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[2006] ZAFSHC 53
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Astral Operations Ltd t/a inter alia County Fair Foods and National Chicks v Country Bird (Pty) Ltd and Another (4432/2006) [2006] ZAFSHC 53 (30 November 2006)
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IN THE HIGH COURT OF SOUTH AFRICA (ORANGE FREE STATE PROVINCIAL DIVISION)
Case No. : 4432/2006
In the case between:-
ASTRAL OPERATIONS LIMITED trading as Applicant Inter alia COUNTY FAIR FOODS AND NATIONAL CHICKS
and
COUNTRY BIRD (PROPRIETARY) LIMITED First Respondent ELITE BREEDING FARMS Second Respondent _____________________________________________________
HEARD ON: 3 NOVEMBER 2006 _____________________________________________________
JUDGMENT BY: VAN DER MERWE J _____________________________________________________
DELIVERED ON: 30 NOVEMBER 2006 _____________________________________________________
[1] This application is unusual in the sense that the applicant approaches this Court for an order in terms of which substantially the same relief is granted pending the finalisation of arbitration proceedings between the parties, than that which the applicant intends to claim in the arbitration proceedings.
[2] The applicant and the second respondent are involved in a joint venture in the name of Elite Breeding Farms, i.e. the second respondent. The parties are ad idem that the second respondent is an universitas and not in any manner a partnership. For reasons that I find unnecessary to repeat, the applicant holds 82% equity in the second respondent and the first respondent holds 18% equity in the second respondent. The applicant inter alia trades as County Fair Foods and National Chicks.
[3] The business of the second respondent is to supply so-called parent stock mainly to the applicant trading as County Fair Foods and National Chicks and to the first respondent. The parties to whom the second respondent supplies parent stock incubate the fertile eggs from such parents and then rear and sell the broilers in the market. The second respondent has operations at Little Loch, Weenen, KwaZulu- Natal and Turtle Springs, Caledon, Western Cape. At these two properties the second respondent holds grandparent stock from which it supplies parent stock to County Fair Foods from Turtle Springs and to each of National Chicks and the first respondent from Little Loch. The operations of the second respondent are substantial. Its balance sheet as at 30 September 2005 reflected total nett assets of R46,5 million and its income statement for the year ended 30 September 2005 reflected a turnover of R60,5 million and a profit of approximately R12,7 million. The properties known as Little Loch and Turtle Springs are owned by a company called Kayfour Investments (Pty) Ltd in which the applicant and the first respondent hold equity in the same proportion as in the second respondent.
[4] The parties are agreed that their relationship in respect of the second respondent is governed by two written agreements, namely a joint venture agreement entered into on 8 November 1993 and a management agreement entered into on 12 March 2000.
[5] In terms of the joint venture agreement each of County Fair Foods and the first respondent is obliged to purchase 90% of its parent stock requirements from the second respondent and National Chicks is obliged to purchase 90% of its Ross parent stock requirements from the second respondent. In terms of clause 18 of the joint venture agreement the parties thereto are to endeavour to resolve any dispute by mediation, failing which the dispute is to be referred to arbitration in terms of clause 17 thereof. In terms of clause 17 a dispute includes failure by the parties to reach unanimity concerning a material decision when unanimous approval is required, a deadlock situation having arisen between the parties and any act or omission which is contrary to the provisions of the joint venture agreement. In terms of this clause a dispute shall be submitted to arbitration under the provisions of the Arbitration Act, No. 42 of 1965. The arbitrator shall be an independent and suitable qualified person to be mutually agreed upon by the parties within three days failing which an arbitrator is to be appointed, depending on the nature of the question in issue, by the president of the relevant professional society.
[6] In terms of the management agreement Ross Poultry Breeders (Pty) Ltd (“RPB”) is appointed to manage the second respondent on behalf of its participants. In terms of clause 4 of the management agreement the prior written approval of the participants is required in respect of inter alia the approval of the annual budget plan, business plan, lease and capital expenditure plan of the second respondent and any amendment of the annual business plan or budget, as well as the increase or decrease in the placement of grandparent stock in excess of 5% unless recorded in an approved business plan or budget. A dispute arising from this agreement is to be referred to mediation and, if no resolution is obtained within 15 days of the dispute arising, then to arbitration. Before me counsel were ad idem that at least in respect of the resolution of disputes, the management agreement should be read with the joint venture agreement, so that in the event of a dispute arising from the management agreement going to arbitration, such arbitration must be regulated by the provisions of clause 17 of the joint venture agreement.
