This matter revolves around the not uncommon but
alliterative conundrum of products purveyed by their producer from peregrine
premises. In particular, it concerns an arbitral award, rendered by the second
respondent on 2 March 2015, ordering the appellant to pay turnover
rent in the sum of $76,481= to the first respondent, in respect of pies
produced by the former at the latter's premises.
On 31 March 2015, the appellant filed an application
to set aside the award. This was followed, on 2 April 2015, by an application
lodged by the first respondent to register the award.
The High Court consolidated both matters by consent. It was
agreed by the parties that the registration of the award was dependent upon the
fate of the application challenging the award. In the event, the court a quo
found in favour of the first respondent.
This appeal lies against that decision.
Background
On 30 December 2013, the parties concluded a lease
agreement with a commencement date of 1 November 2010. In terms of the
agreement, the monthly rental payable by the appellant was fixed at US$2,000=
or 1.5% of its turnover, i.e. net
sales after deduction of VAT, whichever was the greater. The use of the demised
premises by the lessee was designated as being “for purposes of conducting all or any retail business together with all
businesses reasonably or necessarily incidental thereto.”
At a certain stage after occupation, in addition to its
retail business, the appellant started manufacturing pies at the premises for
sale therefrom and for distribution to its other branches. This particular
activity was not specifically approved by the first respondent. A dispute then
arose as to the inclusion of proceeds from the pies distributed to the
appellant's branches in the calculation of the turnover rent.
The dispute was referred to the second respondent (the
arbitrator) to, inter alia, interpret the lease agreement on the meaning of 'turnover'
and 'net sales' and, if this issue was found in favour of the first respondent,
to quantify the damages payable by the appellant. The arbitrator found that the
manufacture of pies was business incidental to retail business and that the
pies distributed to the appellant's branches were for sale for the appellant's
benefit and were, therefore, part of its turnover for the purposes of computing
the monthly rental payable.
Decision of
the High Court
The court a quo agreed with the arbitrator that the
manufacture of pies was incidental to the appellant's retail business and that
there was no need to review the lease agreement in that regard. The court also
noted that the branches in question belonged to the appellant and that the
sales therefrom were for its benefit. Moreover, the quantities and values of
the distributed pies were recorded and confirmed quantifiable sales to the
branches. In effect, the appellant manufactured pies at the demised premises
for its sales from within and from without through its branches.
As regards the two-stage procedure adopted by the
arbitrator, the court found that it was necessary for him to hold two sessions.
The second hearing process was necessary to quantify damages as mandated by the
parties.
The court concluded that the award did not offend public
policy. There was therefore no basis for setting it aside and nothing to
militate against its registration. Accordingly, the application to set the
award aside was dismissed and the application for its registration was granted,
with the appellant being ordered to pay the costs of both applications.
Grounds of
Appeal
The grounds of appeal herein are essentially twofold;
(i) Firstly, the arbitrator erred procedurally in adopting
a piecemeal approach, by directing the adduction of further evidence for the
purpose of quantifying damages, instead of entering the equivalent of
absolution from the instance in favour of the appellant.
(ii) Secondly, consequent upon the arbitrator having
created a new contract for the parties by finding that the manufacture of pies
was covered in the lease agreement, the court a quo erred and misdirected
itself in upholding the finding that the sales of pies distributed to the
branches formed part of the appellant's turnover rather than expenditure
incurred by it.
Procedure
Adopted by Arbitrator
Counsel for the appellant attacks the two-stage procedure
adopted by the arbitrator as not having been authorised by the parties. In the
absence of any prescribed mandate or agreement between the parties, the
arbitrator should have followed the procedure that is ordinarily adopted in a
civil trial and not the dictates of equity. This requires that liability and
quantum be determined together and not in two separate piecemeal processes.
Counsel for the first respondent counters that the parties
are the masters of their own proceedings in the conduct of an arbitration.
However, where there is no specific agreement, the arbitrator is at large to
determine the conduct of proceedings as he deems appropriate.
In the instant case, the parties did not agree on the
procedure to be followed, leaving the matter in the hands of the arbitrator.
