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[2007] ZASCA 103
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SA Breweries Ltd. v Shoprite Holdings Ltd. (476/06) [2007] ZASCA 103; [2007] SCA 103 (RSA); [2008] 1 All SA 337 (SCA); 2008 (1) SA 203 (SCA) (14 September 2007)
THE
SUPREME COURT OF APPEAL
OF SOUTH AFRICA
Reportable
Case no: 476/06
In the matter between:
S A BREWERIES LIMITED
.......................
APPELLANT
and
SHOPRITE HOLDINGS LIMITED
.......................
RESPONDENT
________________________________________________________________
Coram: SCOTT, LEWIS, VAN HEERDEN JJA, MALAN
et
KGOMO AJJA
Date of
hearing: 16 AUGUST 2007
Date of
delivery: 14 SEPTEMBER 2007
Summary:
Sale by appellant to respondent of large retail concern - validity of
determination by expert of accounting disputes
Citation: This judgment may be referred to as
SA
Breweries v Shoprite Holdings
[2007]
SCA
103
(
RSA)
JUDGMENT
________________________________________________________________
SCOTT JA/….
SCOTT
JA:
[1] This appeal concerns the determination by an
expert of accounting disputes which were referred to him by agreement
between the
parties. The respondent, to which I shall refer as
‘Shoprite’, applied in the Cape High Court for an order,
broadly stated,
declaring the expert to have failed properly to
determine certain of the disputes referred to him and directing him,
or alternatively
an internationally recognized firm of accountants
selected by agreement, to determine the disputes in question. The
matter came before
Davis J who granted the order sought. The
appellant, to which I shall refer as ‘SAB’, appeals with
the leave of the Court
a quo
.
[2] It is necessary to set out briefly the factual
background to the dispute between the parties and the events leading
up to the
institution of proceedings in the court below.
[3] On 31 October 1997 SAB and Shoprite entered
into a written agreement in terms of which SAB sold to Shoprite the
entire issued
share capital in both OK Bazaars (1929) Ltd and an
associate company, Retail Holdings (Botswana) (Pty) Ltd, and ceded to
Shoprite
all its claims and those of its subsidiaries against OK
Bazaars and the Botswana company. (The latter company plays no
particular
role in the dispute and I shall refer to both
companies simply as ‘OK’ or ‘the
company’.) The agreement made provision for the preparation of
closing date
accounts (‘CDAs’) in respect of OK as at 31
October 1997. In terms of clause 4.1 the parties recorded that the
balance
sheet forming part of the CDAs would reflect that the
‘ordinary shareholders’ funds’ of OK together with
the ceded
claims (referred to in the agreement as the ‘sale
claims’) would amount to the sum of R540 million. Clause 4.2
provided
that in the event of the ordinary shareholders’ funds
and the ceded claims being less than this amount, SAB would be
obliged
to fund the shortfall by way of a cash loan which would form
part of the claims being acquired by Shoprite. The CDAs were
accordingly
to form the basis for the determination of the amount, if
any, which was to be advanced by SAB. In terms of clause 4.6, any
dispute
between the parties in relation to the determination of any
amount for the purposes of clauses 4.1 and 4.2 (referred to above)
and
clauses 4.4 and 4.5.1 (the former is quoted in part below) was to
be referred for determination to accountants Arthur Anderson who
were
to determine the dispute ‘acting as an expert and not as an
arbitrator’ and whose decision was to be final and binding
on
the parties ‘save for any manifest error in calculation’.
I interpose that the parties chose Arthur Anderson because
they were
known to be the auditors of Pick ‘n Pay and to have particular
expertise in retail auditing.
[4] In terms of clause 8.1 of the agreement, the
CDAs were to have been prepared and certified by OK’s auditors.
Clause 8.2
required them to consult with Shoprite’s auditors.
Any disagreement between them as to the inclusion or exclusion of any
amount
or the principle or basis of calculation was to be referred to
Arthur Anderson who were similarly to determine the dispute acting
as
an expert and not an arbitrator and whose decision was to be final
and binding ‘save for any manifest error in calculation’.
In the event, the auditors of OK, KPMG, declined to accept the
appointment and the parties accordingly agreed that the CDAs would
be
prepared by OK itself with the assistance of certain employees
representing SAB’s interests.
[5] The closing date was 31 October 1997 and the
CDAs were to have been completed by 31 January 1998. However, during
the preparation
of the CDAs there were disagreements between the
parties as to a range of adjustments and provisions in the CDAs and
the completion
of the CDAs was delayed. As previously indicated, the
adjustments and provisions were relevant to determine whether SAB was
required
to make payment to OK, by then owned by Shoprite, and if so,
in what amount. The parties agreed to pursue the preparation of the
draft CDAs as far as possible and then to identify the matters still
in dispute for referral to Arthur Anderson for the latter’s
determination. Arthur Anderson nominated a senior partner, Mr Edwin
Oblowitz, for this purpose. The latter was ultimately cited as
the
first respondent in the court below but elected to abide the decision
of the court. The parties in due course jointly submitted
certain
disputes to Oblowitz (‘the expert’) for his
determination. The referral was by way of a letter signed by both
parties. I shall refer to it as the ‘referral letter’.
[6] The referral letter outlined the areas of
dispute and the specific issues which had been identified by the
parties for determination.
It was itself the product of extensive
deliberation and negotiation between the parties and in particular
their employees who were
experienced in the field of accountancy. The
items in dispute were listed in appendices three and four to the
referral letter. The
letter also recorded the procedural rules which
were to govern the determination. Each party was to be permitted
three sets of written
submissions, an initial submission, a response
to the other party’s initial submission and a counter to the
other party’s
response. There was to be no oral argument. The
expert was entitled to request such information or documents in the
possession of
the parties as he might require and to consult with
independent legal advisors should there be matters involving aspects
of law or
interpretation of the agreement on which he required
advice. The expert’s determination was to include reasons for
his conclusions.
As contemplated in the written agreement, the
determination was intended by the parties to be final. In addition to
the provisions
in the agreement to which reference has already been
made, the referral letter recorded that ‘subject to the expert
having
acted reasonably, honestly and in good faith, neither party
will bring an action or proceedings to make any claim against the
expert
relating to or arising from his duties hereunder’.
