As mentioned in Part I of this series, a common trend in many commercial contracts is the inclusion of an arbitration clause. This type of clause is often accompanied by a mediation clause which requires the parties to try and settle the matter through mediation. The arbitration clause usually only becomes relevant when a full settlement is not reached.

Governing Law

Unlike mediation, the process of arbitration is governed by the Arbitration Act 42 of 1965. One can note that this legislation is quite old. As a result, much of the law governing arbitration has come around through development by our courts.

Despite legislation governing arbitration, there is no clear-cut definition of the process. Authors Butler and Finsen have defined arbitration as “…a procedure whereby the parties to a dispute refer that dispute to a third party, known as an arbitrator, for a final decision, after the arbitrator has first impartially received and considered evidence and submissions for the parties. The reference to the arbitrator takes place under an agreement between the parties. The arbitrator in resolving the dispute, is not an ordinary court of law, but a person chosen by the parties.”

From this definition one thing becomes clear: although a final decision about a dispute is made, arbitration is not the same as referring a dispute to an ordinary court of law.

Other characteristics of arbitration are also revealed by this definition: the arbitration process is designed to resolve a dispute between parties based on existing rights. A contract whereby the parties agree to arbitration is a requirement for this process to be pursued and the parties, by signing the contract containing such clause, bind themselves to the final decision made by the arbitrator.

Perhaps the most significant characteristic of arbitration that one should be acutely aware of is that the arbitrator’s award is final and binding on the parties. This means that even if the parties are unhappy or dissatisfied with the arbitrator’s outcome or award, they cannot challenge the finding.

Advantages and Disadvantages of Arbitration:

Following the arbitration process to resolve a dispute can be beneficial for several reasons. Firstly, the arbitrator generally has specialised knowledge or expertise in the area of law in which the dispute exists. Secondly, arbitration is sometimes considered to be a more convenient process. Parties must agree to a date, time, and place for the arbitration to take place and as a result, do not have to wait for court schedules. Thirdly, arbitration is undeniably a quicker way to resolve disputes. Without the constrictions of an overburdened justice system, a dispute can be speedily resolved, however, this does come at a cost. Finally, the arbitration process is private. This advantage is often one that weighs heavily for big corporations that want to avoid bad press surrounding disputes.

Despite the advantages of this dispute resolution mechanism, there are also disadvantages. Firstly, cost. It is argued by some that arbitration is a less expensive way of resolving a dispute, and this can be true in some cases. However, more often than not arbitration costs a pretty penny: the specialised arbitrator must be remunerated; attorneys and even advocates must be appointed; and there are other hidden costs to this procedure. Secondly, and linked to the above, is that legal aid representation is not allowed at arbitration. This means that a party to the dispute must appoint an attorney at their own cost. Finally, and perhaps most importantly, due to arbitration’s final and binding nature, dissatisfied or unhappy parties have very limited remedies available to attack or set aside an award.

One should carefully consider whether they are comfortable entering into an agreement containing an arbitration clause. While the process has its advantages (especially where costs are not a concern) some possibly serious disadvantages must be borne in mind.

Before entering an agreement prescribing arbitration as the only dispute resolution mechanism it is advisable to approach an attorney to properly discuss the content of such a contract and be properly informed of the consequences should a dispute arise.

WRITTEN BY VICTORIA MATTHEWS

Victoria Matthews is a candidate attorney at Miller Bosman Le Roux Attorneys

While every reasonable effort is taken to ensure the accuracy and soundness of the contents of this publication, neither the writers of the articles nor the publisher will bear any responsibility for the consequences of any actions based on information or recommendations contained herein. Our material is for informational purposes.