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[2013] ZASCA 76
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North East Finance (Pty) Ltd v Standard Bank of South Africa Ltd (492/12) [2013] ZASCA 76; 2013 (5) SA 1 (SCA); [2013] 3 All SA 291 (SCA) (29 May 2013)
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no
: 492/12
Reportable
In the
matter between:
North
East Finance (Pty)
.........................................................................
Ltd
Appellant
and
Standard Bank of South Africa Ltd
...........................................................
Respondent
Neutral citation:
North East Finance v Standard Bank
(492/2012)
[2013] ZASCA 76
(20 May 2013)
Coram:
Lewis, Ponnan, Shongwe and Saldulker JJA and Zondi AJA
Heard:
20 May 2013
Delivered: 29 May 2013
Summary: A clause in a contract requiring parties to refer their
disputes to arbitration is not as a rule enforceable if the contract
itself is invalid. Whether the clause is separable from the contract
such that it too is not invalid depends on an interpretation
of the
contract as a whole, and the context in which it was concluded.
ORDER
On
appeal from South Gauteng High Court, Johannesburg (Hodes AJ sitting
as court of first instance)
The
appeal is dismissed with costs including those of two counsel.
JUDGMENT
___________________________________________________________________
Lewis JA (Ponnan, Shongwe and Saldulker JJA and Zondi AJA
concurring
)
[1] If there are substantive reasons to believe that a contract has
been induced by fraud, does a clause in the contract requiring
the
parties to submit any dispute between them to arbitration bind the
aggrieved party? This appeal turns on that question and
on a
construction of the arbitration clause itself. The South Gauteng High
Court (Hodes AJ) found that allegations of fraud (inducing
the
contract between the parties) made by the respondent, Standard Bank
of South Africa Ltd (the bank), against the appellant,
North East
Finance (Pty) Ltd (North East), did not appear unfounded, and
constituted sufficient grounds for it not to compel the
bank to
submit to arbitration. The high court thus declined the application
by North East to compel such a reference. The appeal
is with leave of
the high court.
The factual matrix
[2] The questions to be determined must be considered against the
factual matrix or context of the contract, termed a ‘settlement
agreement’ by the parties. In summary, this was that North East
conducted business by financing the acquisition of goods
by
concluding rental agreements with end-users. North East discounted
the debts owed to it by end-users with the bank in terms
of an
agreement of cession. The business between the parties commenced in
1999, and the operative cession agreement was concluded
in 2001. In
terms of the cession North East ceded its rights under various rental
agreements to the bank, and agreed to ‘offer
contracts’
to the bank from time to time. The bank was entitled to accept such
offers in its absolute discretion.
[3] The cession agreement was amended from time to time. In
particular an addendum (the collection addendum) was added in 2003,
and it entitled North East to collect payments directly from debtors
(end-users). The bank would in turn claim payment from North
East.
That agreement was in turn amended in May 2007. Disputes about the
collection of rentals, and the debiting of North East’s
bank
account with the bank, arose in 2008.
[4] In September 2008, following negotiations and meetings to resolve
the disputes, the parties entered into a ‘settlement
agreement’, the purpose of which was to phase out and then
terminate North East’s collection function. The agreement
was
drafted by Mr Nimrod van Zyl, North East’s attorney, and the
brother of the deponent to the founding and replying affidavits
in
the application, Mr Hermanus van Zyl. The latter was a director of
North East. The arbitration clause in issue in this matter
was in the
settlement agreement, clause 19.1 of which provided:
‘
In the
event of any dispute of whatsoever nature arising between the parties
(
including
any question as to the enforceability of this contract
but
excluding the failure to pay any amount due unless the defaulting
party has, prior to the due date for such payment, by notice
in
writing to the other party disputed liability for such payment), such
dispute will be referred to arbitration in the manner
set out below.’
(My emphasis.)
[5] Prior to the conclusion of the settlement agreement the bank’s
head of technology finance, Mr Mark Peters, became involved
in the
attempts to resolve the disputes. Although he did not sign the
agreement for the bank, he was conversant with the nature
of the
disputes that had arisen, and he deposed to the answering affidavit
for the bank. He was also instrumental in implementing
the agreement,
primarily in collecting the debts owed, estimated in 2008 to be worth
some R660 million.
