Sure Care Services Ltd v At Your Request Franchise Group Ltd HC Auckland CIV 2008-404-005112

[2010] NZHC 2454

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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2008-404-005112

BETWEEN  SURE CARE SERVICES LIMITED First Plaintiff

ANDR T LAWRENCE AND D J WESSELS Second Plaintiffs

ANDJ C T LAWRENCE AND J C T WESSELLS

Third Plaintiffs

ANDAT YOUR REQUEST FRANCHISE GROUP LIMITED

First Defendant

ANDA C KENNY Second Defendant

Hearing:         4 February 2010

Appearances: A Grant for Plaintiffs

R Dillon for Defendants

Judgment:      24 March 2010

(RESERVED) JUDGMENT OF ANDREWS J

This judgment is delivered by me on 24 March 2010 at 4:00pm pursuant to r 11.5 of the High Court Rules.

..................................................... Registrar / Deputy Registrar

Solicitors:

Stewart Germann Law Office, P O Box 1542, Auckland (for Plaintiffs)

Gaze Burt, P O Box 301 251, Albany (for Defendants) Counsel:

A F Grant, P O Box 2185, Shortland Street, Auckland.

SURE CARE SERVICES LTD And Ors V AT YOUR REQUEST FRANCHISE GROUP LTD HC AK CIV

2008-404-005112 [24 March 2010]

Introduction

[1]      The plaintiffs have applied for leave to file an application for review of a decision of an Associate Judge out of time, and for review of the decision of Associate Judge Abbott, dated 31 July 2009, that proceedings filed by the plaintiffs in this Court were dismissed or stayed pending the outcome of an arbitration.  Both applications are opposed by the defendants.

[2]      If leave to file the application for review is granted, the issue will be whether the Associate Judge was wrong in law to dismiss or stay the proceedings.

Background

[3]      The first defendant, At Your Request Franchise Group Limited (―AYR‖) is a franchising company involved in the provision of home and commercial services. The second defendant is one of its directors.  The first plaintiff, Sure Care Services Limited  (―Sure  Care‖)  is  a  master  franchisee  company.    The  second  plaintiffs (Messrs Lawrence and Wessells) are directors of Sure Care.   The third plaintiffs (Mrs Lawrence and Mrs Wessells) are employees of Sure Care.   The second and third plaintiffs are all shareholders of Sure Care.

[4]      Sure Care and AYR entered into several agreements to purchase regional franchises  (the  franchise  agreements)  in  the  Tauranga,  Rotorua,  and  Whakatane areas, with Messrs Lawrence and Wessells as guarantors.   Sure Care and Messrs Lawrence  and  Wessells  subsequently  claimed  that  there  had  been  breaches  of express and implied terms in the contracts, misrepresentation, and breaches of the Fair Trading Act 1986.

[5]      Following   a   failed   attempt   at   mediation,   the   plaintiffs   commenced proceedings in this Court.   The defendants then purported to refer the dispute to arbitration and protested the jurisdiction of this Court to hear the proceedings.  They applied to dismiss or stay the proceedings on the grounds that the parties had agreed to refer the dispute to arbitration, pursuant to an arbitration clause, cl 24.3, in the

franchise  agreements  (―the  arbitration  clause‖).     The  plaintiffs  opposed  the application to dismiss or stay.

[6]      The application was heard before the Associate Judge on 20 January 2009. On 31 July 2009 he ruled that the proceedings  were to be dismissed or stayed pending the outcome of arbitration.

[7]      On  14  August  2009  the  plaintiffs  filed  an  application  for  review  of  the Associate Judge‘s decision.  This was five working days out of time.  Accordingly, at the same time, the plaintiffs filed an application for extension of time to file the application for review.

Application for extension of time

[8]      Review  of  an  Associate  Judge‘s  decision  is  governed  by  s 26P  of  the Judicature Act 1908 and r 2.3 of the High Court Rules.  Rule 2.3 establishes the time limit for filing an application for review:

2.3      Review of decision

(1)       An application for a review, under s 26P(1) of the Act, of an order or a decision made by an Associate Judge must be by interlocutory application, which must fully state the grounds of review and what exactly is challenged by the applicant.

(2)       Unless a Judge or an Associate Judge directs otherwise, notice of the application must be filed and served, —

(a)       if it is made by a party who was present or represented when the order was made or the decision was given, within  5 working days of the order being made or the decision being given;  or

...

[9]      Rule 1.19 gives the Court discretion to extend or shorten the time limit:

1.19     Extending and shortening time

(1)       The court may, in its discretion, extend or shorten the time appointed by these rules, or fixed by any order, for doing any act or taking any proceeding or any step in a proceeding, on such terms (if any) as the court thinks just.

(2)       The court may order an extension of time although the application for the extension is not made until after the expiration of the time appointed or fixed.

[10]     The factors relevant to a decision whether to extend time for applications for review are no different from those generally adopted in relation to applications to extend time to appeal.  These are the extent of the delay in applying, the explanation for the delay, the substance or merit of the application, and any prejudice resulting from the delay.   There is an overriding principle that a proceeding should not be struck out if it is possible still to do justice between the parties.1

Submissions

[11]     On behalf of the plaintiffs, Mr Grant submitted that r 1.19 allowed the Court to extend time to file the application for review.  He submitted that consideration of the relevant factors pointed towards extension.  First, he submitted that the delay in applying was only five days.   He submitted that the ―five working days‖ rule is designed to ensure that interlocutory processes move along quickly.   In the circumstances, a delay of five working days is of no material significance, in particular when that delay is compared with the delay considered in Sutton (a little

over one month) and in Crane Accessories Ltd v Lim Swee Hee2 (11 days).  In both

of those cases an extension of time was allowed.

