Busby v Sargent HC Wellington CIV 2009-435-215
[2010] NZHC 211
•4 March 2010
IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY
CIV-2009-435-215
IN THE MATTER OF Schedule 2, Clause 5(1)(c) of the
Arbitration Act 1996
BETWEEN RAYMOND OWEN BUSBY JOCELYN DAWNE BUSBY Plaintiffs
ANDNIGEL PETER SARGENT IAN SARGENT
Defendants
Hearing: 25 February 2010
Counsel: PJH Jenkin QC for plaintiffs
K B Johnston for defendants
Judgment: 4 March 2010 at 4.15pm
I direct the Registrar to endorse this judgment with a delivery time of 4.15pm on the
4th day of March 2010.
RESERVED JUDGMENT OF MACKENZIE J
Introduction
[1] This is an application under Part 26 of the High Court Rules for leave to appeal on a question of law under cl 5(1)(c) of Schedule 2 of the Arbitration Act
1996. There is also before the Court an application by the defendants to strike out the application, for non-compliance with the timetable for filing of submissions prescribed by r 26.16.
BUSBY AND ANOR V SARGENT AND ANOR HC WN CIV-2009-435-215 4 March 2010
[2] The plaintiffs and the defendants were parties to a Joint Venture Agreement made in June 2003 relating to the purchase and operation of a farm property near Morrinsville. A dispute arose between them which was, pursuant to an arbitration clause contained in the Joint Venture Agreement, referred to arbitration before J L Marshall QC. The parties agreed that it would be more efficient to deal with the issues in several stages. Mr Marshall issued an Interim Award dated 11 June 2009 dealing with stage one. The plaintiffs, the respondents in that arbitration, seek leave to appeal to this Court against that Award.
The test to be applied
[3] The principles to be applied on an application for leave to appeal are well established. The discretion is to be exercised in accordance with the guidelines given by the Court of Appeal in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 at [54]:
Once the statutory threshold has been passed, the Court should in each case exercise its discretion in a disciplined way. The following are factors to be considered. Other than the first, which is the most important, they are not listed in any particular order. As a matter of caution, it should be said that there may be other considerations which should be taken into account in the circumstances of a particular case. They are to be seen as guidelines to, rather than as governing, the exercise of the discretion.
(1) The strength of the challenge/nature of point of law
The Court should consider in a preliminary way, as discussed in paras [56] and [57], the strength of the argument that there has been an error of law and the nature of that point. If it is a one-off point, in the sense that it is unlikely to occur again and cannot be seen as having any precedent value, either generally or to the parties on another occasion, then unless there are very strong indications of error leave should rarely be given. In other cases, the Court will be looking for a somewhat less stringent assessment. In those cases a strongly arguable case would normally be required for leave to be granted. The existence of conflicting decisions will also be relevant.
We have put the matter in this way not to indicate any basic departure from The Nema guidelines but because we are not comfortable with the conclusory way in which Lord Diplock expressed himself in stating when leave ought to be given in respect
of an alleged one-off error of law. To say that the Judge must be persuaded that the award is “obviously wrong” seems to us, with respect, to be inappropriate. Plainly the House of Lords in The Nema considered that the granting of leave in respect of an alleged one-off
error should not be a common event, but, while that can be accepted, we think it is better to say that what must be shown, on a preliminary view, is that the applicant has a very strongly arguable case that the arbitral tribunal has erred in law.
So, instead of speaking of a “strong prima facie case that the arbitrator was wrong” or “obviously wrong”, which are only labels intended to indicate that there is a high or very high threshold, we would, without intending any lowering of the barrier faced by an applicant for leave, substitute a test of a strongly or very strongly arguable case.
