Generally, the courts have no direct power, and of their own motion, to compel arbitration. However, it can do so indirectly, and upon application of a party to an arbitration agreement. This is possible where the court, after an application for stay of proceedings for reference to arbitration, refuses the claimant audience and/or remedy through the court process. An order for stay of proceedings has the effect that if aggrieved party wants to pursue his claims, he can only do so by arbitration.
The necessity of stay of proceedings arises where the parties have a valid arbitration agreement and upon a dispute arising on a matter covered by the same, one party goes to the court in breach of the Arbitration agreement. An application for stay of the legal proceedings is what section 6 of the Arbitration Act avails the defendant if he/she is to give effect to the arbitration agreement.
An arbitration clause or arbitration agreement in a contract is not an impediment to resolving disputes in court until a party objects. In other words, the parties can choose to ignore the arbitration clause and/or arbitration agreement and file the proceedings in a court. However, if one of the parties is desirous of effectuating the arbitration agreement when the other has lodged a court action, then the former party may seek an order of the court under section 6 of the Arbitration Act staying the court proceedings. Grant of the order of stay of legal proceedings under section 6 leaves the initiator of the court proceedings with no option but to follow the provisions of the arbitration agreement if he wishes the dispute to be resolved.
Conditions for grant of stay under section 6 of the Act
In granting stay of proceedings, the courts generally have regard to the following conditions:
(i) The applicant must prove the existence of an arbitration agreement which is valid and enforceable. The rationale here is that to stay proceeding where there is no valid Arbitration Agreement would otherwise amount to driving the claimant from the seat of justice as s/he cannot get redress by enforcing the arbitration agreement.
The doctrine of separability is important here in the sense that it enables the arbitration clause to survive the termination by breach of any contract of which it is part. Even if the underlying contract is void, the parties are presumed to have intended their disputes to be resolved by arbitration. If the arbitration agreement's validity is questioned the court should endeavour to ascertain the same before staying the proceedings. At least, it should stay the proceedings pending the determination of the issue of validity.
Section 6 of the Act is to the effect that the court shall grant stay unless, inter alia, it finds that the arbitration agreement (as opposed to the entire agreement) is null and void, inoperative or incapable of being performed. For instance, this is the case where the arbitration agreement is inconsistent with a law.
What do you think should be the ideal policy for the court under this condition? Can you recommend that the court lean towards giving effect to the Arbitration Agreement as far as possible?
(ii) The applicant must be a party to the arbitration agreement or at least a person claiming through a party e.g. a personal representative or trustee in bankruptcy. This requirement is in view of the doctrine of privity of a contract which is to the effect that only parties to a contract can enforce it and a party not party to a contract cannot enforce it.
(iii) The dispute which has arisen must fall within the scope of the Arbitration Clause. The draftsmanship in vogue in Kenya today is to have the arbitration clause as wide and comprehensive as possible. However, there arise instances where the parties intended only some limited disputes to be referred to arbitration. In such an instance, the party opposing the arbitration may argue that the dispute is not covered by the arbitration agreement and therefore the court action is not in breach of the same. The court is bound to stay the proceedings unless it finds:
"that there is not in fact any dispute between the parties with regard to the matters referred to arbitration." (Section 6(1) (b) of the Arbitration Act 1995)
In TM AM Construction Group (Africa) v. Attorney General HCCC (Milimani) No. 236 of 2001 the plaintiff opposed the application for stay, inter alia, on basis that the AG was in fact making an application under section 6 of the Arbitration Act as a delay in tactic as there was not in fact a dispute about the claim. It was submitted that the AG took too long and did not do anything and thus was precluded under section 6 (1) (b) of the Arbitration Act.
The AG claimed that there was dispute between it and the respondent that deserved to be referred to arbitration. The respondent retorted that there was not in fact any dispute between the parties with regard to matters agreed to be referred to arbitration. The court found that there was failure by AG to tender any evidence showing that there was in fact any dispute between the parties and that this meant that no basis had been established to show that a dispute in fact existed to justify staying the proceedings and referring the proceedings to arbitration.
Can an applicant stay part of the proceedings where the other parts are not subject of the agreement, for example, in torts and contract claims and the scope of arbitration is confined to contractual agreement?
What if the clause in question is an Alternative Disputes Resolution Clause i.e. where matters cannot be referred to arbitration immediately without first exhausting the other agreed methods of dispute resolution? The House of Lords in Channel Tunnel Corporation Ltd and others-v-Balfour Beatty Construction Ltd [1993] 1 Lloyd's Rep. 291, HL thought that will not prevent the court and the position was adopted in UK Arbitration Act of 1996.
