Ex Ucl Limited v Solarix Networks Limited
[2015] NZHC 1474
•29 June 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-97 [2015] NZHC 1474
UNDER the Arbitration Act 1996 IN THE MATTER OF
an appeal against interim arbitration awards of Mr W M Wilson QC
BETWEEN
EX UCL LIMITED Plaintiff
AND
SOLARIX NETWORKS LIMITED Defendant
Hearing: 18 May 2015 Appearances:
S D Munro and J W C Nicolle for Plaintiff
J E Lethbridge and T J P Gavigan for DefendantJudgment:
29 June 2015
JUDGMENT OF WHATA J
This judgment was delivered by Justice Whata on
29 June 2015 at 3.00 p.m., pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Anderson Lloyd, Christchurch
Grove Darlow & Partners, Auckland
EX UCL LIMITED v SOLARIX NETWORKS LIMITED [2015] NZHC 1474 [29 June 2015]
[1] EX UCL Ltd (formerly Unleash Computers Ltd) (Unleash) sold its business to Solarix Networks Ltd (Solarix). The sale and purchase agreement envisaged a process for the calculation of Trade Debts to be added on to the purchase price. A dispute about the Trade Debt sum was referred to arbitration. The arbitrator made three awards.1
[2] Unleash now claims that the arbitrator made the following errors of law:
(a) A failure to give effect to clause 3.2(d) of an agreement for sale and purchase dated 20 March 2014 (the ASP) which operated to prevent Solarix having valid grounds to bring a dispute in the first place.
(b)A failure to apply the correct approach to interpreting disputed contractual terms, namely:
(i) Erring in interpreting the plain and ordinary meaning of the
word “owing” in clause 1.1(ccc) of the agreement.
(ii) Erring in interpreting the meaning of the word “owing” in the
wider context of the agreement as a whole.
(iii) Erring in interpreting the meaning of the word “owing” in the
wider context of the pre- and post-contractual events.
(c) A failure to apply the doctrine of estoppel by convention to the facts as he found them.
[3] The primary submission made by Solarix is that the five issues raised are not amenable to review because they relate to factual determinations and findings as to
weight and relevance that fall within the scope of the sole purview of the arbitrator.
1 Solarix Networks Ltd v Unleash (Interim Award), 22 October 2014; Solarix Networks Ltd v Unleash (Second Interim Award), 12 December 2014; Solarix Networks Ltd v Unleash (Final Award), 2 February 2015.
Background
First Interim Award
[4] The background to the dispute is succinctly recorded in the first interim award of the arbitrator, Bill Wilson QC.2 The arbitrator recorded:
1.Solarix, a network services provider, contracted to buy the business of Unleash, another provider. Among the assets to be acquired were the accounts recoverable of Unleash (referred to as its “Trade Debts”). In accordance with industry practice, Unleash billed for its services monthly in advance. The issue for my determination is whether Solarix is required to pay for the accounts of Unleash for services which were invoiced but not performed at the completion date of the purchase (31 March 2014) and which Solarix itself was therefore required to provide.
2.Unleash claims that, on the proper construction of the sale and purchase agreement, Solarix is required to pay. Solarix contends to the contrary and, in the alternative, that it is entitled to rely on an implied term, or to obtain rectification of the agreement, or to assert a mutual mistake. Unleash responds that Solarix cannot succeed on these arguments and is in any event estopped from doing so.
3.If Solarix is correct, the payment due for Trade Debts is $57,047.85, which amount it has paid to Unleash. If Unleash is correct, a further payment of $177,096.39 is due for invoices sent at the end of March for services to be provided during April. Unleash therefore claims that amount, together with interest and costs.
[5] The interim award refers to the agreement for sale and purchase signed on 20
March 2014, noting that it provided that Solarix would purchase the assets of Unleash (the assets), including “the Trade Debts” (clause 1.1(c)(vii)) and that the “Trade Debts” were defined in clause 1.1(ccc) as:
...all amounts owing to the vendor by current Customers of the Vendor in connection with the Business as at the Effective Time (whether or not due and payable at that time) but excluding [non-active customers] and “Trade Debt” means any of those amounts.
[6] The arbitrator found that although customers may have been billed for services yet to be performed, these amounts were not “owing” to Unleash until performance had occurred. He acknowledges that the agreement expressly includes amounts which were not due and payable as at the completion date, but observes:
9. ...In the context of a claim for services, I think that the clearest possible wording would be required to impose an obligation on the intended recipient to pay for services even if they were not provided. No such wording is to be found in the customer contracts of Unleash, which provided for Unleash to provide the specified services and for its customer to accept and to pay for them.
[7] The arbitrator observed that this preliminary definition of Trade Debts must be looked at in context of the contract as a whole, the background to the contract and any post contract conduct, citing Vector Gas Ltd v Bay of Plenty Energy Ltd3 and
Gibbons Holdings Ltd v Wholesale Distributors Ltd.4
[8] Looking at the other provisions of the contract, the arbitrator rejected the suggestion that Solarix’s obligation to perform the customer contracts assisted the interpretation issue, but accepted that the comparative definitions of Trade Debts and Trade Credits suggested a different approach was required as between them.
[9] The arbitrator then referred to the background of the contract and the parties
subsequent conduct. He referred to a “Key Terms” agreement signed in January
2014. Specific reference is made to the following point in clause 1 bullet point 3:
·Entitlement to all income for services provided transfers to Solarix as at the date of completion.
[10] The arbitrator considered this showed that parties understood “Solarix was to be entitled to all income for services provided after the date of Completion”. The arbitrator also accepts, however, that pre-contractual discussions are “explicable only on the basis that accounts for services yet to be performed were included.”5
[11] The arbitrator then observes:
14. Having reflected on the terms of the ASP as a whole, the background to the ASP, the post-contract conduct of the parties and the expert evidence, and applying the objective standard that is required, I have concluded that I would not be justified in departing from my preferred interpretation of the words of the definition of “Trade Debt,” namely that invoices for services yet to be performed do not come within that definition.
3 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
4 Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277.
