Napier City Council v H2O Management (Napier) Ltd

[2020] NZHC 1913

IN THE HIGH COURT OF NEW ZEALAND NAPIER

I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE

CIV-2020-441-3

[2020] NZHC 1913

BETWEEN

NAPIER CITY COUNCIL

Plaintiff

AND

H2O MANAGEMENT (NAPIER) LTD

Defendant

Hearing:	28 July 2020
Counsel:	J D Cameron for the plaintiff R A Rosser for the defendant
Judgment:	31 July 2020

JUDGMENT OF CULL J

Overview

[1]    H2O Management (Napier) Ltd (H2O) manages Ocean Spa in Napier, which is owned by Napier City Council (the Council). H2O’s management is governed by a management agreement (the Agreement) for a period of five terms of four years. It is renewable every four years, provided H2O has not been in breach of the Agreement and H2O gives 12 months’ written notice to the Council that it intends to renew the agreement. A dispute arose between the parties, when the Council purported to terminate the Agreement on the grounds that H2O had not sought a renewal by the specified date. The parties disagreed on the specified date under the Agreement.

[2]    The matter went to conciliation and then to arbitration, as required under the dispute resolution clause in the Agreement.

NAPIER CITY COUNCIL v H2O MANAGEMENT (NAPIER) LTD [2020] NZHC 1913 [31 July 2020]

[3]    During the course of the conciliation, the Council alleged that H2O had breached the Agreement by assigning, or subleasing its management over parts of Ocean Spa without the Council’s consent. Further, the Council alleged that H2O’s calculation of income was incorrect, leading to unpaid sums owing under the profit- sharing arrangement, in breach of the Agreement.

[4]    The arbitration was undertaken in two parts. In the first arbitral award (First Award), the Arbitrator held that H2O’s interpretation of the specified due date for renewal was correct and the Council was not entitled to terminate the Agreement. In the second arbitral award (Second Award), the Arbitrator found that H2O owed the Council $37,254.80 and gave H2O 28 days to pay it.

[5]    The Council contends that three questions of law arise from the misconstruction by the Arbitrator of the applicable clauses and seeks to appeal to this Court. H2O submits that there are no errors of law and that any alleged error does not justify the exercise of the discretion and is not arguable.

The issues

[6]    The challenge to both arbitral awards can be summarised in the following two issues:

(a)Did the Arbitrator err in law by misconstruing clauses 8.2 and 8.3 of the Agreement, in holding that those clauses relate to physical changes to the complex only and not to assignments of management?

(b)Did the Arbitrator err in law by misconstruing clause 11.4 of the Agreement holding that H2O was not in breach of the Agreement at the date of renewal in respect of the profit-sharing clauses?

[7]    I will deal with each of the issues briefly, in light of the Full Court of the Court of Appeal’s emphasis on the desirability of a “short judgment” for leave decisions in this context.1

1      Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) at [59].

Construction of clauses 8.2 and 8.3

[8]Under Part 8 of the Agreement entitled ‘Obligations of the Company’, clauses

8.1 to 8.4 provide as follows:

8.1        In consideration of the appointment of the Company as the Manager of the Complex, the Company shall fit-out the Complex, including:

·provisioning of all chattels

·interior construction of a fitness centre

·supply of all fitness equipment

·interior construction of a café

·supply of all café equipment

·supply of onsite hypochlor generation plant

·     supply of a reception front desk and administration system The fit out shall be completed to the value of $1m.

8.2        The Company shall not change, alter or extend the Complex (after the completion of development), during the term of this agreement without the written consent of the Council.

8.3        The Company shall not make changes to the Complex during or after development without the written agreement of the Council. The Company does not have authority to make changes that will incur additional costs for the Council.

8.4        The Company shall report in writing to the Council on the management and operation of the Complex. Such reports and their frequency shall be agreed between the Council and the Company.

[9]    The remaining clauses under Part 8 require the Company to employ qualified staff to supervise the management and operation of the Complex, be responsible for the security of the Complex, and for the maintenance, repair and replacement of specified items. The Company is also obliged to keep the Complex open for public use at specified times and the Company must consult with the Council when amending opening hours or admission fees and charges.

[10]   The Council alleges that H2O was in breach of the Agreement at the date of renewal by subleasing, assigning or alienating the fitness centre and/or café at the

Complex, without obtaining the Council’s written consent  as  required  under  clause 12.1 of the Agreement.

[11]   The Arbitrator found that clauses 8.2 and 8.3 relate only to physical changes of the Complex and do not include arrangements relating to the assignment, sublease or subcontract for the management of part or all of Ocean Spa. Further, the Arbitrator held that in order to establish a breach of clause 12.1 of the Agreement, the Council must establish that H2O assigned its interests in the Complex. Part 12 and clauses 12.1 and 12.2 contain standard terms for assignment of interest and termination of contract clauses.