(iv) The party making the application for stay must have taken steps in the proceedings to answer the substantive claim. For instance, the party must not have served defence or taken another step in the proceedings to answer the substantive claim. The rationale of this requirement is to ensure that stay of proceedings for reference to arbitration is not used as a delay tactic by the defence side. The reasoning is that by taking steps to answer the substantive claim, the party submits or is at least taken to be submitting to the jurisdiction of the court and electing to have court deal with the matter rather than insisting on the right to arbitration. (See Russell on Arbitration (supra) p. 301)
Under section 6 of the Arbitration Act a party wishing to enforce the arbitration agreement in a situation where the other party has initiated court proceedings must apply to court not latter than the time when that party enters appearance or files any pleadings or takes any other steps in the proceedings. This is to say that the application for stay must be made at the correct time under section 6 of the Act. What, then, is the correct time?
In Eagle Star-v-Yural [1978] Llods Rep. 357, Lord Denning MR was of the view that to merit refusal of stay, the step in the proceedings must be one which "impliedly affirms the correctness of the [Court's] proceedings and the willingness of the defendant to go along with the determination by the courts instead of arbitration". In other words, the conduct of the applicant must be such as demonstrates election to abandon the right to stay in favour of the court action proceeding. However, the courts in Kenya have opted to interpret the provisos to section strictly and will not stay proceedings unless the application was filed at the time of filling the memorandum of appearance.
In the leading case of TM AM Construction Group (Africa) v. Attorney General (supra), an application for stay of proceedings under section 6 of the Act had also been opposed for having been filed after defendant had entered appearance. The plaintiff in the case had instituted the suit against the Attorney General on 21st January 2001. The learned AG then entered appearance on the 15th March 2001. The application for stay of proceedings was then made on the 25th April 2001.
Mbaluto J (as he then was) held that an applicant was obliged to apply for a stay 'not later than the time when he entered appearance'. The court thus found that the AG had lost the right to rely on the arbitration clause because if the AG was to rely on it he was obliged to make and application under section 6 not later than when he entered appearance.
The decision in TM AM case was followed in Victoria Furniture Limited-v-African Heritage Limited & Another HCCC (Milimani) No. 904 of 2001. The case involved third-party proceedings where the third-party sought a stay of 'all the proceedings' and reference to arbitration under, inter alia, section 6 of the Arbitration Act. The applicant had been served with a Third Party Notice to which it had made an appearance on 10.8.2001. However, the applicant did not file the application for stay until 11.10.2001.
The Court held that the clear position was that if a party wishes to take advantage of an arbitration agreement under section 6(1) of the Arbitration Act, s/he was obliged to apply for a stay 'not later than the time when he
(a) enters appearance; or
(b) files any pleadings; or
(c) takes any other steps in the proceedings.
In the court's view, the above means that if a party takes any of the steps above without at the same time applying for a stay of proceedings, the s/he losses the right to subsequently make the application.
The learned Mbaluto J in the latter case reasoned that if section 6 of the Act were to be interpreted to mean that a party could file an appearance or take the two other steps and then wait for some time before applying for stay of proceedings, the phrase 'not later than the time he entered appearance or etc, etc' would be not only superfluous but also meaningless. In any case, the court found that in the instant case there was delay of more than 31 days after appearance had been made which situation in the court's view was not what was contemplated under Section 6 (1) of the Arbitration Act.
What if the party has indicated that it still intends to seek stay despite the act? For instance, if a party seeks leave to defend and stay of default judgment-is he to be taken as taking steps in the proceedings as preclude his/her entitlement to a stay? The Court of Appeal of England in Patel-v-Patel [1998] 3 WLR 322 thinks not. What do you think?
It is to be noted that an action to resist interim injunction is not a step in proceedings. Applications for interim applications are interlocutory proceedings whereas the steps proscribed have to taken in substantive proceedings.
Even where the stay is sought against a counter-claim or set off, the rule as to not taking steps in the proceedings still apply with equal force. So that the party seeking stay of the counterclaim must not have filed a defence/reply to the counterclaim or at least any pleading or even counter. The applicant must not have filed an application strike out the counter-claim or taken any other steps in the proceedings. (See Chappel-v-North [1891] 2 Q.B 252)
(v) Where a third-party is involved. The court in the Victoria Furniture Case (supra) also grappled with the issue of whether stay of proceedings will be granted where a third party not party to the arbitration agreement is involved. In the case, the arbitration agreement was only applicable as against the Defendant and the third party to the exclusion of the Plaintiff.
The application for stay was opposed on the ground that the suit would ultimately, and in any event, have to be determined by the Court. The court upheld this point with its finding that apart from the Defendant and the applicant, there was another party involved, namely the Plaintiff. As such, whether or not either of the Defendant or applicant is liable, the matter will have to come back to court for final adjudication as between either of them and the Plaintiff. The court reasoned that the process of arbitration could only decide the issue of who, between the Defendant and the applicant was liable, but not the issue of liability to the defendant. The court also found that there were several questions of law to be resolved in the case.
