The Arbitral Alause: Consequential effects of inclusion in CONTRACTS

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By Sussie Mutahi

The Constitution of Kenya in setting out the guiding principles for Courts and Tribunals, expressly mandates these institutions to promote alternative forms of dispute resolution. These include: reconciliation; mediation; arbitration and traditional dispute resolution mechanisms in so far as they are not in contravention with the Bill of Rights, the Constitution or repugnant to justice and morality.

It is on the basis of this provision that contracts have increasingly incorporated an arbitral clause in their provisions. Going by the numerous court cases surrounding the interpretation and applicability of this clause, it appears that the clause is more often than not, adopted without much appreciation to its potency.

This article seeks to explore the practical and legal ramifications of the inclusion of an arbitral clause in a contract and to highlight current jurisprudence on the subject.

Definition of an arbitration agreement

The Arbitration Act defines an arbitration agreement as:

An agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

The World Intellectual Property Organization (WIPO) defines arbitration as:

A procedure in which a dispute is submitted, by agreement of the parties, to one or more arbitrators who make a binding decision on the dispute. In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court.’

Legal Requirements for the validity of an arbitration agreement

The Act provides that an arbitration agreement is only valid where;

a) It is in writing;

b) It is comprised as an arbitration clause in a contract, or in a separate arbitration agreement;

Does the arbitration clause obligate parties to settle arising disputes strictly by arbitration?

Legal volumes and case law sympathetic to the position that arbitration clauses mandate the parties to refer disputes to the arbitration process generally base their arguments on two premises: the sanctity of contracts and the interpretation of Section 10 of the Arbitration Act.

The doctrine of sanctity of contracts

This doctrine prescribes that a contract made between parties, the making of which is untainted by force, mistake or illegality, is representative of the wishes of those parties and thus behooves any subsequent interpretation of the contract to uphold and respect the wishes expressed therein.

Arthur Cobin hailed this doctrine as the hinge on which the entire law of contract turns, emphasizing that the law’s greatest preoccupation is the realization of reasonable expectations induced by the making of a promise.

The raison d’être for this doctrine was explained by David Parry in his book, The Sanctity of Contracts in English law as follows:

The fact that all persons whose interests are affected by an arrangement have freely and with full knowledge agreed on that arrangement is, in general, cogent evidence in favour of its justice. When all persons interested in a particular transaction have given their consent to it and are satisfied, the law may safely step in with its sanctions to guarantee that right be done by the fulfillment of reasonable expectations.’

Where parties expressly elect arbitration as their preferred forum for dispute resolution, then care should be taken to give effect to this wish.

In The Wrigleys Company v Attorney General and 3 Others the court held that failing to respect and activate the arbitration clause in the parties’ contract amounts to the court’s rewriting of the contract.

This position was reiterated in James Heather – Hayes v African Medical and Research Foundation (AMREF), where the claimant unsuccessfully sought to institute a civil action against the respondent. The Court rendered itself thus:

Parties are expected to execute contractual documents on their free will or else issues of duress and undue influence come to their rescue. In the circumstances of this case, these are yet to be thrashed and determined. The claimant having entered into this contract on his will must accede and go by its provisions… It is not the duty of this court to redraw agreements by parties. The court can only come in to facilitate an interpretation and implementation of these contracts and no more. I agree with the applicant/respondent that there is a subsisting contract that issues in dispute shall be referred to arbitration and I find as such.”

Rika J., in Paul Chemunda Nalyanya v I. Messina Kenya Limited pronounced as follows:

The Parties’ mutual acceptance of the jurisdiction of the Court in their respective pleadings does not invalidate the arbitration clause. This acceptance does not confer the Court with the jurisdiction. No waiver can be assumed in the absence of clear and unambiguous variation or revocation of the arbitration agreement. Neither of the Parties has shown any evidence or other material repudiating the arbitration agreement. The clause is a renunciation of the Parties’ constitutional right to have the dispute decided by the Courts. The Court has an obligation to respect the Parties’ agreement.

the arbitration clause divests this Court the jurisdiction to hear and determine the dispute; confers jurisdiction on an Arbitrator to hear and determine the dispute; and by corollary creates a contractual obligation on the Parties to have their disputes submitted to Arbitration. It is a clause that has adequate anchorage in our law.’’

Section 10 of the Arbitration Act

Section 10 of the Arbitration Act provides that:

Except as provided in this Act, no court shall intervene in matters governed by this Act.”