[12]   The Arbitrator noted that the Council accepted H2O’s claim that the operation of either facility was undertaken by a “trading arm” of H2O. The Arbitrator concluded that the arrangement made by H2O since February 2015 in relation to the operation of the café and the fitness centre were not in breach of clause 12.1 of the Agreement, because H2O cannot assign its interests in either of the café or fitness centre to itself. This aspect of the Arbitrator’s finding was not challenged.

[13]   The Council seeks to argue that the Arbitrator erred in law by incorrectly implying the term “change” and “changes” in clauses 8.2 and 8.3 as applying only to physical changes, rather than to any arrangement by way of assignment, sublease, or subcontract for all or part of the Ocean Spa complex.

[14]   An appeal from an arbitral award is governed by Schedule 2, clause 5 of the Arbitration Act 1996 (the Act) and r 26.15 of the  High Court  Rules  2016.  The High Court shall not grant leave unless a question of law arises and the determination of the question could substantially affect the rights of one or more of the parties.2 If the threshold test is met, then the Court has a general discretion to grant leave to appeal.3 The exercise of the discretion is guided by the eight considerations outlined by the Full Court of the Court of Appeal.4

2      Arbitration Act 1996, clause 5(2).

3      Schedule 2, clause 5(3).

4      Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd above n 1, at [11].

[15]The meaning of a “question of law” is defined in the Act:5

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.

[16]   The starting point here is that the Arbitrator interpreted the words “change” and “changes” as they appeared in clauses 8.2 and 8.3 of the Agreement. On its face, this involves a legal interpretation of the contract but it does not follow that the Arbitrator’s interpretation, if indeed it is in error, can be properly characterised as raising a question of law. This Court, has in several instances, found that the alleged identified error does not engage a question of law when it is, in reality, a challenge to factual inference or sufficiency of evidence.6

[17]   I accept H2O’s submission that the Arbitrator did not imply a term into the Agreement but interpreted the words “change, alter or extend” in the context of the Agreement. The Arbitrator, in interpreting clauses 8.2 and 8.3 as relating only to physical changes of to the Complex, referred to the use of the wording in clause 8.2 of “change, alter or extend” and contrasted it with the wording in clause 12.1, which refers to an assignment of an “interest in the Complex”. Comparing both clauses, the Arbitrator found the wording in clause 8.2 meant physical changes and the wording in clause 12.1 related to contractual arrangements between the parties.

[18]   In analysing clause 8.3, the Arbitrator observed that H2O did not have authority to make changes to the Complex that will incur additional costs for the Council, without the consent of the Council. The Arbitrator construed the wording of

5      Arbitration Act 1996, schedule 2, clause 10

6      Milk New Zealand (Shanghai) Co Ltd v Miraka Ltd [2019] NZHC 2713; Kiwi Property Holdings Ltd v Fletcher Construction Company Ltd [2018] NZHC 1745; and KKDS Ltd v S & G Three Kings Ltd [2019] NZHC 3456.

the clause as a reference to physical changes to the Complex, that could lead to additional operating or maintenance costs for the Council. She found it did not include any changes in assigning interests in parts of the Complex.

[19]   It is plain from the reasoning in both her Arbitral Awards and in the Second Award in particular, that the Arbitrator followed the orthodox approach to contractual interpretation, referring to a number of well-established authorities, which were relied on by both parties.7 As H2O submits, the approach taken by the Arbitrator was to consider the words of the contract; the factual matrix and background knowledge available to the parties at the time of the contract; and the conduct of the parties after they entered into the contract. On my assessment, the Arbitrator has construed the words in accordance with the framework of the Agreement, namely the obligations imposed by Part 8 on the operational management of the Complex.

[20]   Although a contractual interpretation is usually a legal exercise, I consider that the Arbitrator’s interpretation does not raise questions of law for further determination; there is no apparent error of law; and the Arbitrator’s interpretation appears consistent with the nature of the obligations of the respective parties under the Agreement.

[21]   I conclude that the Council’s challenge does not raise a question of law but is instead, a challenge to an unfavourable interpretation for the Council.

Clause 11.4 of the Agreement

[22]Clause 11.4 provides:

11.4             In addition to the payment referred to in 10.2 above, the Company shall pay a share of any profit from the Complex to the Council as follows:

(a)For all profits less than $1.2million in any financial year, the split shall be 60/40 in favour of the company of the gross income after deduction of $150,000.00 (being the return on investment and management fees) and the reasonable operation and administrative costs of the Company relating to the complex. (The sum of $150,000.00 shall be adjusted in accordance with the CPI as per clause 10.2.)

7      Vector Gas v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 144; and Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37, [2008] 1 NZLR 277.

(b)For all profits of $1.2million and greater in any financial year the said profit shall simply be split between the parties 60/40 in favour of the Company.

