KKDS Limited v S & G Three Kings Limited
[2019] NZHC 3456
•23 December 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-004-002122
[2020] NZHC 3456
UNDER Clause 5(1)(c) of Schedule 2 of the Arbitration Act 1996 IN THE MATTER
of an application for leave to appeal an arbitration award on questions of law
BETWEEN
KKDS LIMITED
Applicant
AND
S & G THREE KINGS LIMITED
Respondent
Hearing: 12 December 2019 Appearances:
R Zhao and D Zhang for the Applicant
J W A Johnson and G D Simms for the Respondent
Judgment:
23 December 2019
JUDGMENT OF MOORE J
This judgment was delivered by me on 23 December 2019 at 10:00 am pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar Date:
KKDS LIMITED v S & G THREE KINGS LIMITED [2020] NZHC 3456 [23 December 2019]
Introduction
[1] S & G Three Kings Limited (“S&G”) owns premises situated in the Three Kings Plaza on Mt Eden Road, Auckland (“the Premises”). On 5 March 2018 KKDS Limited (“KKDS”) took over the lease of the Premises to operate two businesses; a gaming room and bar on the upper level known as the Brass Boxer Sports Bar (“Brass Boxer”) and a bar, tables and stage on the lower level known as the “Copper Thief Eatery” (“Copper Thief”).
[2] On 14 August 2018 it was discovered there was a significant leak. As a consequence, S&G informed KKDS that the upper floor would need to be vacated and closed. This was followed by formal notice by S&G purporting to terminate the lease due to the damage.
[3]KKDS disputed the validity of the termination.
[4] The parties initiated and participated in an arbitration which took place before the Hon Robert Fisher QC.
[5] On 3 July 2019 Mr Fisher issued a partial award. It is the findings of that award which KKDS now seeks leave to appeal.
Background facts
[6] KKDS began trading in early 2018 under the management of Mr Shi. Later that year representatives of S&G noticed a leak which was traced to the Brass Boxer. On 14 August 2018 a plumber cut a hole in a wall. He discovered accumulated water and waste in the cavity between the wooden flooring and the concrete slab below. The flooded area was mostly below the Brass Boxer’s bathroom and kitchen. The probable cause was a leaking waste water pipe below the Brass Boxer. This had caused waste water to spread into the cavity area causing not only rot and damage to the timbers but also extensive mould. It was common ground that this was a chronic issue which had developed and continued over a period of years although this was not known until its discovery.
[7] As a consequence, S&G informed Mr Shi that the upper level where the Brass Boxer was trading would need to be closed until further notice. It was assumed that the business would relocate to the lower level. However, further investigations revealed that the problem was more widespread and serious than originally believed and on 13 December 2018 S&G wrote to KKDS purporting to terminating the lease.
[8] The lessor’s material damage policy included a general exclusion for gradual deterioration. There was an exception to the exclusion for hidden gradual damage that occurred, and was discovered during the period of insurance. However, that was capped at $10,000 per each event and $30,000 for the year in question.
[9] For the purposes of the present proceedings the relevant issues determined by Mr Fisher were:
(a)Was any portion of the building “damaged” (clauses 26 and 27 of the agreement)?
(b)If a portion was damaged, did it render the Premises “untenantable” (clause 26.1(a))?
(c)Were “insurance monies … received by the landlord …” inadequate for the repair or reinstatement (clause 27.4)?
Application for leave to appeal
[10] KKDS applies for leave to appeal the partial award under cl 5 of Schedule 2 of the Arbitration Act 1996 (“the Act”). This permits appeals to this Court on questions of law. But leave to appeal is first required.
[11]KKDS identifies the following questions of law:
(a)Should “damage” as referred to in clause 26.1 cover gradual and undetected deterioration?
(b)If so, did the damage sustained in the leased Premises render the Premises untenantable for the purpose of clause 26.1(a) of the lease?
(c)If so, should clause 26.1(a) apply to the present case and terminate lease?
(d)Should the landlord have the obligation to repair, at his own cost, damage caused by gradual deterioration?
(e)Should the lack of insurance be a valid reason to terminate the lease where damage is caused by gradual deterioration?
(f)Is the lease terminated pursuant to clause 27.4(a) for lack of adequate insurance?