Arthur Anderson acknowledged its acceptance of the appointment in a
letter
dated 14 December 1998. The acceptance was essentially on the
terms and conditions set out in the referral letter.
[7] Pursuant to the referral letter the parties
delivered three sets of written submissions to the expert which were
supplemented
from time to time with information and documents which,
at his request, were supplied by the parties. The determination,
consisting
of the expert’s conclusions and reasons, was signed
on 28 February 2000 and received by the parties on 7 March 2000. On
17
April 2000 Shoprite applied to the High Court for an order
compelling the expert to furnish additional reasons for certain of
his
findings. On 10 July 2000 the expert, without conceding that he
was obliged to do so, provided the amplified reasons and the
application
was not pursued. Significantly,
Shoprite did not invoke the so-called ‘call-back provision’
in relation to trade creditors.
I shall revert to this provision in
due course.
[8] The expert’s determination was a
disappointment for Shoprite. It had claimed adjustments and
provisions to the value of
R280 million but those accepted were
limited to R57 million together with a contingent liability of R13
million. A dispute arose
between the parties as to the interpretation
and implementation of essentially two aspects of the determination;
the one related
to the provision to be raised in the CDAs for trade
creditors and the other to an adjustment in respect of the fixed
assets of the
company. Correspondence was exchanged in which each
party advanced its views. A meeting was also held in January 2001 at
Edenvale
but no finality was reached. Shoprite contended, in
addition, that whatever the outcome of the on-going CDA disputes,
there would
be a substantial shortfall under clause 4.2 of the
agreement (referred to in para 3 above). In April 2001 it commenced
arbitration
proceedings against SAB in which it claimed a declarator
to the effect that it was entitled to interest under the
Prescribed
Rate of Interest Act 55 of 1975
in respect of the unpaid shortfall.
The arbitrator dismissed the claim on the ground that Shoprite was
not a creditor within the
meaning of the Act. Arbitration proceedings
were subsequently instituted in the name of Shoprite Checkers (Pty)
Ltd (previously OK
Bazaars) for essentially the same relief. This
claim was similarly dismissed; it was held that the claimant was not
a party to the
agreement of sale and therefore was not entitled to
the relief it sought.
[9] In the meantime, on 23 August 2002, Shoprite
launched the application giving rise to the present appeal. It
contended that in
breach of his contractual obligation to do so, the
expert had failed properly to determine the disputes between the
parties in relation
to trade creditors and fixed assets, and had
failed to produce a determination which was capable of
implementation. It argued that
the proceedings were not precluded by
the provisions of clauses 4.6 and 8.2 of the agreement as to finality
since the purported determinations
made by the expert were in truth
no determinations at all and that the expert had acted unreasonably.
[10] On 12 August 2005 Davis J granted an order at
the instance of Shoprite for the discovery of certain documents
discovered by SAB
in the second arbitration as well as the transcript
of the evidence of certain of SAB’s witnesses in that
arbitration. An order
was also granted
directing
that ‘the matter’ be referred for the hearing of oral
evidence. In the event, three witnesses gave evidence
on behalf of
Shoprite. SAB called no witnesses.
[11] Against this background I turn to the issue
relating to trade creditors. Clause 4.4 of the written agreement
contains a formula
for calculating the provision to be made in the
CDAs for trade creditors. The relevant part reads:
‘
4.4.
For the purposes of the closing date accounts and the Botswana
company closing date accounts the following provisions shall be
made
and the amounts thereof lent by the seller to the company to fund the
company within three (3) days after finalization of such
closing date
accounts, resulting therein that such amounts shall form part of the
sale claims being acquired by the purchaser in
terms of this
agreement:
4.4.1. an amount equal to 80% of the
unrecorded and/or unreconciled trade creditors of the group and the
Botswana company, calculated
as follows:
(A minus B plus or minus C) x 80%
where:
A = the total of creditors statements
rendered to the group and
the Botswana company
B = the amount owing to creditors
according to the books of the
group and the Botswana company
C = the timing differences due to
different cut off dates between
the creditors statements referred to in A
and the books of
the group referred to in B
and following the procedures set out in
5.1.’
As indicated, the procedures that were to be followed are set out in
clause 5.1. It reads:
‘
5.1. The following
procedures will be used by the company and the Botswana company to
determine the amount to be lent by the seller
to fund the company in
respect of the trade creditors of the group:
statements, effective 31 October
1997, will be obtained from all listed suppliers appearing in the
companies’ books of
accounts and the total thereof shall be
A in the formula in 4.4.1.
said
statements from suppliers will be reconciled to the amounts owing
to creditors according to the books of the company and
the
Botswana company (the latter being B
in
the formula in 4.4.1). All differences to be listed and shall be
represented by (A - B). All records and supporting documents
shall
be kept of items relating to such differences;
timing differences due to
different cut-off dates (indicated by C in the formula in 4.4.1)
will be excluded from the lists of
differences.’
It is important to appreciate that ‘timing
differences’ arise when credits or debits are processed in the
company’s
books and those of a supplier (creditor) at different
times. They do not reflect disputed items. An example would be an
undisputed
claim raised by the company for a short delivery or goods
returned not yet processed by the supplier.
[12] The dispute that arose between the parties
concerned the nature of the reconciliation exercise that had to be
carried out. Shoprite contended that a limited
exercise was required. It pointed to the fact that detailed
reconciliations had not
been prepared in the past and argued that
given the number of suppliers and the vast volume of transactions
involved, a full and
detailed reconciliation was impractical and not
what had been intended, particularly having regard to the time limit
imposed in clause
8.1 of the agreement. It contended that in these
circumstances all that was required was that statements be obtained
from creditors
of balances outstanding and that from these balances
be deducted the amounts owing to creditors according to the books of
the company.
In Shoprite’s view there was no need to obtain
from creditors detailed open item statements reflecting the
composition of the
amount of each statement. It stressed that
creditors had in the past been discouraged from sending month-end
statements to the company.
As far as timing differences were
concerned it argued that all that was necessary was to identify
timing differences in the 30-day
period on either side of the closing
date and to exclude the amounts so identified from the calculation.
