Court name
Commercial Court of Uganda
Judgment date
28 May 2013

Daniel Delestre & 5 Ors v Hit Telecom (U) Ltd (Miscellaneous Application-2013/310) [2013] UGCommC 100 (28 May 2013);

Cite this case
[2013] UGCommC 100

THE REPUBLIC OF UGANDA,

IN THE HIGH COURT OF UGANDA AT KAMPALA

(COMMERCIAL DIVISION)

MISCELLANEOUS APPLICATION NO 310 OF 2013

(ARISING OUT OF H.C.C.S NO. 207 OF 2013)

 

  1. DANIEL DELESTRE       
  2. GERARD RIES                
  3. BRUNO BOURGIN        
  4. MICHEL BARRE                          :::::::::::::::::::::::::::::::::::::: APPLICANTS
  5. OLIVIER FROISSART     
  6. PHILOPPE LUXCEY        
  7. ORANGE UGANDA LTD            

VERSUS

HITS TELECOM (U) LIMITED}:::::::::::::::::::::::::::::::::::::::::::::::::::: RESPONDENT

BEFORE HON JUSTICE CHRISTOPHER MADRAMA IZAMA

RULING

The Applicant's application was brought under the provisions of sections 41 and 40 of the Arbitration and Conciliation Act and rule 13 of the first schedule thereto for orders that any further proceedings in High Court Civil Suit Number 207 of 2013 is stayed and the plaint is struck out. It is also for orders that the dispute between the Applicant and the Respondents is referred to arbitration in accordance with clause 24.12 of the shareholders agreement dated 25th of September 2008 and for costs of the application be provided for.

The grounds of the application are set out in the Chamber Summons. They are that the dispute the subject matter of the suit as framed relates to increase in share capital in the 7th Applicant, a matter governed by clause 7.4.2.2 of the shareholders agreement and the eventual allotment and call of the increased capital which is governed by clauses 4.1 of the shareholders agreement. Secondly the Respondent takes issue with the intended resolutions that pertain to the matters concerning share capital referred to above and seeks to restrain the passing of resolutions complained about by the other shareholders of the 7th Applicant and by the 7th Applicant's Board of Directors. Thirdly that the Respondent, the 7th Applicant and other shareholders agreed by clause 24.12 of the shareholders agreement to refer all disputes in relation to the rights and obligations to a final and binding arbitration by a panel of the arbitrator's under the rules of the London Court of International Arbitration with the seat of arbitration being London, England. Instead of referring the dispute to arbitration, the Respondent instituted a suit in the High Court of Uganda against the Applicants. It is just and equitable that the arbitration clause is enforced by stay of the suit and referral of the matters in dispute to arbitration.

The application is supported by the affidavit of the Company Secretary of the 7th Applicant Maximilia Byenkya deposed to on 25 April 2013 which principally attaches the relevant agreements referred to in the chamber summons. These are the shareholders agreement annexure "B". It also affirms the facts stated in the chamber summons. Additionally she attaches annexure "A" which is the amended plaint in HCCS number 207 of 2013 between the Respondent as plaintiff and the Applicants as defendants.

The affidavit in reply is disposed to by John K Musiime of Messieurs Byenkya Kihika and Company Advocates. In the reply the first ground of opposition is that the dispute between the Applicants and the Respondent is not one that is canvassed by the shareholders agreement. Secondly the Applicants are not parties to the shareholders agreement and therefore cannot rely on it to stay Civil Suit Number 207 of 2013. The deponent believes that the arbitration clause which the Applicants are relying on to stay proceedings and make a reference to arbitration is inoperative in the circumstances of Civil Suit Number 207 of 2013.

In the affidavit in rejoinder the Corporation Secretary of the seventh Applicant avers that the seventh Applicant is engaged in the provision of cellular network and communications services in Uganda and has four shareholders namely: Atlas Services Belgium (ABS) which holds 65.93% of the share capital, the Applicant (HITS) which holds 31.57% of the share capital, Veritas Communications Ltd (Veritas) which holds 1.25% of the share capital and Carnegie Klein capital Societe Anonyme (Carnegie) which holds 1.25% of the share capital. The board of directors of the 7th Applicant pursuant to clause 5.2 of the shareholders agreement comprises of five directors were appointed as follows: one director appointed by the Applicant, three directors appointed by the majority shareholder ASB and a director jointly appointed by both the Respondent and ASB.

