The case of AIG South Africa Limited v Brian Molefe has clarified how South African courts approach arbitration clauses when issues of fairness and efficiency are at stake. While arbitration clauses are generally binding, this judgment demonstrates that courts will exercise their discretion to set aside arbitration agreements where strict enforcement would lead to injustice or unnecessary duplication of proceedings.

Case Overview

In 2017, AIG issued a management liability insurance policy to Eskom, covering directors, officers, and employees for liability claims. Former Eskom CEO Brian Molefe was insured under the policy and sought indemnity for legal costs arising from multiple lawsuits against him.

AIG advanced Molefe’s defence costs, amounting to approximately R4.4 million on condition that if a court later found him guilty of unlawful or fraudulent conduct, he would repay the funds. This arrangement was recorded in correspondence dated 27 October 2017 (the “2017 Agreement”).

Subsequent rulings from the Supreme Court of Appeal and the Constitutional Court confirmed that Molefe’s conduct had been unlawful. Relying on both the policy exclusions and the 2017 Agreement, AIG demanded repayment of the funds.

Arguments Before the Court

• AIG’s position: Molefe had been unjustly enriched and was contractually obliged to refund the money. Its claims were based not only on the policy but also on the separate 2017 Agreement and unjust enrichment principles.
• Molefe’s defence:
  • He argued that since Eskom, not himself, was the policyholder, AIG’s recourse should be against Eskom.
  • He invoked clause 7.6 of the policy, which required disputes to be referred to arbitration under the Arbitration Act.
  • He further disputed agreeing to the 2017 Agreement and maintained that any claim should fall within the arbitration framework.

Court’s Analysis

The court rejected Molefe’s arguments, finding that:

• The 2017 Agreement stood on its own and was independent of the insurance policy. Disputes arising from it were not subject to the arbitration clause.
• The claim for unjust enrichment was likewise unrelated to the policy’s coverage terms and therefore outside the scope of the arbitration agreement.
• Fragmenting the dispute into multiple forums, arbitration for some claims and litigation for others, would cause unnecessary duplication of evidence, inflated costs, and the risk of conflicting decisions.

Citing Multi-Links Telecommunications Ltd v Africa Prepaid Services Nigeria Ltd, the court stressed the importance of avoiding piecemeal litigation when the facts overlap.

Accordingly, the court exercised its discretion under section 3(2) of the Arbitration Act to decline referral to arbitration, ruling that all of AIG’s claims should be heard together in a single proceeding.

Key Takeaways

• Arbitration clauses are not absolute: Courts retain the power to set them aside when “good cause” is shown.
• Independent agreements matter: Obligations created outside the main contract (such as the 2017 Agreement) may not fall within the arbitration framework.
• Efficiency and justice prevail: Where multiple claims are factually interconnected, courts will prioritise judicial efficiency over strict party autonomy.
• Practical lesson for businesses: When drafting policies or side agreements, parties should carefully consider how arbitration clauses interact with additional undertakings or separate contractual obligations.

Conclusion

The AIG South Africa Ltd v Molefe ruling underscores that while arbitration remains a cornerstone of commercial dispute resolution, South African courts will not enforce it blindly. Where enforcing arbitration would result in duplicated proceedings, wasted costs, or injustice, courts have the discretion to order that disputes be resolved through litigation instead.

This decision highlights the importance of drafting clear, consistent dispute-resolution clauses in insurance contracts and related agreements, ensuring they align with both legal requirements and practical realities.