The Court of Appeal in interpreting this section in the case of Nyutu Agrovet Limited v Airtel Networks Limited delivered itself as follows:

Section 10 debars court intervention in arbitral proceedings except as may be permitted by the Act. The section is not unconstitutional; to the contrary, it affirms the Constitutional provision that requires the Judiciary to promote alternative dispute resolution mechanisms. The Court would not be promoting arbitration if it kept on intervening in any of its processes, save as required by the Arbitration Act. That would be negating the spirit of the Act….no court should interfere in any arbitral process except as in the manner specifically agreed upon by the parties or in particular instances stipulated by the Arbitration Act.”

In the same case, it was noted that Kenya had adopted the UNCITRAL Model Law on international commercial arbitration which stipulated that courts of law cannot intervene in an arbitral process except in special circumstances permitted by the law. Courts are obligated instead to play a supportive role and to uphold the principle of finality of arbitral awards as enshrined in the UNCITRAL Model law.

Entering appearance: a bar to stay of proceedings

Once a defendant, in a suit founded on a contract containing an arbitral clause realizes that the plaintiff seeks to disregard the arbitral clause and instead settle matters in Court, they are required under Section 6 of the Act to apply for a stay of the proceedings in Court and a reference of the matter to arbitration.

A Court seized of like application ought to grant the stay of proceedings sought unless the Court find that:

(a) that the arbitration agreement is null and void, inoperative or incapable of being performed; or

(b) that there is not in fact any dispute between the parties with regard to the matters agreed to be referred to arbitration.

The right to seek stay of proceedings is snuffed out the very moment the defendant enters appearance and files his defence in reply to the plaint filed in Court.

Kamau J. in Nanchang Foreign Engineering Company (K) Limited v Easy Properties Kenya Limited set out the position as follows:

“…an applicant should not, under any circumstances, file any defence in a matter filed in court if he intends to make an application to stay the proceedings filed in court. If he does so, the court becomes automatically seized of the jurisdiction of the dispute between the parties and he cannot thereafter make an application for such stay of proceedings…. In the instant case, the defendants have filed their defence; therefore, they cannot be heard to tell the court to refer the matter to arbitration. In fact, none of the defendants have sought the reference of the natter to the arbitrator.

The position had previously been adumbrated in the case of Fairlane Supermarket Limited v Barclays Bank Ltd where the Court observed as follows:

the option to refer to the matter to arbitration was sealed when the defendant herein entered appearance and followed it with a defence. In the case of Corporate Insurance Company v Wachira (1995-1998) IEA 20, it was held that if the appellant had wished to invoke the clause, it ought to have applied for a stay of proceedings after entering appearance and before delivering any pleading and that the appellant had lost its right to rely on the arbitration clause by filing a defence …any party who wishes to take advantage of the arbitration clause in a contract should either at the time of entering appearance or before the entry of appearance make the application for reference to arbitration.”

The recent Court of Appeal decision in Adrec Limited v Nation Media Group Limited upholds the foregoing decisions. The Court in this case stated that:

By dint of the defence, the party filing it subjects itself to jurisdiction of the court and cannot thereafter resile from that position.”

Sergon J. in Bahari Transport Company v A.P.A. Insurance Co. Ltd, opined as follows:

The legal position is that arbitration clauses do not preclude parties from accessing courts of law. Let me conclude this issue by referring to Vol.25 Halsbury’s Laws of England 4th Edition page 275 in which the position is stated as follows:

…An arbitration clause does not necessarily preclude the assured from bringing an action to enforce his claim. The clause may be nothing more than collateral term of the contract between the parties by which a tribunal for determining disputes is provided. In this case there is a complete cause of action before the clause becomes operative, and if the assured brings an action the insurers are not relieved from liability, but they are entitled to apply under the clause to have the action stayed.”

A Conclusion & Tabulation of statute sanctioned court interventions

From the foregoing, the decisions championing the upholding of arbitration find anchorage in notorious legal principles. They also collaborate the Constitution’s provisions on the promotion of alternative dispute resolution mechanisms. A summary of the legal import of an arbitration clause was captured in the High Court decision in Nancy Mwangi T/A Worthlin Marketers v Airtel Networks (K) Ltd (Formerly Celtel Kenya Ltd) & 2 others, where it was stated as follows:

The existence of an arbitration clause does not erode the jurisdiction of this court. In fact the law envisages a situation where jurisdiction is concurrent but the parties have the option as to which forum to attend. However, the choice of forum must be before any step is taken in the proceedings. This is just a system to ensure that the parties are afforded an opportunity to choose a forum that may be more advantageous to them over the court process. This explains why the Arbitration Act prescribes that the proceedings in the court are to be stayed, not struck out.”