The dispute in the suit between the Respondent and Applicants pleaded in the plaint raises two essential claims. Firstly it seeks to restrain by way of a permanent injunction the passing of the resolution by the 7th Applicant through its company organs (shareholders in a general meeting) from raising the share capital of the 7th Applicant. Secondly the suit seeks an account and recovery from ASB for the benefit of the seventh Applicant (through a derivative action) of all financial benefits alleged to have been unlawfully obtained through ASB former and present directors specifically the 1st to the 5th Applicants.

The seventh Applicant who sought to be restrained from raising capital without joining to the suit the shareholders would pass the relevant resolution is a party to the shareholders agreement and the raising of capital and the rights and obligations attendant thereto are matters provided for in the shareholders agreement to which the Respondent is also a party.

Lastly ASB against which an account and recovery is sought by reason of the alleged actions of its former and present directors is a party to the shareholders agreement and its relationship with both the Respondent and the seven Applicant is governed by the shareholders agreement clause 23 thereof which provides for a management service agreement pursuant to which various services, the subject of the present complain were agree to be outsourced to France Telecom or its Associates. But the disputes are matters covered by the shareholders agreement and the arbitration clause thereof.

At the hearing of the application, Counsels Masembe Kanyerezi assisted by Bwogi Kalibala appeared for the Applicants while Oscar Kihika represented the Respondent.

The Applicants Counsel said that the facts which have already been referred to in the affidavits in support and opposition to the application.

The gist of the submissions of the Applicant and documents and authorities referred to is that clause 24. requires disputes to be referred for arbitration. Article 24.12 deals with the applicable law and arbitration and provides that the agreement is supposed to be construed in accordance with Ugandan law. The parties are to settle amicably any dispute, claim, controversy, disagreement and/or difference arising out of or in connection with the agreement or relating to the legality, interpretation, performance, breach, termination, resolution, recession, frustration, validity, or enforceability thereof failure for which it shall be exclusively and definitely settled by arbitration. The arbitration shall be conducted under the rules of the London Court of International Arbitration whose rules are deemed incorporated in the agreement. The arbitration and award shall be final and binding upon the parties and enforceable under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Secondly shareholders decisions are governed by clause 7.4.2.2 at page 16 of the agreement which requires two thirds majority in matters such as increase in share capital. Thirdly clause 4.1 of the shareholders agreement provides that no shares in the share capital of the company shall be issued other than by way of a pro rata rights issue offered to the holders of all shares at the time. In case a shareholder does not personally follow its rights, it shall be deemed to renounce the same to the other shareholders would not follow their rights in the same proportion as the following their rights. Upon failure to follow up shareholders rights, the rights issue contemplated shall not constitute unfairly prejudicial, unjust or inequitable conduct towards the particular shareholder.

The gist of this submission is about what the dispute is about. This is contained in the pleadings of the Respondent which include the two basic claims referred to in the affidavit of the Corporation Secretary of the 7th Applicant. This are the seeking of a permanent injunction to restrain the person of the resolution by the servants Respondents relevant can namely the general meeting/assembly to raise the share capital of the seventh Applicant. It seeks to prevent the proposed resolution to increase share capital. The second dispute refers to the dissatisfaction of the plaintiff company with the proposed resolution that subscription rights shall be in accordance with the proportion of the percentages.

Counsel submitted that under clause 7 of the shareholders agreement when understood with reference to the recitals which names the parties to the shareholders agreement, provides that the parties agree on the basis of mutual understanding the manner in which the affairs of the company shall be conducted and to provide for their respective rights and obligations thereto. Clause 7 further provides for the proportionality support for particular kinds of resolutions/decisions. These range from 75%, 51%, 66.6% and 66% majority. In the case of the increase of share capital the company will need to pass it by a 66% majority. HITS Telecom together with ASB own 65% of the shares and only need 1% to get the 66% majority. It is up to them to persuade one of the shareholders who hold 1.25% of the shares. Counsel further referred to clause 4.1 of the shareholders agreement which deals with the issuance of shares and anti-dilution. In case a shareholder cannot follow up its rights under a rights issue by reason of having no resources were not being interested, then the subsequent rights issue contemplated shall not constitute unfairly prejudicial, unjust or inequitable conduct towards the particular shareholder. This was the agreement of the parties. The arbitration clause 24.12 is the applicable law and deals specifically with the matters in dispute in the suit. This included any matters in dispute arising out of or in connection with the shareholders agreement. Disputes are supposed to be resolved amicably failure for which they shall exclusively and definitely be settled by arbitration in accordance with the rules of the LCIA. Counsel noted that it was important for the court to note that the persons who had been sued are directors. The meeting in the relation to which capital is meant to be increased is a meeting of the shareholders. No shareholders have been sued. Counsel prays that the court finds that the matter in dispute falls under the shareholders agreement and is the dispute envisaged by the arbitration clause. The application was brought under section 40 of the Arbitration and Conciliation Act was wording is self explanatory. Counsel further addressed the court on the grounds in the statute for not referring a dispute to arbitration. He prayed that the suit is dismissed or struck out.

