What is arbitration?

In arbitration the two parties agree to appoint a third person (arbitrator) to resolve the dispute. The arbitrator listens to the sides of both parties and hands down a decision. It is like a private court proceeding where the parties (or someone on their behalf) choses the \’judge\’ (arbitrator) and the parties carry the costs of the arbitrators fees and the venue and other costs of the proceedings.

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When do you use it?

Arbitration is a good idea when the parties want quick resolution to their dispute and don\’t want to leave the identity of the adjudicator up to chance.   In South Africa legal proceedings in court can go on for years without resolution and you don\’t get a say in who will decide the matter. Although arbitration can be expensive in the short term (because you are paying the arbitrator and for the costs of a venue and running the arbitration) it usually works out more affordably in the long term because arbitrations are usually resolved quicker than court cases.  Many arbitration clauses will provide that the arbitration must be resolved within a certain number of days.

You might also want to use it to have greater certainty that a person with the right experience level decides the case.  For example you can decide to use an accountant to decide the matter if it is an accounting or financial matter or  a different subject matter expert.  The arbitrator`usually also has greater flexibility than the courts in deciding what the correct procedure is.  The parties usually have the opportunity to suggest an arbitrator and if they are in agreement they can appoint that person.  If they don\’t agree standard arbitration clauses provide for a mechanism to chose an arbitrator.  Usually this mechanism is to appoint a person to chose the arbitrator, like the chairperson of the Arbitration Foundation of South Africa (AFSA) or the head of the Law Society.

To start arbitration proceedings parties are required to give the other party written notice.

Arbitration is usually final and binding on the parties. This means there is no appeal but it can be reviewed by the court in limited circumstances like if there is an allegation that the arbitrator was biased.

If you chose not to include an arbitration clause in your agreement any dispute that arises will have to be decided by the court that has jurisdiction.

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NB: If your agreement provides for an arbitration you may not sue out of court except for urgent relief like interdicts.

Real world example:

Patricia buys a hair salon as a going concern from Masechaba.  They agree on a purchase price of R 1000 000.00.  Patricia pays the deposit of R200 000.00 but fails to make any further payments as she has run into financial problems. Despite sending out a letter of demand Masechaba has not been paid.  Their sale of business agreement provides for arbitration. Instead of issuing summons out of court to sue Patricia, Masechaba must send an arbitration notice. If she sues out of court it is likely to be thrown out and she will waste costs.

If Masechaba hears that Patricia is about to sell the stock and furniture in the salon to raise money Masechaba can still approach the courts for an urgent interdict to prevent her from doing so.

Kleva contract sample wording:

ARBITRATION

1 Unless provided for elsewhere in this agreement any dispute between the Parties relating to the interpretation of or the carrying out of; or any other matter arising directly or indirectly out of, this agreement, shall be submitted to and decided by arbitration.

2 The arbitration will be informal and in terms of Arbitration Federation of South Africa’s (AFSA) rules. The arbitration shall be, as far as possible, held and concluded within 90 days after it has been demanded.  All parties are entitled to be represented at the arbitration.

2.1 The arbitrator shall be, if the issue is: 

2.1.1 primarily an accounting matter, an independent chartered accountant of not less than 15 years standing, agreed upon between all the parties;  

2.1.2 primarily a legal matter, a practising attorney of not less than 15 years standing, agreed upon between all the parties;  

2.1.3 any other matter, an independent person agreed upon between all the parties.  

2.1.4 If the parties can’t agree whether any matter in dispute is an accounting, legal or other matter within 7 days, then that dispute shall be deemed to be a legal dispute. 

2.1.5 If the parties agree to the nature of the dispute but fail to agree on the appointment of an arbitrator, the decision will be referred to the most senior executive officer of the professional body representing that profession and in the case of “other matters” to the President for the time being of the South African Society of Chartered Accountants, for the appointment of an arbitrator.  

2.2 The decision of the arbitrator is final and binding and shall be made an order of any competent Court, including any decision as to costs. 

2.3 This clause will not prevent any Party from seeking urgent or interlocutory relief from any competent court.

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