The use of permissive language ('may') in an arbitration clause does not make arbitration optional once a court identifies a valid agreement. High Court in Arua Rules.

FACTS

The Plaintiff, Arua Taxi Operators Cooperative Society, instituted a suit against Arua District Local Government for alleged breach of a contract executed on 4th September 2017. The Plaintiff sought general damages, enforcement of the tender award/contract, interest, and costs arising from the Defendant’s alleged failure to fulfil its contractual obligations.

The Defendant, while admitting the existence of the contract, denied any breach and contended that it had taken steps to ensure the Plaintiff performed its own obligations under the contract. Critically, the Defendant raised a preliminary objection that the dispute ought to have been referred to arbitration pursuant to Clause 17.2 of the contract between the parties.

Earlier in the proceedings, the Defendant had filed Miscellaneous Application No. 0001 of 2019 seeking a stay of the main suit and referral to arbitration. That application was subsequently dismissed for want of prosecution on 6th December 2021, the Defendant having failed to appear or take steps to prosecute it.

ISSUES

1. Whether the preliminary objection on referral to arbitration was properly raised.

2. Whether the dispute was subject to a valid and enforceable arbitration agreement.

3. Whether the arbitration clause ousted the jurisdiction of the High Court.

4. Whether the suit was improperly before court for failure to first submit to arbitration.

   
   

LEGAL REPRESENTATION

1. Plaintiff: Mr. Henry Odama of M/s Odama & Co. Advocates

2. Defendant: Mr. Illat Oscar from the Attorney General’s Chambers

   
   

SUBMISSIONS OF THE PARTIES

Defendant’s Submissions

Counsel for the Defendant submitted that the contract between the parties contained an arbitration clause under Clause 17.2, which mandated that unresolved disputes be referred to arbitration. He submitted that under Section 5 of the Arbitration and Conciliation Act (Cap. 5), a court before which proceedings are brought in a matter subject to an arbitration agreement is obliged to refer the matter to arbitration, unless the agreement is null and void, inoperative, or incapable of performance.

Counsel relied on the case of ATC Uganda Versus Smile Uganda Ltd, HCMA No. 621 of 2023, submitting that the basis of arbitration is the principle of party autonomy, which recognizes parties' rights to design their own arbitral dispute resolution processes. He further argued that the matter, if at all litigated, ought to have come before the court as an appeal against an arbitral award, and that the arbitral terms were mandatory.

With respect to the dismissal of Miscellaneous Application No. 0001 of 2019, counsel for the Defendant submitted that when the application came up for hearing on 6th February 2019, the court had effectively heard the main suit and the application was overtaken by events. Counsel expressed that the Defendant was surprised to learn that the application had been dismissed.

Plaintiff’s Submissions

Counsel for the Plaintiff submitted that although an arbitration clause existed, it was not mandatory, as the wording of Clause 17.2 used the term “may,” thereby making arbitration optional rather than compulsory. He argued that the Plaintiff was entitled to proceed directly to court.

He further submitted that the Defendant had previously filed an application to refer the matter to arbitration (Misc. Application No. 0001 of 2019), which was dismissed for want of prosecution, rendering the arbitration route inoperative.

Counsel relied on Ssekikubo Theodore v Attorney General to argue that statutory and contractual language must be given its literal meaning. He also maintained that the High Court has unlimited jurisdiction to entertain the matter.

COURT’S FINDINGS

On Preliminary Objections

The court set out the applicable principles governing preliminary objections, drawing on the locus classicus authority of Mukisa Biscuit Manufacturing Ltd versus West End Distributors Ltd (1969) EA 697, where Sir Newbold Charles P. observed that:

A preliminary point of law is in the nature of what used to be a demurrer. It raises a pure point of law, which is argued on the assumption that all the facts pleaded are correct. It cannot be raised if any fact has to be ascertained or if what is sought is the exercise of judicial discretion.

The court also relied on Gunya Company Ltd v. Attorney General, HCCS No. 031 of 2011, where the court stated that the aim of a preliminary objection is to save the time of the court and of the parties by not going into the merits of a suit, where there is a point of law based on ascertained facts rather than evidence.

On the Arbitration Agreement

The court found that there existed a valid and enforceable arbitration agreement between the parties. Clause 17.2 of the contract provided that:

If the parties fail to resolve such a dispute or difference by mutual consultation within twenty-eight days from the commencement of such consultation, either party may require that the dispute be referred for resolution in accordance with the Arbitration Law of Uganda or such other formal mechanism specified in the SCC.

The court, relying on Section 5 of the Arbitration and Conciliation Act (Cap. 5), found that once a valid arbitration agreement is identified, referral to arbitration is mandatory and not at the court's discretion. The court cited Sanlam General Insurance (U) Ltd versus Victoria Motors Ltd & Anor (Miscellaneous Application No. 41 of 2016) in support of this position.

