Clark v Brendon Price Computers Limited

[2019] NZHC 700

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-503

[2019] NZHC 700

IN THE MATTER OF

An application for relief under sections 170, 172 and 174 of the Companies Act 1993

AND

General proceedings seeking relief at

common law including damages for breach of contract

BETWEEN

AND

BRADLEY D M CLARK

First Plaintiff

RARANGI DIVERSION LIMITED
Second Plaintiff

AND AND AND

BRENDON PRICE COMPUTERS LIMITED

First Defendant

BRENDON MORGAN PRICE
Second Defendant

TASMAN TECHNOLOGY LEASING LIMITED

Third Defendant

Hearing:

26 March 2019

Appearances:

M Keall for the Plaintiffs

K Puddle for the First and Second Defendants
No appearance by or on behalf of the Third Defendant

Judgment:

5 April 2019

JUDGMENT OF POWELL J

This judgment was delivered by me on 5 April 2019 at 3.30 pm pursuant to R 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

CLARK v BRENDON PRICE COMPUTERS LIMITED [2019] NZHC 700 [5 April 2019]

[1]    The second defendant, Brendon Price, seeks a stay of the second cause of action in this proceeding, namely a claim by the first plaintiff, Bradley Clark, against Mr Price regarding the third defendant, Tasman Technology Leasing Ltd (“TTL”). Specifically, Mr Price argues that an arbitration clause contained in the TTL constitution is binding on both Mr Clark and Mr Price as shareholders of TTL and is an arbitration agreement for the purposes of the Arbitration Act 1996. As a result, pursuant to Article 8 of Schedule 1 to the Arbitration Act, a stay must be ordered.

Article 8 provides:Arbitration agreement and substantive claim before court

(1)        A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.

(2)        Where proceedings referred to in paragraph (1) have been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.

[2]    Mr Clark denies that the arbitration clause is an arbitration agreement as defined in the Arbitration Act, meaning Article 8(1) is not engaged. In the alternative, if there is a valid arbitration agreement, Mr Clark argues that Mr Price has submitted to the jurisdiction of the Court and/or the arbitration clause is “inoperative, or incapable of being performed”.

[3]These issues will now be considered in turn.

Issue One – Is there an arbitration agreement?

[4]    TTL was established by Mr Clark and Mr Price in August/September 2013 to lease computers and associated equipment. Mr Clark and Mr Price are the only directors and shareholders, with an equal shareholding in TTL.

[5]    At the time TTL was incorporated Mr Clark and Mr Price approved a constitution for the company and subsequently arranged for this to be lodged with the Companies Office. Clause 70 of the TTL constitution provided:

Arbitration

When any difference or dispute arises between the directors or between the company and any shareholder or shareholders regarding the construction of these presents or any regulation herein contained or any provision or regulation substituted for or added to the regulations herein contained or any of them or the conduct, affairs, business or interest of the company and a complete or temporary deadlock in the management by the directors of the affairs of the company is thereby created, the matter in difference or dispute shall immediately be referred by the directors to the shareholders of the company at a general meeting called by the directors for that purpose. If at such general meeting there is a deadlock between the members of the company then such difference or dispute causing the deadlock shall be referred to a single arbitrator in the case the parties agree upon one, otherwise to two arbitrators (one to be appointed by each group of shareholders to the difference) in accordance with and subject to the provisions of the Arbitration Act 1908 (or in any statutory modification or re-enactment thereof).

[6]    There is no dispute that pursuant to s 31 of the Companies Act 1993, a company’s constitution is binding as between both the company and its shareholders,1 and as between each shareholder.2

[7]    Mr Keall, on behalf of Mr Clark, accepted that the TTL constitution, including clause 70, is binding on Mr Clark and Mr Price as the shareholders of TTL. He nonetheless submitted clause 70 is not an arbitration agreement for the purposes of the Arbitration Act. He noted “arbitration agreement” is defined in s 2 of that Act as follows:

arbitration agreement means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

[8]    Mr Keall submits that in this case there is no evidence of any agreement. In particular, he submitted the TTL constitution itself was not a contract or agreement, and that, relying upon Mr Clark’s evidence, it had been somewhat casually adopted by Mr Clark and Mr Price as TTL’s constitution at the time TTL was incorporated. Specifically, Mr Clark’s evidence was that it had only been signed so as to “certify” that this document was the constitution of TTL and did not amount to an agreement between the parties to refer disputes to arbitration.

