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Arbitration: Consequences of Failing to Communicate Statement of Claim by Davison Kanokanga*

18 Mar 2022 4:20 PM | Anonymous

CASE SUMMARY

Issue: Termination of arbitration for failure to communicate Statement of Claim (Article 23 as read with Article 25(A) of the Model Law-effect of arbitrator’s decision - whether arbitrator’s decision can be set aside in terms of Article 34.

This is a short commentary on the below judgment by the Harare High court, Zimbabwe after it held that an arbitrator’s decision terminating an arbitration for failure to communicate a statement of claim(article 23 as read with article 25(a)of the Model Law could be set aside in terms of article 34 of the Model Law.         

CASE: REGAL INSURANCE COMPANY (PRIVATE) LTD versus ZIMBABWE POSTS (PRIVATE) LTD HH 28/22(HARARE HIGH COURT)      

This is a short commentary on a judgment by the Harare High court, Zimbabwe after it held that an arbitrator’s decision terminating an arbitration for failure to communicate a statement of claim(article 23 as read with article 25(a)of the Model Law could be set aside in terms of article 34 of the Model Law.        

THE FACTUAL MATRIX

On the 28th April 2016 the applicant and the respondent entered into a commercial agreement in terms of which the applicant would pay the respondent commission in respect of insurance sales at the respondent’s rented counters. Clause 15 of the agreement provided for the resolution of disputes by way of arbitration. A dispute arose between the parties. In 2018 the parties approached an arbitrator for the resolution of the dispute. The arbitrator convened a preliminary meeting at which the parties agreed on the time frames for the filing of pleadings. It was inter alia agreed that the applicant would file its statement of claim by the 13th July 2018.No statement of claim was filed by the applicant. No explanation for this failure was given by the applicant. Following the failure by the applicant to abide by the agreed arbitration road map and in the absence of any explanation, the respondent asked the arbitrator to terminate the proceedings in terms of article 25 of the Model Law which is attached as a schedule to the Arbitration Act (Chapter 7:15).On the 20th September 2018 the arbitrator without affording the applicant an opportunity to explain its default, acceded to the respondent’s request and went on to terminate the proceedings.

THE APPLICATION

Aggrieved by the arbitrator’s aforesaid award, the applicant filed a court application with the High court. The applicant described the application as one in terms of rule 230 of the High court rules as read with section 14 of the High court Act and article 34 subsection (2)(a)(ii), (iii) and subsection (2)(b)(ii) of the Arbitration Act for an order setting aside the arbitral award issued by the arbitral tribunal and directing that the parties be duly afforded the right to have their dispute resolved by a competent arbitrator.

THE RELIEF SOUGHT

The applicant sought an order in the following terms:

IT IS HEREBY ORDERED THAT:

1. The arbitral award by the Honourable Mutangadura dated 20 September 2018 did not delve into agreed terms of reference and consequently was not a final award.

2. Applicant be and is hereby entitled to refer the dispute to another arbitrator for resolution.

3 Each party to bear its own costs.

THE APPLICANT’S CASE

The applicant contended that it failed to abide by the agreed arbitration road map because its legal practitioners renounced agency. It learnt of the award terminating the arbitration proceedings on 20 September 2018.The arbitrator breached the audi alteram partem rule in that she proceeded to terminate the arbitration proceedings without affording the applicant an opportunity to be heard on whether or not it had sufficient cause for its failure to file the statement of claim. The dispute was not determined. It was against public policy to leave the dispute unresolved. The award is not a final award because it does not delve into the agreed terms of reference.

THE RESPONDENT’S CASE

It was the respondent’s case that the applicant neglected the agreed arbitration process in that it did not file a statement of claim. In the absence of an explanation from the applicant, the arbitrator was entitled to terminate the proceedings in terms of article 25. The applicant should have proceeded in terms of article 34 of the Model law.

THE JUDGMENT

The court identified three issues for determination, namely:

(a) Whether or not the arbitration was properly terminated?

(b) As a matter of procedure is article 34 applicable?

(c) The effect of the termination on the rights of the parties.

On the first issue the court held that the audi alteram partem rule connotes that both parties must be heard. Only the respondent was heard before the proceedings were terminated. Article 25 of the Model Law uses the words “without showing sufficient cause”. One cannot be expected to show sufficient cause unless one is afforded the opportunity to do so. Failure to file a statement of claim, on its own, is no proof that one has no sufficient cause. It was even more demanding for the arbitrator to hear the applicant before the proceedings were terminated because the respondent requested the arbitral tribunal to terminate the proceedings. The arbitration was not properly terminated.

