Arbitration defence exercised: Common law rights?

Note: Footnotes omitted and emphasis added

1. The applicant, Coalcor Mining (Pty) Ltd (Coalcor), seeks an order restoring to it certain underground mining equipment. It bases its application on the rei vindicatio.

2. The application was launched on what Coalcor describes as being a “semi-urgent basis”: the application was instituted on 12 April 2018, and was enrolled for hearing on 8 May 2018, with the respondents being afforded until 25 April to file an answering affidavit. As matters turned out, the application did not proceed on 8 May 2018, with the costs of those proceedings being reserved. It was then set down again for hearing on 15 May 2018. The matter served before me in the urgent court, and I directed the parties to seek a special allocation of the matter from the Deputy Judge President. He allocated 24 May 2018 as the date for the hearing, and the matter came before me once again.

3. The first respondent is Islandsite Investments One hundred and Eighty (Pty) Ltd (Islandsite). It was placed in business rescue on 19 February 2018. The second and third respondents are the business rescue practitioners appointed in respect of Islandsite. Islandsite forms part of the Oakbay stable of companies, several of which are under business rescue.

4. The dispute has its origins in a Sale of Equipment and Mining Contract Takeover Agreement (the agreement) entered into between Coalcor and Islandsite in 2016. The agreement encompassed the sale of Coalcor’s mining equipment, and a cession by Coalcor to Islandsite of its rights and assignment of its obligations under an underground mining contract pertaining to the Boschmanspoort Mine. The total contract price under the agreement was R240 million, payable in instalments, with the first instalment of R50 million falling due on 1 November 2016, and the final instalment of R90 million falling due on 1 February 2017.

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19. Turning to the issue of the arbitration defence, the respondents submit that under clause 14 of the agreement, any dispute in which final relief is sought between the parties falls to be determined by way of arbitration.

Coalcor seeks final relief following its letter of cancellation and the respondents dispute the validity of this cancellation. For this reason, and in accordance with the agreement between the parties, the respondents are entitled to enforce the arbitration clause, and to object to the litigation proceeding before the court: the dispute between them must be determined by arbitration.

20. Coalcor opposes the respondents’ reliance on clause 14 of the agreement. It refers to s6(1) of the Arbitration Act, which provides that:

“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 for a stay of such pleadings.” (my emphasis)

21. Coalcor submits that s6(1) is determinative of the procedure to be adopted should a party to litigation intend relying on an arbitration clause as a dilatory defence. In particular, says Coalcor, the raising of an arbitration defence must be done within the time limits prescribed by this section: i.e. before any pleadings are delivered or any other steps taken. It points out that the respondents failed to heed these constraints in this matter: they filed an answering affidavit after the institution of the application, they thereafter agreed to the removal of the matter from the roll on the first scheduled hearing date, they filed heads of argument and attended a hearing on 17 May 2018, and they co-operated with Coalcor in requesting a specially allocated enrollment date.

The respondents did not, at any of these stages, seek to rely on clause 14 to insist that the court should not deal with the matter. It was only after they had taken these further steps in the proceedings that the respondents sought to rely on clause 14 in a supplementary affidavit. Coalcor submits that, for these reasons, the respondents are precluded under s6(1) from asserting that the court should not adjudicate the dispute. Alternatively, Coalcor submits that the respondents waived their right to insist that the dispute be adjudicated by an arbitrator, rather than a court.

22. The respondents eschew any reliance on s6 of the Arbitration Act in raising their arbitration defence. Instead, they state that in raising the defence they sought to exercise their rights under the common law to raise a special plea in abatement.

In the circumstances, the respondents say that they are not bound by the limits prescribed in s6(1): they are entitled under the common law to seek at this stage to enforce the arbitration clause to which both parties held themselves bound.

23. The question of whether the Arbitration Act extinguishes the common law right to rely on an arbitration agreement as a defence to legal proceedings has long been settled in our law.  The short answer is that it does not do so.

As long ago as 1932 the Appellate Division considered this question in The Rhodesian Railways Ltd v Macintosh. This was prior to the adoption of the present Arbitration Act. The four provinces (and Southern Rhodesia, in respect of which the Appellante Division had jurisdiction at that time) had separate Arbitration Acts. The Southern Rhodesian Arbitration Act had a section virtually identical to the present s6(1). In Rhodesian Railways the question before the court was whether the machinery provided under the Act constituted the only method of staying proceedings pending a determination by arbitration. The court referred to the earlier case of Walters & Allison , with reference to the equivalent s7 of the Natal Act, and the conclusion in that case that:

“the only effect of sec. 7 of the Arbitration Act 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 expense of pleading; but this facility afforded him by the Arbitration Act in no way deprives him of his ordinary right to plead in bar. The terms of the Act are merely permissive.”

24. The Appellant Division was invited to reject this view, but instead endorsed it. The court held in this regard 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 speedier procedure therein provided when once you have delivered pleadings or taken any other step 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 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 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.” (my emphasis)

25. The approach adopted in Rhodesian Railways was more recently applied by the Supreme Court of Appeal in PCL Consulting (Pty) Ltd v Tresso Trading 119 (Pty) Ltd where reference was made to the choice a party to an arbitration clause has between relying on section 6(1) of the Arbitration Act, on the one hand, and raising a dilatory plea for a stay, on the other.