[7] This application concerns expansions that the applicant wishes the second respondent to make. In respect of Little Loch it is proposed that the facilities be expanded by the introduction of three additional setters and extension of the buildings to accommodate the increased facilities at a total cost of R1,5 million. In respect of Turtle Springs it is proposed that the facilities be expanded by the introduction of four additional setters and two additional hatchers and the extension of the buildings to accommodate the additional incubators and to provide additional processing and sexing facilities at a total cost of R3,6 million. An increase of 8% in placement of grandparent stock at Little Loch is also proposed. The parties are agreed that in terms of the management agreement prior written approval is required from both the applicant and the first respondent for these capital expansions and additional placement of grandparent stock.
[8] At a meeting held on 28 September 2006 and consistently thereafter, the first respondent made it clear that it refuses to approve the capital expansions and additional placement. Accordingly disputes arose between the parties. As those disputes were not resolved through mediation, they were referred to arbitration by the applicant by letter dated 13 October 2006. It can safely be stated that this arbitration will not be finally determined within a lesser period than several months. The relief essentially presently claimed by the applicant is authorisation to procure, by and at the expense of the second respondent, the aforesaid expansion of facilities and increase of placement grandparent stock at Little Loch and the aforesaid expansion of facilities at Turtle Springs, pending the determination of the arbitration. The relief claimed in the notice of motion was thus limited by a judgment delivered and order made by me on 31 October 2006.
[9] It is clear that the High Court may on the principles applicable to the grant of an interdict pendente lite, grant an interdict pending a decision of a body or person such as an arbitrator. That much was decided in all three judgments in the Appellate Division in the case of AIROADEXPRESS (PTY) LTD v CHAIRMAN, LOCAL ROAD TRANSPORTATION BOARD, DURBAN AND OTHERS [1986] ZASCA 6; 1986 (2) SA 663 (AD). See the passages at 676 B – D, 678 H – I and 681 E. As Van Heerden JA points out at 680 H – I, it is more accurate in such a case to ask whether a prima facie case is made that the party will succeed in the proceedings such as arbitration proceedings, rather than to refer to a prima facie right. Also, section 21(1)(f) of the Arbitration Act, No. 42 of 1965 provides that for purposes of and in relation to a reference under an arbitration agreement the court shall have the same power of making an order in respect of an interim interdict or similar relief as it has for the purposes of and in relation to any action or matter in that court.
[10] However, the respondent contends that the interim relief in question will result in installation of equipment such as setters and hatchers and building operations, that could not realistically be undone. It is therefore suggested that the interdict applied for will be final in substance and that therefore the matter should be approached on the basis of a final interdict. I cannot agree. It seems to me that the distinction between an interim interdict and a final interdict is a matter of principle and not of degree or practical effect. An interim interdict does not involve a final determination of the rights of the parties and does not affect such a final determination of the rights of the parties. It serves to adjust the applicant’s interests until the merits of the matter are finally resolved. See the AIROADEXPRESS-case, supra at 681 E. In my judgment, an interdict that complies with this description, is an interim interdict, notwithstanding that the practical effect thereof is final. See APLENI v MINISTER OF LAW AND ORDER AND OTHERS 1989 (1) SA 195 (AD) at 200 J – 201 D. See also RADIO ISLAM v CHAIRPERSON, COUNCIL OF THE INDEPENDENT BROADCASTING AUTHORITY, AND ANOTHER 1999 (3) SA 897 (W) at 910 C – 912 G where Goldstein J, with respect, correctly held that the decision in BHT WATER TREATMENT (PTY) LTD v LESLIE AND ANOTHER 1993 (1) SA 47 (W) is wrong in this respect. Of course the practical effect of an interim interdict will have an important and sometimes decisive effect on the balance of convenience.
