THE ARBITRATION DEFENCE: S 6(1) OF THE ARBITRATION ACT AND THE COMMON LAW

Dear Uncle Oswald

A lively discussion ensued while I was staring at the glowing embers of a Sekelbos campfire with our mutual friend, Fearless Frikkie, licking Karoo lamb fat from our fingers.

The issue is this:  A Provincial Government Department (the Department) – as the employer – recently and frivolously terminated a road rehabilitation contract with me, as the contractor. 

I disputed the validity of the termination.  The Department brought an application in the High Court for an order declaring the termination valid.  I opposed the application and delivered an answering affidavit.  I then again read the contract and came across an arbitration clause in the fine print.  The arbitration clause provides that any dispute arising from or in connection with the contract shall be resolved by arbitration.  I then delivered a supplementary answering affidavit in which I relied on the arbitration clause and I claimed an order that the Department’s application be stayed, and that the dispute be referred to arbitration.  The Department’s replying affidavit is to the effect that section 6 (1) of the Arbitration Act 42 of 1965 does not allow me to raise my arbitration defence after having delivered an answering affidavit. 

I am worried.  Should I accept the Department’s view as correct and suffer the inevitable expense and delay of High Court litigation, or do you see light at the end of the tunnel?

Regards

Sam Shabangu


Dear Sam

I do indeed see light at the end of the tunnel, and it is not the headlight of an oncoming train.

Section 6 (1) of the Arbitration Act 42 of 1965 (the Arbitration Act) reads as follows:

If any party to an arbitration agreement commences any legal proceedings in any court (including any inferior court) against any other party to the agreement in respect of any matter agreed to be referred to arbitration, any party to such legal proceedings may at any time after entering appearance but before delivering any pleadings or taking any other steps in the proceedings, apply to that court to a stay of such pleadings.’

(Emphasis added)

In my view the Department’s point is bad.  Certainly, worse than Karoo lamb fat is for one.

The real question is whether section 6 (1) of the Arbitration Act abolishes a party’s common law right to rely on an arbitration agreement as a defence to legal proceedings.  I am convinced that the answer is no.  The procedure provided in section 6 (1) is permissive, not obligatory.  In addition, the wording of section 6 (1) contains no indication that the legislature intended to alter a party’s common law right to rely on an arbitration agreement as a defence to legal proceedings at any time during the course of the proceedings. 

I am fortified in my view by the following judgments of the High Court, the erstwhile Appellate Division, the Supreme Court of Appeal and the Constitutional Court.

Back in the day when Paul Kruger and I played for the Diggers Rugby Club, the Natal Provincial Division of the then Supreme Court concluded in Walters v Allison 1922 NPD 238 at 245 that:

‘… the only effect of sec 7 of the (Natal) Arbitration Act [*equivalent to section 6 (1) of the Arbitration Act 42 of 1965] is that it offers a summary process whereby a person seeking to assert his right may do so immediately after entering appearance in order to avoid the troubles and expenses of pleading; but this facility afforded him by the Arbitration Act in no way deprives him of his ordinary right to plead [*the arbitration defence] in bar.  The terms of the Act are merely permissive.’

(Emphasis and *insertions added)

Some ten years later the erstwhile Appellate Division considered the same question in The Rhodesian Railways Ltd v Macintosh 1932 AD 359.  It – per Wessels ACJ at 370 and 371 – endorsed the view of the Natal Provincial Division in Walters v Allison referred to above as follows:

‘It was also argued that the procedure in the Act is inconsistent with the procedure by common law, for if sec. 6(1) of the Act is invoked, the right of going to arbitration is taken away if any steps have been taken in the proceedings, whereas if the submission is invoked in a plea no such consequence follows.  I confess that I was at first impressed with this argument, but upon mature consideration it appears to me that there is no substance in it.  All that sec. 6(1) lays down is that you cannot adopt the cheaper and speeder procedure therein provided when once you have delivered pleadings or taken any steps in the proceedings.  If you have taken any step in the proceedings, then you can no longer adopt the speedier and less costly procedure of applying to the Court to stay proceedings but you must file your pleadings in the ordinary way.  In pleading, however, you can raise the defence that the case ought to be decided by arbitration: this can be done by a special preliminary plea.  There is nothing in sec. 6(1) which hints at any intention on the part of the Legislature to alter in any way the common law practice.  The section merely provides that a party brought into Court on a contract may at any time after appearance apply to the Court to stay proceedings, and there is nothing in the section that this procedure is in substitution of the former practice.  I am therefore of the opinion that both the opinion expressed by Innes C.J. in King v Harris (1909, T.S. 292) and the decision of the Natal Court in Walters v Allison are correct, and that the procedure provided in sec. 6(1) is not obligatory but permissive, and that it in no way derogates from the former practice of pleading the submission [*arbitration] clause either by way of a preliminary special plea or by way of a defence. The only difference it may make is with regard to costs.’

(Emphasis and *insertion added)

Almost 80 years later the same approach was again followed by the Supreme Court of Appeal in PCL Consulting (Pty) Ltd v Tresso Trading 119 (Pty) Ltd 2009 (4) SA 68 (SCA) at 71H-72C where it confirmed the right of a party to an arbitration clause to either rely on section 6 (1) of the Arbitration Act, or to rely on the common law and raise a dilatory plea for a stay. 

In Telcordia Technologies Inc v Telkom SA Ltd 2007 (3) SA 266 (SCA) at 278J-279A the Supreme Court of Appeal upheld the principle that courts should be slow to override the autonomy of parties who have agreed that their disputes will be settled by arbitration, as opposed to litigation in court. 

The Constitutional Court, in Lufuno Mphaphuli and Associates v Andrews 2009 (4) 429 (CC) at 219, confirmed this principle as follows:

‘The decision to refer a dispute to private arbitration is a choice which, as long as it is voluntarily made, should be respected by the courts.  Parties are entitled to determine what matters are to be arbitrated, the identity of the arbitrator, the process to be followed in the arbitration, whether there will be an appeal to an arbitration appeal tribunal body and similar matters.’

Therefore, Sam, all things considered, I am prepared to bet my bottom Bitcoin on your prospects of success in your quest to have the Department’s application in the High Court stayed, and to have the dispute referred to arbitration.

Best regards, and good luck.

Uncle Oswald.

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