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[2013] ZASCA 120
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Dexgroup (Pty) Ltd v Trustco Group International (Pty) Ltd and Others (687/12) [2013] ZASCA 120; 2013 (6) SA 520 (SCA); [2014] 1 All SA 375 (SCA) (20 September 2013)
REPORTABLE
THE SUPREME COURT OF APPEAL OF SOUTH AFRICA
JUDGMENT
Case no: 687/12
In the matter between:
DEXGROUP (PTY) LTD
..................................................................
Appellant
and
TRUSTCO GROUP INTERNATIONAL (PTY)
LTD
.........................................................................................
First
Respondent
TRUSTCO GROUP HOLDINGS LTD
...........................
Second
Respondent
TRUSTCO FINANCIAL SERVICES (PTY) LTD
...........
Third
Respondent
D M FINE SC Fourth Respondent
Neutral citation:
Dexgroup (Pty) Ltd v Trustco
Group International (Pty) Ltd
(687/12)[2013] ZASCA 120 (20
September 2013)
Coram:
Ponnan, Malan, Majiedt, Wallis andPillay
JJA.
Heard
: 10 September 2013
Delivered
: 20 September 2013
Summary:
Arbitration award – review for
gross irregularity – s 33(1)
(b)
of
Arbitration Act
42 of 1965
.
ORDER
On
appeal from:
South
Gauteng High Court, Johannesburg
(Foulkes-Jones
AJ sitting as court of first instance) it is ordered that:
The
appeal is dismissed with costs, such costs to include those of the
application to lead further evidence on appeal and remit
the matter
to the arbitrator.
JUDGMENT
WALLIS JA
(
PONNAN, MALAN, MAJIEDT
and
PILLAY JJA
concurring)
[1] This case involves a challenge to
an arbitration award in terms of s 33(1)
(b)
of the Arbitration Act 42 of 1965
(the Act). The fourth respondent, a senior advocate and member of the
Johannesburg Bar, made the
award. Foulkes-Jones AJ sitting in the
South Gauteng High Court, Johannesburg, rejected the challenge and
the appeal is with her
leave.
[2] The background to the dispute is
the following. In terms of an agreement of purchase and sale
concluded on 2 November 2007,
the first respondent, Trustco
Group International (Pty) Ltd (Trustco Group) purchased from the
appellant, Dexgroup (Pty) Ltd (Dexgroup),
the entire issued share
capital of the third respondent
1
together with certain claims and loan
accounts. The purchase price was to be a maximum of R65 million.
Of this R20million was
payable in cash on the effective date and the
balance was to be paid by way of the issue of shares in Trustco Group
Holdings Ltd
(Trustco Holdings), the second respondent. The number of
shares to be issued was to be calculated by determining the net
profit
after tax achieved annually by a group of companies consisting
of the third respondent and four subsidiaries over a period of four
years, and dividingthe resultant figure by R3.80 per share. In terms
of clause 4 of the agreement the purchase consideration was
payable
at annual intervals on 31 May 2008, 2009, 2010 and 2011. The total
value of the shares to be issued in terms of that provision
was not
to exceed R45 million. Accordingly, if appropriate profits were
earned earlier in the four year cycle, the appellant
would become
entitled to the issue of the shares at an earlier stage.
[3] On 7 April 2009 Mr Müller, on behalf of
Dexgroup wrote to Trustco Group and Trustco Holdings in the following
terms:
'On 31 March 2009 the requirement for the profit targets in a
cumulative amount of approximately R44 million (FORTY FOUR
MILLION RAND) has been reached surpassing the target as outlined
specifically in clause 5.
The working capital draw-down facility has been settled in the
ordinary course of business on 31 March 2009 as required on a perusal
of clause 22.2.’
Dexgroup accordingly contended that it was entitled to
receive some 3 million shares in Trustco Holdings in settlement
of the
balance of the payment price.
[4] Trustco Group did not accept that it was obliged to
deliver the shares demanded by Dexgroup. It adopted this stance
because
it contended that, contrary to the statement in Mr Müller’s
letter, the working capital facility had not been settled
in the
ordinary course of business on 31 March 2009 and that until it had
been settled it was not open to Dexgroup to claim payment
of the
balance of the purchase price.
