Lusty v Magill

[2018] NZHC 3006

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE

CIV-2018-470-000108

[2018] NZHC 3006

BETWEEN

ANDREW WILLIAM KEVIN LUSTY and JANICE HILDA LUSTY
Appellants

AND

PATRICK JAMES MAGILL and ERICA JANE MAGILL

Respondents

Hearing:	25 October 2018
Appearances:	M J Fisher for the Appellants J Delaney for the Respondents
Judgment:	20 November 2018

JUDGMENT OF WOOLFORD J

This judgment was delivered by me on Tuesday, 20 November 2018 at 11.00 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:           Jones Howden, Matamata

Harris Tate, Tauranga

Counsel:J Delaney, Tauranga M J Fisher, Auckland

LUSTY v MAGILL [2018] NZHC 3006 [20 November 2018]

Introduction

[1]    Mr and Mrs Magill commenced  summary  judgment  proceedings  against Mr and Mrs Lusty in the District Court. Mr and Mrs Lusty protested the Court’s jurisdiction on the basis their dispute with Mr and Mrs Magill should instead be referred to arbitration in accordance with a partnership agreement between them dated 20 September 2000.

[2]    On 6 July 2018, Judge IDR Cameron granted an application by Mr and     Mrs Magill to set aside an appearance by Mr and Mrs Lusty to protest jurisdiction and directed that a summary judgment application filed by Mr and Mrs Magill against  Mr and Mrs Lusty be allocated a hearing date.1

[3]    Mr and Mrs Lusty now appeal against the Judge’s decision. They say the Judge was wrong to set aside their appearance to protest jurisdiction. They seek an order on appeal staying the summary judgment application and directing the dispute between the parties to be referred to arbitration.

Background

[4]    The following account is largely  taken  from  Mr Magill’s  affidavit  dated  30 August 2017. It is not necessary to resolve any factual disputes in the present appeal.

[5]    Mr and Mrs Magill had a holiday home at 29 May Street, Mt Maunganui. They were friendly with their neighbours at 31 May Street, Mr and Mrs Lusty. In or about 1998, an adjoining property at 33 May Street became available for purchase. Mr and Mrs Magill and Mr and Mrs Lusty had previously discussed going into property development together. The property at 33 May Street seemed like a good opportunity for that.

[6]    On 10 June 1998, Mr and Mrs Magill and Mr and Mrs Lusty signed a heads of agreement, recording their intention to form a company to purchase their own

1      Magill v Lusty [2018] NZDC 13272.

properties at 29 and 31 May Street, and 33 May Street, to construct apartments on the land.

[7]    On 10 August 1998, Valencia Court Holdings Limited (VCHL) was established.    VCHL  subsequently  purchased  29,  31  and   33  May  Street.    On  1 December 1998, Mr and Mrs Magill and Mr and Mrs Lusty signed a shareholders’ agreement.

[8]    Construction of a three storey apartment complex began in late 1998 and ended in 2000. When the apartments were under construction, the market was difficult and the apartments sold slowly. Mr and Mrs Magill and Mr and Mrs Lusty therefore set up a partnership to take over the development. They signed a partnership deed dated 20 September 2000 (the partnership). It contained an arbitration clause:

13. ANY dispute arising out of or relating to this Deed may be referred to mediation, a non-binding dispute resolution process in which an independent mediator facilitates negotiation between the parties. Mediation may be initiated by any partner writing to the other partners and identifying the dispute which is being suggested for mediation. The other partners will either agree to proceed with mediation or agree to attend a preliminary meeting with the mediator to discuss whether mediation would be helpful in the circumstances. The partners will agree on a suitable person to act as mediator or will ask the Arbitrators’ and Mediators’ Institute of New Zealand Inc. to appoint a mediator. The mediation will be in accordance with the Mediation Protocol of the Arbitrators’ and Mediators’ Institute of New Zealand Inc.

The mediation shall be terminated by:

(a)The signing of a settlement agreement by the partners; or

(b)Notice to the partners by the mediator, after consultation with the partners, to the effect that further efforts at mediation are no longer justified; or

(c)Notice by one or more of the partners to the mediator to the effect that further efforts at mediation are no longer justified; or

(d)The expiry of sixty (60) working days from the mediator’s appointment, unless the partners expressly consent to an extension of this period.

If the mediation should be terminated as provided in (b), (c) or (d), any dispute or difference arising out of or in connection with this Deed, including any question regarding its existence, validity or termination shall be referred to and finally resolved by arbitration in New Zealand in accordance with New Zealand Law and the current Arbitration Protocol of the Arbitrators’ and Mediators’ Institute of New Zealand Inc. The arbitration shall be by one

arbitrator to be agreed upon by the partners and if they should fail to agree within twenty-one (21) days, then to be appointed by the President of the Arbitrators’ and Mediators’ Institute of New Zealand Inc.