Legal principles
[12] As noted the Court’s jurisdiction to grant leave arises under cl 5(1)(c) and (2) of the Second Schedule of the Act. This 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—
…
(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 1 or more of the parties.”
[13] There is no right of general appeal against an arbitral award. As cl 5 provides, an appeal may only be brought in respect of a specific question of law arising out of the award. If the parties have not specifically agreed to allow appeals, leave of the Court must be obtained. This is such a case.
[14] The parties are agreed that the relevant principles are those set out and discussed by the Court of Appeal in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd where Blanchard J, delivering the judgment of the Court, discussed the policy reasons for the limited circumstances in which a Court ought to grant leave to appeal.1 He said:2
“… [Parliament] intended to encourage arbitration as a dispute resolution mechanism. By enacting a statute with the express purpose of redefining and clarifying the limits of judicial review of arbitral awards, Parliament has made clear its intention that parties should be made to accept the arbitral decision where they have chosen to submit their dispute to resolution in such a manner. It plainly intended a strict limitation on the involvement of the Courts where this choice has been made. This makes inappropriate a broad approach to the discretion, such as that proposed by counsel for the appellant in this case. (Of course, where both parties repent of their decision to choose arbitration over litigation and wish to submit their dispute over a question of law to the Courts, the 1996 Act makes provision for them to do so without leave) …”
(Emphasis added)
[15]In determining whether leave should be granted a two-step process is engaged:
(a)first, it is necessary to satisfy the statutory threshold in cl 5(2) of the Second Schedule to the Act, namely 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; and
(b)secondly, if the threshold is satisfied the Court must decide whether to exercise its discretion to grant leave.
[16]As to the exercise of discretion, Blanchard J identified a number of factors:3
(a)the strength of the challenge/nature of the point of law;
(b)how a question arose before the arbitrator;
(c)the qualifications of the arbitrator;
1 Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA).
2 At [52].
3 At [54].
(d)the importance of the dispute to the parties;
(e)the amount of money involved;
(f)the amount of delay involved in going through the Courts;
(g)whether the contract provides the arbitral award be final and binding; and
(h)whether the dispute for all parties is international or domestic.
[17] These factors are non-exhaustive guidelines. There is no hierarchy except for the first which is to be accorded special weight.4
Discussion
The cl 5(2) threshold
[18] I turn now to consider the first question; whether the cl 5(2) threshold is met. There are two issues for determination under this heading; first, whether the issue on appeal involves a question of law and secondly, whether the determination of that question could substantially affect the rights of one or more of the parties.
Are any of the questions posed, questions of law?
[19] The first step in cl 5(1) requires any appeal to be on the question of law. In other words, only a conventional legal question on unchallenged facts may form the basis for an appeal.5 Questions of fact dressed up as questions of law are impermissible.
[20] There is some division of authority as to whether a question of mixed fact and law is permitted.6 However, in my view it would be consistent with the policy of the
4 Doug Hood at [54] and Phillip Green, Barbara Hunt and Tomas Kennedy-Grant, Green and Hunt on Arbitration Law and Practice (Online loose leaf ed, Thomson Reuters)at [ARSch2.5.12].
5 Sir David A R Williams QC and Amokura Kawharu (eds), Williams and Kawharu on Arbitration
(Second ed, LexisNexis, Wellington, 2017) at [18.4.2].
6 Kiwi Property Holdings Ltd v Fletcher Construction Company Ltd [2018] NZHC 1745 at [9].
Act and the Court of Appeal’s comments in Doug Hood to adopt a narrow interpretation.
[21] Mr Shia, for KKDS, submitted that all six questions involve matters of contractual interpretation. As such, each is a question of law and not a question of fact. In doing so, he relied on the decision of this Court in Pukeroa Properties (No. 2)
Ltd v Rotorua Hunting and Fishing New Zealand Ltd.7
[22] Not all errors in contractual interpretation necessarily raise questions of law. I agree with Walker J in Milk New Zealand (Shanghai) Co Ltd v Miraka Ltd where she commented that a more nuanced analysis is required to ensure that the identified error is not, in reality, a challenge to factual inference or sufficiency of evidence.8
[23] This is particularly relevant to contemporary principles of contractual interpretation which frequently involve a mix of legal and factual questions. Mr Simms, for S&G, referred me to Todd Petroleum Mining Company Ltd v Vector Gas Trading Ltd where Williams J stated:9
“[The relevance of the factual matrix] necessarily now makes contractual interpretation a mix of fact-finding and word interpretation. Findings of fact, one might expect, will routinely underpin the Court’s perspective on the meaning of contractual terms. This then will require Courts hearing applications for leave to appeal from arbitration awards, to give careful consideration to whether the real matter in issue is the meaning of the contract, or the facts upon which that meaning is wholly or partly based. The former may raise a question of law. The latter will not.”