[12]     Secondly, Mr Grant submitted that the reason for the delay was counsel‘s oversight.  Mr Grant submitted that he had been unaware of the short time period for review  of  an  Associate  Judge‘s  decision.    In  his  oral  submissions,  Mr  Grant submitted that the subject matter of the decision was complex (he cited as support for this that the decision was not released until six months after the hearing), and that it had been difficult to confer with his clients given their working hours and their place of residence (some distance from Auckland).

[13]     Further, Mr Grant submitted that no prejudice resulted from the delay, as the period of five days was immaterial, and a separate proceeding to hear the leave

1            See Sutton v New Zealand Guardian Trust Co Ltd (1989) 2 PRNZ 111(HC) at 113 and 117.

2            Crane Accessories Ltd v Lim Swee Hee [1989] 1 NZLR 221 (HC).

application had not been sought.   Accordingly, he submitted that the defendants‘

costs had been limited.

[14]     Finally, Mr Grant submitted that the merits of the application for review warranted the granting of leave.   In this respect he also submitted that the Court should not deprive a party of their ability to prosecute a claim if justice can be done. He submitted that justice could be done by extending time.

[15]     On behalf of the defendants, Mr Dillon submitted that consideration of the factors in Sutton pointed against the exercise of the discretion to grant an extension of time.  First, he submitted that the delay of five working days is not insubstantial, in light of the requirement that an application for review be filed within five working days.  Accordingly, five working days pointed to a delay that was substantial.

[16]     Mr  Dillon  then  submitted  that  the  explanation  for  the  delay  was  not exceptional.  He submitted that counsel are expected to be familiar with procedural rules.  He submitted that to accept counsel‘s oversight as justifying an extension of time would be to defeat the purposes of finality and the prompt disposal of proceedings set out in r 1.2.

[17]     Mr Dillon then submitted that the defendants had been prejudiced by the delay in filing the application for review and had incurred increased costs in having to deal with a late application.  He submitted that it is customary for an application for leave to be heard together with the substantive matter, and that the defendants had not waived their opposition to the leave application.  Finally, he submitted that the application for review was without merit.   Mr Dillon also submitted that the plaintiffs would not be prejudiced by refusing the application for an extension of time, as the issues raised by the plaintiffs in their substantive application could be raised in the arbitration proceedings.

[18]     As noted above, extensions of time have been granted by the Courts, even in cases where the delay has been more than that in the present case.  In Sutton Gault J was minded to do justice between the parties where it was still possible, and considered  that  little further prejudice could  be caused  by the ―short  additional

delay‖.  In Crane Accessories, Smellie J granted an extension of time after a delay of

11 days, because the reasons for the decision were delivered only six days after the hearing, and the defendants resided overseas.  Those factors had placed the case in a

―special category‖ making it unjust to deny the defendants an extension of time.

[19]     Notwithstanding  the  requirement  for  strict  compliance  with  time  limits, Sutton and other cases demonstrate a willingness to grant extensions of time where that may achieve justice between the parties.  Here, the delay was not substantial, the explanation was similar to other cases involving lawyers‘ mistakes, and it does not appear that any substantial prejudice has been caused to the defendants that cannot be met with an award of costs.  Accordingly, I have concluded that an extension of time to file the application of review should be granted, so as to allow the substantive application to be considered.

The franchise agreements

[20]     It is helpful, first, to refer to the dispute resolution provisions in the franchise agreements.  Clause 24 is headed ―Dispute Resolution‖.   Clause 24.1 provides that should any dispute arise between the parties ―touching any matter under this Agreement‖, then the dispute must be defined by written notice by the party raising it to the other party.   The dispute ―shall forthwith be discussed on a ‗without prejudice‘ basis by the parties in an attempt to resolve their differences amicably and expeditiously‖.

[21]     Clause 24.2 provides that if those discussions fail to resolve the dispute, then within 15 business days of the date of the notice, the parties ―may‖ refer the matter to a mutually agreed mediator and ―must not litigate or refer to arbitration prior to‖ mediation.

[22]     Clause 24.3, the arbitration clause, provides, as relevant to this proceeding, as follows:

24.3Arbitration:    If  the  mediation  procedure  in  clause 24.2  fails  to resolve the relevant dispute, then the parties agree that either party may refer the issue to arbitration in accordance with the Arbitration Act 1996. ...

[23]     Clause 24.4 is headed ―No Delay‖, and provides that both parties agree that any such arbitration is to be conducted and completed without delay, and that neither party will impede the arbitration in any way.

[24]     Clause 24.5 is headed ―Ruling Confidential‖,  and provides that the parties agree that they, their advisers and consultants will hold the ruling of the arbitrator confidential.

The decision under review

[25]     The Associate Judge noted that the defendants relied on art 8(1) of sch 1 of the Arbitration Act 1996, which provides that a Court must stay a proceeding in respect of a matter which the parties have agreed to refer to arbitration, unless certain factors exist.  Article 8(1) provides:

8        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.

…

[26]     The Associate Judge then noted that the defendants sought dismissal or stay of the plaintiffs‘ proceeding under r 131 (now r 5.49) of the High Court Rules, on the grounds that art 8(1) precludes the Court‘s jurisdiction, or under r 477 (now r 15.1), on the grounds that it would be an abuse of process for the plaintiffs‘ proceeding to continue in the face of an arbitration agreement.

[27]     From the plaintiffs‘ opposition to the application, he identified six issues to be determined.  Those issues, and his decision in respect of each of them, are set out below.

