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[2006] ZAGPHC 32
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Pather v Kotecha and Others (299976/01) [2006] ZAGPHC 32 (18 April 2006)
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(TRANSVAAL PROVINCIAL DIVISION)
REPORTABLE
CASE NO: 299976/2001
DATE: 18/4/2006 In the matter between: DR RAJENDRAN PATHER Applicant and MR P L KOTECHA First Respondent B P GROUP FINANCIAL SERVICES (Pty)Ltd Second Respondent C F ELOFF N.O. Third Respondent THE SOUTH AFRICAN FUTURES EXCHANGE Fourth Respondent
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MURPHY J 1. This is an application in terms of section 33 of the Arbitration Act 1965 to review and set aside the arbitration award of the third respondent. 2. The applicant, a medical practitioner in Durban, in early 1998 entered into an arrangement with the first respondent and the predecessor of the second respondent, now substituted by the second respondent, in terms whereof he invested an amount of R500 000 on the South African Futures Exchange (“SAFEX”). SAFEX is the fourth respondent. It initially filed an answering affidavit but has subsequently indicated that it is prepared to abide by the decision of the court. 3. The investment arrangement was formalised through a series of agreements concluded between the applicant and various financial services brokers with whom the first respondent was associated, including eventually the second respondent. The arrangement in broad terms involved the second respondent running an account on behalf of the applicant for the purpose of trading in instruments listed by SAFEX and in terms of which the second respondent was authorised by the applicant to withdraw from the account such sums of money as were required to settle any amounts due in the course of trading on SAFEX, against payment of charges and commission to the respondents. Central to the dispute is an averment by the applicant that the respondents held out that the investments were for a fixed period of one year at the end of which the return of the capital investment was guaranteed. The respondents deny this, claiming to the contrary that not only was the capital not guaranteed, but that in terms of the contract the second respondent was entitled to require the payment of additional funds (“margin calls”) to cover trading losses incurred on the exchange in excess of the initial capital investment. 4. The first agreement concluded as part of the arrangement was an agreement referred to as “the SAFEX client agreement” entered into between the applicant and Robinson & Mulder Financial Services (Pty) Ltd on 10 March 1998. Thereafter on 19 March 1998 an umbrella- agreement was concluded with another financial services broker, Unitrade 69. This agreement was never implemented yet it remained binding on the parties. 5. During September 1998 a second client agreement was entered into between RMD Financial Services and the applicant. This agreement was identical to the SAFEX client agreement entered into on 10 March 1998, but merely substituted RMD Financial Services as the one contracting party on account of the first respondent being associated with such company as from that date. Finally, in February 1999 a third client agreement was concluded between the second respondent and the applicant, because by this time the first respondent had incorporated his own brokerage firm (the second respondent) in which he held a direct interest. 6. The first respondent commenced trading in SAFEX maize futures on behalf of the applicant during the first half of 1998. A summary of the cash and margin balances on the trading account indicates that the capital grew from R500 000 to R598 000 by 29 May 1998. Subsequently the capital declined, going as low as R280 000 in July 1998, but then recovered in October and November 1998 to about R531 000. Thereafter it again rapidly diminished to R334 000 on 1 February 1999, which amount was entirely lost by 11 February 1999. The loss of the balance of R334 000 in early February 1999 corresponded with the conclusion of the final SAFEX client agreement with the second respondent. The dramatic loss of the capital was explained in evidence by the first respondent as being the result of trading in maize futures taking an adverse turn in February/March 1999, contrary to market expectations. The result of all of this was that the applicant’s initial investment of R500 000 was lost and he was called upon by the second respondent to deposit an additional sum of R245 665- 65, being the margin call due at 1 July 1999, such sum representing outstanding losses, SAFEX trading fees and interest. 7. The applicant refused to pay the margin call. And on 21 December 1991, together with other investors with whom he was associated and who had similar arrangements with the respondents, he issued summons out of the Durban and Coast Local Division of the High Court alleging that prior to entering into the initial contract the first respondent represented to the applicant and his co-investors that at the end of the investment period the capital amount invested would be repaid to him, that he could expect a return on his investment of 20% per month and that the applicant was induced by these representation to conclude the various agreements and to pay the sum of R500 000. The applicant thus sought an order declaring the agreements void and unenforceable on the ground of fraudulent misrepresentation; a declarator that the respondents were not entitled to recover from him and his co-plaintiffs any further sums allegedly due as margin calls in terms of the agreements; and in the case of the applicant the payment of the sum of R500 000. The other plaintiffs sought repayment of R360 000, such amount being the capital they had together invested with the respondents. In their plea the respondents averred that the applicant and his co- plaintiffs were bound by the agreements which include, inter alia, a term that they had read and understood the risk disclosure statement, being annexure A to the SAFEX client agreements, advising the contracting party that the investment was subject to “a substantial risk of loss,” as well as a sole memorial clause to the effect that the written agreement contained the entire agreement between the applicant and the second respondent and that neither party would be bound by any undertakings, representations or warrantees not recorded in the written agreement. They further denied that the alleged misrepresentations had been made. The second respondent simultaneously filed a claim-in-reconvention against the applicant for the payment of the margin calls in the sum of R245 665- 65 and against the co-plaintiffs jointly and severally for payment of the sum of R121 057-79, together with interest at the overdraft rate applicable to the margin accounts. 8. In an application made to the Durban and Coast Local Division of the High Court during mid-2000, the fourth respondent, SAFEX, sought a stay of the action in order that the dispute could be arbitrated in accordance with rule 17 of the SAFEX rules, which it maintained were binding upon the parties to the dispute by virtue of the agreements concluded between them. The application for the stay was dismissed on the ground that the agreements might be void due to the alleged fraudulent misrepresentation.The parties nevertheless agreed that the dispute would be arbitrated in accordance with the SAFEX rules. 9. The applicant in heads of argument filed with this court in 2003 initially took the view that the submission to arbitration in terms of the SAFEX rules was a form of compulsory arbitration. In order to understand the significance of the point it will help to set out the provisions governing arbitrations under the auspices of SAFEX. SAFEX was previously licensed to carry on business in terms of section 7 of the Financial Markets Control Act of 1989. It is now incorporated into the Securities Exchange of South Africa, known as the Johannesburg Stock Exchange. Section 17 of the Financial Markets Control Act regulates the formulation and content of the rules of each financial exchange. Section 17(6) provides that the provisions of any rule made under the section shall be binding on all members and on every person utilising the services of a member or who concludes a transaction with a member in the course of that member’s business. The SAFEX rules were promulgated in terms of section 17 and came into operation on 1 July 1994. Both respondents are members of SAFEX. In terms of the definition clause of the rules a “client agreement” is defined to mean an agreement between a member and a client, entered into before the member becomes entitled to trade with the client, the basic terms and formal requirements of which have been prescribed by the executive committee of SAFEX. Clause 18 of the client agreement concluded between the applicant and the second respondent incorporates clause 18 of the prescribed standard client agreement. It reads:
“Any dispute arising out of or in connection with this agreement or the subject matter of this agreement shall be resolved by arbitration or mediation in terms of section 17 of the rules.”
