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[2011] ZAKZDHC 14
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Aveng (Africa) Ltd formerly Grinaker-LTA Ltd t/a Grinaker-LTA Building East v Midros Investments (Pty) Ltd (3187/05) [2011] ZAKZDHC 14; 2011 (3) SA 631 (KZD); [2011] 3 All SA 204 (KZD) (8 March 2011)
REPORTABLE
IN THE KWAZULU-NATAL HIGH COURT
DURBAN
REPUBLIC OF SOUTH AFRICA
CASE NO: 3187/05
In the matter between
AVENG (AFRICA) LIMITED
formerly GRINAKER-LTA LIMITED
t/a GRINAKER-LTA BUILDING EAST
….....................
Plaintiff/Applicant
and
MIDROS INVESTMENTS
(PTY) LIMITED
…......................................................
Defendant/Respondent
J U D G M E N T
Del. 8 March 2011
WALLIS J.
[1] Aveng seeks to stay the action that it has
instituted against the respondent, Midros, in order to pursue the
claim that is the
subject of the action by way of arbitration. At
first blush it is distinctly curious to have a party seeking a stay
of proceedings
that it instituted. So far as the researches of
counsel go it is a novel application for which no precedent exists.
The circumstances
in which this arises are the following.
[2] The parties concluded a contract in terms of which
Aveng (under its previous name) built a shopping mall and car park in
Phoenix
for Midros. Subject to certain complaints to which I will
refer in due course, the shopping centre was completed in 2004 and
Midros
has taken occupation. On 15 February 2005 Aveng
instituted the present action against Midros to recover R1 573 049.09
as the
balance of the price payable to it for the contract works. It
relied on three certificates that it contended constitute payment
certificates under the contract. Midros opposed the action
essentially on two grounds. First it said that the certificates were
not payment certificates as contemplated by the contract. Second, and
in any event, it contended that there were defects in the
work and
that the cost of remedying the defects exceeded the amount of Aveng’s
claim. In addition, it lodged a claim-in-reconvention
contending that
in consequence of the defects in the work flooding occurred at the
premises and this had led to it suffering damages.
[3] The action was placed on the awaiting trial roll
but, as ten days were required for the hearing, it was only allocated
dates
for trial from 28 April to 8 May 2009. In the meantime the
parties engaged in discussions aimed at resolving matters between
them.
In the result Aveng agreed to undertake certain remedial work,
against completion of which Midros undertook to pay the full amount
of its claim. That undertaking was supported by a post-dated cheque
for the full amount payable on 31 July 2008. It is
not
disputed that certain work was done but Midros contends that not all
of it was completed or properly done and says that this
constrained
it to stop payment on the cheque.
[4] Thereafter further discussions ensued between the
parties as a result of which Aveng agreed to undertake some more
work. Again
it was agreed that on satisfactory completion this would
result in it receiving payment. In consequence of these latter
discussions
the action was removed from the trial roll on 10 March
2009. The notice of removal records that the action had been settled.
That
has proved overly optimistic. Midros contends that the agreed
work has not been properly performed and continues to withhold
payment.
[5] In consequence of these events the attitudes of the
parties have shifted somewhat. Aveng continues to contend that it is
entitled
to payment under the certificates and it also says that the
amount of the certificates represents the balance of the contract
price
due to it, whether under the original contract or as a result
of the work done pursuant to the negotiations described above. Midros
disputes these contentions. In addition it contends that the action
was settled and that the only claim available to Aveng is a
claim
under the settlement agreement. Any such claim, so it contends, will
be resisted on the grounds that the work has not been
adequately
performed.
[6] The result of this sequence of events is that an
action commenced six years ago in respect of building work undertaken
in 2003
and 2004 has not reached finality. In view of the likely
delay in obtaining trial dates for a trial that will run for at least
ten days, if the matter proceeds by way of the current action it is
unlikely to be resolved for another two or three years. In addition
the issues in dispute between the parties have if anything expanded
as a result of the events described above and in consequence
of the
claim-in-reconvention.