Construction of the arbitration clause

[28]     The Associate Judge identified, as the first issue to be determined, whether, as a matter of construction, the plaintiffs were required to submit the disputes to arbitration.  This turned on the word ―may‖ in the arbitration clause.  Mr Grant had submitted that the word ―may‖ indicated that arbitration is not mandatory, and allowed the parties to choose litigation or arbitration.   He had submitted that that interpretation was supported by the wording of cl 24.2, which included the words

―and must not litigate or refer to arbitration prior to mediating‖.  Against that, Mr Dillon had submitted that the arbitration clause simply provided that once mediation had failed, either party may refer the disputes to arbitration.  He submitted that once a party had referred a dispute to arbitration, the Court must stay the proceeding, if so requested.

[29]     The Associate Judge did not accept Mr Grant‘s submission.  He held that the word ―may‖ in the arbitration clause was to be read as part of the phrase ―the parties agree that either party may refer the issue to arbitration‖.   This meant that once one party has decided to refer a dispute to arbitration, both are bound to that course.  He considered that the phrase carried an implication of an agreed consequence.  He also considered that if the phrase were construed as being permissive, as Mr Grant had submitted, it would be meaningless.

Does cl 24 extend to disputes under the Fair Trading Act?

[30]     The second issue identified was whether the arbitration clause applies to a claim for breach of the Fair Trading Act.  Mr Grant had submitted that the arbitration clause does not apply to conduct that infringes the Fair Trading Act, and that the obligation to comply with the terms of that Act is not ―any dispute ... between the parties touching any matter under this agreement‖ so as to bring such claims within the ambit of cl 24.

[31]     The Associate Judge held that there was no reason to exclude disputes under the Fair Trading Act from the ambit of the arbitration clause.   He noted that the

plaintiffs‘ complaint is that the defendants‘ conduct caused the plaintiffs to enter into the franchise agreements.   He held that that was, in effect, a matter ―touching the agreement‖ in the same way as the alleged misrepresentations by the plaintiffs were.

Is the arbitration clause inoperative because the parties have elected litigation?

[32]     The  third  issue  identified  was  whether  the  arbitration  clause  became inoperative because the parties had elected litigation.  Mr Grant had submitted that even if the arbitration clause is mandatory, it had been rendered inoperative.  This was because the plaintiffs had elected litigation and the defendants had accepted that election.   This submission was based on an exchange of correspondence between solicitors  after  both  parties  had  served  notices  of  cancellation.    In  particular, reference was made to the following exchanges:

a)       Letter   from   the   plaintiffs‘   solicitors   dated   1   December   2006, challenging the defendants‘ cancellation of the franchise agreements. That letter concluded with the statement:

We hope to be able to file proceedings against your client before the end of the year, but if having regard to our own commitments and the commitments of counsel, that is not possible, we will file them in the new year. Can you please let us know if you have instructions to accept service on behalf of your client.

b)Letter from the defendants‘ solicitors dated 14 December 2006:  In the opening paragraph to that letter the defendants‘ solicitors wrote:

We ... confirm we are authorised to accept service on behalf of our client.

[33]     The Associate Judge did not accept Mr Grant‘s submission that that exchange was evidence of an agreement to litigation.  He noted, first, that the letter from the defendants‘ solicitors had ended with the statement:

In addition, any claims your client has with regard to the Franchise Agreements and indeed, issues with our client‘s cancellation, need to be addressed through arbitration as provided for in clause 24 of the Franchise Agreements.   ...

That position was repeated in a subsequent letter dated 9 February 2007.  Both the letter of 14 December 2006 and the letter of 9 February 2007 were sent to the plaintiffs‘  solicitors  well  before  the  plaintiffs‘  proceedings  were  issued,  on  11

August 2008.  Accordingly, the Associate Judge found that the defendants had not unequivocally accepted litigation.

[34]     Further, although the letter from the plaintiffs‘ solicitors of 1 December 2006 referred to filing ―proceedings‖ (a term usually associated with a Court proceeding) there was no explicit reference to a Court proceeding as distinct from an arbitral proceeding.  The  Associate  Judge  considered  that  the  defendants‘  solicitors  had clearly seen arbitration as the appropriate approach, and had pointed the plaintiffs‘ solicitors to that.

Is the arbitration clause inoperative through waiver or estoppel?

[35]     The fourth issue identified was whether the defendants had waived their right to arbitration or were estopped from insisting on it.  This issue also turned on the correspondence just referred to.  Mr Grant had submitted that the statement by the defendants‘ solicitors that they were authorised to accept service was a further reason for the arbitration clause to be inoperative.   Mr Dillon had submitted that the defendants had not waived their right to arbitration.

[36]     The  Associate  Judge  did  not  accept  that  the  letter  from  the  defendants‘ solicitors was inconsistent with their insisting on arbitration, or that the plaintiffs could have understood that the defendants would not insist on the arbitration clause, for the reasons he had given with respect to the previous issue.  Further, he could find no evidential basis for the assertion that it would be unconscionable for the defendants to insist on arbitration, even if the letter of 14 December 2006 could be construed as an acceptance of litigation.

Is arbitration precluded by the claims of the third plaintiffs and the claims against the second defendant?

[37]     The fifth issue identified was whether the fact that the third plaintiffs and the second defendant are not parties to the arbitration agreements but are parties in the litigation precludes arbitration.  Mr Grant had submitted that the application to stay or dismiss the Court proceedings should be denied because the arbitration clause does not apply to the claims by the third plaintiffs, and those against the second defendant,  as  they are  not  parties to  the  franchise  agreements.    Mr  Dillon  had submitted that it did not matter that the third plaintiffs and the second defendant are not parties to the arbitration agreement, as no cause of action had been advanced by or against them, other than jointly with, or against, the parties to the arbitration agreement.