15. That conclusion makes commercial sense. The parties could have agreed that payments for invoiced but unperformed services were to go to Unleash, thereby effectively inflating the purchase price, but is more likely that they intended that payment for services provided by Solarix would go to that company rather than Unleash.
Second interim award
[12] In the second interim award, the arbitrator addresses submissions by Unleash that the customer contracts provided that the services would be provided in advance and that the payment was due on 20th of the following month before the end of the period for which the customer was being billed. Unleash treated these amounts as owing in its accounts, which Solarix reviewed as part of its due diligence. It was said that Unleash was required to provide those services prior to the completion (clause 5.1(a) of the ASP) and Solarix to do so after completion (clause 6.6(b)). It
was further submitted that at the time Unleash issued the invoices on 30 March it had (on 26 March) commenced performing the services covered by those invoices. The effect of the first award was that the amounts owing and therefore payable to Unleash continued to increase, but that the ASP did not provide for apportionment of these amounts after Completion. Furthermore, contrary to the finding in the first interim award, Mr Salmon, the principal of Unleash, had on 1 April advised the actual payment due and this was not disputed by Mr Rasmussen, the principal of Solarix.
[13] The arbitrator was not persuaded that he should change his conclusion. He found that:6
I am confirmed in my view that the terms of the ASP as a whole, the background to it, the post contract conduct of the parties and the expert evidence are, when looked at in their totality, equivocal when it comes to the determination of what I have identified (and noted at [2] above) as the crucial question.
[14] As to that question, the arbitrator remained of the view that payment for services yet to be performed could not sensibly be said to be an “amount owing” to Unleash as at completion. The arbitrator noted that the right of a customer to terminate the contract if Unleash failed to provide the services it had contracted to
provide seemed to him to confirm, rather than conflict with the conclusion. The arbitrator accepted, however, that as a logical consequence of his interpretation, to the extent that Unleash had provided services between 26 and 30 March, it was entitled to receive payment for doing so.
Final award
[15] The final award addresses the final outcome, namely that in full settlement of its liability for costs, Unleash is to reimburse Solarix for the sum of $17,250, that being payments totalling $15,000 which Solarix has made towards the costs plus GST of $2,250.
The ASP
[16] The ASP is described in the introduction in the following terms:
The Vendor has agreed to sell, and the Purchaser has agreed to purchase, the
Business and the Assets on the terms and conditions of this agreement.
[17] Clause 3 deals with purchase price. Relevantly, clause 3.1(c) states:
(c) The Purchaser shall pay to the Vendor $745,125.00 (less the Deposit) on the Completion Date (“First Instalment”). The First Instalment shall be paid to the Vendor’s solicitor’s trust account and shall be applied by the Vendor’s solicitors on the Completion Date to:
(i) discharge those liabilities of the Business in respect of which a financing statement has been registered on the Personal Property Securities Register; and
(ii) discharge all liabilities of the Business incurred before the Effective Time owed to each trade creditor listed in part D of Schedule 2 for the purpose of the Vendor complying with its obligations under clause 12.1,
And the balance of the First Instalment shall be released to the Vendor and the Vendor shall use the First Instalment as necessary to comply with its obligations under clauses 6.3 and 12.1, provided that where the Vendor has not complied with its obligation under clause
6.3(l) in respect of each trade creditor listed in part D of Schedule 2,
the Vendor’s solicitor shall retain half of the First Instalment until the Vendor has fully complied with that obligation.
(d) The Purchaser shall pay to the Vendor the balance of the Purchase Price being $248,375.00 on the date that is six months after the Completion Date (“Second Instalment”).
[18] Clause 3.2 then deals with Trade Debt. It states:
3.2Trade Debt Payment Sum: Payments
(a) In addition to the Purchase Price, the Purchaser will pay to the Vendor the following in respect of the Trade Debts within 31 days of Completion:
(i) an amount equal to 100% of the invoiced sum of each Trade
Debt that:
(1) is not yet due for payment as at the Effective Time;
or
(2) was invoiced 30 days or less before the Effective
Time,
(together referred to as the (“100% TDPS Portion”));
(ii) an amount equal to 80% of the invoiced sum of each Trade Debt that is overdue for payment between one (1) day and thirty (30) days (inclusive);
(iii) an amount equal to 30% of the invoiced sum of each Trade Debt that is overdue for payment thirty-one (31) days or more,
(together referred to as the “TDPS”). For the avoidance of doubt, if Completion does not occur on the Completion Date due to Purchaser default, payment of the TDPS must be made within 31 days of the Completion Date.
[19] The agreement then envisages a process for the estimation of the TDPS. In particular clause 3.2 envisages:
(b) On or before five (5) Business Days before the Completion Date, the Vendor and the Purchaser shall agree an estimate of the TDPS for the purposes of the TDPS Guarantee (making allowance for likely receipt of Trade Debts between this date and the Completion Date).
(c) If the Vendor and the Purchaser cannot agree an estimate of the TDPS for the purposes of the TDPS Guarantee by the Completion Date then the estimate of the TDPS for the purposes of the TDPS Guarantee shall be set by the Vendor at no higher than $300,000.
(d) Immediately following Completion, the Vendor and Purchaser shall agree the TDPS. If any dispute arises as to calculation of the TDPS
within 5 Business Days of the Completion Date, the matter shall be determined by an expert to be appointed in accordance with clause
21.5. Upon agreement by the parties or determination by an expert of the final calculation of the TDPS, the parties agree that the
difference between the invoiced sum of the Trade Debts to which the TDPS relates and the TDPS will be deemed to be a deduction from the Purchase Price.
[20] There is also provision at clause 3.2(e) for payment of a disputed sum, namely:
(e) The Vendor acknowledges if the Purchaser disputes liability for payment of a part of the 100% TDPS Portion or where the parties are in dispute about whether the Vendor has accounted to and paid the Purchaser for any amounts in respect of Trade Debts received by the Vendor after the Completion Date under clause 13.2, then the Purchaser shall pay the disputed sum and/or the sum alleged not to have been accounted for to the Vendor’s solicitor’s trust account to be held pending resolution of the dispute in relation to such dispute. If the parties are unable to resolve the dispute within 10 Business Days of the Purchaser raising the dispute, the matter shall be determined by an expert to be appointed in accordance with clause
21.5. Interest shall follow the funds.
[21] Trade Debts is defined in the agreement to mean:
…all amounts owing to the Vendor by current Customers of the Vendor in connection with the Business as at the Effective Time (whether or not due and payable at that time) but excluding those set out in part C of schedule 2 and “Trade Debt” means any of those amounts.
