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[1999] ZASCA 41
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Dorbyl Marine (Pty) Ltd v Department of Trade and Industry (172/97) [1999] ZASCA 41 (31 May 1999)
THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
Case No. 172/97
In
the matter between:
DORBYL
MARINE (PTY) LIMITED Appellant
and
DEPARTMENT
OF TRADE AND INDUSTRY Respondent
Coram: VAN HEERDEN DCJ, SMALBERGER, SCHUTZ, STREICHER
JJA and MELUNSKY AJA
Heard: 18 MAY 1999
Delivered: 31 MAY 1999
________________________________________________________
JUDGMENT
________________________________________________________
STREICHER
JA/
STREICHER
JA:
[1] The issue to be decided in this
appeal is whether certain statements by an arbitrator in his award
are binding on the respondent.
With the necessary leave the
appellant appeals against the decision of the court
a
quo
that they were
not.
[2] At the relevant time the
appellant was primarily involved in ship building and ship repair
activities. In October 1989 the
Government announced that with
effect from 1 April 1990 it would introduce the General Export
Incentive Scheme ("GEIS").
GEIS was conceived as a
subsidy scheme aimed at promoting the export of processed products.
The greater the degree of processing,
and the greater the local
content by cost, the greater the potential GEIS subsidy. The
subsidy was to be calculated according
to the formula Z = U x (M
+
/-
E) x P where Z was the subsidy; U was the FOB value of export
sales; M was the degree of processing to which the product had
been
subjected in South Africa; E was the exchange rate factor through
which M was adjusted for inflation and exchange rate fluctuation;
and P was the local content factor. At all material times (M
+
/-
E) was 19,5% in the case of ship building.
[3] The
local content factor P was the difference between the FOB value of
the export minus the CIF value of imported inputs
incorporated in
the product expressed as a percentage of the FOB value. If that
percentage was 75% or more P was deemed to be
100%. The effect of
the aforegoing was that if the local content factor was 74% the GEIS
subsidy was 14,43% of the FOB value
of the export and if the local
content factor was 75% or more the GEIS subsidy was 19,5% of the FOB
value of the export.
[4] The
appellant constructed three vessels and exported them in February
1992, September 1992 and March 1993 respectively.
The GEIS
guidelines provided that imported goods which had undergone a
substantial "transformation" process within
the Southern
African Customs Union could, in certain circumstances and subject to
specific approval by the respondent, qualify
as locally manufactured
inputs for the purpose of determining the local content thereof.
Without approval of some transformations
by respondent the appellant
was unable to achieve a P factor of 75%. During the period February
to June 1993 the appellant applied
for the respondent's approval of
certain transformations. The respondent refused the application. At
a subsequent meeting between
the appellant and the respondent in
July 1993 the respondent told the appellant that, based on the oral
information supplied,
it would consider the transformation
applications but that some of them had no chance of success. The
respondent requested
the appellant to submit a full and
comprehensive application in writing and to motivate fully why the
transformations claimed
were in compliance with the GEIS
requirements. As a result of the meeting the appellant resubmitted
an application for the approval
of transformations. This
application was also refused by the respondent.
[5] Subsequent
to the meeting in July 1993 the appellant contended that the
respondent had indicated at the meeting that a rejection
of its
transformation application would not be disastrous for the appellant
because the appellant could always omit any particular
imported
item such as the engine, i.e. the appellant could, for example,
deduct the value of the engine from the FOB value of
the exported
vessel as well as from the CIF value of imported inputs in order to
qualify for the full GEIS subsidy on the lower
FOB value. The
suggested process was referred to as "omissions".
[6] After
the rejection of its transformation claims the appellant submitted
GEIS claims to the respondent. The claims did not
include
transformations but did include omissions. The respondent took the
view that the three GEIS claims had been overstated
by a total
amount of R25 697 072. Notwithstanding negotiations the
parties could not come to an agreement as to the amount
of the
subsidy to which the appellant was entitled. As a result the
parties agreed to submit the matter to arbitration.
[7] On
1 and 2 August 1995 the parties entered into a written arbitration
agreement in terms of which they agreed to submit their
"dispute
regarding the payment of GEIS" to an arbitrator. In terms of
the agreement the parties also agreed that the
arbitrator was to
issue directions as to:
i) The need for any pleadings or statements;
ii) The need for the discovery of any documents;
iii) The need for the filing of expert notices; and
iv) Any other procedure which the arbitrator in his
discretion considered necessary.
[8] The
appellant's statement of case, the comments of the respondent on the
statement and further responses by the parties (hereinafter
collectively referred to as "the written submissions")
were submitted to the arbitrator. The appellant stated in its
statement of case that there were four areas of dispute between the
parties, namely:
"4.3.1 The FOB issue;
4.3.2 The imported inputs issue;
4.3.3 The design costs issue;
4.3.4 The Hermes issue."
The
statement of case concluded as follows:
"14.1 Overall it is Dorbyl Marine's case that:
14.1.1 The actual audited FOB value should be used in
the calculation of the GEIS subsidy;
14.1.2 It should be allowed to take imported inputs out
of both sides of the equation in order to reach a 75% P factor;
14.1.3 The design costs do not form part of the
calculation of the P factor;
14.1.4 The Hermes insurance costs do not form part of
the calculation of the P factor."
