On
29 October 2008 the applicant and the first respondent entered into a
written agreement in terms of which the applicant advanced to the
first respondent the sum of one hundred thousand United States
dollars (the equivalent then of two hundred Old Mutual Ordinary
Shares listed on the Stock Exchange). As a return on this investment,
it was agreed that the applicant would be entitled to thirty percent
of the capital sum invested “each and every month” regardless of
the performance of the investment.
The
thirty percent return was to accrue without deduction each and every
month the capital sum remained outstanding, and, in the event the
applicant did not withdraw the thirty percent return, such
outstanding amounts were to accrue to the capital as capital.
Either
party could terminate the agreement by giving one month's notice,
and, in that event, the first respondent would be required to pay to
the applicant the entire compounded capital plus any outstanding
returns before the expiry of the thirty day notice period. Any
payments still outstanding after the notice period would accrue
thirty percent return on investment which would accrue to capital for
each and every month it remained unpaid.
Disputes
arising from the performance of the agreement were to be referred to
arbitration.
It
is common cause that at the time the capital sum of one hundred
thousand United States dollars was advanced to the first respondent
neither party had sought exchange control approval for that
transaction as then required in terms of the Exchange Control
Regulations, 1996. Similarly, the first respondent's repayment in
terms of the agreement would have required exchange approval.
Following
changes to the law, in February 2009, the need to seek exchange
control approval fell away.
The
first respondent failed to meet the terms of the agreement before and
after February 2009. The applicant then terminated the agreement on 1
October 2009. However, on 13 October 2009, the parties entered into
another written agreement. They signed an acknowledgement of debt in
terms of which the first respondent acknowledged his indebtedness
arising from his outstanding obligations under the terminated
agreement. As assurance and security of his indebtedness, the first
respondent surrendered to the applicant the title deeds of Stand 2253
Bluffhill Township, a property registered in his name.
It
is common cause that on 17 September 2009, and on 9 October 2009, the
first respondent made payments the total sum of which amounted to one
hundred and fifty eight thousand United States dollars. The parties
however failed to agree on the exact amount of money owed by the
first respondent.
The
parties then referred the matter to arbitration.
The
arbitration process consisted of a claim by the applicant for payment
in full in terms of the agreement between the parties and a defence
by the first respondent who argued that the agreement constituted a
loan and not an investment, and, as such, fell foul of the Money
Lending and Rates of Interest Act [Chapter
14:14]
as it bore interest rates above the stipulated levels.
The
first respondent also argued that the agreement was illegal as it
contravened the exchange control regulations as no authority had been
obtained by either party to deal in foreign currency.
For
these reasons, the first respondent argued that the agreement was
against public policy and that therefore the arbitrator had no
jurisdiction to determine the matters under it.
The
arbitrator ruled that the agreement was not a loan but an investment
and that, as such, the agreement was not against public policy as the
in
duplum
rule did not apply. He however held, under paragraph 6.2 of his
determination, that the agreement contravened the Exchange Control
Regulations, 1996 in that authority to pay had not been sought from
the Reserve Bank. He was of the view that as a result the agreement
was subject to that suspensive condition whose non fulfillment
rendered the agreement void. On that basis he dismissed the claim and
held, further, that as the parties were both guilty, the in
pari delicto
rule applied and the loss must lie where it falls.
Aggrieved
by that arbitral decision the applicant approached this court by way
of the present application. He seeks an order to the following
effect:
“IT
IS DECLARED THAT:
1.
Para 6.2 of the arbitration award handed down by the second
respondent at Harare on 13 March 2010 in the arbitration proceedings
between the applicant and the first respondent is contrary to the
public policy of Zimbabwe.
2.
Consequently, it is ordered that the said para 6.2 of the arbitration
award aforesaid be and is hereby set aside in terms of art
34(2)(b)(ii) of the Unictral Model Law, First Schedule to the
Arbitration Act [Cap
2:15].
3.
Consequently, it is ordered, further, that the matter be and is
hereby remitted back to the second respondent for the computation of
the amount due to the applicant under the investment agreement
between the applicant and the first respondent.
4.
That the first respondent shall pay the costs of this application
only if the application is opposed.”
Is
the arbitration award contrary to the public policy of Zimbabwe?
In
terms of Article 34 of the Model Law, a party may apply to the High
Court for setting aside an arbitral award. Article 2 thereof
provides:-
“(2)
An arbitral award may be set aside by the High Court only if –
(a)…,.
(b)
The High Court finds that –
(i)
The subject matter of the dispute is not capable of settlement by
arbitration under the law of Zimbabwe.
(ii)
The award is in conflict with public policy of Zimbabwe.”
The
applicant contends that the award is contrary to the public policy of
Zimbabwe, inter
alia,
because it is contrary to the substantive law of Zimbabwe.
In
terms of section 34(5), an award is in conflict with the public
policy of Zimbabwe if the making of the award was induced by fraud or
corruption or a breach of the rules of natural justice occurred in
connection with the making of the award. However, the provision makes
it clear that public policy may be impinged for reasons other than
the above, by providing that the generality of paragraph 2(b)(ii)
shall not be limited to these categories.
