At what stage can a dispute be referred for arbitration and what is the procedure regarding an application for stay of litigation proceedings pending a referral for arbitration?

Published on July 4, 2022

Attorneys are often confronted with arbitration clauses in agreements between parties in terms whereof disputes between the parties should be referred for arbitration. Apart from contractual arbitration clauses, some legislation contains its own statutory arbitration clauses. At what stage can a dispute be referred for arbitration and what is the procedure regarding an application for stay of litigation proceedings pending a referral for arbitration?

The above issues are discussed in the matter of CROMPTON STREET MOTORS VS. BRIGHT IDEA PROJECTS 2022 (1) S.A. 317 (CC) the Constitutional Court. In this instance an agreement between the parties contained an arbitration clause. The Respondent applied in the High Court for the eviction of the Applicant from its premises. The Applicant opposed the application and in its opposing affidavit requested a stay of the High Court proceedings, pending arbitration proceedings. The Court declined the application to stay proceedings and decided the issues between the parties itself.

The CC was required to answer the following questions:

• Is a Section 12B referral in terms of the Petroleum Products Act to the Controller (arbitrator) ousting the High Court’s jurisdiction to adjudicate the issue?
• If the High Court has the jurisdiction to act, whether Applicant’s failure to comply with the requirements of Section 6(1) of the Arbitration Act rendered the stay application defective?
• Whether the High Court had any discretion to refuse a request to refer the matter to arbitration?

Before returning to the CC’s reasoning in answering the said questions we need to refer to the following issues as background:

• i. Although there is an obvious difference between statutory arbitration and contractual arbitration, all arbitration clauses remain subject to the provisions of the Arbitration Act, 42 of 1965.
• ii. The right to apply for a stay of proceedings is described in Section 6(1) of the Arbitration Act. Section 6(1) provides the prerequisites for a stay in terms of Section 6(1). These prerequisites are:
• a. that the Applicant must be party to an arbitration agreement (whether contractual or statutory) and a litigant in legal proceedings that commenced in any court against it;
• b. that the Applicant may at any time after entering appearance but before delivery of any pleadings or taking any other steps in the proceedings, apply to that Court for a stay of proceedings;
• .c Section 40 of the Arbitration Act stipulates that the provisions of the Arbitration Act were made applicable to arbitration proceedings under any legislation, unless the legislation explicitly excluded its applicability or if the Arbitration Act was inconsistent with the procedure recognized by relevant law.
• d. When the Arbitration Act is applied in terms of a statutory right to arbitration, Section 6 (2) of the Act is to be read to require that a court may stay proceedings if there was no sufficient reason to refer the dispute to arbitration in accordance with the applicable legislation, such as Section 12B of the Petroleum Products Act. A contractual right to arbitration, on the other hand, requires that a court, when considering a stay of proceedings, will consider the terms of the agreement to determine whether sufficient reason exist to refer the dispute to arbitration.
• e. The way in which the CC approached a statutory arbitration in terms of the Petroleum Products Act is explained in Crompton. The court, in exercising its discretion, engaged with the purpose and benefits of Section 12B of the PP Act. In this regard the arbitral mechanism was introduced in order to address the unequal bargaining power between wholesalers and retailers and with this in mind offered a forum for resolving disputes cheaper and quicker than litigation. The court thus has a judicial discretion when confronted with an application for a stay.

As to the questions referred to in (1) – (3) above, the Close Corporation found as follows:

Ad(1): An application for a stay of proceedings does not negate the High Court’s ability to hear disputes of this nature. In the matter of BUSINESS ZONE 1010 CC t/a EMMERANTIA CONVENIENCE CENTRE vs. ENGEN PETROLEUM AND OTHERS 2017 (6) BCLR 773 (CG) the court confirmed that the just and equitable standard required by the Petroleum Products Act applies to High Court litigation:

The contention that two different adjudicative standards, one equitable and one not, apply based on the forum that the parties find themselves before is unsustainable. There is sufficient context and justification to accept that the equitable standard of fairness and reasonableness prevails in all petroleum contracts regardless of whether they are subject to statutory arbitration or ordinary court litigation.

.Section 12 B of the Act holds no pretense to giving effect to a particular constitutional right nor an it, be seen as establishing a separate adjudicative hierarchy.....

....Forum shipping between these different systems of law applied in different institutions will disappear. Instead, what remains is only the choice of arbitration rather than adjudication in the courts....”

The parties clearly have a choice between the statutory arbitration and High Court litigation and both forums must apply the fairness standard [par.28].

Ad(2): The Applicant’s submission was that Section 6(1) of the Arbitration Act was not applicable to this particular case in that the Applicant relied on a statutory arbitration and not a contractual arbitration. The court dismissed the submission and reasoned that Section 40 of the Arbitration Act is applicable to arbitration proceedings under any law. However, the manner in which application is made for a stay in described in Section 6(1) of the Arbitration Act. Section 6(1) requires the following for a stay in terms of Section 6(1):

• 2.1 The Applicant must be a party to an arbitration agreement and a litigant in legal proceedings that have commenced in any court against it;
• 2.2 The Applicant may at any time after entering appearance but before delivery of any pleadings or taking any other steps in the proceedings, apply to that court for a stay of proceedings;
• 2.3 There are two avenues to apply for a stay of proceedings: a substantive application in terms of Section 6 may be made or a special plea requesting a stay of the proceedings pending the determination of the dispute by arbitration (Vide in tis regard PCL Consulting 2009 (4) S.A. 68 (SCA)).

In this particular instance the court found that although the application for stay was incorporated in Applicant’s conditional counter-application and answering affidavit and therefore a step beyond entering appearance, the non-compliance with Section 6(1) did not render the request for a stay invalid [Par.32].

Ad 3: The language of Section 6(2) directs a court acting under that section to stay proceedings where such an application is made unless sufficient countervailing reasons exist for the dispute not to be referred to arbitration. The words “no sufficient reason why the dispute should not be referred to arbitration” denote that the standard position is that a stay should be granted upon request. The onus of satisfying the court that the matter should not be referred to arbitration and instead be heard by the court is on the party who commenced the legal proceedings [Par. 41 E-F]. The advantage of arbitration applies equally to private contractual arbitration and statutory arbitration. These benefits require that there should be legitimately compelling reasons to refuse a stay of proceedings.

HOWEVER, Section 6(2) still confers a discretion upon the courts to grant or refuse a stay. The court must still satisfy itself that in the circumstances sufficient reasons exist not to refer the dispute to arbitration. Therefore, although the standard position is that a stay should be granted and although the onus is on the applicant to satisfy the court not to stay, the court ultimately has a discretion that has to be exercised judicially. The court must consider all factors before exercising its discretion [for reasoning not to stay, vide para 49-58].

In this particular matter the court declined to grant a stay of proceedings.

C.M. Weiss
Practicing Consultant