26. It follows from this that Coalcor’s starting point in opposing the respondents’ arbitration plea is incorrect: s6(1) is not the sole, and obligatory process in terms of which an arbitration defence may be raised. Notwithstanding that they had taken further steps, the respondents remained entitled to raise a special arbitration defence on their pleadings, and more specifically, in the affidavits filed by them. They were not precluded from doing so on the basis of s6(1).

27. I am not persuaded by Coalcor’s alternative submission to the effect that the respondents waived their right to rely on the arbitration defence. The proceedings were launched by way of urgency. It is not disputed that the business rescue practitioners have been under considerable litigation pressure over the last period flowing from their appointment as business rescue practitioners in a number of Oakbay entities. They spell out in their supplementary affidavit the details of the litigation pressure they have faced. In these circumstances, the raising of the arbitration defence in a supplementary affidavit in urgent proceedings (rather than in their original answering affidavit) before me cannot constitute waiver.

Reference was also made by both parties to an informal approach made by counsel for Coalcor at court before the second scheduled hearing of the matter on 17 May 2018. It was suggested by counsel, without a formal brief to do so, that the matter might be referred to arbitration. Respondents’ attorney states that at that time he expressed the prima facie view that the questions raised in the counter-application might be better decided by a court. He states that due to the urgency of the matter he did not fully appreciate the import of clause 14 of the agreement, which only became apparent to him after he consulted with the respondents’ new counsel before the allocated hearing date.

28. In my view, the attorney’s prima facie response to an informal suggestion of arbitration by Coalcor’s counsel also cannot possibly constitute a waiver of the right under clause 14 to insist that the High Court proceedings should be stayed pending the arbitration of the dispute. This is particularly so if regard is had to clause 16 of the agreement, which deals with waiver. It specifically provides that no waiver will be binding for any purpose unless expressed in writing and signed by the party giving it. Further, no failure or delay of either party in exercising any right, power or privilege will operate as a waiver.

29. Our courts have long upheld the principle that courts should be slow to override the autonomy exercised by parties who agree that their disputes should be settled by way of arbitration rather than by litigation in the courts. The Constitutional Court in Lefuno Mphaphuli & Associates (Pty) Ltd v Andrews stated 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 body and other similar matters.”

30. Coalcor does not dispute the arbitration clause in the agreement. It accepts that there is a dispute between the parties, and it does not contend that the dispute raised by its letter of cancellation, and the respondents’ counter-application falls outside of the arbitration clause. Similarly, Coalcor does not contend that there may be exceptional circumstances in this case that would warrant this court taking the extraordinary step of exercising its discretion by refusing to enforce the arbitration clause between the parties.

Our courts have held that because arbitration clauses are based on contractual agreement between the parties, the sanctity of contracts requires that the decision not to enforce an arbitration clause “should only be made where there is a very strong case made out for the parties not to be bound by their agreement.”

31. I am of the view that this is not one of those cases where the parties should be released from their contractual agreement to resort to arbitration, rather than litigation, to settle their dispute. I note that the parties elected, in clause 14.5 of their agreement to give the arbitrator the power to consider principles of both law and equity when determining matters referred to her or him. This clause provides that:

“The arbitrator need not strictly observe all the principles of law and may decide the matters submitted to him according to what he considers equitable in the circumstances.”

32. In light of this, it seems to me to be appropriate that the dispute arising out of the alleged inequities of Coalcor’s decision to cancel the agreement, and the consequences of this for the parties, should be determined by an arbitrator with these broader powers. Consequently, there would seem to me to be no special reason why the parties should not be held to their agreement to submit their disputes to arbitration.

33. For these reasons, I am satisfied that the respondents’ special plea in abatement should be upheld. Coalcor’s application should be stayed pending the finalisation of arbitration proceedings. The respondents have consented to arbitration and request that I record their consent in the order. This finding renders it unnecessary for me to consider the remaining issues in dispute, viz. the s133 issue and the counter-application, the latter issue being part of the dispute for determination by the arbitrator.

34. As far as costs are concerned, I must first determine who should pay the wasted costs of the aborted hearing of 8 May 2018, which were reserved, by agreement between the parties, on that date. The respondents submitted that the applicant ought never to have proceeded urgently to pursue their relief and for that reason they should be ordered to pay these costs. I have already indicated that I would not non-suit the applicant on the basis of urgency. In addition, I note that when it became clear that the matter would be unlikely to proceed on 8 May, the respondents declined the suggestion, made by the applicant on 3 May, that they remove the matter from the Roll at that stage. In my view, this was unwise of the respondents, who later agreed to the postponement, but only after the wasted costs had been incurred. For these reasons, they should bear the wasted costs of 8 May 2018.

35. As to the costs of the hearing before me, normally, costs would follow the result. However, I am mindful that the respondents’ reliance on the common law, and not s6(1) of the Arbitration Act, may have an impact on the issue of costs. In view of the pressure that both parties were under at the hearing before me, this issue was not canvassed fully at the hearing. I am minded to reserve the question of the remainder of the costs in order to permit the parties to make further submissions to me in this regard.

36. I make the following order:

1. The application and counter-application are stayed pending the final resolution of the dispute by arbitration in terms of clause 14 of the agreement dated 19 October 2016.
2. It is recorded that the respondents have consented, in terms of section 133 of the Companies Act 2008, to permit the applicant to pursue its claim in arbitration proceedings.
3. The respondents are ordered to pay the wasted costs pertaining to the hearing of 8 May 2018, including the costs of two counsel.
4. The determination of liability for the remainder of the costs is reserved. The parties may approach my Registrar to make arrangements for further submissions on the question of these costs.