Wai-O-Tapu Limited Partnership v The Trustees of Ngati Tahu Ngati Whaoa Runanga Trust
[2018] NZHC 1003
•9 May 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-463-000085
[2018] NZHC 1003
UNDER The Arbitration Act 1996 IN THE MATTER
of an application to set aside an arbitral award pursuant to Articles 34(2)(b)(ii) & (iii) and 34(6)(b) of Schedule 1 of the Arbitration Act 1996
BETWEEN
WAI-O-TAPU LIMITED PARTNERSHIP
Applicant
AND
THE TRUSTEES OF NGATI TAHU NGATI WHAOA RUNANGA TRUST
Respondents
Hearing: 12 March 2018 Appearances:
S J Mills QC and P J Crombie for Applicant D Salmon and R E Schultz for Respondents
Judgment:
9 May 2018
JUDGMENT OF VENNING J
This judgment was delivered by me on 9 May 2018 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Cooney Lees Morgan, Tauranga
Lee Salmon Long, Auckland
Counsel: S Mills QC, Auckland
WAI-O-TAPU LIMITED PARTNERSHIP v THE TRUSTEES OF NGATI TAHU NGATI WHAOA RUNANGA TRUST [2018] NZHC 1003 [9 May 2018]
[1] Wai-O-Tapu Limited Partnership (the Lessee) seeks to set aside an award of the Hon Robert Fisher QC (the arbitrator) determining a rent review between the Lessee and the trustees of Ngati Tahu Ngati Whaoa Runanga Trust (the Lessor) in relation to a property known as Wai-O-Tapu Thermal Wonderland (Wai-O-Tapu).1 The Lessee says the arbitrator breached natural justice and exceeded his jurisdiction.
Brief background to Wai-O-Tapu
[2] I take the background from a previous decision of the Court.2 Wai-O-Tapu is currently leased under a deed of renewal of lease dated 25 September 2000. The lease incorporates all of the terms of an original lease from 1969 (except in relation to rent in the initial period). The final expiry date of the lease is 30 June 2033.
[3] The Lessor was assigned the land and its reversion as part of a Treaty of Waitangi settlement in 2010. On 31 October 2012 the Lessee purchased the tourism business of Wai-O-Tapu, including the leasehold interest in the land.
[4] The lease requires rent reviews every five years or whenever the Lessee sublets or assigns any part of the land. The previous rent review was completed in 2010. It established the rent at $205,000 plus GST. No review was conducted when the Lessee acquired the lease in 2012.
[5] The subject property is a largely undeveloped 125 ha site consisting of improvements, natural geothermal features and bush. The Lessee operates a well- known geothermal tourism business on the property.
1 Ngati Tahu – Ngati Whaoa Runanga Trust v Waiotapu Ltd Partnership (Partial Award) Robert Fisher QC, 10 May 2017 (the Award).
2 Wai-O-Tapu Ltd Partnership v The Trustees of Ngati Tahu Ngati Whaoa Runanga Trust [2017] NZHC 2597.
The arbitration
[6] The rent became due for review on 1 July 2015. The parties and their experts were unable to agree an appropriate rental. Ultimately they submitted the issue to arbitration. The arbitrator was appointed sole arbitrator to determine the rent review.
[7] The experts who gave evidence at the arbitration as to the Current Market Rent were significantly apart. The Lessor called Mr Gary Cheyne, a registered valuer, who proposed a rent of $1,139,400 per annum; and Mr Michael Lowe, a chartered accountant, who proposed a rent of $972,000 per annum. The Lessee called Mr Gerrard Wilson, a registered valuer who proposed a rent of $287,200 per annum; and Mr Eric Lucas, a chartered accountant who proposed a rent of $300,000 per annum. The arbitrator ultimately fixed the rent at $1,139,400 per annum.
The Lessee’s challenge of the award
[8] The Lessee applied to set aside the arbitral award. First, it sought leave to appeal on questions of law. In a judgment dated 24 October 2017 this Court refused the application for leave.3
[9] The Lessee now seeks to set the award aside based on arts 34(2)(a)(iii) and (b)(ii) and 34(6)(b) of Schedule 1 of the Arbitration Act 1996. The Lessee says that the arbitrator breached natural justice and exceeded his jurisdiction in fixing the rent at $1,139,400 per annum.
The grounds for setting aside
[10] The parties considered the original lease terms did not provide sufficient guidance as to the basis for the rental or the methodology that should apply to the review so entered what has become known as a Process Agreement. The Lessee relies upon the provisions of the Process Agreement to support its application to set aside the award.
3 Wai-O-Tapu Ltd Partnership v The Trustees of Ngati Tahu Ngati Whaoa Runanga Trust [2017] NZHC 2597.
[11]The Lessee raises three arguments:
(a)breach of natural justice in the way the arbitrator dealt with a jurisdictional objection it made based on the range it says was set by the Process Agreement.
(b)the arbitrator exceeded his jurisdiction by setting a Current Market Rent that was outside the range allowed by the Process Agreement;
(c)the arbitrator exceeded his jurisdiction by not basing the new Current Market Rent on an “appropriate methodology” as was required under the Process Agreement.