[5] Some explanation of the working capital facility is
required. In terms of clause 22.1 of the sale agreement Trustco Group
undertook
to make available to the third respondent ‘a banking
facility or cash of up to R30 000 000 (Thirty Million Rand) on the
effective
date’. It was accepted that this facility was
necessary to enable the third respondent (and indirectly its
subsidiaries)
to fund their day to day operations. Although there was
originally some dispute over this, it was common cause during the
arbitration
that Trustco Group had made available such a facility
through ABSA Bank. The use of the facility ensured that the third
respondent
did not go into overdraft with its own bankers, Standard
Bank. Clause 22.2 of the sale agreement provided that:
'By 31 March 2011 or upon the attainment of the profit targets as
mentioned in paragraph 5 hereof whichever happens first, the
Seller
must ensure that the facility in 22.1 is repaid.'
The relevance of the date 31 March 2011 and the profit
targets in paragraph 5 of the agreement is that whichever of these
came first
would determine the date upon which the final payment in
respect of the purchase price would be due.
[6] The dispute over the settlement of the facility
arose in the following way. One of the third respondent’s
subsidiaries,
Brokernet (Pty) Ltd, collected insurance premiums on
behalf of a broking company called Clarendon Transport Underwriters
(CTU).
Immediately before the letter of 7 April 2009 the
outstanding amount of some R19 million in respect of the loan
facility with
ABSA was settled
inter alia
by
way of a transfer of some R17 million from the bank account of
Brokernet (Pty) Ltd, thereby reducing the balance in the ABSA
account
to zero. The ability of Brokernet (Pty) Ltd to make this payment to
ABSA arose because it had collected premiums in at
least this amount
on behalf of CTU. However, Brokernet (Pty) Ltd had to account to CTU
for the premiums collected on its behalf,
and the third respondent
and its subsidiaries still required a banking facility in order to
function. It was accordingly necessary
for Trustco Group to reinstate
the facility almost immediately after 31 March 2009. In those
circumstances Trustco Group contended
that Dexgroup had not ensured
that the facility was discharged as required by clause 22.2 and
accordingly disputed its obligation
to deliver the shares
representing the balance of the purchase price.
[7] Dexgroup and Trustco Group submitted the dispute
over Dexgroup’s entitlement to receive payment of the balance
of the
purchase price of the third respondent to arbitration before
the fourth respondent. Having heard evidence and argument he held
that discharge of the facility was required before Dexgroup would be
entitled to the issue of any shares in respect of the balance
of the
purchase price and that the facility had not been properly discharged
by the means adopted by Mr Müller. He accordingly
dismissed
Dexgroup’s claim and upheld a counterclaim by Trustco Group for
declaratory relief.
[8] The arbitration agreement was subject to the
provisions of the Act. In terms of s 28 the arbitrator’s
award was final
and binding and not subject to appeal. It could only
be challenged on the limited grounds provided in s 33(1) of the
Act.
The ground on which Dexgroup relies in bringing its application
is that the arbitrator committed a gross irregularity in terms of
s 33(1)
(b)
of the
Act or exceeded his powers. It complained that it had suffered a
substantial injustice in the conduct of the proceedings
and explained
the basis for this in the following paragraphs of the founding
affidavit:
'19.1 The central question for determination by the arbitrator was
the correct interpretation to be given to the duty incumbent
upon the
applicant under clause 22.2 of the sale of shares agreement concluded
between the applicant and the respondents …
19.2 The duty in question (in clause 22.2) was to "ensure that
the facility in 22.1 is repaid";
19.3 Clause 22.1 provided that the first respondent would "make
available to the company [the third respondent] a banking
facility or
cash […] on the effective date";
19.4 The arbitrator did not properly construe the
ipsissima verba
of the sale of share agreement, but sought to understand the
contract within its proper commercial setting.