[22] By contrast Trade Credits means:
…all amounts due and payable to Trade Creditors by the Vendor in connection with the Business as at the Effective Time in respect of goods or services supplied to the Vendor before the Effective Time and “Trade Credit” means any of those amounts.
[23] Completion is defined. Completion means:
…completion of the sale and purchase of the Business and the Assets in accordance with this agreement and where the context requires means the time at which such completion takes place or is to take place.
[24] Completion date means:
…subject to clause 6.1, 31 March 2014.
[25] Clause 6.1 then provides that if completion is deferred in accordance with clause 7.1, the completion date will be the date to which it is deferred.
[26] Clause 7.1 then deals with completion not taking place in these terms:
If Completion that does not take place on the current Completion Date because the Vendor materially fails to comply with its obligations under clause 6.3 (Completion), the Purchaser will not be obliged to complete this agreement and may without prejudice to any other rights or remedies it has in law or in equity by notice to the Vendor:
(a) proceed to Completion to the extent reasonably practicable;
(b) postpone Completion to a date not more than 10 Business Days after the current Completion Date; or
(c) terminate this agreement.
[27] Clause 6.3 sets out a number of items that the Vendor must deliver to the
Purchaser prior to the Completion Date.
[28] Clause 12 deals with liabilities and apportionments, namely:
12.1Vendor’s liability: The Vendor will pay, by the Completion Date, for and remains responsible for all liabilities, debts and obligations incurred by it before the Effective Time (including the Excluded Liabilities and all outgoings and expenses accrued in connection with the Business or the Assets in relation to the period before the Effective Time) except to the extent that any of the foregoing are expressly included in the Assumed Liabilities.
12.2Purchaser’s liability: The Purchaser is responsible for all liabilities, debts and obligations incurred by it in connection with the Business and the Assets after the Effective Time (including all outgoings and expenses accrued in connection with the Business or the Assets in relation to the period after the Effective Time).
[29] Clause 13 specifically deals with Trade Debts. More specifically clauses 13.1 and 13.2 provide:
13.1Trade Debts: Subject to Completion, the parties acknowledge and agree that from the Completion Date the Trade Debts will be the property of the Purchaser. For the avoidance of doubt, Trade Debts exclude amounts owing to the Vendor by persons that do not have an active service with the Vendor at Completion and the Vendor will continue to own all such debts and, accordingly, such debts will remain payable to the Vendor. The Purchaser acknowledges that it is
not paying for nor taking ownership of any debtors of the Vendor that are not current customers.
13.2Vendor to account to Purchaser: Where a payment in respect of Trade Debts is received by the Vendor after the Completion Date, the Vendor holds the amount received on trust for the Purchaser and the Vendor must, no later than five Business Days after receipt of the amount, account to and pay the Purchaser for any amounts in respect of Trade Debts received by the Vendor after the Completion Date.
[30] The agreement also contains a dispute resolution clause. In particular clause 21 provides:
21.1In the event of any deadlock in decision making, difference or dispute arising out of or relating to this agreement including any question regarding the existence, validity or termination of this agreement the parties will endeavour to resolve such difference or dispute by discussion and negotiation. If agreement is not reached within 20 Business Days of receipt of the notice of dispute then the parties will proceed to mediation by either party giving notice to the other party referring the dispute to mediation and will agree on a suitable person to act as mediator. If the parties cannot agree on a mediator within 10 Business Days of receipt of the notice of mediation the president of the New Zealand Law Society or his or her nominee, (the President) will appoint a mediator and set the fees for the mediator. The parties shall bear the mediator’s fees equally.
…
21.3If the mediation is terminated as provided above and the difference or dispute is still unresolved then the difference or dispute may be referred to and finally resolved by arbitration in accordance with the Arbitration Act 1996 (and any amendments to that Act or any other statutory provision then relating to arbitration) by either party and the current arbitration protocols of the Institute. The arbitration will be by one arbitrator to be agreed on by the parties and if they fail to agree within 10 Business Days of receipt of the notice of arbitration, then by an arbitrator to be appointed by the President. The arbitration will be conducted in Christchurch.
[31] The parties also agreed that the award of the arbitrator was to be final and binding:
21.4The parties agree that the award of the arbitrator will be final and binding. Clause 5 of the Second Schedule to the Arbitration Act
1996 will not apply to any arbitration between the parties.
[32] Clause 21.5 then states:
21.5If this agreement provides for any dispute to be determined by an expert, this clause 21.5 will apply instead of clauses 21.1 to 21.4.
The expert shall be appointed by the President for the time being of the Canterbury Branch of the New Zealand Institute of Chartered Accountants (or his/her nominee) at the request of either party. The expert shall determine the procedure for the determination and the parties shall cooperate with the expert including complying with the expert’s directions. The expert’s determination is final and binding. The parties shall bear the expert’s fees equally. The Arbitration Act
1996 will not apply.
Jurisdiction
[33] The parties did not use their agreed dispute resolution procedure for this dispute. Instead, the parties signed an Arbitration Agreement on 29 July 2014. The agreement provided at clause 9 that all of the additional optional rules in schedule two of the Arbitration Act 1996 (the Act) would apply, excluding clauses 1, 2 and
3(1)(a). They expressly agreed that clause 5 of schedule two would apply, allowing appeals on questions of law only. Clause 5 provides:
5 Appeals on questions of law
(1) Notwithstanding anything in articles 5 or 34 of Schedule 1, any party may appeal to the High Court on any question of law arising out of an award—
(a) If the parties have so agreed before the making of that award; or
(b) With the consent of every other party given after the making of that award; or
(c) With the leave of the High Court.
(2) The High Court shall not grant leave under subclause (1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties.
