FPM Constructions Pty Limited v Australian Recreation Systems Pty Ltd

[2004] NSWCA 318

CITATION:	FPM CONSTRUCTIONS PTY LIMITED & Anor v AUSTRALIAN RECREATION SYSTEMS PTY LTD & Anor [2004] NSWCA 318
HEARING DATE(S):	18 March 2004
JUDGMENT DATE:	16 September 2004
JUDGMENT OF:	Mason P at 1; Handley JA at 131; Santow JA at 132
DECISION:	Appeal allowed.
CATCHWORDS:	Construction of deed - whether right to terminate arbitration - whether reasonable to determine that it was not in the client's best interests for arbitration to continue - whether utility in the appeal. (ND)
PARTIES :	FPM CONSTRUCTIONS PTY LIMITED (formerly Fyntray Project Management Pty Ltd) & Anor v AUSTRALIAN RECREATION SYSTEMS PTY LIMITED & Anor
FILE NUMBER(S):	CA 40816/03
COUNSEL:	1st and 2nd Appellants: G McVay 1st and 2nd Respondents: A J Grant
SOLICITORS:	1st and 2nd Appellants: McLachlan Chilton 1st and 2nd Respondents: Heazlewoods Bushby International Lawyers

LOWER COURTJURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	ED 3176/03
LOWER COURT JUDICIAL OFFICER :	Campbell J

CA 40816/2003
ED 3176/2003

MASON P
HANDLEY JA
SANTOW JA

Thursday 16 September 2004

FPM CONSTRUCTIONS PTY LTD & Anor v AUSTRALIAN RECREATION SYSTEMS PTY LTD & Anor

JUDGMENT

1 MASON P: The appellants, FPM Constructions Pty Ltd and its principal Mr Anwar Yazbek, challenge a declaration and consequential orders made by Campbell J to the effect that the respondents, Australian Recreation Systems Pty Ltd (“ARS”) and Mr John Nicholas, were entitled to terminate an arbitration between ARS and Camden City Council without further recourse to the appellants and without being liable to the appellants for so doing. The respondents’ claimed right to terminate the arbitration stemmed from cl 7 of a Deed dated 23 January 2003 (“the Deed”) that is set out below.

2 The judgment of the trial judge sets out the primary facts (see FPM Constructions Pty Ltd & Anor v Australian Recreation Systems Pty Ltd & Anor [2003] NSWSC 768). Few of those facts are in dispute. Although it will be necessary to summarise them, the judgment will be cited as the point of reference as to details.

3 ARS was a joint venture vehicle incorporated to perform a contract with the Council to design, construct and manage an aquatic Leisure Centre at Mount Annan. There were three groups of joint venturers namely:

• Mr Michael Davies (an architect) and his company Hofox Pty Ltd, primarily involved in design;
• Mr Anwar Yazbek (a builder) the second appellant and his company Fyntray Constructions Pty Ltd (“FC”) that was to construct the Centre under sub-contract from ARS; and
• Mr John Nicholas, who would manage the Centre once it had been built.

4 ARS had three shares, initially issued to Hofox, Mr Yazbek and Mr Nicholas. Messrs Davies, Yazbek and Nicholas were the original directors.

5 ARS contracted for the design, construction and management of the Centre by deed between itself and the Council dated 23 December 1998 (“the ARS Agreement”). The design and documentation phases of the project were completed by about July 2001. ARS passed under the exclusive control of Mr Nicholas at about that time and has operated the Centre since then.

6 The joint venturers had always intended that the architect and the builder would sever their ties with ARS when their respective phases had been completed.

7 Accordingly, on 1 March 2001 Hofox transferred its share in ARS to Mr Nicholas for a nominal consideration. Mr Davies resigned as a director on 27 April 2001.

8 On 11 May 2001 a Deed was executed by ARS, Mr Yazbek, FC, Mr Nicholas and Mr Nicholas’ company JA Nicholas & Associates Pty Ltd (“the Separation Deed”). The Separation Deed recognised that the design services performed by the architect Mr Davies were “essentially complete”.

9 As regards “construction services” the Separation Deed stipulated:

PART 3 – CONSTRUCTION SERVICES
3.1 ARS has engaged Fyntray Constructions Pty Ltd to carry out the Construction Services of the Mount Annan Leisure Centre.
3.2 In consideration of Fyntray carrying out the Construction Services, ARS will pay to Fyntray fees as referred to in the ARS Agreement for construction.
3.3 Fyntray has at its expense provided to Council a Bank Guarantee for $382,743.50, pursuant to the provisions of Clause 5.7 of the ARS Agreement, and will be entitled to the return of such Bank Guarantee when it is released by Council.
3.4 Fyntray agrees to indemnify and shall indemnify ARS against all action [sic], claims, demands, losses, damages, costs and expenses incurred by Fyntray for which ARS may become liable in respect of or arising from Fyntray carrying out the Construction Services.

10 The Separation Deed further regulated the role of Mr Nicholas and his company in providing management services for the Centre in accordance with the ARS Agreement.

11 The construction phase gave rise to a dispute between the Council and ARS.

12 In about June 2002 Mr Yazbek (while still a director of ARS) instructed Moustacas & Co Solicitors (“M & Co”) to commence arbitration proceedings in the name of ARS against the Council. The Council had refused to pay ARS all of the money claimed for variations to the building work and associated architect’s fees. If recovered, this money would originally have been payable to FC, pursuant to cl 3.2 of the Separation Deed (above). Some of the money claimed by ARS was the balance of two bank guarantees that ARS had provided as security for performance of the contract works. As between the joint venturers, the bank guarantee had been provided by FC, as acknowledged in cl 3.3 of the Separation Deed (above).

13 Mr B J O’Mara was appointed Arbitrator. He gave original directions in the arbitration on 11 July 2002.

14 The original pleadings in the Arbitration consisted of Points of Claim by ARS, Points of Defence by the Council and a Reply by ARS. Unsurprisingly for a significant building dispute, the issues were complex, there were several later amendments and the procedural timetable was adjusted on several occasions.

15 The construction phase had been carried out by FC under sub-contract from ARS. On 30 July 2002, after building work had been substantially completed, the construction sub-contract was assigned by FC to another company under Mr Yazbek’s control, Fyntray Management Pty Ltd. The assignee later changed its name to FPM Constructions Pty Ltd (FPM). It and Mr Yazbek were the plaintiffs in the Equity Division and are the appellants in this Court. Since ARS through Mr Nicholas consented to this transaction (Blue 20), it is academic to consider whether it was an assignment or a novation. None of the parties to this appeal suggested that the transaction was void because of its impact on FC’s creditors.

16 FC possibly went into voluntary administration in mid August 2002 (cf J97). It certainly proceeded into liquidation on 27 March 2003. It owed large sums of money to sub-contractors and suppliers connected with the construction of the Centre. Campbell J found that all the facts about the financial failure of FC were known at the time the Deed of 23 January 2003 was entered into (J87). His Honour also found that Mr Nicholas had been party to the arrangement involving the assignment of the benefit of the building contract from FC to FPM (J78).

17 By the end of August 2002 pleadings in the arbitration had closed. However, ARS’s solicitors had sought the Council’s consent to amend ARS’s Points of Claim and for consequential amendments to be made to the timetable. On 2 September 2002 ARS provided a list of documents to the Council.

18 The dispute referred to arbitration related to the construction phase of the project. It arose after Mr Davies had made his contribution as architect and after he and his company had severed formal ties with ARS. However, architectural fees remained due by ARS, according to Mr Davies.

19 Mr Yazbek and his company FPM stood to benefit from the arbitration in ARS’s name. This was because clause 3.2 of the Separation Deed (set out above) required ARS to pay FC all construction fees recovered by it under the ARS Agreement with the Council and because FC had assigned its rights to FPM. The Yazbek interests’ right to claim the balance of the bank guarantee provided to the Council on ARS’s behalf was also recognised in cl 3.3 of the Separation Deed.

20 The respondents ultimately conceded that they also stood to gain if the arbitral award could determine various issues adversely to the Council (CA Tr p82). These issues included the hoped-for rejection of the list of defective works propounded by the Council against ARS and subsequently included in a cross-claim filed by the Council in the arbitration at the prompting of Mr Nicholas’ solicitor. The respondents also stood to benefit from an anticipated favourable resolution of issues referable to the outstanding fee dispute between ARS and its architect, Mr Davies (J95).

