Summary of Judgment

1. Introduction

This matter concerned an appeal to the High Court of South Africa, Gauteng Division, Pretoria, against part of an order granted by the Regional Court for the Regional Division of Gauteng, Pretoria. The appeal was brought by Kaan Property Development Nr. 2 (the appellant, and plaintiff in the court a quo) against Seipati Maureen Ditshwene (the respondent, and defendant in the court a quo).

The procedural history was that the appellant instituted an action for payment arising from a written building contract. In response, the respondent delivered a plea raising two special pleas, namely a plea based on an arbitration clause and a plea of lack of jurisdiction. The Regional Court dismissed the jurisdiction special plea, upheld the arbitration special plea, and ordered that each party pay its own costs.

The appellant appealed specifically against the portion of the Regional Court’s order that upheld the arbitration special plea and the portion that made a costs order requiring each party to pay its own costs. The underlying subject-matter was a contractual dispute about payment of the final draw under a residential building agreement and the procedural effect of an agreed arbitration clause once litigation had been instituted.

2. Material Facts

The appellant and respondent concluded a written building contract on 8 November 2017, in terms of which the appellant undertook to erect a residential dwelling and perform ancillary work on the respondent’s property in Pretoria North. The agreement contained an arbitration clause (clause 22.1) prescribing that disputes arising during or after completion, including disputes about the construction of the contract or matters arising under it, would be determined through a mechanism involving the appointment of an arbitrator and, if necessary, referral to arbitration culminating in a final and binding award.

After completion of the works, the respondent on 15 May 2018 signed a final request form acknowledging satisfaction with the work and authorising the bank to pay the final draw in terms of the agreement. On the same day, the respondent withdrew the authorisation.

It was common cause that after the dispute arose about payment of the last draw, the appellant invited the respondent on 28 August 2018 and again on 11 September 2018 to refer the dispute to arbitration, and the respondent did not respond to either invitation.

On 8 October 2020, the appellant instituted action in the Regional Court for payment of R211 585.62 and ancillary relief. The respondent delivered a notice to defend and pleaded, by way of special pleas, that the court lacked jurisdiction and that the matter was subject to arbitration under clause 22.1.

As to what was disputed, the respondent’s pleaded stance was that the construction work was not in accordance with the building plans, that she had not agreed to deviations, and that the appellant’s claim should be dismissed. However, for purposes of the appeal, the High Court’s focus was directed primarily to the existence and invocation (or waiver) of the arbitration mechanism, and to the procedural propriety of the Regional Court’s order after upholding the arbitration special plea, rather than to the merits of the underlying building dispute.

3. Legal Issues

The central legal questions were concerned with the procedural and legal effect of an arbitration clause in litigation and the circumstances in which a party may or may not rely on it.

The High Court was required to determine whether the respondent, by failing to respond to the appellant’s invitations to arbitrate, had waived the right to invoke the arbitration clause later once litigation commenced, and whether that non-responsiveness constituted an exceptional circumstance justifying refusal to enforce arbitration at that stage.

A further issue was whether the Regional Court, having upheld the arbitration special plea, granted incompetent relief by effectively dismissing the claim, rather than granting relief consistent with the function of an arbitration special plea (namely, a stay or referral to arbitration), particularly in light of the procedural framework in section 6(1) of the Arbitration Act 42 of 1965.

The dispute therefore involved primarily questions of law and the application of legal principles to largely common-cause facts, especially regarding waiver, the nature of an arbitration special plea, and the discretionary refusal (or enforcement) of arbitration.

4. Court’s Reasoning

The High Court approached the matter from the premise that a special plea of arbitration is not a plea on the merits and does not constitute a substantive defence to the underlying claim. Its procedural purpose is to prevent the court from determining the merits at that stage and to ensure that the dispute is determined in the forum chosen by the parties, typically by staying the litigation pending arbitration.

In dealing with the relationship between arbitration agreements and court proceedings, the High Court relied on the principle that an arbitration agreement does not oust the jurisdiction of the courts. Instead, where proceedings are instituted despite an arbitration clause, the defendant may either apply for a stay under section 6 of the Arbitration Act 42 of 1965 or raise a special plea relying on the arbitration clause. Once arbitration is invoked in either manner, the onus shifts to the claimant to demonstrate that the court should, in the exercise of its discretion, refuse to enforce the arbitration mechanism, which requires a very strong case.