10.
Rule 17.1 provides that any dispute involving persons bound by the
rules in relation to any matter provided for in or relating to the rules shall
be resolved by arbitration or mediation in
terms of rule 17.
11. On the basis then that the contract, rules and the legislation pointed to arbitration as the appropriate means of dispute resolution, the parties, as I have said, agreed to refer the matter to arbitration in terms of the SAFEX rules. The parties then settled terms of reference and the dispute was referred to arbitration before the third respondent, who after hearing evidence, sitting in both Sandton and Durban, handed down his award on 29 August 2001 followed by his reasons on 30 August 2001. 12. The terms of reference, incorporating the pleadings in the action instituted in the High Court, are contained in the minutes of a pre- arbitration conference held in Durban on the 11 July 2001. The issues identified for decision by the arbitrator are stated to be: a). What were the terms of the agreement concluded between the parties? b). Was there a variation of the agreement as alleged in paragraphs 18 and 19 of the particulars of claim? c). Did the first defendant (first respondent) make the misrepresentations alleged in paragraphs 20 and 37 of the particulars of claim? d). Did the agreements between the plaintiffs and the first and second defendant’s terminate by effluxion of time? 13. Although the third respondent made factual and legal findings in respect of each issue, as obviously he was obliged to do, the primary issue in dispute throughout the proceedings before him was whether the first respondent at a meeting at the home of the applicant on 26 February 1998 made the representations that at the end of the investment period the R500 000 capital invested would be repaid to the applicant and that the applicant could a expect return on his investment of 20% per month. It is the third respondent’s findings on this issue that are the subject of attack in this application, on the grounds that he allegedly did not properly apply his mind to the evidence before him and that his decision was not justifiable. Such, it was submitted, constituted a gross irregularity in the conduct of the arbitration proceedings and entitled the applicant to have the award set aside in terms of section 33 of the Arbitration Act of 1965. 14. Despite the other findings not being subject to challenge, they remain of relevance. With regard to the terms of the agreement, the third respondent held that they were set out in the four distinct agreements concluded during the investment period between the applicant and the financial service companies with which the first respondent was associated, including the second respondent. He held further that the parties were bound by the SAFEX agreements, which I assume, although it was not stated, included the SAFEX rules. In relation to the alleged variation, he held it was not adequately proved. Regarding the time period of the agreements, he ruled that although an investment period of twelve months had been mentioned, the parties tacitly agreed to extend the period. And, most importantly, he held that the alleged misrepresentations had not been adequately proved by the claimants on a balance of probabilities. 15. Clause 3 of the minutes of the pre-arbitration conference record the arbitrator’s terms of reference as requiring him to determine whether -
a)
the plaintiffs are entitled to the relief sought in particulars of claim;
and
b) the defendants are entitled to the relief sought in the counterclaim. 16. Accordingly, having decided the issues in the manner he did, the third respondent dismissed the claim of the applicant and the co-plaintiffs based on the alleged misrepresentations and ordered them to pay the amount due as margin calls (in the applicant’s case R245 665-65) together with interest at the stipulated overdraft rate. He also made certain costs awards that need not detain us. 17. As mentioned earlier, only the applicant seeks to review and set aside the award. It is not known whether his co-plaintiffs have complied with the award or await the outcome of these proceedings before doing so. 18. Section 33(1) of the Arbitration Act of 1965 permits this court to set aside an arbitration award on four grounds which can be conveniently summarised to be: a) the arbitrator has misconducted himself in relation to his duties as arbitrator (section 33(1)(a)); b) the arbitrator has committed any gross irregularity in the conduct of the arbitration proceedings (section 33(1)(b)); c) the arbitrator has exceeded his powers (section 33(1)(b)); or d) an award has been improperly obtained (section 33(1)(c)). 19. In terms of section 33(2), the application for an order setting aside the award must be made within six weeks after the publication of the award to the parties. However, section 38 permits the court, on good cause shown, to extend any period of time fixed by or under the Act, whether such period has expired or not. The present application was made outside the six week period and the applicant accordingly sought an extension of the time period. The respondents originally opposed the application for an extension and also challenged the applicant’s inordinate delay in further prosecuting the review in terms of rule 53 of the Uniform Rules of Court. At the commencement of the hearing before me, the respondents indicated that they were amenable to the grant of an extension and condonation. Accordingly, I extended the time period in terms of the Arbitration Act and condoned any non-compliance with the provisions of rule 53. 20. As I have said, the applicant’s main contention is that the arbitrator committed a gross irregularity, because in the view of the applicant, he ought to have found on the evidence before him that the applicant had discharged the onus of proving the misrepresentation on a balance of probabilities.
21.
To begin with, one must to ask: what is the appropriate standard of
review
in relation to arbitration awards under section 33(1) of the Arbitration Act
of 1965? This requires determination, obviously, in order to arrive at the
correct approach to the evidentiary findings and legal
conclusions of the
third respondent.