21 Mr Yazbek’s disengagement from ARS may not have been perfected at law when the disputes leading to these proceedings arose. However, on 4 September 2002 Mr Yazbek delivered a signed transfer of his share in ARS to Mr Nicholas. Mr Nicholas provided him with a written acknowledgement in the following form (Blue 22):

To Whom It May Concern:
I John Arthur Nicholas acknowledge that in the transfer of Anwar Yazbek share in ARS to John Nicholas that there are outstanding building matters that are to be resolved by arbitration.
Proceeds resulting from the arbitration process in relation to the building contract will be transferred from ARS to Fyntray Project Management.

22 This acknowledgment was consistent with ARS’s continuing obligations under Part 3 of the Separation Deed (set out above).

Mr Bushby first investigates the arbitration proceedings on behalf of Mr Nicholas

23 Mr Nicholas was aware, in very general terms, of the arbitration in the first half of 2002. In early August 2002 he instructed his solicitor, Mr Bushby to make further enquiries about it.

24 Mr Bushby was at the time a partner in the firm known as Philip Bushby International Lawyers. The respondents acted on his advice at all material times.

25 Mr Bushby is a solicitor of 30 years standing. Campbell J described him as (J19):

..meticulous and punctilious. Some would find him pedantic. His preferred mode for dealing with this particular matter would have been to inform Moustacas & Co of his client’s requirements, and to have that statement adopted by Moustacas & Co without question or argument….

26 The appellants were at all material times represented by M & Co, the firm of solicitors also retained by Mr Yazbek on behalf of ARS in the arbitration. Most of the work connected with the arbitration proceedings was done by Mr Geary, a young man who was completing his studies at the College of Law in 2002 and who was admitted as a solicitor on 14 February 2003. According to Campbell J (J19):

Mr Bushby regarded him as a young man with a lot to learn, who gave insufficient deference and respect to older and more experienced practitioners such as himself. Mr Moustacas, by contrast, regarded him as an outstanding young man.

27 With one possible exception mentioned in the next paragraph, nothing suggests that Mr Geary was neglectful in any way, having regard to his level of experience. He dealt with Mr Bushby with studied courtesy and significant forbearance in all of the circumstances, notwithstanding a barrage of peremptory, patronising and downright offensive correspondence from the older practitioner (see eg J20, 21, 32, 33, 34, 36, 52, 53, 54).

28 The relationship between the two solicitors got off to a bad start when, through a combination of ignorance and/or oversight, Mr Geary submitted a draft deed containing suggested amendments that were not marked up. This should not have occurred, but the incident has no continuing relevance, save that it coloured Mr Bushby’s assessment of the younger solicitor, even prompting him to raise it as a matter of complaint to the Law Society (countering a complaint directed at Mr Bushby emanating from Mr Geary or his employer, Mr Moustacas) (see J55-60).

29 Mr Bushby wrote to M & Co in early October 2002. He sought and was given access to the firm’s entire file relating to the arbitration.

30 Mr Bushby asked M & Co to estimate the total fees and disbursement the firm would be likely to incur on its side of the arbitration presuming a two to three day hearing (J11). By mid October he was given an estimate of $30,000.

31 Mr Bushby also sought to clarify who would be responsible for the payment of M & Co’s fees for acting on behalf of ARS in the arbitration. Clause 3.4 of the Separation Deed had been quite explicit as to FC’s obligations in this regard, although it was framed in terms of an agreement by FC to indemnify ARS. FC’s capacity to pay was well and truly in doubt by late 2002.

32 On 13 October 2002 M & Co wrote to Mr Bushby stating:

We confirm that our instructions come from Fyntray Project Management Pty Limited, by its director Mr Yazbek. Work prior to the recent restructuring of ARS, was done under a retainer with ARS. However, Mr Yazbek has recently instructed us that the matter is to be run by Fyntray Project Management Pty Limited. Accordingly, our retainer is now with that company and not ARS. We thus confirm that we will not be looking to ARS for our costs after that date. Mr Yazbek has further confirmed that Fyntray Project Management Pty Limited will cover our costs preceding it taking over the proceedings.

This assurance was repeated in a letter of 14 October 2002 (Blue 63).

33 Since ARS was the necessary party to the arbitration, and since its shares then belonged to Mr Nicholas (perhaps in equity only as regards the share previously owned by Mr Yazbek), Mr Bushby’s clients had a legitimate interest to enquire about the likely exposure of ARS for its or the Council’s costs in the arbitration. M & Co’s letters of 13 and 14 October 2002 meant that ARS was at no risk of incurring M & Co’s fees in relation to the arbitration. But the Council’s costs of the arbitration were another matter given the arbitrator’s power to award those costs against ARS.

34 There were other matters of concern that Mr Bushby raised with M & Co on behalf of his clients at these early stages (J13-14). One was that many of the matters in dispute in the arbitration appeared to be fees allegedly due to the architect. Mr Bushby questioned the benefit to ARS in running that claim on behalf of the architect. According to Campbell J (J13):

It has emerged that the architect has been pressing for additional fees, and that there has been a significant falling out between the architect and Mr Nicholas. Further, Mr Yazbek is of the view that, if fees due to the architect are recovered by ARS in the arbitration, not all those fees would end up being payable to the architect, because cross-claims could be asserted against the architect.

Concerns about this matter are reflected in recitals K-N and cll 2-3 of the Deed set out below.

35 Mr Bushby’s further concern was that the Council had issued a substantial defects list. Mr Bushby formed the view that the question whether or not ARS was obliged to make good all or any of these defects should be decided in the arbitration. He told M & Co that he was concerned that the pleadings to date did not raise this issue. This matter is adverted to in recital O and cl 1 of the Deed set out below. It was a factor that contributed to the delay in bringing the arbitration to a state of readiness (see eg J27-29, 74). The Council’s solicitors were for a time reluctant to join in this dance, but had agreed to do so at least by early May 2003 when the arbitrator gave agreed directions for the filing of a cross claim.

36 In November 2002 Mr Bushby advised Mr Nicholas to terminate the arbitration (J15), no doubt through the exercise of Mr Nicholas’ powers as the then sole shareholder and director of ARS. Notwithstanding that advice, Mr Nicholas decided that he should permit the arbitration to continue, on certain terms. Later correspondence revealed that Mr Bushby was unhappy with this situation, but it represents a significant starting point for considering the issues that were later to arise. There could be no basis for ARS or Mr Nicholas contending that they were under any misapprehension about circumstances as at January 2003, since the entire file had been examined by Mr Bushby and M & Co had been fully interrogated by him about the situation to date.

37 The terms on which the arbitration was permitted to continue were largely dictated by Mr Bushby in a series of characteristically firm letters to M & Co between November 2002 and late January 2003 (J15-J21). These were interspersed with threats to stop the arbitration without warning and assertions that Mr Yazbek was being “granted a very large indulgence by this arbitration being continued” (J18).

38 M & Co were however, able to negotiate some concessions on behalf of the Yazbek interests. One of Mr Bushby’s original stipulations was that FPM lodge in his trust account $100,000 against any adverse award or costs order, with irrevocable instructions to apply that money against such order or costs order (J15). This proposal was modified on 6 December 2002 along the lines of what became clause 6 of the Deed executed on 23 January 2003 (see below). However, prior to the execution of the Deed, Mr Bushby wrote to M & Co on 19 December 2002 requesting that a cheque for $5,000 on account of fees be paid into his trust account. A letter of 6 January 2003 required payment of that cheque no later than 10 January 2003 otherwise “we propose to recommend to Mr Nicholas that the arbitration be shut down” (J18). The cheque was provided, presumably within the time stipulated.

39 The two solicitors set about drafting a deed to give effect to the terms on which Mr Nicholas would support the continuing arbitration. It was during this period that Mr Geary emailed back to Mr Bushby a revised version of the Deed in which Mr Geary’s changes by way of deletions and additions to the earlier Bushby draft were not marked up. At Mr Bushby’s request, Mr Geary forwarded a marked up version, apparently with some inaccuracies (J20). Mr Bushby let Mr Geary know his displeasure in no uncertain terms (J20-21). In this as in many of his letters, Mr Bushby reminded Mr Geary that his client was “being granted an enormous indulgence by allowing the arbitration to continue” (J20). This was both irrelevant and inaccurate. It was irrelevant, because the continuation of the arbitration (on terms) was confirmed by the Deed. It was inaccurate, because the Nicholas’ interests were also intended to be served by the arbitration, to a degree, as I have indicated.

