Archers Road Trust Co Ltd v JMR Business Ltd

[2016] NZHC 2987

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-000912 [2016] NZHC 2987

BETWEEN

ARCHERS ROAD TRUST COMPANY

LIMITED First Plaintiff

MALCOLM HAYWARD UDY Second Plaintiff

MT WELLINGTON MARINE LIMITED Third Plaintiff

AND

JMR BUSINESS LIMITED First Defendant

JAMES NICHOLAS ROBINSON Second Defendant

MELISSA ROBINSON Third Defendant

Hearing:	14 October 2016
Appearances:	M Branch for the Plaintiffs SVA East and K M Venning for the Defendants
Judgment:	12 December 2016

JUDGMENT OF EDWARDS J

This judgment was delivered by Justice Edwards on 12 December 2016 at 11 am, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:           Harkness Henry, Hamilton

Bell Gully, Auckland

ARCHERS ROAD TRUST COMPANY LTD v JMR BUSINESS LTD [2016] NZHC 2987 [12 December 2016]

Introduction

[1]      The defendants seek an order staying this proceeding and referring it to an expert  determination  in  accordance  with  a  clause  in  an  agreement  between  the parties.

[2]      The plaintiffs oppose the application on the grounds that:

(a)       the defendants have submitted to the jurisdiction of this Court or have waived the right to require the dispute to be referred to expert determination;

(b)       the   third   plaintiffs’  cause   of   action   falls   outside   the   expert

determination clause; and

(c)       the claims are not amenable to expert determination.

Background

[3]      Mt Wellington Marine Ltd (the third plaintiff) operates a boat marina and a business involving the loading and unloading, servicing and storage, of boats.  NZ Pontoon Systems Ltd manufactures marine pontoons.  Both companies operate from premises owned by Paisley Place Ltd.

[4]      The first plaintiff was the beneficial owner of 50 per cent of the shares in Mt Wellington Marine Ltd and NZ Pontoon Systems Ltd. The remaining 50 per cent was held by the defendants. The defendants also held shares in Paisley Place Ltd.

[5]      The second and third defendants were directors of all three companies.

[6]      By separate agreements, each dated 8 December 2015, the first and second plaintiffs agreed to purchase the defendants’ shares in Mt Wellington Marine Ltd and NZ Pontoon Systems Ltd, and in Paisley Place Ltd (Agreement).

[7]      Clause  12  of  the Agreement  contains  a  dispute  resolution  clause  in  the following terms:

12.1    Dispute Resolution Process:   Unless otherwise provided in this Agreement, if a Party considers that there is a dispute in respect of any matter arising out of, or in connection with it, then that Party may immediately give a Dispute Notice to the other Party or Parties setting out details of the dispute.   The Parties will then endeavour in good faith to resolve the dispute between themselves.  If they are unable to do so within five (5) Working Days of the receipt of the Dispute Notice, then:

(1)       the matter shall be referred for a decision to a suitably qualified independent Expert appointed by the Vendor and the Purchaser (or, if they cannot reach agreement on such appointment within two (2) Working Days, by a person appointed by the President for the time being of the Auckland District Law Society Inc, on application of either the Vendor or the Purchaser); and

(2)       the Expert may, at his or her discretion accept written and/or oral submissions from the Vendor and/or the Purchaser in respect of the dispute; and

(3)       in reaching their decision the Expert is to act as an expert and not as an arbitrator; and

(4)       the  Expert  must  give  his  or  her  determination  in  writing,  with reasons; and

(5)       the Vendor and the Purchaser shall each bear their own costs and expenses in connection with the determination.   All costs and expenses of the Expert shall be borne between the parties as the Expert may determine; and

(6)       the determination of any matter under this clause shall be final and binding upon the Parties.

12.2     Primacy of Dispute Resolution Process:  Except as provided below neither Party will commence legal proceedings against the other before following  the  procedure  set  out  in  subclause  12.1,  provided  that  this provision will not prevent a Party seeking urgent interlocutory relief.

[8]      On 2 May 2016 the plaintiffs filed a statement of claim and a without notice application for freezing and charging orders over the second and third defendants’ properties. The freezing and charging orders were made on a without notice basis on

7 May 2016 and were served on the defendants on 30 May 2016.

[9]      Correspondence between the parties’ respective solicitors occurred following service.   That correspondence was primarily concerned with the discharge of the orders.  In the course of that correspondence, the defendants’ solicitors stated: “our clients deny the matters raised in the claim and will address those matters in their statement of defence.”