[7] In those circumstances, and perhaps in the hope of
achieving a speedier resolution of the disputes, Aveng now wishes to
go to
arbitration. It relies on the provisions of the contract
dealing with the settlement of disagreements and disputes. The
relevant
provisions read as follows:
‘
40.1 Should any disagreement between the
employer or his agents on the one hand and the contractor on the
other arise out of this
agreement, the contractor may request the
principal agent to determine such disagreement by a written decision
to both parties.
On submission of such a request disagreement in
respect of the issues detailed therein shall be deemed to exist.
40.2 The principal agent shall give a decision specifically in terms
of 40.1 to the employer and the contractor within ten (10)
working
days of receipt of such a request. Such decision shall be final and
binding on the parties unless either party disputes
the same in terms
of 40.3.
40.3 Should the principal agent fail to give a written decision
within ten (10) working days or either party dispute the decision
in
terms of 40.2 by notice to the other and the principal agent within
ten (10) working days of receipt thereof, a dispute shall
be deemed
to exist. Such dispute shall be submitted to arbitration in terms of
40.5…
40.4 …
40.5 Where the dispute is submitted to arbitration:
40.5.1
The arbitration shall be conducted according to the rules stated in
the schedule.
40.5.2 The arbitrator shall be the person appointed by the parties in
terms of the schedule or within ten (10) working days of
the date of
submission of the dispute to arbitration. Where the parties make no
such appointment the arbitrator shall be appointed
by the body stated
in the schedule.
40.5.3 The arbitrator shall have the power to open or revise any
certificate, opinion, decision, requisition or notice relating
to
such dispute as if no such certificate, opinion, decision,
requisition or notice had been issued or given.
40.5.4 The parties, unless otherwise agreed, shall request the
arbitrator to give a reasoned award.
40.6 and 40.7 …
40.8 The cancellation of this agreement shall not affect the validity
of this clause 40.0.’
[8] Aveng explains that it commenced
proceedings by way of action because it did not, at the time,
understand there to be any dispute
between it and Midros. It had the
certificates on which it relied in bringing the claim and a number of
payments had been made
in terms of those certificates, including a
partial payment in respect of the final certificate. When the action
commenced there
was, therefore, so Mr Kemp SC submitted, no
disagreement between Aveng, as the contractor on the one hand, and
Midros, as the employer
on the other, that could be referred to the
principal agent for determination in terms of clause 40.1. In the
absence of a dispute
it was not open to Aveng at the time it
commenced this action to have resort to arbitration. Reliance was
placed on the following
passage from the judgment of Didcott J in
Parekh v Shah Jehan
Cinemas (Pty) Limited and Others
1
‘
Arbitration is a method for resolving
disputes. That alone is its object, and its justification. A disputed
claim is sent to arbitration
so that the dispute which it involves
may be determined. No purpose can be served, on the other hand, by
arbitration on an undisputed
claim. There is then nothing for the
arbitrator to decide. He is not needed, for instance, for a judgment
by consent or default.
All this is so obvious that it does not
surprise one to find authority for the proposition that a dispute
must exist before any
question of arbitration can arise.’
[9]
Ms
Annandale SC, for the respondent, contended that this is irrelevant
because it must have been apparent to Aveng once an affidavit
opposing summary judgment was delivered on behalf of Midros
Investments that there was indeed a disagreement between the parties
as to Aveng’s entitlement to be paid under the certificates,
that dispute being the one already described. However,
notwithstanding
its agreement to do so, Aveng did not resort to
arbitration at that stage. Instead a plea and claim-in-reconvention
were filed
and Aveng delivered its plea to the claim-in-reconvention.
The matter was placed on the awaiting-trial roll and further
particulars
were requested for the purposes of trial. In those
circumstances, she contended 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.
[10] Midros also contends that any
claim based on the settlement agreement that Aveng may have is not a
claim that is capable of
being subjected to arbitration under the
building contract. It says that such claims arise under separate
agreements and are therefore
outside the scope of the clause.
Implicit in this contention is reliance on the principle that where
there are several claims some
of which are subject to arbitration and
others which are not, issues of convenience will frequently dictate
that they should all
be resolved in a single set of proceedings and
by necessity that will be by way of litigation.