The Deed

40 The Deed was executed on about 23 January 2003. It provides as follows:

“THIS DEED made ………………………… 2003
BETWEEN: AUSTRALIAN RECREATION SYSTEMS PTY LIMITED (ACN 085 603 130) of
(“ARS”) of the first part
AND: JOHN ARTHUR NICHOLAS of 17 Minell Court, Harrington Park NSW 2567 (“Nicholas”) of the second part
AND: FYNTRAY CONSTRUCTIONS PTY LIMITED (ACN ………….. ) of
(“FC”) of the third part
AND: FYNTRAY PROJECT MANAGEMENT (ACN 003 431 687) of 15 Lorna Avenue, Blakehurst NSW 2220 (“FPM”) of the fourth part
AND: ANWAR YAZBEK of ……………………………..
Company Director (“YAZBEK”) of the fifth part
Recitals
A. By Deed dated 23 December 1998 (“the Deed”) between Camden City Council (“CCC”) and ARS, ARS agreed to build, construct and operate an aquatic centre for CCC at Mount Annan (“the project”).
B. ARS was a joint venture between a company controlled by Davies (“the architect”) and companies controlled by, Nicholas and Yazbek (“collectively the joint venturers”).
C. The architect was responsible for the design stage of the project, FC was responsible for the construction stage of the project, and Nicholas was responsible for the operational stage of the project.

D. It was agreed between the joint venturers that as each of their responsibilities under the Deed terminated that they would resign their directorships of ARS and assign their shares in it to Nicholas.
E. Each of the architect and Yazbek have assigned their shares in ARS to Nicholas. The architect resigned his directorship of ARS and Yazbek is no longer a director of ARS.
F. A dispute has arisen with CCC in relation to the construction stage of the project (“the dispute”).
G. Proceedings were commenced in the name of ARS with CCC in relation to the dispute by way of a building arbitration currently being conducted before Arbitrator O’Mara (“the arbitration”).
H. The arbitration was commenced at a time when Yazbek was a director of ARS and a shareholder of it.
I. As part of the Deed, ARS lodged 2 bankers undertakings with CCC in the sum of $191,371.75 (“the guarantees”) as security for the performance of the construction phase of the project.
J. The guarantees were initially provided by Westpac Banking Corporation at the request of FC. One of the guarantees has been called up by CCC. The other guarantee in the sum of $……… has been reissued by National Australia Bank.
K. The architect has made claims against CCC for additional fees for work alleged to have been carried out by it outside of its obligations under the Deed.
L. A large part of the arbitration includes the architect’s claim for additional fees.
M. Yazbek and FPM assert that the architect is indebted to him or it in respect of various matters.
N. Yazbek and FPM propose that if that part of the arbitration which relates to the architect’s claim for additional architectural fees is successful, that it or he will set off against any amount recovered from CCC the amount said to be owed to it or him by the architect.
O. The arbitration as currently constituted does not include a claim in relation to defects under the building contract alleged by CCC in respect of the construction of the project.
P. A number of sub-contractors in respect of the project are still owed significant sums of money by FC.
Q. Nicholas has expressed reservations about allowing ARS to continue with the arbitration as presently constituted, or at all.
R. Each of Yazbek FC and FPM have requested Nicholas to allow the arbitration to continue in the name of ARS.
S. Nicholas and ARS have agreed to the request of Yazbek, FC and FPM on the terms appearing in this Deed.
Operative part
In consideration of each of Nicholas and ARS acquiescing to the request of each of Yazbek, FC and FPM to allow the arbitration to continue in the name of ARS the parties agree as follows:
1. Yazbek, FC and/or FPM will procure that the merits of the defects issue is determined in the arbitration.
2. Should any award be made in favour of ARS in respect of the claim for increase in architects fees which are Variation claim Nos. VPC01 - VPC11-11A inclusive and collected from the Council, those moneys are to be paid into the trust account of Phillip Bushby International and held there until such time as the dispute between the architect, Yazbek, and/or FPM is concluded. By the signing of this Deed Yazbek and FPM irrevocably instruct Phillip Bushby International to pay the net amount due to the architect once the dispute with him has been determined.
3. Any litigation with the architect in respect of the project or otherwise is not to be carried out in the name of ARS.
4. Each of Yazbek and FPM indemnify ARS and Nicholas against any claim of any sort by anybody arising out of the construction of the Mount Annan Leisure Centre.
5. Each of Yazbek, FC and FPM by the signing of this Deed authorise Nicholas and/or ARS to direct CCC to apply all or any part of the guarantees held by it against any adverse award, costs order or any other damage or loss of any sort which ARS may suffer as a result of allowing the arbitration to continue in its name.
6. Each of Yazbek, FC and FPM shall allow Phillip Bushby International to monitor the conduct of the arbitration on behalf of Nicholas and Yazbek and FPM (but not FC) will pay such fees as Phillip Bushby International bills to Nicholas for that work within 14 days of each itemised account being sent by that firm to Nicholas. A copy of that itemised account shall be made available by Nicholas to Yazbek and FPM.
7. In the event that Phillip Bushby International, acting reasonably, determines that any step in the arbitration is not in the interests of either Nicholas or ARS, then ARS and/or Nicholas may terminate the arbitration without further recourse to Yazbek, FC or FPM, without being liable for so doing.”

41 It is clause 7 of the Deed which is at the heart of the present dispute.

42 It should be observed that the Deed recognised that FPM had come into the picture. In particular, cl 4 obtained an indemnity that was considerably wider than and effectively replaced the indemnity given by the now defunct FC in cl 3.4 of the Separation Deed.

The respondents purport to terminate the arbitration in reliance on cl 7

43 Preparation for the arbitration resumed in early 2003. Pursuant to a telephone directions hearing, a revised timetable was agreed upon, requiring the Council to put on Amended Points of Defence and Points of Cross-Claim (if any) by 7 February 2003, and providing for other steps including discovery and delivery of statements. It also provided for a further preliminary conference to be held on 17 April 2003 with a view to setting the matter down for hearing in late April/May 2003.

44 The Points of Claim were amended with a view to prompting the Council to take up the defects issue in a way that involved assuming the onus of proof (J24). This was at Mr Bushby’s prompting (J15).

45 It will be necessary to return to events occurring between January and May 2003. Some further steps were taken in the arbitration, Mr Bushby sought to have the $5,000 float in his trust account topped up, and there was an exchange of professional misconduct complaints to the office of the Legal Services Commissioner made by each solicitor against the other.

46 On 28 May 2003 Mr Bushby, acting on Mr Nicholas’ instructions, wrote to M & Co the letter whereby Mr Nicholas purported to invoke cl 7 of the Deed:

We refer to our letter to you of 15 May.

Our client has instructed us to record the following:

1. Despite the fact that this matter should have been heard by 24 April, it is obvious from the timetable set on 2 May 2003 that not only is this matter nowhere near ready to be heard, but that its state of preparation is such as to give our client grave concern as to whether the proceeding is being prepared and managed competently;
2. It is obvious from the amended timetable that the original estimate of costs given is woefully inadequate. Our client is extremely concerned about the quantum of costs which could be awarded against it if the arbitration is found in favour of the Council;
3. Despite clause 1 of the undated Deed which governs the ongoing arbitration, your client has not yet procured that the merits of the defects issue will be determined in the arbitration;
4. You, on behalf of ARS, have taken significant steps in the proceedings including amending pleadings and engaging an expert witness (which could involve ARS in considerable expense) without prior discussion or approval, despite the contents of the Deed and the discussions which preceded it;
5. When you (belatedly) informed us about the amendments to the Points of Claim, you informed us that those amendments only went to “better set out the contractual relationships between the parties”. A reading of the Amended Points of Claim clearly indicates that the amendments do not go to the contractual relationship between the parties. Our client has formed the view your conduct in misdescribing the nature of the amendments was deliberately misleading;
6. Given the contents of paragraphs 4 and 5 above, our client has no confidence that your client has to date, or will in the future, allow us to properly monitor the proceeding;
7. Fyntray Constructions has a proven history of failing to pay creditors substantial sums of money in relation to the Mount Annan Leisure Centre, and has apparently deliberately organised its affairs so that any benefit which might flow to the Fyntray group from the proceeding will be kept out of the hands of those creditors. Given that background, our client has formed the view that Fyntray’s refusal to deposit money in our trust account as security against fees being incurred, might render it liable for costs to this firm which will not eventually be recovered from your client(s).
Given the concerns expressed by our client which go to the very heart of allowing these proceedings to continue, we have formed the view that it is not in the interest of either Mr Nicholas or ARS for the arbitration to continue.
Both ARS and Mr Nicholas concur with that opinion. You are therefore notified that after 9.00 am on Monday 9 June, ARS will take steps to terminate the building arbitration with Camden City Council on such terms as it deems appropriate.
The issues fought at trial and determined by Campbell J

47 FPM and Mr Yazbek commenced proceedings by summons seeking a declaration that ARS and Mr Nicholas were not entitled to terminate the arbitration, and an injunction restraining them from doing so. ARS and Mr Nicholas countered with a cross-claim for a declaration as to their entitlement to terminate the arbitration.