The standard of review under section 33(1)(a) was considered recently by the Supreme Court of Appeal in Total Support Management (Pty) Ltd and Another v Diversified Health Systems (SA) (Pty) Ltd and Another [2002] ZASCA 14; 2002 (4) SA 661 (SCA). In that case a dispute arose regarding the payment of part of the purchase price for the sale of a business payable in instalments. The sale agreement included a term that any disputes arising out of the agreement would be resolved by arbitration. The arbitrator dismissed the various claims for the purchase price and interest due on the ground that the claimant had failed to establish that any of the pre- conditions for payment of the second instalment had been met and accordingly that the second instalment made was not in fact due and payable and had thus been paid in mistake. This, he ruled, meant that interest owing in respect of the first installment had to be set-off against the mistaken payment. The award was challenged on two grounds under section 33(1), but only the first is of immediate relevance to the present case. The first ground of review was that the arbitrator had disregarded facts that were common cause and undisputed evidence and that such was so grossly careless that it amounted to misconduct within the meaning of section 33 (1)(a) of the Act. After reviewing the case law, general principles and the influence of various clauses of the Constitution, the Supreme Court of Appeal held that although the arbitrator had made a cardinal error in finding that one of the conditions for payment of the second instalment had not been met, an error with significant unfortunate financial implication for the claimants, the error (or any of the other errors made) did not amount to a gross error justifying the setting aside of the award. Moreover, the court was not prepared to draw an inference of impropriety or mala fides amounting to dishonesty on the strength of the errors in the arbitrator’s judgment, as the probabilities suggested that the errors had been bona fide. In short, it held that the bona fide errors of law and fact did not constitute a basis for a finding of misconduct on the part of the arbitrator. 22. In his judgement, delivered on behalf of the court, Smalberger ADP (as he then was) reviewed the case law and had particular regard to the earlier decision of Dickenson & Brown v Fisher’s Executors 1915 AD 166 where the then Appellate Division had considered the provisions of section 18 of Natal Act 24 of 1898, which provided for the setting aside of an arbitral award where, inter alia, “an arbitrator or umpire has misconducted himself.” In that case, Solomon JA held that there would not be misconduct “unless there has been some wrongful or improper conduct on the part of the person whose behavior is in question” and rejected the notion “that a bona fide mistake either of law or of fact made by an arbitrator can be characterised as misconduct.” This authoritative statement of the law remains the position in our law today - see Amalgamated Clothing and Textile Workers Union of South Africa v Veldspun (Pty) Ltd [1993] ZASCA 158; 1994 (1) SA 162 (A). Smalberger ADP also cited with approval certain dicta and the reasoning of Preiss J in Hyperchemicals (Pty) Ltd and Another v Maybaker Agrichem (Pty) Ltd and Another 1992 (1) SA 89 (W) where the learned judge came to the conclusion that the legislature intended the words of the Arbitration Act of 1965 to bear the meaning which had been judicially determined in similarly worded pre-1965 statutes and rejected the argument that “misconduct” embraced the notion of “legal misconduct” - that is, conduct calling for the application of a less stringent test for interference than that laid down in Dickenson & Brown v Fisher’s Executors. Smalberger ADP then concluded on a preponderance of authority that the basis on which an arbitration award will be set aside on the grounds of misconduct is a very narrow one. A gross or manifest mistake is not per se misconduct. At best, he held, it might provide evidence of misconduct which, taken alone or in conjunction with other considerations, will ultimately have to be sufficiently compelling to justify an inference (as the most likely inference) of what has variously been described as “wrongful and improper conduct, dishonesty and male fides or impartiality” (671H - 672H). 23. The learned judge of appeal stated that these principles are well established and firmly entrenched in our law regulating private arbitration. One need not look too far for the rationale for their existence. Arbitration is intended to provide a specialised, informal, private and convenient process, at reduced cost, aimed at quickly reaching finality. It is of the essence of the process that awards should not be appealable, unless agreed otherwise, and that supervision by the courts generally should be restricted to guarding the process from gross and fraudulent acts. In the private sphere it is a consensual process undertaken by agreement and in conscious awareness of the disadvantages attending the finality of awards and the limited rights of review. 24. However, in the Total Support Management case Smalberger ADP went on to say that because all statutes must be interpreted through the prism of the Bill of Rights in the Constitution, the principles governing the review of arbitration awards may require reassessment and re-evaluation. Section 33(1) of the Constitution provides that everyone has the right to administrative action that is lawful, reasonable and procedurally fair. Should arbitration be considered to be administrative action then it would follow that arbitration awards issued under the Arbitration Act would have to be reasonable, and in the light of the provisions of section 6 of the Promotion of Administrative Justice Act of 2000 (“PAJA”) as such would entitle review on all the ordinary review grounds, including a lack of rational connection between the evidence and the decision as reflected in the reasons given for it. Tests of substantive reasonableness and proportionality, and to a lesser extent rationality, inevitably invite consideration of the merits of a decision, leading often to a blurring of the function of review and appeal. In the Total Support Management case the Supreme Court of Appeal ruled correctly, I would respectfully say, that arbitration does not fall within the purview of “administrative action,” which normally involves the exercise of a public power or the performance of a public function in terms of legislation. Arbitration, by constrast, usually arises through the exercise of private rather than public powers as is evident in the distinctive attributes of arbitration. As Smalberger ADP (at 673E-674C) put it:
“First, arbitration proceeds from an agreement between parties who consent to a process by which a decision is taken by the
arbitrator that is binding on the parties. Second, the arbitration agreement provides for a process by which the substantive rights
of the parties
to the arbitration are to be determined. Third, the arbitrator is chosen, either by the parties, or by a method to which they have
consented. Fourth, arbitration is a process by which the rights of the parties are determined in an impartial manner in respect of
a dispute between parties which is formulated at the time that the arbitrator is appointed….. The hallmark of arbitration is that it is an adjudication, flowing from the consent of the parties to the arbitration agreement, who define the powers of adjudication, and are
equally free to modify or withdraw that power at any time by way of further agreement… As arbitration is a form of private
adjudication the function of an
arbitrator is not administrative but judicial in nature… It follows, in my view, that a consensual arbitration is not a species of administrative action and section 33(1) of the Constitution
has no application to a matter such as the present. The position may be
different in the case of statutorily imposed arbitrations (cf Carephone (Pty) Ltd v Marcus N O and Others 1999 (3) SA 304 (LAC)). In the light of the administrative justice provisions of section 33(1) of the Constitution the decision in the Veldspun case may merit reconsideration in the context of compulsory as appose to consensual arbitrations. The
principles laid down in that case still hold good in the latter type of matter.”
