Brief Summary

Arbitration — Arbitration agreement — Validity of arbitration clause — Applicants sought to set aside arbitration agreement and challenge valuation by non-party — Court held that non-joinder of valuer did not invalidate arbitration proceedings — Arbitrator's finding that valuation could be set aside without valuer's presence upheld — Section 3(2) of the Arbitration Act permits court intervention in arbitration agreements.

Comprehensive Summary

Summary of Judgment

1. Introduction

This judgment of the Gauteng Division, Pretoria (Van der Schyff J) concerned three interrelated applications arising from the same set of arbitration proceedings within the “Mellins Group” business structure. The proceedings required the court to deal with an application under section 3(2) of the Arbitration Act 42 of 1965 seeking to halt arbitration, an application under section 31(1) to make two arbitration awards orders of court, and an application under section 33 to review and set aside an arbitration award relating to a taxation review.

The principal parties were Mr Andre Horn and Mellins i-Style Optometrists Inc (collectively, Horn and MO) on the one side, and Messrs Herman Johannes Jansen, Deon Marius Nel, and Henry Jacques Malan (collectively, Jansen, Nel and Malan) on the other. Retired Judge LTC Harms served as the arbitrator in the underlying arbitration.

Procedurally, the litigation took the form of three case numbers: (i) an award application (case 27388/2022) brought by Horn and MO to have two arbitration awards made orders of court; (ii) a section 3(2) application (case 011316/2022) brought by Jansen, Nel and Malan to set aside or curtail the arbitration agreement in relation to specific valuation disputes; and (iii) a taxation review application (case 25568/2022) brought by Jansen, Nel and Malan to set aside an arbitration award dismissing their taxation review.

The dispute concerned the correct forum and procedural route for challenging the retirement-exit valuations of the applicants’ interests in entities within the Mellins Group, the enforceability of costs awards made in arbitration, and whether an arbitration award dealing with a taxation review was susceptible to being set aside under the limited statutory review grounds in the Arbitration Act.

2. Material Facts

The court accepted as common cause that multiple entities had an interest in the “Mellins Group”, including Mellins i-Style Optometrists Inc, Mellins and Partners, the Mellin Trust, the MV Trust, and Mellins i-Style (Pty) Ltd. The trusts held interests in “Mellins and Partners” and shares in Mellins (Pty) Ltd. The arrangements were described (in the arbitration) as complex.

A written shareholders’ agreement was concluded on 10 November 2001 by the then shareholders of MO. For present purposes, the material terms were that the agreement established a mandatory retirement regime and an exit mechanism for shareholders, together with a procedure for the valuation of the exiting shareholder’s interest in the relevant Mellins Group entities and the purchase price payable.

Jansen, Nel and Malan each became “defaulting shareholders” at different times upon reaching the age of 60, which triggered the mandatory retirement provisions. Each was obliged to sell his interest, and in each instance Mr Horn agreed to take over their shareholding in MO, which in turn entitled them to the purchase price calculated in accordance with the shareholders’ agreement.

The shareholders’ agreement designated Mr Nico Pienaar, a chartered accountant, as the person who would determine the value of a retiring shareholder’s interest and the purchase price. Mr Pienaar was not a party to the shareholders’ agreement. Mr Pienaar determined the values as follows: Jansen at R3 473 883.81, Nel at R7 764 283.07, and Malan at R4 485 071.70. Jansen, Nel and Malan were dissatisfied and regarded the valuations as irregular, unreasonable, and/or so wrong as to be patently unjust.

Arbitration proceedings were commenced after Jansen, Nel and Malan were advised that a valuation challenge fell within the arbitration clause and could be arbitrated even though Mr Pienaar was not a party. They later contended that this advice was incorrect. They asserted that a new written arbitration agreement was concluded to replace clause 11 of the shareholders’ agreement in respect of the valuation dispute, and that the parties proceeded in arbitration without any party initially raising the alleged incompetency of arbitrating the setting-aside of Mr Pienaar’s determination in his absence.