[9] In its comments on the
appellant's statement of case the respondent stated that its
determination of the FOB value should
be accepted; that it would be
acting
ultra vires
if it were to allow the appellant to take imported inputs out of
both sides of the equation in order to reach a 75% P factor;
that
the design costs formed part of the calculation of the P factor;
and that the Hermes costs formed part of the calculation
of the P
factor. Those were the four issues between the parties.
Transformation was not an issue.
[10] On 5 September 1995 the
arbitrator issued his written directions in which he stated
inter
alia
:
"6.1 There is, in my view, no need for any
pleadings or statements. I should, however, indicate at this stage
that, as I
understand the nature of the arbitration agreement, it is
agreed that I should state in my award what, in my view, should
properly
have been payable in respect of GEIS for the three vessels
here in issue, namely Nos 105, 106 and 107. I understand,
therefore,
that I am at large to form a view as to the proper
application of GEIS which may be different from that advanced by
either party."
It
is clear, and not disputed, that the arbitrator did not consider
pleadings to be necessary in that the written submissions,
in which
the issues between the parties were clearly defined, could serve as
pleadings. The parties accepted the arbitrator's
written directions
and certain documents required by him were made available to him.
[11] The
arbitration took place on 26, 27 and 28 September 1995. During the
arbitration and in the documentation submitted to
the arbitrator
reference was made to transformation claims. It is, however,
apparent from the record of the arbitration proceedings
that, at
least insofar as the parties were concerned, the transformation
claims were only considered to be relevant in order
to show how the
dispute about the omission of imported inputs came about. This
appears from the following:
(a) In his opening address appellant's counsel
emphasized that there were four areas of dispute, namely, the four
mentioned in
appellant's statement of case. The arbitrator assured
him that he had studied "the memoranda and what serve as
pleadings".
He was obviously referring to the written
submissions.
(b) When the appellant called its second witness, Mr
Dawe, its counsel said:
"He will be talking of the second claim which has
to do with the omission of items from the input part of the formula.
There
will be some discussion about what's known as transformations
and in, I think, the statement of claim and the defence there are
references to transformations. I think as matters have turned out,
there is no need for you to worry yourself as to what precisely
constituted a transformation, what would be an acceptable
transformation, because all that has fallen by the wayside ..."
Mr Dawe stated in his evidence that because the
respondent had led the appellant to believe that the option of
taking out imported
items was available to it the appellant had not
pursued the other options open to it.
(c) During the evidence in chief of Mr Bullough, who at
the relevant time was the managing director of the appellant,
appellant's
counsel asked the following question:
"Mr Bullough, we now move on to the second area of
dispute between Dorbyl Marine and the Department of Trade and
Industries.
Perhaps as well what we can do is before we go to the
correspondence, Mr Dawe did testify to some extent on it, could you
explain
to Mr Arbitrator the basis of your claim to be entitled to
omit certain imported items from the formula? And in asking you
that
question generally, could you also generally and broadly just
refer to how it came about, namely I want you to talk about the
transformation idea as it developed."
(d) In his argument to the arbitrator after all the
evidence had been presented, appellant's counsel stated that the
appellant,
at the meeting in July 1993, had abandoned the
transformation application and decided to go for the option of
elimination and
omission.
(e) The appellant led no evidence in support of a
transformation claim.
[12] In
his award the arbitrator referred to what he had said in paragraph
6.1 of his directions. In paragraph 55 of the award
he stated that
"on the issues as stated to me, therefore, I reach the
following conclusions". They were that the correct
export
sales value was R333 775 707; that permission had been
given to the appellant to omit certain identifiable
imported items
for the purpose of increasing the P factor to 75% but that the
permission was invalid; and that many of the transformation
claims
set out with regard to Vessel No 107 should have been allowed. In
the latter regard he added:
"56.2 The net effect of the inclusion of these
items would, as I understand it, be to raise the P factor to over
75%. I
have not been given information as to the precise nature of
some of the operations. They would appear, however, to be
sufficiently
described. As I understand it, the description of the
operations was accepted, but it was felt that there was no
sufficient transformation.
This is a view with which I do not
agree."
[13] In
paragraph 57 the arbitrator dealt specifically with the four claims
set out in the written submissions of the parties
and stated:
"On these claims my award is as follows."
