FPM Constructions Pty Ltd v Australian Recreation Systems Pty Limited

[2003] NSWSC 768

CITATION:	FPM Constructions Pty Ltd & Anor v Australian Recreation Systems Pty Limited & Anor [2003] NSWSC 768
HEARING DATE(S):	28/7/03 - 29/7/03 & 15/8/03
JUDGMENT DATE:	21 August 2003
JURISDICTION:	Equity
JUDGMENT OF:	Campbell J
DECISION:	Contractual power to terminate arbitration validly exercised
CATCHWORDS:	CONTRACTS - construction of clause in contract permitting termination of arbitration - whether person purporting to exercise contractual power to terminate arbitration was acting reasonably - WORDS AND PHRASES - monitor (v)
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060 Jones v Dunkel (1959) 101 CLR 298 Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24
PARTIES :	FPM Constructions Pty Ltd (formerly Fyntray Project Management Pty Ltd) - First Plaintiff Anwar Yazbek - Second Plaintiff Australian Recreation Systems Pty Limited - First Defendant John Arthur Nicholas - Second Defendant
FILE NUMBER(S):	SC 3176/03
COUNSEL:	G McVay - Plaintiffs AJ Grant - Defendants
SOLICITORS:	James A Moustacas & Co - Plaintiffs Phillip Bushby International - Defendants

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
EQUITY LIST

CAMPBELL J

21 AUGUST 2003

3176/03 FPM CONSTRUCTIONS PTY LTD (FORMERLY FYNTRAY PROJECT MANAGEMENT PTY LTD) & ANOR v AUSTRALIAN RECREATION SYSTEMS PTY LIMITED & ANOR

JUDGMENT

1 HIS HONOUR: This is a dispute about whether a contractual power to terminate an arbitration has been validly exercised. It raises questions about the construction of the contractual power, and about whether the precondition for its exercise has been fulfilled.

Circumstances Leading to the Arbitration

2 The first defendant, Australian Recreation Systems Pty Ltd, (“ARS”) was incorporated in December 1998. It was, in commercial terms, an incorporated joint venture, intended to perform a contract with Camden City Council (“the Council”) for the design, construction and management of a leisure centre at Mount Annan. There were three groups of joint venturers. The first was Mr Davies and his company Hofox Pty Ltd (“Hofox”), who were to be involved in the design aspect of the project. The second was Mr Yazbek (the second plaintiff in these proceedings), Mr Penglis and their company Fyntray Constructions Pty Ltd (“Fyntray Constructions”), who were intended to carry out the construction part of the project. The third joint venturer was Mr Nicholas, who was interested in carrying out the management of the leisure centre, once it had been built. On 23 December 1998 ARS entered an agreement with the Council for the design, construction and management of the Mount Annan Leisure Centre.

3 By July 2001 the construction of the leisure centre was complete, and ARS commenced to operate it, with Mr Nicholas being in practical terms, responsible for that operation. There had been three issued shares in ARS, one issued to each of the three joint venturers. As well, there had been three directors of ARS, with each of the groups of joint venturers appointing one director. In the period March-April 2001, Hofox transferred its share in ARS to Mr Nicholas, and Mr Davies resigned as a director.

4 In the first half of 2002 Mr Yazbek, acting on behalf of ARS, took steps to institute an arbitration between the Council and ARS, alleging that ARS was entitled to more money under the building contract than it had been paid. That arbitration was commenced on 26 June 2002, when the Institute of Arbitrators and Mediators nominated Mr Barry O’Mara as the arbitrator.

5 Fyntray Constructions had carried out the building of the centre under a sub-contract from ARS. On 30 July 2002 Mr Yazbek asked Mr Nicholas to consent, on behalf of ARS, to an assignment of the construction contract to a company called Fyntray Project Management Pty Ltd. Mr Nicholas signed and returned a document giving that consent. Fyntray Project Management Pty Ltd (“FPM”) has since changed its name to FPM Constructions Pty Ltd. It is the first plaintiff in these proceedings.

6 There is some evidence that by August 2002 Fyntray Constructions (“FC”) had gone into voluntary administration. Eventually, on 27 March 2003 Fyntray Construction was ordered by the Court to be wound up. It went into liquidation owing large sums of money to sub-contractors and suppliers connected with the Mount Annan Leisure Centre job.

7 Though Mr Nicholas was aware, in very general terms, in the first half of 2002 that Mr Yazbek was taking steps to take the Council to arbitration, and though he was told by Mr Freestone, a Council officer, in July 2002 that the arbitration had actually commenced, and that ARS might be at risk if it lost and was responsible for the legal costs of the Council, he knew little about the arbitration. In August 2002 he asked his solicitor, Mr Bushby, to make some enquiries in relation to the arbitration. Mr Bushby carries on practice under the firm name of Phillip Bushby International.

8 On 4 September 2002 Mr Yazbek signed a transfer of his one share in ARS to Mr Nicholas, and resigned as a director of ARS. On that same day, Mr Nicholas signed a letter saying:

“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.”

9 Mr O’Mara had given directions in the arbitration on 11 July 2002. By the end of August 2002 pleadings had been exchanged, and the solicitors acting for ARS in the arbitration, James A Moustacas & Co (“Moustacas & Co”), had requested consent to amend their Points of Claim, and for consequential amendments to be made to the timetable. On 2 September 2002 ARS provided the Council with a list of documents.

Mr Bushby Investigates the Arbitration Proceedings

10 On 2 October 2002 Mr Bushby wrote to Moustacas & Co. He said that he acted for ARS and Mr Nicholas, that Mr Yazbek was no longer a shareholder in, or office bearer in, ARS, and that Mr Nicholas wanted to review the arbitration. On behalf of ARS, he instructed Moustacas & Co to take no further action of any sort in relation to the arbitration, until further written instructions were given. On 4 October 2002, at Mr Bushby’s request Moustacas & Co sent him their entire file relating to the arbitration.

11 One of the first matters which Mr Bushby sought to clarify was who would be responsible for the payment of the fees of Moustacas & Co for acting on behalf of ARS in the arbitration. By 14 October 2002 he was told that Moustacas & Co would not be looking to ARS for their costs at any stage of the arbitration. Another matter of concern to Mr Bushby was the likely quantum of costs which might be payable to the Council if ARS were to lose the arbitration. For the purpose of estimating that amount, he asked Moustacas & Co to give:

“… an estimate of the totality of fees which would be incurred since this matter commenced until its conclusion presuming a 2-3 day arbitration. This estimate is to include counsel’s fees, expert witnessed, arbitrator’s expenses, etc.”

By that he meant the fees of ARS’s side in the arbitration – he took the view that that would provide a rough guide to the fees likely to be incurred by the Council.

12 By mid-October he had been informed that the estimate for the total of those fees was in the vicinity of $30,000.

13 Mr Bushby raised two other significant matters of concern with Moustacas & Co. One was that the vast bulk of the matters in dispute in the arbitration appeared to be fees which were allegedly due to the architect. He questioned what benefit there was to ARS in running that claim on behalf of the architect. 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 were 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.

14 Another concern which Mr Bushby raised with Moustacas & Co was that the Council had issued a substantial defects list – Mr Bushby took the view that whether or not ARS had any obligation to make good all or any of this list of defects, should be decided in the course of the arbitration, and was concerned that the pleadings to that time did not raise the issue.

A Basis for Continuing the Arbitration is Arrived at

15 Shortly after 11 November 2002 Mr Bushby advised Mr Nicholas to terminate the arbitration. Notwithstanding that advice, Mr Nicholas decided that he should permit the arbitration to continue, on certain terms. Mr Bushby wrote to Moustacas & Co on 13 November 2002, setting out those terms. They included:

“1. The Points of Claim are to be amended so that the arbitrator is obliged to decide what defects in the Council’s 76 page list are to be rectified. The applicant is not to take the point that it is not obliged to carry out the rectification of defects because the Defect Notice was given out of time.
4. FPM is to lodge in our trust account $100,000 against any adverse award or costs order with irrevocable instructions to apply that money against such order or costs order.
8. This firm is to oversee the arbitration, including being copied with all documents and pleadings in regard to it. We will attend at the arbitration to oversee the process, and will, on instructions from ARS, be involved in any decisions which affect the litigation or interests of ARS. This is to be at the expense of FPM. FPM is to lodge money in our trust account as against the costs to be incurred in this work, details of which will be provided when your agreement on these points is received.”

There was also provision for any amount paid under an award relating to the architects fees to be paid into Mr Bushby’s trust account, and that he have irrevocable instructions to pay any net amount due to the architect out of that fund.