(2) How the question arose before the arbitrators
The Court should consider whether the question of law arose incidentally, or whether it was the very point of the arbitration. Although it may be undesirable for an arbitrator who is not legally qualified to deal definitively with the law, where the parties have chosen, with full knowledge that the dispute centres on a question of law, to submit that dispute to arbitration rather than asking a Court to determine the question, they should generally be held to their choice. The parties in that situation clearly took the risk that the lay arbitrator would not get the law completely right. In such a case, it will be harder to obtain leave to appeal. But if only during the arbitral process has a legal issue emerged as crucial to the decision, rather than being at the forefront from the beginning, leave will be more readily granted.
(3) The qualifications of the arbitrators
Where the arbitrator chosen by the parties is legally qualified, it will be harder to obtain leave to appeal the arbitral decision on a question
of law. As Lord Donaldson of Lymington MR stated in Ipswich
Borough Council v Fisons plc at p 724, if the chosen arbitrator is a lawyer and the problem is purely one of law, the parties must be assumed to have had good reason for relying on that lawyer's expertise.
(4) The importance of the dispute to the parties
Where the dispute has great significance to the parties, it may be easier to obtain leave to appeal, because the effect on them of an incorrect ruling will be all the greater. In this context it is to be remembered that some disputes referred to arbitration may involve more than just a question of money.
(5) The amount of money involved
Where a very substantial amount of money is involved in the arbitration, the cost of an arbitrator's mistake is obviously much greater. In that situation, it may be somewhat easier for the parties to obtain leave to appeal in order to ensure that an injustice is not done by leaving intact an incorrect ruling.
(6) The amount of delay involved in going through the Courts
This factor is to be balanced against the previous one. If the amount
of money involved is not so substantial, and the delay likely to be occasioned by submission of the dispute to the Court system is great,
it may be that the cost of correcting the alleged error of law is disproportionate to the amount in dispute. In this situation, it will be more difficult for the applicant to get leave to appeal. A fortiore if
the situation is one of urgency as in The Nema itself (see para [18]).
(7)Whether the contract provides for the arbitral award to be final and binding
Where there is such a clause, it will not be determinative, but it will be an important consideration. It will indicate that the parties did not contemplate becoming involved in litigation over the arbitral award. The High Court should lean towards giving effect to the stated preference of the parties for finality.
(8)Whether the dispute before the arbitrators is international or domestic
Under the 1996 Act, parties to an international arbitration can opt in
to cl 5; they can expressly choose to have cl 5 apply to their arbitration. If they do not opt in, then their recourse to the Court is
limited to the setting aside of the arbitral award on the grounds set
out in art 34 of the First Schedule (covering things like incapacity of parties, irregularity of procedures or failure to follow the rules of natural justice). However, if they do opt in, then it is clear that they did intend the possibility of recourse to the Court in the event of an error by the arbitrator on a question of law.
The issues
[4] There are broadly speaking two groups of interests involved. I will refer to them for convenience as the Busbys and the Sargents, while noting that there are different persons and entities within each of those respective groups.
[5] I will describe the background very briefly, sufficient only to make this judgment hopefully comprehensible to persons without access to the award. The background is extensively set out in the award, where relevant factual findings are also made. That wider statement of background, and the findings of fact, provide the basis against which this application for leave must be decided. The Busbys had agreed to buy a farm near Morrinsville (the Fransen farm), and had gone unconditional on that contract. As the time for settlement neared, they had still not succeeded in arranging finance. The Sargents, Nigel and Ian (who have a family
connection with the Busbys) agreed to assist. Nigel Sargent’s farm was used as security for a loan by which the balance needed to complete the purchase was raised. The parties entered into a Joint Venture Agreement to run the Fransen farm. It was run as a joint venture until the farm was sold in 2008. Four issues needed to be resolved in the arbitration. Two of those are relevant on the present application:
a) What was the percentage share of the Sargents in the beneficial ownership of the Fransen farm?
b)Whether the Busbys were entitled to deduct or set off against any capital gain their expenditure and liabilities in relation to the development and operation of the farming unit and, if so, what types
of expenditure and liabilities may be deducted or set off.
The Gold and Resources guidelines
[6] On the first guideline in Gold and Resources, I consider that both issues are one-off points, unlikely to occur again and with no precedent value either generally
or to the parties. That requires that the applicant for leave show a strongly or very strongly arguably case.