There are however instances where the Act permits the intervention of the Court in the arbitration process. Below is a tabulation of the permitted Court interventions in the arbitral process.

Instances where the high courts’ intervention in the arbitration process is permitted by the act

Section

Instance

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Where the High Court finds that:

-The arbitration agreement is null and void, inoperative or incapable of being performed; or

-That there is not in fact any dispute between the parties with regard to the matters agreed to be referred to arbitration.(Court of Appeal in UAP Provincial Insurance Company Ltd v Michael John Beckett, Joab Henry Onyango Omino v Lalji Meghji Patel & Co Ltd

In these instances, the Court will decline to stay proceeding and pronounce its verdict upon its finding.

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Application to the High Court before or during arbitral proceedings to request for an interim measure of protection is not inconsistent with the arbitration clause.

Coast Apparel Epz Limited v Mtwapa Epz Limited & another

In my view, an interim order of protection is meant to protect the subject matter of arbitration. For it to be granted, the court must be satisfied that the parties have already commenced the process for putting in place an arbitral panel or arbitration proceedings have already started.  It is not an order issued in a vacuum as it is premised on intended or ongoing arbitration proceedings. 

A party to an arbitration agreement cannot come to court, in the manner the Plaintiff has done, to seek an order to refer a dispute to arbitration. Inherent in every agreement with an arbitration clause is the requirement for any aggrieved party to refer any dispute to an arbitration forum using the process provided in the agreement. 

Safaricom Limited v Ocean View Beach Hotel Limited & 2 Others

Interim measures of protection in arbitration take different forms and it would be unwise to regard the categories of interim measures as being in any sense closed (say restricted to injunctions for example) and what is suitable must turn or depend on the facts of each case before the court or the tribunal – such interim measures include, measures relating to preservation of evidence, measurers aimed at preserving the status quo, measures intended to provide security for costs and injunctions. Under our system of the law on arbitration the essentials which the court must take into account before issuing the interim measures of protection are: –

1. The existence of an arbitration agreement.

2. Whether the subject matter of arbitration is under threat.

3. In the special circumstances which is the appropriate measure of protection after an assessment of the merits of the application.

4. For what period must the measure be given especially if requested for before the commencement of the arbitration so as to avoid encroaching on the tribunal’s decision making power as intended by the parties.”

12 (6)

The High Court may appoint an arbitrator on behalf of the parties upon satisfaction that there was good cause for the failure or refusal of the party in default to appoint his arbitrator in due time.

14 (3)

The High Court is allowed to hear matters related to challenging an arbitrator following the unsuccessful settlement of the matter by an Arbitral tribunal

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17(6)

The High Court can be requested to grant a withdrawing arbitrator relief from any liability thereby incurred by him; and to make such order as the court thinks fit with respect to his entitlement (if any) to fees or expenses or the repayment of any fees or expenses already paid.

The HigTThe High Court may pronounce itself on the jurisdiction of an arbitrator where a party is aggrieved by the arbitral tribunal’s determination on the existence of jurisdiction.

18(2)

The arbitral tribunal or a party with the approval of the arbitral tribunal, may seek assistance from the High Court in the exercise of any power conferred on the arbitral tribunal under subsection 18(1).

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The arbitral tribunal, or a party with the approval of the arbitral tribunal, may request from the High Court assistance in taking evidence, and the High Court may execute the request within its competence and according to its rules on taking evidence.

32B (4)

Where the arbitral tribunal has, withheld the delivery of an award, a party to the arbitration may, upon notice to the other party and to the arbitral tribunal, and after payment into court of the fees and expenses demanded by the arbitral tribunal, apply to the High Court for an order directing the manner in which the fees and expenses properly payable to the arbitral tribunal shall be determined

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Application for the setting aside of an arbitral award can be made to the High Court in the following instances:

1.That a party to the arbitration agreement was under some incapacity;

2. The arbitration agreement is not valid under the law to which the parties have subjected it;

3. The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present his case;

4.The arbitral award deals with a dispute not contemplated by or not falling within the terms of the reference to arbitration or contains decisions on matters beyond the scope of the reference to arbitration;

5.The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties;

6. The making of the award was induced or affected by fraud, bribery, undue influence or corruption;

7.The subject-matter of the dispute is not capable of settlement by arbitration under the law of Kenya;

8. The award is in conflict with the public policy of Kenya.

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Recognition and enforcements of awards;

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Appeal to the High Court on questions of law arising in domestic legislations.