16 Though Mr Bushby said, in his letter of 13 November 2002, that the conditions were not negotiable, in fact some negotiation about them occurred. Moustacas & Co pointed out the forensic undesirability of amending the Points of Claim so that ARS sought the arbitrator’s decision that nothing was owing in connection with the defects list. And the requirement for FPM to lodge $100,000 as security for any sum which might become payable to the Council. On 6 December 2002 Mr Bushby sent a revised proposal, which included provision, instead of the proposal made on 13 November that FPM lodge money as security for Mr Bushby’s costs:

“4. That we continue to monitor the progress of the arbitration at your client’s expense. We will bill our client who will pay us, and send copies of our bills to you. Your client is to reimburse Mr Nicholas for our fees within 14 days of them being rendered.”

17 On 19 December 2002 Mr Bushby wrote to Moustacas & Co requesting a cheque for $5,000 on account of fees, to be paid into his trust account. That cheque was provided.

18 On 6 January 2003 Mr Bushby wrote to Moustacas & Co saying that their files were available for collection, and that:

“Unless the completed and signed Deed and the cheque for $5,000 requested on 19 December are at our office by the close of business on Friday 10 January we propose to recommend to Mr Nicholas that the arbitration be shut down.
Would you remind Mr Yazbek that he is being granted a very large indulgence by this arbitration being continued. If there is any suggestion of lack of co-operation or strict compliance with our client’s terms, then he runs the risk of the arbitration being stopped without any warning.”

19 Mr Bushby is a solicitor of some 30 years experience. He is 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. The transaction was being handled, at Moustacas & Co, by Luke Geary. In 2002, Mr Geary was completing his studies at the College of Law. He was admitted as a solicitor on 14 February 2003. 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.

20 On 19 December 2002 Mr Bushby had sent to Mr Geary, by email, a deed which he had drafted setting out the terms on which the arbitration could continue. On 13 January 2003 Mr Geary emailed back to Mr Bushby a revised version of that deed. The changes which Mr Geary had made were not marked up on the deed. Mr Bushby promptly requested a marked up version. Mr Geary sent a version which underlined portions of the deed which had been added. However Mr Bushby found that, as well as those additions having been made, some deletions had been made from his draft. On 14 January 2003 he wrote to Mr Geary saying:

“We have received the allegedly marked up copy of the Deed amended by you.
The mark ups are not accurate.
On the first page alone you have deleted reference to Fyntray Constructions Pty Limited without marking up that amendment, and have made amendments to Recital B without marking up those amendments.
We are getting a little tired of wasting our time in dealing with matters like this.
You seem to overlook the fact that your client is being granted an enormous indulgence by allowing the arbitration to continue.
You are to provide an accurately marked up copy of the document without discussion or argument before lunch today.
When we sent you the original Deed we were not asking for your input on its drafting but merely to complete the blanks such as the architect’s full name, your client’s ACN and address etc.
Do not anticipate that we will recommend our client agree to any amendments of consequence to the Deed submitted to you.”

21 Mr Geary, around noon on 14 January, provided Mr Bushby with a list of the omissions which had been made from the deed. Mr Bushby replied to Mr Geary on 16 January, saying:

“It has taken a lot of work to manually mark up the amendments sought by you and to review the document. Your email of 14 January was not accurate. There were other amendments you had made which were not disclosed in that email. You are a very junior member of this profession. In future, please ensure that nothing which is submitted to you by a senior member of it is tampered with in such manner without prior discussion.
You were not invited to renegotiate the document. You were invited to fill in the blanks.
This additional work will be to your client’s account, as will all work from the time the Deed was submitted to you.
If your client has a problem with that, you are to tell us now so that we can get instructions from Mr Nicholas as to whether he is prepared to allow the matter to proceed.”

That letter went on to explain further amendments which Mr Bushby was making, to request certain specified information, and concluded, “On receipt of that material the document will be put in final form and submitted to you for execution without further discussion.”

The Deed

22 Around 23 January 2003 the deed in question was executed. 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.”

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

Preparation for the Arbitration Starts Again

23 On 23 January 2003, a telephone directions hearing was held between Mr Geary, Mr Butterfield (of Marsdens, the solicitors for the Council) and Mr O’Mara. A revised timetable for the arbitration 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 for pleading, 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 on late April/May 2003.

24 The Amended Points of Claim included a claim by ARS for return of the bank guarantee, in the sum of around $191,000, which ARS had caused to be provided to the Council as security for its obligations to rectify defective work. The thinking of Moustacas & Co, and counsel engaged by it, was that that pleading would prompt the Council to raise the defects issue, in a way which put the onus of proving the existence and monetary value of the defects, and the question of whether there was any obligation on ARS concerning the defects, onto the Council. At Mr Bushby’s insistence, Moustacas & Co had written to Marsdens on 18 December 2002, saying:

“We refer to the above matter and note that your present defence does not plead to paragraphs 29-32 of our Amended Points of Claim.
The matter is next before Mr O’Mara on 23 January 2003 and on that date it will be appropriate for the parties to inform the arbitrator of all issues to be decided.
The paragraphs in the Amended Points of Claim relate to our client’s claim for a return of the outstanding amounts of the bank guarantees. Should your client propose to defend that claim by raising a claim for defective works, could that please be included in an Amended defence, to be served on us prior to 23 January 2003.
It is desirable that all issues between our clients, including the defective works, be settled by these arbitration proceedings. In the event that you do not raise the defects issue in the current proceedings, then in any subsequent proceedings in regard to the defects, we will raise an Anshun estoppel.”

25 On 31 January 2003 Mr Bushby wrote to Moustacas & Co requesting a report on the directions hearing, and attaching a memorandum of fees for Mr Bushby’s work in connection with the arbitration, of which an amount of $1,936 was payable by FPM under clause 6 of the Deed. Moustacas & Co wrote on 12 February 2003 authorising Mr Bushby to draw a trust cheque in favour of client in the sum of $1,936 forthwith.

26 On 17 February Mr Bushby requested, again, a report from the directions hearing. On 19 February, Mr Geary provided him with the interlocutory timetable which had been agreed upon, and stated, as well, that the matter had been set down for hearing on 22, 23 and 24 April 2003.

Attempts to have the Defects Issue Decided in the Arbitration

27 On 12 February 2003 Mr Geary wrote to Marsdens enquiring,

“1. Whether your unsigned Amended Points of Defence under cover of your facsimile dated 11 February 2003 is a draft or a final copy; and
2. Whether you intend to particularise the defects issues in your points of Cross Claim and, if so, when?”

28 On 19 February 2003 Mr Bushby requested Mr Geary to provide a “full report” setting out what steps had been taken to insure that the defects issue was determined in the proceedings.

29 On 12 March 2003 Marsdens wrote to Moustacas & Co saying:

“We … note your view that we ought to put on a Cross Claim … .
There is some issue as to whether we need to cross claim, but we note your comments in that regard. What I do not want to occur is an unnecessary dispute re pleadings when it is clear what our position is from our Defence filed to date. If we file a Cross Claim it will only be a formality and will not raise any issue that varies substantial from our Defence already filed, to your Amended Claim, and of which you are aware. Whatever the case, we will get you an answer this week.”

Mr Bushby Seeks Topping Up of his Trust Account

30 On 26 March Mr Bushby wrote to Mr Geary saying:

“Could you please advise the current position in relation to the Council’s cross claim on the defects issue.
So far, we have reimbursed our client $2,728.00 from the money held in trust. Mr Nicholas requires a float to be held in trust as against future expenses of at least $5,000.00.
Please have your client forward its cheque in our favour in the sum of $2,728.00 to top up that float.”

31 That request on Mr Bushby’s part for a top-up was a request not justified by any provision of the Deed. On 27 March 2003 Mr Geary wrote,

“Kindly advise as to which clause of the deed between our client that you are relying upon to establish your client’s right to demand “a float to be held in trust as against future expenses of at least $5,000.00” .”

32 Mr Bushby replied, on 27 March 2003.

“Do not waste my time, and your client’s money, writing letters such as yours of 27 March. You well know the contents of the deed.
Having read it so carefully you will be aware of clause 7.
Our client is not prepared to allow his company to be exposed to a liability for costs in the event that your client has not placed him in funds to meet them. If such an exposure appears possible our client can, acting reasonably, determine to discontinue the arbitration.
Do you want to go on with this matter, or do you want to send the cheque?”

