Does a plaintiff have the right to invoke an arbitration clause after commencement of an action?
Aveng (Africa) Ltd (formerly Grinaker-LTA Ltd) t/a Grinaker-LTA Building East v Midros Investments (Pty) Ltd 2011 (3) SA 631 (KZD) refers.
Aveng brought an application against Midros in the KwaZulu Natal High Court to stay the action Aveng had instituted a few years earlier in order to pursue its claim by way of arbitration.
The parties had concluded a contract in terms of which Aveng, the applicant (and the plaintiff in the main action), had built a shopping mall and car park in Phoenix (Durban) for Midros.
In 2005, Aveng instituted action against Midros to recover R1,5 million as the balance of the price payable to it for the contract work. Midros had withheld payment from Aveng for several reasons, one of which was that the cost of remedying the defects in the work exceeded the amount of Aveng’s claim.
Pleadings were exchanged and when the parties advised the court they would need ten days for the hearing, the action was placed on the trial roll to be heard in early 2009. In the meantime, the parties tried to resolve matters. About a month before trial was to commence, the parties agreed that the action should be removed from the trial roll as they believed they had reached a settlement.
The parties did not, however, resolve matters. In fact, the issues expanded. In view of the likely delay in obtaining dates for a trial that would run for at least ten days, it became clear that the matter would not be resolved for another two to three years.
Aveng, probably in the hope of achieving a speedier resolution, invoked an arbitration clause in the construction agreement. Its explanation for changing course was that it had commenced proceedings by way of action because it did not at the time understand there to be any dispute between it and Midros. It believed it was owed R1,5 million in payment and that Midros had no basis for withholding payment.
Aveng launched an application for summary judgment against Midros, contending that Midros did not have a defence to its claim and had entered a notice of intention to defend solely for the purposes of delay.
As required by the rules of court, Midros served an affidavit setting out its reasons for withholding payment. Midros contended that it must have been apparent to Aveng – once its affidavit resisting summary judgment had been delivered – that there was indeed a substantive disagreement between the parties, some of which fell within the ambit of the arbitration clause.
Midros opposed the application on several grounds, the most important being that Aveng had elected to pursue its claims by way of litigation and it was no longer open to it to have resort to arbitration. The court took the view that the onus rested on Midros to prove that Aveng, with full knowledge of its right to arbitrate, had decided to abandon it.
The court pointed out that where a party to an arbitration agreement commenced legal proceedings, against the other party to that agreement, the defendant was entitled either to apply for stay of the proceedings pursuant to the Arbitration Act or to deliver a special plea relying upon the arbitration clause. Whichever course it adopted, the onus rested on the plaintiff to persuade the court to exercise its discretion to refuse arbitration.
The court confirmed that a plaintiff was also entitled to apply for a stay of the proceedings even if it had commenced the action; that a party to an arbitration agreement who commenced litigation instead of proceeding to arbitration did not merely, as a result of adopting that course, abandon its right to have resort to arbitration under the agreement.
The court, however, qualified its pronouncement. It was of the view that Aveng was not entitled to seek a stay of the action as it was in breach of an agreement to arbitrate. The breach occurred when it became clear to Aveng that there was a substantive disagreement between the parties, namely when Midros filed its affidavit opposing the summary judgment; instead of Aveng invoking the arbitration clause at that stage, it pursued litigation.
Aveng had thus ignored its contractual obligations under the arbitration clause by pursuing its claims by way of litigation.
Furthermore, while Aveng was in breach of its obligations to arbitrate by commencing litigation, it sought to enforce against Midros the very contractual provision of which it was in breach. The court found the situation untenable and dismissed Aveng’s application to stay the proceedings in order for it to pursue arbitration. In the circumstances, Aveng has two options available to it:
- abandon the litigation and proceed to arbitration, in which case it would have to tender Midros’s wasted litigation costs; or
- accept the delay occasioned by litigation and continue to litigate without relying on the arbitration clause to seek a stay in the proceedings.
Written by Itumeleng Phalane, senior associate in the commercial litigation department of corporate law firm Bowman Gilfillan
Article first published on March 22, 2012