(3) The High Court may grant leave under subclause (1)(c) on such conditions as it sees fit.
(4) On the determination of an appeal under this clause, the High Court may, by order,—
(a) Confirm, vary, or set aside the award; or
(b) Remit the award, together with the High Court's opinion on the question of law which was the subject of the appeal, to the arbitral tribunal for reconsideration or, where a new arbitral tribunal has been appointed, to that arbitral tribunal for consideration,—
and, where the award is remitted under paragraph (b), the arbitral tribunal shall, unless the order otherwise directs, make the award not later than 3 months after the date of the order.
…
(10) For the purposes of this clause, question of law—
(a) includes an error of law that involves an incorrect interpretation of the applicable law (whether or not the error appears on the record of the decision); but
(b) does not include any question as to whether—
(i) the award or any part of the award was supported by any evidence or any sufficient or substantial evidence; and
(ii) the arbitral tribunal drew the correct factual inferences from the relevant primary facts.]
[34] Ms Lethbridge submitted that the interpretation of the contract in this case involved an assessment of mixed fact and law and that I may only interfere in circumstances where the outcome is effectively outside the realm of reasonable outcomes.7 By contrast, Mr Munro submitted the identification of relevant facts for the purpose of interpretation of the contract is a question of law, citing the second stage of the three stage process essayed by Mustill J in Finelvet AG v Vinava Shipping Co Ltd,8 namely:
In a case such as the present, the answer is to be found by dividing the arbitrator’s process of reasoning into three stages: (1) The arbitrator ascertains the facts. This process includes the making of findings on any facts which are in dispute. (2) The arbitrator ascertains the law. This process comprises not only the identification of all material rules of statute and common law, but also the identification and interpretation of the relevant parts of the contract, and the identification of those facts which must be taken into account when the decision is reached. (3) In the light of the facts and the law so ascertained, the arbitrator reaches his decision.
[35] I am doubtful that Mustill J had the current permutation of the factual matrix in mind.9 In any event, the clear policy of the Arbitration Act is to preclude inquiry
into “facts” of which an examination of the conduct of the parties must involve.10
7 Citing Shell Petroleum v Vector Gas [2014] NZHC 31.
8 Finelvet AG v Vinava Shipping Co Ltd [1983] 2 All ER 658 (QB) at 663.
9 As distinct from Lord Wilberforce’s ‘factual matrix’ in Reardon v Smith Ltd v Hansen –Tangen
[1976] 1 WLR 989 (HL) at 997.
10 Refer also Shell Petroleum Ltd v Vector Gas, above n 7 at [38]—[40]; Arbitration Act 1996, sch
[36] Helpfully Mackenzie J in Busby v Sargent11 addressed this issue with his usual conciseness of expression:
[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.
[37] I respectfully adopt this approach.
Assessment
Issue 1 – meaning and application of clause 3.2(d)
[38] Mr Munro maintained that clause 3.2(d) imposes an obligation to agree “immediately”; that any dispute about the TDPS had to be raised within five working days of the completion date and then, if so, resolved by an expert.
[39] He also contends that clause 3.2(d) was triggered because Unleash emailed a calculation for the TDPS to Solarix immediately after completion date (“the 1 April email”) and Solarix did not raise any issues about it until well after the five day period had expired. Mr Munro thus submits that Solarix was prohibited from disputing the figure and that the arbitrator failed to squarely address this issue.
[40] Ms Lethbridge submits that this issue was never properly pleaded or in focus before the arbitrator and that in any event, the arbitrator addressed the 1 April email and its implications and was not persuaded to change his conclusions about the meaning of “owing”. Furthermore, and in any event, clause 3.2(d) did not preclude referral to arbitration of the central issue, namely the meaning of “amounts owing”.
[41] In order to determine whether Solarix is bound by Unleash’s estimate, I must
therefore resolve:
2 cl 5(10).
11 Busby v Sargent HC Wellington CIV-2009-435-215, 4 March 2010.
(a) Whether the effect of clause 3.2(d) was properly before the arbitrator;
(b)Whether the arbitrator addressed the implications of clause 3.2(d); and if not
(c) What the effect of clause 3.2(d) if triggered is; and
(d) Whether the 1 April email triggered clause 3.2(d); and if so
(e) Whether the meaning of “amount owing” could be referred to
arbitration pursuant to clause 21.1—21.4 irrespective of clause 3.2(d).
Whether the effect of clause 3.2(d) was properly before the arbitrator
[42] Contrary to Ms Lethbridge’s submissions, I accept that the present issue was
properly pleaded and before the arbitrator. The statement of defence dated
27 August 2014 and the amended statement of defence dated 17 September 2014 pleaded:
25.It denies that the declaration sought in paragraph A(i) should be made and says further:
(a) …
(c) The parties agreed that TPDS pursuant to clause 3.2(d) of the S&P Agreement. The plaintiff is now precluded from raising a dispute.
[43] Unleashed also recorded the issue in correspondence between solicitors. It stated:
(h) As required by clause 3.2(d) of the Agreement, the parties agreed the TDPS figure following Completion. Our client sent yours a calculation of the TDPS on 1 April 2014. Any objection about the TDPS calculation was to be made within five business days of completion and none was made. Your client did not raise any objection to this calculation and is now bound by it.
[44] The memorandum of counsel for the defendant in relation to the interim award then squarely highlights the issue in the following terms:
10.Paragraph 12 of the Interim Award refers to “discussions” regarding the “likely payment” for accounts receivable as part of the consideration of post-contract conduct. The Interim Award does not make mention of the 1 April email where Mr Salmon advises the actual TDPS figure. This was not correspondence about a “likely payment” but the actual figure, calculated by Mr Salmon in furtherance of the specific contractual obligation as required by clause 3.2(d) and was not disputed by Mr Rasmussen within the contractual timeframe to do so.
11. This 1 April agreement does not fall in the same category as earlier estimates of the “likely payment” but was a firm figure which, it was submitted, has contractual force and should be binding on Solarix.
12.As noted, the Interim Award does not address this critical issue and it is unclear whether it has been taken into account. If the Arbitrator considers it appropriate, Unleash would be grateful for further consideration in explanation of this issue.
