Gregory Lancaster And v Limited and Eric John Watson

[2003] NZCA 101

IN THE COURT OF APPEAL OF NEW ZEALAND

CA51/03

BETWEENGREGORY LANCASTER AND JOHN HENRY HUNTER

Applicants

ANDCULLEN INVESTMENTS LIMITED AND ERIC JOHN WATSON

Respondents

Hearing:19 May 2003

Coram:Blanchard J
Anderson J
Glazebrook J

Appearances:  M R Camp QC and G M Brodie for Applicants

M A Gilbert for Respondents

Judgment:26 May 2003 

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

[1]       Mr Lancaster and Mr Hunter (the applicants) are seeking special leave to appeal to this Court under article 5(5) of the Second Schedule of the Arbitration Act 1996.  The matter sought to be raised concerns the quantum of equitable compensation awarded to the applicants by an arbitrator.  The arbitration arose from a business arrangement which involved the takeover of the retail company Pacific Retail Group (PRG).  In 1999 Logan Corp Ltd, a wholly owned subsidiary of Cullen, made a partially successful (74%) takeover bid for PRG.  The applicants, former employees of PRG, had earlier put together an independent proposal for an acquisition of the company.  They had approached Clavell Capital Ltd which agreed to help finance the arrangement and brought in Eric Watson who effectively controlled Cullen.  Mr Watson was asked by Clavell to sign a confidentiality agreement, which he duly did. It was envisaged that the applicants and Cullen representatives would work together in the takeover of PRG.

[2]       Following the takeover, talks between Cullen representatives and the applicants about the latter’s entitlement broke down and concluded with a letter from Cullen on 6 May 1999.  Cullen subsequently sold its shareholding in PRG for a handsome profit.

[3]       The applicants filed proceedings in the High Court against Cullen and Mr Watson claiming for the loss of benefits they alleged they were entitled to: a three year management contract, and a share of the gains Logan would have made if the parties had developed PRG and onsold the shares as agreed.  The proceedings were discontinued when the parties agreed instead to submit to arbitration.  They agreed that either party could appeal the arbitrator’s findings, but only on a question of law.  The arbitrator, the Rt. Hon John Henry DCNZM QC, found as follows:

1.There was no contractual entitlement to the benefits claimed;

2.There was no breach of the confidentiality agreement;

3.There was no operative estoppel;

4.There was a breach of fiduciary duty by Cullen. This was framed as a duty “not to acquire the 74% shareholding for itself to the exclusion of the [applicants]”.

[4]       The arbitrator found that the loss resulting from the breach of fiduciary duty was $7.491m.  He reduced the award to the applicants to $1,638,552 after making three deductions.  The first was a deduction for the fee which the applicants would have been required to pay to Clavell ($1,805,000). That reduced the damages to $5,686.000.  The second was a discount of that figure by 70% to reflect the assessment that there was only a 30% chance of the benefits claimed by the applicants eventuating.  Essentially, the arbitrator accepted the evidence of expert accountants Mr Stiassny and Mr France on this point.  The third deduction was a collection of minor factors which are of no moment in this appeal.

[5]       Cullen appealed the arbitrator’s findings to the High Court.  In a judgment delivered on 27 September 2002, Chambers J held:

1.        Mr Watson was also liable for breach of fiduciary duty;

2.Cullen and Mr Watson were both liable for breach of the confidentiality agreement;

3.The challenge by Mr Lancaster and Mr Hunter to the arbitrator’s assessment of compensation was dismissed. The Judge said it was a factual assessment and the applicants could not succeed by now arguing for an account of profits when they had sought compensation from the arbitrator only on the basis of a loss of chance.

[6]       Cullen then sought leave to appeal against this judgment, which was granted by Chambers J on 27 February 2003.  The applicants also sought leave to appeal against the assessment of compensation point.  Counsel for the applicants could not directly challenge the factual assessment relating to the 70% discount or the deduction for Clavell fee because neither raised any question of law.  Instead, counsel submitted that the arbitrator’s error was in making a deduction “on a lost opportunity approach, for the chance of finding an investment partner when the errant fiduciary has picked up and is pursuing the opportunity”.  Chambers J refused leave.  He said that what counsel was trying to do was say that the arbitrator should not have assessed the compensation on a lost opportunity approach, but on a disgorgement of profits basis.  After carefully going through the parties’ pleadings, the evidence before the arbitrator, and the transcript, Chambers J held that this change in the methodology of the claim was not open to the applicants because it had not been raised in the arbitration.

[7]       The applicants now seek special leave from this Court to appeal on the compensation point.