[7] Mr Jenkin’s submissions addressed the issues in [5] in reverse order. I consider them in the order they were addressed by the arbitrator. The first issue turned on the application of cl 2 of the Joint Venture Agreement which provided as follows:
2. Capital
2.1 The capital of the Joint Venture shall be such sum as is the total cost of and incidental to the purchase of the Farm, including all legal, brokerage and other costs incurred by the parties or any of them in relation to the purchase of the Farm and the formation of the Joint Venture less $2,838,785.00 (being the loan from Capital & Merchant Finance Limited of $2,577,500.00 and the GST of $261,285.00).
2.2Nigel and Ian will, between them, contribute $350,000 to the capital of the Joint Venture. The Trust shall contribute the balance.
2.3The parties’ share in the capital of the Joint Venture will be the proportion that their respective contributions bear to the total capital. Nigel shall nominate (in writing) the amount of his proportion which is to be allocated to Ian.
2.4Profit and loss shall be allocated between the parties in accordance with their shares in the capital of the Joint Venture.
[8] The principal question for determination in the arbitration on this first issue was whether the contribution of $350,000 referred to in cl 2.2 had been made by the Sargents. The shortfall on the purchase price to which I have referred was $350,000.
A mortgage was raised by the Busbys, secured over the farm being purchased and the Sargents’ farm, by which $350,000 was raised. The Sargents’ contention in the arbitration was that their having allowed the Sargent farm to be used as security constituted the contribution of $350,000 referred to in cl 2.2. The Busbys submitted that cl 2 makes it clear that the capital of the joint venture was to be calculated on the basis of cash contributed and that the Sargents did not make any cash contribution to the capital of the joint venture.
[9] In interpreting the contract, the arbitrator directed himself as to the principles
of interpretation to be applied in terms, the correctness of which is not challenged.
He referred to the well-known judgment of Lord Hoffman in InvestorsCompensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114 and to the approval of that passage by the New Zealand Court of Appeal in Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 at 81-82. He also noted that subsequent conduct of the parties which is shared or mutual can be considered when interpreting a contract, in reliance on the Supreme Court decision in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277. He went on to note the difference of opinion as to whether conduct which is not shared or mutual can be used as an aid to interpretation. The arbitrator made factual findings which included the following:
59.The clear intention of the parties, with this background, when they signed the agreement was that the sum of $350,000 which was made available to the Trust to purchase the property would be treated as
Nigel and Ian’s contribution to the capital of the joint venture. At that time the urgent need was for the sum of $350,000 to be provided through a mortgage over Nigel’s property, to enable the purchase of the Fransen farm to be completed. Whether that money came through Nigel mortgaging his property himself, and writing a cheque for $350,000; or through Nigel mortgaging his property to provide security for the Trust to borrow the sum of $350,000 was not an issue at that stage. Either way the wording of the agreement, read in the light of the factual matrix shows that the parties’ intention was that this $350,000 would be Nigel and Ian’s contribution to the capital of the joint venture.
[10] A court or arbitral tribunal which is faced with the task of interpreting a contract in its factual matrix must necessarily make findings of fact as to the factual matrix. Such findings are findings of fact, not of law. The interpretation of the contract in the light of that factual matrix is a question of law. Since an appeal under
cl 5 of the Second Schedule to the Arbitration Act is limited to an appeal on a question of law, an appeal may relate to the way in which the arbitrator has applied his factual findings in interpreting the contract but an appeal will not lie against the factual findings themselves.
[11] Accordingly, I consider that the relevant question is whether, having regard
to the facts as the arbitrator has found them to be on this issue, there is a sufficiently strong case that the arbitrator’s conclusion that the mortgaging of the property to enable $350,000 to be raised was a capital contribution which fell within cl 2.2 was wrong.