48 The parties were at issue as to the interpretation of clause 7 of the Deed.

49 The plaintiffs also disputed that circumstances had arisen that entitled the defendants to terminate the arbitration under that clause. This in turn raised the question whether Mr Bushby “acting reasonably, determine[d] that any step in the arbitration [was] not in the interests of either Nicholas or ARS”. Mr Bushby gave evidence as to the matters that he took into account in writing the termination letter (see J66), but Campbell J found that the evidence did not raise any substantial new matter going beyond the concerns raised in the letter of termination (J89). In this Court, counsel for the respondents accepted that they were limited to the matters that Mr Bushby had set out in his letter of termination and that the case at trial had been fought on this basis (CA Tr pp79-80).

50 The plaintiffs also contended that Mr Bushby’s determination and the matters on which it was based were not arrived at in good faith. This contention was rejected by Campbell J (see J90) and a challenge to this conclusion was not pressed in this Court (CA Tr p54).

51 Campbell J reached the following conclusions as to the interpretation of clause 7:

(1) The discretionary power to terminate the arbitration conferred on ARS and/or Mr Nicholas was pre-conditioned upon Mr Bushby “acting reasonably, determin[ing] that any step in the arbitration is not in the interests of either Nicholas or ARS” (J68).

(2) The words “any step” in cl 7 meant any one or more events in the progress of the arbitration towards determination. Any such event would be conduct in the arbitration by either party to it (J69).

(3) For the Deed to have business efficacy, any “step” which fell within cl 7 would need to be a step which occurred after the Deed was entered into. It would therefore not be open to Mr Bushby, for example, to conclude that starting the arbitration at all had not been in the interests of Mr Nicholas or ARS, and then terminate the arbitration under cl 7 (J70).

(4) The “steps” to which Mr Bushby could have regard could be either a past event or a proposed future event at the time of his determination (J71).

52 The seven numbered paragraphs in the letter of termination were not seen by Campbell J as identifying particular steps in the arbitration proceedings (J73). Indeed, his Honour held (J72):

The actual view which Mr Bushby has expressed in his letter of 28 May 2003, is not one which focuses on any particular step in the arbitration. Rather, the view he there expresses is “we have formed the view that it is not in the interests of either Mr Nicholas or ARS for the arbitration to continue” . That is, in substance, it seems to me, a determination that whatever the next step in the arbitration might be, and whatever any subsequent steps in the arbitration might be, they are not in the interests of either Nicholas or ARS.

See also J76. This aspect of his Honour’s interpretation of cl 7 is challenged by the appellants.

53 Campbell J addressed each of the seven numbered paragraphs with a view to considering whether it provided a reasonable ground for Mr Bushby determining that it was not in the interests of the respondents for the arbitration to continue.

54 His Honour concluded that none but the last of the seven matters relied upon provided a reasonable ground for Mr Bushby forming the view that he did. (This reading of his Honour’s reasons is disputed and I address it further below.)

55 The first matter relied on in the termination letter was that the arbitration’s state of preparation gave “grave concern as to whether the proceeding is being prepared and managed competently”. Campbell J found that (J74):

…. Once the proceedings were reactivated, following the terms of the Deed being settled, and a new timetable being set on 23 January 2003, delay arose in part from the unwillingness of the Council to file a cross claim to raise the defects issue. The amendment which was made to ARS’s Points of Claim, is one which would not, in substance, have altered the evidentiary scope of, or time involved in, the hearing to any appreciable extent. It was Mr Bushby’s insistence that the arbitration should include the defects issue which was one of the causes of the need to have some fresh pleadings, and also of the expansion of the likely hearing time from three days to five days. Another cause of that expansion was the decision of both Moustacas & Co and Marsdens [representing the Council] that expert evidence would be needed. Yet Mr Bushby, in cross-examination, declined to allege that the calling of expert evidence was itself unreasonable in the conduct of the arbitration. Nor did he allege that the making of the amendments to the Points of Claim was not reasonable. In these circumstances, even though by 28 May 2003 the state of preparation of the arbitration was still quite rudimentary, that state of preparation was not one which should reasonably give Mr Nicholas or ARS “grave concern as to whether the proceeding is being prepared and managed competently” .

56 The second matter relied upon had been expressed as follows:

2. It is obvious from the amended timetable that the original estimate of costs given is woefully inadequate. Our client is extremely concerned about the quantum of costs which could be awarded against it if the arbitration is found in favour of the Council;

57 Campbell J held that it was open to Mr Bushby to have regard to the future impact of a costs order adverse to ARS in the arbitration, at least to the extent to which an adverse costs order might be larger than that which was foreseen at the time the Deed was entered into. And he found, inferentially, that Mr Geary’s initial estimate of $30,000 for his firm’s costs was or had turned out to be manifestly inadequate (J75-76). However, the respondents were held disentitled to rely upon this matter because Mr Bushby had taken no steps to form his own view about the likely extra extent of those costs (J77). Nor had he investigated the adequacy in the circumstances of the guarantee or bond provided by the Council (cf cl 5 of the Deed) or of the indemnity from Mr Yazbek and FPM provided in clause 4 of that Deed (J77-78). Campbell J held that cl 4 was “probably wide enough to require Mr Yazbek and FPM to indemnify ARS and Mr Nicholas against any adverse costs order in the arbitration” (J77).

58 The third matter relied upon was the failure of the Yazbek interests to have procured that the merits of the defects issue would be determined in the arbitration. This was found not to provide a reasonable basis for termination, for the following reasons (J79):

There was no time limitation contained in Clause 1 of the Deed, stipulating by what time Mr Yazbek, FC and/or FPM had to procure that the merits of the defects issue were determined in the arbitration. Moustacas & Co had, partly at Mr Bushby’s urging, communicated with Marsdens, and filed pleadings, in a way which would be likely to require the Council to file a cross claim which raised the defects allegations. The timetable fixed on 2 May had made provision for the Council to file a cross-claim. In fact, on 4 June 2003 Mr Moustacas’ office received Points of Cross Claim from the Council, which raised the defects issue. Those Points of Cross Claim bear the date 1 April 2003 on their cover page. In my view the fact that, by 28 May 2003, the Council had not actually filed that Notice of Cross Claim does not provide a reasonable basis for concluding that continuation of the arbitration was not in the interests of Mr Nicholas or ARS.

59 Matters 4, 5 and 6 were linked in Mr Bushby’s letter and were addressed jointly by his Honour (J80-85). Paragraphs 4 and 5 of the letter were held to be separately flawed, although one aspect of par 4 was found to provide some justification for par 7 (J82). (I shall address it in that context also.) Paragraph 6 that relied upon pars 4 and 5 was held not to provide a reasonable basis for concluding that there had been a failure, or likely future failure, on the part of M & Co to allow Mr Bushby properly to monitor the proceedings (J85).

60 Mr Bushby had asserted, in par 4 of the termination letter and elsewhere, that he was entitled to be consulted in advance concerning amendments to pleadings or engaging of expert witnesses, and that his prior approval was required for the taking of any such steps by M & Co. Clause 6 of the Deed had conferred upon him rights “to monitor the conduct of the arbitration”, but this was held not to confer a right to insist upon prior consultation and approval (J81).

61 Campbell J also rejected the claim in par 5 that Mr Geary’s conduct had been “deliberately misleading”. He found that it was not a reasonable conclusion to draw from the material that had been presented to Mr Bushby that Mr Geary had misled him, or that his manner of describing the amendments to the pleadings was deliberately misleading. Nor was there anything upon which to provide a reasonable basis for concluding that there had been a failure, or a likely future failure, on the part of M & Co to allow Mr Bushby to properly monitor the proceedings (J83-84). See also J90.