33 On 27 March 2003 Moustacas & Co replied,

“We refer to your letters to us, dated 26 and 27 March 2003.
We have read clause 7 of the deed to which you have referred in your letter of 27 March 2003. We have also read clause 6. With respect, and with regret, we cannot agree that either of the two clauses obliges our client to pay the sum of $2,728.00 referred to in your letter of 26 March 2003.
Unfortunately, the last sentence of your letter of 27 March 2003 appears to contain a threat that unless the amount demanded is paid that the arbitration will be terminated pursuant to clause 7 of the deed.
Your demand for payment is not a valid one and, accordingly, your client has no right to receive it. We note that your Mr Bushby must act reasonably in the terms of clause 7, in terminating the arbitration. It is submitted, with respect, that your Mr Bushby would not be acting reasonably if he determined that our client’s refusal to pay the amount demanded was a step in the arbitration which was not in the interests of your client’s.
We have been instructed to inform you that should the arbitration be terminated pursuant to the threat contained in your letter of 27 March 2003, that we will immediately move the Supreme Court of NSW seeking a declaration that Mr Bushby has not acted reasonably and restraining your clients from terminating the arbitration.
We also mention, with respect, the provisions of Solicitor’s Practice Rule 34 and s.57D(4) of the Legal Profession Act . We note that a breach of the rule or the section may constitute professional misconduct or unsatisfactory professional conduct. In any proceedings before the Court, we will tender your letters of 26 and 27 March 2003.
We await your reply.”

34 On 28 March, Mr Bushby replied to Mr Geary.

“We do not have time to be playing games with a very junior lawyer, who apparently has more time on his hands than other members of the profession.
Your letter asking us to point out the clause which required your client to pay further money was specious. It does you no credit to write such a letter.
No threat has been made to terminate the arbitration as you suggest.
Your client has been given an enormous indulgence by allowing this litigation to continue. That indulgence was against our strong advice to Mr Nicholas, and in circumstances where his strict instructions were that he was not to be at risk of any sort in relation to payment of our costs.
We have simply pointed out to you that if your client is not prepared to allay our client’s fears in that regard, then that could constitute reasonable grounds for terminating the arbitration.
We presume your first letter was written on specific instructions from your client. On that presumption, we were entitled to conclude that your client was refusing our clients request to top up the float to the $5,000.00.
Is that the case, or was the letter written without instructions?
We do not propose to respond to the balance of your letter.
If the money is not received at this office by 5pm on 4 April, we will ask Mr Nicholas what he intends to do about the matter.”

35 On 31 March 2003 Mr Moustacas, one of the partners in Moustacas & Co, wrote to Mr Bushby, saying:

“We refer to your letter to us, dated 28 March 2003.
The opening paragraph of your letter is clearly an insult to one of my employees, who is admitted as a Solicitor of the Supreme Court of New South Wales.
I propose to make a formal complaint to the Law Society of New South Wales about your conduct in relation to the first paragraph of your letter of 28 Instant and also in relation to the content of your letters of 26 & 27 March 2003.
I take the view that neither my professional employees nor my firm should be subject to such unprofessional and personally distasteful comments. Whether the Law Society takes any action will be a matter for it. No doubt you will be given an opportunity to explain why your letters do not constitute Professional Misconduct or Unsatisfactory Professional Conduct.
We are instructed to inform you that upon a copy of the itemized account referred to in clause 6 of the deed, being sent to our client, the amount of such account will be paid. Any suggestion that our client will not pay the fees is baseless. Similarly, your attempt to create reasonable grounds for terminating the deed is contrived as it has no basis in fact as our client stands ready to comply with clause 6 of the deed.”

36 On 1 April 2003 Mr Bushby replied:

“We refer to your letter of 31 March.
The facts are:
1. Our client instructed us that it will not, under any circumstances, allow itself to be exposed to our costs for monitoring the arbitration;
2. The terms of the Deed are self evident. Mr Geary’s letter of 27 March was either written with specific instructions from your client, or without those specific instructions;
3. We have asked you to identify whether the letter was written on specific instructions or not;
4. You have declined to answer that question;
5. If Mr Geary or Mr Yazbek had a serious issue about the request to “top up” the money held in trust, that should have been put squarely to us, and not under the guise of the type of letter written by Mr Geary on 27 March;
6. Mr Geary’s letter of 27 March deserved the type of response it got. It was specious and would not have been written by a more experienced practitioner. Someone with more experience would, particularly in the circumstances of this case, squarely raise any concern he had;
7. Our annoyance at Mr Geary’s letter was in part generated by his past conduct. See our letter to you dated 14 January 2003. Please also see our letter of 18 December 2002;
8. Mr Geary’s second letter of 27 March was yet a further waste of time and resources. Mr Nicholas’ legitimate claims were not addressed. Instead, the letter contained threats of Court proceedings and references to practice rules and legislation which have got nothing to do with the issue. Again, dealing with this matter has wasted further time and resources unnecessarily.
You may make such complaint as you wish to whomever you like. We suggest that your time would be better served in counselling a young solicitor as to his obligation to address issues squarely and directly.
But for the indulgence being given to Mr Yazbek by Mr Nicholas, Australian Recreation Systems Pty limited would not be in this arbitration at all. That being the fact, all costs being incurred by ARS to this firm are as a direct result of that indulgence being granted. We doubt out client will be prepared to argue the point as to what costs go to monitoring the arbitration and what costs you claim to fall outside of the ambit of the Deed.
We have referred the matter to Mr Nicholas for instructions and will advise you when we receive them.”

37 On 1 April 2003 Mr Geary wrote to Mr Bushby, saying:

“We are in receipt of your letter of 31 March 2003 and the invoice attached to it in the sum of $572.00.
We note that some of the items claimed relate to correspondence with this firm concerning a contribution by our client to funds held by you up to a sum of $5,000.00.
We respectfully invite your attention to clause 6 of the deed and note that the expenses for which our client is liable are those related to your Mr Bushby’s monitoring of the conduct of the arbitration proceedings.
Correspondence wrongly claiming an amount from our client to a ‘top up’ of funds held does not relate to the monitoring of the conduct of the arbitration proceedings.
Accordingly, we are instructed that our client will not pay the amount of your invoice which relates to correspondence making unlawful demands on our client for payment. We are instructed that our client does authorise the release of $352.00 to your client, which amount represents the work done by you in relation to the monitoring of the conduct of the arbitration proceedings.
We respectfully remind you that while our client acknowledges that it must work within the terms of the deed that it is a bilateral deed and that your client and yourself must also operate within the terms of the deed.”

38 On 3 April 2003 Mr Geary wrote a further letter to Mr Bushby.

“We are in receipt of your letter of 1 April 2003.
With respect to paragraphs numbered 2,3 and 4 of your letter, our correspondence with you in this matter has been wholly on our clients instructions. Our clients are aware as to your demands and are adamant as to their position. We previously did not see it necessary to respond to your allegation of acting outside of our clients instructions, as it is spurious.
The deed between our respective clients sets out all of the rights and obligations concerning the arrangement in relation to the arbitration. To act outside of the deed would be to obviate the agreement between our respective clients. The whole purpose of our facsimile of 27 March 2003, was to ascertain your legal basis for requesting further funds. It was a serious request and was not squarely responded to. If you are of the opinion that your client has a right under the agreement which is set out in the deed to demand monies in excess of those which are set out in clause 6, kindly advise as to your legal basis. Once we are aware as to what you are relying on for your assertion, we will then advise our clients on their rights.
We note your client’s stance in respect of the costs of the recent burst of correspondence between the parties. You are no doubt aware as to our clients stance on the matter. We note the provisions of s.61 of the Legal Profession Act 1987 . If the dispute between our respective clients as to liability for costs cannot be resolved by agreement, we suggest the parties seek a determination from the Court or some other appropriate dispute resolution body. Otherwise, our stance on this matter is as set out in our facsimile of 31 March 2003.
Our complaint has been referred to the Legal Services Commissioner and no doubt you will be contacted in relation thereto shortly. Accordingly, we believe that it would be inappropriate for the parties to further correspond with respect to the issues set out in the correspondence since 27 March 2003. Of course, other correspondence going to the issues in the arbitration, or in relation to our suggestion in the above preceding paragraph would be suitable.
If you have any queries regarding this matter please telephone the writer on the above number.”

The Arbitration Hearing Adjourned

39 On 10 April 2003 Mr Geary sent to Mr Bushby a copy of a facsimile dated 9 April 2003 from Marsdens to Moustacas & Co, which enclosed a draft letter proposed to be sent to Mr O’Mara, and requesting ARS’s consent to the proposals contained in that draft. Mr Geary also sent to Mr Bushby his reply to that fax, which stated:

“… we advise that we consent to your application for vacation of the scheduled arbitration date in this matter and consent to your proposal for a new timetable to be set.
Kindly advise as to the outcome of your application.”

