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Does an arbitration clause in a contract provide a pretext for an unscrupulous debtor to delay payment by raising a bogus defence and demanding that it be subjected to arbitration?

If an agreement provides that any disputes must be decided by arbitration and not by litigation, a court has a discretion to decide whether to disregard the arbitration clause and require the matter to be decided by a court.

Arbitration clauses - a double edged sword? It is often a good idea to include an arbitration clause in a commercial agreement, in other words, a clause which says that, if any dispute arises out of the agreement, the dispute must be decided by arbitration and not by litigation in the ordinary courts.

But does an arbitration clause hold any dangers?

Consider this scenario. You enter into a commercial agreement (which includes an arbitration clause) in terms of which, in return for providing certain services to X, the latter will pay you R100 000.

You render the services and then, when you submit your invoice, X raises all manner of trumped-up and bogus reasons as to why he doesn't have to pay you. For example, X alleges that your services were performed late, were performed negligently, or that he has a counterclaim against you for damages in excess of what you say he owes you.

You threaten to issue summons against X and you tell him - if you defend the claim, I'll apply for summary judgement and force you to file an affidavit where you have to swear on oath to all of the nonsense you are now raising, and then I'll lay a criminal charge of perjury against you.

To which X replies, "You won't get to first base - you can't even issue summons against me because our agreement says that all disputes must be resolved by arbitration".

In short - can an unscrupulous debtor use an arbitration clause as a stratagem to delay payment of what is due to you?

This issue came to the fore in Kimberley High Court in the recent case of River Corporate Finance (Pty) Ltd v Diamond Core Resources (3 July 2009; not yet reported).

In this case, the High Court pointed out that an arbitration clause in an agreement does not oust the jurisdiction of the courts, and that the court has a discretion whether to adjudicate the dispute, or require it to be resolved by arbitration as per the agreement. And that the party who wants to have the matter decided by the court, despite the arbitration clause, bears the onus of satisfying the court that the matter should not be decided by arbitration.

The court went on to say that, even where a contract contains an arbitration clause, it can only apply where there is, indeed, a "dispute". For if there is no genuine dispute, then there is nothing for the arbitrator to decide. And that it is for the court to decide whether there is, indeed, a dispute.

In this particular case, the court held, after examining the correspondence between the parties, that the "defences" raised by the defendant to the plaintiff's claim were "mere stratagems" to try to delay payment, and that the defendant's version should be "rejected out of hand". In other words, the court held that there was no genuine dispute at all, and therefore nothing to go to arbitration.


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