[6] The process of collection proved more difficult than anticipated.
Peters and his team found it hard to get access to information
and to
understand the systems and processes used by North East prior to the
conclusion of the settlement agreement. It is not necessary
to
examine the details of the investigation, or its outcome, described
by Peters. Suffice to say that after some time Peters concluded
that
the settlement agreement was induced by fraudulent misrepresentations
and non-disclosures: by 2010, he said, he had discovered
that
procedures had been flouted by North East; transactions had been
disguised, funds embezzled and other serious breaches of
the
fiduciary duty owed by North East to the bank had occurred. Peters
concluded that these irregularities must have been known
to Hermanus
van Zyl at the time when the settlement agreement was concluded. By
deliberately failing to make disclosure of all
the irregularities,
the bank claimed, North East induced the bank to conclude the
contract.
[7] Having discovered the fraud, the bank elected to resile from the
agreement and to regard it as void ab initio. It refused to
submit
the question as to whether there had been fraud inducing the contract
to arbitration, maintaining that the arbitration clause
fell with the
contract (and indeed asserting that the clause had been included in
the agreement as part of the fraudulent strategy
of the Van Zyls).
North East, on the other hand, contended that any dispute between the
parties had to be submitted to arbitration,
including one as to the
enforceability of the contract. North East, after calling for various
pre-arbitration meetings (in terms
of clause 19.2 of the agreement)
which the bank refused to attend, launched an application in the high
court for an order that
a dispute existed as to whether the
settlement agreement was void ab initio; that the dispute was
arbitrable in terms of clause
19.1 of the agreement; and that a
dispute between the parties regarding the quantum of a payment to be
made under the settlement
agreement was also arbitrable.
The findings of the high court
[8] The high court made several findings: that there were numerous
disputes of fact relating to the fraudulent conduct of North
East,
and the conclusion of the settlement agreement, that could not be
resolved on the papers before it; that the arbitration
clause was
part of the agreement and had no separate existence; that the
allegations of fraud were ‘not wholly unfounded’
on the
bank’s version; that the arbitration clause did not refer to
fraudulent misrepresentations inducing the contract specifically,
such that this was not an issue to be determined by arbitration; that
the agreement to arbitrate was not severable form the rest
of the
settlement agreement; and that accordingly, the court would not
compel the bank to comply with the clause.
The legal issues
[9] On appeal, North East contended that the arbitration clause
conferred jurisdiction on an arbitrator despite the allegations
of
fraud inducing the settlement agreement, and that in any event the
allegations of fraud were denied, or were based on ‘hearsay
evidence’ or ‘secondary facts’. The finding of the
high court that, on the bank’s version, the allegations
of
fraud were not wholly unfounded could lead, it was argued, to a party
escaping an arbitration clause, when it was no longer
considered
desirable, by simply alleging fraud.
[10] The bank argued that there were three issues for determination
on appeal: whether the arbitration clause could survive the
demise of
the agreement in which it was included; whether it was divisible from
the remainder of the contract and would govern
the determination of
the question whether there was fraud that induced the agreement
including the clause itself; and whether the
bank had laid a basis
sufficient to persuade the court not to refer the question of fraud
to arbitration.
[11] As I see it, there are really only two issues for determination.
First, whether the particular arbitration clause should be
construed
so as to compel submission to arbitration on whether the bank was
induced by North East’s fraud to conclude the
settlement
agreement; and if so whether the allegations of fraud do not appear
to be ‘wholly unfounded’.
The effect of fraud on an arbitration clause in general
[12] The first principle that the bank argued required consideration
is really not in question. If a contract is void from the
outset then
all of its clauses, including exemption and reference to arbitration
clauses, fall with it. The principle was most
recently enunciated by
this court in
North West Provincial Government & another v
Tswaing Consulting & others
1
where Cameron JA said that an arbitration clause ‘embedded in a
fraud-tainted agreement’ could not stand. The court
referred in
this regard to
Wayland v Everite Group Ltd
2
which in turn relied on
Allied Mineral Development Corporation
(Pty) Ltd v Gemsbok Vlei Kwartsiet (Edms) Bpk
.