19.5 The applicant and the respondents put up two diametrically
opposed interpretations as to what the meaning of the duty in clause
22.2 entailed;
19.6 Plainly, it fell to the arbitrator to decide which of these two
interpretations was borne out by the written agreement;
19.7 As appears from the transcript of the hearing annexed hereto,
counsel for the respondents adopted a line of analysis before
the
arbitral tribunal which characterised the actions of Müller (as
executive chairman of the third respondent) in repaying
the credit
facility of R19 499 883.80 obtained from ABSA on the basis of the
R12M cash loan made (as substituted performance in
terms of clause
22.1) by the first respondent to Brokernet (a wholly owned subsidiary
of the third respondent) as constituting:
19.7.1 a misuse of trust money;
19.7.2 a breach of Müller's fiduciary duties; and, consequently,
19.7.3 theft.
19.8 These allegations were not pleaded by the first to third
respondents and were hence not fully and fairly ventilated on behalf
of the applicant. …
19.9 These allegations were not based upon any substantial evidence
to that effect led before the arbitrator …
19.11 … Advocate Fine SC erroneously and to the severe
prejudice of the applicant characterised the applicant's conduct
implicitly as illegal in relation to the funds in question. This was
a gross irregularity. It formed a foundational pillar of the
arbitration award and tainted the entire reasoning of the
arbitrator.'
[9] These basic allegations were supplemented by
complaints that Mr Müller had been subjected to character
assassination; that
matters of ‘serious import’ had not
been properly ventilated at the hearing; and, that the arbitrator had
failed to
carry out his duties in a judicial manner. Not surprisingly
Mr Fine reacted to these allegations and, in a memorandum filed in
response to the application, described them as unfounded and untrue.
In particular he pointed out that he had not made the adverse
findings against Mr Müller attributed to him by Dexgroup.
[10] The heads of argument delivered on behalf of
Dexgroup ranged far and wide over the terrain covered by the
arbitration award
and criticised it in considerable detail, in the
process adding fresh complaints to those embodied in the founding
affidavit. This
was clearly improper and counsel who appeared before
us, who had not prepared the heads of argument, confined himself to
points
made in the founding affidavit. In the result he advanced
three contentions. First he said that the pleadings did not cover a
complaint
that the means adopted by Mr Müller to discharge the
overdraft with ABSA involved ‘theft, misuse of trust monies or
a breach of fiduciary duty’ and that cross-examination that
suggested this had irretrievably tainted the proceedings. Second
he
said that the arbitrator’s approach to the construction of the
agreement and the admissibility of evidence in that process
was
flawed and resulted in an irregularity. Third he submitted that the
approach by the arbitrator improperly extended the scope
of the
arbitration and went outside its permissible limits. This, so he
contended, amounted to the arbitrator exceeding his powers.
I deal
with each argument in turn.
[11] The arbitration agreement recorded that Dexgroup
alleged that it was entitled to the payment of further consideration
in respect
of the purchase price of the shares in the third
respondent. It went on to record that Trustco Group alleged that
Dexgroup had
failed to fulfil its obligation to repay the banking
facility in terms of the sale agreement. From the outset therefore
the lines
of dispute were clearly demarcated. It will be recalled
that in his letter of 7 April 2009 Mr Müller had stated
that
the banking facility had been repaid. A clear dispute over this
allegation is reflected in the pleadings delivered in the
arbitration.
[12] In its statement of claim Dexgroup alleged that it
had complied with all its obligations in terms of the sale agreement.
The
response was an allegation that, in breach of clause 22.2, it had
failed to ensure that the overdraft facility had been repaid on
the
attainment of the profit targets. In further particulars, furnished
for the purpose of the arbitration,Dexgroup alleged that
one of the
obligations that it had fulfilled, entitling it to payment of the
balance of the purchase price,was the repayment of
the facility ‘by
means other than payment’ by itself. It amplified this by
alleging that the facility was paid ‘by
electronic funds
transfer from the banking account of Brokernet (Pty) Ltd’ into
the ABSA account. In response the counterclaim
by the third
respondent was amended to say that:
‘
On 31 March 2009 the Claimant, represented
byMüller, purported to repay and terminate the Facility pursuant
to clause 22.2,
but instead unlawfully and in breach of that clause
and of the aforesaid terms of the Agreement, made such payment by
diverting
funds held and/or controlled by Brokernet totalling R17
million from the Third Respondent and/or its operating subsidiaries.