[13] SAB, on the other hand, took the view that
what was required by the agreement was a full and detailed
reconciliation in which
all differences between supplier’s
statements and the amounts shown on the company’s books of
account
were properly identified and
distinguished from timing differences. It argued that the 30-day
cut-off period in respect of timing
differences contended for by
Shoprite would fail to exclude from the calculation timing
differences which took longer than 30 days
to be processed. SAB’s
attitude was that a superficial reconciliation and the failure
properly to identify timing differences,
in particular the timing
differences in respect of claims raised by the company, would operate
very much to its disadvantage and
would result in it having to pay
considerably more than was due. It was also aware that in many
instances the suppliers would be
unable to justify their claims, yet
SAB was being called upon to pay 80 per cent of these claims to
Shoprite.
[14] The issues in relation to trade creditors referred to the expert
were formulated by the parties in the referral letter as follows:
‘
You are instructed to
determine:
whether the exercise performed by
the Company constitutes a reconciliation as is required by clause
5.1.2 of the Agreement;
whether the Company has complied
with its obligation under 5.1.1 of the Agreement to obtain
statements from all its suppliers;
whether the Company has complied
with its obligation under 5.1.2 to list all differences and to keep
records and supporting documentation
for all items relating to such
differences;
what adjustments constitute “timing
differences” for the purposes of determining “the
unrecorded or unreconciled
trade creditors of the Group” as
required under clause 4.4.1 of the Agreement;
- it being agreed that the Expert shall
as part of the exercise undertaken in terms of 1.1 to 1.4 above be
called upon to determine
what the nature of the calculation should be
to determine the “unrecorded and/or unreconciled trade
creditors” as contemplated
by clause 4.4.1;
and
what further steps, if any, need to
be taken by the Company to prepare a reconciliation as required by
the Agreement.’
The parties clearly anticipated that the answers
given by the expert might be insufficient to resolve their
differences regarding
the nature and amount of adjustments to be made
in respect of trade creditors. This much is apparent from the
so-called call-back
provision which followed on the questions quoted
above. It reads:
‘
Dependent on the outcome of
your determination, there are likely to be other areas of dispute
regarding the nature and amount of adjustments
to Trade Creditors.
The following will then apply:
Any party who wishes to refer any
further area of dispute to you, must identify such area of dispute
by written notification to
you (copied to the other party) within 10
(ten) days of the outcome of your determination having been
communicated to the parties.
In such event you will be required
to convene a meeting within ten (10) days of receiving such written
notification under sub-paragraph
(i), at which meeting the parties
will be required, in conjunction with you, to agree on the further
procedures that are to be
followed and time limits to be adhered to
by the parties to enable you to determine the further areas of
dispute. Failing such
agreement the Expert shall determine such
further procedures and time limits in his sole discretion after
consultation with the
parties and consideration of their
requirements.’
[15] As previously indicated, each party filed
three sets of submissions in which they advanced the contentions
briefly outlined above.
Shoprite sought to justify its cut-off period
of 30 days before and after the closing date on the basis that in the
context of normal
accounting operations transactions not processed by
both parties within a period of 30 days before and after the normal
accounting
month-end, are ‘in all probability’ in
dispute. I interpose that Mr Griffin, Shoprite’s group
administration manager,
subsequently conceded in evidence that the
before and after 30-day cut-off period would ‘only pick up a
portion’ of the
timing differences. He confirmed that credit
notes in response to claims raised by the company were in several
instances issued some
three months to two and a half years later.
With regard to identifying timing differences arising from claims
raised by the company
which had not yet been processed by suppliers,
Shoprite contended that the massive volume of transactions involved
and the fact that
suppliers’ statements were not available for
November 1997 ‘rendered it practically impossible to trace all
claims to
credit notes on suppliers’ November statements’.
Accordingly, a sample list of suppliers’ claims was selected to
be tested and the percentage of claims processed by suppliers was
extrapolated to the total claim made by the company. Significantly,
Shoprite in its submissions advanced no suggestions in the
alternative as to what could be done to identify timing differences
in
the event of the expert rejecting its cut-off period of 30 days
before and after the closing date. SAB similarly advanced no
alternative
in the event of its claim for a full reconciliation being
rejected.
[16] In response to the first question (‘whether
the exercise performed by the company constitutes a reconciliation as
is required
by clause 5.1.2 of the Agreement’), the expert
noted the absence of a definition of ‘reconciliation’ in
the agreement
and referred to the practical problems associated with
carrying out a comprehensive reconciliation as outlined by Shoprite
in its
submissions. He then proceeded to answer the first question as
follows:
‘
The
exercise performed by the Company adequately identifies the totals of
“A” and “B” as defined above but
does not
deal adequately with “C” as defined above, (e.g. claims
on suppliers were sampled and not comprehensively determined;
only
transactions
one
month either side of cut-off
date were considered)
.
I
determine that the exercise performed by the Company does not
constitute a reconciliation as required by clause 5.1.2 of the
Agreement.’
[17] Turning to the second question (whether the
company has complied with its obligations under clause 5.1.1 of the
Agreement to
obtain statements from all its suppliers), the expert
answered as follows:
‘
Shoprite has
represented that the Company has obtained statements from all listed
suppliers as required by clause 5.1.1 of the Agreement
and that the
procedures followed were as detailed below:
“
.
. . to ensure that all listed creditors were accounted for, an
extract of the Supplier Database (Cost Book) of the company was
obtained;
All creditors were telephonically
contacted and requested to submit their statements as at 31 October
1997 to the company. In instances
where the statements rendered did
not account for the period up to 31 October 1997, an interim
statement was requested for the remaining
period up to 31 October,
1997;”
SAB did not challenge this representation
from Shoprite or query the abovementioned procedures, but asserted
that the statements did
not contain information in sufficient detail
as to enable the determination of the timing differences, and that
additional information
and supporting documentation were required.
I determine that the Company has complied
with its obligations under 5.1.1 of the Agreement to obtain
statements from all its suppliers.’