40 On 10 April 2003 Mr Bushby wrote to Moustacas & Co asking for a copy of Marsdens’ letter to the arbitrator, and saying, “If you are aware of the basis of Marsdens request for an adjournment could you please advise us.” That letter also dealt with the possibility of a conversation between Mr Yazbek and Mr Nicholas resolving the difficulty which had arisen about topping up the $5,000 float, and continued:

“… but, if it does not, we are specifically instructed to inform you of the following:
1. Given that Fyntray Constructions owes numerous sub-contractors and suppliers well over $600,000.00 in respect of work done or materials supplied in respect of the project which is the subject of the current proceedings, our client is not prepared to allow ARS to proceed with the arbitration if there is any risk that its costs to this firm will not be paid;
2. If ARS forms the view that it might be at such risk, it will immediately terminate the arbitration;
3. Your client originally provided the “float” of $5,000.00 when the Deed was signed, even though there was no provision in the Deed for it to do so. It was recognised that this float was security against costs being incurred;
4. Our client insists that the “float” be topped up as asked for;
5. Our client might determine that the size of the float is to be increased if the anticipated work to be done by this firm looks likely to exceed the amount currently held in trust;
6. If your client refuses to provide a float as against future costs as and when requested our client will, because of Fyntray Construction’s history of not paying its bills as outlined above, determine if it is to be at a financial risk which it is not prepared to accept;
If our client makes that determination, it will terminate the arbitration so it is not exposed to the liability for costs which it might not be able to recover from your client.

Our client regards all costs incurred by this firm in this matter to be to the account of your client. We would not need to be in the matter but for the indulgence granted in allowing the arbitration to continue. Our client is not prepared to enter into any argument with you or Mr Yazbek about what costs connected to the arbitration should be paid by our client or your client.
Hopefully, this matter can be resolved amicably between Mr Yazbek and Mr Nicholas.
If not, you have notice of our instructions.”

41 On 10 April 2003 Mr Geary sent Mr Bushby a copy of Marsdens’ draft letter to the arbitrator. That draft letter included the following:

“We note that this matter was listed for hearing on the 22nd, 23rd and 24th April, 2003. In this regard we advise that after discussing the evidence to be presented at the hearing with the solicitor for the applicant it is our opinion that the hearing in this matter will take a full five days.
We also advise that as the parties now intend to use expert evidence it would be advisable for those experts to meet prior to the hearing so as to narrow the issues in dispute.
We note further that you are to begin leave shortly after the scheduled hearing and advise that in our respectful opinion it would not be desirable for this matter to be part heard.
We therefore request the following:
1. That the scheduled hearing be vacated.
2. That the matter be set down for five consecutive days in July or August.
3. That in the event that you are unable to hear the matter at that time that it be referred to another arbitrator.
In this regard we note that no evidence has been filed in the matter and therefore it should be easily transferred in the time available.”

42 In his facsimile to Mr Bushby of 10 April 2003 Mr Geary went on to say:

“We advise that the reasons for the adjournment were that we have amended our client’s pleading to better set out the contractual relationship between the parties. The solicitor for Marsdens is still yet to provide us with their pleading in response. Further, each parties experts have been unable to prepare their evidence on time.”

43 On 11 April 2003 Mr Bushby replied to Mr Geary saying:

“… We read for the first time this morning that you have further amended ARS’ pleading “to better set out the contractual relationship between the parties.”
Did it not occur to you that, consistent with your client’s obligation to keep our client informed of the progress of the matter, this proposed amendment should have been referred to us for approval in advance of it being filed and served? It may be that the amended pleading does not further adversely affect our client but we are not to know that without sighting the document.
We also note, again for the first time, that you have engaged an expert witness in the proceeding.
Please advise by return fax who engaged that expert and provide full details of his commission. In particularly, we want to know whether the expert could fairly regard whoever engaged him as the agent of ARS.
You can anticipate that we will require a letter from the expert to confirm that under no circumstances will he look to ARS for the payment of his fees.
Please provide a copy of your instructions to the expert and a copy of any response received from him to date.
Is there anything else going on in this arbitration which you have not told us about?
In the discussions which led up to the signing of the Deed there was a detailed conversation about the type of monitoring we are to provide to ARS. It was agreed that we would not wish to vet every letter or other communication in advance, but that you were expected to keep us informed of any significant development including copies of any relevant documents.
You have failed to do so. We regard this as a serious breach of your obligation to keep us informed about any matter of significance in relation to the arbitration.
The Deed did not attempt to spell out the nature of the monitoring we are to carry out for our client. It would be impossible to define the nature of that task in advance. However, it is abundantly clear to all concerned that we cannot be expected to monitor the proceeding, and properly advise our client on it, if you do not keep us informed of developments of significance.
In addition to the documents requested in this letter we require your written undertaking by fax today that there have been no other significant events in the arbitration which you have not told us about, and that in future you will not take any significant step in the arbitration without previously having notified us of your intention to do so in sufficient time for us to determine whether or not that step would be taken.
We are reporting this issue to our client. We reserve its rights pending receipt of the information and undertaking requested.
Please ensure your reply is to us today.”

44 Mr Geary replied on 11 April 2003 saying:

“We enclose herewith our Further Amended Points of Claim which were forwarded to our opponent and the arbitrator for filing, on 1 April 2003.
Despite our requests, as previously forwarded to you, we have not received our opponent’s finalized pleading. In light of our amended claim, we expect to receive our opponent’s amended pleading in the coming two weeks.
As requested, we categorically state that there have been no “other significant events” in the arbitration, which are not set out in your facsimile to us of earlier today.
We refer to the deed between our respective clients and in particular to paragraph 6 thereof. With respect, that clause confers a right on you to monitor the proceedings. It does not confer an obligation on us to seek your permission or advice with respect to the carrying on of the matter.
Your earlier letter to us of even date refers to your client granting our client an ‘indulgence’. Let us make it abundantly clear that from the moment the parties entered into the deed, that ‘indulgence’ ceased to hold any weight. The fact is that by virtue of the parties having entered into the deed, they each have rights and responsibilities with such rights and responsibilities being governed strictly by the provisions of the deed. The agreement between the parties is a bilateral agreement.
We acknowledge that clause 6 of the deed gives you a right to know how the proceedings are being run. Whilst you will note that the amendments to our pleading have absolutely no bearing on your client’s liability in these proceedings, we take your point. Accordingly, we undertake to provide you with copies of/allow you access to (depending on volume) all pleadings and evidence filed or to be filed in this arbitration in the future.
In the spirit of allowing you to monitor the proceedings, we advise that our engagement of an expert is for the purpose of giving an opinion as to ‘reasonable rates and times’ with respect to the design variation claims. We will write to our architect in due course and provide you with the letter you have requested as soon as it is available to us.”

45 There was some misrepresentation of the situation contained in the last paragraph quoted from that letter, in that, while Moustacas & Co had formed the view that expert evidence would be needed, they had not actually engaged an expert. They had been trying to engage an expert, but did not succeed in engaging one until 15 April 2003. That fact was not known to Mr Bushby until after he had written a letter purporting to exercise the power under Clause 7 of the Deed.

The Adequacy of Mr Geary’s Description of the Amendment to the Points of Claim

46 The Further Amended Points of Claim changed a date in Clause 27, and added new clauses 28A to 28J, which were a claim alleging breach of contract by the Council, in not issuing a certificate of practical completion when it was obliged to do so. The relevant contractual provisions, circumstances alleged to be a breach, and circumstances alleged to be the suffering of damage, were pleaded. There were also new paragraphs 32A to 32F, which contained a further allegation of breach of contract on the part of the Council, in failing to issue a Final Certificate when it should have, and in failing to release bank guarantees when it should have. Again, those new paragraphs pleaded the relevant contract provision, the circumstances alleged to be a breach, and the damage alleged to be suffered.

47 On 15 April 2003 Mr Bushby wrote to Moustacas & Co saying:

“In your letter of 10 April you informed us that you had amended the pleading to “better set out the contractual relationship between the parties”.
The marked up version of the Further Amended Points of Claim which you sent to us on 11 April indicates amendments to paragraphs 27, 28A-J inclusive, 32A-F inclusive.
We are unable to see where any of those amendments are to “better set out the contractual relationship between the parties.”
Have you sent us the correct document? If so, please identify the amendments which go to the issue of the contractual relationship between the parties.
If you have not sent the correct document, please do so immediately.
We have already set out our view of the obligations under the Deed. We do not propose to debate them.
Please let us have a response today.”