Against that legal background, the High Court treated the following as decisive: it was common cause that the appellant had requested the respondent twice to refer the dispute to arbitration and that the respondent did not respond. The High Court characterised the respondent’s failure to react to invitations to arbitrate, despite knowledge of the contractual right to arbitration, as conduct amounting to a waiver of that right. On this reasoning, the respondent could not, after litigation had begun, seek to rely on the arbitration clause without providing a plausible explanation for the earlier non-participation in the agreed dispute-resolution process.

The High Court further reasoned that the respondent’s non-responsiveness was an exceptional circumstance such that the arbitration special plea ought not to have succeeded. On this footing, the Regional Court’s decision to uphold the arbitration special plea was regarded as incorrect.

In addition, the High Court addressed the competence of the Regional Court’s order. It expressed the view that even if the arbitration special plea had properly succeeded, the appropriate consequence would not have been to dismiss the appellant’s claim, because no determination on the merits had been made when deciding the special plea. The High Court indicated that the appropriate procedural consequence of upholding an arbitration special plea would be to refer the dispute to arbitration (or otherwise stay proceedings) rather than to terminate the claim on the merits.

On costs, the High Court considered the appellant’s request for punitive costs (including a reference to costs de bonis propriis) based on the respondent’s conduct in ignoring the invitations to arbitrate. The High Court confirmed the general approach that costs de bonis propriis are typically directed at attorneys where there is serious negligence warranting the court’s disapproval. It concluded that the circumstances did not justify punitive costs, but that the appeal’s success warranted an ordinary costs order in the appellant’s favour.

5. Outcome and Relief

The High Court upheld the appeal with costs.

It set aside the Regional Court’s order and substituted it with an order dismissing both special pleas and awarding costs against the respondent. The substituted order dismissed the first special plea of arbitration, dismissed the second special plea of lack of jurisdiction, and directed the defendant (respondent) to pay the costs of the application.

No punitive costs order was granted.

Cases Cited

Aveng Africa t/a Grinaker-LTA v Midros Investments 2011 (3) SA 631 (KZD) was cited for the principles governing the effect of arbitration clauses, the availability of a stay under section 6 of the Arbitration Act 42 of 1965, the use of a special plea, and the onus and discretion relating to refusal to enforce arbitration.

Rhodesian Railways Limited v Mackintosh 1932 AD 359 at 375 was referenced in relation to jurisdictional principles concerning arbitration agreements and the courts.

Legislation Cited

The Arbitration Act 42 of 1965, and specifically section 6(1), was cited in relation to a party’s ability to apply for a stay of court proceedings where the dispute is subject to an arbitration agreement.

Rules of Court Cited

Rule 33(4) was referenced in relation to the separation and determination of issues, including the determination of a special plea as a separate issue while litigation proceeds on other issues.

Held

The High Court held that a special plea relying on an arbitration clause is not a plea to the merits and is aimed at securing determination of the dispute in the contractually chosen forum, not at defeating the claim substantively.

It held that, on the common-cause facts, the respondent’s failure to respond to two invitations to refer the dispute to arbitration constituted a waiver of the right to rely on the arbitration clause thereafter, and that this non-responsiveness amounted to an exceptional circumstance justifying dismissal of the arbitration special plea.

It further held that, in any event, the dismissal of the appellant’s claim following the upholding of an arbitration special plea was procedurally inappropriate because the merits had not been adjudicated; the proper procedural effect would be a referral to arbitration or a stay, not termination on the merits.

The appeal was therefore upheld, the Regional Court’s order was replaced, and costs were awarded against the respondent without granting punitive costs.

LEGAL PRINCIPLES

An arbitration agreement does not oust the jurisdiction of the courts; rather, it furnishes a basis upon which a court may, in an appropriate case, stay proceedings so that the dispute is determined in the agreed arbitral forum.

Where litigation is commenced in spite of an arbitration clause, the defendant may rely on the arbitration clause either by bringing an application for a stay in terms of section 6 of the Arbitration Act 42 of 1965 or by raising a special plea premised on the arbitration agreement. The mechanism chosen does not convert the arbitration clause into a defence on the merits; it regulates forum and procedure.

When arbitration is invoked, the claimant bears the onus of persuading the court to exercise its discretion to refuse arbitration, which requires a strong case and is framed in the judgment as requiring exceptional circumstances.

A party may waive reliance on an arbitration clause through conduct inconsistent with the exercise of that right, including a failure to respond to invitations to arbitrate where the party acts with knowledge of the right and offers no plausible explanation for non-participation.

A court’s disposition of a special plea of arbitration should not amount to a determination of the merits of the claim; the proper procedural consequence is generally to facilitate arbitration (such as by staying proceedings or referring the dispute to arbitration), rather than dismissing the claim as if finally adjudicated.