[12] There are a number of factual findings which underpin the conclusions in paragraph 59. At paragraph 16, the arbitrator held that it was clear that without the provision of the security over the Sargent farm, the purchase of the Morrinsville farm could not have proceeded and the Busbys’ deposit would most probably have been forfeited. It is also clear from the arbitrator’s factual findings that the fact that the
$350,000 would be raised under a mortgage arrangement under which the Busbys would be the borrowers, with the Sargent farm used as security, was known to all parties before the Joint Venture Agreement was signed.
[13] In the light of those factual findings, there is no obvious error in the arbitrator’s conclusion that the contract, properly interpreted in accordance with the
intention of the parties, was that the $350,000 raised under that mortgage was what the parties intended by cl 2.2. The arbitrator’s conclusion that it did not matter whether the $350,000 was borrowed directly by Nigel or not is a perfectly understandable conclusion. I do not consider that the contention that the parties intended that an additional $350,000 would be contributed is sufficiently arguable to justify the granting of leave to appeal. Having regard to the findings of fact, I consider that the proposition that the provision of security for the borrowing of
$350,000 was not a contribution in terms of cl 2.2, and that an additional cash contribution of $350,000 was required, involves a contrived and artificial interpretation of cl 2.2 which substantially ignores the factual matrix as determined by the arbitrator.
[14] Mr Jenkin QC submits that the suggestion in paragraph 61 of the award that the mere provision of a guarantee, with security to support it, is sufficient to be the contribution to capital required by cl 2.2 is in conflict with the analysis in paragraph
64. I do not consider that there is a conflict, when due regard is paid to the factual findings I have referred to at [12]. Mr Jenkin further submits that an important distinction between a borrowing by the Busby Trust and a borrowing by Nigel Sargent is that in the former case the Trust would meet the costs of the security and the outgoings, in the latter Nigel would have done so. The force of that submission depends upon factual findings as to who in fact bore the outgoings, and whether those outgoings would have formed part of the calculation of profit and loss under cl 2.4. The arbitrator addressed that issue in paragraphs 110 to 112 of the award. He held that the mortgage payments would be included in the expenses to be taken into account. That factual finding substantially diminishes the force of Mr Jenkin’s argument on that point. Further, the argument relies upon further evidence from Mr Butchard. That need for further evidence on the appeal also militates against the grant of leave.
[15] The second question relates to the fourth issue in the arbitration, namely whether the Busbys are entitled to deduct or offset, against the capital gain, expenditure in relation to the development and operation of the farming unit.
[16] Clause 4 of the Joint Venture Agreement provided that the Busby Trust would be the registered proprietor of the farm and would hold that as trustees for the parties pursuant to the Joint Venture Agreement. Clause 4.5 specified the trusts upon which the proceeds of sale would be held when the farm was sold. That provided:
4.5On the disposal of the Farm the Trust shall receive the proceeds of sale, and after payment of all outgoings and expenses in respect of the disposal hold the net proceeds of sale upon trust for the parties pursuant to the terms of this Agreement.
[17] Clause 6 is also relevant. That provided:
Indemnity
6.1The Trust and Raymond and Jocelyn (at whose request Nigel and Ian have entered into this Joint Venture) hereby agree to indemnify Nigel and Ian at all times against all loss and liability of any kind arising out of the Joint Venture
[18] The contention on behalf of the Busbys was that profit or loss on the venture was to be shared in accordance with cl 2.4. The arbitrator noted that the farm finances had not been kept separate, as cl 7 of the Joint Venture Agreement required.
He noted that to apportion the expenditure on the joint venture farm from the total
Busby farming operation would be a complex and expensive exercise. He noted that
it might show a loss rather than a profit. He also noted that if there was a loss, the
Busbys would bear that loss by reason of the indemnity in favour of the Sargents in
cl 6. The arbitrator’s findings on issue 4 are encapsulated in paragraphs 114 to 116
as follows:
114.For the purposes of answering Issue 4, the point is that clause 7.2, read with clause 2.4 and 6.1 shows that the intention of the parties was that “all expenditure on the farm” was to be paid out of the bank account into which the income from the farm was to be paid. If there was a loss, the claimants are identified.