In reply Counsel Kihika Oscar opposed the application on the ground that the application is brought under sections 5, 40 and 41 of the Arbitration and Conciliation Act which does not provide for such a remedy. He contended that there is no provision for striking out the plaint and legislature did not intend to provide for such a remedy. Stay of legal proceedings gives opportunity for a party who raises issue of jurisdiction in the arbitral proceedings to come back to the suit. The Arbitration and Conciliation Act only provides for stay of suit/proceedings. He further contended that causes of action are several and there were causes of action that may not be subject to arbitration proceedings. Consequently it is appropriate that a suit is not struck out but stayed. He prayed that the court finds that the relief of striking out is not available to the Applicants.

Secondly Counsel submitted that in an application of this nature the Supreme Court of Uganda in the case of Shell Uganda Ltd versus Agip (U) Ltd civil appeal number 49 of 1995 sets out the conditions for the exercise of discretion to stay proceedings pending arbitration proceedings. He contended that the power to stay is discretionary and particularly highlighted passage from the judgement of honourable justice TsekooKo JSC giving the necessary conditions which influence court in the exercise of its discretion. These conditions are:

  1. There is a valid agreement to have the dispute concerned settled by arbitration.
  2. Proceedings in court have been commenced.
  3. The proceedings have been commenced by a party to the agreement against another party to the agreement.
  4. The proceedings are in respect of the dispute so agreed to be referred.
  5. The application is made after appearance by the party to the proceedings.
  6. The application is made after appearance by that party, and before he has delivered in the pleadings or taken in the other "step in the proceedings."
  7. The party applying for stay and is ready and willing to do all things necessary to the proper conduct of the arbitration.

Thirdly the Respondents Counsel submitted that shareholders agreement only bind parties to that agreement. According to the textbook on Company Law by Brenda Hannigan it’s written that in addition to the articles of Association, shareholders may enter into a shareholders’ agreement which is a separate contractual agreement between the shareholders or some of them dealing with various aspects of their relationship. Matters, be dealt with in the shareholders agreement include voting matters, the provision of capital, the transfer of shares, and the appointment of directors. The agreement has a number of advantages over the standard articles of Association in that it is a contract and binding as such and subject to all the usual contractual remedies. It does not involve the parties in discussions as to whether a right is conferred qua member or whether the rule in Foss versus Harbottle (1843) 2 Hare 461 applies. Enforcement of outsider rights conferred by the agreement is not a problem. The disadvantage is that the agreement can only bind those parties who are privy to it and a new agreement is necessary where there is a change in the composition of shareholders. Furthermore Counsel relied on Gower on Company Law at pages 568 and 569 for the proposition that the shareholders agreement is valid though the directors may not fetter their discretion in their capacity as directors, shareholders may generally exercise their votes in any way they please. Such agreements only bind parties to it notwithstanding something to the contrary in the articles.

In the suit Counsel submitted that the Respondent sued the directors namely the Applicants who are not parties to the shareholders agreement. Applicant's number 1 – 6 do not satisfy conditions number three in the Supreme Court judgement because they are not parties. Annexure "B" to the affidavits in support demonstrates that there are two parties to the shareholders agreement. The 7th Applicant is not a signatory to the agreement. Counsel submitted that the Applicant's failed to satisfy conditions number 3 as laid out in the case of Shell versus Agip Uganda limited (supra). There is no doubt that the agreement is about the management of the 7th Applicant. They saw it fits not make it a party and they have no locus standi. The Applicant did not agree to refer the dispute to arbitration.

As far as the seventh condition in the case of Shell versus Agip is concerned, the parties must show that they are willing to do all things necessary to commence arbitration proceedings. They have not indicated in the application that they are willing to enhance the arbitration. In other words they have not satisfied the court.