3
That decision referred to
Heyman & another v Darwins Ltd
4
where Viscount Simon LC said:
‘
An
arbitration clause is a written submission, agreed to by the parties
to the contract, and, like other written submissions to
arbitration,
must be construed according to its language and in the light of the
circumstances in which it is made. If the dispute
is as to whether
the contract which contains the clause has ever been entered into at
all, that issue cannot go to arbitration
under the clause, for the
party who denies that he has ever entered into the contract is
thereby denying that he has ever joined
in the submission. Similarly,
if one party to the alleged contract is contending that it is void
ab
initio
(because, for example, the making of such a contract is illegal), the
arbitration clause cannot operate, for on this view the clause
itself
is also void.’
[13] North East accepted the general principle expressed in the
passage in
Heyman
. But it argued that the arbitration clause
itself provided that a dispute as to the enforceability of the
settlement agreement
had to be determined by arbitration given the
phrase in parentheses: ‘including any question as to the
enforceability of
this contract’. It contended that there is
authority that if an arbitration clause ‘specifically says so’
the
validity of the whole agreement must also be determined by a
reference to arbitration. This will, of course, depend on a
construction
of the clause in the contract to see if it does
‘specifically say so’.
5
The interpretation of the arbitration clause
[14] North East argued that the arbitration clause in this case
specifically said that the validity of the settlement agreement
was
to be determined by arbitration: that was the effect of the inclusion
of the phrase concerning the enforceability of the agreement.
The
bank argued that ‘enforceability’ was not co-extensive
with ‘validity’ and that the question whether
the
contract was void as a result of the fraudulent misrepresentations or
non-disclosures was not one that could be determined
by an
arbitrator. I do not think that this argument is helpful. The effect
of fraud that induces a contract is, in general, that
the contract is
regarded as voidable: the aggrieved party may elect whether to abide
by the contract and claim damages (if it can
prove loss) or to resile
– to regard the contract as void from inception, and to demand
restitution of any performance it
may have made, tendering return of
the fraudulent party’s performance.
[15] The bank chose to treat the settlement agreement as void from
inception, and when it made that election the contract effectively
ceased to exist. It did not have to be cancelled or rescinded: it was
void. The terms are often used loosely and confusingly. See
Christie’s The law of contract in South Africa
6
where the authors write of rescission of a contract induced by fraud
(if a contract is void there is nothing to rescind), but point
out
that where the fraud results in a fundamental mistake, it cannot be
anything but void from inception. That principle was expressed
clearly by this court in
Brink v Humphries & Jewell (Pty)
Ltd
.
7
It is not, however, necessary (indeed it is not possible, given the
disputes of fact in respect of the alleged fraud) for this
court to
determine whether the settlement agreement was void from inception or
voidable until the bank had elected to resile. I
consider that the
term ‘enforceability’ refers to both a void and a
voidable contract: if the parties had intended
that the question
whether fraud inducing the contract should be determined by an
arbitrator then he or she would determine whether
the contract was
valid and enforceable, or voidable or void.
[16] It is in principle possible for the parties to agree that the
question of the validity of their agreement may be determined
by
arbitration even though the reference to arbitration is part of the
agreement being questioned. That is suggested in
Heyman
. Lord
Porter said:
8
‘
. . .
I think it essential to remember that the question whether a given
dispute comes within the provisions of an arbitration clause
or not
primarily depends upon the terms of the clause itself. If two parties
purport to enter into a contract and a dispute arises
as to whether
they have done so or not, or as to whether the alleged contract is
binding upon them, I see no reason why they should
not submit that
dispute to arbitration. Equally, I see no reason why, if at the time
when they purport to make the contract
they
foresee the possibility of such a dispute arising
,
they should not provide in the contract itself for the submission to
arbitration of a dispute as to whether the contract ever
bound them
or continues to do so. They might, for instance, stipulate that, if a
dispute should arise as to whether there had been
such a fraud,
misrepresentation or concealment in the negotiations between them as
to make a purported contract voidable, that
dispute should be
submitted to arbitration. It may require very clear language to
effect this result, and it may be true to say
that such a contract is
really collateral to the agreement supposed to have been made, but I
do not see why it should not be done.’