[24] In oral argument before me, Mr Shia accepted that of the six questions posed there are, in reality, only three. These are:
(a)the meaning of the word “damage” in the agreement;
(b)whether the damage rendered the Premises untenantable for the purpose of clause 26.1(a) of the agreement; and
7 Pukeroa Properties (No 2) Ltd v Rotorua Hunting and Fishing New Zealand Ltd [2019] NZHC 1367.
8 Milk New Zealand (Shanghai) Co Ltd v Miraka Ltd [2019] NZHC 2713 at [59].
9 Todd Petroleum Mining Company Ltd v Vector Gas Trading Ltd [2017] NZHC 1161 at [57]; adopted in Milk New Zealand (Shanghai) Co Ltd v Miraka Ltd at [58].
(c)was the lease terminated pursuant to clause 27.4(a) for lack of adequate insurance.
[25] Mr Shia accepted that while the other questions may aid in the interpretation of the three questions posed above, those three questions properly reflect the legal issues engaged in this case.
[26] Notwithstanding, I shall deal with each of the six questions as posed by the applicant in turn.
Should “damage” cover gradual and undetected deterioration?
[27] Mr Simms submitted that the first question is, in reality, a question of fact. This is because KKDS argues that the word “damage” should not have its natural and ordinary meaning because of the factual matrix of the instant case. In other words the interpretation of “damage” in the agreement is linked to the surrounding facts.
[28] In contrast Mr Shia submitted that this is truly a question of law. The interpretation does not require an examination of the factual matrix although the factual matrix will determine whether in this case there was damage for the purposes of the agreement.
[29] I agree with Mr Shia that this is a genuine question of law which sits independently of the facts. Whether damage can include gradual deterioration must be a question of law, the interpretation of which sits independently of the facts.
The other questions
[30] However, I do not accept that the question of tenantability posed in either the second or third questions is a question of law. Whether the Premises were tenantable and whether it was lawful under the lease for S&G to terminate the tenancy are very much fact-based questions specific to this case. Their determination is inextricably connected to determinations of fact as found by the arbitrator. For that reason I am not satisfied that either question is a question of law for the purposes of cl 5(1).
[31] The fourth and fifth questions deal with essentially the same issue; that is, should the landlord have the obligation to repair, at his own cost, the damage caused by gradual deterioration and should the lack of insurance be a valid reason to terminate the lease where the damage is caused by gradual deterioration. Again, neither of these questions is a question of law. I agree with Mr Simms that they appear to be policy questions. It is not relevant whether the landlord “should” have certain obligations or whether the lack of insurance “should” be a reason for termination. Furthermore, the answer to each of those questions is inextricably connected to findings of fact. Neither can be answered without reference to the facts of the case.
[32] The same applies to the sixth question, that is whether the lease was terminated pursuant to cl 27.4(a) for lack of adequate insurance. That is plainly not a question of law. The grounds for determining the question must be founded in fact.
[33] It follows from this analysis that I am satisfied that only the first question, that is whether the definition of “damage” also includes gradual deterioration, involves a question of law. I now turn to assess whether that question could affect the rights of KKDS.
Could the arbitrator’s interpretation of “damage” substantially affect the rights of KKDS?
[34] Plainly the interpretation of “damage” does affect the rights of KKDS. S&G terminated the lease. As a consequence the Brass Boxer and Copper Thief businesses were obliged to relocate. In his affidavit sworn in support of the application, Mr Shia says that neither business has been able to operate. As a consequence there have been significant financial effects on KKDS. This includes loss of income at around $10,000 per week from the inability to operate 10 gambling machines previously situated in the Brass Boxer. The business was purchased for $1.2 million but operated for only around six months before KKDS was forced to close. The significant investment made by KKDS is generating no income.
