle came on board with its own requirements. Oracle required TQ to enter and accept membership of the Oracle Partner Network – the intentions were to ensure that the relationship that TQ had with I-Flex is further extended to Oracle as the successors in title and that TQ would be able to distribute Oracle’s other programs. The two entered into an agreement, which was then termed the Oracle Partner Network Agreement. On the conclusion of the agreement, the parties entered into two further agreements which were termed the Oracle Licence and Services Agreement and the Oracle Partner Network Full Use Distribution Agreement. In terms of all these three further agreements, any disputes relating thereto would be determined according to South African laws and by the South African courts.

The dispute

A dispute arose, where TQ instituted a civil claim against Oracle and SAPO in the amount of R 61 603 515 for breach of the licence agreements. TQ claimed that Oracle and SAPO entered into agreements, which excluded TQ – and that the agreements were in breach of the licence agreement and the sub-licence agreement entered with TQ, respectively. In the enforcement of the dispute clauses of the agreements, TQ insisted that the dispute resolution mechanism specified in the Oracle network membership agreements that the arbitration and governing laws were strictly in terms of South African law and they insisted that referral of disputes to international arbitration would not be in the interest of any of the parties since all the parties are based in SA and the action arose within SA.

Oracle disputed the referral of the dispute to the South African court and in terms of South African laws, by bringing an application for stay of the action pending referral of the dispute to arbitration. It used the arbitration and governing laws in the licence agreements to its favour and stated that the dispute was bound to be referred to international arbitration under the supervision of the ICC and it further contended that the South African Arbitration Act 42 of 1965 was not applicable to the licence agreements.

The High Court’s position

In light of the pleadings by both parties, the Gauteng Division of the High Court, Pretoria held that the clauses in the earlier licence agreement that TQ and I-Flex entered into on which Oracle later became a successor in title, remained valid and binding. The sub-licence agreement between TQ and SAPO also remained valid and binding. Therefore, both licence agreements remained valid despite the three later agreements. The High Court further ruled in favour of Oracle and ordered a stay of the action proceedings pending referral of the dispute to arbitration. TQ was dissatisfied with the judgment handed down by the High Court and proceeded to appeal the order.

Supreme Court of Appeal

Before the SCA the main argument made by TQ was that the dispute was not an international commercial dispute on the basis that I-Flex, which is the Indian company was no longer party to the licence agreements and the two entities which were now involved were based in SA.

Subsequent to the above argument, the SCA had to consider all the five agreements in question and had to decide whether the:

  • ‘The dispute was not an international commercial dispute because I-Flex was no longer party to the licence agreements and the entities involved were based in South Africa?’
  • ‘The arbitration and governing law clauses superseded by the dispute resolution clauses in the network membership agreements?’
  • The International Arbitration Act 15 of 2017 and the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration of 1985 (Model Law) would apply to the dispute in terms of the licence agreements?
Whether the arbitration and governing law clauses were superseded by the dispute resolution clauses in the network membership agreements

The SCA held that ‘the period of the licence agreements was “perpetual”, subject to termination by either party as provided in the agreements’ (para 17). It was further held that ‘in terms of the licence agreements, the arbitration and governing law clauses would only terminate if the parties or one of them invoked the provisions of the termination clause’ (para 25).

As a result, no variation of the licence agreement was ever affected and there was nothing in the Oracle network membership agreements, which directed that TQ and Oracle intended to terminate the licence agreements or any clauses therein.

Therefore, the SCA held that arbitration and governing laws remained valid and in force in terms of the licence agreements.

The applicability of the International Arbitration Act and Model Law in the dispute

The SCA stated first that the dispute is still an international commercial dispute as the agreements remained in force even though I-Flex is no longer party to the agreement.

It further stated that ‘there is no bar to parties who conduct business in the Republic choosing a place of arbitration that is situated outside the Republic. Under Article 20 of the Model Law, parties are free to agree on the juridical seat of arbitration’ (para 34).

The SCA substantiated with the case of Polysius (Pty) Ltd v Transvaal Alloys (Pty) Ltd and Another; Transvaal Alloys (Pty) Ltd v Polysius (Pty) Ltd 1983 (2) SA 630 (W) whereon the court held that:

‘When the parties contracted, they were fully alive to the nature of the issues that would be likely to arise … . With this in mind, they stipulated for an arbitration in Switzerland and should be held to it’.

The SCA stated that the case was similar to the case at hand on the basis that when TQ and Oracle agreed to the terms of the original agreement between TQ and I-Flex they were alive to the location of their businesses and resorted to retain the arbitration and governing law clauses in the licence agreements.

Furthermore, the SCA stated that the International Arbitration Act and Model Law was still applicable in the agreement. It further stated that the submission made by TQ that the Model Law is excluded from the application was misguided.

Conclusion

Thus, the SCA emphasised the applicability of a non-variation clause where there is more than one agreement concluded between the parties – in that an agreement cannot be superseded by another agreement – unless the parties who enter into the subsequent agreement(s) expressly make their interests clear from the onset and trigger the termination clause or any clause thereon, which shall give rise to superseding all prior agreements.

Furthermore, the applicability of the arbitration clause and governing laws is in terms of the express provisions as provided for in the agreement in question, namely where the breach and enforcement of the agreement is sought and cannot be interpreted and/or sought in other agreements entered into between the parties unless such terms are express to that effect.

This places a paramount importance to the parties when concluding commercial agreements that they pay particular attention to their dispute resolution and governing law clause – which are often referred to as standard clauses that can be easily missed.

 

Lufefe Zwelendba LLB (UFH) is a candidate legal practitioner at MRT Law Inc in Cape Town.  

This article was first published in De Rebus in 2022 (Nov) DR 6.

X