(My emphasis.)
[17] North East contended that the principle set out in
Heyman
was
approved and applied by this court in
Van Heerden
(above), a
matter decided on exception. This particular passage was not,
however, referred to. (I shall return to the passage shortly.)
And in
Van Heerden
this court held that the question whether
misrepresentations (included as warranties in the contract) had
induced the contract
should be referred to arbitration on the basis
that the plaintiff relied on breach of warranties. As the bank
contended, that case
is distinguishable and turned on the nature of
the dispute.
[18] North East relied also on the House of Lord’s decision in
Fiona Trust & Holding Corporation & others v Privalov &
others
9
where Lord Hoffman endorsed the approach of Longmore LJ in the Court
of Appeal in that matter, that a fresh start should be made
in
determining whether an arbitration clause in an agreement covered a
particular dispute, including whether the contract was valid.
The
approach set out is instructive, but in my view says not much more
than was said in
Heyman
by the same court: the question must
be determined by interpreting or construing the clause itself and the
contract generally.
[19] The fresh start was needed in part to avoid the very fine
distinctions drawn by the English courts on the basis of the use
of
different prepositions – as was the case in
Heyman
where
Lord Porter drew a distinction between ‘arising under’
and ‘arising out of’ an agreement. More importantly,
it
was required because s 7 of the Arbitration Act 1996 introduced a
completely new principle in England. It provides:
‘
Separability
of arbitration agreement
Unless otherwise agreed by the
parties, an arbitration agreement which forms or was intended to form
part of another agreement (whether
or not in writing) shall not be
regarded as invalid, non-existent or ineffective because that other
agreement is invalid, or did
not come into existence or has become
ineffective, and it shall for the purpose be treated as a distinct
agreement.’
The provision in effect reverses the previous principle that a
provision in a contract would have the same status as the contract
itself unless the parties specifically said otherwise.
[20] The House of Lords in
Fiona Trust
accordingly had to make
the fresh start, and Lord Hoffmann did so in line with modern
approaches to the interpretation of contracts:
the court should have
regard to what ‘the parties, as rational businessmen, are
likely to have intended’.
10
Lord Hoffman put it this way:
11
‘
Arbitration
is consensual. It depends on the intention of the parties as
expressed in their agreement. Only the agreement can tell
you what
kind of disputes they intended to submit to arbitration. But the
meaning which parties intended to express by the words
which they
used will be affected by the commercial background and the reader’s
understanding of the purpose for which the
agreement was made.
Businessmen in particular are assumed to have entered into agreements
to achieve some rational commercial purpose
and an understanding of
this purpose will influence the way in which one interprets their
language.’
[21] It was necessary, therefore, Lord Hoffman said, to have regard
to the purpose of the agreement as a whole and of the arbitration
clause in particular. In doing so, the court would assume that
generally parties intended to have all their disputes under an
agreement determined by the same tribunal – not some disputes
by an arbitrator and others by a court. If the parties intended
otherwise, it was easy enough for them to say so.
12
[22] In his speech in
Fiona Trust
Lord Hope agreed with the
approach adopted by Lord Hoffmann, saying that if the parties had
confidence in their chosen jurisdiction
for one purpose there was no
reason for them not to have such confidence for another purpose. But
he did qualify this by stating
that ‘one should be slow to
attribute to reasonable parties an intention that there should in any
foreseeable eventuality
be two sets of proceedings’ (my
emphasis).
13
[23] Lord Hope thus echoed the principle set out by Lord Porter in
Heyman
, quoted above, that if the parties foresee the
possibility of a particular dispute arising as to the validity of
their contract,
they may provide that it be referred to an arbitrator
for resolution. Accordingly if they anticipate that the contract
itself may
be invalid for want of true consensus or for some other
reason, they may make that arbitrable. But that can be determined
only
by having regard to the context in which the agreement was
concluded. This is in line with the South African approach to the
interpretation
of contracts generally.
Interpretation of the contract in general
[24] I do not propose to recite the principles of interpretation
comprehensively. They are well-settled. The court asked to construe
a
contract must ascertain what the parties intended their contract to
mean. That requires a consideration of the words used by
them and the
contract as a whole, and, whether or not there is any possible
ambiguity in their meaning, the court must consider
the factual
matrix (or context) in which the contract was concluded. See
KPMG
Chartered Accountants (SA) v Securefin Ltd.