Lastly the Respondents Counsel submitted that the dispute is not one that can be referred to arbitration. This is because the suit is a derivative action which actions are unique because they are filed by the minority on its behalf and on behalf of the company. In such a case as demonstrated by the case of Salim Jamal versus Uganda Oxygen Ltd Supreme Court Civil Appeal Number 64 of 1995, which discusses two types of action that may be brought by or on behalf of the company. The first type is where a wrong has been done to a company also known as the rule in Foss versus Harbottle (supra). An action is commenced to restrain the continuation or to recover the company's property or for damages or compensation. The second is one between the company on one hand and a third-party on the other. It is immaterial that the third parties happened to be directors or controlling shareholders of the company. A derivative action may sometimes be brought by an individual member where it is impractical for the company to do so. Counsel submitted that the company must of necessity be a defendant albeit a nominal defendant. He submitted that there was no dispute between the 7th Applicant and the Respondent. He prayed for dismissal of the application for failure to disclose the material conditions for the grant of such an application. Counsel relied on the case of East African Development Bank versus Zziwa Horticultural Exporters being the judgement of honourable justice Okumu Wengi for the proposition that the question of whether a dispute and whether differences arising between the parties in connection with the agreement should be referred to arbitration is a discretionary power. The decision was made under section 6 of the Arbitration and Conciliation Act 2000 and considerations or conditions in the case of Shell (U) Ltd versus Agip (U) Ltd Supreme Court civil appeal number 49 of 1995 were applied. In that case it was emphasised that proceedings have been brought by a party to the agreement. Secondly the proceedings have to be in respect to a dispute so agreed to be referred for arbitration and the party applying for stay was and is ready and willing to do all the things necessary to the proper conduct of the arbitration.

In rejoinder Counsel Masembe Kanyerezi contended that the conditions laid out in Shell versus Agip (supra) were based on section 17 of the repealed Arbitration Act cap 55 laws of Uganda. Under the new Arbitration and Conciliation Act the relevant provisions of sections 5 and 40 have different wording and tests. In the contemporary law, the court shall refer the dispute for arbitration unless the agreement is null and void, inoperative or incapable of been performed. Additionally section 5 provides that the dispute shall not be referred where it does not fall within the submission. On the basis of the above the case of Shell Uganda Limited versus Agip Uganda Limited (supra) and the case of Zziwa versus Horticultural Exporters Limited (supra) are distinguishable.

As far as striking out a plaint is concerned, section 5 does not provide for stay of proceedings at all. It provides for reference to arbitration and does not provide for what do with the suit. Similarly section 40 is silent about what to do with the suit after reference to arbitration. It is up to the court to determine what to do with the dispute. Rejection of the plaint is provided for under order 7 rule 11 (d) of the Civil Procedure Rules. The Applicants Counsel submitted that in the circumstances of the case, the Respondent's suit is barred by law and the plaint should be rejected.

On the question of whether the Applicants are parties to the shareholders agreement, the amended plaint annexure "C" has a stamp copy were Orange signed. A shareholders agreement defines the parties as the shareholders and the company. The arbitration clause refers to the "parties". On the question of whether the directors were not parties, the directors cannot be sued individually. Orange seeks to recover from ASB. Counsel agreed with the doctrine on derivative actions being brought on behalf of the company. In the circumstances of this case he submitted that it was a classic matter for arbitration as a matter brought on behalf of the company.

In reply to the new point raised by the Applicants Counsel for rejection of the plaint under order 7 rule 11 (d) of the Civil Procedure Rules, Counsel Oscar Kihika Counsel for the Respondent submitted that there has to be a specific application. This was a pre-condition which has not been made and was prejudicial to the Respondent. Secondly it was not pleaded and the Respondent did not have opportunity to reply. The Applicant's application is an omnibus application and omnibus applications are defective. The Applicant seeks to bring another application not envisaged and should not be allowed.

I have considered the arguments for and against the application for reference to arbitration under section 40 of the Arbitration and Conciliation Act. I will start with the submission that the power to refer a dispute for arbitration is a discretionary power. This application was brought under section 40 of the Arbitration and Conciliation Act which provides that:

"When seized of an action in a matter in respect of which the parties have made and arbitration agreement referred to in section 39, the court shall, at the request of one of the parties, refer the parties to arbitration, unless it finds that the agreement is null and void, inoperative or incapable of being performed."