[9]VCHL was removed from the Register of Companies on 9 March 2002.

[10]   The partnership eventually sold the apartments. Mr and Mrs Magill took ownership of two apartments – 29B and 29M – and Mr and Mrs Lusty took ownership of three apartments – 29E, 29F and 29N.

[11]   In 2006, the parties received notice of a leaky building claim filed in the High Court on behalf of the Valencia Court body corporate. The partnership, together with Mr and Mrs Magill and Mr and Mrs Lusty personally, were named as defendants. By order of the High Court dated 23 July 2008, VCHL was restored to the Register of Companies and was also joined as a defendant.

[12]   As the  parties’ interests were the  same, Mr  and Mrs Magill and Mr and  Mrs Lusty agreed to pool their resources to defend the claim. They engaged the services of a law firm, Sharp Tudhope, who briefed a barrister, Kelly Quinn, to act for all of them in respect of the case. The litigation stretched out over a period of three years. A trial date was set down for 5 July 2010, and the parties expected to defend the claim at trial.

[13]   Initially, the legal costs were met equally by the parties, using the partnership bank account. However, from about September 2009, Mr and Mrs Lusty were unable to pay their share of the legal fees. In about December 2009, Mr and Mrs Lusty told Mr and Mrs Magill that they were having financial difficulties due to the ongoing costs of the case, and other business problems. Mr and Mrs Lusty told Mr and Mrs Magill there was a possibility of their bank forcing the sale of their apartments because they were unable to meet their mortgage repayments. Mr and Mrs Magill were concerned they would be left with the legal bills and face the full cost of any court award if they were unsuccessful in defending the claim at trial. Mr and Mrs Magill advised them that they would continue to pay for the litigation if they had assurances from Mr and Mrs Lusty that they would eventually meet their half share of the costs.

[14]   As a result, the parties negotiated a deed of indemnity. It was signed on 14 June 2010. Mr and Mrs Lusty also agreed to give Mr and Mrs Magill a mortgage over their three apartments in Valencia Court. Mr and Mrs Lusty applied for legal aid which was initially refused, but granted on review.

[15]   The claim was settled just before the trial was due to begin. Under the settlement agreement, Mr and Mrs Magill and Mr and Mrs Lusty agreed to transfer three apartments to the plaintiffs in full and final settlement of their claim against them.

[16]   Mr and Mrs Magill transferred units 29B and 29M, which had a combined rating valuation of $1,484,000. There was no mortgage on these properties. Mr and Mrs Lusty transferred unit 29F, which had a rating valuation of $945,000. However,

$350,000 was owed to Westpac Bank as security against the property and had to be repaid by Mr and Mrs Lusty. The total settlement therefore represented $2,079,000 of value made up of $1,484,000 from the properties owned by Mr and Mrs Magill, plus

$595,000 from Mr and Mrs Lusty, taking into account the repayment of the mortgage.

[17]   Mr and Mrs Magill say they agreed to make a bigger contribution to the settlement because, based on what Mr and Mrs Lusty told them, that was the only way they could get a deal with the plaintiffs.  Mr and Mrs Magill had discussions with  Mr and Mrs Lusty about their ability to pay them back for their unequal contribution. Mr and Mrs Magill understood that Mr and Mrs Lusty would need time to repair and sell their remaining two apartments.

[18]   Mr and Mrs Magill claim that Mr and Mrs Lusty owe them $444,500, being the difference between half of the total settlement value of $1,039,500 less the

$595,000 that Mrs and Mrs Lusty did contribute.

[19]   The total amount of legal fees paid to Sharp Tudhope and Kelly Quinn, after the deed of indemnity was signed, was $254,749.04. In total, Mr and Mrs Magill said they paid $203,200.94 in legal fees and Mr and Mrs Lusty paid $51,548.10. To equalise the contributions, Mr and Mrs Magill say that Mr and Mrs Lusty also owe them $45,826.42, taking into account a subsequent payment of $30,000 received from them.

[20]   Mr and Mr Lusty dispute these calculations. They say Mr and Mrs Magill have failed to take into account their contributions to the partnership, including the value of their share of the tax losses and the profits of the partnership. They point to other items too. Mr and Mr Lusty say, for the dispute to be resolved, an account must be taken to establish the final position of the partnership’s affairs. No such taking of account has yet been undertaken.