62 The seventh numbered paragraph was found to contain the only concern justifying a reasonably-formed view that the continuation of the arbitration was not in the interests of Mr Bushby’s clients. I shall analyse the reasoning in detail under the heading Why the appellants lost at first instance.

63 As indicated, Campbell J rejected the allegation of bad faith made against Mr Bushby with respect to his assertion that Mr Geary had been deliberately misleading. His Honour concluded (J90):

Mr Bushby was mistaken, and seriously, in making that allegation, but he honestly believed what he said.

An alternative bad faith allegation was also rejected (J91).

64 His Honour then addressed the impact of his findings adverse to the respondents in relation to most of the matters invoked by Mr Bushby. Campbell J concluded that the determination, being unaffected by bad faith, was valid in so far as it rested upon matters found to be reasonably open (J92-95).

65 A defence of unclean hands in relation to the plaintiffs’ claim for an injunction was rejected (J96-99).

66 Campbell J concluded his reasons with an indication that, if it had been established that there had been no valid exercise of the contractual power to terminate the arbitration, damages for wrongfully bringing the arbitration to an end would not be an adequate remedy. Injunctive relief would have been appropriate (J100).

67 Costs were addressed subsequently. Campbell J ordered the present appellants to pay 80% of the costs of the proceedings.

Utility of appeal

68 It is convenient to address this issue at the outset.

69 Armed with the declaration made by Campbell J, ARS effectively discontinued its arbitration proceedings and submitted to the Council’s claims in its Cross Claim. On 22 August 2003 an award was made by consent in the following terms:

1. Declarations, findings and Orders in accordance with the Short Minutes of Order signed by the solicitors for both parties and initialled by me.
2. Subject to Order 1, I dismiss the Applicant’s claim.
3. Subject to Order 1, I dismiss the Respondent’s Cross Claim dated 22 August 2003.

70 The Short Minutes of Order referred to in par 1 of the award were as follows:

1. DECLARATION and finding that it is a term of agreement between the Applicant and Respondent dated 23 December 1998 in respect of the design, construction and operation of the Mount Annan Leisure Centre (“the Agreement”) that the Applicant was obliged to rectify any defects or omissions in the works as at 31st May 2002 (“the defect works”).
2. DECLARATION and finding that the date of practical completion under the Agreement was 31st May 2002.
3. DECLARATION and finding that the Applicant is required by the Agreement to rectify each of those defects identified in a Defects List served by the Respondent on the Applicant under cover of a letter from the Respondent to the Applicant dated 31 May 2002 (“the Defects List”).
4. DECLARATION and finding that it was a term of the Agreement that the Respondent could direct the Applicant to complete the defect works by a nominated date and the Respondent has done so.
5. DECLARATION and finding that the Respondent validly directed the Applicant to complete the defect works by 31 May 2003.
6. DECLARATION and finding that the Applicant has not completed the rectification of the defect works as at 31 May 2003.
7. DECLARATION that it was a term of the Agreement that if the defect works were not completed by 31 May 2003 the Respondent could carry out the rectification of the defect works at the expense of the Applicant.
8. DECLARATION and finding that one of the obligations of the Applicant under the Agreement is to rectify each of the defects identified in the Defects List that is exhibit TF 27 to T Freestone’s statement filed herein.
9. ORDER that the Applicant carry out the defect works identified in the Defect List in default of which the Respondent is entitled to carry out the defect works at the expense of the Applicant.
10. Otherwise Respondent’s Points of Cross Claim be dismissed.
11. Applicant’s Further Amended Points of Claim be dismissed.
12. Each party pay their own costs of and incidental to this arbitration.

71 In light of this outcome, the respondents submit that there is no utility in the appeal.

72 There is now no point in granting the injunction that Campbell J would have given had he formed a different view about the letter of termination. I cannot, however, accept the respondents’ submission on the utility issue. In the first place, the respondents’ success at first instance carried a declaration and a substantial costs order in their favour. Secondly, the declaration (if it stands) would preclude the claim for damages for breach of the subject Deed that the appellants have foreshadowed.

73 This litigation does not require the Court to decide what (if any) contractual obligation to the appellants was breached if cl 7 was not duly invoked. Nor are we concerned with difficult issues of computation of damages. An enquiry as to those damages would involve complex factual issues exploring the extent to which the appellants were disadvantaged financially by the settlement of the arbitration proceedings that took place in a context where the Council would almost certainly have known about Campbell J’s declaration. But such enquiry ought not to be foreclosed by the declaratory relief granted at first instance if it ought to be set aside.

74 Accordingly, this appeal is not an exercise in futility. If the declaration should not have been made, then it should be set aside even though it is no longer practical to grant injunctive relief. And if the appellants are correct, they are as entitled to the declaration that they have always sought as the respondents were entitled to the declaration that they obtained at first instance.

Issues in the appeal

75 The appellants challenge the trial judge’s construction of cl 7 of the Deed. They further contest his findings on those matters where Mr Bushby was held justified in his conclusion that it was not in the interests of his clients for the arbitration to continue.

76 The respondents support Campbell J’s reasoning where it was in their favour. By notice of contention they assert that his Honour erred in not finding Mr Bushby justified in each of pars 1-6 of the termination letter; and in his rejection of a clean hands defence.

The construction of clause 7

77 The appellants accept that clause 7 was available to be invoked in relation to past and future steps in the arbitration. They submit, however, that the clause required that particular steps should be known and identified by Mr Bushby before he could have regard to their impact on the respondents’ interests. In other words, they challenge that part of his Honour’s reasoning that held that cl 7 permitted “a determination that whatever the next step in the arbitration might be, and whatever any subsequent steps in the arbitration might be, they [were] not in the interests of either Nicholas or ARS” (J72. See also J76). For similar reasons the appellants challenge the correctness of Campbell J’s observation (J71) that “it is consistent with the commercial purpose of the Deed that it should be open to ARS or Mr Nicholas to be able to terminate the arbitration if they saw it was about to head in a direction which was not in their interests, without having to wait until that direction had actually been embarked upon.”

78 The appellants submitted that this approach to cl 7 had not been embraced by either party at the trial; and that it was unjustified by the language of the clause in any event.

79 The first criticism was presented as a lukewarm appeal to the principles of procedural fairness. Alternatively, the appellants submitted that they should get the costs of the trial even if Campbell J was correct in his interpretation (Orange 19T). In my view, these procedural submissions are misconceived. The authority cited by the appellants (ACX Ltd Limited v Deputy Commissioner of Taxation (2003) 201 ALR 271 at 274[7] and 281[41]) adverts to notions of procedural fairness in a context far removed from the present. A court faced with a contest over the interpretation of a contract must make up its own mind about the correct meaning and, subject to procedural fairness, determine the correct meaning. The respondents advanced the submission that was accepted (see Blue 597). Campbell J clearly flagged the possibility that he would construe the Deed as he did (see Black 153, 157). As Lord Wilberforce said in Saif Ali v Sydney Mitchell & Co [1980] AC 198 at 212:

Judges are more than mere selectors between rival views – they are entitled to and do think for themselves.

80 On the substantive issue, the appellants challenged Campbell J’s approach to cl 7 in the context of his conclusions on the matters found adversely to the appellants. It is convenient that I should approach the matter in similar fashion, because it is potentially misleading to read his general remarks about the scope of cl 7 divorced from their application to the particular facts.

Why the appellants lost at first instance

81 On my reading of Campell J’s reasons, par 7 of the termination letter was found to contain the only independently sustainable justification for Mr Bushby making the determination that he did. It is convenient to repeat it.

Fyntray Constructions has a proven history of failing to pay creditors substantial sums of money in relation to the Mount Annan Leisure Centre, and has apparently deliberately organised its affairs so that any benefit which might flow to the Fyntray group from the proceeding will be kept out of the hands of those creditors. Given that background, our client has formed the view that Fyntray’s refusal to deposit money in our trust account as security against fees being incurred, might render it liable for costs to this firm which will not eventually be recovered from your client(s).