The arbitration agreement referred to in section 39 refers to a New York Convention award. It provides that:

"A New York Convention award means an arbitral award, in pursuance to an arbitration agreement, in the territory of a state (other than Uganda), which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the "New York Convention") adopted by the United Nations Conference on International Commercial Arbitration on 10th of June, 1958."

Consequently the arbitration agreement referred to in section 39 of the Arbitration and Conciliation Act is an arbitration agreement where the seat of arbitration is outside Uganda.

Section 5 on the other hand has a head note which reads as: "Stay of legal proceedings." It provides that a judge or magistrate before whom proceedings are being brought in a matter which is the subject of an arbitration agreement shall, if a party so applies after the filing of a statement of defence and both parties having been given a hearing, refer the matter back to the arbitration unless he or she finds that the arbitration agreement is null and void, inoperative or incapable of been performed; or that there is not in fact a dispute between the parties with regard to the matters agreed to be referred to arbitration.

Both sections 5 and 40 of the Arbitration and Conciliation Act are couched in mandatory language. The court shall refer the dispute to arbitration unless the arbitration agreement is null and void, inoperative or incapable of being performed. The provision does not give discretionary powers to the court though in appropriate cases; other considerations may be used for the court to exercise its inherent jurisdiction to try the dispute. I.e. the parties may have waived the right to proceed under the arbitration clause. One of the parties may be using the arbitration clause oppressively to prevent resolution of the dispute without any intention of commencing arbitration proceedings. Nonetheless, the clear intention of legislature is that a dispute arising under an agreement with an arbitration clause shall be referred for domestic or international arbitration in accordance with the intention of the parties. I further agree with the Applicants Counsel that each statute should be interpreted on the basis of its own language. This is because power to stay proceedings where there is a submission under the repealed Arbitration Act cap 55 is couched in a different language.

Section 17 of the repealed Act provides as follows:

"Where any party to a submission from which this Part applies, or any person claiming under him, commences any legal proceedings against any other party to the submission or any person claiming under him, in respect of any matter agreed to be referred, any party to such legal proceedings may, at any time after appearance, and before filing a written statement, or taking any other steps in the proceedings, apply to the court to stay the proceedings; and the court, if satisfied that there is no sufficient reason why the matter should not be referred in accordance with the submission, and that the Applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary for the proper conduct of the arbitration, may make an order staying the proceedings."

It is quite clear that the previous law under section 17 gives the court discretionary powers by use of the word "may" in respect of the stay of legal proceedings. Secondly it provides that the court has to be satisfied that the Applicant was at the time when proceedings were commenced and also the time of making the application ready to do all necessary things for the conduct of the arbitration. The case of Shell (U) Ltd versus Agip (U) Ltd (supra) is clearly distinguishable on the ground that the Supreme Court was interpreting the repealed section 17 of the Arbitration Act which is couched in permissive language. On the other hand sections 5 and 40 of the Arbitration and Conciliation Act are couched in mandatory language. In those circumstances, the considerations for the grant of an order for stay of proceedings pending arbitration laid out in the case of Shell (Uganda) Ltd versus Agip (Uganda) Ltd (supra) cannot apply wholesale to the new law namely the Arbitration and Conciliation Act sections 5 and 40 thereof. Similarly the case of East African Development Bank versus Zziwa Horticultural Exporters Limited Miscellaneous Application Number 1048 of 2000 arising from Company Cause number 11 of 2000 is inapplicable.

Having held that the provisions of sections 5 and 40 of the Arbitration and Conciliation Act are couched in mandatory language, it follows that the court does not have discretionary powers on the question of whether or not to refer a dispute which is the subject of an arbitration clause, for arbitration and stay proceedings. The power to refer the parties to arbitration is exercised upon fulfilment of the conditions laid out under sections 5 or 40 or the Arbitration and Conciliation Act as the case may be. In this case, the applicable provision is section 40 which deals with New York award agreements. All that the court needs to do is to consider whether the parties to the proceedings before the court are bound by an arbitration clause in the relevant agreement between the parties. The narrower question therefore is whether the directors who are Applicant’s number 1 to 6 cannot rely on the arbitration clause under the shareholders agreement to which they are not parties. Secondly whether the dispute is a dispute agreed to be referred to arbitration in accordance with the agreement of the parties if the first question is answered in the affirmative.

I have duly considered the shareholders agreement in relation to Orange Uganda Limited (the 7th Applicant). The agreement is between Orange Uganda Limited and House of Integrated Technology and Systems Uganda Limited (HITS) and Atlas Services Belgium (ASB). The agreement is signed by all the three companies. It is quite clear that none of the Applicant's other than the 7th Applicant is a party to the agreement. It is however admitted that those Applicants are directors in the 7th Applicant namely Orange Uganda Limited.

