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Tanzania Arbitration series part I: Why do entrepreneurs prefer litigation to arbitration in dispute settlement?

2018-02-15 09:01:33

By Frederick Werema & Paul Kibuuka

Business, commercial and investment transactions in every sector of the Tanzanian economy are prone to disputes. However, the speedy, effective and equitable resolution of disputes is essential for stability and growth in the economy. It is also one of the criteria used by investors when assessing Tanzania on the cost and ease of doing business within its jurisdiction. The more speedy, effective and equitable disputes can be resolved, the more Tanzania is likely to attract quality investments.

More and more frequently these days, contracts—whether between businesses, between shareholders of a company, between businesses and vendors, or between investors and the Government of Tanzania—have a clause stipulating that if a dispute should occur, then the parties will go to arbitration instead of immediately pursuing litigation i.e. filing a lawsuit in court. This is not to suggest that arbitration has only recently been used in resolving disputes, far from it! For many centuries arbitration has been in use; in fact, classical philosopher Plato wrote about it among the Greeks.

First though, it is important to be clear that by ‘arbitration’ we mean the process by which parties to a dispute arising out of any business, commercial or investment transaction agree to voluntarily submit that dispute to a third party (arbitrator) appointed by agreement between the parties, and whose decision (arbitral award) is final and binding on the parties. In terms of Tanzania’s current law and practice, an arbitral award is non-appealable.

In a broad sense, the spectre of high costs and emotional distress that is innate to litigation today makes arbitration a better option than litigation for resolving disputes of a business, commercial or investment nature. Despite such downsides, Tanzania’s business executives and entrepreneurs seem to prefer litigation over arbitration, even when they have inserted into the contract an arbitration clause.

It is amazing to hear that some executives seemingly pay no or little attention to the clause, but why? Could it be that some legal advisors to the transactions downplay the importance of the arbitration clause, or that they do not anticipate challenges that may arise when a dispute occurs? From experience, the answers to these questions appear to be in the affirmative.  

Business executives and entrepreneurs also seem to prefer arbitration over litigation due to the widespread perception among them that arbitration may only be a clone of court proceedings, because once the arbitral award is delivered it has to be enforced by Tanzania’s High Court and the losing party may challenge the enforcement of the award. Hence, going to arbitration leads to more delays arising from a pile up of pending cases in the High Court thereby eliminating the intention of a speedy and effective redress of business disputes through arbitration.

This is really one of the concerns of corporate Tanzania which must be urgently addressed in order to give arbitration the credibility that it deserves.

Our theme is that some of the concerns, if not all, can be addressed through a comprehensive review of Tanzania’s Arbitration Act, Cap 15 (Revised Edition 2002). This Act still closely follows its 1931 predecessor that was amended some forty-seven years ago, in 1971. Little wonder, then, that today arbitration is conducted largely on an ad-hoc basis. Ad-hoc arbitration pointedly increases the chances of a court intervention.

Be that as it may, Tanzania’s efforts to institutionalize arbitration can be seen through the establishment of two main arbitration bodies, namely, the Tanzania Institute of Arbitrators and the National Construction Council. But these efforts are curtailed by the alarmingly archaic Arbitration Act which, until now, incorporates the Geneva Protocol on Arbitration 1923 and the Geneva Convention on Execution of Foreign Arbitral Awards 1927.

Neighbouring Uganda and Kenya have departed from the colonial era enactment and they have modernized their arbitration legislation. It’s time for Tanzania to stop lagging behind its regional counterparts in undertaking arbitration legal reforms, especially in this era of heightened competition among developing countries for foreign investment.

We must, however, sound a cautionary note: The attitude and behaviour of Tanzanian Government executives, business leaders and entrepreneurs, legal advisors, and the courts towards arbitration will have to change tremendously if we want to make arbitration legal reforms meaningful. 

Hon. Frederick Werema is a retired Judge and former Attorney General of Tanzania and currently the managing partner of FMD Legal Consultants & Advocates. Mr Paul Kibuuka is the managing partner of Isidora & Company Advocates.

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