[38]     The Associate Judge accepted that the third plaintiffs have pleaded that they have suffered losses in their own right, but found that their claims are dependent on the claims advanced by the first and second plaintiffs.   They had not pleaded any dealings between the defendants and themselves, additional to the defendants‘ dealings with the other plaintiffs, nor any deceptive or misleading conduct directed specifically towards them.   Accordingly, the third plaintiffs‘ claims would not succeed if the other plaintiffs‘ claims did not.

[39]     Further, the Associate Judge accepted that the plaintiffs had all made claims against the second defendant (Mr Kenny) in person.  Like the third plaintiffs, he is not a party to the arbitration agreements.  He is director and majority shareholder of the first plaintiff, AYR.   The Associate Judge found that the plaintiffs had not pleaded any conduct by Mr Kenny which would not also give rise to liability on AYR‘s part.  He noted that Mr Kenny was willing to have all of the plaintiffs‘ claims heard in an arbitration.

[40]     The Associate Judge did not see any reason why the third plaintiffs needed to participate in the arbitration.  He considered that if the representations which were alleged to comprise misleading conduct on behalf of the defendants were established

as between the second plaintiffs (their husbands) and the defendants, then the third plaintiffs could pursue independent claims if they wished.  On the other hand, if the second plaintiffs could not establish misleading and deceptive conduct, the third plaintiffs‘ claims would also fall away.  He referred to r 1.2 of the High Court Rules, requiring the rules to be applied in a way that will best secure a just, speedy, and inexpensive determination of a proceeding.  In the circumstances, he considered that if the other claims should otherwise have to be determined by arbitration, and Mr Kenny agreed to the claims against him being included in the arbitration, then in the present case it was appropriate to stay the claims of the third plaintiffs to await the outcome of the arbitration.

Is arbitration precluded on public policy grounds?

[41]     The final issue identified was whether there are public policy considerations that precluded arbitration.  Mr Grant submitted that it would be contrary to public policy to enforce the arbitration clause.  In support of that submission he referred to a number of cases in which the Courts had to decide whether to uphold claims for confidentiality in the face of a public interest in the subject of the confidence.

[42]     Mr Grant‘s submissions had arisen out of AYR‘s marketing of the franchise business as one based on honesty, integrity, and fairness.  The plaintiffs had claimed that they were induced to enter into the agreements by this marketing and other representations, but that the way in which the business had been operated was to the contrary.

[43]   Mr Grant had referred to evidence from former franchisees as to their experiences, which showed that the plaintiffs‘ case was not an isolated one and that the defendants‘ practices (alleged to be designed to conceal from prospective purchasers the way in which the franchises operated) were systemic.   He had submitted that requiring the disputes to be determined by arbitration would allow those  practices  to  continue  to  the  detriment  of  the  public  and,  specifically, prospective purchasers of franchises.  Accordingly, Mr Grant had submitted that a similar public interest approach should be taken to the present application so as to bring the practices out from behind the ―closed doors‖ of arbitration.

[44]     That submission was challenged by Mr Dillon, who submitted that public policy favoured arbitration where disputes are capable of private settlement.   The defendants disputed the claims and would answer them all at the appropriate time. They had not filed a defence to the Court proceedings as to do so would be a ―step in the proceeding‖ which would preclude arbitration.   He had also submitted that provisions for confidentiality and arbitration are standard features of commercial agreements.

[45]     The Associate Judge noted that the Court has an overriding entitlement not to enforce an arbitration agreement for public policy reasons in an appropriate case. This is recognised in s 10(1) of the Arbitration Act 1996.  However, he noted that he had  not  been  referred  to  any  case  where  a  Court  had  declined  to  enforce  an arbitration agreement merely on the grounds of public interest in the subject matter. Further, he was not persuaded that the cases cited by Mr Grant were directly on point.  He noted that the present case was not one for breach of confidence per se, but was rather about enforcing an agreement to resolve disputes by arbitration rather than litigation.   However, he considered that the cases provided a useful basis for analysis, and that they indicated that there needs to be a balancing of interests.  The starting point is the public interest in upholding agreements.

[46]     The Associate Judge also accepted that confidentiality and arbitration clauses are regularly used in commercial agreements.   He accepted that the plaintiffs had advanced matters that could amount to conduct that should be disclosed, but those matters had not been proven.  He was satisfied, on the basis of affidavits sworn by Mr Kenny, that there are ―two sides to the dispute‖.

[47]     The Associate Judge observed that it was also relevant to look at the ―public interest‖ that the plaintiffs were advancing, which was to ―protect prospective purchasers‖.    However, he accepted Mr Dillon‘s submission that the agreements provide several safeguards for them, and that it is open to any purchasers to make inquiries of existing franchisees.   He also accepted that there are currently 214 franchisees whose businesses might be adversely affected if the allegations were made public and were subsequently shown to have no merit, or to apply only to the plaintiffs.

[48]     What the Associate Judge considered most telling was that the cases relied on by Mr Grant suggested that disclosure is not unlimited – it must be to a person with a proper interest in the information.  On that basis he considered that, at least at the stage when allegations are unproven, there was no good reason to disclose them more generally than to the arbitrator as the person agreed upon by the parties to resolve their disputes.  He saw no reason for unproven allegations to be disclosed to the public at large.