82 In their written submissions, the appellants suggested that Campbell J held that two particular matters could, and by implication were, properly taken into account by Mr Bushby. These were the refusal of the appellants to deposit money in Mr Bushby’s trust account by way of a “top up” and the engaging of an expert (which could involve ARS in considerable expense) without prior discussion or approval (Orange 20). These findings are said to be found in his Honour’s discussion of par 4 of the termination letter (at J82) and his discussion as to the reasonableness of the view stated in par 7 of the letter (J86-88).

83 These written submissions do not do full justice to his Honour’s reasoning, the critical part of which appears under the heading Result. After rejecting the appellants’ allegation of bad faith, his Honour said (at J92) that:

… there is a situation where Mr Bushby has relied upon several reasons to come to the view that it is not in the interests of either Mr Nicholas or ARS for the arbitration to continue; I have found that some of those reasons are legitimate, some are not. The legitimate reasons relate to the potential exposure for costs and disbursements which ARS would have if the proceedings were to continue. Those costs exposures – for the architect’s fees, and Mr Bushby’s fees – are ones which, taken by themselves, are enough to justify the conclusion that Mr Bushby was acting reasonably in deciding that no further steps should be taken in the arbitration.

84

Later he said (J95):

It was within the scope of reasonable decision-making for Mr Bushby to decide that the benefits to ARS from conducting the arbitration were not such as to warrant ARS being under any financial risk whatever the reason of the arbitration. When there was financial risk on ARS by reason of the arbitration continuing, in connection with the architect’s fees and Mr Bushby’s fees, that alone suffices to reach a conclusion that Mr Bushby was performing the task which Clause 7 of the Deed authorised him to perform, and acting reasonably in deciding that it was not in the interests of ARS or Mr Nicholas for the arbitration to continue.

85 I do not read these as findings that the engagement, without Mr Bushby’s prior authority, of an expert witness for the arbitration was in itself improper or irregular. His Honour had earlier found that cl 6 of the Deed did not entitle Mr Bushby to be consulted in advance concerning engagement of expert witnesses (J81); and that Mr Bushby had made no complaint on this account (J74). The taking of such a step by Mr Geary was entirely proper for the due prosecution of the arbitration. But (had it not been for M & Co’s assurances that they would look only to the appellants for recovery of their own costs) it would have been a step that might have cost consequences for ARS, something that was a legitimate matter for Mr Bushby’s concern, at least so far as there was any proper basis for worry about the capacity of FPM and Mr Yazbek to meet the indemnity they had given by cl 4 of the Deed.

86 In the course of his reasoning rejecting the justification offered in pars 4, 5 and 6 of the termination letter, Campbell J said (J82):

Concerning the potential expense of an expert witness, Mr Bushby had, on 11 April 2003 told Moustacas & Co that he would require a letter from the expert to confirm that under no circumstances would he look to ARS for the payment of his fees. Moustacas & Co had, on 11 April 2003, said “We will write to our architect in due course and provide you with the letter you requested as soon as it is available to us”. No such letter had ever been provided. That is a matter which could, it seems to me, properly be taken into account in deciding whether continuation of the arbitration was in the interests of Mr Nicholas or ARS. When Moustacas & Co were conducting the arbitration in the name of ARS, they would have ostensible authority to incur liability on behalf of ARS for the type of expenses usually involved in the running of litigation, including engaging experts. It was only if Mr Bushby had confirmation from the architect that he was not looking to ARS for his fees that he could be confident that ARS would not become liable, through that ostensible authority, for the architect’s fees. On 28 May 2003 he did not have any such confirmation.

87 I think that Campbell J’s statement in the Result paragraphs (J92 and J95) (set out above) should be taken as incorporating by reference this material in J82, as well as the clearly incorporated reasons of his Honour referable to par 7. Those reasons were (J86-88):

86 The financial failure of Fyntray Constructions, in circumstances where it owed creditors large sums, was known at the time of execution of the Deed. The only basis which there appears to be for the allegation that Fyntray Constructions “has apparently deliberately organised its affairs so that any benefit which may flow to the Fyntray Group from the proceeding will be kept out of the hands of those creditors” is the assignment of the benefit of the sub-contract to FPM. That assignment is an event which Mr Nicholas concurred, and which was known to him prior to execution of the Deed. There was no obligation under the Deed for the $5,000 which had been deposited into the trust account to be “topped up” . Rather, Clause 6 of the Deed set out a different regime for payment of Mr Bushby’s fees, whereby those fees were payable in arrears, within 14 days of an itemised account being sent. It was reasonably foreseeable that, if any further steps were to be taken in the arbitration, Mr Bushby’s monitoring of those steps would result in additional fees being payable to him, which would need to be paid by Mr Yazbek and FPM, in accordance with Clause 6 of the Deed. Before the Deed was executed Mr Geary had proposed (on 9 December 2002) that Mr Bushby’s fees for monitoring the proceedings be capped at $5,000. Mr Bushby, on 10 December 2002, had rejected that proposal. On 19 December 2002 Mr Bushby had required payment of $5,000 on account of fees as a condition of the Deed being signed.

87 It is to be noted that paragraph 7 of the letter of 28 May 2003 starts up by referring to “Fyntray Constructions” , then to the “Fyntray Group” , and finally to, simply, “Fyntray” . As Fyntray Constructions Pty Ltd was ordered to be wound up in March 2003, this last reference to “Fyntray” could only be a reference to FPM. All the facts about the financial failure of Fyntray Constructions, and its failure to pay creditors substantial sums, were known at the time the Deed was entered. The only new event, concerning payment of Mr Bushby’s fees, since the Deed was entered, is that the $5,000 has either run out, or nearly run out.

88 By 9 May 2003 the amount remaining in Mr Bushby’s trust account, from the $5,000 which had initially been deposited, had dwindled to $688. Even though there was no contractual obligation on the plaintiffs to top up Mr Bushby’s trust account, their failure to do so exposed Mr Nicholas and ARS to a risk of having to meet Mr Bushby’s fees for monitoring the arbitration. In my view the existence of that risk was a matter which Mr Bushby could reasonably take into account in deciding that any further step in the arbitration was not in the interests of either Mr Nicholas or ARS. The refusal of the plaintiffs to top up Mr Bushby’s trust account was a deliberately adopted stance. Mr Bushby’s rate of charge (of $400 per hour), was such that the amount remaining in the trust account as at 9 May 2003 either would have been depleted by 28 May 2003, or would be likely to be depleted very soon thereafter if the arbitration continued. Given the rudimentary state of advancement of the arbitration, it was readily predictable that several thousand dollars would be likely to be involved in Mr Bushby’s monitoring the arbitration to its conclusion.


The appellants’ challenges to these conclusions analysed

88 The appellants press a two-fold attack on these reasons. The reasons are said, firstly, to give effect to his Honour’s erroneous approach to cl 7 of the Deed in so far as he held that it could be engaged otherwise than with reference to identified “steps” in the arbitration (whether past or future). Secondly, Mr Bushby was not reasonably justified in forming his conclusion on the basis of the matters accepted by Campbell J.

89 Mr Bushby gave evidence that he never saw any advantage to ARS in the arbitration (Black 59Q, 133D). Consistently with this, he viewed the respondents’ decision to allow the arbitration to run as an “enormous indulgence” (Black 70E. See also his letters of 13 November 2002 (Blue 68) and 6 January 2003 (J18)). This view was made known by Mr Bushby to the appellants (through Mr Geary) and to the respondents before the Deed was entered into. In these circumstances, the appellants submit, it would be a surprising and uncommercial interpretation of cl 7 for it to be engaged if nothing else happened other than Mr Bushby forming the view (during the currency of the Deed) that it was not in the interests of his clients to continue the arbitration. In my opinion there is real force in this submission, when it is recognised that the Deed addressed and decided the question whether the arbitration would go forward at all. Campbell J effectively accepted it at J70.

90 But I cannot accept the corollary advanced by the appellants to the effect that cl 7 did not authorise termination merely because Mr Bushby formed a view (even a reasonable view) that each and every further step in the arbitration was no longer in his clients’ interests. The language of cl 7 is broad enough to permit the formation of a view that any and every further step in the arbitration would not be in the interests of Mr Bushby’s clients.

91 However, I do accept the appellants’ submissions that the concerns in par 7 identified by Mr Bushby and accepted by the primary judge could not be characterised as based upon Mr Bushby “acting reasonably”. Accepting that cl 7 of the Deed contemplated termination if each and every further step in the arbitration was not in the interests of the respondents, Mr Bushby’s determination was not reasonably based upon the matters stated in or incorporated into in par 7 of the termination letter. My reasons follow.

