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Stay of proceedings pending arbitration: A legal critique

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It has now become commercially trendy in Nigeria for parties to an agreement to comfortably include clauses in their contracts, for the determination of any disputes emanating from the contract by arbitration, rather than litigation in courtrooms. And rightly so, arbitration has proved to be faster, less costly, and more party-friendly. Hence, parties bind themselves to the arbitration process through an arbitration agreement. Where this is done, unless expressly agreed to by the parties to the contract, the parties no longer have the freedom to determine the mode of settlement of the dispute arising from the contract.

Davies


In fact, by virtue of Section 5 of the Arbitration and Conciliation Act (the ACA), where one party to an agreement that contains an arbitration clause approaches a court in respect of the same dispute covered by the arbitration clause, the other party to the agreement may apply to the court for an order staying the court’s proceedings pending reference of the dispute to arbitration. That section further stipulates conditions that must be fulfilled before such an application for stay of proceedings pending arbitration can be granted by a court. One of the pre-conditions, which will now form the crux of this article is the “willingness of an applicant to arbitrate”.
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There are two leading schools of thought on this subject. Whilst one school of thought, pioneered by the decision of the Court of Appeal in UBA V. TRIDENT CONSULTING LTD (2013) 4 CLRN 119 and MV PANORMOS BAY V OLAM (2004) 5 NWLR (Part 865) 1, believes that the will must be demonstrated by documentary evidence; the other, pioneered by Charles D. Mekwunye V. Lotus Capital Limited & Ors. (2018) LCN/11288 (CA), opines that same can be demonstrated by a simple deposition in the application seeking to stay proceedings pending arbitration.
 
To unearth the objective of this paper, it has therefore become imperative to examine and critique the decision of the Court of Appeal in Charles D. Mekwunye V. Lotus Capital Limited & Ors. (2018) LCN/11288 (CA) vis-à-vis the interpretation of Section 5 of The Arbitration and Conciliation Act, Cap A18 Laws Of The Federation Of Nigeria (LFN) 2004 (ACA).

Section 5 of the Arbitration And Conciliation Act 1988
Section 5 of the Arbitration and Conciliation Act, Cap A18 Laws of the Federation of Nigeria (LFN) 2004 (ACA) and Section 5 of this act provides that:
(1) If any party to an arbitration agreement commences any action in any court with respect to any matter, which is the subject of arbitration, any party to the arbitration agreement may at any time, after appearance and before delivering any pleadings or taking any other steps in the proceedings, apply to the court to stay the proceedings.
 

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(2) A court to which an application is made under subsection (1) of this section may, if it is satisfied- (a) that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the arbitration agreement; and (b) that the applicant was at any time when the action was commenced and still remains ready and willing to do all things necessary to the proper conduct of the arbitration, make an order staying the proceedings.

Section 5(2) of the ACA provides for three conditions, which must be satisfied by an Applicant, before the court may exercise its discretion to make an Order for a stay of proceedings pending arbitration. The three conditions are:
1. the Applicant must have taken no step in the proceedings; 2. there must be no sufficient reason why the matter should not be referred to arbitration; 3. the Applicant was at the time when the action was commenced, and still remains, ready and willing to do all things necessary to the proper conduct of the arbitration.

The conflicting trend
Prior to the year 2018, the Court of Appeal had been unanimous on the fact that the willingness of an applicant, seeking to stay proceedings pending arbitration, to participate in arbitration must be demonstrated by documentary evidence. See: MV PANORMOS BAY V OLAM (2004) 5 NWLR (Part 865) 1, UBA V. TRIDENT CONSULTING LTD (2013) 4 CLRN 119. However, in 2018, the Court of Appeal in MEKWUNYE V. LOTUS CAPITAL LTD. & ORS (2018) LPELR-45546 (CA) the court departed from its previous decisions by holding that proof of willingness by documentary means is alien to the provisions of the ACA.