Conclusion

[49]     Having rejected the plaintiffs‘ submissions on each of the identified issues, the Associate Judge decided that the arbitration clause required the disputes between the plaintiffs and the defendants to be determined by arbitration if one party so elected.  He found that the defendants had elected arbitration.  Accordingly, subject to Mr Kenny filing and serving a memorandum confirming that he agreed to the disputes against him being determined by arbitration at the same time as the claims against the first defendant, the claims by the first and second plaintiffs were dismissed, and the claims by the third defendants stayed pending determination of the first and second defendants‘ claims by arbitration.

Approach to review

[50]     The statutory provisions governing reviews of Associate Judge‘s decisions are s 26P(1) and (1AA) of the Judicature Act and r 2.3 of the High Court Rules. Section 26P(1) and (1AA) of the Judicature Act provides:

26P     Review of, or appeals against, decisions of Associate Judges

(1)       Any  party  to  any  proceedings  who  is  affected  by  any  order  or decision made by an Associate Judge in Chambers may apply to the Court to review that order or decision and, where a party so applies in accordance with the High Court Rules, the Court —

(a)      Must review the order or decision in accordance with the

High Court Rules;

(b)      May make such order as may be just.

(1AA)  The   determination   of   the   High   Court   on   a   review   under subsection (1) is final, unless the High Court gives leave (or the

High Court refuses leave, but the Court of Appeal gives special leave) to appeal from it to the Court of Appeal.

...

[51]     Rule 2.3 of the High Court Rules has already been referred to, in relation to the time within which an  application  for review must  be filed.   Rule 2.3(4) is relevant to the Court‘s approach to an application for review.  It provides:

2.3      Review of decision

...

(4)      If  the  order  or  decision  being  reviewed  was  made  following  a defended hearing and is supported by documented reasons, —

(a)      the review proceeds as a rehearing;  and

(b)       the Judge may, if he or she thinks it is in the interests of justice, rehear the whole or part of the evidence or receive further evidence.

[52]     Pursuant to r 2.3(4), if the Associate Judge‘s decision is a reasoned one, following a defended hearing, the approach is essentially appellate.  The burden is on the plaintiff to establish that the Associate Judge made unsupportable findings of fact and/or applied wrong principles of law.3

[53]     The Judge has a discretion as to whether to grant a review.  The readiness of the Court to intervene will vary depending on the thoroughness of the argument originally  presented,  whether  the  decision  of  the  Associate  Judge  was  a  fully reasoned one, and the extent to which significant fresh evidence, arguments or authorities  have  been  introduced  for  the  first  time  on  review.4      The  appellate

approach in Austin, Nichols & Co Inc v Stichting Lodestar5  has been applied to

reviews of decisions of Associate Judges.6    In Austin, Nichols it was held that the

Appellate Court has to make its own assessment as to whether the decision under appeal was wrong.  If it so decides, it is an error for the Appellate Court to defer to

3Midland Metals Overseas Pte Ltd v The Christchurch Press Co Ltd (2002) 16 PRNZ 107 (HC) at [13].

4            Wilson v Neva Holdings Ltd [1994] 1 NZLR 481 (HC) at 485.

5            Austin, Nichols & Co Inc v Stichting Lodestar [2008] 2 NZLR 141 (SC).

6            See Gough Finance Ltd v C J Harvesting Ltd HC Rotorua CIV 2006-463-914, 20 March

2008 at [10] and Burmeister v O’Brien [2008] 3 NZLR 842 (HC) at [29].

the lower Court‘s assessment of the acceptability and weight to be accorded to the

evidence, rather than forming its own opinion.

Issues on review

[54]     Central to the consideration of this application for review is art 8 of sch 1 of the Arbitration Act.  Article 8 has already been set out.  In essence, it provides that proceedings brought in a matter which is the subject of an arbitration agreement must be stayed and referred to arbitration if a party to the agreement so requests before taking any step in the proceeding, unless the Court finds that the arbitration agreement is null and void, inoperative, incapable of being performed, or that there is no in fact any dispute between the parties.  Thus, the Court has no discretion under art 8; it must grant a stay and give effect to the arbitration agreement unless the request  for  stay  is  made  after  the  party  requesting  it  has  taken  a  step  in  the proceeding, or the arbitration agreement is deficient, or there is not in fact any dispute between the parties.

[55]     Section  10  of  the  Arbitration  Act  is  also  relevant.    It  provides  for  the arbitrability of disputes:

10       Arbitrability of disputes

(1)       Any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless the arbitration agreement is contrary to public policy or, under any other law, such a dispute is not capable of determination by arbitration.

...

[56]     It is to be noted that there is in New Zealand a strong policy in favour of enforcing contractual arbitration provisions:   see, for example, Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd,7  Attorney-General v Mobil Oil NZ Ltd,8 and  CBI NZ  Ltd v Badger  Chiyoda.9      Section 5  of the Arbitration  Act  is  also

relevant.  It provides that the purposes of the Arbitration Act include ―to encourage

7            Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (HC).

8            Attorney-General v Mobil Oil NZ Ltd [1989] 2 NZLR 669 (CA) at 667.

9            CBI NZ Ltd v Badger Chiyoda [1989] 2 NZLR 649 at 666–668.

the use of arbitration  …‖  and  ―to  facilitate the recognition  and  enforcement  of

arbitration agreements …‖.

[57]     Mr  Grant  submitted  that  the  Associate  Judge  was  wrong  in  law  in  his decisions on each of the six identified issues.  I therefore turn to consider the parties‘ submissions on those issues.