92 Earlier in his reasons, Campbell J had held that cl 7 addressed “steps” after the Deed was entered into, with the corollary that it was not open to Mr Bushby to conclude that starting the arbitration at all had not been in the interests of his clients (J70). I agree. The appellants ultimately recognised that the arbitration served the interests of all parties. More to the point, cl 1 of the Deed (read with recitals R & S) expressly provided for the arbitration to take place, at least as the vehicle for determining the “defects issue”.

93 In this context, par 7 of the termination letter must be viewed as a statement about the financial risks to ARS and Mr Nicholas of the arbitration continuing down the course indicated as at 28 May 2003. That course included the risk of an adverse costs order consequent upon a complex and hard-fought building dispute before an arbitrator. Detailed procedural directions had been given on 2 May 2003 and they are referred to in par 1 of the termination letter.

94 The legitimate kernel of concern to which par 7 was addressed was the capacity of FPM and Mr Yazbek to meet their indemnity under cl 4 of the Deed. This is a generous approach to par 7 that I am prepared to take in the respondents’ favour, for the purpose of argument. But what was the expressed and reasonable basis for such concern on Mr Bushby’s part? And what were the financial parameters to which it was addressed?

95 Paragraph 7’s kernel of legitimate concern turns out to be encased in a shell of unjustified assertion that is not reasonably based, for several reasons.

96 In the first place, no category of future costs is mentioned in par 7 except for the costs recoverable by Mr Bushby’s firm under cl 6 of the subject Deed for monitoring the conduct of the arbitration. Paragrapah 7 confined itself to concerns referable to the respondents’ capacity to meet their obligation under cl 6 of the Deed. This is made plain by the second sentence. It was therefore not open to the respondents to seek to construe this “concern” as directed at the future costs of the arbitration generally.

97 Furthermore, no money was shown to be owing to Mr Bushby for fees at the time when the letter was written (see J88, set out above). The deposit of $5,000 made before the Deed was entered into had not actually been exhausted, on the evidence. It is of course obvious that considerable additional expense would be incurred in the future even if Mr Bushby’s monitoring continued at a less acute level of oversight than had been adopted to date. But cl 6 of Deed ensured that Mr Bushby’s right to payment would accrue in arrears, and subject to an itemised account being sent 14 days before payment could be demanded.

98 Secondly, the concerns expressed by Mr Bushby in par 7 referable to the recovery of his fees were based, in terms, upon “Fyntray’s refusal to deposit money in our trust account as security against fees being incurred”. This was a demand that Mr Bushby knew he was not contractually entitled to make (Black 135-6). Mr Geary had pointed this out again and again in correspondence. Mr Bushby’s right to infer FPM’s and Mr Yazbek’s incapacity to pay his fees as they accrued in the future, stemming from the appellants’ refusal to submit to such a demand, was therefore unjustified and unreasonable. The appellants had never repudiated their obligations under the Deed or threatened to do so. In fact, their solicitors had explicitly affirmed them in this context (see J35, 38).

99 Thirdly, if (contrary to my view) par 7 were to be read as extending to the future costs of the arbitration itself, reliance on this matter would have been vitiated by the very factors that struck at the validity of par 2. As indicated above, Campbell J had held that the respondents were disentitled to have regard to the future impact of an adverse costs order in the arbitration where he had taken no steps to form a view about the likely extra extent of those costs (J77). The same may be said about any assumed concern if it is to be read as forming part of the par 7 determination.

100 The fourth matter also emerges from Campbell J’s findings referable to par 2 of the letter of termination. His Honour held that it was unreasonable of Mr Bushby to have had regard to the future impact of a costs order adverse to ARS without having investigated the adequacy in the circumstances of the guarantee or bond provided by the Council (cf 5 of the Deed) or of the indemnity from Mr Yazbek and FPM provided in cl 4 of the Deed (see J77-78). These considerations also apply to par 7 on the generous assumption I have been making.

101 There is a fifth problem for the respondents. The first sentence and the opening words of the second sentence in par 7 make it plain that Mr Bushby based his adverse view about FPM’s financial capacity (in part at least) upon FC’s “proven history of failing to pay creditors… and [its] apparently deliberately organis[ing] its affairs so that any benefit which might flow to the Fyntray group from the proceeding will be kept out of the hands of those creditors”. This was attributing guilt by association that pays little regard to the separate corporate existence of FC and FPM. Be that as it may (and I am prepared to assume in the respondents’ favour that Mr Bushby could justifiably reason in this way), the fact remains that Mr Bushby’s clients had been privy to the very re-organisation of affairs about which complaint was now being made. They knew all the facts when the Deed was entered into (J87). There was no evidence that they or Mr Bushby learnt anything adverse about the appellants’ financial position since the Deed was executed. In these circumstances it strikes me as unreasonable to flag this re-organisation as part of the “background” triggering the concern expressed.

102 Clause 4 of the Deed provided:

Each of Yazbek and FPM indemnify ARS and Nicholas against any claim of any sort by anybody arising out of the construction of the Mount Annan Leisure Centre.

103 This was entered into well after FC had got into terminal financial difficulties. The parties to the Deed would then have been under no illusions as to FC’s capacity to meet its indemnity under cl 3.4 of the Separation Deed. Consistent with the novation agreement whereby FPM was effectively substituted for FC as ARS’s building sub-contractor, cl 4 of the Deed substituted FPM as the corporate indemnifier (along with Mr Yazbek personally) of both ARS and Mr Nicholas against “any claim of any sort by anybody arising out of the construction” of the Leisure Centre.

104 There was no evidence suggesting that FPM or Mr Yazbek were without adequate resources, let alone suggesting that something affecting their capacity to meet the negotiated indemnity embodied in the Deed had occurred between the date of the Deed (January 2003) and the date of the termination letter (28 May 2003). I do not share Campbell J’s views (J78) that it was open to Mr Bushby to draw adverse inferences against Mr Yazbek and FPM as to their capacity or willingness to meet their indemnity from the events relating to the substitution of FPM for FC. But in any event, there were several additional problems with par 7, as I have endeavoured to show.

105 These considerations are also relevant to whether it would have been reasonable for Mr Bushby to have relied upon Mr Geary’s failure or delay in writing to the architect retained as an expert in the arbitration requiring that architect to confirm that in no circumstances would he look to ARS for the payment of his fees (Blue 375-6, J82). Campbell J held that it was (J82, set out above). I respectfully disagree.

106 Mr Bushby never invoked this particular matter as one of his “concerns” in the letter of termination, so the issue is strictly academic.

107 Furthermore, there are additional difficulties for the respondents stemming from the reasoning in J82.

108 Mr Bushby properly conceded that there was nothing unreasonable in the retention of an architect as an expert witness for the arbitration proceedings (Black 117, 112. See J74). On 2 May 2003 the arbitrator had directed that ARS put on expert evidence by 13 June 2003. The letter of termination does not however indicate that the burden of this particular expenditure in relation to the expert witness was (a) taken into account or (b) costed by Mr Bushby when invoking cl 7. Nowhere in the letter did Mr Bushby suggest that he had concerns based on Mr Geary’s delay in obtaining from the expert a promise not to look to ARS as a source for payment of his yet to be incurred expenses. Furthermore ((c)), there was no, or insufficient, consideration of the true risk to ARS in light of the contractual indemnities that it had procured (cl 4) and its contingent access to the bank securities (cl 5) (see generally J75-78). In any event ((d)), any concern in that regard would not have been justified in light of M & Co’s written assurances in October 2002 that the firm would look only to FPM to cover all of its costs in the arbitration.

109 When a solicitor engages an expert witness in litigation the solicitor usually contracts as agent for a disclosed principal (see Bowstead & Reynolds on Agency 16th ed, 1996, p549). But M & Co had assured Mr Bushby on 13 October 2002 that their retainer was with FPM and not with ARS. This assurance was repeated in a letter of 14 October 2002 (Blue 63). It would therefore have been a gross, unexpected and fruitless breach of that assurance for M & Co to have exposed Mr Bushby’s clients to the risk of being sued by the expert for his fees. Nothing indicates the likelihood of this occurring. This casts doubts upon the reasonableness of Mr Bushby’s original insistence that Mr Geary procure from the expert a letter stating that the expert would not look to ARS for his fees. It would certainly colour the reasonableness of any inference of insolvency (had it been drawn by Mr Bushby) from Mr Geary’s delay in obtaining this letter. Mr Geary had only agreed to get the letter in a spirit of cooperation, not obligation (see J44). There was in fact no evidence that Mr Bushby drew such an inference (cf J66).