The Third Respondent was, in consequence, obliged immediately to
re-instate the Facility, and in fact did so, to enable the Third
Respondent and its subsidiaries to access the funding they required
to fund their day-to-day business activities.’
Finally in further particulars this was described as an
‘unlawful diversion’ of funds.
[13] There can be no doubt in the
light of these allegations and counter-allegations that the primary
issue in the arbitration would
be whether Dexgroup had satisfied its
obligations under clause 22.2 in relation to the repayment of the
facility. There was no
dispute over the manner in which it had
purported to do this, but whether that was a permissible way of
repaying the facility was
squarely in issue. The conduct of Mr Müller
in causing it to be discharged from funds held by Brokernet (Pty) Ltd
was characterised
as an unlawful diversion of funds contrary to the
terms of the agreement. Dexgroup could have been under no
misapprehension that
what Mr Müller had caused to be done in
that regard would be attacked as improper and unlawful and in breach
of its obligations
under the agreement. The suggestions that were
made in cross-examination that the impropriety rested in a breach of
the relevant
provisions of s 45 of the Short-Term Insurance
Act
2
and
of the agreement with CTU cannot have come as a surprise to Mr Müller
and his response to the suggestions did not suggest
otherwise. Nor
did these suggestions prompt objections from his senior and junior
counsel. All that happened is that, in the course
of
cross-examination, some suggestions were put to the witness who dealt
with them, and the case moved on to deal with other points.
[14] In those circumstances there is
no merit in the suggestion that the arbitration proceeded on the
basis of allegations that
had not been pleaded or adequately raised,
with the result that Dexgroup and its witness were taken by surprise
and thereby deprived
of a fair hearing. Nor is there any merit in the
suggestion that the arbitrator was, as a result of these suggestions,
diverted
from the true enquiry before him such as to result in a
gross irregularity.
3
In
fact the arbitrator accepted the evidence of Mr Müller and at no
stage in his award mentioneddishonesty, breach of fiduciary
duty or
theft, much less made any findings to that effect.
[15] Turning to the second point it had two aspects.
First it was said that clause 22.2 was clear in its terms and
therefore it
was impermissible for the arbitrator to have regard to
any extrinsic evidence to provide the context within which it fell to
be
interpreted. Second it was contended that the arbitrator had
allowed inadmissible evidence to be placed before him and made use
of
such evidence in construing the relevant clause of the agreement.
[16] In regard to the interpretation
of the contract it was submitted that the arbitrator was bound by
‘the well-established
rule that a contract must be interpreted
by construing its plain words’ and that it is only in cases of
ambiguity or uncertainty
that an arbitrator can take account of
surrounding circumstances ‘or its so-called factual matrix’.
It is surprising
to find such a submission being made in the light of
the developments in the interpretation of written documents reflected
in
KPMG Chartered
Accountants (SA) v Securefin Ltd & another
4
and
Natal
Joint Municipal Pension Fund v Endumeni Municipality
.
5
These
cases make it clear that in interpreting any document the starting
point is inevitably the language of the document but it
falls to be
construed in the light of its context, the apparent purpose to which
it is directed and the material known to those
responsible for its
production. Context, the purpose of the provision under consideration
and the background to the preparation
and production of the document
in question are not secondary matters introduced to resolve
linguistic uncertainty but are fundamental
to the process of
interpretation from the outset. The approach of the arbitrator cannot
be faulted in this regard.
[17] The second objection related to
the alleged inadmissibility of the evidence to which the arbitrator
had regard in construing
the agreement. Fundamental to this objection
was the contention that an arbitrator is obliged to apply the rules
of evidence in
the same way as a court of law. As authority for that
proposition, the heads of argument for Dexgroup cited the statement
in
Lawsa
6
of the traditional view that an
arbitral tribunal is obliged to apply the formal rules of evidence.