14
[25] In addition, a contract must be interpreted so as to give it a
commercially sensible meaning:
Ekurhuleni Metropolitan
Municipality v Germiston Municipal Retirement Fund
.
15
This is the approach taken to considering the ambit of an arbitration
clause adopted in
Fiona Trust
. We must thus examine what the
parties intended by having regard to the purpose of their contract.
The interpretation of the arbitration clause in question
[26] North East argued that in construing the arbitration clause we
must take into account the phrase ‘including any question
as to
the enforceability of this contract’. We must, it contended,
give the phrase some meaning. To do that the court is
required to
look at the settlement agreement as a whole, and its purpose. That we
do by looking at the context in which it was
concluded. As stated at
the outset, the parties had a protracted dispute about the collection
of debts and the amounts owed to
each other respectively. The sums
ran into millions of rand. The purpose of the settlement agreement
was to resolve accounting
issues: at the time the bank was oblivious
to the malpractices it claimed were perpetrated by North East. In
Peters’ words,
prior to concluding the settlement agreement,
the bank ‘was under the impression that the arrears had arisen
primarily due
to inadequate management and control . . . . The
respondent [the bank] did not realise the full extent of the arrears
and the type
of transactions that had been concluded because it did
not have access to the debtors’ book, or the applicant’s
management
information system.’
[27] Moreover, said Peters, the bank’s investigations were
frustrated by North East which gave it limited access to information.
Although the bank had sent an employee to North East to examine its
business viability, and the report produced did not suggest
any fraud
– only inadequate systems – the employee had expressly
indicated in the report that an in-depth investigation
was needed in
order for the bank to gain some form of ‘comfort/discomfort’.
Had the bank known the extent of the arrears
and the true facts it
would not have entered into the agreement at all, it alleged.
[28] Peters alleged also that even the wording of the arbitration
clause was ‘improperly procured’ in order ‘to
avoid
a public scrutiny of its conduct’. The bank argued that it had
not foreseen that there might have been fraudulent conduct
on the
part of North East at the time of concluding the agreement. There was
thus no intention that the arbitrator would be expected
to resolve
issues relating to fraud. It had envisaged that the arbitrator’s
role would be to determine disputes in respect
of accounting issues.
[29] North East’s counter to that argument was that the
arbitration clause provided that the arbitrator would be a senior
member of the Johannesburg Bar who would be able to determine
questions relating to fraudulent misrepresentations inducing the
agreement itself. In my view, that is not an answer. The fact that an
experienced lawyer might be able to determine issues relating
to
fraud does not mean that the parties intended him or her to do so.
[30] I consider that, in the light of the purpose of the settlement
agreement, and having regard to what the parties envisaged
(because
it was what they could foresee) at the time of concluding the
agreement, it was not intended that the validity or enforceability
of
the contract induced by fraudulent misrepresentations and non-
disclosures, would be arbitrable. That brings me to the next
question: were the allegations made by the bank, in its answering
affidavit, sufficiently substantiated such that the court should
refuse to compel a reference to arbitration?
16
Substance in the allegations of fraud?
[31] In his answering affidavit Peters catalogued in detail the
results of investigations that he and his team had undertaken,
and
which led to the decision to resile from the settlement agreement on
the ground that it had been induced by North East’s
fraudulent
misrepresentations and non-disclosures. North East maintained that
Peters’ evidence was ‘secondary’
since he had not
represented the bank when it concluded the agreement. The facts
averred were also labelled secondary since they
were no more than
inferences drawn by Peters as to what Hermanus van Zyl must have
known. The argument fails to appreciate that
Peters had participated
in discussions preceding the conclusion of the settlement agreement
and had led the bank’s enquiries
after the agreement was
concluded: that it was he who asserted that he had established fraud
on the part of North East. In any
event, his affidavit was confirmed
by a representative of the bank who was party to the agreement and to
the decision of the bank
to resile.