2
[11] I cannot accept this second contention. Whether the
certificates on which Aveng relies are certificates issued in terms
of
the contract is plainly an issue on which the contractor and the
employer disagree. So too there is disagreement on whether the
work
has been properly completed or whether it suffered from defects and,
if so, whether the employer has suffered damages as a
result. All of
these disagreements arise out of the agreement and therefore fall
within clause 40 and no-one suggested otherwise.
It would be
permissible for Midros to meet the claim by Aveng in arbitration
proceedings by relying on the alleged settlement agreements
and the
arbitrator would be obliged to determine the terms and effect of
those agreements. For the arbitrator to be precluded from
considering
an alternative claim by Aveng based on its having fulfilled its
obligations under the settlement agreements and being
entitled to
payment of the same amount in consequence thereof would be extremely
artificial. In my view it is incorrect.
[12] There was a time, particularly
in England from where we have derived much assistance in developing
our law relating to arbitration,
3
when arbitration clauses were
narrowly scrutinised and their language carefully parsed to determine
whether a particular dispute
was within or outside the terms of the
clause.
4
Such an approach has not I think been
adopted by our courts, although there are cases where debates have
been raised as to the application
of an arbitration clause where one
party contends that the agreement containing that clause is invalid
or void for some reason.
5
However that is not the issue in the
present case. Nor does Midros contend that in concluding the alleged
settlement agreements
the parties effected a consensual cancellation
of the original building contract, which would raise different
issues.
6
All that it says is that the parties
agreed upon the work that would be done to complete the contract
against which the balance
of the contract price would be paid. A
disagreement between the parties over whether the work has been done
and whether it was
done satisfactorily is, like the other disputes, a
disagreement arising ‘out of this agreement’ in terms of
clause
40. Whilst it requires consideration of what the parties
discussed and agreed in 2008 and 2009 and what was done thereafter,
the
basis for those discussions was the obligation of Aveng to
construct the shopping centre in accordance with the agreement and
the
disagreement between the parties remains whether it has done so
and whether it is entitled to be paid the balance of the contract
price for doing so. That is in my view a disagreement arising out of
the original building contract.
[13] I am fortified in this approach
to clause 40 by the fact that the modern approach to arbitration
clauses is to respect the
parties’ autonomy in concluding the
arbitration agreement and to minimise the extent of judicial
interference in the process.
The historical desire of courts to
protect their own jurisdiction and their consequent suspicion of
arbitration as a means of resolving
disputes has been replaced by a
recognition that arbitration is an acceptable form of dispute
resolution with which the courts
should not interfere.
7
As O’Regan ADCJ said in
Lufuno
Mphaphuli and Associates v Andrews
8
‘
[219]
The decision to refer a dispute to private arbitration is a choice
which, as long as it is voluntarily made, should be respected
by the
courts. Parties are entitled to determine what matters are to be
arbitrated, the identity of the arbitrator, the process
to be
followed in the arbitration, whether there will be an appeal to an
arbitral appeal body and other similar matters.’
[14] An arbitration clause is inserted in a contract at
the time of its conclusion because the parties contemplate as a
matter of
commercial convenience that it is desirable to adopt this
as a mechanism for resolving the disputes that may arise in the
course
of their business relationship. Its construction should
therefore be influenced by a consideration of the underlying
commercial
purpose of including such a clause in the agreement. Lord
Hoffmann explained this in
Fiona Trust &
Holding Corporation and others v Privalov and others
9
when he said:
‘
4 … I shall for the sake of
convenience discuss the clause as if it was a simple arbitration
clause. The owners say
that for two reasons it does not apply. The
first is that, as a matter of construction, the question is not a
dispute arising under
the charter. The second is that the
jurisdiction and arbitration clause is liable to be rescinded and
therefore not binding upon
them.
5 Both of these defences raise the same fundamental
question about the attitude of the courts to arbitration. Arbitration
is consensual. It depends upon the intention of the parties as
expressed in their agreement. Only the agreement can tell you what
kind of disputes they intended to submit to arbitration. But the
meaning which parties intended to express by the words which they
used will be affected by the commercial background and the reader's
understanding of the purpose for which the agreement was made.