This overlooked the submission
in the same paragraph
7
of that volume of
Lawsa
that
the rule would more accurately reflect modern arbitral practice if it
was restated as saying that, unless the arbitration agreement
otherwise provides, the arbitrator is not obliged to follow strict
rules of evidence provided the procedure adopted is fair to
both
parties and conforms to the requirements of natural justice.
[18] In my view the submission by the
author of this volume of
Lawsa
is
sound. No authority binding on us was cited in support of the
so-called traditional view and my research has not revealed any.
The
nearest one comes to it is a statement in
Dutch
Reformed Church v Town Council of Cape Town
8
that
the court may set aside an award if it is only supported by
inadmissible evidence. Apart from that there is an
en
passant
remark by
Selikowitz Jin
Benjamin
v Sobac South African Building & Construction (Pty) Ltd
9
that where an arbitration is to be
conducted informally the arbitrator may have regard to hearsay
evidence and occasional undeveloped
references in other judgments to
inadmissible evidence. Beyond that the question is not one that
appears to have arisen in our
courts. The Act does not deal with the
issue and the references to ‘subject to any legal objection’,
in ss 14(1)
(b)
(iii)
and (iv), are directed at issues of the competence and compellability
of witnesses and the right to invoke privilege and exclude
without
prejudice communications and not at importing the formal rules of
evidence into arbitration proceedings.
[19] In England the position was
formerly that arbitrators were bound to apply the rules regarding
admissibility of evidence.
10
However,
there were exceptions to the rule that diminished its importance and
courts demonstrated an understandable reluctance to
set aside awards
on this ground where it had no substantial bearing on the outcome of
the case. When the Arbitration Act 1996 was
passed, after an
extensive review of the law relating to arbitrations, all this was
swept away. Section 34(2)(f) of that Act now
provides that it is for
the arbitrator to decide whether to apply the strict rules of
evidence or indeed any rules at all in regard
to the admissibility,
relevance and weight to be attached to evidence. Indeed the section
permits the arbitrator to determine in
what form evidence, if any, is
to be tendered. In other words control over the proceedings is vested
in the arbitrator to determine
how the arbitration is to be
conducted. Provided the parties receive a fair hearing there are no
grounds for challenging the arbitrator’s
decisions in that
regard.
[20] The advantages of arbitration
over litigation, particularly in regard to the expeditious and
inexpensive resolution of disputes,
are reflected in its growing
popularity worldwide. Those advantages are diminished or destroyed
entirely if arbitrators are confined
in a straitjacket of legal
formalism that the parties to the arbitration have sought to escape.
Arbitrators should be free to adopt
such procedures as they regard as
appropriate for the resolution of the dispute before them, unless the
arbitral agreement precludes
them from doing so. They may therefore
receive evidence in such form and subject to such restrictions as
they may think appropriate
to ensure, as the arbitrator in this case
was required to do, the ‘just, expeditious, economical and
final’ determination
of the dispute. That accords entirely with
what Gardiner J said, nearly a century ago, in
Clark
v African Guarantee and Indemnity Co Ltd
11
that,
whilst arbitrators must carry out their duties in a judicial manner,
that does not mean that they must observe the precision
and forms of
courts of law.
[21] I am aware that in
Crollqq
Kerr v Brehm
12
Cloete
J said that arbitrators should follow the ‘broad rules for
judicial investigation’,but that was said in the context
of
part of the proceedings being conducted in the absence of one of the
parties, and not in relation to the application of formal
rules of
evidence. In my view the modern demands of arbitration dictate that
arbitrators should be free, in the absence of anything
in the
arbitration agreement to the contrary, to determine the admissibility
of evidence without being shackled by formal rules
of evidence. The
correct approach is that arbitrators may follow such procedures in
regard to the admissibility of evidence as
they deem appropriate,
provided always that the parties are afforded a fair hearing.
[22] It follows that even if some of the evidence placed
before and considered by the arbitrator in this case, in accordance
with
the strict rules of evidence,would have been inadmissible its
admission would not have constituted an irregularity or an act in
excess of the arbitrator’s powers. That avoids the necessity to
identify the evidence that Dexgroup contends fell in this
category.