[45] While I accept that this issue was not front and centre in the arbitration, the arbitrator was obliged to address it.
Whether the arbitrator addressed the implications of s 3.2(d)
[46] I am not satisfied that the arbitrator specifically turned his mind to the effect of clause 3.2(d). The first award did not expressly address this issue. The arbitrator also conceded in his second interim award that he did not refer to the 1 April email. Having then considered this email, together with further submissions, the arbitrator confirmed his view that the post-contractual conduct was equivocal in terms of the definition of the amount owing. But this does not square up to Unleash’s pleading, nor the clear point made by Ms Paterson for Unleash in her memorandum on the interim award about the effect of clause 3.2(d).
[47] I turn then to examine the issue.
What is the effect of clause 3.2(d)?
[48] Given its significance I repeat it here for ease of reference:
(d) Immediately following Completion, the Vendor and Purchaser shall agree the TDPS. If any dispute arises as to calculation of the TDPS within 5 Business Days of the Completion Date, the matter shall be determined by an expert to be appointed in accordance with clause
21.5. Upon agreement by the parties or determination by an expert
of the final calculation of the TDPS, the parties agree that the difference between the invoiced sum of the Trade Debts to which the TDPS relates and the TDPS will be deemed to be a deduction from the Purchase Price
[49] The primary obligation is to agree the TPDS immediately following completion. If a dispute arises as to the calculation of the TDPS within 5 working days of the Completion Date, the matter must be referred to an expert. While not express, the combined effect of these provisions is that contracting parties must have reasonably expected that any dispute about the “calculation” of the TDPS will be raised by the relevant party within five working days of the Completion Date.
[50] This construction is supported by the scheme of clause 3.2 as a whole. It provides a timeous, step by step, method for resolving disputes about the calculation of and liability to pay the TDPS, namely:
(a) The sum set aside as a guarantee for the TDPS must be agreed five days prior to the Completion Date (clause 3.2(b));
(b)If agreement as to a guarantee cannot be reached by the stipulated date, the guarantee shall be fixed at $300,000 (clause 3.2(c));
(c) The TDPS must be fixed by agreement immediately following
Completion, namely 31 March 201412 (clause 3.2(d));
(d)If a dispute about calculation is raised within five working days after the Completion Date, the dispute is referred to an expert (clause
3.2(d)); and
(e) Upon agreement by the parties or determination by an expert of the final calculation of the TDPS, the parties agree that the difference between the invoiced sum of the Trade Debts to which the TDPS relates and the TDPS will be deemed to be a deduction from the
Purchase Price (clause 3.2(d));
12 The date of “Completion” was not argued before me, but I assume from the pleadings that it refers to 31 March 2014 i.e. the contractual “Completion Date”.
(f) If the Purchaser disputes liability for a part of the 100 per cent portion or disputes whether the Vendor has properly accounted for the Trade Debt after the Completion Date, the Purchaser must pay the disputed sum or hold the sum allegedly not accounted for on trust and the dispute must be referred to an expert within ten working days (clause
3.2(e)).
(g)Clause 21.5 excludes the operation of the Act where the agreement envisages referral to an expert.
[51] The wider context of the agreement also supports a timeous calculation of the TDPS. The arbitrator found the pre-contractual discussions are explicable only on the basis that Trade Debt included all invoices up to the completion date. Furthermore, the parties had only just concluded the quantum of the guarantee for the TDPS in the sum of $283,873.69. This strongly suggests that the parties expected a straightforward calculation process and there is otherwise nothing to suggest from context surrounding the agreement that the calculation would be determined other than in accordance with the timeline mapped out in clause 3.2(d).
[52] Accordingly, the clear expectation of the parties as evinced through clause
3.2 in light of surrounding context is that the “calculation” of the TPDS would be a straightforward matter, resolved within five working days after completion date or referred to expert evaluation. However, if there is then a dispute about liability to pay a sum for the 100 per cent TDPS portion, this is to be referred to an expert within ten working day of the dispute being raised. Conversely referral to arbitration on this issue was plainly not expected by the parties.
Was clause 3.2(d) triggered by the 1 April email?
[53] I am not persuaded by Ms Lethbridge’s argument that the arbitrator found that the 1 April email did not trigger 3.2(d) as a matter of fact. There is simply nothing in the awards to suggest that he made any factual finding about it, other than to note that it formed part of the factual matrix for the purposes of interpretation of “amounts owing”.
[54] Turning then to the facts, the 1 April email from Mr Salmon to Mr
Rasmussen states:
Hi Flemming,
See attached AR as at midnight March 31st with non-transferring customers removed (on a separate sheet), with percentage values corresponding $ values calculated at the bottom.
I make TDPS of $234,144.24.
Let me know if you have any concerns with this.
…
[55] By this stage Unleash knew what the actual invoiced amounts were as the relevant billing run had taken place.13
[56] Mr Rasmussen however says that there is nothing in the communications that suggested that this amount (showing the total accounts receivable) included amounts payable to Unleash post March 2014. He says that the wash up figure that was still to be paid still needed to be finalised. That payment was not due until 31 days post completion (being 1 May 2014) pursuant to clause 3.2. He said that a reconciliation of the TDPS was not finalised until 1 May 2014 and that the figure that arose from the reconciliation was one of $57,047.85 payable by Solarix to Unleash for those amounts invoiced for the period pre-completion.
[57] But Mr Rasmussen’s elongated process of reconciliation to “calculate” the TDPS is not consistent with the clear objective of clause 3.2(d) namely that the TDPS amount be agreed immediately following completion. Relevantly, in my view, Mr Salmon specifically refers to the “TDPS”. The contractual significance of this missive must have been known to Mr Rasmussen, having just concluded the ASP and agreed the TPDS guarantee. However, any dispute about “liability” to pay the
100 per cent TDPS portion was a separate issue, and subject to clause 3.2(e) rather than clause 3.2(d). The issue in this case fundamentally about liability; namely whether Solarix is properly liable for a sum equivalent the portion of the TDPS
claimed by Unleash.