[18] The
third question (whether the company had complied with its obligation
under 5.1.2 to list all differences and to keep records
and
supporting documentation for all items relating to such differences)
was dealt with by the expert in two parts. As to the obligation
to
list all differences, ie as represented by A-B in the formula
contained in 4.4.1 of the Agreement, the expert recorded that:
‘
Shoprite has represented that the Company has
listed all differences represented by (A-B). SAB has acknowledged
that this listing
was prepared but asserts that it is defective in
that the listing does not contain a detailed analysis of the
individual differences.’
He concluded:
‘
I
find that the Company has complied with the requirement of the first
part of clause 5.1.2 to list all differences represented by
(A-B).’
As far as
the second part of the question is concerned, the expert found that
the company had not complied with the requirement to
keep ‘all
records and supporting documents relating to such differences’.
However, the claim in respect of this aspect
of the determination was
dropped in the light of the evidence adduced at the hearing.
[19] With
regard to the fourth question (‘what adjustments constitute
“timing differences” for the purposes of determining
“the
unrecorded or unreconciled trade creditors of the Group” as
required under clause 4.4.1 of the Agreement’),
the expert
determined:
‘
Shoprite
has represented that timing differences would include,
inter
alia,
the
following:
invoices
from creditors in respect of goods not yet received by the Company;
goods
received by the Company for which invoices have not yet been
processed in its books;
payments
made by the Company not yet accounted for by creditors;
post
dated cheques not recorded in the Creditors’ [Ledger] System
(“CLS”) which have been accounted for by creditors
as
payments;
claims
raised by the Company which have not yet been processed by
creditors.
SAB’s interpretation of “timing
differences” (i.e. undisputed entries which have been processed
by either the supplier
or the Company, but not in the relevant
period), would include the abovementioned adjustments as timing
differences.
The following additional adjustments
should also be taken into account as timing differences:
credit notes issued by creditors not
yet accounted for by the Company.
payments
(other than post dated cheques) recorded by creditors but not yet
processed by the Company.
I
determine that all the abovementioned adjustments constitute timing
differences for purposes of clause 4.4.1 of the Agreement. In
determining such timing differences, differences arising from
transactions effected in the periods
more
than 30 days
before
and after closing date should also be examined.’
[20] The expert then addressed himself to the following further
questions:
‘
.
. . as part of the exercise undertaken in terms of 1.1 to 1.4 above
[the expert shall] be called upon to determine what the nature
of the
calculation should be to determine the “unrecorded and/or
unreconciled trade creditors” as contemplated by clause
4.4.1;
and
1.5 what further steps, if any, need to
be taken by the Company to prepare a reconciliation as required by
the Agreement.’
It is necessary to quote his answer in full -
‘
My
determinations in respect of the aforegoing are set out in the
subparagraphs
numbered
1,2 and 3 below:
The CLS [Creditors’ Ledger
System] download listing should be used for comparison with the
creditors’ statement balances
for purposes of identifying
(A-B).
A detailed calculation should be
made of all timing differences (of the types identified above under
1.4) as at October 31, 1997.
The following specific matters should
be taken into account when the timing differences are determined:
the
statement received from each creditor should be examined to
ascertain whether or not any post-dated cheques have been taken
into account. Where these
have
been taken into account, a timing
difference should be recorded as the cheques were not taken into
account in the CLS balances.
the
Company should determine comprehensively the value of claims for
credit raised which have not, to date, been contested by
suppliers
- the sampling and extrapolation exercise previously performed by
the Company is not considered to be appropriate.
pre-arranged
advertising rebates claimed by the Company but not yet recognised
on creditors’ statements should also be recognised
as timing
differences.
the
Company should examine transactions which are dated more than 30
days before/after closing date to identify other potential
relevant
timing differences.
previous
workings should be reviewed and any potential errors and/or
deficiencies should be corrected and adjusted - the following
specific matters do not constitute a comprehensive listing and
further enquiries or investigation by the parties may reveal
additional items of this nature:
Shoprite represented that the timing
differences had been adjusted for six payment-related differences
totaling R2,702m identified
by Price Waterhouse. It remains unclear
whether the amount of R493 773 in respect of Tongaat Hulett has been
appropriately treated
as a “cheque” difference on the
reconciliation Schedule SC1.20 to Shoprite’s third submission.
In addition, another
difference of R133 833 for Flame Electrical has
not, as acknowledged by Shoprite, been included in the timing
differences. In respect
of the R677 996 timing differences for manual
advertising rebates also identified by Price Waterhouse, it is
unclear from an examination
of the abovementioned Schedule SC1.20
whether they have been included.
3. The
above process should generate a comprehensive total for timing
differences “C”, which when added to - or deducted
from -
the previously determined (A-B), should yield a balance, 80% of which
will constitute the “unrecorded and/or unreconciled
trade
creditors” provision which the Agreement requires to be made in
the CDA.’
[21] From the aforegoing, it is clear that the
expert was fully aware of the absence of records and supporting
documents relating
to past transactions and that detailed
reconciliations had not been prepared by the company in the past.
Nonetheless, he unequivocally
rejected Shoprite’s submission
that only timing differences arising from transactions effected
within the period of 30 days
before and after the closing date need
be examined. Similarly, he rejected the sampling and extrapolation
exercise performed by the
company and ruled that the company should
determine comprehensively the value of claims raised by the company
which had not, by the
date of his determination, been contested by
suppliers. By the same token, it is clear from the answers to
questions one, two and
three that he rejected SAB’s contention
that there be a full and detailed reconciliation of all differences.
The solution,
therefore, lay between the two extremes adopted
respectively by each party. Common sense would indicate that what was
intended for
the purpose of identifying timing differences was that
transactions before and after the closing date were to be
investigated to
the extent that it was reasonable and practical to do
so. Significantly, a solution along these lines was proposed by
Shoprite following
the determination. However, in the correspondence
between the parties that followed, SAB adopted a stance which senior
counsel for
SAB found himself obliged to concede was opportunistic
and which I would characterize as obstructive. In the result no
finality was
reached.