[11] It is sometimes stated, as was done by Van Heerden JA in AIROADEXPRESS, supra at 681 F, that an interdict which is to be operative for a fixed or a determinable period, may still be final in its nature and effect or final in substance and that in this regard, as in my view is virtually always the case, substance should take precedence over form. In my view, such statements simply mean that an interdict which is to be operative for a fixed or determinable period or even pending decision of an action and therefore appear to be interim in form, may still involve a final determination of rights. This will be the case where a final determination of rights is required even though the interdict will only endure for some time, as in CAPE TEX ENGINEERING WORKS (PTY) LTD v SAB LINES (PTY) LTD 1968 (2) SA 528 (K) at 530 A – B or where rights sought to be protected by interdict will not arise at all in the subsequent proceedings. This was the position, for instance, in STRAUSZ v STRAUSZ AND OTHERS 1964 (1) SA 720 (W) at 723 A – C and BOTHA v MAREE EN ‘N ANDER 1964 (1) SA 168 (O) at 172 B – F. In the instant case, the arbitrator will finally determine the rights of the parties in respect of the expansions and additional placement of stock and that final determination of rights will not be affected by the interim interdict sought by the applicant. It follows that I must consider the matter on the basis of an interim interdict.
[12] It is trite that the requirements for an interim interdict, whether it is mandatory or prohibitory, are at least a prima facie right, even though open to some doubt, in such case a well-grounded apprehension of irreparable harm to the applicant if the interim relief is not granted, that the balance of convenience favours the granting of an interim interdict and the absence of any other satisfactory remedy for the applicant. In respect of a prima facie right (or prima facie case), even though open to some doubt, the accepted test in the context of an interim interdict is to take the facts averred by the applicant, together with such facts set out by the respondent that are not or cannot be disputed and to consider whether, having regard to the inherent probabilities, the applicant should on those facts obtain final relief at the trial. The facts set up in contradiction by the respondent should then be considered and, if serious doubt is thrown upon the case of the applicant, it cannot succeed. See SIMON NO v AIR OPERATIONS OF EUROPE AB AND OTHERS [1998] ZASCA 79; 1999 (1) SA 217 (SCA) at 228 G – H.
[13] The applicant points out that the second respondent exists primarily to provide the parent stock requirements of its participants. In this regard the applicant refers to the obligation in terms of the joint venture agreement on the participants to purchase a substantial portion of their parent stock requirements (90% thereof for instance in the case of County Fair Foods and the first respondent) from the second respondent. The applicant says that the facilities at Little Loch and Turtle Springs and the level of grandparent stock at Little Loch are inadequate to meet the requirements of the participants. In the case of Little Loch the order book for the year to 30 September 2007 amounts to 13504 parcels of parent stock (each parcel comprising 104 females and 15 males) and that without the proposed expansion and additional placement the annual production capacity at Little Loch is approximately 12096 parcels. This means that without the proposed expansion and additional placement the Little Loch operation will be unable to meet the demand. In the result, the second respondent and its participants concerned stand to suffer substantial prejudice, the former through loss of sales to participants and the latter because they will be short of parent stock in order to rear broilers for their markets. The Turtle Springs operation is fully extended and has no capacity to handle any additional demand. Consequently, any mishap could at any time result in the Turtle Springs operation failing to meet current demands. In addition, County Fair Foods has already approved substantial expansions to its breeding operations which will result in substantial increase of its demands upon the Turtle Springs operation. Without the proposed expanded facilities, according to the applicant, the Turtle Springs operation will not begin to meet the increased demand from County Fair Foods. All this is met by the respondent at most with general bare denial. On the papers as a whole there is no evidence thereof that the first respondent is opposed to the proposed expansions and additional placement of stock per se. On the contrary, at the aforesaid meeting of 28 September 2006, the chairman of the first respondent indicated that the proper financial decision for the second respondent would have been to expand the hatchery in order to meet the increased demand but that this changed as a result of what the first respondent regards as serious mismanagement of the second respondent’s affairs, to which I will refer below.
[14] The applicant therefore says that there are sound commercial reasons for the expansion of facilities and additional placement of stock and that that is in the best interest of second respondent as well as its participants, including the first respondent. The applicant refers to clause 3.4.2 of the joint venture agreement in terms of which the participants are obliged to use their best endeavours to promote the interest of the second respondent. On this basis the applicant says that it has made out at least a prima facie case that it will persuade the arbitrator to sanction the capital expansions and additional placement of stock.