Section 5 of the Arbitration and Conciliation Act cap 4 laws of Uganda has one common feature with section 17 of the repealed Arbitration Act. Both of them provide for proceedings in respect of a dispute which falls within the subject of a dispute defined in an arbitration agreement. Thereafter any party to the proceedings after filing of a defence and after being heard may make an application for reference of the matter back to arbitration. Section 40 of the Arbitration and Conciliation Act provides for a situation where the action is in a matter in respect of which the parties have made an arbitration agreement referred to in section 39. In other words there has to be an agreement between the parties and the question of whether a party is a party to the agreement is relevant.

I have duly considered the authorities referred to by Counsel for the Respondent for the proposition that a reference to arbitration can only be made on the application of a party to the agreement with a clause providing for reference to arbitration. He referred to 2 authorities namely a textbook on Company Law 2nd edition by Brenda Hannigan and particularly between pages 110 and 111. It is provided therein that the agreement/shareholders agreement is a contract and binding and subject to the usual contractual remedies. She further indicates that it was disadvantageous that the agreement can only bind parties who are parties to it. She goes on to draw some clear principles on such agreements. First of all the agreement is drawn up to address the particular position of the shareholders whereas the standard Articles of Association operate without regard to individual circumstances. Secondly she indicates that the process of drawing up the agreement can be useful in getting the members to focus on issues of concern to them and identify ways in which disputes should be resolved when they arise. Thirdly the agreement cannot be altered by majority of the parties, as the articles can, so a shareholder party to the agreement is assured that changes cannot occur without his or her consent. Lastly the agreement is a private contract whereas the Articles of Association have to be registered with the Registrar of Companies. A careful perusal of the provision shows that the shareholders agreement is binding on the parties thereto. Secondly a shareholder is assured that no changes can be made to the composition of shareholders without his consent. Thirdly, disputes are resolved in accordance with the agreement. This position is reiterated by Gower on Principles of Modern Company Law fourth edition 1979. He asserts at page 569 of the text referred to by the Respondents Counsel that the parties to the shareholders agreement cannot have their contracts varied or abrogated without their consent. On the other hand the position of shareholders registered in companies is much less secure because without control they normally have no protection against subsequent variation of their rights.

Is this a simplistic approach to the question of shareholders rights governed by a shareholder’s agreement? In this particular case it is obvious that the 7th Applicant can apply for reference of the dispute for arbitration in accordance with the shareholders agreement as both the Respondent and the 7th Applicant are parties to the shareholders agreement. When the dispute is referred, the whole of the dispute relating to the shareholders agreement will become the subject of arbitration and the other Applicants will be rendered redundant in the proceedings. In other words reference to arbitration would be a reference of the entire dispute concerning the shareholding of the company.

This is however not the end of the matter, Counsel relied on the case of Salim Jamal versus Uganda Oxygen Ltd (supra) for the definition of a derivative action and particularly the doctrine that a derivative action is brought on behalf of the company and that the 7th defendant/Applicant is a nominal defendant.

I find this argument difficult to sustain for the simple reason that it is admitted by the Respondent that he sued the directors of the 7th Applicant. The position of directors is that they act on behalf of the company. They do not act on their own behalf. Suffice it to quote paragraph 2 of the plaint which avers that the 1st, 2nd and 3rd defendants who are also the 1st, 2nd and 3rd Applicants to this application are directors in the 7th defendant company having been nominated by Atlas Services Belgium (ASB). Secondly the 4th, 5th and 6th defendants are also directors in the 7th defendant company having been nominated by ASB. In paragraph 4 of the plaint it is averred that the affairs of the company had been conducted in a manner oppressive to the minority shareholders wherein the plaint seeks a permanent injunction to prevent a proposed increase in the share capital in the company. What is crucial is that under paragraph 5 (b) of the plaint it is averred that the plaintiff company was a subscriber to the memorandum and articles of Association of the 7th defendant company filed on 24 September 2008 and was a party to the shareholders agreement made between the 7th defendant company on the one part and the plaintiff and ASB on the other part. In paragraph 5 (e) of the plaint it is further pleaded that the shareholders agreement constituted three of the five directors appointed in a general meeting. It is further pleaded that on 25 February 2013 the board of directors of the 7th defendant company resolved that an extraordinary general meeting is convened to consider a share capital increase in the company. That the resolution indicates that the subscription rights of each of the shareholders shall be in proportion to the percentage shareholding in the 7th defendant company. The representations and proposals of the plaintiff company were dismissed or ignored by the defendants without just and reasonable explanation. Without going into the details of the plaint, it is apparent that the dispute relates to shareholding and consequences thereof in the management of the company. Particularly what is complained of is the proposed increase in share capital.

