There are likely few ‘high stakes’ business men and women and (hopefully) fewer commercial attorneys who won’t be familiar with an arbitration clause. Typically, such a clause will oblige the parties to an agreement to refer any dispute arising from the agreement, to be determined by an arbitration tribunal in accordance with certain rules which are incorporated by reference into the agreement.
The agreement to arbitrate is one of pure commercial practicality. It provides contracting parties with the opportunity to resolve (actual) disputes in a speedy and efficient manner, at least relative to its alternative (litigation in court). Arbitration is also reputably less expensive than litigation, although this reputation is not always well-founded.
Perhaps in part due to the frequency with which arbitration clauses are found in commercial agreements, they are often roughly glanced over as a standard clause not worth paying too much attention to.
Issues arise when contractual parties fail to properly consider whether an arbitration clause is appropriate for their specific agreement or, where an arbitration clause agreed, to appreciate the legal consequences of their arbitration clause and the far-reaching, often exclusionary powers, endowed upon their chosen arbitration tribunal.
These issues are manifested in a number of ways, for example, the attempt by one of the parties to approach a court in vain, where it is clear from the agreement that an arbitration process must be respected before a party can seek relief from a court. In this regard, our courts will generally, in terms of section 6(1) of the Arbitration Act, 1965, accept applications by defendants to stay court proceedings pending the outcome of arbitration proceedings.
Perhaps the converse of the aforementioned issue, is where a contracting party seeking to abuse the arbitration process insists on arbitration to defend a claim in circumstances where it would be more appropriate for a court to rule on the matter, for the reason that there is no actual dispute which calls for arbitration. In the same vein, bona fide parties may find themselves calling for unnecessary and costly arbitration to enforce their claim, even where there is no real dispute, for the simple reason that their agreement calls for arbitration.
It is therefore imperative that contracting parties carefully consider their position and anticipate the types of dispute which may arise, before signing their agreement, as arbitration is not appropriate for all disputes and certainly not always cheaper or quicker. In this regard one should take note of the purpose of arbitration.
The core purpose of arbitration is to resolve actual, meaningful disputes, in other words, disputes where either party, if it could prove the facts which it seeks to rely upon, would have a good case on its merits.
Arbitration is therefore not an appropriate forum where there is no material dispute of fact and the defendant does not have a bona fide defence to the claim, i.e., in circumstances where summary judgment would be granted.
A contracting party seeking to invoke an arbitration clause in such circumstances should not be entitled to do so and our courts have recognised this. Thus in PCL Consulting v Tresso Trading the SCA dismissed an appeal by the appellant to stay court proceedings where the contractual relationship between the parties had been subject to an arbitration agreement.
The court rejected the appellant’s argument that an arbitrable dispute had been raised merely by the fact that the appellant had entered an appearance to defend. Without substantiating a defence and the material facts relied upon for that defence, the appellant could not justify that there was a dispute worthy of arbitration.
Contracting parties should consider the principles to be gleaned from the aforementioned case and apply them when considering the provisions of their agreement, with a view to avoiding the unnecessary insertion of an arbitration clause and the inevitable frustration which may arise when a party seeks to enforce a straightforward claim, only to be countered by a frivolous call for arbitration motivated solely by delay tactics.
One should start by asking what the propensity is for a real dispute to arise from the contractual relationship. A financier in a straightforward term loan agreement, for example, may have little use for an arbitration clause because the likelihood of a bona fide dispute arising is minimal.
The deliverables and receivables are clearly determinable: money is advanced; if it is not paid back on time, there is not really much to arbitrate about and the appropriate remedy is a simple court application.
Of course this will not be the case for all loan agreements, as there may well be components to a loan agreement which are arbitrable. An agreement for the performance of services however, or an agreement where the deliverables of a contracting party may give rise to ambiguity, is invariably a candidate for arbitration, because the propensity for genuine disputes to arise between the parties is greater and it is in the event of disputes of this nature that arbitration finds its true calling.
Where genuine disputes subject to an arbitration agreement do arise, our courts are reverent of any arbitration process duly agreed to by willing parties. Arbitration agreements are interpreted liberally and a court will not readily usurp powers duly bestowed upon arbitrators. In the recent case of Zhongji Construction v Kamoto the SCA noted that even those who refer matters to arbitration “implicitly, if not explicitly… abandon the right to litigate in courts of law and accept that they will be finally bound by the decision of the arbitrator.” In this case the court refused to grant a declaratory order that a particular dispute was arbitrable, as the arbitrator had in terms of the parties’ agreement been given the power to determine its own jurisdiction.
The court found this to be the case even where it was in dispute that one of the agreements between the parties was subject to an arbitration clause.
It found that because the parties had agreed to arbitration in a previous agreement, they must have intended that they would submit disputes to arbitration in a subsequent agreement which arose from and which dealt with similar subject matter to the previous agreement, even though this was not expressly stated.
In conclusion, while arbitration serves a very important function in commercial agreements, it is not a proverbial ‘no-brainer’. It is not always the most practical dispute resolution mechanism and is vulnerable to abuse where it is not appropriate. Contracting parties should therefore consider their position carefully before submitting to arbitration. Where it is not appropriate it should be avoided.
Where it is appropriate, it should be included as a dispute resolution mechanism, but parties should nonetheless be mindful that its purpose is to resolve genuine disputes and that disingenuous disputes might often be (and can be, even in spite of an arbitration clause) best settled in court.