13 Refer paragraph 38 of affidavit of Mr Salmon.
[58] In my view, therefore, the 1 April email triggered the clause 3.2(d) process meaning that Mr Rasmussen had to raise any dispute about the “calculation” of the TDPS within five working days. Nevertheless, Solarix could subsequently challenge “liability” to pay a sum in respect of the 100 per cent TDPS portion, but had to follow the clause 3.2(e) expert referral process within ten working days of raising the dispute. It follows that any agreement reached pursuant to 3.2(d) did not debar Solarix from raising an issue of liability in relation to the 100 per cent TDPS portion, including whether any amounts claimed were properly included within TDPS.
Whether the meaning of “amounts owing” could still be referred to arbitration pursuant to clause 21.1-21.4 irrespective of clause 3.2(d)?
[59] Ms Lethbridge maintains that a dispute about the calculation of the TDPS at clause 3.2(a) is something different from a dispute about the “meaning” to be given to “amounts owing”. The former is an arithmetic exercise while the latter issue is definitional and properly amenable to arbitration under clause 21.
[60] Supporting Ms Lethbridge’s argument, I note that Unleash’s solicitors made
the following comment when agreeing to arbitration:
You have attempted to invoke clause 3.2(e) of the Agreement. We disagree that clause 3.2(e) applies. The parties have already agreed the quantum of TDPS under clause 3.2(a). Clause 3.2(e) is not intended to give your client an appropriate opportunity to revisit its obligations or Agreement. The resolution mechanism provided by clause 3.2(e) is also inappropriate as to the nature of the dispute. This is not an accounting/quantitative one, but an issue of interpretation of the Agreement. In the circumstances, the dispute resolution provisions in clause 21.1 to 21.4 should apply.
[61] Against this, as the preceding quote observes, Solarix’s solicitors sought to invoke the dispute resolution process at clause 3.2(e), presumably because they considered Solarix bound to refer any dispute about liability to pay the 100 per cent TDPS portion to an expert.
[62] For my part, clause 3.2 secured timeous resolution of any dispute about the TDPS, if necessary, by an expert appointed by appointed by the President for the time being of the Canterbury Branch of the New Zealand Institute of Chartered Accountants (or his/her nominee). The simple reason for this is that the
quantification of Trade Debts is a quotidian function of an accountant. While this case illustrates the inherent capacity to make any exercise more complex than it needs to be, the parties plainly expected that exercise would be a simple one, and ultimately resolved by an accountant. In short, a dispute about the TDPS was not a matter that the contract contemplated would be referred to arbitration.
[63] Accordingly, the effect of clause 3.2 is that Solarix was bound to refer any dispute about the calculation of, or liability to pay, the TDPS to an accountant within the periods specified. Problematically Unleash specifically directed Solarix to go down an arbitration route. In my view it cannot now reasonably complain that the
dispute about liability was referred to and resolved by the arbitrator.14
Result on issue 1
[64] I therefore dismiss the first ground of appeal. The capacity to raise an issue of liability to pay in respect of the 100 per cent TDPS portion was specifically contemplated by clause 3.2(e) irrespective of any agreement reached on the calculation of the TDPS pursuant to clause 3.2(d). While that clause also contemplated referral to an expert within ten days of the dispute about liability being raised, Unleash directed Solarix to refer the issue to arbitration. The reservation made by Unleash in relation to clause 3.2(d) was of no material consequence.
Issue 2 – Contract interpretation
[65] Mr Munro contends that the arbitrator defaulted too quickly to an apparently “commercially sensible” interpretation of the agreement in preference to the plain and ordinary meaning of the words used. This is said to have produced three key errors which I will shortly address.
[66] I make the preliminary point that I perceive no error of principle in the way that the arbitrator framed the interpretative exercise by first forming a preliminary
view of the meaning of the words used and then turning to the wider context,
14 After the hearing I sought submissions on the effect of clauses 21.1 — 21.4. While helpful they have not caused me to alter the views expressed above.
including the contract as a whole, the background to the contract and relevant post contractual conduct.15
[67] The arbitrator’s approach is perhaps more liberal than the approach adopted by Wilson J in Vector Gas to the effect that the Court “should go beyond the contract itself only to resolve a relevant ambiguity or for the purpose of addressing issues of commercial sense or estoppel.”16 But he was in the minority on this point.17 Nor do I consider that the majority in Firm P1 Limited v Zurich Australian Insurance Limited t/a Zurich New Zealand18 departed from Vector Gas, as Mr Munro appeared to suggest. Rather the majority simply emphasised that the “text remains centrally important” and “will be a powerful, albeit not conclusive, indicator of what the parties meant.”19
Erring in interpreting the plain and ordinary meaning of the word “owing” in clause
1.1(ccc) of the agreement
[68] Clause 1.1(ccc) states:
“Trade Debts” means all amounts owing to the Vendor by current Customers of the Vendor in connection with the Business as at the Effective Time (whether or not due and payable at that time) but excluding those set out in part C of schedule 2 and “Trade Debt” means any of those amounts.
[69] Mr Munro contends (in short) that the arbitrator erred by ascribing an ordinary meaning to “owing” based on a commercially sensible interpretation that does not fit Unleash’s business model. He emphasised that the arbitrator assumed that any enforceable debt cannot be incurred without the provision of a service. But, Mr Munro submits, Unleash’s (now Solarix’s) business model is based on customers incurring enforceable debt in advance of service delivery.
[70] Mr Munro might be right about Unleash’s business model. Nevertheless, the assessment of commercial efficacy and associated legal liability is an assessment of
mixed fact and law. The arbitrator concluded, in light of all the evidence “that
15 If authority is needed, refer to Tipping J’s statement in Vector Gas, above n 3 at [24].
16 Vector Gas, above n 3 at [127].
17 Blanchard, Tipping, McGrath and Gault JJ formed the majority on this issue.
18 Firm P1 Limited v Zurich Australian Insurance Limited t/a Zurich New Zealand [2014] NZSC
147, [2015] 1 NZLR 432 at [61].
19 Above, n 18 at [63].
payment for services yet to be performed could not sensibly be said to be “owing” to Unleash as at completion.” Any mistake made by the arbitrator following this composite inquiry is not amenable to correction on an appeal to this Court as an error of law (subject to what I have to say about evident error of law in the interpretation of other contractual terms).