The appellant did not raise any objection to the procedure adopted but actually
co-operated with the arbitrator's directive. The conduct of the second hearing
was expressly agreed by the parties and, therefore, it was not open to the
appellant to challenge the procedure it had expressly agreed to.
The determination of rules of procedure in arbitration
proceedings is governed by Article 19 of the Model Law scheduled to the
Arbitration Act [Chapter 7:15]. Paragraphs (1) and (2) of Article 19 provide as
follows:
“(1) Subject to the provisions
of this Model Law, the parties are free to agree on the procedure to be
followed by the arbitral tribunal in conducting the proceedings.
(2) Failing such agreement, the
arbitral tribunal may, subject to the provisions of this Model Law, conduct the
arbitration in such manner as it considers appropriate. The power conferred
upon the arbitral tribunal includes the power to determine the admissibility,
relevance, materiality and weight of any evidence.”
Also relevant for present purposes are paragraphs (1) and
(2) of Article 24 pertaining to the conduct of hearings and written
proceedings:
“(1) Subject to any contrary
agreement by the parties, the arbitral tribunal shall decide whether to hold
oral hearings for the presentation of evidence or for oral argument, or whether
the proceedings shall be conducted on the basis of documents and other
materials. However, unless the parties have agreed that no hearing shall be
held, the arbitral tribunal shall hold such hearings at an appropriate stage of
the proceedings, if so requested by a party
(2) The parties shall be given
sufficient advance notice of any hearing and of any meeting of the arbitral
tribunal for the purposes of inspection of goods, other property or documents.”
My reading of Articles 19 and 24, taken together, is that
the primary determinants of arbitral procedure are the consensus and
convenience of the parties themselves. However, where the parties are unable to
agree or silent on the matter, the arbitrator or tribunal is at large, within
the bounds of procedural and substantive fairness, to conduct the arbitration in such manner as he or it
considers appropriate. Moreover, there is nothing in the provisions of the
Model Law to preclude the arbitrator from holding separate hearings at
appropriate stages of the proceedings, either if this is requested by one party,
or, quite obviously, where it is mutually agreed by both of the parties.
In my view, the reasoning
in Pilime & Others v Midriver Enterprises (Pvt) Ltd HH367-14, relative to
arbitration in labour matters, but which was relied upon by counsel for the
appellant in the present context, is starkly inconsistent with the clear and
unambiguous language of the Model Law.
It is pertinent at this juncture to consider precisely what
transpired in the course of the arbitration proceedings in casu.
The first oral hearing was held on
11 December 2014. As appears from the first award (rendered on 15
December 2014), the parties and the arbitrator agreed on the issues to be
determined, viz. jurisdiction,
prescription, construction of the lease agreement, and, lastly, quantum of
damages “if the Claimant is successful
in its claim.” The award then indicates that “no discovery took place relating to the issue of quantum” and that
“the Respondent, alone, is in a position
to establish what turnover various parts of its business generated.” The
arbitrator therefore decided, “with the
parties' consent,” that he would “first
render a (partial) award on liability.” Thereafter, “if quantum remained relevant…,
further discovery, and, possibly, a
further hearing, would be necessary.”
Having found in favour of the claimant, the arbitrator then
provided “directions for the parties so
that the issue of quantum can either be agreed or determined.” At the end
of the first award, the arbitrator noted that he was “reassured by a representative of the Respondent present at the hearing
that the necessary information is readily available.” He then directed that
there be disclosure on the issue of quantum, and, in the event that the parties
were “unable to agree the relevant
turnover rent,” he would “list the
matter for a further hearing on the issue of quantum.”
The minutes of the second hearing, held on 10 February
2015, indicate confirmation by the parties that “discovery of the relevant documents had taken place in advance of the
hearing and therefore both of them were content to proceed with the hearing.”