On the second issue the court stated that, “whether one calls an award “final” (because it determines terms of reference) or “not final” (because it did not delve into agreed terms of reference) to me, the overall effect is the same in that the arbitration proceedings have been terminated. The court held that a proper case to set aside the award had been made out under article 34 save the relief sought cannot be a declarator.

Vis-à-vis the third issue, the court held that,” Reinstitution of proceedings terminated through article 25(a) as read with article 32 is not allowed as long as the award is extant”.

DISPOSITION

1.The arbitral award by the Honourable Mutangadura dated 20 September 2018 terminating the arbitration proceedings in terms of article 25(a) of the Arbitration Act (Chapter 7:15) be and is hereby set aside

2.The applicant be and is hereby entitled to refer the dispute to another arbitrator of the parties’ choice or in the absence of such agreed choice one who is appointed by the chairperson of the Commercial Arbitration Centre.

3. Each party to bear its costs.

AN ANALYSIS OF THE JUDGMENT

Was the arbitration properly terminated?

Article 25(a) of the Model Law provides that:

Unless otherwise agreed by the parties, if, without showing sufficient cause-

(a)   The claimant fails to communicate his statement of claim in accordance with article 23(1), the arbitral tribunal shall terminate the proceedings.

The communication of a statement of claim is mandatory. Where a claimant fails to file a statement  of claim such failure triggers a duty on the arbitral tribunal to issue an order asking the claimant “ to show cause as to why he failed to submit his claim within the time”[1]established or in accordance with article 23(1).Whilst the court  correctly held that the arbitration was not properly terminated, it is submitted that what made the termination improper was the arbitrator’s failure to comply with article 25(a) in that she did not issue an order asking the claimant to show cause why it failed to file its claim. The termination of arbitration pursuant to a failure to file a statement of claim should only be undertaken where the failure to file the statement of claim was without sufficient cause.[2]

Was article 34 applicable in this matter?

In dealing with this issue the court stated that:

“Whether one calls an award “final” (because it determines terms of reference) or “not the overall effect is the same in that arbitration proceedings have been terminated.

It is submitted that when asked to intervene in arbitration proceedings, a court should bear in mind that:

In matters governed by this Model law, no court shall intervene except where so provided in this Model Law.[3]

Article 5 of the Model Law sets the limits of judicial involvement in arbitration. It is a mandatory provision of the Model Law which helps ensure the efficacy of the arbitral process as a dispute resolution mechanism.

When interpreting the Arbitration Act, courts should be guided by section 2(3)of the Act which provides that:

The material to which an arbitral tribunal or a court may refer in interpreting this Act includes the documents relating to the Model Law and originating from the United Nations Commission On International Trade Law ,or its working group for the preparation of the Model Law- ,-that is to say the travaux preparatoires to the Model law- ,and-,in interpreting the Model law- ,regard shall be had to its international origin and to the desirability of achieving uniformity in its interpretation and application.

An order to terminate arbitral proceedings is not subject to set-aside proceedings, as is otherwise the case with an arbitral award to the same effect. This is also true in respect of termination under article 25(a) of the Model Law.[4] An arbitration award as envisaged in terms of article 34 must meet one or more of the following criteria:[5]

(a)it must be a final award

(b) be the instrument by which the tribunal records its decision on arbitration

(c) be a final settlement of the matters contained in it

(d) considers and disposes of all the issues submitted for arbitration

(e) finally determines any question of substance or competence

(f) or of procedure

(g) in the case of procedural questions, the arbitrator must term it an award, and

(h) the award must have the effect of res judicata in respect of what is contained in it

A final award brings the parties dispute conclusively to an end.[6]

Not all decisions of the arbitrator are awards that enjoin the court to set them aside[7]. An arbitral award is one which finally decides an issue between the parties,[8] whereas procedural orders are those which are made during the arbitration proceedings in order to manage the arbitration– and as such do not have the status of awards.[9] On this distinction, Gary Born in his treatise on international commercial arbitration notes that “[a]n award must set forth the arbitrators’ resolution of a substantive issue in the arbitration. Purely procedural, logistical, or administrative decisions are not awards within the meaning of international arbitration conventions or national legislations.”[10]

The question of whether the arbitral tribunal decision to terminate proceedings on the basis of the claimant’s failure to file the statement of claim amounts to a final award was deliberated upon in an Indian case[11]. The court in that matter was of the view that the decision to terminate the proceedings on the basis of the default  of a party for non-compliance with section 23 of the Act (article 23 of the Model Law)-under section 25 (article 25 of the Model Law)-was more of an order rather than a final award within the meaning of section 32 of the Act which replicates article 32 of the Model Law .In that context, the Indian court opined that an order of termination under section 25 of the Arbitration and Conciliation Act(article 25 of the Model Law)due to failure to file the statement of claim could not entitle  the claimant to benefit from  the setting aside of the award under section 34 of the Act which replicates article 34 of the Model Law. The High court of Singapore in PT Pukuafu Indah and Ors v Newmont Indonesia Ltd and Anor[12]rejected an application to set aside an order made by an arbitral tribunal noting that the categorization of a determination of the tribunal as an “award” has legal consequences, including the jurisdiction of the Singapore courts to set aside the award which is not extended to orders made by the arbitral tribunal.