A key point of divergence between the parties related to what had occurred before the arbitrator on the issue of Mr Pienaar’s non-joinder. Horn and MO maintained that the arbitrator had upheld a plea to the effect that the relief sought could not be granted without Mr Pienaar being joined. Jansen, Nel and Malan maintained that the point had not been fully canvassed as part of separated issues. The court examined the arbitrator’s interim award and concluded that both sides misinterpreted the arbitrator’s position: the arbitrator had in fact rejected the contention that Mr Pienaar had to be joined, holding that Mr Pienaar’s interest in that part of the case was “indirect if not tenuous”.

In the arbitration, three special pleas were heard and an award was issued on 20 May 2021, with costs awarded in favour of Horn and MO. The parties then appointed Mr Wandrag, a taxing consultant, to tax the bill of costs. Jansen, Nel and Malan brought a taxation review against Mr Wandrag’s allocator before the arbitrator, which the arbitrator dismissed in an award published on 28 March 2022, again with costs.

It was common cause that the two awards were published and that Jansen, Nel and Malan failed and/or refused to pay the costs awarded. Horn and MO sought enforcement by having the awards made orders of court.

3. Legal Issues

The court was required to determine three main legal questions, each involving the application of statutory standards to largely undisputed procedural facts, together with evaluative judgments concerning discretion and fairness within the framework set by the Arbitration Act.

First, under section 3(2) of the Arbitration Act, the court had to decide whether good cause had been shown to set aside the arbitration agreement or to order that the relevant valuation disputes should not be referred to arbitration (or that the arbitration agreement should cease to have effect in respect of those disputes). This was primarily a question of judicial discretion guided by established principles on the enforcement of arbitration agreements.

Second, under section 33 of the Arbitration Act, the court had to decide whether the arbitration award dismissing the taxation review should be set aside on the basis of misconduct, gross irregularity, excess of powers, or the award being improperly obtained. This was a legal enquiry into whether the alleged defects amounted to the limited statutory review grounds, rather than an appeal on the merits.

Third, under section 31(1) of the Arbitration Act, the court had to decide whether the two arbitration awards were properly made pursuant to the arbitration agreement and the Act, and whether they should be made orders of court. This involved a narrow enquiry focused on enforceability and finality, not on the correctness of the arbitrator’s conclusions.

4. Court’s Reasoning

Section 3(2): whether “good cause” existed to curtail arbitration

The court approached section 3(2) by emphasising that the provision confers a discretion and that an applicant must show good cause. It relied on authority explaining that “good cause” is broad but requires a case-by-case assessment to reach a just and equitable outcome, while also recognising that the onus is not easily discharged and that parties are ordinarily held to their arbitration bargain absent compelling reasons.

On the facts, the court identified the sole reason advanced by Jansen, Nel and Malan for seeking to halt arbitration: their contention that, because Mr Pienaar was not a party to either the shareholders’ agreement or the arbitration agreement, the arbitrator could not competently set aside his valuation or compel a fresh determination, making the arbitration abortive.

The court rejected the premise that Mr Pienaar necessarily had a direct and substantial interest in the outcome merely because the valuation might be set aside. It accepted that the arbitrator would have to decide whether the valuation was done in accordance with the shareholders’ agreement; but held that such a finding would not necessarily constitute an adverse finding about Mr Pienaar’s professional competence. The court drew a distinction between (i) a challenge alleging incorrect calculations or a wrong formula, and (ii) relief that would involve findings disqualifying Mr Pienaar as expert (for example, on bias or lack of qualification). It considered the former to be the case at hand and accepted the arbitrator’s view that Mr Pienaar’s interest was “indirect if not tenuous”.

The court further reasoned that if the “instrument” created by the agreement for valuation “malfunctions”, the parties must revert to the agreement’s mechanisms. It posed a practical comparison: if Mr Pienaar had refused to do the valuation in the first place, the parties could not necessarily compel him simply because he was named in the agreement, given that he was not a party to it. In the court’s view, a situation in which the valuation is set aside does not differ materially from a situation where the designated expert refuses to act. Additionally, there was no indication on the papers that Mr Pienaar would refuse to redo calculations if asked after an award setting aside the existing valuations.

The court also distinguished the matter from Welihockyj v Advtech Ltd, reasoning that Welihockyj involved an alleged scheme affecting third parties and potentially requiring findings about non-parties’ conduct, whereas in the present matter Mr Pienaar’s position did not raise comparable concerns.