25. Initially, as mentioned earlier, in heads of argument filed on behalf of the applicant in late 2003, the applicant submitted that the arbitration award and decision handed down by the third respondent constituted administrative action by virtue of the arbitration being compulsory in terms of the SAFEX rules and hence, he argued, the standard of review was such that he was entitled to an arbitration award which was reasonable or justifiable. In supplementary heads of argument handed in at the hearing, counsel however conceded that the arbitration was in fact consensual and abandoned reliance on the right to just administrative action and a review based on the principles of justifiability. The concession, in my view, was wisely made. I am not persuaded that arbitration under the auspices of the SAFEX rules amounts to compulsory arbitration as contemplated in the Total Support Management and Carephone cases. While I readily accept that SAFEX, like the Johannesburg Stock Exchange, albeit not an organ of state, might have been subject to review under section 33(1) of the Constitution and the provisions of PAJA, because on occasion it may have exercised a public power or performed a public function in terms of legislation, that alone would not have sufficed to have endowed any arbitration proceedings conducted under its auspices with a compulsory character. First of all, the contractual arrangements between the applicant, the respondents and SAFEX were consensual to start with. And though the provisions of the Financial Markets Control Act 1989 incorporated the rules of SAFEX into the contractual arrangements between the parties, there would not appear to have been any provision in either the SAFEX rules or the legislation which posed an insurmountable obstacle to parties contracting on terms different to either the SAFEX rules or the standard client agreement prescribed by the executive committee. Moreover, as appears from this case, when investors on SAFEX contractually bound themselves to arbitration in terms of the rules, and/or the standard agreement, they retained the rights (unlike parties under the Labour Relations Act) to choose the arbitrator and to determine his or her terms of reference and remedial powers; or at least such was effected by a method to which they had earlier consented. The overall scheme of the SAFEX investment arrangements and the contractual nature of the arbitration provisions in particular, therefore, lead easily to the conclusion that the arbitration undertaken by the third respondent was indeed a consensual arbitration and thus not a species of administrative action inviting review under section 33(1) of the Constitution or PAJA. Be that as it may, it deserves noting that the concession made on behalf of the applicant was on a narrower basis. Counsel for the applicant based the concession on the consensual nature of the agreement made at the time of the application by the fourth respondent to the Durban and Coast Local Division of the High Court. Considering that the court had ruled that arbitration was not compulsory in the circumstances, such agreement in and of itself was sufficient to characterise the arbitration as consensual. 26. Having abandoned its reliance on the ground of justifiability, the applicant is constrained therefore to establish that the award is reviewable in terms of section 33(1) of the Arbitration Act of 1965 and is required to show that either the arbitrator misconducted himself in relation to his duties as arbitrator; committed a gross irregularity in the conduct of the proceedings; exceeded his powers; or that the award was not properly obtained. The applicant makes no claim that the arbitrator exceeded his powers or that the award was improperly obtained. Furthermore, presumably in light of the very narrow interpretation of the concept of misconduct in the Total Support Management case, the applicant makes no claim that the arbitrator misconducted himself. Instead, he has limited his challenge to a claim that the arbitrator committed a gross irregularity in the conduct of the arbitration proceedings. The substance of the complaint relates to the third respondent’s alleged mistaken approach to and treatment of the evidence concerning the alleged misrepresentations and his findings on the probabilities based on the credibility and reliability of that evidence. Any errors in that regard would have been of direct relevance in a determination of the question of justifiability, but in view of the findings in the Total Support Management case, any errors of fact and of law whether in the form of evidentiary findings of credibility, reliability or probability, or in the legal conclusions drawn from them, would probably not constitute misconduct. The only question remaining therefore is whether such errors would constitute a gross irregularity in the purview of section 33(1)(b) of the Arbitration Act 1965. 27. When one speaks of an irregularity in relation to a judicial decision, one typically has in mind a dialectical facet of the process rather than the correctness of any findings of fact or law. At issue is how the decision- maker arrived at his decision, not the substantive error or otherwise of his ultimate findings. Before an arbitrator’s award can be set aside on the basis that the arbitrator has committed a gross irregularity in the conduct of the proceedings, the irregularity it would seem must have been of such a serious nature that it resulted in the applicant not having his case fully and fairly determined. The ground of review relates to the conduct of the proceedings and not the result thereof - Bester v Easigas (Pty) Ltd and Another 1993 (1) SA 30 (C) at 42J. Almost one hundred years ago this court vividly made the point as follows in Ellis v Morgan 1909 TS 576 at 581:
“But an irregularity in proceedings does not mean an incorrect judgement; it refers not to the result but to the method of a
trial, such as, for example, some high-handed or
mistaken action which has prevented the aggrieved party from having his case fully and fairly determined.”
28.
The examples of irregularity that come to mind include: the failure by the
arbitrator to give one of the parties an opportunity to call
evidence; the
receiving of evidence in the absence of a party; a descent into the arena
through impermissible, excessive and repetitive cross-examination by the
arbitrator; and
the re-calling of witnesses by the arbitrator against the
wishes of the parties and in a manner
prejudicial to one of the parties.