The arbitrator’s decision terminating the arbitration was not a final award. It was not even an arbitral award. It was an order. Article 32(2) of the Model Law empowers an arbitral tribunal to issue an order terminating arbitral proceedings. The arbitrator’s order could not be set aside in terms of article 34 of the Model Law. The court erred when it said that “A proper case to set aside the award has been made under art 34---” and went on to grant relief which the applicant had not sought.

What was the effect of the termination of the arbitration on the rights of the parties?

Termination of arbitral proceedings pursuant to a claimant’s failure to file a statement of claim does not render the mandate of the arbitral tribunal functus officio. A claimant has a right to be heard by the tribunal after the termination of the proceedings, in order to demonstrate that the quashing was erroneous, or that the proceedings should be recalled on the basis of the existence of a sufficient cause that contributed to his failure to file the statement of claim.[13]The Indian Court in M/S SK and Associates explained that there is a possibility that the claimant could institute the claim afresh in case it was still within the period of limitation of time[14].It is respectfully submitted that the court erred when it said that the reinstitution of proceedings terminated through article 25(a) as read with article 32 is not allowed as long as the award is extant.

It is submitted that the judgment in this matter can be criticized for:

(1)   Allowing the challenge proceedings under article 34 of the Model Law, when no such proceedings are maintainable against an order passed under article 25(a); and

(2)   Holding that reinstitution of proceedings terminated   through article 25(a) as read with article 32 is not allowed as long as the award is extant, which:

(a)   confuses the effects of a procedural order with those of an arbitral award; and

(b)   incorrectly concluded that the applicant was barred from pursuing the proceedings   either by:

(i) approaching the same arbitral tribunal to show that   the applicant had sufficient cause for its default of not filing its statement of claim in time (assuming, following the Indian courts position, that a tribunal is not functus officio after issuing a termination order under article 25(a); or 

(ii) before a new tribunal.

____________________________________________

* Partner, Kanokanga & Partners Law firm, Harare, Zimbabwe

[1]Srei Infrastructure Finance Ltd v Tuff Drilling Private Ltd, Supreme Court of India, Civil Appellate Jurisdiction, Civil Appeal No 15036/2017,judgment(20 September 2017)(n81),19

[2]Bharat Heavy Electricals Ltd v M/S Jyothi Turbopower Services Pvt. Ltd  and others, High court of Judicature at Madras, delivered on 7 June 2016,para 25

[3] Article 5 of the Model Law

[4] Ilias Bantekas-Termination of Proceedings-UNCITRAL Model Law on International Commercial Arbitration, a commentary-page 838

[5]Zimbabwe Electricity Transmission and Distribution Company(Pvt)Ltd v Tendai Cletos Masawi T/A Masawi and Partners and Retired Justice Mtshiya NO HH 404/20 pages 6-7

[6] Davison Kanokanga, Commercial Arbitration In Zimbabwe, Juta (Pty) Ltd  2020,page 163 para 8.5.7

[7] Ibid ,page 7

[8] Russell on Arbitration, (24th Ed, 2015): “In principle an award is a final determination of a particular issue or claims in the arbitration. It may be contrasted with orders and directions of the tribunal which address the procedural mechanism to be adopted in the reference.” (para. 6-002); See also, Redfern and Hunter on International Arbitration (6th Ed., 2015) (para. 9.10);

[9] Russell on Arbitration, (24th Ed, 2015): “In principle an award is a final determination of a particular issue or claims in the arbitration. It may be contrasted with orders and directions of the tribunal which address the procedural mechanism to be adopted in the reference.” (para. 6-002); See also, Redfern and Hunter on International Arbitration (6th Ed., 2015) (para. 9.10);

10.G. Born, International Commercial Arbitration, (3rd Ed, 2021), p. 3172. 

[11]M/S Anuptech Equipments Private v M/S Ganpati Co-op Housing, AIR 1999 Bom 219,para 11

[12] [2012]SGHC 187

[13]Bharat Heavy Electricals supra

[14]M/S SK and Associates and Another v Indian Farmers and Fertilizers Cooperative  Ltd ,Phoolpur, Allahabad and Another, High Court of Judicature at Allahabad, Civil Miscellaneous Arbitration Petition No73  of 2009,paras 19-20



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