[35] Attempts to identify new locations to operate from have been unsuccessful. One of the reasons for this is the difficulty in obtaining a liquor licence for the Copper Thief business. Furthermore, the gaming machines located at the Brass Boxer are
contractually bound to be located at the previous premises. It is apparently a complex task to transfer the gaming licence to another premises.
[36] These are significant issues which flow directly from the termination of the lease. I accept that in these circumstances the broad interpretation given to “damage” does substantially affect KKDS’ rights under the agreement.
[37] For these reasons I am satisfied that the statutory threshold in cl 5(2) is met. This then requires me to turn to the second step namely whether I should exercise my discretion to grant leave to appeal.
Should I exercise my discretion to grant leave?
[38]Under this heading I consider the relevant factors identified by Blanchard J in
Doug Hood.
The strength of the challenge
[39] As Blanchard J observed, if the issue in dispute is a one-off point, in the sense it is unlikely to occur again and cannot be seen to have any precedent value, either generally or to the parties, then unless there are strong indications of error, leave should rarely be given.
[40] Mr Shia submitted that the interpretation of “damage” has important precedential value. It is not a one-off point. It arises out of the standard ADLS lease, a template which is widely used. Thus, the interpretation of damage has significant public importance and will likely impact on the operation of many other leases in the country. Furthermore, Mr Shia submitted that the meaning ascribed by Mr Fisher leads to “an obvious absurdity” where the lease could terminate in circumstances where neither party has knowledge of the termination.
[41] Secondly, he criticises Mr Fisher’s observation that it would be an anomaly if the lessee were denied the opportunity to walk away simply because the damage had occurred gradually due to inadequate maintenance by the lessor. Mr Shia submitted
that this was not a scenario faced by KKDS. Such an interpretation would permit a negligent landlord, who had not regularly maintained the property, to escape liability.
[42] Thirdly, if the lessor’s failure to maintain was such that the Premises became untenantable, it would constitute a breach of the lessor’s obligation to maintain the Premises pursuant to the agreement thus substantially reducing the lessee’s benefit under the contract.
[43] Finally, Mr Shia submitted that the authorities relied on by Mr Fisher to extend the definition of damage were all decided in the context of sudden and accidental damage and are, by that reason, distinguishable.
[44] I cannot agree with any of these criticisms. Mr Shia’s first reason is a non- sequitur. His second reason is also untenable. If the breach is a consequence of negligence on the part of the lessor, the lessee’s remedy would be to sue in damages.
[45] Neither do I agree that the authorities relied on by Mr Fisher were inapt. In my view Mr Fisher’s reasoning is unimpeachable. His approach involved the application of orthodox and well-settled principles of statutory interpretation.
[46] He started with the well understood principle, supported by authority, that it requires a strong case to persuade a Court that something has gone wrong with the language.10
[47] Next, but in the same context he examined the ordinary and natural meaning of the word. In doing so he considered the definitions of “damage” in the online Oxford Living Dictionaries, the Shorter Oxford English Dictionary and the Dictionary of New Zealand Law. He observed that all definitions were consistent with the broad interpretation of “damage”, embracing impairment of the object in question, irrespective of whether the cause was sudden or gradual. He agreed with counsel for S&G that “damage” is used in the agreement’s clauses to describe the state of the Premises, adding there is no reference to the means by which, or the period of time
10 Firm PLL Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147 at [88].
over which, the Premises had reached that state. He also accepted that the ordinary meaning of “damage” is physical harm whether sudden or gradual.
[48] He then referred to Parkin v Vero.11 There Mander J was required to interpret the meaning of the word “damage” in an insurance contract. He observed that the approach to interpretation of insurance contracts is no different from the construction of any other contract.12 The Judge repeated the well-known principle that the construction of an insurance contract must commence with the plain words of the contract and the ordinary meaning ascribed to individual words.13 The Judge then examined interpretations of the meaning of “damage” in the caselaw.14 Those authorities, as Mr Fisher rightly observed, were all consistent with the broader meaning promoted by S&G.
[49] Mr Fisher also considered the implied commercial objectives in the agreement agreeing with S&G’s submission that if Premises had been damaged or rendered untenantable a contractual formula is needed to govern the consequences. For that purpose it is immaterial whether the cause of the condition of the Premises was sudden or gradual. The point is simply that the Premises have become wholly or partly unusable. In that situation it is in the interests of both parties to define the consequences which follow. He concluded with the following:15
“If it is in the interests of the parties to have a contractual formula to resolve a situation where a premise have become unusable, there is no obvious reason for distinguishing between lack of usability caused by sudden damage, on the one hand, and lack of usability caused by gradual damage, on the other. The commercial rationale remains the same.”