110 Accordingly, I have concluded that (subject to the contention points raised by the respondents) none of Mr Bushby’s expressed concerns were reasonably based.

The respondents’ notice of contention

111 The respondents filed a notice of contention that challenged the judge’s findings that rejected the reasonableness of the concerns expressed in pars 1-6 of the letter of termination.

112 In my view, these contentions should be rejected. I am not persuaded of any error in his Honour’s reasons addressing these paragraphs, save for the matters referred to above, which are findings I would make adverse to the respondents’ position.

113 The matters advanced in the respondents’ written and oral submissions frequently strayed beyond the concerns expressed in the letter of termination, raising issues that were not properly open. Several of the submissions also failed to engage with the key reasons why Campbell J had found that Mr Bushby’s stated concerns were not reasonably based.

114 I would add the following in relation to particular submissions of the respondents.

115 On 2 May 2003 the arbitrator gave directions culminating in the fixing of a five day hearing date in late August 2003. The directions addressed the finalisation of the pleadings in the arbitration and the exchange of lay and expert evidence, discovery and outlines of submissions. A copy of these directions was faxed to Mr Bushby on 14 May 2003. The respondents submitted that the matters covered in the arbitrator’s directions were steps that should have been taken well before then and that these were the future steps that Mr Bushby considered not to be in the interests of his clients. It was submitted that it was the confirmation that these steps lay yet in the future that prompted and justified the termination letter. In my view, it is not open to the respondents to seek to justify the termination of the arbitration on this broad-ranging basis. These were not the “concerns” advanced in the letter of termination, the reasonableness of which were properly the focus of attention at trial and the basis of Campbell J’s findings. The narrower concern voiced in par 1 was correctly dismissed by Campbell J (J73 and 74).

116 In any event, putative concerns about the delays in bringing the arbitration to a head were not reasonably based in light of the fact that delay stemmed largely from the difficulties in persuading the Council to file its cross claim raising the “defects issue”. I agree with Campbell J’s reasons absolving Mr Geary of default in this regard (see J74 and J79, set out above).

117 The written assurances given by M & Co on 13 and 14 October 2002 meant that the respondents were not at risk as to ARS’s costs in the arbitration. M & Co were going to look directly to FPM for their costs and disbursements. In this situation, the only direct financial exposure in the arbitration that could remain a matter of concern to the respondents and their solicitor was the risk of an adverse costs order in favour of the Council. Yet there was nothing to indicate that such a risk had increased since the Deed was entered into or that such increased risk had been taken into account or estimated by Mr Bushby. It is to be remembered that the respondents were anxious to have the “defects issue” included in the arbitration determination and that they protected themselves against this risk by procuring the indemnity given in cl 4 of the Deed.

118 It is also necessary to say a little more in relation to the respondents’ challenge to Campbell J’s findings referable to par 2 of the letter of termination. Campbell J implicitly found that the likely costs of the arbitration would greatly exceed Mr Geary’s initial estimate of $30,000. His Honour further held that ARS’s exposure was a legitimate matter for Mr Bushby’s concern. Nevertheless, par 2 of the letter was held not to provide a reasonable basis for the decision to terminate the arbitration because (1) Mr Bushby had taken no steps to form a view about the likely extra extent of the costs and (2) because Mr Bushby had not investigated whether the bond held by the Council would be an inadequate fund to meet those costs, subject to the Council’s prior right to go against the bond for its expense in remedying defects in the building work. In any event, the only legitimate subject for concern was the costs capable of being awarded to ARS, because M & Co were looking exclusively to the Yazbek interests to pay their own costs and disbursements.

119 Under the ARS Agreement ARS had lodged two banker’s undertakings each in the sum of $191,371.75 as security for the performance of the construction phase of the project (Blue 99, 106). According to Recital J to the Separation Deed one of the guarantees had been called up by the Council with the other being re-issued by the National Australia Bank (see also Blue 210). In its Points of Claim in the arbitration ARS asserted that the remaining guarantee should be released by the Council (Blue 132, 210). The Council had pleaded otherwise, but no evidence was led in the present proceedings to contradict what ARS had contended for in its Points of Claim. No steps had been taken by the Council to call up any portion of the remaining bond. It is common ground that Mr Bushby had not addressed the possibility that there might be some change for ARS out of the bank guarantee that remained.

120 The respondents say, in defence, that Mr Bushby could hardly have done so given that the Council had not even quantified its cross-claim for building defects by the time the arbitration was terminated (CA Tr p90). The Council filed its cross-claim with respect to alleged defects on 4 June 2003, ie after the termination letter. That pleading does not quantify the Council’s alleged loss beyond claiming that the cost of the remedying defective works exceeded the amount of ARS’s primary claim in the arbitration (Blue 147X). The Council claim the right not to release the guarantee in the meantime.

121 These matters nevertheless reinforce Campbell J’s finding that Mr Bushby did not cost ARS’s exposure referable to the defects or form any estimate about the availability of the bank guarantees as a source of meeting the liabilities and costs of the arbitration.

122 The respondents face an additional difficulty unless they succeed in upholding each and every one of Mr Bushby’s “concerns”. The critical part of the termination letter was in its penultimate paragraph that appeared after the seven numbered “concerns”. It stated:

Given the concerns expressed by our client which go to the very heart of allowing these proceedings to continue, we have formed the view that it is not in the interest of either Mr Nicholas or ARS for the arbitration to continue.

123 No evidence was led by the respondents to the effect that this determination would still have been made if one or more of the “concerns” were held to have been unfounded. One could possibly guess at the answer that Mr Bushby might have given, but none was.

124 I am not suggesting that it was necessarily open to the respondents to seek to justify the termination on this basis. On one view, the letter must speak for itself, without evidentiary reformulation. The question whether it was apt to invoke the analogy of administrative law and the further question whether Campbell J was correct in the conclusions that he drew (J93-95) are unnecessary to be resolved, in light of my approach to the issues in the appeal.

125 Clause 7 of the Deed contemplates a single determination, without prejudice to the possible right to replace a flawed determination at one point of time with a more sustainable one at a later point of time. The letter of 18 May 2003 purports to be a single determination, the operative part of which is to be found in its penultimate paragraph. That determination is based upon the “concerns” spelt out in the seven numbered paragraphs that precede it. This is the main reason why I doubt the correctness of Campbell J’s approach, in which he found for the respondents because one of the “concerns” was reasonably based although six were not. It is however, unnecessary to dwell on the “severance” issues because I have concluded that none of the “concerns” were reasonably based.

126 The final contention point raised by the respondents relates to the trial judge’s rejection of the defence of unclean hands (J96-100).

127 The defence failed because the facts established by the respondents upon which it was based had all occurred prior to execution of the Deed, and were known to the respondents at the time of execution of the Deed. With that knowledge, the respondents agreed to allow the arbitration to continue. In these circumstances, Campbell J held that the matters relied upon did not have an immediate and necessary relation to the equity that the appellants were suing for at trial. In my view, his Honour was clearly correct, for the reasons he gave.

128 The unclean hands contention point also fails because the appellants are no longer seeking equitable relief.

Disposition

129 For these reasons the declaration made by Campbell J and the ensuing order for costs at first instance ought to be set aside. The appellants are entitled to the declaration they sought from the outset of the proceedings, with costs.

130 I propose the following orders:

1. Appeal allowed.

2. Set aside the declaration made by Campbell J on 21 August 2003.

3. Set aside the order for costs made by Campbell J on 1 October 2003.

4. Declare that on the true construction of the Deed between the appellants and the respondents and Fyntray Constructions Pty Ltd made on or about 23 January 2003, and in the events which have happened, the respondents were not entitled to terminate arbitration No 2060 between the first respondent and Camden City Council without further recourse to the appellants and without being liable to them for doing so.

5. Respondents to pay appellants’ costs of the appeal and in the Equity Division and to have a certificate under Suitors’ Fund Act 1951 if qualified.

131 HANDLEY JA: I agree with Mason P.

132 SANTOW JA: I agree with Mason P.

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Last Modified: 09/20/2004