Makan Distiller Limited v Natural Sugars (New Zealand) Limited
[2015] NZHC 1111
•21 April 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-100 [2015] NZHC 1111
BETWEEN MAKAN DISTILLER LIMITED
Applicant
AND
NATURAL SUGARS (NEW ZEALAND) LIMITED
Respondent
Hearing: 21 April 2015 Appearances:
E St John for Applicant
E J Grove for RespondentJudgment:
21 April 2015
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
D G Law, Auckland, for Applicant
Prudential Law, Auckland, for Respondent
Counsel:
Eugene St John, Auckland, for Applicant
E J Grove, Auckland, for Respondent
MAKAN DISTILLER LIMITED v NATURAL SUGARS (NEW ZEALAND) LIMITED [2015] NZHC 1111 [21
April 2015]
[1] Makan Distiller Ltd applies to set aside a statutory demand requiring it to pay
$109,303.63. The debt is said to be the total due under two arbitration awards dated
26 September 2014 and 8 December 2014 respectively. Both awards were made by the panel of arbitrators of the Refined Sugar Association. This was a foreign arbitration. Natural Sugars (New Zealand) Ltd, the creditor, is relying on two foreign arbitration awards.
Facts
[2] Natural Sugars deals in sugar at both wholesale and retail levels. Makan Distiller manufactures soft-drinks and liquor, and uses sugar as a raw material. The present matter arises out of a sugar supply agreement between Natural Sugars and Makan. The parties appear to have begun dealing with each other in 2010 when Makan signed a credit account application form with Natural Sugars, which incorporated Natural Sugars’ terms and conditions. Clause 17 of the terms and conditions provides that they are governed by and to be construed in accordance with New Zealand law. The parties submitted to the non-exclusive jurisdiction of the courts of New Zealand. There were also terms providing that when any order was placed for sugar, each order would constitute a separate contract for the supply of the particular goods. Similarly, the supplier could deliver goods by instalments, and each instalment would be treated as a separate contract under these terms. There is nothing in those terms and conditions to indicate that any disputes between the parties were to be referred to arbitration.
[3] Later, after a period of trading between the parties, Makan Distiller entered into a sales contract on 16 August 2012. This contract is a one page document. It provides for the supply of 200 metric tonnes of white sugar. A director of Natural Sugars and a director of Makan Distiller signed the contract. It has these provisions:
Arbitration
All disputes arising out of or in conjunction with this Contract shall be referred to the Refined Sugar Association, London, for settlement in accordance with the rules relating to arbitration. This Contract should be governed by and construed in accordance with English Law.
Terms and conditions
This contract is subject to the rules of the Refined Sugar Association, London, as fully as if the same had been expressly inserted herein, whether or not either or both parties to it are Members of the Association. If any provision of this Contract is inconsistent with the Rules, such provision shall prevail.
[4] Makan delayed in calling for deliveries under the August 2012 contract.
[5] The parties had discussions in November 2013 which resulted in Natural Sugars making two supplies of 20 metric tonnes each to Makan and issuing invoices. Following those invoices, Natural Sugars served two statutory demands. The first, dated 11 February 2014, related to a supply in December 2013. That statutory demand required payment of the amount of the invoice plus interest that had accrued. Makan appears to have complied with that demand.
[6] The second demand, dated 5 March 2014, required payment of $26,344.53. A schedule was attached to that demand showing how that was calculated. In its demand, Natural Sugars claimed not only the invoice value of the second delivery, but also charges for service fees and legal fees. The significance of this is that these service fees and legal fees were payable under the terms and conditions of the 2010 agreement but were apparently not payable under the rules of the Refined Sugar Association. Makan paid the amount outstanding under the second invoice, but did not pay the legal fees and service fees.
[7] The lawyers for Natural Sugars wrote to Makan advising that Natural Sugars had further claims arising out of the failure of Makan to take deliveries under the August 2012 contract. They proposed that its claim under this head should be referred to arbitration, and referred to the arbitration clause in the August 2012 agreement. The lawyers demanded payment of $90,749.96, indicating that there would be further interest and costs charged if payment was not made within seven days. A schedule to the letter set out calculations which took into account what were called penalty charges and interest charges, as well as legal fees. There was also a claim for losses because the sugar market had fallen so that on any resale Natural Sugars would allegedly obtain less than Makan had agreed to pay. As to the service
fees and legal fees, Natural Sugars again relied on clause 2.5 of the terms and conditions of the 2010 agreement to justify its claim.
[8] While Makan did respond, Natural Sugars’ lawyers pressed on with their proposals for arbitration. They wrote two letters on 23 May 2014. One of them gave notice of intention to commence an arbitration. The other was sent on a “without prejudice except as to costs” basis, and it is not necessary for me to refer to it.