The irregularity must be “gross” in the sense of being egregious, improper,
dishonest or mala fides. The basis on which an award will be set aside on
the grounds of gross irregularity, as with misconduct, is thus also a very
narrow one. Much will depend on the nature of the error, its consequences
and the context in which it is made.
29. The applicant’s specific ground of review in the present matter, we have seen, is the allegation that the third respondent failed properly to apply his mind to the evidence before him and thereby committed a gross irregularity. In this regard, counsel relied upon Goldfields Investment Ltd and Another v City Council of Johannesburg and Another 1938 TPD 551 at 560, where Schreiner J held that gross irregularities fall broadly into two classes, those that take place openly, as part of the conduct of the trial, and those that take place inside the mind of a judicial officer, which are only ascertainable from the reasons given and which are latent. This, according to counsel for the applicant, permitted me to consider the alleged failure by the third respondent to apply his mind properly to the evidence as evidencing a latent irregularity. A fuller reading of the dicta of Schreiner J reveals that the learned judge may have had something narrower in mind. Thus, he stated:
“Neither in the case of latent nor in the case of patent irregularities need there be any intentional arbitrariness of conduct
or any conscious denial of justice. The law, as stated in Ellis v Morgan (supra) has been accepted in subsequent cases, and the passage which has been quoted from that case shows that it was not merely high-handed or arbitrary conduct which is described as a gross irregularity; behavior which is perfectly well-intentioned and bona fide, though mistaken, may come under that description. The crucial question is whether it prevented a fair trial of the issues. If it did prevent the fair trial of the issues then it will amount to a gross irregularity. Many patent irregularities have this effect. And if from the magistrate’s reasons it appears that his mind was not in a state to enable him to try the case
fairly this will amount to a latent gross irregularity. If, on the other hand, he merely comes to a wrong decision owing to his having made a mistake on a point of law in relation to the
merits, this does not amount to a gross irregularity. In matters relating to the merits the magistrate may err by taking a wrong one of several possible views, or he may err by mistaking
or misunderstanding the point in issue. In the latter case it may be said that he is in a sense failing to address his mind to the true points to be decided and therefore
failing to afford the parties a fair trial. But that is not necessarily the case. Where the point relates only to the merits of the
case, it would be straining the language to describe it as a gross irregularity or a denial of a fair trial. One would say that the
magistrate has decided the case fairly but has gone wrong on the law. But if the mistake leads to the court’s not merely missing or misunderstanding a point of law on the merits, but to its misconceiving the whole nature of the enquiry, or of its duties in connection therewith, then it is in accordance with the ordinary use of language to say that the losing party has not
had a fair trial.”
30.
Counsel has referred me also to the decisions of the then Appellate
Division in Hira and Another v Booysen and Another 1992 (4) SA 69 (A);
and Blue Circle Ltd v Valuation Appeal Board, Lichtenburg 1991 (2) SA
772 (A) which he suggested were authority for the proposition that an
arbitrator’s bona fide failure to apply his mind to evidence could constitute
an irregularity. These decisions deal with review on administrative law
grounds of administrative action and accordingly, in my view, are not
authority for a similar proposition in relation to proceedings conducted
under the Arbitration Act where, for the reasons stated by Smalberger
ADP in the Total Support Management case, different considerations
should apply. Decisions of the Labour Appeal Court in relation to
decisions of
arbitrators under that Act are likewise not authoritative
because they deal
with compulsory arbitration, such having been
judicially determined to be a species of administrative action. Indeed, the
only judicial pronouncement on section 33(1)(b) of the Arbitration Act,
appears to be that of Brand AJ (as he then was) in Bester v Easigas (Pty)
Ltd and Another (supra). He concluded in accordance with prevailing
authority that in order to justify a review on this basis, the irregularity must
have been of such a serious nature that it resulted in the aggrieved party
not having his case fully and fairly determined and that such ultimately
was concerned with the method of the trial as opposed to the result.
31. I turn now to the third respondent’s findings in order to determine whether the award should be set aside on the ground that he committed a gross irregularity in the conduct of the arbitration proceedings. The third respondent accepted that the various contracts were concluded as a result of the presentation on investment in the futures market made by the first respondent at the home of the applicant on 26 February 1998. He however rejected as improbable the applicant’s version regarding the two alleged representations. In keeping with best arbitration practice the third respondent’s reasons are succinct, to the point and make limited reference to the record of evidence. Accordingly, when necessary, I will elaborate on his conclusions with fuller reference to the record. 32. With regard to the claim that the first respondent represented that the capital was guaranteed to be returned to the investor on termination of the investment period, the third respondent made four critical findings based on the evidence of the applicant and one of his co-plaintiffs, Dr Naidoo. Firstly, on the basis of a concession made by the applicant that he had perused the relevant clauses of the Unitrade Agreement, the third respondent found it to be probable that it was merely the object of the arrangement to preserve capital through hedging and that there was no guarantee of preservation of the capital. Secondly, although the applicant stated that he merely browsed through the various other agreements, the third respondent held it was likely that the applicant had seen the risk clauses and would have realised that there was no assurance that the capital invested would remain intact. Thirdly, since the applicant and the other claimants had at least some investment experience, the third respondent felt that considering the projected high returns possibly to be achieved on the futures market, they must have realised that the investment was accompanied by substantial risks. As he put it:
“In other words, if the complainants were told that they might attain enormous profits, they must have realised that their capital would be at risk.”
Fourthly, he accepted as reliable the evidence of a former employee of the
second respondent that she had regularly dispatched statements to the
claimants disclosing their trading position. This, together with the
information disclosed at the signing of the later agreements, ought to have
prompted the realisation on the part of the claimants that substantial
inroads could be made in their capital, contrary to any belief that the
capital was being preserved.
33. As for the alleged representation that the claimants could expect returns on their investment of 20% per month, the third respondent considered it unlikely that the first respondent would have held out a guarantee of such enormous profits (presumably in the light of the rarity of a return of 240% per annum on any investment), or if he had said something in that vein it reasonably would have been understood to have been mere puffing. 34. The objective facts, as reflected in the provisions of the agreements, and the nature of trading in futures, support the third respondent’s findings and conclusions. Clause 1 of the Unitrade Agreement is of particular relevance. It reads:
“1.