1      Companies Act 1993, s 31(2)(a).

2      Companies Act 1993, s 31(2)(b).

Discussion – Issue One

[9]    The definition of arbitration agreement makes it clear that it is not limited to a purely contractual arrangement or agreement and it is simply not correct that agreement was not reached on clause 70 as part of the TTL constitution. Specifically, regardless of whether Mr Clark understood the effect of the constitution, or indeed had ever even read it, there can be no dispute that he and Mr Price reached agreement that TTL should have a constitution, and that that constitution should be in the form that was ultimately adopted. There was thus agreement that the TTL constitution containing clause 70 would be the constitution of TTL. Given this, Mr Clark cannot dispute that he, together with Mr Price, approved the constitution and arranged for it to be lodged at the Companies Office. Having taken those steps, by operation of law the TTL constitution became binding on both Mr Clark and Mr Price pursuant to s 31.

[10]   In those circumstances I have no hesitation in concluding clause 70 is an arbitration agreement in terms of the Arbitration Act, and is clearly wide enough to encompass the claims made by Mr Clark pursuant to ss 170, 172 and 174 of the Companies Act against Mr Price. Pursuant to Article 8(1) the dispute must therefore be referred to arbitration unless Mr Price had previously submitted to the jurisdiction of the Court and/or clause 70 is inoperative or otherwise incapable of being performed.

Issue Two – Did Mr Price at any point submit to the jurisdiction of this Court?

[11]   The parties agree that the starting point for whether there has been any submission to the jurisdiction of this Court is whether Mr Price has submitted a statement on the substance of the dispute pursuant to Article 8(1). As Heath J noted in Pathak v Tourism Transport Ltd:3

In my view, a critical distinction is to be drawn between a party who initiates curial interim injunction proceedings in anticipation or in aid of arbitral proceedings and a Plaintiff who does not. If proceedings are issued to seek an interim injunction without reference to the arbitration agreement, I am of the view that The Property People Ltd and the cases which follow apply to prevent a Plaintiff who issues such proceedings from subsequently seeking a stay. Similarly, a Defendant who opposes interim relief and fails to seek a stay (or protest jurisdiction) in respect of the substantive dispute will also be prevented from seeking a stay: see The Property People at para [24].

3      Pathak v Tourism Transport Ltd [2002] 3 NZLR 681 at [47] and [48].

This case is, however, different. The Plaintiffs clearly contemplated the commencement of arbitral proceedings to resolve any disputes. If

[a]      the Plaintiffs had relied expressly on Article 9 of the First Schedule to the Act to justify the grant of an interim injunction; and

[b]      the proceedings been initiated under the originating application procedure (as submitted by Mr Tingey)

the fact that the application for interim relief did not amount to a submission of the substance of the dispute to the jurisdiction of the Court would have been much clearer. But, in my view, the true test to be applied under Article 8 is whether the Plaintiffs submitted the substantive dispute to the jurisdiction of the Court. The reference to the “first statement on the substance of the dispute” (in Article 8) must be read in that context.

[12]   Applying these principles Keane J in Dependable Property Management Ltd v Li noted:4

As the cases to which counsel referred show, a party may make a first statement on the substance of the dispute in a variety of ways, some of which vary depending on whether the party seeking the stay is the plaintiff or defendant. There can be no general prescription.

[13]   In Mr Keall’s submission these authorities and, in particular Keane J’s comments, are wide enough that a submission on the substantive dispute does not require filing documents with the Court. Rather, it is sufficient simply to engage with the other parties’ solicitors on the substance of the dispute to amount to a submission for the purposes of Article 8(1). In this case, Mr Keall pointed to email correspondence between counsel after the proceedings were filed in which factual issues were raised with regard to the way in which the second cause of action had been pleaded by the plaintiffs, and the agreement reached between counsel that resulted in the plaintiffs repleading the second cause of action and required no statement of defence to be filed in the interim.