In
Sasfin
(Pty) Ltd v Beukes
SA 1989 (1) the court had occasion to deal with the nature and extent
of the elusive concept of “public policy”. In deciding whether an
agreement is contrary to public policy the interests of the community
or the public are of utmost importance. Agreements which are contrary
to law or morality are contrary to public policy and may not be
enforced. The court's power to declare transactions or contracts
contrary to public policy should be exercised with caution and with a
view to do justice as between individuals. It must be borne in mind
that public policy upholds the freedom of contract and requires that
“commercial transactions should not be unduly tramelled by
restrictions on that freedom.” The power to declare contracts
contrary to public policy should thus be exercised sparingly lest the
whole field of contract is thrown into uncertainty as to the validity
of contracts.
In
ZESA
v Maphosa
1999 (2) ZLR 452 (S) GUBBAY CJ…, had this to say…,:
“…,
the approach to be adopted is to apply the public policy defence…,
restrictively in order to preserve and recognize the basic objective
of finality in all arbitrations: and to hold such defence applicable
only if some fundamental
principle of the law or morality or justice
is violated.”…,.
At
p466 of the same judgment it was held thus:
“An
award will not be contrary to public policy merely because the
reasoning or conclusions of the arbitrator are wrong in fact or in
law. In such a situation the court would not be justified in setting
the award aside…,. Where, however, the reasoning or conclusion in
an 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 fair minded
person would consider that the conception of justice in Zimbabwe
would be intolerably hurt by the award, then it would be contrary to
public policy to uphold it.”
In
this case, I agree with the arbitrator's decision in holding that
the agreement was not a loan but an investment, in terms of which a
return on investment rather than interest accruing on the capital sum
loaned was payable.
As
to the legality of the agreement there is no doubt that the agreement
was a legal and binding document. It is its performance that would
require the prior approval of the Exchange Control authorities. The
agreement was therefore subject to that suspensive condition. In
Hattingh
and Others v Van Kleek
1997 (2) ZLR 240 the court held as follows:
“It
seems to me pertinent that section 8 of the Regulations only
prohibits, but does not declare void or illegal, the transactions
enumerated therein.”
In
Macape
v Executrix, Estate Late Forrepper
1991 ZLR 315 it was held that;
“The
contract to pay is lawful. Actual payment in pursuance of the
contract is unlawful without permission. There is no reason why the
court should not order payment subject to the condition that
authority is obtained. I must make it clear that this judgment in no
way inhibits the Reserve Bank in the exercise of its discretion. It
is entirely for the Reserve Bank to decide whether or not to
authorize the payment. If it decides not to do so the payment may not
be made. The contract remains lawful. Payment will then have to await
a change either in the law or in the policy of the Reserve Bank.
In
other words, the plaintiff is entitled to his judgment and Treasury
permission is a hurdle which can be jumped when it is reached.”
In
my view, therefore, the arbitrator erred in holding that the
agreement was void on account of the parties not having obtained
Reserve Bank approval in terms of the Exchange Control Regulations.
The regulations impose a punitive penalty, they do not declare void
or illegal transactions made without that approval.
If
this view is correct, does that mean that the decision arrived at by
the arbitrator, being erroneous at law, is contrary to the public
policy of Zimbabwe?
The
decision can only be held to be contrary to public policy if “some
fundamental principle of the law or morality or justice is violated”
or if it is so defiant of logic or accepted moral standards that the
conception of justice in Zimbabwe would be “intolerably hurt.”
It
is a fundamental principle of our law of contract that the
non-fulfillment of a suspensive condition does not render the
contract illegal or void. A suspensive condition merely suspends the
operation of all or some of the obligations of the contract until the
occurrence of a future event. Its non fulfilment does not, per
se,
vitiate the contract.
The
arbitrator's award violates this fundamental principle of the law
of contract in Zimbabwe.
More
significantly, the arbitrator erred in that he did not give effect to
the terms of an acknowledgement of debt duly signed by both parties
in October 2009, when, owing to a change in the law, it was no longer
a requirement to seek Treasury authority to transact in foreign
currency. His refusal to recognize the acknowledgment of debt freely
entered into by the parties, at a time when the constraint affecting
the original investment agreement had been removed, is so defiant of
logic or accepted legal and moral standards that if upheld, the
conception of justice in Zimbabwe would be intolerably hurt.
Public
policy upholds, as a fundamental principle, the freedom and sanctity
of contract and requires that commercial transactions should not be
“unduly tramelled by restrictions on that freedom.”
For
these reasons, I am inclined to grant the application on the grounds
that the arbitrator's decision runs contrary to the public policy
of Zimbabwe. Accordingly it is declared and ordered that:
1.
Paragraph 6.2 of the arbitration award handed down by the second
respondent at Harare on 13 March 2010 in the arbitration proceedings
between the applicant and the first respondent is contrary to the
public policy of Zimbabwe.
Consequently,
it is ordered that paragraph 6.2 of the said arbitration award be and
is hereby set aside in terms of Article 34(2)(b)(ii) of the Unictral
Model Law, First Schedule to the Arbitration Act [Chapter
7:15].
2.
The matter be and is hereby remitted to the second respondent for the
computation of the amount due to the applicant under the investment
agreement as read with the acknowledgement of debt both of which are
filed of record.
3.
The first respondent pays the costs of this application.