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It has become paramount to now briefly examine the decisions in;- UBA V. TRIDENT CONSULTING LTD (2013) 4 CLRN 119 – MEKWUNYE V. LOTUS CAPITAL LTD. & ORS (2018) LPELR-45546 (CA)
In Uba v. Trident Consulting Limited (supra) the Respondent commenced an action at the High Court of Lagos State against the Appellant. Upon being served with the originating processes filed in the suit, the Appellant applied to stay proceedings pending determination of arbitration between the parties in view of the arbitration clause, which the Appellant alleged to exist in the agreement of the parties. This application was, as expected, opposed by the Respondent, which argued that the Appellant was not willing to arbitrate. The High Court in agreeing with the Respondent dismissed the application for stay of proceedings on the ground that there was no evidence before it to demonstrate the Appellant’s willingness to arbitrate. Dissatisfied with the decision of the High Court, the appellant lodged an appeal at the Court of Appeal.
 
The Court of Appeal in determining whether the Lagos High Court was right in refusing to grant a stay of the proceedings pending reference to arbitration, relied on the decision of the court in MV Panormos Bay v Olam (supra) and held that before a stay may be granted pending arbitration, the party applying for a stay must demonstrate unequivocally by documentary evidence or any other visible means that he is willing to arbitrate. The Court of Appeal then held that the Appellant had not shown its willingness to arbitrate as there was documentary evidence supportive of that fact.
 
It is evident from this decision that, in granting an order staying proceedings pending arbitration, the applicant must demonstrate its willingness to arbitrate and this demonstration is mostly done by issuing a Notice of Arbitration or taking any other positive step towards arbitration, otherwise, there is no other way the Court will conclude or draw appropriate inferences of the “willingness” to arbitrate. In other words, an applicant for a stay of proceedings pending arbitration must demonstrate the steps that it has taken to commence or initiate the commencement of arbitration.

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Then came the decision of the Court of Appeal delivered in 2018, in the case of Mekwunye V. Lotus Capital Ltd. & Ors (supra). Although faced with a similar situation as was in UBA v. Trident Consulting Limited (supra), the Court reached a different conclusion. The Court in resolving the issue for the need to present documentary evidence to prove the willingness of a party to arbitrate as established in Uba v. Trident Consulting Limited (supra), held that an applicant for a stay of proceedings pending arbitration need not show by documentary evidence that it is willing to and ready to proceed with arbitration. The Court further held that placing the burden of presenting documentary evidence to support an application for stay of proceedings pending arbitration constitutes a departure from the plain provisions of Section 5(2) of the ACA.

It was also the opinion of the Court of Appeal that its previous decisions to the effect that an applicant seeking a stay of proceedings pending arbitration should show the steps that he has taken to commence arbitration not only violate the principles of freedom of contract and party autonomy but also encourages a wanton breach of otherwise valid arbitration agreements. It should be noted that the Court in Mekwunye’s case held that documentary proof only becomes necessary where the deposition in the affidavit of the Applicant has been controverted by the respondent.
 
Another very interesting decision, which seems to have an impact on the conditions for the grant of a stay of proceedings pending arbitration, is Fak Engineering v. Governor of Bayelsa State (2018) LPELR. The facts of the case were that a contract between the parties was terminated by the Respondent. Upon termination of the contract, the Appellant made a demand to the Respondent informing it of its intention to commence legal actions. Subsequently, the Appellant filed an action in Court. Upon being served and entering an appearance, the Respondent filed an application for stay of proceedings pending arbitration which was granted. An appeal was taken against this decision. On appeal, the Court of Appeal in setting aside the application held that as at the time it terminated/revoked the contract, if it was indeed willing to arbitrate, it should have proceeded to arbitration before revoking the contract. It was also held by the Court that the application for stay of proceedings pending arbitration was belated.