Interpretation of the arbitration clause

[58]     Mr Grant submitted that the Associate Judge was wrong in law to find that the  parties  were  bound  to  arbitration  once  one  party  referred  the  dispute  to arbitration.   He submitted that if a party elects litigation before the other elects arbitration, arbitration is not compulsory. He submitted that this was the proper meaning to be given to the word ―may‖ in the arbitration clause, in light of the use of the word ―must‖ in cl 24(2) in relation to mediation.  In the present case, Mr Grant pointed to the fact that the defendants elected arbitration only after the plaintiffs had signalled their intention to issue Court proceedings.   Further, he submitted that if there were any ambiguity in the arbitration clause, it should be interpreted contra proferentum as the arbitration agreements had been prepared by the plaintiffs.

[59]     Mr  Dillon  submitted  that  the  Associate  Judge‘s  interpretation  of  the arbitration  clause  was  reasonable,  and  that  the  clause  had  no  ambiguity.    He submitted that the use of the word ―may‖ as opposed to ―must‖ simply means that neither  party is  bound  to  refer  the  matter  to  arbitration,  but  either  may do  so. However, pursuant to art 8, once a party has elected arbitration, that is binding.  He submitted that the interpretation put forward on behalf of the plaintiffs requires a qualification of the words in the arbitration clause that does not exist.

[60]     I am not satisfied that the Associate Judge was wrong to find, as he did, that the word ―may‖ in the arbitration clause is permissive to the extent that the parties can elect whether to take their dispute to arbitration.  Nor am I satisfied that he was wrong in law in concluding that the effect of the arbitration clause is that once one party decides to refer a dispute to arbitration, both are bound to that course.  I am not satisfied that the difference in wording between clause 24.2 (―must  not litigate or

arbitrate‖ and clause 24.3 ―the parties agree that either party may refer the issue to arbitration‖) requires any different interpretation.

Does cl 24 extend to disputes under the Fair Trading Act?

[61]     Mr Grant submitted that disputes under the Fair Trading Act do not fall within the ambit of the arbitration clause as the phrase ―touching any matter under this agreement‖  is narrow in scope, and the arbitration agreement does not make reference to that Act.  He submitted that the wording of the arbitration clause is to be compared with other arbitration clauses that typically include the words ―or in any way in connection with this agreement‖.   Again, he submitted that if there is any ambiguity, then the contra proferentum principle must apply.

[62]     Mr  Dillon  submitted  that  the  phrase  ―touching  any  matter  under  this agreement‖  is sufficiently wide to include claims under the Fair Trading Act.   He submitted that such claims require proof of misrepresentation, and as the arbitration agreements have a ―no representation‖ clause, the claims ―touch a matter‖ under the agreement.  Accordingly, he submitted there was no error of law.

[63]     The words ―touching any matter under this agreement‖ come from cl 24.1 of the arbitration agreement, which provides:

Notice:   Should any dispute arise between the parties touching any matter under this agreement, then such dispute shall be defined by written notice by the party raising it to the other party ...

[64]     In Attorney-General v Mobil Oil NZ Ltd10 the arbitration agreement used the phrase ―... any dispute under this agreement ...‖.   The relevant dispute was whether the Commerce Act 1986 had been breached.  Heron J held that whether there was a dispute under the Commerce Act, and whether it had been infringed, depended on the   contract,   and   the   particular   arrangement   the   parties   had   entered   into. Accordingly, the matter in dispute had to be regarded as a difference which had arisen under the contract.

[65]     In Marnell Corrao Associates Inc v Sensation Yachts Ltd,11 an argument that an arbitration clause did not apply was rejected.  In that case, the arbitration clause provided that if a dispute between the parties was not resolved by one of the means set out in the arbitration provisions, then either party ―may by notice require that the matter in dispute be referred to arbitration‖.  The arbitration provisions also included a submission to the jurisdiction of the courts of New Zealand.   In rejecting the argument that one party had the right to sue in relation to the contract, Wild J noted at [61] that he was giving 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.

[66]     His Honour also noted, at [62], the judgments of the High Court in Attorney- General v Mobil Oil and of the Court of Appeal in Badger Chiyoda which, he said, evinced ―a strong New Zealand policy in favour of enforcing contractual arbitration provisions‖.

[67]     In the light of those authorities, I am not satisfied that the Associate Judge was wrong in law in concluding that the plaintiffs‘ complaint under the Fair Trading Act is that the defendants‘ conduct caused them to enter into the franchise agreements, and that the claims are, in effect, a matter ―touching any matter under‖ the franchise agreement in the same way that claims of alleged misrepresentations are.

Have   the   parties   elected   litigation,   thus   rendering   the   arbitration   clause inoperative?

[68]     Mr Grant submitted that the statement by the defendants‘ solicitors, in their letter of 14 December 2006, that they were ―authorised to accept service‖ on behalf of  their  client  was  an  unequivocal  acceptance  of  the  election  to  litigate.    He submitted that the acceptance of service was unqualified, and would otherwise be meaningless.  Further, he submitted that ―filing‖ of proceedings could only refer to Court proceedings, not arbitration, because there is no registry in which a reference

to arbitration can be ―filed‖.   He submitted that the reference to arbitration at the

conclusion of that letter was not an unequivocal election of arbitration.

[69]     Mr Dillon submitted that the Associate Judge had made a finding of fact (not law) that there had been no agreement between the parties that the dispute would be subjected to litigation.  He submitted that the defendants had consistently maintained their desire to arbitrate, and that the solicitors‘ statement as to acceptance of service did not indicate acceptance of litigation.   He submitted that the terms ―file‖  and

―proceedings‖ can equally refer to arbitration.  Further, he submitted that ―service‖

could apply to acceptance of communications under the arbitration agreement.

