Changing from litigating to arbitrating

6 September 2011 Authors: Daniel McConnell, Robert Krombein

Contacts

If a party to a contract breaches an arbitration agreement and, as plaintiff, institutes legal proceedings in court, it is not entitled, at a later stage, to refer the matter to arbitration and have the court proceedings stayed. It must abandon the court proceedings and submit the dispute to arbitration. This was the finding of the court in the case of Aveng (Africa) Limited v Midros Investments (Pty) Ltd 2011 (3) SA 631 KZD. It may have severe consequences in relation to the extinction of claims by prescription. Adverse consequences can be avoided by following the correct process from the start.

Aveng and Midros concluded a contract in terms of which Aveng was to construct a shopping mall and car park for Midros. The contract contained a standard dispute resolution clause, which obliged Aveng to refer any disagreement first to the principal agent and, if either of the parties disputed the principal agent’s decision, to arbitration.

A dispute arose between Aveng and Midros regarding the payment of certain amounts. Aveng claimed payment in terms of three certificates which it alleged were payment certificates in terms of the contract. Midros disputed Aveng’s entitlement to payment on two grounds. Midros contended that the certificates Aveng sought to rely on were not payment certificates issued in terms of the contract and that the work performed by Aveng was defective.

The parties agreed to settle the dispute on the basis that Midros would make payment on condition that Aveng undertook remedial works. Aveng performed the remedial works, but Midros was dissatisfied with the remedial works and continued to withhold payment.

In 2005 Aveng instituted proceedings against Midros in the high court for payment under the settlement agreement. Midros did not challenge Aveng’s decision to proceed out of the high court and it filed a reply and counterclaim.

The litigation continued for six years without resolution. Aveng then sought to change course midstream, in the hope of achieving a speedier resolution. It applied for a stay of the court proceedings in order to pursue its claim by way of arbitration.

Midros objected on two grounds:

  • Aveng, having elected to proceed by way of litigation, had waived its right to pursue its claim through arbitration; and
  • any claim in relation to the settlement agreement was not subject to the arbitration agreement

The court dismissed Midros’ first objection. It held that there are a number of instances in which a party to an arbitration agreement may initiate litigation and subsequently elect, or be required to proceed by way of arbitration. The mere fact that a party commences litigation does not result in it abandoning its right to arbitrate.

The court also dismissed Midros’ second objection. It held that the source of the disputes between the parties lay within the provisions of the contract, namely whether the certificates Aveng sought to rely on were payment certificates under the contract and whether the works performed by Aveng were sufficient. Any attempts to settle the matter could be presented to the arbitrator and the arbitrator would be entitled to determine the effect of those attempts.

Having found that Aveng was entitled to have the dispute determined by arbitration, the court held that Aveng was not entitled to have the court proceedings stayed whilst the arbitration took place. Aveng’s decision to proceed by way of litigation was a breach of the arbitration agreement. The court refused to allow Aveng to continue to breach the arbitration agreement and, at the same time, enforce that agreement against Midros. Aveng was required to make an election – either to continue with the litigation, or to withdraw it and start afresh by way of arbitration.

The point raised by the judgment may appear to be a technical point and only of interest to lawyers. However, it may have severe practical consequences. In light of the court’s judgment, Aveng will be required to start arbitration proceedings afresh if it does not wish to continue with the existing High Court action. However, it will then face the difficulty that its claim, which arose during 2004/2005, may have prescribed or may be time barred by the provisions of the contract. The case highlights the importance of knowing and following the dispute resolution procedures agreed to by the parties.