Businessmen in particular are assumed to have entered into agreements
to achieve some rational commercial purpose and an understanding
of
this purpose will influence the way in which one interprets their
language.
6 In approaching the question of construction, it is
therefore necessary to inquire into the purpose of the arbitration
clause. As to this, I think there can be no doubt. The parties have
entered into a relationship, an agreement or what is alleged
to be an
agreement or what appears on its face to be an agreement, which may
give rise to disputes. They want those disputes decided
by a tribunal
which they have chosen, commonly on the grounds of such matters as
its neutrality, expertise and privacy, the availability
of legal
services at the seat of the arbitration and the unobtrusive
efficiency of its supervisory law. Particularly in the case
of
international contracts, they want a quick and efficient adjudication
and do not want to take the risks of delay and, in too
many cases,
partiality, in proceedings before a national jurisdiction.
7 If one accepts that this is the purpose of an
arbitration clause, its construction must be influenced by whether
the parties, as rational businessmen, were likely to have intended
that only some of the questions arising out of their relationship
were to be submitted to arbitration and others were to be decided by
national courts. Could they have intended that the question
of
whether the contract was repudiated should be decided by arbitration
but the question of whether it was induced by misrepresentation
should be decided by a court? If, as appears to be generally
accepted, there is no rational basis upon which businessmen would
be
likely to wish to have questions of the validity or enforceability of
the contract decided by one tribunal and questions about
its
performance decided by another, one would need to find very clear
language before deciding that they must have had such an
intention.
8 A proper approach to construction therefore requires the
court to give effect, so far as the language used by the
parties will
permit, to the commercial purpose of the arbitration clause. But the
same policy of giving effect to the commercial
purpose also drives
the approach of the courts (and the legislature) to the second
question raised in this appeal, namely, whether
there is any
conceptual reason why parties who have agreed to submit the question
of the validity of the contract to arbitration
should not be allowed
to do so.’
[15]
I
can discern no sound commercial reason why Aveng and Midros should
have agreed to submit disagreements concerning the quality
of Aveng’s
work and its entitlement to be paid to arbitration, where those
disagreements arose on completion of the contract
works, but would
exclude an arbitrator from considering the selfsame issues when they
arose from discussions between the parties
in a bid to resolve the
initial disagreements between them. The source of the disagreements
is the rights and obligations of the
parties under the agreement and
the differences between them are disagreements arsing out of the
agreement. All of them accordingly
are disagreements falling within
the terms of the arbitration clause.
[16] That brings me back to the
issue of whether it is open to Aveng to change course at this stage
and proceed to arbitration under
clause 40. The contention by Midros
is that it cannot do so because it has elected to pursue its claim by
litigation and it is
now precluded from retracing its steps. Election
is generally regarded as a form of waiver
10
the onus of proving which
rests on Midros. This requires it to show that Aveng, with full
knowledge of its right to arbitrate, decided
to abandon it.
11
The argument is that Aveng
had two alternative remedies. It was entitled either to litigate or
to go to arbitration. Having chosen
the former route it is precluded
now from changing track and seeking to arbitrate.
[17] There are fundamental
difficulties in the path of a contention that Aveng has elected to
abandon its right under the contract
to refer disagreements between
it and Midros for decision to the principal agent and if not
satisfied with the outcome of that
reference to arbitration. These
flow from the relationship between arbitration and the courts. It is
now well-established that
an arbitration agreement does not oust the
jurisdiction of the courts.
12
Where a party to an
arbitration agreement commences legal proceedings against the other
party to that agreement, the defendant is
entitled either to apply
for a stay of the proceedings pursuant to
s 6
of the
Arbitration
Act 42 of 1965
or to deliver a special plea relying upon the
arbitration clause. Whichever course it adopts the onus then rests on
the claimant
to persuade the court to exercise its discretion to
refuse arbitration. This requires a very strong case to be made out.
13
If a stay is granted the
only recourse that the claimant then has in order to pursue the claim
is to proceed by way of arbitration.