[14]   In the alternative, Mr Keall submits the fact that Mr Price did not raise the arbitration clause until filing the statement of defence amounted to a waiver of his rights to rely on the clause, or that he is otherwise estopped from so doing. Likewise, Mr Keall also argued that when Mr Price did raise the arbitration agreement, it actually amounted to an admission of claim. The statement of defence was filed in September

4      Dependable Property Management Ltd v Li [2015] NZHC 3355 at [21].

2018, and a defence was pleaded in respect of the first cause of action (by Mr Clark and the second plaintiff, Rarangi Diversion Ltd, against the first defendant, Brendon Price Computers Ltd). In respect of the second cause of action the statement of defence recorded:

Second Cause of Action

19.-38. They protest the jurisdiction of the High Court to determine the second cause of action contained paragraphs 19 to 28 due to the existence of an agreement to arbitrate in clause 70 of the Constitution of Tasman Technology Leasing Limited.

[15]   Despite this, Mr Keall went on to submit that notwithstanding the apparently clear protest to the jurisdiction made by Mr Price and the lack of any statement as to the substance of the dispute, because there had been no application for a stay and the High Court accordingly retained jurisdiction at that point, the failure to dispute the second cause of action by Mr Price was therefore an acceptance of the plaintiff’s claim.

Discussion – Issue Two

[16]   As noted above, while the submission of any statement on the substance of the dispute is a matter of fact, the “submission of a statement” clearly envisages steps to be taken in Court, and does not include correspondence between solicitors and counsel as to the merits of the dispute whether before or after the issue of proceedings.

[17]   Such is indeed clear from the survey of authorities set out in both Pathak5 and Dependable Property.6 It is also clear that considerable steps can be taken in the proceedings, including participating in case management and applying for and/or agreeing to interim orders without being found to have made a statement on the substance of the dispute in issue.

[18]   In this case I am satisfied that the steps taken by Mr Price’s counsel to question the way in which the second cause of action was pleaded was not a submission on the substance of the dispute. I note in particular that not only were no steps taken in Court, but that Mr Price’s position on the dispute was in fact never specified in any event.

5      Pathak v Tourism Transport Ltd, above n 3, at [41]-[46].

6      Dependable Property Management Ltd v Li, above n 4, at [21]-[35].

[19]   On the contrary, from the time Mr Price took his first step with regard to the second cause of action, he has consistently maintained the second cause of action should be dealt with by way of arbitration. Although no application for stay was initially filed this does not detract from the position taken by Mr Price and it was in any event consistent with the processes identified in McGechan on Procedure.7 It is difficult to see on what basis a party who has clearly protested the jurisdiction and followed a process apparently approved should be prevented from relying upon the arbitration agreement.

[20]   It follows that, given the consistent position taken by Mr Price in all documents filed with the Court, there has been no submission on the substance of the dispute in relation to the second cause of action. The emails between counsel, or the lack of any explicit reference to the arbitration clause prior to the filing of the statement of defence, cannot in any way be interpreted as amounting to some sort of waiver of  Mr Price’s right to have the dispute arbitrated, or mean that Mr Price is somehow now estopped from relying on the clause. It follows that there can also be no conceivable merit in suggesting that the protest to jurisdiction contained in the statement of defence can be interpreted as an admission of claim, rather than what it states, namely a protest to the jurisdiction of this Court.

[21]   I now turn to the remaining issue, whether the arbitration agreement contained in clause 70 of the TTL constitution is “inoperative or incapable of being performed”.

Issue Three – Is the arbitration agreement inoperative or incapable of being performed?

[22]   Mr Keall submits that clause 70 is inoperative or incapable of being performed for the following reasons:

(a)        Clause 70 requires both parties to agree on a single arbitrator and failing that to each appoint their own arbitrator.

7      McGechan on Procedure (looseleaf ed, Thomson Reuters) at [HR5.49.10] and [HR5.49.11]. I acknowledge the learned authors record that “in some circumstances” the filing of a statement of defence can risk a defendant being treated as submitting to the jurisdiction. Here, the statement of defence contained no substantive defence to the merits of the second cause of action. Accordingly, the filing of the statement of defence should not be interpreted as a submission to the Court’s jurisdiction.