[10]     On 8 June 2016 the defendants filed an application to discharge the interim orders.  The application was accompanied by two affidavits and a memorandum of counsel.  The memorandum recorded the defendants’ intention to file a statement of defence to the substantive proceeding within the time specified in the High Court Rules.   It also set out why the defendants had a good arguable defence to the plaintiffs’ claims.

[11]     The plaintiffs filed a notice of opposition to the discharge application on

13 June 2016.   The application was listed for mention in the Duty Judge List on

15 June 2016.   During the course of that hearing, counsel for the parties reached agreement on the discharge of the interim orders.

[12]   The parties were then asked to confer about timetabling orders for the substantive proceeding.  They reached agreement on those orders and Faire J made orders by consent.  Those orders included timetabling directions requiring the filing of an amended statement of claim, statement of defence, replies to any affirmative defences, and the allocation of a case management conference.

[13]     On  27  June  2016  the  parties  filed  a  joint  memorandum  seeking  orders resolving the remaining issues between them in respect of the freezing and charging orders. Those orders were made by consent on 29 June 2016.

[14]     The plaintiffs filed a first amended statement of claim on 5 July 2016. The third plaintiff was added at this time.

[15]     The defendants did not file a statement of defence.   On 25 July 2016 they informed the plaintiffs that they considered that the parties ought to proceed with an expert determination pursuant to cl 12 of the Agreement and indicated they would seek a stay if agreement could not be reached.

[16]      The application for a stay was subsequently filed on 29 July 2016.

Plaintiffs’ claims

[17]     The plaintiffs’ amended statement of claim comprises three causes of action.

[18]     The first cause of action is by the first and second plaintiffs against the defendants for breach of the indemnity and warranty clauses of the Agreement. It includes an alleged understatement of creditors and liabilities, and breaches of a warranty relating to computer data and back-ups.

[19] It is also claimed that the defendants have breached a warranty in the Agreement that the business premises be “fit for purpose”. This claim relates to the construction of a dry boat storage stack which is designed to store multiple boats. The plaintiffs plead that the premises were not fit for purpose as the construction of the boat stack did not comply with the Building Act 2004, and the work carried out was deficient in several respects.

[20]     The  second  cause  of  action  is  by  the  third  plaintiff  against  the  second defendant.  That cause of action claims that the second defendant acted negligently in relation to the building of the boat stack.  The second defendant was the project manager for that work.

[21]     The third cause of action is by the third plaintiff against the second and third defendants in relation to that building work. The claims are advanced as breach of directors’ duties, and there is reference to ss 131 and 137 of the Companies Act

1993.

[22]     The particulars of deficient work pleaded in support of the “fit for purpose” warranty claim in the first cause of action, are the same as those advanced in relation to the second and third causes of action (the third plaintiffs’ claims).  Damages in the sum of $302,315.23 are claimed in relation to this warranty claim, and in each of the second and third causes of action.  This forms the greater part of the total damages claimed of $400,167.89.

Relevant legal principles

[23]     A court  may stay proceedings  so  as  to  enforce  an  agreement  to  use  an alternative dispute resolution process under r 15.1 or in the exercise of its inherent jurisdiction.

[24]     Before ordering a stay in favour of a dispute resolution process, the Court must  be  satisfied  that  the  parties  have  contractually  bound  themselves  to  an alternative means of resolving their dispute and that their process for doing so is sufficiently certain.1

[25]     There  is  no  dispute  between  the  parties  that  cl  12  of  the Agreement  is sufficiently certain and the first and second plaintiffs are bound by its terms.  The plaintiffs nevertheless oppose a stay on the grounds set out above (at [2]).  Each of these grounds is considered below.

Submission to jurisdiction/waiver

[26]     The plaintiffs say that the defendants have submitted to the jurisdiction of this Court, or otherwise waived their right to have the dispute referred to expert determination.