[9] Later, in July 2014, London solicitors instructed by Natural Sugars wrote to the Refined Sugar Association with a request for arbitration. They also wrote to Makan Distiller, again giving fresh notice of intention to commence an arbitration. The London solicitors provided a summary of the claim, calculating the amount at NZD81,420.26. They also provided a statement of claim for the arbitration which pleaded matters very fully with supporting documents attached.
[10] I refer to the rules of the Refined Sugar Association of London. They are relevant to the form of the arbitration. The rules provide for a short form arbitration, where the amount of the claim or counterclaim is less than USD150,000. Rule 420 as to the short form arbitration procedure provides that such arbitrations will be decided on the documents alone, awards should be made without stating reasons, are to be published within five working days of the convenors’ final meeting, and the parties to such an arbitration waive all rights of appeal.
[11] Makan responded to these steps to refer the matter to arbitration. In August
2014, it filed with the Refined Sugar Association a protest to jurisdiction. That document set out various arguments based on New Zealand law. The thrust was that Makan had not agreed to arbitration, the arbitration provisions were null and void and were contrary to public policy, and that Makan may have claims which could be heard only in a New Zealand court and could not be subject to arbitration.
[12] That led to the first award in the statutory demand. The panel of arbitrators issued a partial final arbitration award on 26 September 2014, addressing Makan’s protest to jurisdiction. The arbitrators found that they did have jurisdiction. In particular, at paragraph 23 of the award, they addressed Makan’s objection on public
policy grounds. They noted that the short form arbitration rules were similar to provisions found in the rules of several other arbitral institutions. They said that that is a pragmatic way to deal with small claims, and to obtain a fair resolution of disputes without unnecessary delay or expense in accordance with the English Arbitration Act 1996. As s 69 of the Arbitration Act 1996 allows parties to agree to dispense with reasons for an award, the agreement could not be contrary to public policy. The award held that the parties did have a reasonable opportunity to put their cases. The award also fixed costs - and if those costs had already been paid by Natural Sugars it would be entitled to immediate reimbursement. It fixed the costs of the award in the sum of £5,890 exclusive of VAT.
[13] There is no evidence that Makan took any further steps in the arbitration. The panel of arbitrators issued a final arbitration award on 8 December 2014. That award shows on its face that it was made on the papers alone. There are no reasons. It is very much an award made on a formal proof basis. The award directed Makan to pay Natural Sugars NZD81,420.26 and interest up to the date of the award, plus interest on the amount of the award, NZD83,659.87, at eight per cent per annum until payment, and costs fixed at £3,325 excluding VAT. Makan was required to reimburse Natural Sugars for the arbitration registration fee of £2,000.
[14] When the sums payable under the partial award and the final award are converted into New Zealand currency, the total payable under both awards comes to
$109,303.53, the amount in the statutory demand.
The grounds for the setting aside application
[15] Natural Sugars served a statutory demand dated 12 January 2015, after the time for payment under the award based on the rules of the Refined Sugar Association had expired. Makan applied within 10 working days to set aside the award under s 290(4)(a) of the Companies Act 1993 on the basis that there is a substantial dispute.
[16] Its grounds are essentially three-fold:
(a) Before Natural Sugars can issue a statutory demand, the award must be either entered as a judgment under Art 35(1)(b) of Schedule 1 of the Arbitration Act 1996, or otherwise enforced by action.
(b)As a matter of public policy, the court ought not to recognise a foreign arbitration award, given these matters:
(i) Both parties were New Zealand companies;
(ii)the contract on which the dispute arose was performed wholly in New Zealand;
(iii)the seat of arbitration was outside New Zealand, the law governing the arbitration and the law governing the contract was a foreign law;
(iv)the procedures were short form procedures under which the dispute was decided on the papers alone; and
(v)there was no right of appeal and the arbitrators were not required to give any decisions.
(c) Natural Sugars had waived its right to invoke the reference to arbitration because it relied on provisions in the terms and conditions of sale entered into in 2010, as against relying on the contractual terms incorporated in the August 2012 contract.
[17] These matters are said to give rise cumulatively to a sufficient dispute that this court should not deal with the matter in its Companies Act jurisdiction, but should be left to be determined by a court exercising its ordinary jurisdiction.
[18] Makan’s submissions set out correctly the principles on which applications under s 290(4)(a) are decided:
(a) The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. The task for the
Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b) The mere assertion that a dispute exists is not sufficient. Material, short of proof, is required to support the claim that the debt is disputed.
(c) If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.
(d) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
Does Natural Sugars need to enter the award as a judgment under article
35(1)(b) of Schedule 1 of the Arbitration Act 1996?