District Court decision

[21]   The statement of claim contains two causes of action for breach of contract. The first claims $350,000 in respect of the value contributed by Mr and Mrs Magill in excess of a half share of the total value of the settlement.2 The second claims

$45,826.42 in respect of the legal fees paid by Mr and Mrs Magill in excess of their half share of the total legal fees.

[22]   After briefly reciting the factual background, the Judge noted the reliance by Mr and Mrs Magill on the terms of the indemnity agreement dated 14 June 2010 that the parties would share equally in the amount of contribution to any settlement (cl 1.1) and would also share equally in legal fees (cl 1.2). The indemnity agreement did not contain an arbitration clause. He also noted the reliance by Mr and Mrs Lusty on the terms of the earlier partnership agreement dated 20 September 2000, and in particular cl 13, which allows any dispute “arising out of or relating to this deed” to be referred to mediation and if unsuccessful, to arbitration.

[23]   The Judge then recorded the advice of counsel for Mr and Mrs Magill that they now accepted that the first cause of action relating to the contribution towards the settlement value ought to be stayed and that matter referred to arbitration as the value of the apartments owned by Mr and Mrs Magill and Mr and Mrs Lusty as at the date of the indemnity agreement was in dispute. It was accepted that the matter was more appropriately dealt with by arbitration pursuant to cl 13 of the original partnership deed.

2      A half-share in fact amounts to $444,500. However, the monetary limit of District Court claims is $350,000 and so Mr and Mrs Magill abandoned their claim to the extent that it exceeded the Court’s jurisdiction.

[24]   The Judge was therefore dealing only with the second cause of action – the claim for $45,826.42 for legal fees.

[25]   The Judge referred to several arguments put forward by Mr and Mrs Lusty as to why the arbitration clause in the earlier partnership agreement should also apply to the claim for legal fees. First, the Judge rejected the submission that the indemnity agreement was unenforceable because no consideration was provided by Mr and  Mrs Magill.

[26]   Second, he rejected the submission that it did no more than recite obligations between the partners to the earlier partnership deed and was not a stand-alone agreement. He was of the view that it went beyond the partnership agreement by incorporating a mechanism by which Mr and Mrs Magill could obtain security for the amount of any excess paid by them.

[27]   Third, the Judge rejected the submission that  the  agreement  of  Mr  and  Mrs Magill that their claim for their unequal contribution to settlement of the legal claim against them should be referred to arbitration was fatal to their contention that their claim for legal fees fell outside the ambit of the arbitration clause. He noted that no such concession was made by Mr and Mrs Magill.

[28]   Fourth, the Judge rejected the submission that Mr and Mrs Lusty in fact contributed more to the settlement value than Mr and Mrs Magill and were therefore likely to have a set-off against any monies due to Mr and Mrs Magill for legal fees. He was of the view that there was an insufficient evidential foundation to support that contention.

[29]   Fifth, the Judge rejected the submission that as Mr and Mrs Lusty were legally aided, they therefore could not be sued for fees which had been paid by the Legal Services Agency. He thought there was nothing in this point as Mr and Mrs Magill treated the payments made by the Legal Services Agency as fees actually paid by  Mr and Mrs Lusty.

[30]   The Judge therefore ordered a stay of the first cause of action and directed that the matter be referred to mediation and if unsuccessful to arbitration under cl 13 of the partnership deed dated 20 September 2000. He also granted the application by Mr and Mrs Magill to set aside the appearance by Mr and Mrs Lusty to protest jurisdiction and directed the allocation of a hearing date for the summary judgment application in respect of the claim for $45,826.42 for legal fees.

Appeal

[31]   Section 124 of the District Courts Act 2016 provides a general right of appeal to the High Court from a decision of the District Court. Section 128 enables the High Court to reach its own decision on the merits of the case and substitute its decision for that of the District Court.

The law

[32]Article 8 of sch 1 of the Arbitration Act 1996 provides:

Arbitration agreement and substantive claim before court

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

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

[33]   The first question is whether proceedings have been brought in a matter which is the subject of an arbitration agreement. It is a question of interpretation. Generally, a liberal approach is adopted for the interpretation of arbitration agreements.3 It is necessary to inquire into the purpose of the arbitration clause. Courts should strive to give effect to the intention of parties to submit disputes to arbitration. Phrases such as

3      David Williams and Amokura Kawharu Williams & Kawharu on Arbitration (2nd ed, LexisNexis, Wellington, 2017) at [4.10].

