Circumstances under which a court would decline to stay proceedings and refer a matter to arbitration.

County Government of Kirinyaga v African Banking Corporation Ltd

Civil Case No 3 of 2018

High Court at Kerugoya

LW Gitari, J

May 4, 2020

Reported by Beryl Ikamari

Alternative Dispute Resolution - arbitration -  stay of court proceedings and reference of a matter to arbitration - timeframe in which a party could invoke an arbitration agreement - at what point in the course of court proceedings was a party allowed to invoke an arbitration clause in order to have the proceedings stayed and the matter referred to arbitration - Arbitration Act, No 4 of 1995, section 6(1)(a).

Alternative Dispute Resolution - arbitration -  stay of court proceedings and reference of a matter to arbitration - validity of an arbitration agreement - circumstances under which a court would decline to stay proceedings and refer a matter to arbitration - Arbitration Act, No 4 of 1995, section 6(1)(a).

Brief facts

The plaintiffs filed a suit for a declaration that an agreement between the parties for the supply, delivery and commissioning of a revenue collection service was void on grounds that it violated sections 135(2), 135(6) and 137 of the Public Procurement and Assets Disposal Act. They also sought a declaration that arbitration proceedings instituted under that agreement were illegal and therefore null and void.

The defendant filed an application for a stay of all court proceedings pending the determination of the application and pending the arbitration proceedings. They also prayed for the suit to be referred to arbitration.

Issues

1. What was the timeframe within which a party was allowed to invoke an arbitration clause in order to seek a stay of proceedings and to refer a matter to arbitration?
2. Under what circumstances would the court decline to stay proceedings and refer a matter to arbitration under section 6(1)(a) of the Arbitration Act?

Held

1. Under section 6(1) of the Arbitration Act, where there were proceedings in court relating to a matter that was the subject of an arbitration agreement, the proceedings would be stayed and the matter would be referred to arbitration unless the arbitration agreement was null and void, inoperative or incapable of being performed or there was no dispute between the parties to be referred to arbitration.
2. The agreement between the parties had an arbitration clause and it expressed the clear intentions of the parties to oust the jurisdiction of the court and refer any disputes between them to arbitration. The preference of arbitration as a dispute settlement mechanism was in line with article 159(2)(c) of the Constitution which required the court to promote alternative forms of dispute resolution.
3. Where there were proceedings filed before the court, a party seeking to invoke an arbitration agreement had to do so not later than at the time of entering appearance. The application invoking the arbitration clause was properly before the court as the defendant, after filing the memorandum of appearance duly filed the application seeking to stay the proceedings pending arbitration. It was filed within the timeframe set out in section 6(1) of the Arbitration Act.
4. The respondent's contention that the arbitration clause was null and void was a ground upon which the court could decline to refer the matter to arbitration as an agreement which violated the law was null and void ab initio. The court would therefore consider whether there were any legal impediments on the validity, operation or performance of the arbitration agreement.
5. While the respondents contended that the parties’ agreement was null and void as it violated sections 135(2), 135(6) and 137 of the Public Procurement and Assets Disposal Act, the applicants did not respond to those contentions. The averments on illegality remained uncontroverted.
6. The arbitration clause in the parties' agreement provided that all disputes including those related to the validity of the agreement had to be referred to arbitration. However, section 6(1)(a) of the Arbitration Act provided that the grant of an order for stay of proceedings and reference of the matter to arbitration would not be granted where the arbitration agreement was null and void, inoperative or incapable of being performed. An agreement could not go against statutory provisions and effectively oust the jurisdiction of the court where statute had not done so.
7. The intention of the legislature was that if the arbitration agreement was null and void, the forum with jurisdiction to hear and determine the dispute between parties to the agreement was the court. The court was therefore not obligated to stay its proceedings. Whether or not an arbitration clause was valid was a matter that the court, in which the stay of proceedings was sought, was bound to decide.
8. The principles related to the grant of stay of proceedings were the following: -

1. the court was not bound to grant a stay but had discretion to grant or not to grant it;
2. the discretion to grant the stay should be exercised when strong cause for doing so was shown;
3. the burden of proving such strong cause was on the plaintiff;
4. in exercising discretion, the court should take into account the circumstances of the particular case; and
5. a mere balance of convenience was not enough.
9. The onus of proving that the matters in dispute fell within a valid and subsisting arbitration clause was on the party applying to the court for a stay of proceedings, once that burden had been discharged then the burden shifted to the opposing party to show cause why effect should not be given to the arbitration clause.
10. The applicant did not clearly set out the nature of the dispute whose resolution through arbitration was sought. The application made reference to an attached letter which was about a demand for an outstanding amount and the specific value of that amount was not stated. The applicant had the burden to prove that there was a dispute which fell within the arbitration clause. That burden was not discharged.
11. The applicant failed to demonstrate that there was a dispute which fell within the terms of a valid and subsisting arbitration clause. Additionally, the respondent's contention that the agreement between the parties was invalid had not been challenged by the applicant.
12. The arbitration clause required parties to attempt to settle any dispute via negotiation and then where negotiation attempts failed, they could refer it to arbitration. The applicant failed to show that there had been attempts at negotiation and that they had failed. Therefore, referring the matter to arbitration, even if the court had found that the arbitration clause was valid, would be premature.

Application dismissed with costs to the respondents.