[32] The bank argued that it need do no more than show that there was
some justification for its contentions that the agreement
was induced
by fraud. And it maintained that its allegations had not been denied
in North East’s reply – merely evaded.
An example of the
response to allegations of fraudulent misrepresentations and
non-disclosures is to be found in the introductory
paragraphs of the
reply, where Van Zyl asserted that the issues raised were irrelevant
to the question before the court and that
‘responding in detail
to each and every of those allegations by the respondent will unduly
burden the record and serve no
purpose’. So too, the allegation
by the bank that the arbitration provision was itself fraudulently
induced was met with
a bare denial. There was already mutual
distrust, asserted North East, and the bank was not reliant on it for
any disclosure. That
is hardly a justification for deliberate
non-disclosure.
[33] The methods described by Peters for investigating North East’s
systems and reconciling data, detailed comprehensively,
were met with
the response that ‘the intricate and involved procedures set
out by respondent . . . is a clear example of
why the issues between
the parties should be resolved by way of arbitration. The arbitrator
has been vested with the authority
to devise rules and procedures
best suited for resolving the issues’. No purpose would be
served by setting out more examples
of evasion. Suffice to say that
there are several.
[34] The high court correctly, in my view, held that the disputes of
fact could not be resolved in the application. And it also
correctly
held that the allegations made by the bank were sufficient to found
or to justify the conclusion that the settlement
agreement was
probably induced by fraud and that the bank could not be compelled to
refer the questions of fraud, and the bank’s
right to resile
from the agreement, to arbitration.
[35] The appeal is accordingly dismissed with costs including those
of two counsel.
_____________
LEWIS JA
Judge of Appeal
APPEARANCES:
For
Appellant: L W de Koning SC
Instructed
by: Marks-Anthony Beyl Attorneys
Johannesburg
Honey
Attorneys
Bloemfontein
For
Respondent: O Cook SC
(with
him A Botha)
Instructed
by: Edward Nathan Sonnenbergs Inc
Johannesburg
Symington
& de Kok
Bloemfontein
1
North
West Provincial Government & another v Tswaing Consulting &
others
2007 (4) SA 452
(SCA) para 13.
2
Wayland
v Everite Group Ltd
1993 (3) SA 946
(W) at 951H-I
3
Allied
Mineral Development Corporation (Pty) Ltd v Gemsbok Vlei Kwartsiet
(Edms) Bpk
1968 (1) SA 7
(C) at 14B.
4
Heyman
& another v Darwins Ltd
[1942] 1 All ER 337
(HL) at 343.
5
Sentrale
Kunsmis Korporasie (Edms) Bpk v Van Heerden
&
others
1972 (2) SA 729
(W), referring to
Heyman
, which was approved
also in this court on appeal:
Van Heerden en andere v Sentrale
Kunsmis Korporasie (Edms) Bpk
1973 (1) SA 17
(A) at 27G-H.
6
Sixth
ed by R H Christie and G B Bradfield (2012) 296-297.
7
Brink
v Humphries & Jewell (Pty) Ltd
2005 (2) SA 419
(SCA) para 2.
8
At
357.
9
Fiona
Trust & Holding Corporation & others v Privalov & others
[2007] UKHL 40
;
[2007] 4 All ER 951
(HL).
10
Para
13.
11
Para
5.
12
Para
13, referring to Longmore LJ’s judgment in the Court of
Appeal: [2007] 1 All ER (Comm) 891.
13
The
court referred in this regard to
Ashville Investments Ltd v Elmer
Contractors Ltd
[1988] 2 All ER 577
(QB) at 599.
14
KPMG
Chartered Accountants (SA) v Securefin Ltd
2009 (4) SA 399
(SCA)
para 39. See also
Christie
op cit 225ff and S W J van der
Merwe, L F Van Huyssteen, M F B Reinecke and G F Lubbe
Contract
General Principles
4 ed (2012) 264ff.
15
Ekurhuleni
Metropolitan Municipality v Germiston Municipal Retirement Fund
2010 (2) SA 498
(SCA) para 13. See also
Natal Joint Municipal
Pension Fund v Endumeni Municipality
2012 (4) SA 593
(SCA) para
18.
16
Allied
Minerals
above at 13A-D approved in
Wayland
above at
951D-H.