Lakeside Dairy Limited v International Centre for Arbitration and Mediation in Kampala (ICAMEK) and Midland Emporium Limited High Court Miscellaneous Cause No. 021 of 2021

The High Court (Commercial Division) in Kampala delivered an important decision relevant to arbitral practice in Uganda. In Miscellaneous Cause No. 021 of 2021 (Lakeside Dairy Limited v International Centre for Arbitration and Mediation in Kampala (ICAMEK) and Midland Emporium Limited), the Court declined to set aside an arbitral award rendered by an arbitral Tribunal under the auspices of ICAMEK as the administering institution under the ICAMEK Arbitration Rules.

The Court (I) broadly examined the instances in which a Court may set aside an arbitral award or refuse enforcement under section 34 of the Arbitration and Conciliation Act Cap 4 (“the ACA”) of Uganda, and (II) considered the effect of a party’s conduct during the selection, appointment, and constitution of the arbitral Tribunal on that party’s subsequent challenge to enforcement of the arbitral award.

The Court determined that the Applicant had failed to prove any violation of the grounds under section 34 of the ACA to justify the setting aside of the arbitral award. In particular, the Court declined to set aside the award on jurisdiction grounds based on the Applicant’s conduct during the arbitral proceedings. The Court concluded that the Applicant deliberately refused to participate in the arbitral proceedings or raise any jurisdiction objections before the Tribunal itself despite several invitations to do so from the Respondent and the Tribunal.

Background

The controversy related to a breach of an exclusive distribution agreement (“the Agreement”):

• Under the Agreement, the Applicant (Lakeside Dairy Limited) appointed the 2^nd Respondent (Midland Emporium Limited) as the exclusive distributor of the Applicant’s milk products (“the Products”) in the western province of Kenya (“the Territory”).
• Based on the Agreement, the 2^nd Respondent at its own expense, setup exclusive distribution channels for the Applicant’s Products with various retailers in the territory at the retail level. However, contrary to the Agreement, the Applicant came into the exclusive territory of the 2^nd Respondent without any notice, cause or justification and began dealing with the 2^nd Respondent’s retailers and other third parties to distribute its products in breach of the Agreement.
• The 2^nd Respondent declared a dispute and initiated arbitration proceedings pursuant to the Agreement for breach of contract. Upon invitation to constitute an arbitral Tribunal, the Applicant refused to participate and engage with the 2^nd Respondent regarding the 2^nd Respondent’s claim as well as the selection and appointment of the arbitral Tribunal.
• As a result of the parties’ failure to agree on an arbitrator, the 2^nd Respondent invited ICAMEK to exercise its mandate as an appointing authority under section 2 of the ACA, to appoint and constitute an arbitral Tribunal to determine the dispute between the parties.
• The arbitral Tribunal was constituted and appointed under the ICAMEK Rules of Arbitration. On several occasions, the arbitral Tribunal invited the Applicant to submit to arbitration, including offering the Applicant the opportunity to exercise its right to challenge jurisdiction and composition of the Tribunal if the Applicant so desired. The Applicant declined to make any representations and to participate in the arbitral process. The Tribunal accordingly ruled on its own jurisdiction and proceeded to try and determine the dispute on the evidence before it.
• The Tribunal rendered an award granting the 2^nd Respondent’s claim for breach of contract. The Tribunal awarded the 2^nd Respondent damages for loss of expected revenue in the amount of USD 386,400 among other reliefs (including commercial interest and costs of the arbitration).
• The Applicant challenged the award on several grounds including the mandate of ICAMEK to constitute an arbitral Tribunal and administer the arbitration, the composition of the arbitral Tribunal, the jurisdiction of the Tribunal and the validity of the arbitration clause.
• The Court dismissed the Applicant’s application because of failure to prove any violation of the grounds under section 34 of the ACA.

The Decision

The High Court declined to set aside the arbitral award and made several important findings that are highlighted below: -

The general presumption of party cooperation and participation in arbitration

Parties who signed a binding arbitration agreement are in principle, bound by its terms. Once a dispute arises and a Claimant commences arbitration proceedings against a Respondent, a general assumption is that the parties will cooperate and actively participate in the proceedings. The principle that arbitrators have an inherent power to continue arbitration proceedings when the other party refused to participate and to tender an ex parte award therefore, applied.

An arbitral award cannot be set aside on the basis of irregularities that do not result in a denial of “fair”, “equal” treatment and a “reasonable opportunity” to a party to present its case

Where at the beginning of any arbitration or at any stage in the course of or in connection with the proceedings, there has by reason of anything done or left undone, been a failure to comply with the requirements of the process, whether in respect of time, place, manner, form or content or in any other respect, any step taken in the proceedings, or any document, decision or order therein, that has not had the effect of denying a party “fair”, “equal” treatment and a “reasonable opportunity” to present its case, the failure can only be treated as an irregularity not sufficient to nullify the proceedings.

A Tribunal is entitled to take a tough line against a recalcitrant party to minimise disruption and excessive costs as a measure of fairness and necessity to enable the Tribunal to comply with its duty under section 18 of the ACA.

In the instant case, the Applicant was not denied a reasonable opportunity to present its case including objecting to jurisdiction because the Applicant, without reasonable cause, chose to absent itself from proceedings of which it had ample notice and had by its conduct, abused its right to a fair hearing by engaging in dilatory or guerilla tactics.

The arbitral Tribunal correctly accepted jurisdiction to determine the dispute because ICAMEK which constituted the Tribunal is an appointing authority under section 2(1)(a) of the ACA and the Arbitration and Conciliation (Appointment of International Centre for Arbitration and Mediation in Kampala as an Appointing Authority) Notice 2020, Legal Notice No. 4 of 2020.

An arbitration agreement that has been ratified by conduct is not void for want of capacity/authority

The arbitration agreement was not void for want of capacity / authority of the Applicant’s representative because the Applicant ratified the arbitration agreement by conduct. That there was no legal requirement for ratification of an arbitration agreement to be communicated to the 2^nd Respondent for it to be effectual.

The Court also relied on correspondence from the Applicant acknowledging the existence of the Agreement which contained the arbitration agreement among other ratifying acts and omissions.

Conclusion

The ruling is a positive development in arbitral jurisprudence for practitioners in Uganda. The Court sets a benchmark for future judicial consideration of the effect of party conduct in arbitral proceedings. Parties and their legal advisors are required to act in good faith before, during and after arbitral proceedings by honoring their contractual bargain to submit to the arbitration process to ensure an effective mechanism of commercial dispute resolution. The conduct of parties during the arbitral process is key to legitimizing the arbitral process and the resultant award considering that arbitration is consensual in nature.

In practical terms, the ruling highlights the key risks that parties who frustrate arbitral proceedings may face if they seek to challenge the arbitral award in bad faith. Arbitration practitioners should carefully consider the risks of advising their clients against submitting to arbitration where a valid arbitration clause has been invoked.

A party who has been accorded due process during arbitral proceedings may waive the right to challenge an arbitral award if that party (including their legal counsel) has engaged in conduct deliberately intended to frustrate the arbitral process. 

The ruling also emphasizes the importance of submitting to arbitration as the agreed mechanism for dispute resolution. If a party finds the process objectionable, such objection (including jurisdiction objections) can only be raised and determined by the arbitral Tribunal.