[71] I am also satisfied that the arbitrator’s definition of “amounts owing” was reasonably available to him in terms of the plain meaning of those words. In ordinary parlance to owe means “to be required or obliged to pay or repay (money or in kind) in return for something received”.20 To the extent therefore that the arbitrator
improperly assumed the role of arbiter of commercial reasonableness21 as submitted
by Mr Munroe, he did so in a mundane way.22
Erring in interpreting the meaning of the word “owing” in the wider context of the
pre- and post-contractual events
[72] Mr Munro contends that the factual findings of the arbitrator about pre-and post-contractual events are irreconcilable with the conclusion that Trade Debts did not include all invoiced amounts prior to the completion date, including in respect of services not yet rendered. Mr Munro placed significant weight on the finding that pre- and post -contractual discussions were explicable only on the basis that accounts for services yet to be performed were included.
[73] The arbitrator identified in his first award the salient facts that he considered favoured both sides of the argument.23 This included a finding that the Key Terms agreement contemplated that Solarix would be entitled to all income for services provided. He made a further finding that the pre-contractual discussions are explicable only on the basis that Trade Debts included all invoices up to the
completion date. The arbitrator then resolved in his second award that the evidence
20 Shorter Oxford Dictionary (6th ed 2007) at 2058.
21 Something to be avoided according to Lord Justice Neuberger in Skansa Rashleigh Weatherfoil v
Somerfield Stores Ltd [2006] EWCA Civ 1732 at [22]
22 This is not to be confused with the equally mundane approach to contractual liability arising on an exchange of promises, rather than on the performance of the promises. But I am here dealing with the contention that the plain meaning, sans context, was not available to the arbitrator.
23 Interim Award, above n 1 at [12].
overall was equivocal about what the broader context revealed.24 With respect to Mr Munro’s careful argument, this conclusion, based on all of the evidence was the product of an assessment of fact not law.
[74] Mr Munro’s subsidiary argument is that the arbitrator’s interpretation of the Key Terms was itself flawed. He submitted that the reference to “income” in the Key Terms agreement did not advance the interpretation of Trade Debt in the sale and purchase agreement. He said that “income” was simply a reference to post completion revenue to which Solarix remained entitled.
[75] There is some force to Mr Munro’s argument. The Key Terms Agreement
provides (among other things) that:
(a) Clause 1, bullet point 3 - entitlement to all income for services provided transfers to Solarix as at the date of Completion.
(b)Clause 5 – Solarix will purchase the Accounts Receivable for all active customers at Completion at a valuation based on specified formula and payment for the accounts receivable will be made within
31 days of Completion.
[76] As Mr Munro suggests, on one reading, these clauses suggest that the income for services provided by Unleash prior to Completion was to transfer to Solarix, but that Solarix would pay for all accounts receivable for active customers as at Completion.
[77] But I do not think that the arbitrator’s conclusion as to the significance of the Key Terms agreement is amenable to review by this Court on a question of law. While called an agreement, it is no more that an unenforceable “guide to the preparation of a mutually satisfactory agreement for the sale and purchase of Unleash’s business”. It forms part of the factual matrix and the assessment of its
significance is an assessment of fact.
24 Second Interim Award, above n 1 at [11].
[78] Furthermore, the significance attached to Key Terms agreement was available to the arbitrator, based on the words used and in the context of the commercial transaction involving the sale of going concern. A purchaser would ordinarily expect to receive “income for services provided” by the purchaser after the date of purchase. Conversely, the purchaser would not ordinarily expect to pay the vendor a sum for services to be rendered by the purchaser.
[79] Accordingly, I do not accept that this alleged error raises an issue of law or that the relevant findings of contextual fact were obviously wrong.
Erring in interpreting the meaning of the word “owing” in the wider context of the agreement as a whole
[80] Mr Munro cited the following clauses of the agreement to show that the
contract as a whole supported Unleash’s interpretation:
(a) Clause 12.3 confirmed that payments of outgoings or expenses would be apportioned as at the completion date, but there was no similar apportionment clause for income.
(b) Clause 13.1 confirms Solarix’s ownership of the Trade Debts post
completion, and its entitlement to receive all of that income.
(c) Clause 13.2 meant that if a customer paid the amount of their invoice to Unleash following completion, Unleash would hold that money on trust and subsequently pay it to Solarix.
(d)The combined effect of clause 13.1 and 13.2 was to ensure that Solarix obtained the revenue from all the Trade Debts owing by Unleash’s customers whether or not due and payable at the Completion Date.
(e) Clause 3.2(a) is not an apportionment clause; rather it set out that in addition to the purchase price, within 31 days of the Completion Date, Solarix would pay Unleash an amount reflecting the revenue it would
collect in respect of the Trade Debts, but nevertheless an amount calculated according to a defined formula which included, amongst other amounts 100 per cent of every Trade Debt that:
(i) Was not yet due for payment as at 11.59 pm on 31 March
2014; or
(ii) Was invoiced 30 days or less before 11.59 pm on 31 March
2014.
(f) Unleash’s invoices were sent to customers on 30 March 2014, were not yet due for payment as at 11.59 pm on 31 March 2014, and were also invoiced 30 days or less before that time, thereby falling within both limbs of this definition.
[81] The arbitrator does not expressly address clause 13 in his awards, but he does say:25
Looking at the other provisions of the ASP, it seems to me that the undoubted obligation of Solarix to perform the customer contracts it was purchasing from Unleash does not assist one way or the other in resolving the issue I am addressing.
[82] Ms Lethbridge maintains that that was enough and that the interpretative exercise is so intertwined with the factual assessment that isolated points like this are of little moment.
[83] I do not agree that I should defer in this way to the arbitrator on the interpretation of other provisions of the ASP (as distinct from the wider factual matrix). Unlike the Key Terms agreement, the plain meaning of the ASP clauses is an assessment of law not fact. “Trade Debts” is a defined term. Its meaning is central to the contractual effect of clause 3.2 and clause 13. All things being equal, the interpretation given to Trade Debts should cogently apply to both clauses. In the
absence of any explicit discussion about this in the awards, I turn then to examine
25 Interim Award, above n 2 at [11].
the efficacy of the arbitrator’s interpretation of Trade Debts in light of clauses 13.1 and 13.2.
