The Benefits and Pitfalls of an Arbitration Clause in Contracts

Most, if not all legal jurisdictions make provision for parties to choose to use private arbitration to settle matters instead of the Courts. It decreases the workloads on over burdened courts, as well as the state’s contribution to the cost of justice. It also allows the justice system to wipe it’s hands of a case, as the parties become responsible for the quality of the justice they receive in the case. The benefits are not just for the State, and as I will set out below there are very real and useful benefits for a contractant to choose to insert an arbitration clauses into an agreement.

The most valuable benefit that can be provided by an arbitration clause is that of privacy. Defamatory allegations made about a party in court papers are “privileged” and cannot be the basis for a defamation claim unless the defamed party is able to prove that there was malice behind the allegations. Court Process is open to the public and the allegations made therein must be made available the public on request. However, if a party were to include a privacy or non-disclosure clause in an agreement in addition to the arbitration clause, the only the parties themselves and the arbitrator would have knowledge of the matter. No member of the public would be entitled to information about the matter, and none of the parties are entitled to disclose information about the matter. The Arbitration Act no 42 of 1965 (“the Act”) even allows for parties to limit the extent of that parties have to discover evidence in their possession.

The Act allows for parties to customize every facet of the litigation process, from the time frames to deliver pleadings and notice to the inspection and delivery of evidence. Ordinarily, it can take approximately 3 months before a magistrate’s court will grant judgment in an undefended matter. Parties seeking quick and enforceable solutions to their disputes may benefit by agreeing to refer the matter to an arbitrator. However, there is on caveat in respect of the efficiency of arbitration clauses, and it is that the parties must truly intend to utilize arbitration. The mere existence of a clause which requires parties to refer matters to arbitration is not an automatic bar to the institution of legal action in a civil court. Should a party elect to institute action in the courts, that court will have jurisdiction to hear the matter unless the other party brings an application in terms of S6(1) of the Act. The court will only grant the application to stay proceedings if the respondent has been unable to show good reason as to why the matter should not be referred to arbitration.

Parties who continually find themselves repeating the same commercial transaction, such as a landlord leasing the same property to different tenants, usually elect to use a one size fits all contract for those transactions. It sometimes happens that those agreements contain arbitration clauses specifying that disputes arising from the agreement must be referred to an arbitrator. This type of agreement is often a double edged sword. It will allow a party to utilize a private forum, but a careless party could find themselves involved in unnecessarily costly litigation if they proceed to institute legal action without first seeking to refer the matter to arbitration.