UNITRADE and the Client hereby enter into an agreement with each
other in terms of which UNITRADE is hereby appointed as advisor to the
Client, and UNITRADE hereby undertakes to advise the Client on trading
in contracts on the South African Futures Exchange (“SAFEX”) and in
the cash commodities markets with the specific object of preserving the
Capital Amount and realising profits on each trade for the benefit of the
Client on the terms and conditions set out herein. The preservation of the
Capital Amount shall be achieved through hedging each position. The
Client hereby authorises UNITRADE to give effect to such advise (sic) by
dealing directly with the broker registered with SAFEX to effect the
transaction on behalf of the Client, in the Clients account with such
broker.”
35.
Clause 5 of the SAFEX client agreement under the heading “risk
acknowledgement” provides:
“The client acknowledges that he has read the risk disclosure statement attached hereto as Annexure A and fully understands the contents thereof.”
The risk disclosure statement consists of a preamble and twelve
numbered paragraphs containing information about the risky nature of
futures trading. The relevant part of the
document reads:
“Risk Disclosure Statement
This risk disclosure statement is made pursuant to the rules. The risk of loss
arising from trading in futures and options can be substantial. You should
carefully consider whether such investments are suitable for you in the light of
your circumstances and financial resources. You should be aware of the
following points -
1. If the market moves against your position, you may, in a relatively short time, sustain more than a total loss of the funds placed by way of margin or deposit with your member. You may be required to deposit a substantial additional sum, at short notice, to maintain your margin balances. If you do not maintain your margin balances your position may be closed out at a loss and you will be liable for any resulting deficit. 2. Under certain market conditions it may be difficult or impossible to close out a position. This may occur, for example, where trading is suspended or restricted at times of rapid price movement. 3. Where permitted, placing a stop-loss order will not necessarily limit your losses to the intended amounts, for market conditions may make it impossible to execute such orders at the stipulated price. 4. A spread or straddle position may be as risky as a simple long or short position and can be more complex. 5. Markets in futures and options can be highly volatile and investment in them carry a substantial risk of loss. The high degree of “gearing” or “leverage” which is often obtainable in trading these contracts stems from the payment of what is a comparatively modest deposit or margin when compared with the overall contract value. As a result a relatively small market movement can, in addition to achieving substantial gains where the market moves in your favour, result in substantial losses which may exceed your original investment where there is an equally small movement against you.”
Clause 12 of the risk disclosure statement invites investors to contact
SAFEX for more detailed information before signing the contract should
they have any doubts or concerns regarding the risks.
36. Clause 2.3 of the Unitrade agreement governs the payment of fees and commission. It reads:
“2.3
an advisory fee and commission equal to fifty percent (50%) of the profit
realised in respect of each transaction shall be paid to UNITRADE by the
Client immediately upon receipt of the proceeds on such transaction.
The profit shall include the margin realised from the close out of a
position on SAFEX less the cost of the transaction (i.e. the SAFEX fees,
clearing costs and SAFEX brokerage); and any interest earned on the
Capital
Amount. Provided that where the total profits on the transactions
annualised for the year
(the annual return), and calculated for a full year
from the Commencement Date, is less
than thirty percent (30%) of the
Capital Amount, the advisory fee and commission shall be calculated as
follows: where the annual return is fifteen percent (15%) or less of the
Capital Amount, the advisory fee and commission shall be zero; where
the annual return is more than fifteen percent (15%) of the Capital
Amount but less than or equal to twenty
percent (20%) of the Capital
Amount, the advisory fee and commission shall be the actual return less
the annual return of fifteen percent (15%) of the Capital Amount, the
object being that Client shall receive no less than fifteen percent annual
return; where the annual return is more than twenty percent (20%) of the
Capital Amount, the advisory fee and commission shall be equal to an
annual return of five percent (5%) of the Capital Amount, plus fifty
percent of the profit in excess of the annual return of twenty percent
(20%) of the Capital Amount. The advisory fee and commission shall be
for all services rendered to the Client in terms of this agreement (except
the administration fee in clause 2.2 above).”
From this clause it is manifest that returns are envisaged anywhere within
the range of less than 15% per annum and more than
50% per annum.