As far as the question of parties to the shareholding agreement is concerned, the directors are being sued in their official capacity as directors of the company. They have not been sued in their personal or individual capacity and therefore they are an extension of the company namely the 7th defendant/Applicant to this application. A corporation is a legal fiction and can only act through its directors. By suing the directors, the Respondent intend to influence what the company does and has in effect sued the company. The authority for this proposition is the case of Lennards Carrying Co. Ltd v Asiatic Petroleum Co. Ltd (1915) AC 705 where it was held that:

"A Corporation is an abstraction. It has no mind of its own any more than it has a body of its own, it's active and directing mind must be sought in the person of somebody…"

Furthermore in the case of H L Bolton (Engineering) Co Ltd v T J Graham & Sons Ltd [1956] 3 All ER 624  Denning LJ discussed the dictum that the mind and will of a company which is a legal abstraction has to be sought in the directors where he held at page 630:

“A company may in many ways be likened to a human body. They have a brain and a nerve centre which controls what they do. They also have hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what they do. The state of mind of these managers is the state of mind of the company and is treated by the law as such. So you will find that in cases where the law requires personal fault as a condition of liability in tort, the fault of the manager will be the personal fault of the company. That is made clear in Lord Haldane’s speech in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd ([1915] AC 705 at pp 713, 714). So also in the criminal law, in cases where the law requires a guilty mind as a condition of a criminal offence, the guilty mind of the directors or the managers will render the company themselves guilty...”

The directors of the 7th Applicant/defendant are obliged to implement the shareholders agreement as far as any dispute relating to the proportion of shares issued etc is concerned. For emphasis it is necessary to refer to the relevant clauses of the shareholders agreement.

I have carefully considered clause 4.1 of the agreement which provides that subject to the express terms of the agreement including without limitation clause 16, no shares in the share capital of the company shall be issued other than by way of pro rata rights issue offered to the holders of all shares at the time. In that clause the shareholders agreed that if any shareholder does not pursue a rights issue, it shall be deemed to renounce the same to other shareholders. The question of proportion of shareholding is relevant. If a shareholder cannot follow its rights for whatever reason, the rights issue contemplated shall not constitute unfairly prejudicial, unjust or inequitable conduct towards the particular shareholder. In other words in the suit the plaintiff is complaining about increasing share capital which would constitute unfair, unjust or inequitable conduct to itself.

Secondly this suit is about a dispute which is contemplated by article 24.12 of the shareholders agreement which has been specifically pleaded in paragraph 5 of the plaint. In that clause the parties agree to settle amicably any dispute, claim, controversy, disagreement and/or difference arising out of or in connection with the agreement relating to the illegality, interpretation, performance, breach, termination, resolution, rescission, frustration, validity, or enforceability. The dispute arises out of or in connection of the proposed increase in shareholding which is a matter contemplated by clause 4.1 of the shareholders agreement. I also agree with the Applicant's submissions that the question of majority votes or proportions of voting is catered for in the agreement. Article 7.4.1 deals with matters requiring special resolution of the shareholders. Any rights attaching to any class of shares cannot be altered without 3/4 majority in a general meeting. Under clause 7.4.2 two thirds majority of shareholders in a general meeting are necessary to vote to effect any increase, subdivision, cancellation, purchase or redemption of the capital of the company. The shareholders agreement is an elaborate agreement between the plaintiff/Respondent to this application, Orange Uganda Limited and ASB. Because the suit was filed by a particular shareholder under the agreement against the directors of the 7th Applicant in their official capacity as directors, the dispute the subject matter of High Court civil suit number 207 of 2013 is a dispute contemplated by the parties to the shareholders agreement and falls within the agreement to refer disputes not amicably resolved to arbitration.

