Can Courts Invoke an Arbitration Agreement on their Own Motion? A Case Comment on Dashen Bank S.C vs. Richel Tesfaye Trading PLC (158634/2018)

Introduction

Ethiopia’s Federal Supreme Court Cassation Division released its latest volume of decisions (28) recently. One of the compiled decisions concerns whether a court may decline jurisdiction on the basis of an arbitration agreement even when the defendant has not invoked the arbitration agreement to object to the jurisdiction of the court. While the court, in accordance with the repealed provisions of the Civil Code and Civil Procedure Code, decided that the courts may invoke an arbitration clause on their own motion, the reasoning and outcome would likely differ under the new law i.e. the Arbitration and Conciliation Working Procedure Proclamation No. 1237/2021 (Arbitration Proclamation).

Because the case has been published and released recently, it may create the impression that this is the current state of arbitration law of Ethiopia. This piece looks at the case in light of the provisions of the Arbitration proclamation in order to inform practitioners that it is not applicable for cases governed by the 2021 Arbitration Proclamation.

1. The Case: Dashen Bank S.C vs. Richel Tesfaye Trading PLC (File No. 158634)

The case concerned building lease agreement under which Richel Tesfaye Trading rented premises from Dashen Bank. Dashen Bank sued Richel Tesfaye Trading requesting the Federal First Instance Court to order the defendant to pay outstanding rent, penalty and order for eviction. The defendant, on the other hand, argued that the rent has been paid and the claim should be dismissed.

The Federal First Instance Court declined jurisdiction noting that the lease contract had an arbitration clause and such dispute can only be entertained by an arbitral tribunal constituted in accordance with the arbitration agreement. The Federal High Court confirmed the decision.

Dashen Bank petitioned to the Cassation Division of the Federal Supreme Court arguing that the lower courts committed a basic error of law by invoking the arbitration clause on their own motion and deciding on a matter that has not been raised by the defendant. It argued that in the absence of any plea from the parties relying on the arbitration clause, the courts were not entitled to base their decision on it.

The Cassation Division rejected this argument suggesting that the underlying agreement was a law between the parties, and the courts were required to take a judicial notice of that law. Thus, courts may invoke an arbitration clause on their own motion and decline jurisdiction accordingly. 

2. The Arbitration Proclamation of 2021

Article 8 of the Arbitration Proclamation governs the effect of an arbitration agreement when it is brought before a court. It reads as follows:

1. Where a suit falling under an arbitration agreement is brought before a court and the defendant raises preliminary objection that the parties agreed to resolve their disputes through arbitration agreement, the court shall dismiss the suit and the parties to resolve their dispute in accordance with the arbitration agreement.
2. Notwithstanding the provision of Sub-Article (1) of this Article, the court shall hear the case where the arbitration agreement is void and becomes ineffective;
3. The fact that the suit mentioned in SubArticle (2) of this Article is pending before a court does not prohibit commencement or continuation of the arbitration proceedings parallelly, and not prohibit the arbitral tribunal from rendering an award.
4. The arbitration agreement shall be deemed null and void if it is not raised under preliminary objection.” (Bold added for emphasis)

A combined reading of sub-articles 1 and 4 suggests that when a party takes the case to the court, the Proclamation expects the other party to raise the objection at the preliminary objection stage. The preliminary objection, as indicated in article 244(3) of the Civil Procedure Code, refers to the ‘earliest possible opportunity’. In practice, this means at most at the time when the defendant submits its statement of defence.

Under the Civil Procedure Code, the effect of failure to raise a preliminary objection is it would be considered to have been waived. Of course, that waiver is for that particular dispute, and nothing prohibits the party from raising the objection in future disputes under the Civil Procedure Code. The Arbitration Proclamation, however, seems to adopt a broader approach. Failure to raise it at the preliminary stage makes the arbitration agreement “null and void”. If interpreted literally, null and void means that the arbitration agreement is treated as if it never existed thereby bestowing the court the jurisdiction over current and future disputes in relation to the contract in question. However, sub-article 3 of the same article destabilises this assumption by allowing the commencement and continuation of arbitral proceeding and the issuance of an arbitral award in parallel to the court proceedings. It is not clear how and why an arbitral tribunal can have jurisdiction if the arbitration agreement becomes null and void.

Despite the ambiguity, Article 8 indicates that the arbitration agreement becomes void, and the court assumes jurisdiction in an event of failure by the defendant to raise it as an objection. 
In the above case, however, the court decision indicates that the defendant did not raise it at any stage of the proceedings let alone at the preliminary stage. Rather, the court invoked it on its own motion and declined jurisdiction.

If the new law had applied to this case, this would not have happened as explained above. The provisions of the new proclamation, therefore, appear to have been inserted with the purposes of creating clarity on this issue that raising the objection is a matter for the parties, not for the court to raise on its own motion. 

Conclusion

The purpose of this article is that the reasoning and outcome of the decision in the above case cannot and does not serve as precedent because the new law contains a clear provision on this matter. It was decided based on the already repealed provisions of the Civil Code and Civil Procedure Code. According to the new law, a preliminary objection on jurisdiction based on an arbitration agreement must be raised by the parties. Failing to raise it nullifies it. The court automatically assumes jurisdiction.

Gidey Belay Assefa is a PhD candidate at The Australian National University. Previously, he practiced arbitration and taught law courses in Ethiopia.