“under”, “arising out of”, “in connection to” or “relating to” will be construed broadly. As Wild J said in Marnell Corrao Associates Inc v Sensation Yachts Ltd:4

That result gives effect to the general principle that Courts should uphold arbitration, by striving to give effect to the intention of parties to submit disputes to arbitration, and not allow any inconsistencies or uncertainties in the wording or operation of the arbitration clause to thwart that intention.

[34]   Once it has been established proceedings have been brought in a matter which is the subject of an arbitration agreement, the Court must determine whether to stay those proceedings and refer the parties to arbitration. It will be appropriate to do so unless the Court finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.5

[35]   In the present case, the relevant part is whether there is “in fact any dispute between the parties with regard to the matters agreed to be referred” – referred to as the “added words”.6 This is not a question of whether there is an arguable defence or arguable claim. Rather, the question is whether there is an actual dispute between the parties. As the Supreme Court said in Zurich Australian Insurance Ltd v Cognition Education Ltd:7

If it is clear that the defendant is not acting bona fide in asserting that there is a dispute, or it is immediately demonstrable that there is nothing disputable at issue, there is not in reality any “dispute” to refer to arbitration. In these circumstances, a stay could properly be refused and summary judgment would be available. By contrast, in other situations falling within the broad test (that is, the “no arguable defence” test applied on summary judgment), there will be what can properly be described as “disputes” even though they are ultimately capable of being determined by a summary process.

...

The fact that one party’s view on such a question is held to be incorrect does not mean that there was no legitimate “dispute” on the point. Cooke P’s reference to “adequate argument” and McGrath J’s reference to ruling on legal

4      Marnell Corrao Associates Inc v Sensation Yachts Ltd (2000) 15 PRNZ 608 (HC) at [61].

5      Assuming the party requesting a stay did so not later than when submitting that party’s first statement on the substance of the dispute.

6      That is because this part is not in art 8 of the Model Law on International Commercial Arbitration adopted in June 1985 by the United Nations Commission on International Trade Law (UNCITRAL). The inclusion of these words in the New Zealand Act was recommended by the Law Commission.

7      Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383 at [36]–[38].

arguments indicate that their Honours considered that the point at issue would be contestable, albeit that it was ultimately capable of determination by the court following a summary process. In cases of this type, there is a real “dispute” even though a court may ultimately be prepared to grant summary judgment in relation to it. In principle, such a dispute should be referred to arbitration, given the parties’ agreement to utilise the arbitral process and the 19969 Act’s purposes of facilitating the enforcement of arbitration agreements and limiting the opportunities for intervention by the courts.

[36]   The “added words” are, therefore, not intended to cover a situation in which the defendant disputes the claim on grounds the plaintiff is very likely to overcome.8 Rather, it is aimed at situations in which the defendant is not really raising a dispute at all.9

Discussion

[37]   Clause 13 of the original partnership deed allows any party to refer “any dispute arising out of or relating to this Deed” to mediation. If mediation is unsuccessful, the dispute is to be referred to arbitration. The clause adopts different phrasing when it turns to arbitration. It provides “If the mediation should be terminated as provided in (b), (c) or (d), any dispute or difference arising out of or in connection with this Deed, including any question regarding its existence, validity or termination shall be referred to and finally resolved by arbitration”.

[38]   The central issue is whether the second cause of action is captured by the arbitration clause. It is a question of interpretation. As discussed above, a broad approach is adopted.

[39]   After carefully considering all the circumstances, I have concluded that the dispute relating to the legal fees falls within the scope of the arbitration clause. This is because of four reasons.

[40]   First, the fact the parties used different phrasing within cl 13 to define its scope indicates they did not take particular care in that task. Fine lines were not intended to be drawn. In any event, the phrases “dispute arising out of or relating to this Deed”

8      Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383 at [39].

9      Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383 at [39].

and “any dispute or difference arising out of or in connection with this Deed” must have the same meaning. This is because cl 13 is a multi-tiered dispute resolution clause. The phrases envisage the same dispute at different stages – the former when it is to be referred to mediation and the latter when it is to be referred to arbitration. All this reinforces that a broad approach should be adopted.

[41]   Second, in my view, the purpose of the arbitration clause was to govern disputes relating to the partnership. The parties entered a relationship of partnership. That had the potential to give rise to disputes. They wanted those disputes to be resolved by a tribunal of their choosing. As Lord Hoffmann said in Fiona Trust & Holding Corp v Privalov:10

They want those disputes decided by a tribunal which they have chosen, commonly on the grounds of such matters as its neutrality, expertise and privacy, the availability of legal services at the seat of the arbitration and the unobtrusive efficiency of its supervisory law. Particularly in the case of international contracts, they want a quick and efficient adjudication and do not want to take the risks of delay and, in too many cases, partiality, in proceedings before a national jurisdiction.