[27]     Both parties referred to The Property People Ltd v Housing New Zealand

Ltd,2 and Pathak v Tourism Transport Ltd in support of their respective positions.3

[28]     In  The  Property  People,  Salmon  J  concluded  that  the  defendant  had submitted to the jurisdiction of the Court by filing a response to an interim injunction application.  That case concerned an arbitration agreement and the application of art

8 of the First Schedule to the Arbitration Act 1996. Article 8 provides that a Court shall stay proceedings if a party so requests not later than when submitting that party’s “first statement on the substance of the dispute”.   The Judge held that the principle of certainty required art 8 to be given its plain meaning and the defendant should have applied for a stay at least prior to the hearing of the interim injunction application.4

[29]     The meaning of art 8 was also at issue in Pathak.  The plaintiffs in that case were found not to have submitted the substantive dispute to the Court when they

1      Braid Motors Ltd v Scott (2001) 15 PRNZ 508 (HC) at [33] and [38].

2      The Property People Ltd v Housing New Zealand Ltd (1999) 14 PRNZ 66 (HC).

3      Pathak v Tourism Transport Ltd [2002] 3 NZLR 681 (HC).

filed an application for interim relief because it was clear they were initiating interim injunction proceedings in anticipation of, or in aid of, arbitral proceedings.  The Property  People  Ltd  was  distinguished  on  that  basis.   A stay  was  nevertheless refused on the grounds that significant steps had been taken in the proceeding which amounted to a submission to the jurisdiction of the Court.  Justice Heath observed that had a stay been sought immediately after the resolution of the interim relief

application in that case, a stay would have been granted.5

[30]     The enquiry in both The Property People Ltd and Pathak is different to that in this case. Both of those cases focused on the interpretation and application of art 8 of the First Schedule to the Arbitration Act 1996.  That article has no application to expert  determination  clauses.     That  means  that  whether  the  defendants  have submitted to the jurisdiction of the Court is not dispositive of the application for a stay in this case; whether to grant a stay remains a matter of discretion.   It also means that the focus in this case is not on the meaning of art 8. Rather, the focus is on the meaning of cl 12.2 and the scope of the interlocutory relief exception in that clause.

[31]     I do not consider the filing of the application to discharge the freezing and charging orders to amount to a substantive step in the proceeding.  That step falls directly within the proviso to cl 12.2 being an application in the nature of “urgent interlocutory relief”.   Such an application was necessary given that the original orders were made on  a without notice basis.   It  would have been  advisable to expressly reserve the right to seek a stay at the same time as filing the application. In the arbitration context, the failure to do so may well have been fatal to the stay application. But, given the application falls within the scope of the exception agreed between  the  parties  in  cl  12.2,  I  do  not  consider  the  filing  of  the  discharge application amounts to a submission to the Court’s jurisdiction in this case.

[32]     Similarly, the agreement to timetabling orders for the substantive proceeding was made in the context of resolving the issues around the interim orders.   The discharge of those orders was the primary focus. It is significant that no actual steps in furtherance of the timetabling orders were taken by the defendants prior to the

stay application being made.   That distinguishes this case from Pathak where the plaintiffs took significant steps in the proceeding following resolution of the interim relief application.  Those steps included seeking further particulars of the statement of defence, providing further particulars of the statement of claim, and swearing a verified list of documents.

[33]     The reference in the defendants’ memorandum to having a good arguable defence to the plaintiffs’ claims was also made in the context of the application to discharge the interim orders. The likelihood of success of the plaintiffs’ claim is a relevant consideration to the maintenance or discharge of the interim orders.  I do not consider those references amount to a submission to the Court’s jurisdiction in the circumstances.

[34]     Similarly, construed in context, the statements made about the preparation of a statement of defence amount to a representation of an intention to defend the substantive claim.  They do not amount to an intention to waive the right to insist on strict compliance with cl 12.1.  I note that cl 14.8 of the Agreement provides that any failure to enforce a clause, or any forbearance, delay or indulgence, will not act as a waiver of any rights under the Agreement. Something more than the statements at issue in this case would be required to overcome that clause in my view.

[35]     It is also far from clear that the filing of an amended statement of claim was a step taken in reliance on the defendants’ apparent acceptance of jurisdiction.   The submission that the third plaintiff’s pleading would not have been required had the parties agreed to proceed in terms of cl 12.1 is difficult to accept.  It appears to be at odds with the plaintiffs’ submission that those claims are independent of the other claims, and fall outside the scope of cl 12.1.  If that position is accepted, it would have been necessary to plead them in any event.

[36]     Overall, I consider the steps which the defendant took were consistent with the proviso in cl 12, and did not amount to a waiver of the right to demand compliance with its terms, or a submission to this Court’s jurisdiction.