The court identified the following elements required to determine whether a matter must be referred to arbitration, as set out in British American Tobacco versus Lira Tobacco Stores, HCMA No. 924 of 2013:

1. There must be a dispute between the parties.

2. The dispute must be arbitrable.

3. The dispute must be governed by a valid and enforceable arbitration agreement.

   
   

The court found all three elements satisfied on the facts. The existence of a dispute was undisputed, the dispute was arbitrable, and counsel for the Plaintiff had himself conceded the existence of a valid arbitration agreement, which was admitted into evidence as PEX.1.

On Whether the Agreement Was Inoperative or Incapable of Performance

Rejecting the Plaintiff's argument that the word 'may' in Clause 17.2 made arbitration optional, the court held that once a valid arbitration agreement is found, it is bound under Section 5 of the ACA to refer the matter to arbitration. The court noted that the Plaintiff's argument conflated the parties' discretion to invoke the clause with the court's obligation upon finding a valid agreement.

Applying the test for inoperability from ATC Uganda Ltd versus Smile Communications Uganda Ltd (supra), the court held that an arbitration agreement is inoperative only where it has ceased to have legal effect or is no longer legally valid. Citing Halsbury's Laws of England, Vol. 2, page 630, and Fulgensius Mungereza versus PricewaterhouseCoopers Africa Central, SCCA No. 18 of 2002, the court further noted that an agreement is incapable of performance only where the circumstances are such that performance is impossible even if both parties were willing.

On the dismissal of Miscellaneous Application No. 0001 of 2019, the court reviewed the record and found that the parties had not been referred to arbitration. The record of 6th February 2019 showed only that the court had adjourned the matter and asked the parties to 'talk.' The application was subsequently dismissed on 6th December 2021 after the Defendant failed to appear. The court found no evidence that arbitral proceedings had ever been commenced by any party under Section 21 of the ACA.

The court concluded that the arbitration agreement remained valid, operative, and capable of performance, and that none of the exceptions under Section 5 of the ACA applied.

On Court Jurisdiction

The court held that where a valid and enforceable arbitration agreement exists, the court's jurisdiction is ousted and the dispute must be subjected to arbitration. The court cited the Court of Appeal's decision in Babcon Uganda Limited versus Mbale Resort Hotel Limited, CACA No. 87 of 2011, where it was observed that:

It appears to us that the tenor of the ACA is to limit the intervention of courts in matters that are governed by the ACA. The law has chosen to reinforce freedom of contract and allow the parties or one of the parties enforce an existing arbitration agreement as the only mode available to the parties to solve their dispute, and to that extent, oust the jurisdiction of the courts to entertain such a dispute. The words used to achieve this are unambiguous.

The court further noted that enforcement of arbitration agreements is intended to respect freedom of contract and foster party autonomy, and that the court's powers in matters subject to arbitration are limited to specific instances under the ACA. Short of those instances, the arbitration agreement must be respected and strictly enforced. The court's jurisdiction in arbitral matters is limited to what is specified under Section 9 of the ACA.

Outcome

The court found that the suit was improperly filed before it, as the parties were bound by their valid and enforceable arbitration agreement. The suit was accordingly dismissed with costs to the Defendant.

Read the full case

Arua Taxi Operators Cooperative Society v Arua District Local Government 2026 UGHC 336 (14.

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Key Takeaways

1. Parties to a contract containing an arbitration clause must honour it: where a valid and enforceable arbitration agreement exists, the court is obliged, under Section 5 of the Arbitration and Conciliation Act, to refer the matter to arbitration, this is mandatory, not discretionary.

2. The use of permissive language (“may”) in an arbitration clause does not make arbitration optional once a court identifies a valid agreement. The obligation to refer runs to the court, not the parties, upon discovery of such an agreement.

3. An arbitration agreement is only “inoperative” if it has lost legal effect, and “incapable of performance” only if circumstances make performance impossible regardless of the parties’ willingness, a high threshold not easily met.

4. Failure to prosecute an application for referral to arbitration (leading to its dismissal for want of prosecution) does not render an arbitration agreement inoperative or extinguish the court’s mandatory obligation to refer under Section 5 of the Arbitration and Conciliation Act.

5. Courts have very limited jurisdiction in arbitral matters, confined to the specific instances prescribed under the Act. Where an arbitration agreement governs the dispute, the court’s jurisdiction to entertain the main suit is ousted.

6. Contract drafters should use precise, unambiguous language in arbitration clauses, specifying whether referral is mandatory or discretionary, and clearly delineating the arbitral rules and procedures to be followed.

7. Parties contemplating litigation in the face of an arbitration clause do so at their peril, the cost consequences of a dismissed suit (as in this case) can be significant, in addition to the delay caused by failed litigation.