[15] The case for the first respondent is that its refusal to approve of the capital expansions and additional placement of stock, is based on sound commercial reasons relating to mismanagement of the affairs of the second respondent and lack of financial information proving the feasibility of the expansions.
[16] The allegations of the first respondent in respect of mismanagement of the affairs of the second respondent are based on a forensic report by KPMG Services (Pty) Ltd (“KPMG”), which report and annexures thereto form part of the papers herein. It was submitted on behalf of the applicant, only in reply, that the KPMG report constitutes inadmissible hearsay evidence. I do not agree. The report is at least admissible to show that such report with such content exists and is available to the first respondent. The main findings of this report, relied upon by the first respondent, are the following:
The first respondent concludes that the business of the second respondent is run by managers who have lost their independence in that they openly favour the applicant and that therefore the first respondent cannot be expected to invest in the second respondent by agreeing to the proposed capital expansions and additional placement of stock.
[17] The applicant disputes the correctness of the contents of the KPMG report. It points out that the disputes between the parties arising from the KPMG report was referred to arbitration in terms of the joint venture agreement by the first respondent. This was referred to in argument as the first respondent’s arbitration, as opposed to the applicant’s arbitration referred to above. A submission to arbitration in respect of the first respondent’s arbitration was signed on 6 October 2006. In the result, the applicant says that it would be inappropriate to respond to the first respondent’s allegations based on the KPMG report save to state, as will according to the applicant be established at the first respondent’s arbitration, that the allegations and complaints are almost all without substance.
[18] The argument that the refusal to consent to the proposed capital expansions is justified by a lack of financial information, is based thereon that at a meeting held on 1 June 2006 when the capital expansions was previously discussed, the financial information contained a mistake and that the financial information had not been updated from January to June 2006 in order to reflect actual sales. The mistake relied upon was made in the schedules to the strategic plan to be adopted, containing projected figures for a future five year period. An increase in turnover was reflected but a decrease in profit before interest and tax, and this mistake, since it occurred in one of the early years of the future five year period, was compounded as a result of extrapolation in respect of the later years. It seems clear however that the error was an obvious one, picked up immediately. Furthermore it is undisputed that the first respondent was at all times regularly provided with the actual monthly financial statements of the second respondent and that prior to the meeting of 1 June 2006, the first respondent had been provided with the current financial statements (up to the end of April 2006) of the second respondent. Moreover, the alleged lack of financial information was at no stage before the rejoining affidavit on behalf of the first respondent, deposed to on 1 November 2006, in any way put forward as a reason or basis for refusal to consent to the expansions. Prima facie the alleged lack of financial information as a ground for opposition of the expansions, appears to me to be an afterthought that has no merit.
[19] From the aforegoing it seems to me that in respect of the aforesaid disputes in the applicant’s arbitration, the arbitrator will essentially have to decide whether the first respondent should, in the best interest of the second respondent, have agreed to the proposed capital expansions and additional placement of stock. It is therefore no answer for the first respondent to say that it acted lawfully or within its rights to refuse to agree thereto. I obviously do not know if and to what extend the KPMG report will at the first respondent’s arbitration be found to be correct or substantiated. Even if it is so found, it does not in my view follow that the arbitrator in the applicant’s arbitration will necessarily decide in favour of the first respondent. Apart from the admitted unauthorised management fee charged by the applicant, the allegations of mismanagement are made against RPB. It is undisputed that this management fee was stopped as from October 2005. Although the applicant has close links with RPB, there is no denial that they are separate legal persona. It seems likely that both the applicant and the RPB would in future refrain from repeating or continuing any errors made in respect of the management of the second respondent. RPB may be removed as manager of the second respondent, even before the commencement of arbitration. What weighs heavily with me in this regard, is that the first respondent clearly elected at this stage that the joint venture agreement remains in force. It therefore has to act in the best interest of the second respondent and cannot now pave the way to “wind up” the affairs of the second respondent. On the totality of the evidence I find that the applicant has shown prima facie, even though open to some doubt, that it will succeed in persuading the arbitrator in the applicant’s arbitration to determine that the expansions and additional placement are justified.