37. These provisions, and the probability that the applicant (a medical specialist, studying at the time for an MBA degree, with some investment experience), actually read them, lead to two prima facie rational and legitimate conclusions. Firstly, that the contracts did not guarantee capital preservation, and secondly that any representations about the return of capital and the prospects of spectacular returns, as the third respondent held, were mere puffing and otherwise probably not intended to be binding if only by virtue of the sole memorial provisions of the agreement. The applicant’s interpretation of clause 1 of the Unitrade Agreement, to mean that the capital would be preserved through hedging (and thus be consistent with the alleged representation), is sustained neither by the language of clause 1, the risk disclosure statement, nor, I would imagine, by conventional practice in futures trading. Pursuing the object of capital preservation through hedging each position is not the same as guaranteed capital preservation. In fact, to the contrary, the stipulation of a strategy to achieve capital preservation by particular means, hedging, implies that the capital is at risk and that the means are being employed to minimise the risk and to achieve the desired object of preservation. Such is no guarantee. 38. Admittedly, the agreements were concluded at a date subsequent to the presentation which took place at the applicant’s home on 26 February 1998 and not simultaneously with the alleged representation. Accordingly, the agreements cannot serve as direct evidence that the representation was not made. Nevertheless, a finding that it is improbable, in the light of the prevailing standard terms and the stated risks of investing on the futures market, is by no means unreasonable or irrational. 39. The third respondent was further swayed by contradictions between the evidence of the applicant and his co-claimant, Dr Naidoo. The applicant testified that he was informed that there were no downside risks. By contrast, Naidoo stated that he knew heavy losses could be sustained. Under cross-examination, Naidoo, in addition, eventually also conceded that there was no guarantee of capital preservation and that the aim of the Unitrade Agreement was to provide a minimum return of 15% per annum. Contrary to the applicant’s unequivocal statement that 20% per month was guaranteed, Naidoo seemed to say that such could be achieved, and without prompting he volunteered that the agreement aimed at 15% per annum, as opposed to 240% per annum. 40. A key part of the applicant’s challenge to the award is directed at the alleged failure by the third respondent to take into account the fact that the version of the applicant was corroborated by three facts in particular, as well as the supposed unreliability of the first respondent as a witness. Firstly, it was submitted that the third respondent ought to have attached greater weight and significance to an offer made by the first respondent at a meeting on 10 June 1999 to repay the applicant his capital after it had been lost, such supposedly being consistent with an undertaking to guarantee its preservation. Secondly, evidence that the first respondent avoided contact with the applicant, it was contended, indicated that the first respondent could not communicate with the applicant because he knew he had misled him. And thirdly, a claim by the first respondent to have in fact discouraged the claimants from investing in the futures market when he did the presentation at the applicant’s home, was suggested to be so improbable on the part of a newly registered broker seeking clients that it brought into question the first respondent’s version of what was said at the meeting. 41. The first respondent admitted meeting with the applicant on 10 June 1999 in an attempt to get him to meet the margin call. At the meeting he offered to repay the capital lost or to re-acquire it on the market, failing which within eighteen months to offer the applicant shares in the second respondent equal to the value of the capital lost provided the applicant immediately met the margin call. This proposal was subsequently confirmed in writing. When it was put to the first respondent in cross- examination that this was an unusual offer to make, the first respondent explained he had been acting under pressure and in the interests of ensuring the survival of the company, which in terms of the arrangement stood surety on the margin calls. The failure by a broker to meet the margin calls of a defaulting investor could result in the broker being delisted and thus barred from trading under the rules of the exchange. He denied making the offer because he felt constrained to pay the claimants the capital on account of having guaranteed its preservation at the meeting of 26 February 1998. The third respondent accepted this explanation and refused to draw the inference sought by the applicant. Whether he was correct to do so may be debatable. If he erred in this respect, such error would evidently be bona fide and could hardly be regarded as improper, dishonest or mala fide to an extent justifying an inference of misconduct or gross irregularity. As Schreiner J said in the Goldfields Investment Ltd case, it would be straining the language to describe an error of this kind as a gross irregularity or a denial of a fair trial. The point relates only to the merits of the case, and at best the third respondent may have gone wrong on the facts or the legal conclusions drawn from them. It cannot be said that in reaching the conclusion he did he misconceived the whole nature of the enquiry with the result that the applicant did not have a fair trial. Put in another way, in the language of justifiability, correct or not, there is certainly a rational connection between the evidence on the point, which was overtly considered, the decision reached and the reasons for it. An inference that the offer was made to repay the capital, consistent with an undertaking to preserve it, is not the only plausible or legitimate inference to be drawn. The first respondent’s version is equally plausible and the finding that he was motivated to save his company by avoiding de-listing on SAFEX is entirely rational and justifiable in relation to the evidence, and it cannot be said that the third respondent failed to properly apply his mind to it. 42. The evidence that the first respondent avoided contact with the applicant and did not send statements to him, thus suggesting an avoidance propensity based on feelings of guilt or discomfort, was cogently contested. The evidence adduced on behalf of the respondents was to the effect that market reports were sent on a daily basis, bank statements were sent monthly and other communication took place between the parties. The applicant, on the other hand, maintained that he had experienced difficulty in making contact with the first respondent. The third respondent, when dealing with the question, accepted the evidence of Mrs Hunter, an employee of the second respondent and Mr Martin, a former client. Both, in essence, testified that trade reports were communicated on a daily basis and bank statements were faxed monthly. The third respondent accordingly rejected the notion that there had been a communication problem and by implication that avoidance behavior was resorted to from which could be inferred, at a stretch I would say, the existence of a guarantee, or alternatively a conclusion that the first respondent was an incredible witness. But again, even if the arbitrator erred here too, such an error would not present any misconception of the whole nature of the enquiry. He addressed himself to the point, decided it and could not be said to have failed to afford the parties a fair trial of the issue. It follows logically from his rejection of the claim that communication was difficult, although he did not expressly say so, that he was not prepared to draw the adverse inferences sought. He did not misunderstand the point in issue. At best for the applicant, the rejection by the third respondent of the inference sought to be drawn by the applicant might have been instances of his taking the wrong one of several possible views. 43. As for the improbability of the first respondent discouraging the claimants from investing, the first respondent’s testimony on the point was to the effect that normally as a part of his presentation he would elaborate at length on the risks of futures trading in order to frighten clients with the real potential of taking substantial losses. He also claimed not to have actively sought clients at the time because he had made significant gains for his own account. He made the presentation to the applicant and his co- plaintiffs at the request of a colleague at Investec, Mr Prem Ramiga, who handled the investment portfolios of the claimants. The third respondent found that the first respondent was probably overstating matters when he said that he was not looking for new clients and that he warned the clients not to invest in the futures market. However, he clearly drew no adverse inference from this in support of the representation having been made. Again, I am unable to conclude that in so finding he thereby failed to afford the parties a fair trial. 