(c)The threshold figure of $1.2million shall be adjusted in accordance with the CPI as per clause 10.2.

[23]   The Council seeks to argue that the Arbitrator misconstrued clause 11.4 of the Agreement, by importing a three-step process into the clause. The Council alleges that the Arbitrator has found that when sums have not been paid under the profit- sharing clause, the parties are required to go through the dispute resolution process and be given an opportunity to make missed payments, before a breach of the Agreement can be said to have occurred.

[24]   In the Second Award, the Arbitrator found that H2O had not included all income generated by the Complex in the profit-share calculations and had deducted expenses that were not the reasonable costs of the Complex. The Arbitrator identified that $37,254.80 was owing to the Council for the financial years ending March 2016, March 2017 and March 2018 and gave H2O 28 days to make that payment.

[25]   The Council seeks to appeal two aspects in respect of the Second Award. First, it alleges that the Arbitrator implied a term that the parties must go through a three- stage process before a breach can be found. This, the Council says, is contrary to the Agreement and therefore an error of law. Secondly, in finding that H2O had not complied with the profit-sharing clause, the Arbitrator erred in failing to find that H2O was in breach of the Agreement at the date of renewal.

[26]   The real gravamen of the Council’s challenge to the Second Award is that it alleges H2O was in breach of the Agreement, as at the date of the renewal of its contract, and the Council was therefore entitled to terminate the Agreement.

[27]   The Council’s claim of breach of the profit-share clause was not initially raised when it sent a letter terminating the Agreement for H2O’s breach. The purported termination was on the basis that H2O had failed to renew in time. The profit-sharing issue arose subsequent to the alleged failure of H2O to renew in time and was a secondary issue, raised prior to or during the conciliation process. H2O’s Counsel advised it led to the arbitration hearing being split into two.

[28]   At the hearing before me, Mr Cameron for the Council clarified that prior to the renewal date, the Council had requested further financial information from H2O, as the information provided was unsatisfactory. The parties however, did not agree on the profit-share amount owing. Ms Rosser for H2O submits that consequently, the parties were in “dispute” and that issue had to be resolved. I accept H2O’s submission that, if there was an issue of a “missed payment” which was disputed, the Agreement requires all disputes, whether a breach is ultimately established or not, to undergo a specific dispute resolution process as required by clause 15.2.

[29]   It follows that I am unable to uphold the Council’s submission that the Arbitrator has implied terms or suggested additional obligations that must now be read into the Agreement. The Arbitrator did not imply a term that required all future issues of “missed payments” or breaches of the profit-sharing clause to undergo a three-stage process. The procedure adopted was limited to this dispute, arising in these particular circumstances, which required determination, before H2O could be held to be in breach. The fact that the determination was finalised after the date of renewal does not render the Arbitrator’s finding an error of law. At the time H2O sought to renew its term, H2O was not in breach in the Agreement but was in dispute over the sums owing. I note that it was open to the Council to raise these allegations of breach prior to the date of renewal, so that the matter could have been determined before renewal.

[30]   I consider that no question of law has been raised and there has been no error of law. The parties could not agree on whether there were sums owing by H2O to the Council; there was a dispute as defined under the Agreement; and in accordance with the Agreement, the dispute was referred to arbitration. The determination of that dispute occurred after the date of renewal and on any view of the facts and the timing, H2O was not in breach of the Agreement at the date of renewal. I find that this is a heavily fact-oriented challenge and does not raise a question of law to be determined.

Conclusion

[31]   On the basis of my findings above, none of the Council’s alleged questions of law meet the threshold test under the Act. Even on a consideration of the discretionary considerations, I note that the Arbitrator, Ms Nicole Smith is legally qualified. The

continuation of the contract is only for a further two years. There is no monetary value attaching to any alleged mistake by the Arbitrator. I further observe that if leave were granted, the substantive appeal is likely to be determined either within a year, or at the expiration, of the final term of the Agreement. These factors count against a grant of leave.

[32]   To conclude therefore, the proposed appeal, although involving an interpretation of a contractual agreement does not engage questions of law, as the questions raised are heavily fact-oriented and involve challenges to the Arbitrator’s interpretation of words within the context of the Agreement. Her conclusions appear sound and appropriate. I consider the Council has a marginal prospect of appellate success, given the facts involved in both the First and Second Awards, and there is no likely useful precedent that can emerge from a grant of leave.

Order

[33]The Council’s application for leave to appeal is dismissed.

Costs

[34]   In the absence of Counsel agreeing to costs, the parties may file and serve memoranda of no more than five pages:

(a)H2O by 5pm 13 August 2020;

(b)The Council by 5pm 20 August 2020.

Cull J

Solicitors:

Lawson Robinson, Napier for the Plaintiff

Holland Beckett Law, Tauranga for the Defendant