[20] In my view the applicant has established that if the proposed expansions at Little Loch and Turtle Springs and the additional placement of stock at Little Loch do not proceed, the second respondent will be unable to meet the requirements of its participants and that this will result in substantial loss of sales and opportunity for the second respondent which would be irrecoverable. In my view the applicant has therefore established objectively a well-grounded apprehension of irreparable harm if the interim relief is not granted.
[21] It is trite that in considering the balance of convenience the court must weigh the prejudice to the applicant if the interim relief is refused against the prejudice to the respondent if it is granted. In this case particularly, the nature of the relief claimed, namely inter alia the extension of buildings and the installation of equipment such as setters and hatchers, is an important factor to be considered. To the extent that the proposed expansions may constitute improvement of fixed property, it will of course constitute improvement of Little Loch and Turtle Springs which are both owned by Kayfour Investments (Pty) Ltd in which the first respondent holds 18% equity. It is undisputed that the second respondent has sufficient own funds readily available to pay for the expansions and additional placement of stock. Despite the allegations of mismanagement of the second respondent, it is also undisputed that the second respondent has made a substantial profit of approximately R12,7 million for the year ended 30 September 2005. There is no indication that the financial position of the second respondent worsened after that date. It does not appear that there is any reason to believe that the first and second respondents will lose money if the interim relief is granted, on the contrary, there are strong indications that the profit of the second respondent will be increased by the increased capacity.
[22] In any event the applicant has given an undertaking to both the first and second respondents that it will be liable for any damages proved to have been suffered as a result of the granting of the interdict. The applicant is a public company and there is no suggestion that it would be unable to make good in terms of its undertaking. In my view the undertaking is too narrow and should refer to damages or losses suffered by the first respondent and/or the second respondent, as losses may possibly be suffered for which the first respondent may not have a claim for damages in law. Its undertaking to be liable for damages or losses should in my judgment be imposed as a condition of the interim interdict. See CRONSHAW & ANOTHER v COIN SECURITY GROUP (PTY) LTD [1996] ZASCA 38; 1996 (3) SA 686 (AD) at 690 H – 691 B. In addition, the applicant offered an undertaking that in the event of these disputes being determined against the applicant and if then required by the first respondent to do so, the applicant will take over the relevant equipment and stock acquired in the course of the aforementioned expansions and placement and will recompense the second respondent for the relevant expenditure incurred by the second respondent, with interest calculated at the overdraft rate charged by the second respondent’s bankers as from the date of payment of the expenditure. For some or other reason this undertaking did not find favour with the first respondent, who proposed that in the event of an interim interdict being granted, the applicant and the second respondent should be directed to provide monthly statements to the first respondent reflecting all income and expenditure associated with the expansions and increased activities of the second respondent. In my judgment, in the exercise of my discretion, both an undertaking in accordance with the above and an obligation to provide monthly statements should be imposed as conditions of the interim interdict. In my view such monthly statements should only relate to expenditure. The applicant says that monthly financial statements of the second respondent are regularly made available so that such condition should not result in an undue burden. In my view the order of this Court should also contain provisions ensuring that the applicant’s arbitration is proceeded without delay. In the light of all this, I find that the balance of convenience favours the applicant.
[23] In the event of findings in accordance with the abovementioned, no suitable or adequate alternative remedy was suggested by the first respondent, nor do I find such remedy.
[24] On behalf of the first respondent it was submitted that costs of the application should be reserved for determination by the arbitrator. I do not believe that such order would constitute a proper exercise of my discretion in respect of costs. In my judgment, costs should follow the result with the exclusion of the orders as to costs made on 31 October 2006. The employment of two counsel who was justified in my view and not objected to as such by counsel for the first respondent. I am not prepared to grant costs on the scale of attorney and client.
[25] IT IS ORDERED THAT:
________________________ C.H.G. VAN DER MERWE, J
On behalf of the applicant: Adv. P. Hodes SC With him: Adv. B.D.J. Gassner Instructed by: Israel Sackstein Matsepe BLOEMFONTEIN
On behalf of the first respondent: Adv. H. van Eeden Instructed by: McIntyre & Van der Post BLOEMFONTEIN
On behalf of the second respondent: No appearance
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