[19] Article 35 says:
35 Recognition and enforcement of awards
(1) An arbitral award, irrespective of the country in which it was made,—
(a) must be recognised as binding; and
(b) on application in writing to a court, must be enforced by entry as a judgment in terms of the award, or by action, subject to the provisions of this article and of article 36.
(2) The party relying on an award or applying for its enforcement must supply—
(a) the duly authenticated original award or a duly certified copy of the award; and
(b) if the arbitration agreement is recorded in writing, the original arbitration agreement or a duly certified copy of the agreement; and
(c) if the award or agreement is not made in the English language, a duly certified translation into the English language of either or both documents.
(3) For the purposes of this article, court means—
(a) the High Court; or
(b) a District Court in any case where the amount of any money made payable by the award does not exceed the amount to which the jurisdiction of the District Court is limited in civil cases.
[20] The article draws a distinction between recognition and enforcement. Enforcement entails using court procedures so that an award may be treated in the same way as a court judgment, by being “entered as a judgment”. Alternatively, it may be enforced by action resulting in a judgment. Once those steps are taken, the creditor under the award has the benefits of a judgment of a court, and can then have its rights under the award enforced as if it had originally sued in court. Enforcement remedies such as sale orders and attachment orders may be issued out the court accordingly.
[21] Makan submits that reliance on a statutory demand is just as much a matter of enforcement as using formal execution available under the court rules for enforcing judgments. Makan cited Tad Holdings Ltd v Evans.1 There, a contract had provided for a moratorium on “enforcement action”. Master Kennedy-Grant found that the issue of a statutory demand came within the expression “enforcement action”.
[22] With respect, that decision is distinguishable. Here, we are dealing with the Arbitration Act which draws a clear distinction between recognition and enforcement of an award. An award may be recognised without being enforced. Typically, recognition may be used defensively, for example, when one party makes a claim against the other, and the successful party under the award uses that award defensively to reduce the claim made by the other. That amounts to recognition without the need for the award to be entered as a judgment.
[23] An award may be used not only defensively but also to prove that the successful party under the award is a creditor of the other party. As an example, suppose that the losing party had gone into liquidation. A liquidator would be entitled to recognise the award as binding on the company, even if it had not been entered as a judgment in the court. Just as an award would be recognised as binding in a liquidation, I regard an award as also binding for the purpose of a statutory demand, even if it has not been entered as a judgment. Under an award directing payment, the party directed to make payment comes under an obligation to the other
party to make the payment. The award establishes the relationship of creditor and
1 Tad Holdings Ltd v Evans HC Auckland M179/96, 14 October 1996.
debtor. I see no reason why the court should not recognise that as creating binding obligations, without requiring the award to be entered as a judgment in court.
[24] I refer to article 36. That gives grounds for refusing both recognition and enforcement of an arbitral award. Where a creditor relies on an arbitral award, the grounds for refusing recognition under article 36 may provide grounds for an application under s 290(4)(a) to have the statutory demand set aside, because those grounds provide a basis for not recognising the award. Articles 35 and 36 apply irrespective of the country in which the award was made. Obviously, a domestic award can be the basis for a statutory demand. That was recognised in two decisions: Alexander Civil Construction Ltd v Arbitration & Alternative Dispute
Resolution Centre NZ Ltd2 and Chatham Island Shipping Services Ltd v Hawke’s Bay
Stevedoring Services Ltd.3 A foreign award may also be the basis for a statutory demand. That is because the court must consistently apply the same approach to awards made in other countries. That is, after all, consistent with New Zealand’s obligations under the New York Convention of 1958.4
Should the court decline to recognise the awards as contrary to public policy?
[25] Makan says that, as a matter of public policy, the court ought not to recognise a foreign award made under foreign law in a foreign suit, in circumstances where there is a short form arbitration, with a decision made only on the papers, without reasons, and without any right of appeal.
[26] In Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd,5 the Court of Appeal stated the approach to interpreting “in conflict with public policy” under article 34(2)(b)(ii) of the Arbitration Act, which is in similar terms to article 36(b)(2). It followed courts overseas in a narrow reading of the public policy ground. The thrust of the matter is that the award must not conflict with fundamental
understandings of law and justice in either substantive or procedural respects. The
2 Alexander Civil Construction Ltd v Arbitration & Alternative Dispute Resolution Centre New
Zealand Ltd HC Auckland M758-IM02, 5 September 2002.
3 Chatham Island Shipping Services Ltd v Hawkes Bay Stevedoring Services Ltd HC Wellington, M349/98, 13 November 1998.
4 Convention on the Recognition and Enforcement of Foreign Arbitral Awards 330 UNTS 3 (opened for signature 10 June 1958, entered into force 7 June 1959). See especially article III.
5 Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614 (CA).
