The Court of Appeal of Tanzania in Oryx Energies Tanzania Limited vs. Mo Assurance Company Limited and Encod Limited (Civil Appeal No. 705 of 2023) has delivered a significant judgment regarding the proper judicial approach when a party initiates a court suit despite a valid arbitration agreement. The ruling, authored by Justice D.J. Nangela, clarifies the distinction between striking out and staying a suit in such circumstances, providing crucial guidance for commercial disputes in Tanzania.
This review provides a concise analysis of the Court’s decision, its implications, and its reinforcement of the pro-arbitration stance in Tanzanian law.
The Factual Background
The case originated from a dispute between Oryx Energies Tanzania Ltd. (the appellant) and two respondents, Mo Assurance Company Ltd. and Encod Limited. The appellant, an oil-supplying company, had a wholesale supply contract with the second respondent, Encod Limited. This contract included a crucial arbitration clause (Clause 11), mandating that any disputes be resolved through arbitration if they couldn’t be settled informally.
The second respondent, Encod, exceeded its credit limit, and the first respondent, Mo Assurance, issued a performance bond to secure the increased credit. When Encod defaulted on payments, the appellant filed a civil suit in the High Court of Tanzania, Commercial Division, against both respondents.
The first respondent’s counsel raised a preliminary objection, arguing the suit was premature because of the existing arbitration clause. The High Court upheld this objection and, critically, struck out the entire suit with costs.
Aggrieved by this decision, Oryx Energies appealed to the Court of Appeal, challenging the High Court’s decision to strike out the case and its order on costs.
The Court of Appeal’s Analysis and Ruling
The Court of Appeal focused on two central issues:
- The propriety of the preliminary objection raised at the trial court.
- The appropriate course of action for a court when faced with a suit that should have been referred to arbitration.
On the Preliminary Objection
The appellant’s counsel, Dr. Alexander Nguluma, argued that the High Court erred by entertaining a preliminary objection that wasn’t formally pleaded or filed. However, the Court of Appeal rejected this argument. Citing the classic case of Mukisa Biscuits Manufacturing Company vs. West End Distributors Ltd [1969] Ε.Α 696, the Court reiterated that a preliminary objection can be based on a point of law that arises “by clear implication out of pleadings”. The existence of the arbitration clause in the parties’ contract was a fact clearly revealed in the pleadings, making it a valid point of law to be addressed. Therefore, the trial court was correct to consider the objection.
Striking Out vs. Staying the Suit
This was the core of the appeal. The Court of Appeal acknowledged the practical wisdom behind the trial judge’s decision to strike out the suit, which was aimed at discouraging parties from circumventing arbitration agreements and contributing to court backlogs. However, the Court emphasized that judicial discretion must be guided by law and established principles.
The Court’s position is that when a court is satisfied that a valid arbitration clause exists and that the dispute falls within its scope, the correct and legally sound approach is to stay the proceedings, not to strike them out.
The judgment provides three key reasons for this approach:
- Respect for Party Autonomy: Staying the suit upholds the fundamental principle of pacta sunt servanda (agreements must be kept) and the parties’ initial choice to resolve their disputes through arbitration. The Court’s inherent power to manage its proceedings includes ensuring the sanctity of the parties’ agreement.
- Statutory and Inherent Powers: The Court has a statutory power to refer parties to arbitration under Section 14(1) of the Arbitration Act, Cap. 15 R.E. 2020. This referral necessitates a stay of proceedings, which can also be granted under the court’s inherent jurisdiction. The Court held that even without a formal application for a stay under Section 15(1) and (4) of the Act, a stay can be ordered as a necessary implication of referring the parties to arbitration.
- Preservation of Rights: A stay of proceedings is temporary and time-bound. It preserves the possibility of resuming litigation if, for any reason, the arbitration process fails to resolve the dispute. Striking out the suit, on the other hand, terminates the proceedings and could force the plaintiff to refile, subject to potential issues like the law of limitation.
The Court relied heavily on its previous decision in Scova Engineering S.P.A & Another vs. Mtibwa Estates Ltd & Others [2021] TZCA 74 (TanzLII), which explicitly states that a court “neither can dismiss the suit because it has not heard and determined it on the merits nor can it strike it out because, except for the choice of a different forum, it is otherwise competent to try the matter”. This was a clear signal that the High Court’s decision was an error of law.
On the Award of Costs
Despite ruling in favor of the appellant on the main issue, the Court of Appeal refused to interfere with the High Court’s order on costs. The Court reaffirmed that the awarding of costs is within the trial court’s discretion. Since the trial judge had valid reasons for awarding costs—noting that time and resources were spent on the preliminary objection—and the discretion was exercised judiciously, the Court saw no reason to disturb it. The appellant’s argument that the proceedings were terminated at a preliminary stage was deemed insufficient to overturn the costs order.
Key Takeaway for Businesses and Legal Practitioners
This judgment is a powerful affirmation of Tanzania’s pro-arbitration legal framework. It sends a clear message that:
- Arbitration agreements are sacrosanct. Parties who agree to arbitrate their disputes must honor that agreement.
- Courts will enforce arbitration clauses not by striking out suits, but by staying them. This ensures that the agreed-upon dispute resolution mechanism is followed while preserving the court’s jurisdiction as a last resort.
- The judgment serves as a deterrent against “litigation-first” strategies where arbitration has been contractually agreed upon.
This decision strengthens commercial predictability and provides a more predictable legal path for parties operating under arbitration clauses. It reinforces the Tanzanian judiciary’s commitment to respecting party autonomy and promoting efficient dispute resolution in line with international best practices.
Disclaimer
The information provided in this article is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy of the information, it is not a substitute for professional legal counsel. The facts and circumstances of each case are unique, and you should not act on any information provided herein without seeking advice from a qualified legal professional.
Author Details
The author is Sunday Ndamugoba , Partner, RIVE&Co he can be reached at sunday@rive.co.tz