Its submissions in that regard were closely tied to its erroneous
contentions in regard to the construction of the agreement
and it may
be that on closer examination its complaints about the admissibility
of evidence would have evaporated. However, as
those complaints
raised a point of general principle in regard to the conduct of
arbitrations they are better disposed of on that
ground.
[23] The last point argued on behalf of Dexgroup flowed
from its contention that the cross-examination had strayed into
territory
not covered by the pleadings in the respects already
mentioned in para 10 above. As I have already held this contention to
be unsound
it is unnecessary to discuss it further.
[24] For those reasons the court below was correct to
dismiss the challenge to the arbitrator’s award and the appeal
must
fail. I should however mention that the learned acting judge did
not give any reasons for granting leave to appeal. This is
unfortunate
as it left us in the dark as to her reasons for thinking
that Dexgroup enjoyed reasonable prospects of success. Clearly it did
not.Although points of some interest in arbitration law have been
canvassed in this judgment they would have arisen on some other
occasion and, as has been demonstrated, the appeal was bound to fail
on the facts. The need to obtain leave to appeal is a valuable
tool
in ensuring that scarce judicial resources are not spent on appeals
that lack merit. It should in this case have been deployed
by
refusing leave to appeal.
[25] Two other matters need to be dealt with before I
conclude. The first is that, in correspondence addressed to the
Deputy President
of the Court prior to the hearing, it was brought to
his notice that in 2009 my colleague, Malan JA, then sitting in the
high court
in Johannesburg, presided over a dispute between the same
parties in which the sale of shares agreement that fell to be
interpreted
in the arbitration figured in some way. The letter did
not say what the Deputy President should do with this information so
it
was raised at the outset of the hearing by the presiding judge.
Counsel’s response was that no application for Malan JA’s
recusal was being made and that it was not contended that he should
meromotu
consider recusing himself, but that the information
had been conveyed to the Deputy President
ex abundantecautela
.
Nothing more needs to be said about this.
[26] The other matter relates to an application filed on
behalf of Dexgroup that was conditional upon its being unsuccessful
in
the appeal. In that event leave was sought to adduce further
evidence and to refer another issue between the parties, not the
subject
of their arbitration agreement, back to the arbitrator. The
application was opposed and not persisted with in argument. The only
remaining issue in that respect is costs and Dexgroup must clearly
bear those costs.
[27] In the result the appeal is dismissed with costs,
such costs to includethose of the application to lead further
evidence on
appeal and remit the matter to the arbitrator.
M J D WALLIS
JUDGE OF APPEAL
Appearances
For appellant: E J FERREIRA (with him J J MEIRING) the
heads of argument having been prepared by STEPHAN DU TOIT SC and J J
MEIRING.
Instructed by:
Bouwer Cardona Attorneys, Johannesburg;
Honey Attorneys, Bloemfontein
For respondent: C M ELOFF SC
Instructed by:
Eversheds, Johannesburg
Lovius Block Attorneys, Bloemfontein.
1
The
third respondent was then called Dex Group Financial Services (Pty)
Ltd, but it was subsequently renamed and is now called
Trustco
Financial Services (Pty) Ltd.
2
Act
53 of 1998.
3
Goldfields
Investment Co Ltd & another v Johannesburg City Council &
another
1938 TPD 551
at 560-561.
4
KPMG
Chartered Accountants (SA) v Securefin Ltd & another
2009
(4) SA 399
(SCA) paras 39 and 40
5
Natal
Joint Municipal Pension Fund v Endumeni Municipality
2012 (4) SA
593
(SCA) paras 18 and 19.
6
Lawsa
Vol
1 (2
nd
ed) para 586.
7
Para
586 fn 5.
8
Dutch
Reformed Church v Town Council of Cape Town
(1898) 15 SC 14
at
23.
9
Benjamin
v Sobac South African Building & Construction (Pty) Ltd
1989
(4) SA 940
(C) at 964J-965A.
10
Michael
J Mustill and Stewart C Boyd
Commercial Arbitration
2ed(1989)
352-353 under (f).
11
Clark
v African Guarantee and Indemnity Co Ltd
1915 CPD 68
at 77.
12
Crollqq
Kerr v Brehm
2 Searle 227
at 229.