Vodacom (Pty) Ltd v Makate and Another (Case no 401/2022) [2024] ZASCA 14 (06 February 2024)

A third person nominated to fix a price or make a valuation must exercise the judgment of a reasonable person. If their judgment leads to a patently inequitable result, it can be corrected on equitable grounds

Author

Ross Shepstone
March 01, 2024

Kenneth Nkosana Makate invented the "Please Call Me" (PCM) service while employed by Vodacom (Pty) Ltd, a leading telecommunications company in South Africa. The PCM service allowed users without airtime to send free messages requesting a call back. Despite the service's success, Vodacom did not compensate Makate for his invention. After prolonged negotiations failed to yield an agreement on reasonable compensation, the matter escalated through various legal channels.

The Constitutional Court of South Africa, in a landmark judgment in 2016, recognized the validity of the oral agreement between Makate and Vodacom. It ordered Vodacom to negotiate in good faith with Makate to determine reasonable compensation for the PCM invention. Failing agreement, the matter was to be decided by Vodacom's Chief Executive Officer (CEO).

Negotiations did not result in an agreement, leading to the CEO's determination of compensation. The CEO awarded Makate R47 million as compensation, a figure Makate found unsatisfactory. Makate sought a review of the CEO's determination, arguing it was unreasonable and inequitable, particularly criticising the methodology used in calculating the compensation and the duration for which compensation was calculated.

"The issue s for determination are the interpretation of the Constitutional Court order, in relation to the CEO’s mandate and determination. Arising from that, this Court must determine whether the high court was correct in granting the order it did and, in particular, whether it was correct to impose directives on the CEO on, inter alia, the exercise of his mandate and the duration of the contract period."

The High Court reviewed the CEO's determination, finding it flawed and remitting the matter back to the CEO with specific directives for recalculating the compensation. Vodacom appealed this decision to the Supreme Court of Appeal, which led to the judgment under discussion.

The ratio decidendi of the Supreme Court of Appeal's decision in Vodacom (Pty) Ltd v Makate and Another revolves around the interpretation and application of the Constitutional Court's order regarding the determination of reasonable compensation for Kenneth Nkosana Makate's invention of the "Please Call Me" service. The core legal principles underlying the decision are as follows:

1. Interpretation of Contractual Agreement and CEO's Mandate: The court clarified that the agreement between Makate and Vodacom did not specify that Makate was entitled to a fixed percentage of all revenue generated by the PCM product. Instead, the agreement was for Makate to be paid a "share" or "part" of the revenue, the amount of which was to be determined through negotiations or, failing agreement, by the CEO of Vodacom. The CEO's mandate was to determine a reasonable compensation, which did not necessarily have to be a percentage of the revenue.

2. Standard of Review for CEO's Determination: The court applied the test from Bekker v RSA Factors, which requires that a third person nominated to fix a price or make a valuation must exercise the judgment of a reasonable person. If their judgment leads to a patently inequitable result, it can be corrected on equitable grounds. The CEO's determination is final and binding unless it is shown to be unreasonable, irregular, or wrong to the extent of leading to obvious unfairness.

3. Application of the Plascon-Evans Rule in Motion Proceedings: The court emphasised the importance of the Plascon-Evans rule, which dictates that in motion proceedings, the court must decide the matter based on the facts averred by the applicant that are admitted by the respondent, together with the facts averred by the respondent. This rule was highlighted in the context of addressing disputes of fact in the review of the CEO's determination.

4. Remittal for Fresh Determination: The court found that the CEO's determination regarding the duration of the contract was unreasonable and inequitable, particularly because it did not adequately consider the actual duration for which the PCM service generated revenue for Vodacom. The matter was remitted to the CEO for a fresh determination of reasonable compensation, specifically instructing that an 18-year contract period be considered, reflecting the actual period the PCM service was in use and generated revenue.

These principles collectively underscore the importance of fairness and reasonableness in determining compensation for contractual agreements, especially in cases where the compensation is linked to the revenue generated by an invention or idea.

In its reasoning process, the Supreme Court of Appeal referred to several cases to support its legal principles and conclusions. Here are some of the key cases cited, along with their full citations:

1. Bekker v RSA Factors [1983] 4 All SA 328 (T)

2. Lufuno Mphaphuli & Associates (Pty) Ltd v Andrews and Another [2007] ZASCA 143; 2008 (2) SA 448 (SCA)

3. Plascon-Evans Paints (Pty) Ltd v Van Riebeeck Paints (Pty) Ltd 1984 (3) SA 623 (A)

4. Simelane NO and Others v Seven-Eleven Corporation SA (Pty) Ltd and Another [2002] ZASCA 141; [2003] 1 All SA 82 (SCA)

5. Transnet National Ports Authority v Reit Investments (Pty) Ltd and Another [2020] ZASCA 129

6. Tahilran v Trustees of the Lukamber Trust and Another [2021] ZASCA 173; 2022 (2) SA 436 (SCA)

7. Wright v Wright and Another [2014] ZASCA 126; 2015 (1) SA 262 (SCA)