[70]     Whether the parties agreed to submit their dispute to litigation, rather than arbitration, is a question of fact.   I am not satisfied that the Associate Judge was wrong to conclude that there was no election to litigate.  In particular, I do not accept that the defendants‘ solicitors‘ letter of 14 December 2006 can be read as being an unequivocal acceptance of litigation.   Quite apart from the concluding words, in which the solicitors clearly indicated that any claims with regard to the franchise agreements should be addressed through arbitration, the confirmation of being authorised to accept service, even if that applies solely to litigation proceedings, does not indicate an unequivocal acceptance of litigation.   Acceptance of service of proceedings is necessary in order to file an application to strike out proceedings on the grounds that the dispute is subject to an arbitration agreement.   Further, Mr Grant‘s arguments based on the meaning of ―file‖ and ―proceedings‖ ignore the clear intention of the defendants to arbitrate, demonstrated in the final sentence of the solicitors‘ letter.

[71]     Accordingly, I cannot conclude that the Associate Judge‘s decision was based

on any unsupportable findings of fact.

Is the arbitration clause inoperative through waiver or estoppel?

[72]     Counsels‘ arguments on this issue largely reflected those made in respect of the previous issue.  For the same reasons as given in respect of that issue, I conclude that  the  plaintiffs  must  also  fail  on  this  argument.    I am  not  satisfied  that  the

Associate Judge was wrong in concluding that the solicitors‘ statement that they were  authorised  to  accept  service  was  not  inconsistent  with  the  defendants‘ insistence on arbitration, or that the plaintiffs could have understood that the defendants would not insist on the arbitration clause.

Is arbitration precluded by the claims of the third plaintiffs and the claims against the second defendant?

[73]     Mr Grant submitted that the Associate Judge was wrong in law to conclude that the third plaintiffs‘ claims were dependent on the claims of the first and second plaintiffs.   He also submitted that to stay their claims is to compel them to suffer the shortcomings  of  arbitration,  as  they  would  have  no  right  of  appeal  should  the outcome be adverse to them.

[74]     Mr Dillon submitted that the Associate Judge could exercise his discretion to stay the third plaintiffs‘ claims pending arbitration, for reasons of resources and efficiency.  He submitted that the third plaintiffs‘ claims are dependent on the second plaintiffs‘ claims.  Further, he submitted that the third plaintiffs may also claim in the arbitration, should they wish.

[75]     In Montgomery Watson NZ Ltd v Milburn NZ Ltd,12 Montgomery Watson and Aquatec-McDow Joint Venture (―Aquatec‖) were parties to an arbitration agreement. Their dispute was in relation to Montgomery Watson‘s design of a pre-acidification tank that was  a component of a waste water treatment plant.   The tank failed. Aquatec contended that Montgomery Watson‘s design of the tank was faulty, and sought to set off damages associated with the failure against fees owed to Montgomery Watson.     Montgomery Watson said the tank failed because of negligence by three companies (Milburn and two others) who had supplied materials or components used in the construction of the tank.   They were not parties to the arbitration agreement.

[76]     Aquatec  purported  to   refer  its  dispute  with  Montgomery  Watson   to arbitration.     Montgomery  Watson  did  not  wish  to  arbitrate  unless  the  three

companies participated.  They were not willing to do so.  Montgomery Watson then issued proceedings against the three companies, and Aquatec, and sought an interim injunction to prevent the arbitration proceeding.  Aquatec sought an order directing a stay of the litigation.

[77]     William Young J stayed the litigation proceedings.  He referred to art 8 of sch

1 of the Arbitration Act, which he described as ―very  prescriptive‖.   He said (at

[21]):

The wording of that Article does not leave any easy or obvious mechanism for overriding a submission to arbitration on the grounds that an arbitration of a particular dispute would be artificial and inefficient given the possible involvement of other parties.

[78]     William Young J rejected submissions on behalf of Montgomery Watson that the existence of claims against the three companies meant that art 8 did not apply, and that permitting the arbitration to proceed would cause substantial prejudice to the three companies and to Montgomery Watson.   With respect to the latter submission, his Honour, citing Kaverit Steel & Crane Limited v Kone Corporation,13  observed (at [29]):

...  The possibility of other litigation and contradictory findings was not seen as permitting parties to an arbitration agreement to depart from their submission to arbitration.   That an arbitration clause may not operate conveniently does not mean that it is inoperative.

[79]     His Honour also held that Montgomery Watson‘s claims against the three companies were to be stayed.  He noted (at [32]) the possibility that if the litigation proceedings continued, they might run in parallel with the arbitration.   At [33] he saw this as permitting the process of the Court to be used to subvert the arbitration agreement.

[80]     Having regard to r 1.2 of the High Court Rules, which requires the rules of Court to be applied in a way that will best secure a just, speedy, and inexpensive determination of a proceeding, and to the judgment of William Young J in Montgomery Watson, I am not satisfied that the Associate Judge was wrong in law to

conclude  that  it  was  appropriate  to  order  a  stay  of  the  third  plaintiffs‘  claims,

pending the outcome of the arbitration.