[22] The issue in the present case, however, is
not whether one or other interpretation of the determination is the
correct one but
whether the determination is one which is valid in
law. Counsel on both sides were agreed that in general the
requirements for a
valid arbitral award are equally applicable to an
expert determination and we were referred to a number of authorities
in which these
requirements are set out. (See eg David Butler and
Eyvind Finsen
Arbitration in South
Africa Law and Practice
(1993) p
260-264; H S McKenzie
The Law of
Building and Engineering Contracts and Arbitration
5
ed (1994) p 191-196; Sir Michael J Mustill and Stewart C Boyd
Commercial Arbitration - The Law and
Practice of Commercial Arbitration in England
2
ed (1989) p 284-388 and David St John Sutton and Judith Gill
Russell
on
Arbitration
22
ed (2003) p 254-260.) In summary, what is required is that all issues
submitted must be resolved in a manner that achieves finality
and
certainty. The award or determination may therefore not reserve a
decision on an issue before the arbitrator or expert for another
to
resolve. It must also be capable of implementation. On the other
hand, what must be determined are the matters submitted and no
more.
Depending on the questions, therefore, the determination may not
necessarily result in a final resolution of a dispute between
the
parties. Generally, a court will be slow to find non-compliance with
the substantive requirements and an award or determination
will ‘be
construed liberally and in accordance with the dictates of
commonsense’ (Mustill & Boyd,
supra
,
at 570). This, I think, must be particularly so when the questions
for determination are themselves lacking in precision. A question
as
to what steps are to be taken to achieve a particular result is
perhaps a good example. A court will, therefore, as far as possible
construe an award or determination so that it is valid rather than
invalid. It will not be astute to look for defects. As observed
by
Bingham J in
Zermalt Holdings SA v
Nu-Life Upholstery Repairs Ltd
[1985]
275 Estates Gazette 1134
(Queen’s Bench Division (Commercial
Court)) in the context of an arbitration award:
‘
.
. . as a matter of general approach, the Courts strive to uphold
arbitration awards. They do not approach them with a meticulous
legal
eye endeavouring to pick holes, inconsistencies and faults in awards
and with the objective of upsetting or frustrating the
process of
arbitration. Far from it. The approach is to read an arbitration
award in a reasonable and commercial way expecting, as
is usually the
case, that there will be no substantial fault that can be found with
it.’
Where uncertainty in meaning does emerge regard
may be had, as in the case of the interpretation of contracts, to the
extrinsic circumstances
surrounding or leading up to the award or
determination. (
Cf Firestone South
Africa (Pty) Ltd v Gentiruco AG
1977
(4) SA 298
(A) at 304.)
[23] Counsel for Shoprite submitted that the
expert’s determination on the question of trade creditors did
not meet the requirements
of a valid determination. They pointed to
the fact that the expert was fully aware that the majority of
suppliers’ statements
received had ‘carried forward’
balances, that the company had not maintained proper records and that
a comprehensive
and detailed reconciliation of all differences was
impossible in the circumstances, particularly having regard to the
time deadline
imposed by the agreement. Once the 30-day cut-off
proposal was rejected, the expert was obliged, so it was argued, to
state for what
exact period before or after the closing date
transactions had to be examined to identify timing differences and
how such timing
differences were to be identified, in other words,
how the exercise was to be performed where the data necessary for the
exercise
was not available. It was argued further that there was an
inherent inconsistency between, on the one hand, the expert’s
acceptance
that the company had complied with its obligation to
obtain statements from suppliers and list all differences and, on the
other
hand, the rejection of a 30-day cut-off period; and that
although the expert purported to lay down the steps that had to be
taken
in order to determine the quantum of timing differences, ie the
letter ‘C’ in the formula, he had in fact failed to do
so
and the dispute between the parties remained unresolved.
[24] Counsel for SAB, on the other hand,
emphasized that the determination was made by an expert in the field
of retail auditing and
was directed at experienced accountants well
versed in the retail industry. Accordingly, so it was argued, the
determination had
to be construed according to the understanding of
such people. Counsel submitted that once the expert had rejected both
the expedient
of a 30-day cut-off period and the requirement of a
comprehensive reconciliation, common sense dictated that what was
required was
an exercise to identify timing differences to the extent
that it was reasonable to do so on the records and information
available;
that the actual mechanics of such an exercise was not
something that ought to present a problem to experienced accountants.
In this
regard counsel relied heavily on the evidence of Mr Marius
Bosman, Shoprite’s group financial manager, who testified at
the
oral hearing. In particular counsel referred to the following
passages in the cross-examination of Bosman:
‘
Counsel:
He [the expert] said you must go back and forward more than 30 days.
Bosman: Yes, the expert said that.
Counsel: Now when the expert said that,
did you believe it was now impossible for you to carry out his
determination?
Bosman: To my mind what the expert meant
or how we understood the determination of the expert was to do what
was possible and what
was practical.’
The evidence continued:
‘
Counsel:
You looked at the expert determination you said, and you said look,
it
’
s
got an implied limitation. You say you’ll do it if it’s
possible. Is that right?
Bosman: Yes, do it with the documentation
that is available.
Counsel: You would like to say, the
qualification is do it with what’s available, the documentation
that’s available.
Bosman: Yes, that’s correct.
Counsel: So you said to yourself well, I
can carry this out if I imply the qualification that I must do it
with such documents that
I have.
Bosman: That is correct.’
A further exchange reads:
‘
Counsel:
And therefore if they brought a Court action to get you to do what
they say the expert determination says, you would defeat
the Court
action by showing the Court that the expert must have meant exactly
what you say he meant.
Bosman: Yes.’
In the light of this evidence counsel for SAB
argued that even if one were to ignore the call-back provision (to
which I shall turn
next), Shoprite could not succeed on the basis on
which it had proceeded in the present case, ie that the determination
in respect
of trade creditors was invalid. Whether it would have any
other remedies in law, said counsel, was not a question before the
court
a quo
and
hence not relevant to the appeal.
