A Lesson in the Timeous Institution of Arbitration Proceedings

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Arbitration is steadily on the rise in the developing world.[1] More interesting is that this growth seems to be centered around Africa, or, at least, African parties. The reasons are no doubt compound, but one reason is that Africa is slowly on the rise, economically speaking, and which leads to a high propensity for friction between businesses and people required resolutions. Many African states are saddled with the perception (valid or not) of an inefficient and ineffective justice system which inevitably leads to some disputes being referred to private arbitration.

This Article aims to explore arbitration and highlight the importance of instituting arbitration proceedings on time and in compliance with the agreement upon which a particular dispute is based.

Why Arbitration and when to Refer

Although this Article will not go into any detail as to the relative benefits associated with arbitration, it is useful to understand when arbitration is applicable. Importantly, the Arbitration Act 42 of 1965 (hereinafter referred to as ‘the Act’) applies to all arbitration proceedings conducted in the republic.[2] A dispute can only be referred to arbitration when the parties to an agreement have agreed to do so with reference to the necessary clause within the agreement.

Once the parties have identified a dispute, or, at least, the potential for a dispute, they must then refer to the arbitration clause to ensure that the matter is correctly referred. Clauses often elect who will be the arbitrator or will at least provide a framework for selecting an arbitrator when the parties are not in agreement. The clause should also provide for, inter alia, the venue, the procedures as well as how parties may or may not go about appealing the outcome. It is vital to ensure that the arbitration clause is keenly worded to avoid further dispute.[3]

The rights and obligations of parties will often depend on each particular agreement and the details of the arbitration clause. A common clause appearing in written agreements is the imposition of a time frame within which a dispute, or claim, may be referred to arbitration or the courts. The wording of the time bar clause simply prevents a party from raising a dispute after a certain period of time.

A Real Life Parable

It is not difficult to imagine circumstances where parties attempt to truantly refer a matter to arbitration to the prejudice (alleged or not) of the other party. These circumstances may not be malicious however and s 8 of the Act specifically allows for  the ‘innocent’ (a relative term) party to apply to court to lift the application of such a time bar under circumstances where the time bar would result in “… undue hardship …”[4]

The case of Samancor Chrome Holdings (Pty) Ltd and another v Samancor Holdings (Pty) Ltd and others[5] provides the ideal parable. The case illustrates that parties may need to extend the time bar for reasons not of their doing; that it is complicated and expensive process to seek an extension of the a time bar and that, as a consequence, matters should be referred to arbitration as soon as is possible.

In Samancor the contracting parties agreed to sale of the entire share capital of the sellers company. In terms of the agreement the seller indemnified the buyer against the payment of any Income Tax paid by the buyer on behalf of the seller. Although complicated, income tax would be paid buyer on behalf of the seller during a certain period in which ownership overlapped. The parties recognised that certain tax obligations would take some time to be determined, and that the South Africa Revenue Services (SARS) may only impose tax and/or penalties some time thereafter. As such an extended period of 6 years was included within which time the buyer would be allowed issue a claim against the seller.

With a degree of inevitability, the seller delayed the filing of its tax return by 28 months, and SARS only raised its assessment some 30 months thereafter taking another few years to finalise an audit. The buyer became liable, on behalf of the seller, to SARS for a large sum of money which the seller was, by all rights, entirely responsible.

The claim was referred to arbitration where the arbitrator found that the buyer’s claim was well founded, but that the time bar clause prevented the matter from being referred to arbitration. This ruling was then appealed, where that forum found that the time bar clause was not contrary to public policy, and the appeal was accordingly dismissed.

The Buyer, taking advantage of s 8 of the Act, sought relief from the High Court applying for the time bar to be extended on the basis that it would suffer undue hardship should the bar not be extended. The matter was interesting as the parties did not dispute that the buyer had a well-founded claim. In this regard Meyer J confirmed that “… It is thus common cause that [the seller] was to blame for the error and that [the buyer] did not know, and could not have known, of it until after the time-bar had expired.”[6]

From this position Meyer J determined that the time bar should be extended on the basis that the buyer would suffer undue hardship far greater than what would be faced by the seller. The reasons centered around, inter alia, the following considerations: that the buyer had good merits; the buyer had not caused the delay in bringing the claim forward; the lapsing of the time bar could not have been prevented by them; the seller had been unduly benefited in that they had not paid tax; the sum at stake was substantial being 52 Million Rand and that the Seller would not suffer any prejudice from the late institution of the claim.[7]

The final argument was that to extend the time bar would be contrary to the principal of  pacta sunt servanda, more commonly understood as the sanctity of the contract.[8] It was argued that the parties all agreed in writing to the time bar and as such the court should not interfere with his agreement. However, the court found that the parties would have been equally aware that the Act allowed for the parties to seek an extension if undue hardship to prevent any undue hardship.

The court ruled in the buyers favour thus extending the time bar allowing the buyer to institution arbitration proceeding at their leisure.

Conclusion

Arbitration is a valuable method in which parties can resolve a variety of disputes. However, referring a matter to arbitration is a process which begins at the stage at which the agreement is being drafted and negotiated. Samancor illustrates this point well. The parties where alive to the dispute, but even then where unable to foresee the extent of the inevitable delays. Although an extreme parable, the lesson is valuable: ensure that your arbitration clause is a true and accurate representation of the circumstances relating to the agreement.

If these factors are not taken into consideration parties may be required to go to the lengths as described in Samancor in reaching a suitable outcome. If you, or your company, are facing a possible dispute seek legal counsel as soon as possible. Contact an expert at SchoemanLaw for assistance.

 

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[1] https://www.leadersleague.com/en/news/arbitration-in-africa-new-perspectives-shape-the-legal-landscape

[2] the Arbitration Act 42 of 1965

[3] https://www.polity.org.za/article/arbitration-in-south-africa-2017-05-05

[4] S8 of the Arbitration Act 42 of 1965; Power of court to extend time fixed in arbitration agreement for commencing arbitration proceedings.—Where an arbitration agreement to refer future disputes to arbitration provides that any claim to which the agreement applies shall be barred unless some step to commence arbitration proceedings is taken within a time fixed by the agreement, and a dispute arises to which the agreement applies, the court, if it is of the opinion that in the circumstances of the case undue hardship would otherwise be caused, may extend the time for such period as it considers proper, whether the time so fixed has expired or not, on such terms and conditions as it may consider just but subject to the provisions of any law limiting the time for commencing arbitration proceedings.

[5] Samancor Chrome Holdings (Pty) Ltd and another v Samancor Holdings (Pty) Ltd and others [2019] 4 All SA 906 (GJ)

[6] Samancor at para 9.

[7] Samancor at para 36 – 41

[8] Samancor at para 52

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