Having concluded that arbitration was not shown to be incompetent or abortive, the court held that Jansen, Nel and Malan failed to establish good cause on a balance of probabilities. The section 3(2) application was therefore dismissed with costs.

Section 33: whether the taxation review award was reviewable and should be set aside

In addressing the taxation review application, the court framed the enquiry under section 33 as a limited statutory review, not an appeal. It emphasised that the grounds for setting aside an arbitral award are confined to misconduct, gross irregularity, excess of powers, or improper procurement, and that a bona fide mistake of law or fact by an arbitrator does not without more constitute reviewable misconduct.

The court relied on authority, particularly from the Supreme Court of Appeal, clarifying that gross irregularity concerns a methodological flaw that deprives a party of a fair and full determination of the case, rather than the correctness of the result. The court reiterated that an arbitrator “has the right to be wrong” and that errors in law or factual analysis do not on their own amount to gross irregularity.

On the facts of the taxation review, Jansen, Nel and Malan alleged irregularities including that their notice did not comply with Uniform Rule 48(2)(b), (c), and (d), and that it was grossly irregular for the arbitrator to proceed; they also contended that the arbitrator’s review powers were broader than rationality review; and they raised complaints including alleged misdirection on VAT and overlapping items.

The court considered the arbitrator’s award and found that the arbitrator had expressly recognised the nature of the review and the non-compliance with Rule 48(2), and had explained the consequence that the process lacked the advantage of the taxing master’s reasons for the decisions under attack. The court also noted that the arbitrator dealt with the VAT-related complaints on the basis that VAT did not appear in the notice and that VAT was raised as a component of broader fee objections rather than as an independent issue, and that the arbitrator addressed the overlapping-cost argument and other concerns.

The court further observed that the record showed that Mr Wandrag, despite taking the view that the Rule 48 review was fatally defective, nonetheless proceeded to provide the necessary information before the arbitrator. In this context, the court found it difficult to accept that a party who had filed a review without compliance could later rely on that non-compliance as a basis to set aside the arbitrator’s decision to determine the review.

Ultimately, the court held that the alleged defects did not establish that the arbitrator misconceived the enquiry, prevented a fair hearing, or exceeded his powers. The application under section 33 therefore failed and was dismissed with costs.

Section 31(1): whether the arbitration awards should be made orders of court

The court then considered the award application under section 31(1). It described the purpose of section 31(1) as enabling enforcement and execution of arbitration awards where a party fails to honour the award, provided the award is final.

The court held that when considering a section 31 application, the enquiry is limited to whether the award was made in accordance with the relevant arbitration agreement and the Arbitration Act, and that the court’s disagreement with the arbitrator’s findings would not be a reason to refuse enforcement.

Applying this approach, the court found that the disputes had been referred to arbitration pursuant to an arbitration agreement, the arbitrator had been appointed in accordance with that agreement, and two awards had been made. Since the section 3(2) application and the taxation review application were both dismissed, and the awards were final, Horn and MO were entitled to have the awards made orders of court to enable execution in respect of the unpaid costs.

5. Outcome and Relief

The court dismissed the section 3(2) application (case 011316/2022) with costs, ordering the three applicants (Jansen, Nel and Malan) jointly and severally to pay Horn and MO’s costs, including the costs of two counsel.

The court dismissed the taxation review application (case 25568/2022) with costs, ordering Jansen, Nel and Malan jointly and severally to pay Horn and MO’s costs, including the costs of two counsel.

The court granted the section 31(1) award application (case 27388/2022) and made both arbitration awards by retired Judge LTC Harms orders of court, namely the award published on 20 May 2021 (upholding special pleas with costs) and the award published on 28 March 2022 (dismissing the taxation review with costs). Jansen, Nel and Malan were ordered jointly and severally to pay Horn and MO’s costs of the section 31 application, including the costs of two counsel.

Cases Cited

De Lange v Presiding Bishop for the time being of the Methodist Church of Southern Africa and another 2015 (1) SA 106 (SCA).

Metallurgical and Commercial Consultants (Pty) Ltd v Metal Sales Co (Pty) Ltd 1971 (2) SA 388 (T).