[50] It is noteworthy that when I asked Mr Shia if he was aware of an authority supporting the narrower interpretation of “damage” he advanced, he was unable to assist.
11 Parkin v Vero [2015] NZHC 1675 at [36].
12 At [33].
13 At [35].
14 Ranicar v Frigmobil Pty Ltd (1983) 3 ARNZ Insurance Cases 60-525 (TASSC) and in Moore v Evans [1918] AC 185 (HL) at 191.
15 At [30].
[51] I cannot fault Mr Fisher’s reasoning and although I am not required to be satisfied to such a level for present purposes, I fully agree with Mr Fisher’s definition for the reasons he gave as set out above.
How the question arose before the arbitrator?
[52] I agree with Mr Simms that it is significant that the question of law was central to the arbitration rather than incidental. The question was fully argued at a hearing which lasted almost a full day.
[53] Furthermore, I agree with Mr Simms that as was noted in Gold and Resource Developments (NZ) Ltd, where the parties have chosen to submit a dispute to an arbitrator rather than a Court, they should generally be held to their choice.16
The qualifications of the arbitrator
[54] The arbitrator chosen by the parties is legally qualified and the issue involves a question of law, it would be harder to obtain leave.17
[55] In this case the parties selected Mr Fisher, a highly respected former Judge of this Court and an eminently qualified arbitrator with great expertise and experience in the area of dispute in this case.
The importance of the dispute to the parties
[56] I agree with Mr Simms that there is little or no precedent value between the parties. This is not a case where there is an ongoing commercial relationship between the parties. I do not overlook Mr Shia’s submission that income has been lost and difficulties have been experienced by KKDS in procuring new business premises.
The amount of money involved
[57] As was noted in Gold and Resource Developments (NZ) Ltd, where a very substantial amount of money was involved, the cost of an arbitrator’s mistake is
16 At [54](2).
17 Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd at [54](3).
obviously much greater. In that situation it may be somewhat easier for the parties to obtain leave to ensure an injustice is not done by leaving in tact an incorrect ruling.
[58] When running, the combined income of the businesses was $34,537.08 per month. Furthermore, KKDS has lost an average income of $10,000 per week from its inability to operate the 18 gaming machines which were located in the Brass Boxer.
[59] Against this, must be balanced the estimated value of the repair works (between $400,000 and $600,000) and the rent that would be payable to KKDS over the duration of the lease if it had not been terminated.
The delay involved in going through the Courts
[60]Mr Fisher delivered his award on 3 July 2019.
[61] KKDS filed its application for leave on 3 October 2019 which was the last day of the prescribed three month period.
[62] I heard the application for leave approximately two months later. If leave is granted it is unlikely that the appeal could be heard in this Court within six months.
[63] The Premises have been closed since September 2018. If leave is granted it is likely that more than two years will have passed before the outcome of the appeal is known.
[64] That is plainly most unsatisfactory. The delay in KKDS filing its application for leave is unexplained by Mr Shia.
Whether the contract provides the arbitral award to be final and binding
[65] If the parties have agreed that the award will be “final and binding” then this is obviously an important consideration operating against a grant of leave.
[66]Clause 1.1 of the arbitration agreement provided:
“The dispute is submitted to the award and decision of the Hon Robert Fisher QC as arbitrator whose award shall be final and binding on the parties.”
[67] I agree with Mr Simms that the Court should give effect to the parties’ stated preference for finality.
Conclusion
[68] It follows that I am satisfied the only question of law raised on this appeal is whether the definition of damage should include gradual deterioration.
[69] However, for the reasons given I am not satisfied that I should exercise my discretion to grant leave.
Result
[70]The application for leave to appeal is dismissed.
Costs
[71]S&G, being the successful party, is entitled to costs.
[72]I encourage the parties to consult with a view to reaching agreement on costs.
[73] In the event that costs cannot be agreed then the parties are to be file and serve memoranda not exceeding three pages within 30 working days of the date of this judgment.
Moore J
Solicitors:
Mr Zhao, Auckland Mr Zhang, Auckland
Wynn Williams, Auckland
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