[8]       The argument put to us for the applicants is that their case before the arbitrator, on the basis of both breach of confidentiality and breach of fiduciary duty, was that Cullen/Watson deprived them of the opportunity of joint venturing with Cullen and that they should be compensated for an award of equitable damages for the loss of that opportunity.  It is said that the arbitrator was mistaken in thinking that the claimed loss of opportunity related to a possible joint venture with someone other than Cullen.  On this approach, no discount was appropriate because there can be no doubt, it is said, that if Cullen/Watson had not acted in breach of their equitable obligations towards them, Mr Lancaster and Mr Hunter would have achieved participation in the joint venture which actually occurred.  Mr Camp submitted that equitable damages are claimable on this basis, citing Dempster v Mallina Holdings Ltd (1994) 15 ASCR 1 and LAC Minerals Ltd v International Corona Resources Ltd (1989) 61 DLR (4^th) 14; that there was therefore no need to seek a restitutionary remedy or an accounting of profits.

[9]       We must say that, if indeed the arbitrator was led into error in this respect, we have considerable sympathy for him, as we do for Chambers J, in view of the way the point appears to have been presented to him.  The pleadings and the argument for the applicants displayed a lack of precision, indeed vagueness, which could readily give rise to misunderstanding.  Even from the written submissions to us it was not immediately obvious what was being put forward.  But, as the argument was orally developed before us, we were brought to the view that an arguable question of law appears to have emerged.  We should not, however, be considered to be putting the matter any higher than that, nor to be foreclosing an argument for the respondents to this application that at a full hearing of the appeal, and with an examination of the full record of the arbitration proceeding – which was not before us – it will be apparent that the arbitrator did not in fact misunderstand the basis upon which the damages claim was actually advanced.  If so, and if the arbitrator is found merely to have approached the assessment of damages on the basis then urged on behalf of Mr Lancaster and Mr Hunter, it will not be possible to say that the arbitrator erred in law.  It cannot be the case that an arbitrator commits an error of law by failing to determine a question of this kind in a manner differing from that upon which it has been approached by the party which is seeking to appeal the award.

[10]     Chambers J’s attention, and no doubt that of the arbitrator also, was drawn to paragraph 27 of the pleading, which unhelpfully alleged that as a consequence of the breach of confidentiality the applicants had suffered the loss of the opportunity to participate in the takeover of PRG in conjunction with a joint venturer.  Notably, it did not refer to the joint venturer, namely Cullen.  But, as Mr Camp pointed out to us, in the next following paragraph, in which the expected benefits for the applicants were recited, the claim for damages was put in terms of the anticipated gain from the disposal of assets of Logan, Cullen’s subsidiary, and from Logan’s ownership of share capital in PRG.  If paragraphs 27 and 28 are read together, it is at least arguable that they assert the claim on the basis now explained by Mr Camp.

[11]     The applicants equally did not help themselves by the way in which they framed the question of law in their appeal to the High Court:

Was the Learned Arbitrator correct in holding that there were risks in the venture not properly recognised in the discount factor used by Mr Stiassny and Mr France which justified a further reduction of 70% in respect of the damages payable by the Defendants?

That might appear merely to challenge the percentage of the discount applied by the arbitrator, i.e. to challenge just a conclusion of fact.  But when what is said to be the true basis of the damages claim is understood, the question may be seen as intended to raise the issue of whether it was correct in law to make any reduction at all in the damages in circumstances in which the defendants had used confidential information and the PRG opportunity for themselves to the exclusion of the plaintiffs.

[12]     In view of the amount involved in the quantum issue, Mr Gilbert realistically accept that if we concluded, as we do, that the applicants have been able to point to an arguable question of law, in circumstances in which Cullen/Watson already have leave to appeal, the issue can be regarded as of sufficient importance to the parties to justify a second appeal.

[13]     There is also the proposed appeal relating to the Clavell fee.  But, as Mr Camp appeared to accept, that raises no question of law, let alone an arguable one.  The discount was correctly applied to the net figure after deducting that fee.  The finding that the fee would have been payable if any alternative arrangement had been made was a factual finding and, we would add, inevitable.  It certainly was to be payable if the applicants participated in a joint venture with Cullen.

[14]     We grant the applicants special leave to appeal limited to the question of whether there should have been any discount from the figure of $5,686,000 but leaving it open to the respondents to argue, on the basis of the full record of the arbitration, that the applicants are precluded from asserting their damages claim on the basis they now wish to advance.

[15]     There will be no order for costs on this application.

Solicitors:
Anthony Harper, Christchurch for Applicants
Chapman Tripp, Auckland for Respondents