48 On 17 April 2003 Moustacas & Co replied to Mr Bushby saying:

“We confirm that our amended pleading has been sent to you and say as follows:
(i) In relation to paragraphs 28A to 28J, the claimant has pleaded these additional paragraphs in order to rely on clauses 2 and 42.5 of the contract, in addition to the separable portions argument which is already set out at paragraphs 20-27 of the further amended points of claim. These amendments do not raise any further type of claim by our client and have been inserted into the pleading for the sole purpose of determining the ‘Practical Completion’ issue;
(ii) The amendment to paragraph 27(a) was to cure a typographical error which was not previously noticed and simply changed the date for the calculation of damages from 9 June 2001 to 12 June 2001;
(iii) In relation to paragraphs 32A-32F, the claimant has pleaded these additional paragraphs to better set out the claim which was previously at paragraphs 31 and 32 of the previous amended points of claim. This section of the pleading relates to the claim for a final certificate, the release of security and the award of damages relating to the late release of the security. These are all issues which were previously set out in our previous amended points of claim.
We note that we have not received any objection in relation to the Further Amended Points of Claim from our opponent.
We advise that this mater is next listed for telephone directions on 2 May 2003 at 4:30PM. The purpose of these directions is to set a further timetable in this matter. The parties anticipate a date for hearing in August 2003, a time when Mr O’Mara returns from overseas. We will advise you of the orders made on 2 May 2003.”

49 On 17 April 2003 Mr Bushby faxed Moustacas & Co, acknowledging receipt of their letter of 17 April 2003, and saying:

“Would you advise by fax today how any of the amendments which you have now explained “better set out the contractual relationship between the parties.”
We spoke to Mr Nicholas on 14 April. He informed us that he had spoken to Mr Yazbek.
Mr Nicholas instructs us that Mr Yazbek has informed him that your letter of 27 March was not written on his instructions.
He informed Mr Nicholas that he was aware in vague terms of some disagreement between our firms, but says he was not aware of the detail of it.
Mr Nicholas instructs us that he was informed by Mr Yazbek that he was to see your firm on Monday or Tuesday of this week to give you instructions in regard to the level of co-operation required, and to make arrangements to pay the money requested.
No money has been received.
We require you to forward to us today a letter signed by Mr Yazbek to confirm the following:
1. Whether or not he instructed you to write your letter of 27 March;
2. What his specific instructions are in regard to your co-operation in us monitoring the future conduct of this matter; and
3. What his specific instructions to you are in regard to security for our client’s costs to us.
We await your reply today.”

50 On 17 April 2003 Mr Geary replied to Mr Bushby, in a facsimile which was countersigned by Mr Yazbek, saying:

“In answer to your three queries, Mr Yazbek confirms the following:
1. Our letter to you, dated 27 March 2003 was written with full instructions by Mr Yazbek;
2. With respect to your monitoring of the future conduct of this matter, Mr Yazbek says that you are entitled to be kept aware of the events occurring in the proceedings but that he has no obligation to obtain your client’s consent with respect to the filing of pleadings or evidence;
3. Mr Yazbek instructs us that initially, he provided you with $5,000.00 to be held in trust as security, out of his good faith and under no obligation under the deed. Mr Yazbek does not agree that you are entitled to continue to demand further monies to ‘top-up’ the trust funds held. Mr Yazbek further says that there is no indication that he will not pay your future fees, to the extent that he is obliged to do so under the deed, as and when they fall due in accordance with clause 6 of the deed.
Our client instructs us that the conversation with Mr Nicholas was not as set out in your letter. Mr Yazbek instructs us that he was at all times aware as to the nature of the dispute between our respective firms. Further, our client denies that he even mentioned the letter of 27 March 2003 to your client.
In light of our client’s confirmation of the above three points, set out above, we see this as a non-issue.”

51 On 17 April 2003 Mr Bushby replied, saying:

“We refer to your letter of 17 April received at 11.50 am.
You have not answered our earlier letter of today.
Please inform us by return fax how any of the amendments to the Points of Claim which you have now explained “better sets out the contractual relationship between the parties.”

52 Mr Bushby wrote to Moustacas & Co again on 30 April 2003 saying:

“In your letter to us of 10 April you informed us that you have amended the Points of Claim to “better set out the contractual relationship between the parties.”
You then produced for our perusal a copy of that document.
We are unable to see how the amendments go to the issue of the contractual relationship between the parties.
We asked you to explain how the amendments go to the issue of the contractual relationship between the parties in our letters of 15 and 17 April.
You have not responded to our request.
In the absence of a proper explanation, which has now been requested on two occasions, we have little choice but to form the view that your letter of 10 April was deliberately misleading.
We will report this matter to our client for its instructions.”

53 Moustacas & Co responded on 2 May 2003, saying:

“We refer to your letter of 15 April 2003. and our reply of 17 April 2003. We also refer to your letter of 17 April 2003 in response to our letter of 17 April 2003.
With no disrespect, the amendments speak for themselves and can be understood by reference to the clauses in the contract referred to in the amendments.
The amendments in paragraphs 28A-28J plead a breach of clause 23 of the contract, as a result of the Superintendent failing to issue a Certificate of Practical Completion pursuant to clause 42.5 of the contract. The damages arising from that breach are particularised in paragraph 28H.
The amendments in paragraphs 32A-32E plead a breach of clause 42.8 of the contract in relation to the failure of the Superintendent to issue a Final Certificate. The damages arising from the breach are particularised in paragraph 32E.
Paragraph 32F seeks an order that the second Bank Guarantee be released on the basis that our client is entitled to a Final Certificate.
Please contact us if anything further is required.”

54 Mr Bushby replied on 5 May 2003, as follows:

“We have received your letter of 2 May.
If a matter is properly pleaded the amendments should speak for themselves. As we read the amendments, none of them go to “better (setting) out the contractual relationship between the parties”.
We gave you three opportunities to explain how the amendments went to that issue. You have not given an adequate response.
We have no alternative but to conclude that your letter to us of 10 April 2003 was deliberately misleading.
We will report the facts to our client for instructions.”

The Professional Misconduct Complaints

55 Part of the background against which this exchange of correspondence took place was that on 11 April 2003 Mr Bushby received notification from the Office of the Legal Services Commissioner that Mr Geary had made a complaint against him, alleging a breach of Rule 25 and Rule 34 of the Revised Professional Conduct and Practice Rules. Those Rules provide:

Rule 25: Communications
A practitioner, in all of the practitioner’s dealings with other practitioners, must take all reasonable care to maintain the integrity and reputation of the legal profession by ensuring that the practitioner’s communications are courteous and that the practitioner avoids offensive or provocative language or conduct.
Rule 34: Communications
A practitioner must not, in any communication with another person on behalf of a client:
34.1 represent to that person that anything is true which the practitioner knows, or reasonably believes, is untrue; or
34.2 make any statement that is calculated to mislead or intimidate the other person, and which grossly exceeds the legitimate assertion of the rights or entitlement of the practitioner’s client; or …
34.4 demand the payment of any costs to the practitioner in the absence of any existing liability therefor owed by the person to the practitioner’s client.”

56 The Legal Services Commissioner invited Mr Bushby’s response within 21 days from 11 April 2003.

57 On 5 May 2003 Mr Bushby sent two letters to the Legal Services Commissioner – one was his response to the complaint which Mr Geary had made against him, the other was a complaint which he made against Mr Geary. The complaints which he made against Mr Geary were six-fold.

1. Making disparaging remarks about a fellow senior practitioner;
2. Failing to respond to telephone calls and letters in a prompt and reasonable manner;
3. Making substantial changes to a document without prior notification or discussion with the author of it;
4. When asked to provide a marked up copy of the amendments he had made, misleading a fellow practitioner by failing to provide an accurate marked up copy;
5. At about the same time as making his complaint to the Legal Services Commissioner, failing to meet his obligations as required under the agreement between the parties by amending the pleading, and potentially incurring a debt for ARS without specific instructions to do so, and without providing copies of the amended documents to Mr Bushby;
6. Deliberately misleading a fellow practitioner by misdescribing the nature of the amendments made.

58 The first complaint related to slighting remarks which Mr Geary was said to have made about one of the solicitors at Marsdens. The other complaints related to Mr Geary’s dealings with Mr Bushby. The third and fourth complaints related to the circumstances of Mr Geary amending Mr Bushby’s deed. Concerning the fifth complaint, Mr Bushby’s allegations were:

“The attached correspondence and deed clearly show that Mr Geary well knew that he was obliged to keep this office informed of any changes of substance in the building arbitration which I was monitoring.

Mr Geary made amendments to the Points of Claim, and engaged an expert witness who might have a claim for his fees against ARS, in circumstances where he well knew that he should not have done so without my prior consent.
That conduct, I submit, is not only in breach of the obligations of Mr Geary’s clients, but in deliberate disregard of his obligation to act with honesty and fairness to a fellow practitioner as required by paragraph 10885 of Riley.”

