Farpin Investments (Private) Limited v Netone Cellular (Private) Limited and Justice L.G. Smith (Retd) - Arbitrator

The first respondent (Netone) sold its 60% shareholding in Zellco Cellular (Private) Limited to the applicant (Farpin) via an Agreement of Sale of Shares (ASS) dated 23 February 2009. At that time, Zellco was operating under a Service Provider Agreement (SPA) with Netone, distributing Netone's cellular services to customers in return for commission. The SPA was due to expire in 2011. Clause 13.2 of the ASS required Netone to renew the SPA for a further 5 years to allow Farpin to realize full value on its shares. Netone cancelled the SPA in May 2011, allegedly due to Zellco's failure to remit over $14 million owed. Zellco obtained a provisional order reinstating the SPA, and Netone was found in contempt of court for non-compliance. Zellco subsequently filed for voluntary liquidation. Farpin claimed damages of approximately $14.9 million from Netone for breach of clause 13.2, calculated based on commissions Zellco would have earned under the SPA. An arbitrator (retired judge, second respondent) initially ruled the dispute was arbitrable, then in a second award dismissed Farpin's claim with costs on an attorney-client scale, finding no privity of contract and that Farpin was improperly stepping into Zellco's shoes. Farpin applied to set aside the arbitral award.

• Whether the arbitrator contradicted himself between his first and second awards
• Whether there was privity of contract between Farpin and Netone under the SPA
• Whether Farpin was entitled to claim damages directly from Netone for breach of clause 13.2 of the ASS based on commissions that would have been earned by Zellco
• Whether the arbitral award was in conflict with the public policy of Zimbabwe as envisaged by Article 34(2)(b)(ii) of the Model Law incorporated in the Arbitration Act
• Whether the arbitrator misdirected himself in awarding costs on an attorney-client scale and ordering Farpin to bear the arbitrator's costs alone

1. The application to set aside the arbitral award was dismissed with costs. 2. Paragraph 2 of the arbitration award relating to costs was set aside and substituted with: 2.1 The Claimant (Farpin) shall pay the Respondent's (Netone's) costs on the ordinary scale. 2.2 The costs of the arbitrator shall be borne by the parties in equal shares.

The binding legal principles are: (1) An arbitral award may only be set aside on grounds specified in Article 34 of the Model Law, and the public policy exception requires proof of a palpable inequity that is far reaching and outrageous in its defiance of logic or acceptable moral standards - mere errors of law or fact are insufficient. (2) A shareholder has no privity of contract with third parties who have contractual relations with the company in which shares are held. (3) A share represents a complex of rights including dividend rights and distribution on liquidation, but does not confer ownership of company assets or a direct right to sue for company debts or losses. (4) A shareholder cannot step into the shoes of the company and sue third parties directly for losses suffered by the company, even where the shareholder's investment value is diminished - this violates basic tenets of company law regarding separate legal personality. (5) In arbitration, costs should ordinarily be awarded on the ordinary scale unless there is misconduct or special circumstances justifying a higher scale, and arbitrator's costs should generally be shared equally by the parties unless there is justification for a different apportionment.

Mafusire J made several non-binding observations: (1) The applicant's affidavits were criticized as "prolix, repetitive and argumentative" and both parties' submissions were noted as "somewhat convoluted and in some instances intended to confuse the real issues." (2) The court noted that even if Netone had breached the SPA by improper cancellation (as found in the contempt proceedings), any rights arising from such breach would accrue to Zellco, not Farpin. (3) The judge observed that clause 13.2 only revised rights regarding renewal, not cancellation, and did not prevent Netone from canceling the SPA if Zellco breached it. (4) The court noted that Farpin's damages claim was based on numerous assumptions including that Zellco had not breached the SPA (despite a court judgment), that Zellco was trading profitably (despite filing for liquidation), and that dividends would have been declared. (5) The court suggested the general principle that costs follow the result applies in arbitration as in civil courts. (6) While Farpin achieved partial success on the costs issue, this was described as "so infinitesimal as to warrant interference with the general principle that costs should follow the result."

This case is significant in Zimbabwean arbitration and company law for several reasons: (1) It clarifies the limited grounds for setting aside arbitral awards under Article 34 of the Model Law in the Arbitration Act, particularly the "public policy" exception which requires a "palpable inequity that is so far reaching and outrageous in its defiance of logic or acceptable moral standards" - not mere errors of law or fact. (2) It reinforces the principle that courts exercise restraint in interfering with arbitral awards and do not exercise appellate powers over arbitrators' decisions. (3) It affirms fundamental company law principles regarding the separate legal personality of companies and the nature of shareholder rights - shareholders cannot sue directly for losses suffered by the company or claim company assets/debts as their own. (4) It establishes that a clause in a share sale agreement requiring renewal of a service provider agreement does not override the substantive terms of that service provider agreement or create privity of contract between the shareholder and the service provider. (5) It provides guidance on costs in arbitration, establishing that the ordinary scale applies unless misconduct or special circumstances warrant a higher scale, and arbitrator's costs are generally shared equally.