Court of Appeal has reinforced that approach in Hi-Gene Ltd v Swisher Hygiene Franchise Corp.6 Amaltal itself is of interest. The court declined to set aside an award where it was alleged that the contractual terms were penalties rather than liquidated damage provisions. That was not considered to be in conflict with public policy so as to make the award vulnerable to non-recognition.
[27] Here, it is submitted that there is hardship to a person such as Makan to be subjected to a decision from a foreign panel of arbitrators when a dispute has arisen in relation to a purely local supply contract. The convenience of access to local courts, and to local dispute resolution mechanisms has been denied in favour of the dispute with Natural Sugars being determined by a body on the other side of the world under what seems to be a rather rudimentary and summary procedure.
[28] The answer is that, having elected arbitration in the supply contract, Makan is bound by the arbitration clause. It seems reasonable to infer that when Makan’s director signed the August 2012 contract, he may not have appreciated the full effects and implications of the arbitration clause and the reference to the rules of the Refined Sugar Association. Notwithstanding that, the company is bound by the terms it signed up to in the August 2012 contract.
[29] As Mr Grove pointed out, that use of arbitrators under the Refined Sugar Association may be commercially understandable. No doubt the panel of arbitrators of the association are familiar with disputes that can arise with sugar supply contracts. No doubt they are experienced in determining disputes under contracts applying the rules of the association. They are a specialist body well able to determine disputes in a consistent manner. The provisions for short form arbitration seem to be readily explicable in that parties may have their disputes determined quickly and efficiently on the papers, without the parties being put to greater expense by a hearing in person. That would obviously be a benefit for parties in New Zealand.
[30] The objection from Makan, as I understand it, is that two New Zealand companies should not be able to have their disputes determined outside New Zealand
6 Hi-Gene Ltd v Swisher Hygiene Franchise Corp [2010] NZCA 359 at [20]-[27].
on the other side of the world. As to that, arbitration is a recognised form of a dispute resolution. The Arbitration Act requires the courts to recognise the awards of arbitrations not only in New Zealand but also from overseas. The Arbitration Act is New Zealand’s way of giving effect to the New York Convention. If the parties had agreed to a domestic arbitration, there could be no objection at all to the award being recognised. Arguments on public policy grounds as to being denied access to the New Zealand courts would not wash.
[31] The New York Convention requires foreign arbitral awards to be given equal recognition with domestic awards. The submission as to the award being a foreign arbitration cannot stand scrutiny, once regard is had to the New York Convention. Accordingly I see no public policy grounds for not recognising the awards on which the statutory demand is based.
Has Natural Sugars waived its right to arbitration?
[32] Makan’s argument here was that in its statutory demand issued in early 2014, Natural Sugars relied on provisions in the 2010 terms and conditions, specifically clause 2.5 which gives it the right to recover its legal costs. The point taken was that those rights are not available under the Refined Sugar Association’s rules; but by enforcing clause 2.5 of the 2010 terms Natural Sugars had waived its right to go to arbitration.
[33] I do not regard those facts as amounting to a waiver of the right to go to arbitration. There must be something in the course of conduct that shows a clear choice by Natural Sugars that it would not arbitrate its differences with Makan Distiller. That might be so if Natural Sugars had issued proceedings in court seeking final relief. But that is not what happened here. In its statutory demand Natural Sugars claimed sums that it considered to be incontestably payable. That was, in part, recognised by Makan paying the amounts of the invoices. Natural Sugars may have overplayed its hand in the second statutory demand of March 2014 by asking for payment of its costs. But that seems at first only to have been an excessive demand in the sense that it could not be justified under the conditions of the August
2012 contract. It does not amount to an election to abandon arbitration.
[34] Natural Sugars Ltd pursued arbitration for matters which it recognised were contestable and could not be the subject of a statutory demand. In electing to issue statutory demands first for debts that were incontestable and, second, to separately go to arbitration over matters that were contestable, it was maintaining a clear distinction between matters that could be referred to arbitration and those that could not. In pursuing that line of conduct, I cannot see any waiver of its right to go to arbitration.
Outcome
[35] Makan Distiller sensibly in my view did not invite me to review the merits of the award. I decline to do so as a matter irrelevant to the present application.
[36] Makan Distiller Ltd has not persuaded me that there is any reason for not recognising the debts arising under the awards on which the statutory demand of January 2015 is based. Accordingly, I dismiss the application. I also make an order under s 291(1)(a) of the Companies Act requiring Makan Distiller Ltd to pay the sum of $109,303.63 to Natural Sugars within 10 working days – that is, by 6 May 2015.
[37] Costs follow the event. Makan Distiller Ltd is to pay Natural Sugars Ltd costs on this application on a 2B basis. If the parties are unable to agree costs they
may file a memorandum and I will decide costs on the papers.
Associate Judge R M Bell
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