59 Concerning the sixth complaint, Mr Bushby’s allegations were:

“In Mr Geary’s letter to me of 10 March 2003 he says that the amendments to the Points of Claim were to “better set out the contractual relationship between the parties”.
The attached amended Points of Claim speak for themselves. None of the amendments go to the issue of the “contractual relationship between the parties”.
Mr Geary was given three opportunities to explain how the amendments went to the issue which he represented them to go to.
No direct and unequivocal response to this question has been given.
I submit that in the circumstances no other inference can be drawn but that Mr Geary in his letter of 10 March 2003 attempted to deliberately mislead a fellow practitioner by misdescribing the nature of amendments made to a pleading.
That conduct is, in my view, in breach of paragraph 10885 of Riley. Although not strictly an “opponent” as set out in the advocacy rules, in the circumstances of this matter I submit you should conclude that Mr Geary knowingly made a false statement to an opponent in relation to a case in direct breach of Advocacy Rule A.51.”

60 On 6 May 2003 Moustacas & Co wrote to Mr Bushby, saying:

“We refer to your letter of 30 April 2003, which was received today.
We note that our response to you was contained in our facsimile of 2 Instant.
Please contact us if anything further is required.”

A Further Timetable for the Arbitration

61 On 14 May 2003 Mr Geary wrote to Mr Bushby saying:

“We advise that a new timetable has been set. Find enclosed herewith a copy of the agreed orders.
The dates for hearing written on the enclosed email (at point 14) have been changed by Mr O’Mara. With respect to the hearing date of this matter, Mr O’Mara has now confirmed the period 22-26 September 2003 at the Phillip Street arbitration rooms.”

62 The agreed orders which were enclosed in that letter, took the form of an email from Mr Geary to Mr Butterfield and Mr O’Mara dated 2 May 2003. It set out a new timetable which had been agreed upon in a telephone conference held on 2 May 2003. That new timetable began with the Council putting on Points of Defence to the Further Amended Points of Claim, and Points of Cross Claim. It continued through all the usual interlocutory steps, including putting on both lay and expert evidence (though not, this time, including provision of any lists of documents), and for the matter to be set down for arbitration over five days.

Mr Bushby Invokes Clause 7 of the Deed

63 On 15 May 2003 Mr Bushby wrote to Moustacas & Co saying:

“We refer to our letter to you of 5 May.
We have at last been able to meet with Mr Nicholas to discuss the issues of concern to both him and us in relation to the conduct of the arbitration.
In particular, we have reviewed with Mr Nicholas your conduct in relation to the running of the matter (and our supervision of it) and, in the context of Fyntray Construction’s history of not paying its creditors, the risk to ARS if our fees are not secured by the lodgement of money in trust.
We have reported to our client your complaint to the Legal Services Commissioner and have gone through the terms of our complaint on your conduct to the Legal Services Commissioner.
Mr Nicholas is not concerned about the first complaint against you but is gravely concerned about the other matters, particularly as it impacts on the arbitration itself and our ability to oversee it.
Further, Mr Nicholas has reviewed the further amended timetable which you provided yesterday and has expressed his concern about the state of readiness of this matter which was supposed to have been heard in April.
Mr Nicholas needs some time to consider the matter, and to discuss it with the directors of ARS, to determine whether or not it is in the interests of ARS and/or himself to allow the arbitration to continue.
We have instructions that our client will not terminate the arbitration without giving you 5 business days notice of its intention to do so.”

64 Prior to Mr Bushby sending the letter of 28 May 2003, Mr Nicholas instructed Mr Bushby to stop the arbitration completely.

65 On 28 May 2003 Mr Bushby wrote to Moustacas & Co as follows:

“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.”

66 Mr Bushby gave affidavit evidence that before he wrote the letter of 28 May 2003 he took into account the following:

“(i) Fyntray Constructions was the company which carried out the building work in respect of MALC on behalf of ARS.
(ii) Fyntray Constructions is in liquidation and owes creditors an aggregate sum in excess of $600,000.00. Many of those creditors were subcontractors and suppliers of labour and materials to MALC;
(iii) Fyntray Constructions had attempted to arrange its affairs to ensure that the benefit of any money it obtained under the building arbitration which is the subject of these proceedings went to the First Plaintiff and not it. I formed the view that Fyntray Construction’s reason for doing so was to keep the benefit of any money it might obtain away from its creditors;
(iv) Both the First and Second Plaintiffs are related to Fyntray Constructions;
(v) As a result of the conduct of Fyntray Constructions and the two Plaintiffs, ARS could have no confidence in any indemnity given to it by the Plaintiffs, and that it should not allow itself to be exposed to any financial risk which might leave it to call on those indemnities;
(vi) That as the Plaintiffs were informed on 13 November 2002 that ARS would require funds to be placed in my trust account as security for costs being incurred by ARS, and as the Plaintiffs had deposited the first tranche money into trust on the signing of the Deed as requested, the Plaintiffs’ refusal to pay further money into trust as security against further fees being incurred by ARS was an indication that the Plaintiffs could allow ARS to run up substantial legal fees to my firm without any certainty that those costs would be paid by the Plaintiffs;
(vii) That the conduct of the Plaintiffs’ solicitors was such that ARS could have no confidence that the Plaintiffs have to date, or would in the future, allow me to properly monitor the arbitration.
(viii) That ARS was exposed to risk by the Plaintiffs taking significant steps in the arbitration by amending pleadings and engaging experts without prior notification to me and in breach of their obligation under Exhibit “JAN1” to the affidavit of John Arthur Nicholas sworn 16 June 2003;
(ix) That the description of the amendments made in the Further Amended Points of Claim as being to “better set out the contractual relationship between the parties” was deliberately misleading;
(x) The arbitration was originally set down for hearing on 22, 23 and 24 April 2003. Having read the letter from JAM dated 14 May 2003 I formed the view that not only was the arbitration nowhere near ready for hearing, but that the quantum of costs originally estimated by the Plaintiffs’ solicitor in respect of that hearing were significantly less than what the actual costs would be because of the state of preparation of the proceeding;
(xi) That, despite having been told over 6 months ago that ARS insisted that the defects issue be litigated in this building arbitration, the state of pleadings were such that the issue was not a live one before the arbitrator.”

These Proceedings

67 These proceedings were begun by a summons filed on 5 June 2003. The hearing was expedited. FPM seeks a declaration that ARS and Mr Nicholas are not entitled to terminate the building arbitration, and an injunction restraining them from doing so. ARS and Mr Nicholas have filed a Cross Claim seeking a declaration of their entitlement to terminate the arbitration. When the matter was first before the Court on 10 June 2003 the defendants undertook not to terminate the building arbitration without seven days written notice of their intention to do so. That undertaking was not one which was expressed to operate until the hearing of the suit or further order. Hence, the Cross Claimants also seek to be released from that undertaking.

Construction of Clause 7 of the Deed

68 Under Clause 7 the power to terminate the arbitration is one which is conferred on ARS and/or Mr Nicholas. Because of the words “may terminate”, that power to terminate is a discretionary power. It is a precondition to ARS and/or Mr Nicholas exercising that power that Mr Bushby “acting reasonably, determines that any step in the arbitration is not in the interests of either Nicholas or ARS.”

69 I accept the submission of the defendants that “any step” means 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.

70 For the Deed to have business efficacy, any “step” which fell within Clause 7 would need to be a step which occurred after the Deed was entered. It would 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 Clause 7.

71 A more difficult question of construction concerning whether, at the time Mr Bushby makes his determination, the “step” concerning which he makes the determination must be a step which, as at that time, has already been taken, or whether it can include a step which is then proposed to be taken. In my view, the “step” can be either a past event, or a proposed future event, at the time of Mr Bushby’s determination. Concerning a past “step”, it is easy to see how it would be possible, at one point in time, for Mr Bushby to determine whether or not that step was in the interests of either Mr Nicholas or ARS. As well, however, it is within the ordinary use of language, in a situation where, for instance, Mr Bushby is considering a fixed proposal on the part of FPM to amend the claim in some fashion which would alter the risk to Mr Nicholas or ARS of the arbitration continuing, to determine that the taking of that step is not in the interest of either Mr Nicholas or ARS. It also seems to me 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.

72 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.

Reasonableness of the View – First Matter Relied on

73 The seven numbered paragraphs in the letter of 28 May 2003 are all matters which Mr Bushby has taken into account in forming his view that it is not in the interests of either Mr Nicholas or ARS for the arbitration to continue. I do not accept the view, which the plaintiffs urged upon me, that the seven numbered paragraphs ought each be required to be considered as though it identified a step in the proceedings, which Mr Bushby considered was not in the interests of Mr Nicholas or ARS. I will consider each of those paragraphs, and whether it provides reasonable ground for Mr Bushby taking the view that it was not in the interests of Mr Nicholas or ARS for the arbitration to continue.