Scope of cl 12.1

[37]     The plaintiffs also oppose the stay on the grounds that the third plaintiff’s claims fall outside the scope of the expert determination clause.  They claim that the third plaintiff is not bound by cl 12.1, and that its claims are not captured by the clause.

[38]     Clause 12.1 provides that if a “Party” considers there is a dispute in respect of the Agreement, then that Party may give a Dispute Notice to the other Party or Parties setting out details of the dispute.    “Party” is defined in the Agreement to include the third plaintiff.   As set out in cl 12.1(6), the expert determination is binding upon the “Parties”. Clause 12.2 also refers to legal proceedings being commenced  by a “Party”  against  the other.   Yet,  other sub-clauses  refer to  the “Vendor” and “Purchaser”.  It is those parties which agree on the expert (cl 12.1(1)); make submissions  (cl  12.2(2);  and  bear their own costs  in  connection  with  the determination (cl 12.2(5)).

[39]     The references to “Vendor” and “Purchaser” in the clause suggest that the expert determination was only intended to cover disputes between those two parties to the Agreement.  In practice, disputes between those two parties are the most likely to arise in the context of a sale and purchase of shares. But, the plain meaning of cl

12.1 is that any “Party” may initiate the expert determination procedure. There is no reason to read that clause down or in a way which is inconsistent with the definition in the Agreement.  I consider the third plaintiff is bound by the expert determination clause.

[40]     Clause 12.1 only covers “a dispute in respect of any matter arising out of, or in connection with” the Agreement.  The third plaintiffs’ claims are for negligence and breach of directors’ duties; they do not arise out of the Agreement. Whether they are captured by the clause depends on the meaning of “in connection with”.

[41]     If that phrase is interpreted to mean a subject matter connection with the Agreement, then the third plaintiffs’ claims would fall outside the ambit of the clause.  The third plaintiffs’ claims have nothing to do with the sale and purchase of the shares and stand separate and independent from the terms of the Agreement. If

the phrase was interpreted more liberally, so as to mean any disputes involving a factual connection with the Agreement, then the third plaintiffs’ claims would be captured by virtue of the factual overlap with the fitness for purpose warranty claim.

[42]     If cl 12.1 required the parties to arbitrate their dispute, I would not hesitate in adopting the second, more liberal, interpretation of the clause. It is presumed that parties to an arbitration clause are unlikely to have intended that different disputes should be resolved before different tribunals. A wide interpretation of the dispute resolution clause is justified in that case. 6

[43]     But the parties have chosen expert determination, and not arbitration, in this case.   Although expert determination can be used as a general dispute resolution mechanism, it is more typically used to resolve technical or specialist disputes. The choice of expert determination may well be an indicator that the parties intended different categories of dispute to be submitted to different forums.7

[44]     The fact that the clause appears to anticipate the Vendor and Purchaser being the main participants in any expert determination also suggests that the parties only intended disputes arising between those parties to be captured by the clause. In other words, only those disputes which have a subject matter connection to the Agreement were intended to be resolved by an expert. In my view, the third plaintiffs’ claims fall outside the clause.

[45]     Even if that is the case, it does not mean that a stay should not be granted. The Courts have granted a stay in cases involving multiple claims where some fall within the dispute resolution clause, and some fall outside it.8   That is particularly so where the claims are interdependent or derivative of each other.

[46]     Whether the third plaintiffs’ claims are interdependent with the breach of

warranty claim is difficult to tell at this early stage in the proceeding.  It will depend

6      See for example McNaughton v Dobson HC Hamilton CIV-2005-419-1629, 4 May 2006, and the cases cited in that decision.

7      See Barclays Bank PLC v Nylon Capital LLP [2011] EWCA Civ 826, [2012] 1 All ER (Comm)

912 at [28].

8      See the cases cited in Danone Asia Pacific Holdings Pte Ltd v Fonterra Co-operative Group Ltd [2014] NZHC 1681 at [41]–[53]. See also Sure Care Services Ltd v At Your Request Franchise Group Ltd HC Auckland CIV-2008-404-5112, 31 July 2009.

on the nature of the evidence to be called at trial.  As currently pleaded, different outcomes on each of the claims are possible despite the factual commonality.  For example, the premises might be found not fit for purpose in the first cause of action, but the second defendant may be found not liable for those defects in the second and third causes of action.