But, if the commencement of
legal proceedings constituted an abandonment of its right to
arbitrate, the defendant could oppose
the arbitration on that ground
alone. That does not make sense and is clearly incorrect. If it were
correct it would make a nonsense
of the process of seeking, and the
grounds for granting, a stay. The stay does not afford the defendant
an absolute defence to
the claim. Its purpose is to have the claim
determined by the forum to which the parties have agreed to submit
themselves. Nor
can it matter in those circumstances how far the
litigation has progressed. After all, if the question of arbitration
is raised
by way of a special plea rather than under
s 6
of the
Arbitration Act the
litigation will proceed on all issues until the
stage when the special plea is determined as a separate issue under
Rule 33(4).
If a stay is granted at that stage then the claimant
is entitled to pursue its claim by way of arbitration.
14
[18] A party may commence litigation rather than
arbitrate because it genuinely believes that there is no dispute
between it and
the defendant. Were the contention on behalf of Midros
to be correct it would not be permissible for the claimant, once a
dispute
emerged, to withdraw the litigation, against a suitable
tender in regard to costs, and refer the dispute to arbitration. It
is
conceivable that on realising that a dispute of a technical nature
had been raised, such as a claim that the work done under a building
contract is defective, the contractor might prefer to have it
determined by way of arbitration in an informal fashion by an
arbitrator
having expertise in the field, rather than by means of the
time-consuming procedures in a court of law. Yet, if the contention
on behalf of Midros is correct, it is debarred from following that
route.
[19] The answer in my view is that a party to an
arbitration agreement who commences litigation instead of proceeding
to arbitration
does not, merely as a result of adopting that course,
abandon its right to have resort to arbitration under the agreement.
That
being so it is not open to the other party to contend that it
has ‘accepted’ the resort to litigation by not itself
seeking a stay, and that this ‘acceptance’ debars
subsequent resort to arbitration. Whilst parties can, by mutual
agreement, put an end to an arbitration agreement that requires the
elements of a contractual agreement to be present. The act of
litigating instead of arbitrating is not in my view an offer in the
contractual sense available to be accepted. Nor is the act
of the
defendant in failing to raise arbitration as a dilatory plea or by
way of an application for a stay a contractual acceptance.
The
election for which Midros contends cannot therefore be sustained on
the basis of agreement. In my view the commencement of
litigation
does not preclude Aveng from invoking the arbitration clause in the
contract.
[20]
That does not however mean that Aveng is entitled to seek a stay of
this action. It does mean that it is free to abandon the
litigation
and proceed to arbitration although conceivably it would face
problems of prescription were it to do so. But that is
not what it
wishes to do. It wishes to keep the present litigation in place but
stayed whilst it pursues its claim by way of arbitration.
The problem
is that it commenced this action in breach of a binding agreement to
arbitrate. Midros has chosen not to contest this
by seeking a stay,
but Aveng’s conduct remains a breach of its obligations under
the arbitration clause. It does not cease
to be such merely because
Midros, for its own reasons, does not seek to rely upon that breach.
[21] Aveng is in breach of its
obligations under the arbitration agreement, but claims nonetheless
to enforce that agreement against
Midros. That is an untenable
situation and contrary to basic principle. An arbitration agreement
is a clear example of an agreement
where the obligations of the
parties are reciprocal in the sense that performance by the one party
is conditional on performance
by the other.
15
Hitherto Aveng has ignored
its contractual obligations under the arbitration clause and pursued
its claims by way of litigation.
Midros has chosen not to challenge
this.
16
Now Aveng, whilst keeping
in place the litigation commenced in breach of its obligations, seeks
to enforce against Midros the very
contractual provision of which it
is in breach. It is hardly surprising that Midros objects to this.
Whilst it has phrased that
objection in the language of election its
character remains that it objects to having the arbitration clause
enforced against it
for so long as Aveng remains in breach of its
obligation to arbitrate. It is not in my view an answer for Aveng to
say that it
is now willing to arbitrate and comply with its
obligations. It seeks to do so whilst maintaining the present
litigation that was
commenced and has been conducted in breach of the
arbitration agreement. In other words it seeks to take advantage of
its existing
breach whilst trying to hold Midros to the terms of the
agreement. That is not something that a court will countenance.