In the above premises, there is no need for me to consider any further arguments as submitted by Counsels in this application. In accordance with section 40 of the Arbitration and Conciliation Act Cap 4 2000 laws of Uganda, High Court civil suit number 207 of 2013 between the Respondent as plaintiff and the Applicants as defendants shall be referred for arbitration in accordance with clause 24. 12 of the agreement between Orange Uganda Limited, House of Integrated Technology and Systems Uganda Limited (HITS) and Atlas Services Belgium (ASB) dated 25th of September 2008 in respect to the shareholders agreement in relation to the shareholding of Orange Uganda Ltd/the 7th Applicant/defendant. The arbitration shall be conducted under the rules of the London Court of International Arbitration (LCIA) by a panel of three arbitrators’ according to the provisions of the rules of the LCIA. Furthermore clause 24.12 provides that the agreement is governed by and is to be construed in accordance with the laws of Uganda.

Regarding the prayer that the plaint in High Court civil suit number 207 of 2013 is struck out under the provisions of order 7 rule 11 (d) of the Civil Procedure Rules, the submission of the Applicants Counsel is that the suit is barred by statute. In considering whether a suit is barred by statute, the provision relied upon clearly indicates that the suit should appear from the statement in the plaint to be barred by any law. As earlier indicated, the provision relied upon to make this application is section 40 of the Arbitration and Conciliation Act. It provides that in any proceedings where there is an arbitration agreement referred to in section 39 the court shall at the request of one of the parties refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of been performed. In other words the suit is not barred by statute as such and the parties may waive their right to apply for a reference to arbitration if none of them request that the dispute is referred to arbitration in accordance with the contract. The provisions of order 7 rule 11 (d) of the Civil Procedure Rules are inapplicable.

The Applicants Counsel further submitted that the statute is silent about what happens to the case after a reference though under section 5 the head note reads "Stay of legal proceedings." Section 5 just like section 40 provides that where a party to the agreement/proceedings applies for reference of the dispute pending in court to arbitration in accordance with the agreement between the parties to that effect, the court shall refer the matter back to the arbitration unless the arbitration agreement is null and void, inoperative or incapable of been performed or the there is no dispute between the parties with regard to matters agreed to be referred to arbitration. I agree with Counsel for the Applicant to the extent that the court refers the dispute to arbitration. The court does not handle the dispute. Secondly section 5 (2) of the Arbitration and Conciliation Act makes it clear that notwithstanding that the application has been made to refer the dispute to arbitration and the application is still pending before the court, arbitration proceedings may be commenced and continued and an award made. In other words the pendency of any matter or dispute before the court or the fact that an application has been made to refer the matter to arbitration is not a bar to an arbitral tribunal from proceeding with properly commenced arbitration proceedings involving the same dispute. This should be read in consonance with section 9 of the Arbitration and Conciliation Act which provides that: "Except as provided for in the Act no court shall intervene in matters governed by the Act".

It is clearly the intention of legislature to support the operation of an arbitration clause and to ensure that it can proceed even if there is a suit pending in respect of the same dispute contemplated in the arbitration clause. It would not be contempt of court to conduct arbitral proceedings when the same matter is pending in court provided there is an arbitration clause providing for reference of the contemplated dispute for arbitration. In any case the court has no power to intervene in the arbitration under the provisions of section 9. Arbitration has been defined by section 2 (1) of the Act to mean any arbitration whether or not administered by a domestic or international institution where there is an arbitration agreement. An arbitration agreement means an agreement by the parties to submit to arbitration or refer such disputes which are present or which may arise between them in respect of a defined legal relationship, whether contractual or not.

The silence of the legislature cannot be interpreted to mean that the suit has been barred. Secondly the provisions of section 5 are silent as to what happens to the suit after a reference of the dispute to arbitration. In those circumstances, the only order that can be made is that the dispute shall be resolved through arbitration and not through the process of the court. By referring the dispute to arbitration, the civil suit lapses.

The question of costs incurred in High Court civil suit number 207 of 2013 and miscellaneous application number 310 of 2013 is further referred to the arbitral tribunal to be constituted in accordance with the agreement of the parties.

Ruling delivered in open court this 28th day of May 2013.

 

Christopher Madrama Izama

Judge

 

 

Ruling delivered in the presence of:

Masembe Kanyerezi assisted By Bwogi Kalibala for the applicants

John Musiime holding brief for Oscar Kihika for the respondent

Applicant represented by its company secretary Mrs Maximilia Byenkya and by its legal officers Miss Doreen Byengoma and Mathew Kakooza

Charles Okuni: Court Clerk

 

Christopher Madrama Izama

Judge

28th May 2013