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South Africa: Supreme Court of Appeal |
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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
SAFLII:
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