44. The applicant maintains further that the first respondent was a poor witness and that the third respondent failed properly to reject his testimony, and that this too constituted a gross irregularity. The arbitration award does not explicitly deal with the submissions made in support of the applicant’s contention that the first respondent was an unreliable or incredible witness. The third respondent, however, does refer in the award to the fact that certain other arguments had been made but that he considered them to be without merit. 45. Four submissions were made regarding this point. First was that despite stating that the applicant had agreed to pay the margin call during a telephonic conversation, subsequent to the meeting of 10 June1999, the first respondent had not reflected such in the claim-in-reconvention and no date for repayment was agreed. This supposedly was a contradiction impacting on his credibility. To my mind, the first respondent adequately dealt with these issues during cross-examination. He is a broker not a lawyer and had assumed, not altogether incorrectly, that he was entitled to rely on the original agreement to enforce the margin call when the applicant ultimately reneged on the agreement to pay. The absence of any adverse credibility finding on this score does not to my mind amount to a reviewable irregularity. One may safely assume that the third respondent accepted the explanation of the first respondent. His so doing in no way failed to afford the applicant a fair trial. 46. The second submission regarding the first respondent’s credibility concerned the manner in which the various agreements were completed. The first respondent testified that he was present when the SAFEX client agreements were signed and that he went through them carefully together with the applicant and Dr Naidoo. According to counsel for the applicant, this evidence cannot be reconciled with the manner in which the agreements were completed in that important information that should have been filled in was omitted and deletions which were called for were not made. This contradiction, it was submitted, could not be satisfactorily explained and showed the first respondent to be an unreliable witness Counsel for the first respondent argued that it was likely that the first respondent had explained the implications of the SAFEX client agreement when the first one was signed on 10 March 1998 and therefore it was not done again when the subsequent agreements were signed because the first respondent had reasonably assumed such had already been digested. It is clear from the award that the third respondent applied his mind to this particular submission, but limited himself to a comment that he did not think the applicant’s argument held water. One assumes therefore that he preferred the argument advanced by the first respondent’s counsel. Again, it may be debatable as to whether he chose the correct or wrong view. But that would be an appealable issue and not a reviewable gross irregularity. It is evident that he did not mistake or misunderstand the point, but rather opted for a particular interpretation of the merits. 47. The third submission as to credibility arose from the claim that the first respondent avoided the claimants by not replying to their telephone calls and repeatedly cancelled meetings in order to avoid reporting and accounting to them. The first respondent denied that he could not be contacted telephonically. According to the applicant his version was corroborated by the transcript of a telephone conversation that the first respondent produced when he was recalled to testify. The transcript confirms that accusations had been made that the first respondent was not returning the applicant’s telephone calls. However, I am not persuaded that the transcript corroborates the fact that it was difficult to contact the first respondent. The conversation was between the first respondent and Mr Prem Ramiga of Investec Bank. The relevant portion of the transcript reads as follows: “First respondent: I am hearing lots of accusations, which is like completely irritating me right now. Prem: Yeah but I think they left messages for you to call they say and you haven’t returned their call, and so. First respondent: I mean take Dr Pather, for example, he phoned twice last week to make an appointment, which we did and he didn’t turn up, which is fine, because he phoned to say he can’t make it. He was supposed to come in yesterday, he was supposed to confirm this, and he never did, so in the meantime I waited until lunchtime yesterday for him to confirm, he was supposed to come in then.” The applicant’s reliance on this interaction as corroboration of the fact that the first respondent was uncontactable in my view seems to be misplaced. If anything, it confirms that the first respondent was attempting to meet with the applicant to discuss the matter, but that it was the applicant who failed to follow through on contact and communication. This too, I suspect, may have prompted the third respondent to reject the proposition that communication was difficult. As he said, if the two doctors considered that they had been duped they would and should have gone to the first respondent’s office to tax him. That opportunity always existed. Given the third respondent’s general view on the communication issue, it is then not surprising that he failed to make any adverse credibility finding arising out of the telephone conversation transcript. 48. The fourth submission on credibility concerns the respondent’s claim that the claimants had been notified of the poor performance of their investments by means of ABSA bank statements sent to them monthly. The evidence of the witness Martin established that bank statements were not faxed to him from the offices of the second respondent but that they had been posted to him directly by ABSA. Nevertheless, Mrs Hunter was adamant that the bank statements had been faxed to the applicant after they were received from ABSA bank. However, the second respondent was unable to provide any proof of the bank statements having been faxed to the applicant. It was furthermore established that when matters began to deteriorate copies of the bank statements for a three month period were faxed together in one batch to the applicant by Mrs Hunter when he told her that he had not received them. According to the applicant this establishes that critical information was not sent or communicated. From this, he seeks to draw the inference that the respondents wanted to hide the poor performance of the investments which in turn adds support to the contention that the applicant was misled. Had the third respondent appreciated the inconsistency, so it was contended, he would have concluded that the first respondent was dishonest and that the probabilitiestherefore favoured the applicant’s version that a misrepresentation had been made. The third respondent does not deal in his award with the submission in these terms. His comment about the communication issue, to which I have referred to earlier, essentially consisted of a rejection of the explanation that communication was difficult. He accepted the evidence of Mrs Hunter, particularly that market reports were sent on a daily basis. It would seem also that he did not accept that Mrs Hunter’s faxing of the three months bank statements in one batch necessarily implied that they had not been dispatched by other means at an earlier date. 49. Whatever the truth of the actual situation regarding communication, the applicant’s submissions on the point obviously did not distract the third respondent from his conclusion that the applicant and his co-claimants had not discharged the onus to prove the alleged misrepresentations on a balance of probabilities. Even accepting that fuller consideration deserved to be given in the award to these facts and submissions, assuming that they were made similarly before the arbitrator as they were before me, they do not alone or cumulatively present evidence of a gross irregularity sufficient to set aside the award. A finding that the onus was not discharged, particularly in the face of the inherent improbability of such a guarantee ever being given in the futures trading environment under the arrangements effected by the standard agreements, as well as the apparent contradictions in the evidence of the claimants on the central issue of the representations, was entirely reasonable, rational and justifiable, if not indeed correct. In the premises I am unpersuaded that any gross irregularity was committed by the third respondent. 50. The application is accordingly dismissed with costs, including the costs of all postponements in the application earlier determined to be costs in the cause. Judge J Murphy JUDGE OF THE HIGH COURT Advocate for the applicant, Adv G.O. van Niekerk SC, Durban, advocate for the 1st & 2nd respondents, adv H.P. Jefferys, Durban. Attorney for the applicant, Goodrickes, Durban and attorney for the 1st & 2nd respondents, Sham & Co Inc, Greyville. |