115. There is no provision in the agreement for expenditure and liabilities
in relation to the development and operation of the Fransen farm to be deducted from, or set off against, the capital gain on sale of the
farm. Indeed clause 4.5 is clear. It is only the outgoings and
expenses in respect of the disposal of the farm which are to be deducted from the proceeds of sale, not all, or any, expenditure and liabilities in relation to the development and operation of the farm.
116.I therefore find that the respondents are not entitled to deduct or set off against the capital gain on the sale of the Fransen farm their expenditure and liabilities in relation to the development and operation of the farm.
[19] Mr Jenkin does not take issue with the arbitrator’s analysis in the paragraphs preceding those quoted, to the effect that the Joint Venture Agreement requires the creation of profit and loss accounts for the Fransen farm. He submits however that the arbitrator has decided that the effect of cl 4.5 is to eliminate cl 2.4. Mr Jenkin submits that conclusion is wrong.
[20] Mr Johnston submits that Mr Jenkin’s submission that all expenditure in the farming operation is to be taken into account before the proceeds of sale are divided does not give sufficient regard to the different interests involved in the joint venture.
He submits that cl 4 creates a trust in favour of the joint venture partners and that the trustee is required to account for the proceeds of sale in accordance with cl 4.5. Mr Johnston submits that the Joint Venture Agreement separately creates a joint venture between the Busbys and the Sargents and contains provisions which apply as between those parties for determining the profit and loss.
[21] It is clear from the arbitrator’s award, in particular paragraphs 114 and 115, that he regarded the provisions as to the way in which expenditure was to be met and profit and loss calculated as essentially separate from the provisions as to calculation
of the proceeds of sale to which the trusts in cl 4 were to attach. The interpretation contended for by Mr Jenkin involves the proposition that the obligations imposed on the trustee pursuant to the trust established by cl 4 are to be read in such a way that the trust fund which is established and quantified by cl 4.5 is reduced by expenditure incurred in carrying out the farming operation. I do not regard that a strong argument. I therefore do not consider that the argument that the arbitrator has wrongly interpreted the interrelationship between the various provisions gives rise to a strongly or very strongly arguable case.
[22] For these reasons I do not consider that the plaintiffs have demonstrated that there is a strongly arguable case in support of the interpretation for which they contend, on either of the issues raised.
[23] Because of that conclusion, I can deal briefly with the remaining guidelines
in Gold and Resources. The questions of law were the very point of the arbitration, and the arbitrator was legally qualified. These factors point against the grant of leave. The dispute is no doubt important to the parties, and there is a substantial sum
of money involved. I do not regard likely delay as an important consideration. The contract does not provide for the award to be final and binding, and the dispute is domestic not international. I regard these latter factors as essentially neutral: they do not weigh against the grant of leave, but nor do they justify a grant of leave which is not otherwise appropriate.
Application to strikeout
[24] The Sargents apply to strikeout the Busbys’ application for leave to appeal,
on the basis that submissions should have been filed, in accordance with HCR 26.16, within 10 days after 25 September 2009. The strikeout application was filed on
15 October 2009. Submissions were filed on 16 October 2009. Mr Johnston submits that the tight timeframes imposed reflect important policy considerations and the only indulgence should be by way of response to genuine extraordinary circumstances, which he submits do not arise here.
[25] The view which I have formed on the substantive application makes the decision on the strikeout application largely academic. For that reason, I have preferred to deal with the substantive application. This should not be taken as in any way diminishing the importance of compliance with the timetable for such applications, or as indicating any view on the merits of the strikeout application if that had been decisive.
Decision
[26] For these reasons the time for filing submissions on the application for leave
to appeal is extended, but leave to appeal is declined.
[27] The parties may submit memoranda as to costs if they are unable to agree.
“A D MacKenzie J”
Solicitors: Keesing McLeod, Lower Hutt for Plaintiffs
Gawith Burridge, Masterton for Defendants
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