[25] The question that arises is whether it is in
any event open to Shoprite to rely on an alleged breach of contract
on the part
of the expert for failing to determine properly the
dispute referred to him and indeed to impugn the determination for
lack of certainty
notwithstanding its failure to invoke the call-back
provision (quoted in para 14 above). It will be recalled that the
clause provided
for a mechanism for resolving ‘other areas of
dispute regarding the nature and amount of adjustments to trade
creditors’
that were likely to arise ‘dependent on the
outcome of [the] determination’. Any party who wished to refer
any ‘further
area of dispute’ to the expert was entitled
to identify the area of dispute by written notice to the expert
within a period
of 10 days of the determination. In the event of
either party doing so, the expert was required to convene a meeting
within 10 days
at which the parties would be required to agree on the
procedure to be adopted to enable the expert to determine the further
areas
of dispute and in the absence of agreement the necessary
procedures were to be decided by the expert. Counsel for SAB
emphasized
that Shoprite in its submissions to the expert had
advanced no alternative to the 30-day cut-off period it proposed to
identify timing
differences and yet its complaint was that the
expert, after rejecting this proposal, had failed to determine
precisely how far back
and how far forward the company had to go to
identify timing differences. Counsel argued that if the implied
limitation accepted
by Bosman was unacceptable to Shoprite or if it
felt that the limitation was unclear, its remedy was to invoke the
call-back provision.
Having failed to do so, said counsel, Shoprite
could not now seek to impugn the determination for lack of certainty.
[26] The court
a quo
rejected SAB’s contentions on two grounds.
As to the first, Davis J held that the call-back provision ‘was
intended to
deal with additional areas of dispute, that is other than
those which flowed from the determination itself’. He held that
the
disputes as to how far beyond the 30 day period OK was to go and
how the timing differences were to be determined were disputes that
flowed from the determination itself and were therefore not ‘further
areas of dispute’. I cannot agree. The learned judge’s
conclusion, in my view, is inconsistent with the plain wording of the
call-back provision. It refers to ‘other’ or ‘further’
areas of dispute which are ‘likely’ to arise ‘dependent
on the outcome of your [the expert’s] determination’
and
which are disputes ‘regarding the nature and amount of
adjustments to trade creditors’. As counsel for SAB point
out,
if the interpretation of the learned judge was correct and the
call-back provision was intended to deal only with additional
areas
of dispute which did not flow from the determination itself, it is
difficult to imagine how these could ever be ‘dependent
on the
outcome of the determination’. The disputes in issue clearly
related to ‘the nature and amount of the adjustments
to trade
creditors’ and the questions giving rise to those disputes were
not questions specifically asked in the referral letter
but arose
from the determination. The very object of the call-back provision
was to enable the parties to have such ‘further
disputes’
determined by the expert.
[27] The second ground on which the court
a
quo
rejected SAB’s reliance on
the call-back provision was that the provision would not be
applicable if the expert’s determination
failed to comply with
the substantive requirements of law (as the learned judge found to be
the case). In other words, so counsel
for Shoprite contended, if the
determination was invalid because it failed properly to answer the
questions put to the expert, then
in law there was no determination
at all and accordingly no primary jurisdictional fact to trigger the
call-back provision.
[28]
When formulating
the questions to be put to the expert, the parties clearly
anticipated that the answers might not resolve the dispute
relating
to trade creditors and that there were ‘likely to be other
areas of dispute’ that required determination arising
from the
answers to the five questions posed. Significantly, the provision for
follow-up questions applied only to the determination
in relation to
the dispute concerning trade creditors and not to any of the many
other disputed items raised in the referral letter.
Shoprite’s
objection to the determination was ultimately that it lacked
certainty and finality because it provided no clear
answer to a
question that was inherent in those that were formulated in the
referral letter, namely precisely how the letter ‘C’
in
the formula in clause 4.4.1 of the agreement was to be determined in
the event of the 30-day cut-off proposal not being accepted
by the
expert. If, however, the determination had to provide answers to all
possible areas of dispute ‘regarding the nature
and amount of
adjustments to be made in respect of trade creditors’ before
the call-back provision could be invoked, that provision
would serve
no purpose. But, as I have indicated, the parties clearly anticipated
that further areas of dispute regarding the issue
of trade creditors
could arise from the determination. In these circumstances, the
construction placed on the call-back provision
by the court
a
quo
strikes me as over-technical and
one that could not have been what the parties intended. It follows
that in the absence of the expert
being required to answer follow-up
questions as envisaged in the call-back provision he cannot, in my
view, be held to have failed
to fulfill his mandate to determine
properly the dispute referred to him; nor, I think, can his
determination be impugned on the
ground of such a failure.
[29] Shoprite also advanced as a reason for not
invoking the call-back provision that SAB would have objected to such
a referral and
this would have frustrated the process. But it is
clear from the terms of the provision that either party was entitled
to invoke
the provision without the agreement of the other and that
SAB could not have prevented the process had it been correctly and
timeously
invoked. There is accordingly no substance in this
argument. It follows that the appeal on the issue of trade creditors
must succeed.
[30] I turn now to the expert’s
determination in respect of the fixed assets of the company. The
fixed assets register (‘FAR’)
was a register containing
the details of fixed assets of OK and was kept in compliance with the
requirements of the Companies Act.
The value of the assets should in
principle be reflected in the fixed assets account of the company’s
general ledger (‘GL’)
and the value of fixed assets
reflected in the FAR and the GL should be the same. The GL in part
determines the CDAs and, as explained
above, could therefore have an
effect on any shortfall payable by SAB in terms of clause 4.2 of the
agreement. At the time of the
preparation of the draft CDAs, the
value of assets reflected in the GL exceeded that reflected in the
FAR by some R8.8 million. Shoprite
claimed that there should be a
write-off of assets shown in the GL in this amount to reflect the
assets which it claimed were missing
from the company at the closing
date. SAB contended that the FAR was unreliable and that the
difference between the FAR and the GL
did not warrant a downward
adjustment of the GL.
[31] In an attempt to verify the reliability of
the FAR, the company selected 26 stores (out of a large number of
retail outlets)
and conducted an investigation into the reliability
of the fixed asset register of each. Errors were discovered and it
was found
that in some cases assets had been moved from one store to
another resulting in discrepancies in their respective fixed asset
registers.
The discrepancies were consolidated in order to derive an
overall figure for the 26 stores and the result was then extrapolated
across
the entire company. SAB did not accept the result of this
sampling exercise.