[84] Given their significance I repeat those clauses for ease of reference here:
13.1 Trade Debts: Subject to Completion, the parties acknowledge and agree that from the Completion Date the Trade Debts will be the property of the Purchaser. For the avoidance of doubt, Trade Debts exclude amounts owing to the Vendor by persons that do not have an active service with the Vendor at Completion and the Vendor will continue to own all such debts and, accordingly, such debts will remain payable to the Vendor. The Purchaser acknowledges that it is not paying for nor taking ownership of any debtors of the Vendor that are not current customers.
13.2 Vendor to account to Purchaser: Where a payment in respect of Trade Debts is received by the Vendor after the Completion Date, the Vendor holds the amount received on trust for the Purchaser and the Vendor must, no later than five Business Days after receipt of the amount, account to and pay the Purchaser for any amounts in respect of Trade Debts received by the Vendor after the Completion Date.
[85] Plainly, in my view, clauses 13.1 and 13.2 contemplate the transfer of all active accounts receivable to Solarix after the Completion Date, being 31 March
2014.
[86] By contrast, the arbitrator’s definition of “Trade Debts” literally means that:26
(a) The invoiced amounts to current customers for services which were billed but not performed as at 31 March 2014 are not “Trade Debts” and so do not transfer to Solarix pursuant to clause 13.1; and
(b)Payments in respect of the accounts receivable of current customers for services which were billed but not performed as at 31 March 2014 are not “Trade Debts” and so are not received on trust for Solarix, or payable to Solarix pursuant to clause 13.2.
[87] Furthermore, as a consequence of the arbitrator’s second interim award, the amounts owing for services rendered by Unleash prior to the Completion Date were apportioned to Unleash, not Solarix, contrary, it appears, to clause 13.1.
26 For ease of reference, the arbitrator found in Interim Award, above n 1 at [14] that “invoices for services yet to be performed do not come within the definition of Trade Debts”.
[88] With respect to the arbitrator, these outcomes are difficult to reconcile with the overt objective of Clause 13 to transfer all of the Vendor’s accounts receivable to Solarix from the Completion Date. Furthermore, Clause 13.1 reserved to Unleash “amounts owing” from persons who do not have an active service as at Completion Date. The reservation of such amounts is not concordant with the arbitrator’s premise that “amounts owing” related only to services rendered.
[89] What is the significance of this? I do not think that the parties intended, on the words used, to exclude amounts owing for services not yet rendered from the meaning of Trade Debts for the purpose of clause 13. This conclusion accords with clause 5 of the Key Terms Agreement27 and the evidence of the expert accountants for both parties in dealing with the sale of a going concern.28
[90] Accordingly, I consider that this ground of appeal has been established in part. But the effect of my interpretation of clause 13 should be remitted back to the arbitrator to consider against the full matrix of fact. The arbitrator concluded that the full background was equivocal when it comes to the determination. Unleash has identified a problem with that determination in light of clause 13. But that is not a sufficient basis per se for concluding that the arbitrator was wrong. As the arbitrator does not refer to clause 13, I cannot be sure that he has weighed its intended effect in the mix, but I am not prepared to assume that he did not. I consider that the preferable approach in those circumstances is to refer the matter back to the arbitrator for him to reconsider the definition of Trade Debts in light of my
construction of clause 13.
27 Clause 5 states that “ Solarix will purchase all Accounts Receivable for all active customers at
Completion…”
28 Mr Graham stated at [16] (and Mr Jarrold agreed) that: “Commercial parties to the sale of a business routinely provide for a mechanism by which funds received by the vendor after the completion/settlement date that are for the benefit of the purchaser (being the new owner) are accounted for and paid over to the purchaser. This is part of the good faith element inherent in any commercial bargain, to ensure the purchaser is getting the full benefit of what it has paid to purchase.”
Issue 3 – estoppel by convention
[91] I will deal with estoppel by convention summarily as I consider that it really re-litigates the primary complaint made about the arbitrator’s contextual interpretation.
[92] The arbitrator found that discussions between Mr Salmon and Mr Rasmusssen as to the likely payment for accounts receivable were explicable only on the basis that accounts for services yet to be performed were included. This supports the proposition that Solarix is estopped by convention29 from subsequently arguing that “Trade Debts” did not mean what was in fact discussed. While the arbitrator did not address this issue in his award, I am not satisfied that I should simply adopt the finding of fact most favourable to Unleash without also acknowledging the overall factual conclusion of the arbitrator that the context does not support Unleash’s
interpretation of the contract. Indeed to do so would, in my view, simply achieve in a circuitous way what could not be achieved directly. I therefore dismiss this ground of appeal.
Result
[93] The arbitrator’s construction of Trade Debts is discordant with the plain meaning and effect of clause 13, namely to transfer Unleash’s active accounts receivable from the Completion Date to Solarix. The arbitrator did not specifically address clause 13 in his awards. I cannot discern whether he has taken clause 13 into account, but I am not prepared to assume that he did not. In order to do justice between the parties I consider that the matter must be referred back to the arbitrator to reconsider the definition of Trade Debts in light of my interpretation of the plain
meaning and effect of clause 13.30
[94] Accordingly pursuant to clause 5(4)(b) of the second schedule of the Act, I
remit this matter to the arbitrator to reconsider in light of my interpretation clause 13.
29 Chartbook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [47]; Vector Gas v Bay of Plenty Energy Ltd above n 3 at [34] per Tipping J, [67] per McGrath J and [124] per Wilson J.
30 Understandably the parties wanted some finality to this dispute. But given the composite nature of the inquiry into the meaning of the contractual terms, the arbitrator is best placed, in accordance with the arbitration agreement, to resolve the definitional dispute.
Costs
[95] Costs on this appeal should follow the event in the usual way on a 2B basis. If necessary memoranda may be filed within 10 working days, no more than three pages in length.
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