(b)        As conceded by the defendants there is no mechanism in the clause 70 or the Act to alter the number of arbitrators or to resolve conflicting awards from two arbitrators. The Arbitration Act in fact requires a majority decision from any arbitral tribunal involving more than one arbitrator - article 29 of Schedule 1.

(c)        Specifically, article 29 of Schedule 1 of the Act provides: In arbitral proceedings with more than 1 arbitrator, any decision of the arbitral tribunal shall be made, unless otherwise agreed by the parties, by a majority of all its members.

(d)        Alternatively, even if it were possible to appoint three arbitrators, which is denied, the cost of appointing three arbitrators would be prohibitive and out of all proportion to the matters in issue in the second cause of action.

(e)        In that vein it would also be prohibitively expensive and inefficient to litigate the first cause of action in the High Court and to pursue the second cause of action in arbitration. Both disputes are in truth facets of the same failed business relationship between Price and Clark and the considerable duplication of evidence is inevitable.

(footnotes omitted)

Discussion – Issue Three

[23]   The submissions made by Mr Keall do not show that clause 70 is inoperative or incapable of being performed. Quite obviously if the parties agree to a single arbitrator, which is the first option specified in clause 70, all of the objections identified by Mr Keall are rendered moot.

[24]   Mr Keall’s submission also overlooks Article 1 of Schedule 2 to the Arbitration Act which contains a number of default provisions where particular arbitration agreements are silent as to the types of issues he identifies. Relevantly, Article 1 provides:

(3)In an arbitration with—

(a)a sole arbitrator; or

(b)2 or 4 or more arbitrators; or

(c)3 arbitrators and more than 2 parties,—

the parties shall agree   on the person or persons to be appointed as arbitrator.

(4)Where, under subclause (2) or subclause (3), or any other appointment procedure agreed upon by the parties,—

(a)a party fails to act as required under such procedure; or

(b)the parties, or the arbitrators, are unable to reach an agreement expected of them under such procedure; or

(c)a third party, including an institution, fails to perform any function entrusted to it under such procedure,—

any party may, by written communication delivered to every such party, arbitrator or third party, specify the details of that person’s default and propose that, if that default is not remedied within the period specified in the communication (being not less than 7 days after the date on which the communication is received by all of the persons to whom it is delivered), a person named in the communication shall be appointed to such vacant office of arbitrator as is specified in the communication, or the arbitral tribunal shall consist only of the person or persons who have already been appointed to the office of arbitrator.

[25]   These provisions make it clear that the legislation has specifically envisaged arbitrations with two arbitrators notwithstanding the issues identified by Mr Keall. It follows that the mere fact that clause 70 envisages the appointment of two arbitrators if no agreement can be reached on a single arbitrator, does not by itself render the clause inoperative or incapable of being performed.

[26]   More broadly, as discussed with counsel at the hearing, Article 1(4) provides a clear mechanism to follow where a party fails to carry out its obligations with regard to the selection of an arbitrator or arbitrators, to enable arbitrators to be appointed to ensure that the arbitration proceeds without delay.

[27]   There is accordingly no basis for suggesting clause 70 is inoperative or incapable of being performed. I therefore conclude a stay of the second cause of action should be granted.

Decision

[28]   The second cause of action is stayed pending arbitration of the dispute pursuant to clause 70 of the TTL constitution.

[29]   The parties have until 15 April 2019 to confirm whether any consequential orders are necessary to give effect to this decision, including whether the parties wish the Court to make any orders in respect of the first cause of action which is not

otherwise affected by this decision. In particular, the parties are to confirm whether or not they wish the proceedings as a whole to be stayed in the event that agreement is reached that the first cause of action can be arbitrated alongside the second cause of action, or whether the first cause of action should be transferred to the District Court, or that some other order is sought.

[30]   In the meantime, Mr Price is entitled to costs on a 2B basis together with disbursements as fixed by the Registrar. In the event that agreement cannot be reached on the quantum of the costs I will determine the issue following the filing of memoranda.

Powell J