[47]     What is clear is that the extent of the factual overlap means that there will be an  unnecessary duplication  of proceedings  and  costs,  and  a risk  of inconsistent factual  findings,  if  the  Court  proceeding  and  expert  determination  continue  in parallel. It is in the interests of justice that the claims be determined in the one forum and at the same time.

[48]      If the third plaintiff ’s claims fall outside the scope of cl 12.1, the third plaintiffs cannot be compelled to submit that claim to expert determination.   That leaves pursuit in the High Court the preferred option.  That factor weighs against a stay of proceeding.

Nature of plaintiffs’ claims

[49]     Even if the third plaintiffs’ claims fall within cl 12.1, the plaintiffs say a stay should not be granted, because the claims as pleaded are not amenable to expert determination.

[50]     Expert determinations are an informal, speedy, and cost effective way of resolving disputes, particularly those of a technical or specialist character.  Experts apply their knowledge and expertise to resolve the dispute.  There is no right to be heard or call witnesses unless such rights are provided for in the agreement. There is also no provision for judicial oversight in an expert determination, with the parties bound by the determination.9

[51]     As pleaded, the plaintiffs’ claims in this case involve mixed questions of fact

and law.  Some of the factual issues in dispute involve technical or specialist areas

(e.g. the construction of the boat stack).  Other issues involve determinations of fact

9      See Greymouth Petroleum Acquisition Company Ltd v Petroleum Resources Ltd HC Auck CIV-

2003-404-6984, 22 December 2003 at [38]–[39].

(e.g. whether the second plaintiff was told about a balloon payment).  Resolution of the claims will depend, at least in part, on the evidence of witnesses to be called by each party.   Challenges to that evidence through cross examination will also be important.

[52]     Clause 12.1 does not provide for the calling of witnesses, or the application of evidential rules. Even the right to make submissions to the appointed expert is at his or her discretion (cl 12.1(2)).   That truncated procedure is not well suited to claims where the calling of witnesses is necessary to resolve disputed areas of fact in my view.

[53]     The claims also involve questions of law.  The first cause of action involves interpretation of the Agreement, determinations of breach, and the quantification of loss.  The second cause of action involves the law of negligence and the third cause of action concerns directors’ duties, including those owed under the Companies Act

1993.

[54]     As Ms East submits, there is nothing on the face of the clause preventing the parties from appointing a lawyer as expert in this case. But such an appointment would not address the concerns about the lack of any guarantees around procedural fairness.  Nor would it address the lack of judicial oversight in expert determinations. The parties are bound by the expert determination procedure pursuant to cl 12.1(6). Unlike arbitration, there is no limited appeal right.   Short of dishonesty, or non- compliance with cl 12.1, there is no scope to challenge erroneous decisions on the

law.10    The  lack  of  any  appeal  right  is  brought  into  sharp  focus  when  the

determination of claims depend on questions of law.

[55]     The defendants say that the expert determination procedure will allow a cost- effective resolution to the dispute, which is important given the quantum of damages at stake.   I accept that the relative cost and convenience of each procedure is a

relevant factor to take into account in deciding whether to grant a stay.  But in this

10     See for example Waterfront Properties (2009) Ltd v Lighter Quay Residents’ Society Inc [2015] NZCA 62, [2015] NZAR 492 at [29] and [39] where the Court noted that the conventional approach to a dispute resolution clause that provided any expert determination was final and binding meant that a determination could only be challenged on very limited grounds. Further, it is not enough to show that the expert had made a mistake, was negligent or even patently wrong.

case, those considerations bow to questions of fair process, and the right to have a claim determined according to the law.

[56]     Overall, I consider the range of factual issues, the need for evidence to be called, and the legal aspects of the claims make them ill suited to expert determination.

Overall balance

[57]     Although the defendants’ conduct does not amount to a submission to this jurisdiction or a waiver of the right to enforce cl 12.1, the uncertainty about whether the third plaintiff ’s claims fall within cl 12.1 and the nature of the claims pleaded, weigh against a stay in this case.

Result

[58]     The application for a stay of proceeding is dismissed.

[59]     If the parties cannot agree costs, then memoranda in support of an application may  be  filed  within  10  working  days,  with  memoranda  in  response  filed  five

working days thereafter.

Edwards J