74 While the original plan was for the arbitration to be heard in April 2003, Mr Bushby required, on 2 October 2002, that no further step be taken in the arbitration. By mid-November 2002 the decision in principle that ARS would permit the arbitration to continue, on terms acceptable to it, had been made, but there was continued disputation between Mr Bushby and Moustacas & Co about the precise terms on which the arbitration should continue. That disputation was not resolved until the terms of the Deed were finally settled, around 23 January 2003. 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 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”.

Reasonableness of the View – Second Matter Relied On

75 The reader will recall that Moustacas & Co had given an estimate to Mr Bushby of $30,000, presuming a 2-3 day arbitration, for the total costs and disbursements, including counsel’s fees, fees payable to expert witnesses and the arbitrator. In an affidavit sworn 5 June 2003, Mr Moustacas stated that up to that date the legal costs payable to his firm in relation to the arbitration were $30,000. That was the amount payable to his firm alone, not including counsel’s fees or expert witnesses fees, or the arbitrator’s fees. He agreed, in cross-examination, that the original estimate of costs was manifestly inadequate, and that it was likely that the Counsel’s costs would have been revised upwards as well. Significantly, no submission was made by the plaintiffs that the increased quantum of costs which ARS might have awarded against it if it were to lose the arbitration was not a matter which could reasonably result in Mr Bushby forming the view that continuance of the arbitration was not in the interests of ARS.

76 The submission which the plaintiffs made on this topic was that Clauses 5 and 6 of the Deed dealt with how any adverse costs order was to be disposed of, and hence that that topic could not count as a “step in the arbitration” within Clause 7. That submission was made in a context of treating the various numbered paragraphs of the letter of 28 May 2003 as though they were the “steps in the arbitration” to which Mr Bushby’s determination was directed. I have said earlier that I do not agree with that way of characterising the numbered paragraphs in the letter – rather, the “step in the proceeding” which Mr Bushby was considering in that letter was a future step, of doing anything to continue with the arbitration. And the numbered paragraphs were reasons why the taking of that future step was not in the interests of Mr Nicholas or ARS. Further, I do not see why the fact that Clause 5 contemplates that any adverse costs order might be paid from a guarantee held by the Council is a reason why the prospect of there being an adverse costs order made cannot be taken into account under Clause 7, as a reason why a step in the arbitration is not in the interests of either Mr Nicholas or ARS. If the extent of the adverse costs order which was taken into account as a reason why a step in the arbitration was not in the interests of either Mr Nicholas or ARS was no greater than the extent of the adverse costs order which was reasonably foreseeable at the time that the Deed was entered into, it would probably not be reasonable to take it into account, as such a reason for the purposes of Clause 7. However, to the extent to which an adverse costs order in the arbitration proceedings might be larger than that which was foreseen at the time the Deed was entered, it seems to me it would be reasonable to take it into account.

77 But just because it is reasonable to take the prospects of there being a larger adverse costs order into account does not necessarily mean that the particular way in which Mr Bushby took it into account provided a reasonable basis for concluding that continuation of the arbitration was not in the interests of ARS or Mr Nicholas. While the likely quantum of costs which will be payable, in the event that ARS loses the arbitration, is now substantially greater than it was at the time the Deed was executed, Mr Bushby has taken no steps to form a view about the likely extra extent of those costs. The Deed proceeded, under Clause 5, on the basis that any adverse award or costs order would be paid by directing the Council to apply the guarantee held by it. Further, the indemnity given by Mr Yazbek and FPM to ARS and Mr Nicholas, in Clause 4 of the Deed is probably wide enough to require Mr Yazbek and FPM to indemnify ARS and Mr Nicholas against any adverse costs order in the arbitration. Mr Bushby has engaged in no investigation of whether the bond will be inadequate to pay any adverse costs order. While the amount of the bond would be payable, as well, towards any costs of rectifying defects, Mr Bushby has not carried out any examination of what the prospects are that the amount remaining, after payment of costs of any defect rectification, would not be enough to cover any adverse costs awards.

78 So far as the value of any indemnity given by the plaintiffs are concerned, he says, in paragraph 33 of his affidavit, that he took the view that ARS could have no confidence in any indemnity given to it by the plaintiffs, because of their conduct in seeking to keep the benefit of any award away from the creditors of Fyntray Constructions. In my view, this is a matter which Mr Bushby could reasonably take into account, even though the circumstance of the assignment of the benefit of the contract by Fyntray Constructions to FPM had occurred months before, and Mr Nicholas had been party to it. It was open to Mr Bushby to take into account the fact that Mr Yazbek was prepared to engage in this sort of financial evasive action, and that Mr Yazbek effectively controlled FPM, in deciding whether his client was adequately protected by a personal covenant to pay from Mr Yazbeck and FPM. Further, it would be reasonable for Mr Bushby to conclude that it was not in the interests of his client to have an indemnity from a possibly reluctant payer, even if the indemnifier might, at the end of the day, have enough assets to meet the indemnity. However, the failure to consider whether the bond of approximately $191,000 might possibly be inadequate has the consequence, it seems to me, that the mere fact that there would be larger costs than had been envisaged at the time the Deed was executed, if the plaintiffs were to lose the arbitration, is not a sufficient reason for Mr Bushby to reasonably conclude that the prospect of there being such increased costs made continuation of the arbitration not in his clients interests.

Reasonableness of the View – Third Matter Relied On

79 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.

Reasonableness of the View – Fourth, Fifth and Sixth Matters Relied On

80 Paragraphs 4, 5 and 6 of the reasons given in the letter of 28 May 2003 need to be taken together, as they all go to the topic of monitoring of the proceedings. The Macquarie Dictionary gives the following meanings for “monitor” when used as a verb.

“10 radio, TV a to listen to or watch (transmitted signals) using a receiving set in order to check the quality of the transmission b to listen to (broadcasts) for operating compliance, censorship, propaganda analysis and similar purposes
11 to check, observe or record the operation of (a machine, etc) without interfering with the operation.
12 to supervise; observe critically.”

81 Clause 6 of the Deed did not entitle Mr Bushby to be consulted in advance concerning amending of pleadings or engaging of expert witnesses, nor did it require his approval to the taking of any such steps. Clause 6 entitled him to know, promptly as it happened, what was happening in the arbitration. The structure of the Deed is that, if he is told of any step in the arbitration and forms the view that it is not in the interests of Mr Nicholas or ARS, then the contractual power in Clause 7 can be triggered. Though that is not the only which in which Clause 7 can be triggered – see paragraph 71 above.

82 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.

83 The fifth point relied upon in Mr Bushby’s letter is, in my view, mistaken. Mr Bushby explained in cross-examination that he understood the expression “contractual relationship” to mean not the terms of the contract but the relationships the contract itself establishes. He said that, when he read that the Points of Claim were amended to “better set out the contractual relationship between the parties” he was concerned about one particular issue, namely whether there was an allegation in the pleading which could affect ARS, for instance, an allegation that Fyntray was an agent of ARS, which could have exposed ARS to claims by unpaid suppliers or sub-contractors. When the pleading he received said nothing at all like that, he was concerned that he had not been sent the right document. He then formed the view that the description which he had been given of the amendments was misleading, and deliberately so. In my view, the description which Mr Geary gave to the amendment to the pleading, while not the most informative one possible, was still accurate – it is within ordinary language use to say that a pleading better sets out the contractual relationship between the parties if it makes fuller allegations about what the contractual provisions are between the parties to the arbitration, and whether those contractual provisions have been breached or not. When Mr Bushby saw the expression “to better set out the contractual relationship between the parties” in Mr Geary’s fax of 10 April 2003, he took “the parties” to be the Council, ARS, possibly the architect, and possibly the builder – he did not take it to be necessarily restricted to the parties to the arbitration, namely the Council and ARS. In my view it was not a reasonable conclusion to draw, from the correspondence concerning the amendment to the pleading, that Mr Geary misdescribed the nature of the amendments, or that his manner of describing the amendments was deliberately misleading.

84 I was invited, by the defendants, to draw a Jones v Dunkel (1959) 101 CLR 298 inference on this topic, arising from the fact that Mr Geary was not called. Mr Geary has ceased working for Moustacas & Co, in May 2003. The principle in Jones v Dunkel enables one to draw more strongly an inference which is otherwise available when evidence which could counteract that inference is not called, by a party who has the capacity to call it. In the present case, I do not regard there as being any basis for the view that Mr Geary deliberately misdescribed the nature of the amendments; hence there is no inference which can be drawn more strongly in consequence of Mr Geary not being called.