[21] For those reasons the application is dismissed with
costs.
DATE OF HEARING: 11 FEBRUARY 2011
DATE OF JUDGMENT: 8 MARCH 2011
PLAINTIFF’S COUNSEL K J KEMP SC
PLAINTIFF’S ATTORNEYS COX YEATS
DEFENDANT’S COUNSEL A M ANNANDALE SC
DEFENDANT’S ATTORNEYS NAIDOO MAHARAJ INC
1
1980
(1) SA 301
(D) 304 E-G. Cited with approval in
Telecall
(Pty) Ltd v Logan
[2000] ZASCA 97
;
2000 (2) SA 782
(SCA) para [11]. The requirement of a dispute is fundamental to
arbitration. See Mustill and Boyd,
Commercial
Arbitration
(2
nd
Ed) 46-48. Although the
2001
Companion
to Mustill and Boyd repeats
the principle at 22-23 it points out at 40 that under s 9(4) of
the 1996
Arbitration Act a
stay must be ordered even if the claim is
indisputable.
2
Universiteit
van Stellenbosch v J A Louw (Edms) Beperk
1983
(4) SA 321
(A) at 341G-342G.
3
This
is not to say that our law is the same as English law. Care must be
exercised to observe the different origins of the law
in both
countries before applying decisions in England to South African
circumstances.
Van Heerden v Sentrale Kunsmis Korporasie (Edms)
Bpk
1973 (1) SA 17
(A) 29A-H.
4
See
the discussion by Lord Porter in
Heyman v Darwins Ltd
[1942]
1 All ER 337
(HL) 360 of the difference between a dispute ‘arising
under’ and one ‘arising out of’ an agreement.
5
See
the citation from the speech of Lord Simon LC in
Heyman v Darwins
Ltd, supra,
343 in
Scriven Bros v Rhodesian Hides &
Produce Co Ltd and Others
1943 AD 393
at 400 and
Allied
Mineral Development Corporation (Pty) Ltd v Gemsbok Vlei Kwartsiet
(Edms) Bpk
1968 (1) SA 7
(C) 14B.
6
Atteridgeville
Town Council and another v Livanos t/a Livanos Brothers Electrical
[1991] ZASCA 139
;
1992 (1) SA 296
(A) 304D-305C
7
Telcordia
Technologies Inc v Telkom SA Ltd
[2006] ZASCA 112
;
2007 (3) SA 266
(SCA) paras [4]
and [5].
8
2009
(4) SA 529
(CC)
9
[2007]
UKHL 40
;
[2007] 4 All ER 951
(HL)
10
Moyce
v Estate Taylor
1948 (3) SA 822
(A) 830;
Thomas v Henry and
another
1985 (3) SA 889
(A) 895J-898C
11
Laws
v Rutherfurd
1924 AD 261
at 263
12
The
Rhodesian Railways Limited v Mackintosh
1932
AD 359
at 375.
13
Rhodesian
Railways v Mackintosh, supra,
375;
Universiteit van Stellenbosch v A J
Louw (Edms) Bpk, supra,
333 F-H.
MV Iran Dastghayb: Islamic Republic of Iran
Shipping Lines v Terra-Marine SA
2010
(6) SA 493
(SCA) para [19]
14
Conceivably
issues of prescription may then arise but it is unnecessary to
determine those in these proceedings.
15
Valasek
v Consolidated Frame Cotton Corporation Ltd
1983 (1) SA 694
(N)
697C-F and 698G-F;
B K Tooling (Edms) Bpk v Scope Precision
Engineering (Edms) Bpk
1979 (1) SA 391
(A) 418B – 419H.
16
Whether
as a result Midros has taken a step in the proceedings and can no
longer rely upon the arbitration clause is unnecessary
for me to
decide. See in this regard Ramsden,
supra
, para 7.1.6, p 104.
If it is precluded from invoking the arbitration agreement in
consequence of its response to Aveng’s
initial breach of its
terms that is merely a further reason for holding that Aveng cannot
invoke it.