The court upheld as extant in matter the following grounds supplied in Emden & Gills Building Contracts and Practice 7th Edition, at page 363 upon which a court may refuse to stay proceedings and refer a matter to arbitration:
1. where there are questions of law involved;
2. where there is multiplicity of proceedings and (it is necessary to avoid) inconsistent findings of facts;
3. where the arbitration is appropriate, (as was obviously the case in the matter) for only a part of the dispute.
The court concluded that it would be a miscarriage of justice to parties if the proceedings were stayed and the matter referred to arbitration.
In a word, the ratio of the court's ruling on the above point is that a stay may be refused where there are questions of law involved; where there is multiplicity of proceedings and (it is necessary to avoid) inconsistent findings of facts; and where the arbitration is appropriate, for only a part of the dispute e.g. in third party proceedings as was the case in the matter.
The position seems to be that where a third party is involved, the court may refuse to stay the proceedings as the case will only be appropriate for only a part of the dispute. It is noteworthy that the position in UK has changed and involvement of third party is no longer a reason to refuse stay.
(vi) What if the suit is brought by a claimant who is a pauper and can show the court that he is not in position to afford arbitration? Generally, the position in UK is that the poverty of the Defendant is not a ground for staying arbitration unless the same has been brought about by the breach of contract on part of the Defendant. (At least this was the position taken by the court in Fakes-v-Taylor Woodrow Construction Limited [1973] Q.B. 436) However, the court is enjoined to take into account whether or not the Plaintiff would be unable to receive legal aid for arbitration proceedings. (Edwin Journeys-v-Thyssen (GB) Ltd [1991] 57 Build. L.R 116) In addition, the court may also consider taking into account the ability of the Plaintiff to fund the take off of the arbitration process.
Procedure for the applications for stay
The party seeking stay of legal proceedings for reference to arbitration moves the court in the manner provided under rule 2 of the Arbitration Rules 1997. Rule 2 of the Arbitration Rules 1997 provides that an application under section 6 shall be made by summons in the suit.
Some judges are of the view that that if you move the court using a wrong procedure the error is fatal to the application. So that if instead of a chamber summons one prefers a notice of motion, the application may be struck-out. There are, however, decisions overlooking such mishap.
In James Muhando Mwangi-v-B.O.G Premier Academy & Another HCCC (Milimani) No. 78 of 2001 an application for stay of proceedings under section 6 of the Arbitration Act was opposed on the ground that, inter alia, it did not comply with the requirements of Rule 2 of the Arbitration Rules. The argument was that Rule 2 requires that an application under Section 6 of the Arbitration Act be made by summons in the suit while the application was headed "Chamber Summons" but took the form of a Notice of Motion.
The Respondent's Counsel in the case was of the view that that was a defect which could not be cured by amendment and urged dismissal of the application. However, the court held that the chamber summons, though wrongly taking the form of a Notice of Motion, did not invalidate the application for stay which the rules require to be made by summons. The court reasoned that the defects manifested were in form only and not substance and the respondent was not prejudiced thereby.
In Nakumatt Holdings Limited-v-Kenya Wildlife Services HCCC (Milimani) No. 1131 of 2001 (O.S.) the plaintiff was seeking orders to refer a dispute between it and the Defendant to arbitration. In addition, appointment of an arbitrator from the list of three availed to the court was sought. The application did not disclose which arbitration Act was being invoked nor did the title of the summons indicate under which rule the matter had been brought.
On that basis, the Originating Summons was preliminarily objected as being patently incompetent and should be dismissed. The learned judge upheld the objection holding that the application was patently defective and could not succeed. Hence the Originating Summons was dismissed with costs.
The Moral of the case? To be on the safe side do not overlook such minor issues as ensuring that the heading indicates that the Arbitration Act is 1995 one and indicating the rules under which the application is brought in the application.
The summons is to be accompanied by a supporting affidavit obviously annexing the arbitration agreement or clause.
Generally, there is no requirement that reference to arbitration be already started before application for stay of proceedings. (Enco Civil Engineering Ltd-v-Zeus International Development Ltd [1991] 56 Build. L.R. 43) But the Act allows a party to commence arbitral proceedings despite the pendancy of stay of proceedings application. The legal position is that while the application for stay is pending, arbitration may still be commenced and an arbitral award made. (Section 6(2) of the Act) This provision appears justified given the innumerable delays witnessed in our court system.
Conclusion
The best time for application of a stay of proceedings under section 6 of the Arbitration Act 1995 if a party has a valid arbitration agreement that the instant court action breaches and there is dispute referable to arbitration under the agreement is as early as possible after service of summons on the suit and not latter than when the party enters appearance. Such factors as whether the suit involves third parties not party to the arbitration agreement and whether proper procedure of chamber summons supported by an affidavit as provided under Rule 2 of the Arbitration Rules 1997 has been followed will be important consideration for the court in granting or refusing the stay.