85 The conclusion expressed in paragraph 6, that “our client has no confidence that your client has to date, or will in the future, allow us to properly monitor the proceeding” is one which is dependant upon the content of paragraphs 4 and 5. As paragraphs 4 and 5 themselves are flawed, for the reasons I have given, paragraph 6 does not provide a reasonable basis for concluding that there has been a failure, or likely future failure, on the part of Moustacas & Co to allow Mr Bushby to properly monitor the proceedings.

Reasonableness of the View – Seventh Reason

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.

89 Though paragraph 33 of Mr Bushby’s affidavit of 19 June 2003 elaborates on some of the matters he took into account, it does not raise any substantial new matter beyond those referred to in the letter of 28 May 2003.

The Bad Faith Allegation Against Mr Bushby

90 The plaintiffs submit that, in making the allegations that Mr Geary was deliberately misleading in the way he described the amendment to the Points of Claim, Mr Bushby was attempting to contrive or trump up a situation upon which he could ultimately rely in making his determination. I do not accept that that is so. Mr Bushby was mistaken, and seriously, in making that allegation, but he honestly believed what he said.

91 Another attack which the plaintiffs make on Mr Bushby’s determination is that Mr Nicholas has frankly stated that he instructed Mr Bushby to stop the arbitration completely. However, before Mr Nicholas gave that instruction, Mr Bushby had formed the view that it was not in the interests of Mr Nicholas or ARS for the arbitration to continue. It could not be said that Mr Bushby had not given genuine and independent consideration to the question of whether it was in the interests of Mr Nicholas or ARS for the arbitration to continue.

Result

92 If there had been bad faith in the formation of the conclusion that it was not in the interests of ARS or Mr Nicholas for the arbitration to continue, then that could have infected the whole of the conclusion. However, there was no such bad faith. Rather, 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.

93 The plaintiffs relied upon analogies from administrative law, whereby the taking into account of an irrelevant consideration can result in an administrative decision being void, to submit that the reasons which Mr Bushby relied on, but which were not legitimately open to him, prevent him from having reached a valid conclusion. In Minister For Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24, at 40 Mason J said:

“Not every consideration that a decision-maker is bound to take into account but fails to take into account will justify the court setting aside the impugned decision and ordering that the discretion be re-exercised according to law. A factor might be so insignificant that the failure to take it into account could not have materially affected the decision (see, for example, the various expressions in Baldwin & Francis Ltd v Patents Appeal Tribunal [1959] AC 663; Hanks v Minister of Housing and Local Government [1963] 1 QB 999 at 1020; Reg v Chief Registrar of Friendly Societies ; Ex parte New Cross Building Society [1984] QB 227 at 260. A similar principle has been enunciated in cases where regard has been had to irrelevant considerations in the making of an administrative decision ( Reg v Bishop of London (1889) 24 QBD 213 at 226–227; Reg v Rochdale Metropolitan Borough Council; Ex parte Cromer Ring Mill Ltd [1982] 3 All ER 761 at 769–770).”

94 The question, when an irrelevant consideration has been taken into account is whether, notwithstanding that fact, the task which the decision-maker is authorised to carry out has in substance been performed: cf Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314.

95 When considering what would count as deciding reasonably that continuation of the arbitration was not in the interests of ARS or Mr Nicholas, it is relevant, it seems to me, that ARS was in a position of particular vulnerability in allowing the arbitration to proceed in its name, although in effect on instructions from Mr Yazbek and FPM. Any award in the arbitration in favour of ARS would not end up enriching ARS in any way. ARS stood to gain from the arbitration in two ways. The first was that an award in favour of ARS for the architect’s fees would provide the means of freeing ARS from a claim by the architect for those fees. The second was that resolution of the defects claim would free ARS from any potential liability which it might have on that score to the Council. 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 by 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.

Unclean Hands

96 Though, given the conclusion that I have reached about the validity of the exercise of the power to terminate, it is not necessary to consider this point, I shall record the submissions which were made, and my conclusions concerning them. The defendants submitted that, even if the exercise of the power to terminate was invalid, no injunction should be granted against them because of the plaintiffs’ unclean hands. These were said to result from the following matters.

(a) Mr Yazbek giving Moustacas & Co instructions for ARS to commence the Arbitration against the Council:
(i) without a Board resolution of ARS authorising it;
(ii) without consulting his then fellow director of ARS, Mr Nicholas;
(iii) in breach of the original agreement between Messrs Davies, Yazbek & Nicholas under which he had agreed to resign as a director of ARS on completion of the construction phase of the Leisure Centre (which had occurred in about July 2001); and
(iv) such that the party liable under any costs order made in favour of the Council in the Arbitration would be ARS, and not Mr Yazbek or any company or entity associated with him;
(b) Mr Yazbek’s failure to inform Mr Nicholas of the Arbitration after it had been commenced, so that Mr Nicholas only learned of it from Mr Freestone of the Council; and
(c) Mr Yazbek and FPM being party to an arrangement by which the construction sub-contract from ARS was assigned from FC to FPM, with FC going into voluntary administration approximately 2 weeks later with unpaid creditors (as at October 2002) of $840,966.51 (and arranging for any proceeds received by ARS from the Arbitration to be transferred to FPM).
(d) Fyntray Constructions Pty Ltd is party to the Deed, with Mr Yazbek as one of the signatories on its behalf, yet Fyntray Constructions went into administration in 2002. Hence, it is submitted, Yazbek did not have the power to sign on behalf of Fyntray Constructions, because section 437A Corporations Act vested administration of the company in the administrator, not the directors.

97 The factual foundation of the submission set out in paragraphs (a)-(c) is made out. I am not satisfied that the factual foundation for the submission in paragraph (d) is made out. The company search of Fyntray Constructions Pty Ltd does not reveal that it ever had an administrator appointed. Further, the winding up, on 27 March 2003, was a winding up by the Court. The usual outcome of an administration is either that it enters a deed of company arrangement, that it becomes subject to a creditors’ voluntary winding up, or that the company’s creditors resolve that the administration should end (section 435C(2) Corporations Act). Under section 440A(2) the Court must adjourn the hearing of any application for an order to wind up a company if the company is in administration and the Court is satisfied that it is in the interests of company’s creditors for the company to continue under administration rather than be wound up. When there is no doubt that the winding up was a winding up by the Court, these factors suggest it would be out of the ordinary for Fyntray Constructions to have been in administration immediately before it was ordered to be wound up. The evidence that this company was in administration arises from a reference to administration in a letter which Marsdens wrote on 15 August 2002 to Moustacas & Co. Whatever the situation might have been in August 2002, I am not persuaded that at the date of the Deed, the company was in administration. In that situation, the factual basis for a submission of unclean hands as set out in paragraph (d) is not made out.

98 All the matters relied on in paragraphs (a) to (c) are ones which occurred prior to the execution of the Deed, and were known to ARS and Mr Nicholas at the time of execution of that Deed. With that knowledge, ARS and Mr Nicholas agreed to allow the arbitration to continue in the name of ARS, on the conditions of the Deed

99 In Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060 at [157]-[185] I examined the case law concerning unclean hands, and in particular the requirement that unclean hands have an immediate and necessary relation to the equity sued for. The equity which the plaintiffs here sue for, is an injunction to protect their alleged contractual right under the Deed to continue to conduct the arbitration in the name of ARS. To establish the facts necessary to make out that entitlement, it would not be necessary for the plaintiffs to prove any of the facts set out in paragraphs (a) to (c). While it might be said that the fact that the arbitration is on foot at all is a consequence of wrongful conduct on the part of the plaintiffs, all of that wrongful conduct was known to ARS and Mr Nicholas at the time the Deed was entered. The Deed is explicable only on the basis that the various matters set out in paragraph (a) to (c) do not prevent the plaintiffs from continuing to conduct the arbitration in the name of ARS, on the terms of the Deed. For these reasons, the matters set out in paragraphs (a) to (c) do not have an immediate and necessary relation to the equity sued for.

100 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. Thus, if it had been established that the contractual power had not been validly exercised, it would have been appropriate to issue an injunction requiring ARS not to treat as valid its purported exercise of that contractual power.

Orders

101 I make the following declarations and orders.

1. Declare that on the true construction of the Deed between the Cross-Claimants, the Cross-Defendants and Fyntray Constructions Pty Ltd made in or about January 2003, and in the events which have happened, the Cross-Claimants are entitled to terminate arbitration number 2060 between the First Cross-Claimant and Camden City Council before arbitrator B J O’Mara without further recourse to the Cross-Defendants and without being liable to them for so doing.

2. Order that the Defendants are released and discharged from the undertakings given by them to the Court on 10 June 2003.

3. Apart from any questions of costs, the Amended Summons is dismissed.

4. Submissions concerning costs of the proceedings may be made on a date to be arranged with my Associate, such arrangement being made within 28 days of the date of handing down of these reasons for judgment.

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Last Modified: 08/28/2003