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Shortcomings and Pitfalls In Mekwunye V. Lotus Capital Ltd (Supra)
Some of the identifiable shortcomings of the decision include 1. The Court of Appeal’s decision seems to offend the provisions of Section 136, 137 (1) and 139, the Evidence Act on the burden of proof.

Sections 136 and 137 (1) of the Evidence Act provide that the burden of proof in a suit or proceeding lies on the person who would fail if no evidence were given on either side (which in this instance is the applicant who wishes to stay proceedings pending arbitration). Since the provision of the law is clear on who is to adduce evidence, the decision of the Court of Appeal in Mekwunye v. Lotus (Supra) seems to offend the provisions of section 136 and 137(1) of the Evidence Act. The Court of Appeal, by its decision, has placed the burden on the Respondent to a motion for stay of proceedings, to disprove the Applicant’s willingness to arbitrate. This, in the writer’s view, is contrary to the onus of proof in the Evidence Act.
 
Section 139 of the Evidence Act provide that: “The burden of proof as to any particular fact lies on the person who wishes the court to believe in its existence…” Hence, to hold that documentary proof is only necessary when the Respondent controverts the deposition of the Applicant, cannot, in the author’s view, stand. 2. The decision seems to support Trident v. UBA with certain modalities

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In Mekwunye’s case, the Court was of the opinion that the documentary proof of willingness only becomes necessary where a deposition in the affidavit has been controverted. Having made this finding, it is the view of the author of this article that, the criticism of Trident’s decision by the Court, to the effect, that “placing the burden of presenting documentary evidence to support an application for stay of proceedings pending arbitration constitutes a departure from the plain provisions of Section 5(2) of the ACA” does not arise. This is because, according to Mekunye’s case the need for documentary proof is still necessary but at a different stage of the proceedings.

3. The decision may infringe on a party’s right to a fair hearing.
The decision in Mekunye’s case may ultimately infringe on a Respondent’s right to a fair hearing. In our various High Court (Civil Procedure) Rules, where an application is filed, a respondent to such application is permitted to file a Counter-affidavit in opposition and the originator of such application may file a Further-Affidavit if it so wishes. The filing of a Further-Affidavit brings an end to the filings in relation to the said application and no further process is allowed to be filed under the Rules. The implication of the decision is that an applicant is at liberty to produce documentary evidence in proof of its willingness through a Further-Affidavit when the Respondent to such application may not have a chance to challenge same. This, in the author’s view, may infringe on the Respondent’s right to a fair hearing. See: Afolabi v. Tejuoso & Anor (2017) LPELR-42543.

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4. The decision may allow parties to contrive documents for the purpose of an application for stay.
Since an Applicant is allowed to introduce documents at a later stage to demonstrate willingness, a party may proceed to contrive a document for that purpose which will pollute the streams of justice. Documents may, by the decision, be made during the pendency of the action or application for stay of proceedings for the purpose of demonstrating a willingness to arbitrate. This is the author’s view will however be inadmissible by virtue of Section 83 of the Evidence Act 2011, which is to the effect that documents made during the pendency, or in anticipation, of proceedings are inadmissible. The decision in Mekunye’s case seems to have glossed over this very important provision.
 
The case of Fak Engineering seems to have had this in mind when the Court held that the application for stay by the Applicant in that suit was belated owing to the fact that it was not willing to arbitrate having not initiated arbitration as at the time it proceeded to revoke the contract is awarded to the Respondent.

Conclusion
Although I do, and undoubtedly so, commend the industry of My Lords, at the Court of Appeal in Mekunye’s case, in view of the shortcomings which have been highlighted above, I maintain the position that until the Supreme Court makes a pronouncement on the issue, Trident is still good law and should represent the valid interpretation of Section 5 of the Arbitration and Conciliation Act in relation to the demonstration of the willingness of an Applicant to arbitrate, a precondition to the grant of a motion for stay of proceedings pending arbitration.
 
Davies is an associate partner at Pinheiro LP.

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