[32] The adjustment to the draft CDA proposed by
Shoprite, and disputed by SAB, was recorded as item 12 of appendix 3
to the referral
letter. The item reads:
‘
Write
off assets not physically identified on FAR on sample basis R8,8m.’
The question put to the expert to resolve the dispute was formulated
in the referral letter as follows:
‘
You are instructed to
determine:
4.1
whether the adjustments reflected under items 11 to 14 on
Appendix
3
, which affect the
values at which fixtures and fittings and computer equipment are
stated in the draft Closing Date Accounts, are
in accordance with the
Agreement.
If not, what adjustments should properly
be made and what further steps, if any, does the Company have to
take?’
[33] In its submissions to the expert Shoprite
contended that the FAR was reliable. Its claim for an adjustment of
R8.8 million was
in fact dependent on the reliability of the FAR. In
support of this contention it relied on both the sampling exercise
referred to
above and a warranty in the agreement of sale as to the
reliability of the FAR. However, in its second submission to the
expert,
Shoprite referred to, and quoted from, a letter dated 24
April 1997 addressed by KPMG (OK’s auditors) to the audit
committee
of the company in support of the proposition that no
reliance could be placed on the unqualified nature of the audit
report on the
March 1997 accounts of the company. The relevant
passage in Shoprite’s submission to the expert reads as
follows:
‘
4.16.1 The expert is referred to paragraph 6 of
the letter by KPMG to the Audit committee of the Company annexed
hereto marked Schedule
“SC4.3” which records:
“
The
fixed assets records of the group are inadequate at this stage to
properly support the balance reflected in the General Ledger.
In
addition fixed assets with a net book value of R5,5 million relating
to closed stores have not yet been written off. We are however
satisfied that the balance is conservatively stated taking into
account the significant adjustments in prior years, but have included
the R5,5 million in our schedule of audit differences. Management are
aware of the problem and will address it when circumstances
permit.”
It is submitted that the
unqualified audit report to the March Accounts by KPMG clearly
relied upon the fact that management
were made aware of the
problem and had undertaken to address it by:
the formation of a fixed asset
project committee tasked with the setting up of an accurate fixed
asset register with meaningful
descriptions and values to enable
adequate physical verification to take place;
the move of the fixed assets
register into the Millenium fixed assets computer software package.
4.16.3 To Shoprite’s knowledge the
Company’s erstwhile management had not complied with such
undertakings as at the Closing
Date. In the light thereof no reliance
can be placed on the unqualified nature of the said audit report. In
support hereof Shoprite
annexes hereto a memorandum of matters
arising from the audit for the year ended 31 March 1997 by KPMG,
marked schedule “SC4.4”.’
The above notwithstanding, Shoprite persisted in
the contention that the FAR should be accepted as being more reliable
than the GL
and that the value of fixed assets reflected in the GL
should be reduced by R8.8 million so as to bring it into line with
the FAR.
[34] The
expert answered as follows:
‘
As indicated above,
SAB represented that the FAR is inaccurate. Furthermore, both parties
acknowledge the processing of a large write-off
in 1995 which was
reflected in the audited financial statements for the financial year
in which such write-off was made. It is impractical
for me to
determine whether or not the R8,8m should be adjusted for in the CDA.
I determine that adjustment, if any,
should be made in terms of Item 12 in respect of specific assets
which have been acquired (or
scrapped) in the financial years
following that in which the R87m write-off had been made, and that
steps be taken by the parties
to establish this.’
(It is
necessary to explain that the words ‘as indicated above’
is a reference to the KPMG letter dated 24 April 1997
to which the
expert referred in some detail when dealing with item 11 of appendix
3 which is not in issue.)
[35] The
expert’s amplified reasons for his determination read:
‘
I
concluded that it was impractical for me to determine whether or not
the CDA should be adjusted by the claimed R8,8m in respect
of assets
not physically identified but still reflected in the fixed asset
register (“FAR”). My reasons were stated in
the original
Determination, namely that the FAR was accepted by both parties as
inaccurate and that a large write-off of R87m had
already been
processed in the general ledger in 1995 without the corresponding
write-offs being specifically recorded at the time
in the FAR. While
sympathetic to the submission by Shoprite that there might be assets
included in the general ledger incapable of
substantiation, I was
concerned that the sampling exercise performed in order to estimate
the R8.8m proposed adjustment had been
based on the information
contained in the FAR, a register which was accepted by both parties
as being deficient. The possibility
exists that amounts included in
the proposed R8,8m adjustment may already have been covered by the
R87m write-off in 1995, and I
therefore determined that the CDA
should be adjusted only for those “missing” assets which
could be clearly identified
as
not
having been written off in the R87m
(namely those “missing”
assets acquired after the write-off date or those assets acquired
before that date which could
be shown to have been scrapped
after
that date without
corresponding adjustment in the general ledger). In other words, my
Determination accepted the principle that the
“missing”
assets be adjusted for, but aimed to ensure that there was no
“double-counting” in respect of the
quantum of the
write-off proposed in applying the principle.
I
considered Shoprite’s submission based on the warranty by SAB
that the Company’s books and records had been properly
maintained. However, I was required by the terms of my engagement to
make determinations in respect of certain specific adjustments
proposed in respect of fixed assets. The fact that the FAR was not
properly maintained did not, in my opinion, entitle Shoprite to
claim
as an adjustment an amount not otherwise capable of substantiation.
In my deliberations on fixed assets, I examined the submissions
of
the parties and the evidence presented in order to determine whether
or not the proposed adjustment had been adequately substantiated.
I
concluded that it had not.
’
[36] It will be observed that there were
essentially three questions put to the expert in respect of the
adjustment reflected in item
12 of appendix 3. They were: first,
whether the adjustment was in accordance with the agreement, second,
if not, what adjustments
were to be made and, third, what steps, if
any, was the company to take. The expert clearly rejected the
contention that there should
be an adjustment in the amount of the
difference between the GL and the FAR. The answer to the first
question was therefore unequivocally
‘no’. The answer to
the second question was similarly unequivocal. The adjustments, if
any, said the expert, were those
in respect of specific assets which
were acquired or were scrapped in the financial years following 1995,
being the year in which
the R87 million write-off was made. The
answer to the third question put to the expert was that steps were to
be taken ‘by
the parties’ to establish (ie identify) such
assets as had been acquired or scrapped during the period previously
referred
to. Counsel for Shoprite argued that it was this answer that
rendered the determination uncertain and incapable of implementation.