Public policy

[81]     Mr Grant submitted that the Associate Judge was wrong to decline to find that arbitration should be precluded on public policy grounds.  He submitted:

a)       The fact that no case had decided to oust an arbitration clause on public policy grounds does not mean it is not possible.  In support he referred to Badger Chiyoda.

b)There  was  good  evidence  showing  that  the  defendants‘  desire  to arbitrate stemmed from a desire to suppress from the public their dishonest and deceitful misrepresentation and practices.  He submitted that to say that the allegations of deceitful conduct were ―not proven‖ is to set too high a standard, as that would make it impossible to succeed on a public policy ground.   Further, he submitted that the Associate Judge‘s finding that there were ―two sides to the dispute‖ was not supported on the evidence.

c)       Public interest can be allowed to prevail over the private contracts of parties.   In this respect he referred to the judgments in, inter alia, Initial Services Ltd v Putterill14 and Wilkinson v Osbourne.15

d)The interests of the existing 214 franchisees that might suffer adverse consequences from publicity may be outweighed by those of the number  of  potential  franchisees  that  would  benefit  from  knowing about the allegations made by the plaintiffs.  He submitted that if the existing franchisees were happy with their lot, they would have said

so.

14          Initial Services Ltd v Putterill [1968] 1 QB 396.

15          Wilkinson v Osbourne (1915) 21 CLR 89.

[82]     Mr Dillon submitted that:

a)       Public policy considerations in relation to arbitration are in favour of referring disputes capable of private settlement to arbitration.  In this respect he referred to r 7.80 (which relates to arbitration agreements entered  into  during the  course  of  a proceeding)  and  r 15.1  (as  to dismissing or staying all or part of a proceeding) of the High Court Rules.

b)        The plaintiffs in effect allege fraud to justify the public policy ground.

He submitted that such serious allegations should only be advanced on clear and unequivocal evidence.   He referred to r 13.8.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008.   He also submitted that fraud is not alleged in the plaintiffs‘ statement of claim.

c)        The authorities cited by the plaintiffs are not directly relevant.   Mr

Dillon made the distinction between a ―public  interest‖  issue and a

―public policy‖ issue.   He submitted that to be contrary to public policy, there must be a state interest that the requirement to arbitrate should remain unperformed.

[83]     The plaintiffs‘ submission relies on the wording of s 10 of the Arbitration Act, that any dispute which the parties have agreed to submit to arbitration may be determined by arbitration ―unless the arbitration agreement is contrary to public policy‖.   As noted earlier in this judgment, New Zealand courts have demonstrated an  expansive  approach  to  arbitration,  interpreting arbitration  clauses  widely and staying litigation proceedings in order to prevent an abuse of Court processes.

[84]     Whether a stay should be granted, in light of a strong public interest in the dispute, was considered in Attorney-General v Mobil Oil.16    It was argued in that case  that  the  importance  of  competition  law  issues  under  the  Commerce  Act

warranted favouring litigation  over  arbitration.    In  rejecting the  ―public  policy‖

16          Attorney-General v Mobil Oil [1989] 2 NZLR 649 (HC) at 665–668.

argument, Wild J referred to Mitsubishi Motors Corporation v Soler Chrysler- Plymouth Inc.17

[85]     Although the ―public policy‖ referred to in Mitsubishi Motors was in relation to international arbitrations, I am satisfied that the public policy of enforcing arbitration agreements outweighs the protection of potential franchisees of AYR.

[86]     None of the authorities cited by Mr Grant were concerned with the issue of whether an arbitration agreement should not be enforced on the grounds that the agreement was contrary to public policy.   They concerned issues as to whether confidential information should be disclosed – on either ―public policy‖ or ―public interest‖  grounds.   Like the Associate Judge, I do not find those authorities to be directly on point in the present case.

[87]     In Van Brandenburg v Muir,18 the Court of Appeal made reference to public policy in the context of an arbitration agreement.  In that case the parties had agreed, when a judicial settlement conference had failed to resolve their dispute, that the presiding Judge should determine the matter as arbitrator.   The Judge did so.   He issued a ―reserved judgment‖  that was then sealed as a judgment of the Court.  At issue before the Court of Appeal was whether the Judge had jurisdiction to act as an arbitrator.   It was submitted on behalf of the appellants that it was against public policy to allow enforcement of an award given or purported to be given by a judicial officer in excess of his jurisdiction.   The Court of Appeal rejected the appellant‘s submissions, first, that the Judge did not have jurisdiction to act as an arbitrator, and secondly, that it would be contrary to public policy to enforce his decision.

[88]     I am not satisfied that the Associate Judge was wrong, having considered the authorities  cited  on  behalf  of  the  appellants,  to  conclude  that  the  arbitration agreement was not contrary to public policy and should be enforced.  Further, I am

satisfied that it was open to him to balance the competing interests of disclosure of

17Mitsubishi Motors Corporation v Soler Chrysler-Plymouth Inc 473 US 614 (1985). The United States Supreme Court, in a majority decision, held that the interest in upholding arbitration agreements outweighed the public policy of anti-trust law. Further, it was noted that courts can still review an arbitration award at the enforcement stage to ensure that legitimate interests have been addressed.

18          Van Brandenburg v Muir (2005) 18 PRNZ 4 (CA).

the plaintiffs‘ allegations against the interests of upholding the arbitration agreement,

to find that the balance was in favour of upholding the arbitration agreement.

Result

[89]     On each of the issues raised on behalf of the plaintiffs, I have found no error in the Associate Judge‘s decision.   Accordingly, the application for review is dismissed.

[90]     Costs should follow the event.  I note that the Associate Judge made an order for costs to be paid by the plaintiffs to the defendants on a 2B basis.  That order has been stayed pending determination of this application for review.  It is appropriate that an order is made for the plaintiffs to pay costs on the application for review, on the same basis as they are payable in respect of the hearing before the Associate

Judge.

Andrews  J