In his final award (handed down on 2 March 2015) the arbitrator observed that
he had “rendered a partial award on the
issue of liability' on 15 December 2014 and had “then set out how the quantum of damages should be calculated.” In
the event, “as the parties could not
agree on the quantum of damages, a further hearing was listed and held on the
10th of February 2015.” Thereafter, “pursuant to the directions given at that hearing, the Respondent was
asked to supply the number of pies manufactured at Ardmbare but sold out in
other branches.” These directions were then duly complied with through a
document e-mailed to the arbitrator on 19 February 2015, thereby enabling him
to render his final award.
Having regard to the foregoing, it is abundantly clear that
the procedure adopted by the arbitrator was at all times in keeping with the
agreed mandate of first determining liability, if any, and then, if necessary,
establishing the quantum payable to the claimant.
Moreover, he appears to have conducted the requisite
two-stage hearing process not only with the active concurrence of both parties
but also in a manner that would, in the circumstances of the case before him,
most practicably enable him to fulfil his mandate to comprehensively adjudicate
the issues agreed for determination.
It follows, in my view, that there is no merit whatsoever
in the appellant's attack against the procedural propriety of the arbitral
proceedings in casu.
Creation of
New Contract
It is trite that judicial tribunals cannot, as a matter of
public policy, re-write the terms of a given contract. The contract must be
enforced - even if the result would be harsh or oppressive.
In this respect, it is submitted for the appellant that it
is quite irrelevant that the demised premises were being used free of charge
for the manufacture of pies. The contract in question did not contemplate the
scenario in situ and should have been reviewed by the parties to take account
of that omission. The arbitrator himself was obliged to apply the law, as
opposed to notions ex aequo et bono, and enforce the express terms of the
contract.
The use of the leased premises is governed by clause 7.1 of
the lease agreement in the following terms:
“The Lessee shall be entitled to use the premises for
purposes of conducting all or any retail business together with all businesses
reasonably or necessarily incidental thereto and for no other purposes
whatsoever save with the prior written consent of the Lessor, which consent
shall not be unreasonably withheld.”
Arguably, the manufacture of pies would not ordinarily fall
within the ambit of retail business.
Nevertheless, such manufacture could certainly be regarded
as falling within the broader coverage of “all businesses reasonably or
necessarily incidental” to “all or any retail business,” particularly where, as
in the present case, the pies manufactured in and sold from the leased premises
were sold to the appellant's customers as part and parcel of its retail trade.
This would also apply to the sale of pies distributed to and sold from the
appellant's branches inasmuch as the branches in question belonged to the
appellant and the sales therefrom were ultimately for the appellant's own
benefit. On this basis, neither the arbitrator nor the court a quo can be
faulted for finding that the manufacture of pies was incidental to the
appellant's retail business and that there was no need to review the lease
agreement in that regard.
Taking a broad conspectus of the matter, I am unable to
accept the appellant's argument that the arbitrator created a new contract for
the parties or that the court a quo misdirected itself in endorsing the
arbitrator's approach in this regard.
Calculation
of Turnover
Clause 3.1 of the lease agreement in casu regulates the
calculation of rental as follows:
“The rental payable by the Lessee to the Lessor for the
premises shall be the sum of US$2,000= (two thousand United States dollars)
(hereinafter referred to as 'the base rent') per month or 1.5% (one comma five
per centum) of turnover (hereinafter referred to as 'turnover rent') (net sales
after deduction of Value Added Tax) per month, whichever is greater.”
The appellant's position is that it is only retail business
income that constitutes net sales and that, therefore, only the selling of pies
at the Mbare branch constituted part of the appellant's turnover. It further
argues that the deduction of value added tax pre-supposes that there is a sale
of goods in exchange for money.Thus, in the appellant's books of account, the
pies distributed to its branches would notionally equate to expenditure rather
than income.
The first respondent counters that even the pies
distributed to the other branches are effectively sold to those branches and
form part of the appellant's turnover. This is because value added tax can be
calculated on those sales. Moreover, the transfer of pies was treated as
equating to the sale of stock and the values thereof were actually calculated
for the purpose of determining the quantum payable to the first respondent. In
effect, the appellant manufactured the pies at the Mbare branch free of any
rental charge and then sold them at a profit from that branch and through its
other branches.