However, before dealing with counsels’ submission on this issue
it is necessary to consider briefly two subsidiary criticisms
levelled
at the determination.
[37] It was argued that the expert erred in
finding that the FAR ‘was accepted by both parties as
inaccurate’; it was
also argued that the determination
contained no express or implied finding that the FAR was unreliable.
The point that was made was
that while this was not an appeal from
the determination, the ‘error’ gives ‘some insight
into the question whether
the determination is certain or not’.
I cannot agree. The observation that both parties accepted the
inaccuracy of the FAR
was clearly based on Shoprite’s reliance
on the KPMG letter to which the expert referred when dealing with
item 11 of appendix
3. In any event, the implication that the expert
found the FAR to be unreliable is readily apparent. This much is
clear from his
rejection of the sampling exercise and the concern he
expressed that amounts included in the proposed R8.8 million
adjustment may
already have been covered by the R87 million write-off
in 1995.
[38] A
further criticism levelled at the determination was the statement
that it was ‘impractical’ for him to determine
whether or
not the R8.8 million ‘should be adjusted for in the CDA’.
The suggestion was that the expert was declining
to determine whether
the adjustment referred to in item 12 was properly made. I do not
think this is what the expert intended to
convey. In my view, all
that he was saying was that the adjustment could not be made on the
basis presented to him and that any adjustment
would have to be made
with reference to specific assets that had been acquired or scrapped.
I should add that various other criticisms
were levelled at the
determination but as these, in the main, concerned the correctness or
otherwise of the expert’s findings
on fact, it is unnecessary
to deal with them.
[39] I
return then to the answer given to the third question. Counsel for
Shoprite referred in the first place to the words ‘the
parties’
and argued that this implied that the parties had to agree on a
procedure to identify the assets in question. In support
of such an
implication counsel referred to correspondence in which this had been
conceded on behalf of SAB (although the concession
was later
withdrawn) and argued that as there was no common ground between the
parties on the point of departure for the exercise,
the answer left
the dispute unresolved. In my view, the argument sets too much store
by the use of the word ‘the parties’.
The question put to
the expert was what steps, if any, were to be taken by ‘the
company’. The reason for the reference
to ‘the company’
was that the company, by then owned and controlled by Shoprite, held
all the relevant material. SAB
on the other hand, held none of the
records and was not in a position to assist in pursuing any steps
which the expert may have proposed.
Following the determination, SAB
was for the same reason unable to assist with the steps directed by
the expert, namely to identify
missing assets which had been acquired
or scrapped subsequent to 1995. This much was conceded by Mr Douglas
King who is the head
office manager of Shoprite and who testified on
its behalf at the oral hearing. I accordingly agree with counsel for
SAB that the
expert did not refer to ‘the parties’ in
contradistinction to ‘the company’, but in
contradistinction to
himself. While the use of the words ‘the
parties’ may have been less than precise, they do not justify
the inference
that the parties were required to agree upon a
procedure for identifying missing assets.
[40] The main thrust of Shoprite’s criticism
of the determination, however, was that the expert failed to answer
the third question,
ie he failed to provide guidance as to how assets
were to be identified or as counsel put it, he failed to provide a
‘roadmap’
and ‘left it to the parties to resolve
the dispute themselves’. In support of this submission much was
made of subsequent
correspondence to demonstrate the stance taken by
SAB in the past and how it differed from that adopted by SAB in the
present litigation.
But it is necessary to emphasize that the
question in issue is not what SAB might have said or done in the
past, or which of two
possible constructions of the determination may
be the correct one, but whether as a matter of law the determination
is certain and
final and capable of implementation.
[41] As
pointed out above, a court will be slow to find non-compliance with
the substantive requirements of a valid determination
and will
construe a determination liberally and in accordance with the
dictates of common sense. It will not examine the determination
with
a meticulous eye in an endeavour to find some fault. The expert in
the present case was not asked to specify a particular procedure
that
had to be followed (assuming it was possible for him to have done so)
but to give an answer to the less precise question of
what steps had
to be taken. The answer he gave was that the steps to be taken were
those necessary to identify assets that were missing
and had been
either acquired or scrapped after the write-off in 1995. The answer
was not addressed to lay persons or lawyers but
to experienced
accountants in the employ of the company and Shoprite. They were told
exactly what they had to look for and it was
made clear that in doing
so reliance was not to be placed on the FAR. In these circumstances,
I cannot agree that the determination
was rendered invalid for want
of directions as to how to go about tracing the missing assets.
[42] The fact that the determination made it
necessary to identify specific assets rather than rely on the FAR
made the task undoubtedly
more onerous. Shoprite’s accountants
hardly needed the expert to tell them what they had to do. Shoprite’s
real complaint
was the onerous nature of the exercise required by the
determination rather than its uncertainty. As Bosman conceded in
evidence,
the acquisition and scrapping of assets would normally be
recorded in documents. Typically, written authority would be required
for
the acquisition of an asset and the greater the amount involved
the more senior would be the person authorizing the expenditure.
The
same would apply to the scrapping of an asset. The exercise required
by the determination involved the laborious task of tracing
the
documents evidencing the acquisition and scrapping of specific assets
subsequent to 1995. This was hardly what Shoprite would
have wanted
from the determination. But that is what the determination required
and that, in my view, was both certain and capable
of being carried
out. It follows that the appeal against the court
a
quo’s
finding on the issue of the
company’s fixed assets must likewise succeed.
[43] The appeal is upheld with costs, including
the costs occasioned by the employment of two counsel. The order of
the court
a quo
is
set aside and the following is substituted in its place:
‘The application is dismissed with costs, including the costs
occasioned by the employment of two counsel.’
D G SCOTT
JUDGE OF APPEAL
CONCUR
:
LEWIS
JA
VAN HEERDEN JA
MALAN AJA
KGOMO AJA