Rhodesian Railways v Mackintosh 1932 AD 359.

Halifax Overseas Freighters, Ltd v Rasno Export; Technoprominport and Polskie Linie Oceaniczne P.P.W. ("The Pine Hill") 1958 (2) Lloyds List Law Reports 146.

Russel v Russel (1880) 14 Ch D 411.

Rawstone and Another v Hodgen and Another 2002 (3) SA 433 (W).

Kmatt Properties (Pty) Ltd v Sandton Square Portion 8 (Pty) Ltd and Another 2007 (5) SA 475 (W).

Polysius (Pty) Ltd v Transvaal Alloys (Pty) Ltd and Another; Transvaal Alloys (Pty) Ltd and Another v Polysius (Pty) Ltd 1983 (2) SA 630 (T).

Welihockyj v Advtech Ltd 2003 (6) SA 737 (W).

Kolber and Another v Sourcecom Solutions (Pty) Ltd and Others: Sourcecom Technology Solutions (Pty) Ltd v Kolber and Another 2001 (2) SA 1097 (CPD).

Dickenson & Brown v Fisher's Executors 1915 AD 166.

Amalgamated Clothing and Textile Workers Union v Veldspun (Pty) Ltd [1993] ZASCA 158; 1994 (1) SA 162 (A).

OCA Testing and Certification South Africa (Pty) Ltd v KCEC Engineering Construction (Pty) Ltd and Another (1226/2021) [2023] ZASCA 13 (17 February 2023).

Legislation Cited

Arbitration Act 42 of 1965 (sections 3(2), 28, 31(1)–(3), 33(1)–(3)).

Rules of Court Cited

Uniform Rule 48(1).

Uniform Rule 48(2)(b), (c), and (d).

Uniform Rule 48(6)(a)(ii).

Held

The court held that Jansen, Nel and Malan did not demonstrate good cause under section 3(2) of the Arbitration Act 42 of 1965 to set aside or curtail the arbitration agreement in relation to the valuation disputes, because their contention that the valuation dispute was incompetent in arbitration absent Mr Pienaar was not accepted and did not show compelling reasons to depart from arbitration.

The court held that the arbitrator did not commit reviewable misconduct, gross irregularity, or exceed his powers under section 33 when dismissing the taxation review, and that the complaints advanced amounted to dissatisfaction with the process and outcome rather than a procedural defect depriving the applicants of a fair determination.

The court held that the arbitration awards published on 20 May 2021 and 28 March 2022 were final and properly made under the arbitration agreement, and should therefore be made orders of court under section 31(1) to permit enforcement.

LEGAL PRINCIPLES

The judgment applied the principle that a court has a discretion under section 3(2) of the Arbitration Act 42 of 1965 to decline to enforce an arbitration agreement, but that the party seeking to avoid arbitration bears an onus to show good cause, which generally requires a very strong case, compelling reasons, and circumstances that justify departure from the parties’ contractual choice of forum.

The judgment applied the principle that non-joinder concerns depend on whether a third party has a direct and substantial interest in the relief sought, and that an expert’s interest may be characterised as insufficiently direct where the dispute concerns whether calculations complied with a contractual mechanism, rather than seeking relief implicating disqualification, bias, or adverse professional findings.

The judgment applied the principle that review under section 33 is limited and focuses on the conduct of the arbitral proceedings rather than the correctness of the outcome. A gross irregularity entails a procedural or methodological defect that prevents a fair and full determination of the dispute, while mere errors of law or fact (even if serious) do not without more justify setting aside an award. The judgment also proceeded on the basis that arbitration is intended to be final and that judicial intervention should be restrained to preserve the autonomy of the forum chosen by the parties.

The judgment applied the principle that an application under section 31(1) to make an award an order of court involves a narrow enquiry into whether the award was made pursuant to a valid arbitration agreement and the Arbitration Act, and that the enforcement mechanism should not be withheld merely because the wider arbitration remains ongoing, where the relevant awards are final and require court recognition for execution.

Horn and Another v Nel and Others (27388/2022; 011316/2022; 25568/2022) [2023] ZAGPPHC 724 (21 August 2023)