[42]Cost is another obvious reason why parties choose to arbitrate.

[43]   Third, the indemnity agreement of 14 June 2010 is best viewed as a development of the partnership deed. The two agreements are intertwined. The original partnership deed envisaged unequal contributions and a squaring up of the partners’ accounts. The original partnership deed provided for eight per cent interest on the value of excess capital invested by one of the parties before profit and losses are divided equally. Clauses 7 and 8 provide:

7.           IN the event that any of the partners have invested in the capital of the partnership a greater sum than the other partner then and in such case the partner having a greater capital interest shall at the conclusion of the partnership period be paid out of the partnership profits prior to the division as hereinafter contained in Clause 8 a sum equal to eight (8) per cent of the value of such excess capital so invested or at such other rate of interest as may be agreed upon between the parties from time to time.

8.           SUBJECT to the provisions of Clause 7 hereof the net profits and/or losses of the business shall be divided equally between the partners and they shall in like proportion bear all losses of capital PROVIDED HOWEVER

10     Fiona Trust & Holding Corp v Privalov [2007] UKHL 40, [2007] 4 All ER 951 at [6].

that there shall first be taken into consideration and account all capital contributions made by the partners.

[44]   The subsequent indemnity agreement made numerous references to the partnership. It noted that Mr and Mrs Magill and Mr and Mrs Lusty together with the partnership were being sued for damages arising out of water related damage to the apartment block and that Mr and Mrs Magill and Mr and Mrs Lusty together with the partnership denied any liability.

[45]   The indemnity agreement also made the partnership a party to the actual agreement when it stated:

IT IS THEREFORE AGREED by Paddy, Jane, Andi and Jan and the Valencia Court Partnership

THAT IN THE EVENT of any liability arising from the said claim, being agreed or determined by any such Court or otherwise, as being owing by the said Valencia Court Partnership and/or by any one or more of its members, and

IN THE EVENT of payment on account of the said liability (agreed or determined as the case may be) being made by any one or more of the members or by the said Partnership,

[46]   Further, the indemnity agreement is signed by Mr and Mrs Magill and Mr and Mrs Lusty. It does not specify in what capacity they have signed the agreement but it must be both in their personal capacity and in their capacity as partners because they purport to bind the partnership:

IT IS THEREFORE AGREED by Paddy, Jane, Andi and Jan and the Valencia Court Partnership

[47]   Returning to the partnership deed, the apartments were brought into the capital of the partnership by cl 5, which provides:

5. THE capital of the partnership shall consist of the unencumbered nett value of the property being acquired by the partnership from Valencia Court Holdings Limited, namely the properties at 29-31 May Street, Mount Maunganui and contained and comprised in an Agreement for Sale and Purchase between the partners and Valencia Court Holdings Limited together with any sums and any plant which any or all of the partners shall with the unanimous consent of the others shall from time to time acquire or contribute for capital purposes.

[48]   The clause contemplates that the parties may contribute further sums “for capital purposes”. As noted earlier, unequal contributions attract interest at eight per cent. The transfer of the three apartments as part of the settlement of the claim against not only Mr and Mrs Magill and Mr and Mrs Lusty but also the partnership must be a capital contribution while the legal fees can also be seen as a legitimate expense both of Mr and Mrs Magill and Mr and Mrs Lusty and of the partnership.

[49]   Fourth, in light of what I just discussed, I do not consider it would have been the parties’ intention for the dispute regarding the settlement contributions to be referred to arbitration only to continue in parallel court proceedings on the legal fees dispute. I have no doubt that the agreement to refer the first cause of action to mediation, and potentially arbitration, was proper. It would be artificial to separate the claim for legal fees from the claim for unequal contributions to settlement of the claim. Hearing the two causes of action in different tribunals will not be efficient or economic. These are both common reasons why parties choose to arbitrate. In these circumstances, there is also risk of conflicting decisions between the District Court and the arbitrator.

[50]   I turn to the “added words”. There is clearly a bona fide dispute between the parties. The respondents’ submissions on this point are instead focused on why the defence must fail. That is not the point of the “added words”. The claim must be stayed.

Result

[51]   The appeal is allowed. The respondents’ application to set aside the appellants’ appearance protesting jurisdiction is dismissed.  The proceedings are stayed under  art 8 of sch 1 of the Arbitration Act 1996. The parties are referred to mediation and, if it goes that far, arbitration.

[52]   Costs are payable by the respondents to the appellants in the High Court and District Court on a 2B basis.

Woolford J