[14] The
appellant thereupon submitted a claim for an amount of R22 620 501
calculated on the basis that, in terms of the arbitrator's
award,
certain transformations qualified as locally manufactured inputs for
the purpose of determining local content. In a letter
to the
appellant the respondent acknowledged that it was indebted to the
appellant in the sum of R3 951 794 but disputed liability
in respect
of the balance of the claim on the basis that the remarks made by
the arbitrator in respect of transformation were
considered to have
been made in passing and not to be binding on the respondent. The
respondent stated:
"The transformation issue was, for purposes of the
arbitration, never an issue between the parties and never formed
part
of the mandate of the arbitrator. Had it been an issue a full
gamut of expert evidence would have been required to determine
whether each and every transformation claimed had any merit. This
was not done for the simple reason that it was not required.
The
Department noted the remarks made by the arbitrator but respectfully
disagrees and does not consider itself bound by those
remarks."
This dispute gave rise to an
application to the Durban and Coast Local Division of the High Court
by the appellant against the
respondent for payment of R18 668 707.
The judge in the court
a
quo
held that the
remarks made by the arbitrator concerning transformation claims,
which according to him should have been allowed,
were merely made in
passing in respect of a matter which was not an issue in the
arbitration; consequently, that the respondent
was not bound by
those remarks. The application was therefore dismissed.
[15] Before us the appellant
contended that the views expressed by the arbitrator in regard to
transformations were binding on
the respondent. The appellant
submitted that the parties had in terms of the arbitration agreement
agreed that their "dispute
regarding the payment of GEIS"
be submitted to arbitration; that the arbitrator understood the
agreement between the parties
to be that he was obliged to state
what was properly payable in respect of GEIS and that he was at
large to form a view as to
the proper application of GEIS different
from that advanced by either party; that the parties accepted the
arbitrator's definition
of his mandate; that as a result of the
agreement in respect of omissions having been held to be
ultra
vires
the
transformation claims had not been novated; that once the
arbitrator had found that the "omissions agreement"
was
ultra vires
he could not fulfil his mandate to state in his award what was
properly payable in respect of GEIS without dealing with
transformations;
and that he therefore dealt with the
transformation issue in fulfilment of his mandate.
[16] It is common cause between the
parties that the arbitrator could only have derived his authority to
make a binding award
from an agreement between the parties (see
McKenzie N.0. v
Basha
1951 (3) SA
783
(N) at 787F-788B). In terms of the arbitration agreement, which
was concluded on 1 and 2 August 1995, the parties agreed:
(1) To submit their dispute regarding "the payment
of GEIS" to an arbitrator.
(2) That the arbitrator should issue directions as to
the need for any pleadings or statements.
By
that time the dispute between the parties "regarding the
payment of GEIS" had been defined in the written submissions
as
a dispute concerning four items which did not include transformation
claims. There can be no doubt that those issues constituted
the
matter which they had agreed to submit to arbitration. Confirmation
that that was the case is to be found in the fact that
the written
submissions were shown to the arbitrator on 1 August 1995, that is
to say at the very time that the arbitration agreement
was
concluded.
[17] The
question then arises whether the parties, by accepting the
arbitrator's written directions in which he stated his understanding
of the arbitration agreement, agreed to enlarge the scope of the
arbitration so as to cover matters not in dispute between the
parties.
[18] In
my view it cannot be found that such an agreement was concluded. My
reasons are the following:
(1) It is not alleged by the appellant that by
accepting the arbitrator's written directions the parties intended
to amend their
arbitration agreement.
(2) The written submissions served as pleadings as far
as the arbitrator and the parties were concerned. The object of
pleadings
is to define the issues to be decided and the issues were
clearly defined in those submissions.
(3) What the appellant is contending for is that, by
accepting the arbitrator's understanding of the agreement, the
parties agreed
that the arbitrator could make an award against one
of them, in respect of a matter which was not in dispute between
them, without
notifying them that he intended doing so and whether
or not they had addressed the issue in the evidence presented or in
argument.
To grant such authority to the arbitrator would be so
far-reaching and can lead to such unfair results that it is very
unlikely
that the parties could ever have intended to grant such
authority to the arbitrator.
(4) All the indications are that the parties throughout
the arbitration proceedings were under the impression that the
issues
to be decided in the arbitration were the four issues
specified in their submissions and that transformation was not one
of them.
(5) In the light of the aforegoing it is probable that
the parties interpreted the arbitrator's statement in his directions
to
be that he was at large to decide what should properly have been
payable in respect of GEIS and what the proper application of
GEIS
was in respect of the agreed issues between the parties and not that
he considered himself to be at large to decide what
the proper
application of GEIS was in respect of any other issues.
[19] It
follows that the arbitrator had no authority to give any decision in
respect of transformations and that, insofar as
he purported to do
so, his decision is invalid.
[20] It
is therefore not necessary to decide whether the arbitrator intended
to give a decision in respect of transformations
or whether what he
said in respect of transformations was merely said in passing and
not intended to be binding on the parties.
[21] For
these reasons the appeal is dismissed with costs including the costs
consequent upon the employment of two counsel.
_______________________
P
E STREICHER
JUDGE
OF APPEAL
AGREE:
VAN
HEERDEN DCJ
SMALBERGER
JA
SCHUTZ JA
MELUNSKY AJA