The first point to note from clause 3.1 of the lease
agreement is that the concept of turnover is not confined to sales from the
appellant's Mbare branch only. Admittedly, given the possibility of wastage,
not all of the pies distributed to the other branches would necessarily have
been sold for human consumption. However, this is a risk that inheres in the
retail trade of all edibles and would apply as well to the sale of pies from
the Mbare branch itself. What the appellant's argument ignores is the critical
fact that the income and profit that was derived from the sale of pies
manufactured at the Mbare branch, whether sold at that branch or at any other
branch and whatever the internal accounting process or formula that might have
been applied to those sales, eventually accrued to the benefit of the
appellant's own coffers.
In my view, an analogous and apposite scenario would be
that of the appellant manufacturing the pies within the leased premises and
then selling them just outside those premises through a tuck-shop owned by
itself or in the nearby vicinity through a mobile vendor under its direct
employ and control. It seems inconceivable that such sales should not be
treated as constituting part of the appellant's turnover.
For all of the foregoing reasons, I am satisfied that the
arbitrator correctly found, as was properly affirmed by the court a quo, that
the sale of pies manufactured at the appellant's Mbare branch and sold through
its other branches formed part of the appellant's turnover for the purpose of
calculating the monthly rentals payable to the first respondent in respect of
the leased premises.
Violation of
Public Policy
The relief sought by the appellant is that the arbitral
award rendered by the arbitrator in the matter between the parties be set aside
in its entirety on the basis that it was rendered contrary to the public policy
of Zimbabwe.
The limited grounds upon which an arbitral award may be set
aside are delineated in Article 34(2) of the Model Law, scheduled to the
Arbitration Act [Chapter 7:15]. In terms of Article 34(2)(b)(ii), as read with
and elaborated by Article 34(5) of the Model Law, scheduled to the Arbitration
Act [Chapter 7:15], an award may be set aside if it is in conflict with the
public policy of Zimbabwe.
It is now axiomatic that the concept of public policy as
well as what might be perceived as being in conflict with that policy, within
the meaning of Articles 34 and 36, must be construed narrowly so as to attain
the objective of finality in commercial arbitration as contemplated by the
Model Law.
The locus classicus on the subject is the decision of this
Court in Zimbabwe Electricity Supply Authority v Maposa 1999 (2) ZLR 452
(S), per GUBBAY CJ…,.
As was emphasised in that case, an award is not contrary to
public policy merely because the reasoning or conclusions of the arbitrator are
wrong in fact or in law. The reviewing court does not exercise an appeal power
by having regard to what it considers should have been the correct decision. It
will only intervene to set aside an award on the ground of public policy where
the reasoning or conclusion in the award:
“Goes beyond mere faultiness or incorrectness and
constitutes a palpable inequity that is so far reaching and outrageous in its
defiance of logic or accepted moral standards that a sensible and fair minded
person would consider that the conception of justice in Zimbabwe would be
intolerably hurt by the award [or] where the arbitrator has not applied his
mind to the question or has totally misunderstood the issue, and the resultant
injustice reaches the point mentioned above.”
See also the principles enunciated and applied more
recently in Willoughbys Investments (Pvt) Ltd v Peruke Investments (Pvt) Ltd
& Another 2014 (1) ZLR 501 (S)…,.
In my view, the appellant has failed to satisfy the
rigorous test articulated by this Court for interfering with any arbitral
award. Arguably, the arbitrator in casu might have erred marginally in
computing the exact turnover attributable to the pies distributed by the
appellant beyond the leased premises. However,
I am unable to discern any palpable inequity, gross irrationality, moral
turpitude or resultant grave injustice, either in the procedure adopted by the
arbitrator or in his substantive findings on the merits of the matter, so as to
warrant the setting aside of the impugned award.
In the absence of any perverse conduct or outlandish
aberration on the part of the arbitrator or in the affirmation of his award by
the High Court, the appellant is not entitled to the relief that it craves.
In the result, the appeal is devoid of merit and
cannot succeed. It is accordingly ordered that the appeal be and is hereby
dismissed with costs.