The Process Agreement and its amendment
[12]Clause 8 of the lease provided that on the occurrence of certain events:
the annual rental hereinbefore reserved shall be reviewed by agreement between the Lessor and the Lessees: …
Both parties considered the clause did not provide sufficient guidance on the basis for the rental or methodology that should apply to the 2015 rent review. They agreed a joint brief to apply to the rent review (the Process Agreement). The Process Agreement was:
to act as a basis for engagement between the parties and their respective appointed assessors in relation to this rent review.
[13] The Process Agreement provided for a Rental Assessment Determination Process; a basis of reviewed rental; and referred to the methodologies to be considered. It also provided the current rent was to apply in the interim and for costs. As relevant it provided:
The parties agree that in order to reach agreement on the rental for the ensuing term the process set out below will be followed by the parties and their third party advisors as well as in relation to any determination made by a third independent assessor:
Rental Assessment
Determination Process
The parties have agreed to:
1. Appoint appropriate and suitably qualified third party advisors, acting as experts, to assist with the rental assessment, negotiation and determination process. The Trustees have appointed KPMG and WLP has appointed PWC. The two experts shall each be provided with the information, documentation and explanation they consider reasonably necessary in order to reach their assessment. The experts will be permitted to retain the services of a registered property valuer experienced in the valuation of assets of this nature as they consider necessary to reach their assessment;
2. The third party experts’ reports shall be made available to both parties, and the parties shall negotiate directly in good faith in an attempt to reach agreement within a reasonable time on the rental that should apply.
3. Should the parties not be able to reach agreement once the two assessments are shared, then the experts shall consider each other’s assessments and expert reports and attempt to reconcile any areas of disagreement and endeavour to provide an amended assessment for the parties’ further consideration and negotiation; and
4. If the parties still cannot reach agreement within a reasonable time, the matter is to be referred to a jointly appointed and independent third expert with each party having the opportunity to make written and oral representations. The third expert shall make a determination providing written notice and substantiating the determination to the parties. The determination must be within the range supported by each of the parties’ experts’ assessments from step 3 above. The determination shall be binding on the parties with no further right of review or appeal.
In determining the rental that should apply:
· Per the original lease the rent determined is not to be less than the rent for the period immediately preceding this rent review;
Basis of reviewed rental:
Current Market Rent, as defined by International Valuation Standards (namely the estimated amount for which a property, or space within a property, should lease on the date of valuation between a willing lessor and a willing lessee on appropriate terms in an arm’s length transaction, after proper marketing wherein the parties had each acted knowledgeably, prudently, and without compulsion), and having regard to the relevant terms and conditions of the lease and any subsequent variations.
Methodologies to be
considered
The experts shall apply an appropriate methodology to arrive at their opinion on Current Market Rent as defined above.
The experts will consider, inter-alia, a Direct Comparison methodology as a basis for the rental to apply to the site (Direct Comparison methodology involves the comparison of rents for other comparable land based concessions, leases or licenses, in this case being those pertaining to other tourism related or similar activities).
It is acknowledged by the parties that supporting analysis of the businesses trading accounts is to be carried out with reference to factors such as industry metrics for similar tourism businesses, the necessary capital employed in operating a going concern lessee business, improvements owned by the lessee and the terminating nature of the concession and any other relevant factors.
In addition to the above, the following factors (without limitation) are also considered relevant to determining the rental as it relates to the trading outlook for the lessee’s going concern:
· Forecast tourism activity (domestic and international); and
· Forecast economic conditions.
Interim rent:
Until the reviewed rent is determined, the parties agree that the current contract rent of $205,000 plus GST per annum is to apply as interim rental, with the reviewed rent to be backdated to the review date and any underpayment reimbursed to the Lessor.
Costs:
In the event the rent is determined by the third expert, the written notice determining the rent shall provide as to how the costs of the determination should be borne, otherwise each party, acting reasonably and in good faith, is to meet their own costs of this assessment and determination process.
[14] The first step in clause 1 of the Rental Assessment Determination Process was completed in accordance with the Process Agreement. The Lessee appointed Mr Lucas of PwC. He suggested a rental of $300,000. The Lessor appointed Mr Lowe of KPMG. He settled on a figure of $972,000.
[15] Given the gap between the two figures the parties accepted that the negotiation and meeting of the experts provided for in clauses 2 and 3 was unlikely to result in agreement.
[16] There then followed discussions between the parties’ solicitors directed at abandoning the rental assessment part of the Process Agreement and instead having the rent fixed at arbitration. Mr Crombie, the Lessee’s solicitor emailed Mr Salmon, the Lessor’s solicitor on 16 June 2016 to confirm the agreement to vary the Process Agreement as follows:
The variations to the Process Agreement are;
·Clauses 2 & 3 of the Rental Assessment Determination Process are waived …
·Clause 4 of the Rental Assessment Determination Process will no longer apply. It is to be replaced by a new clause 4 which reads as follows:
“4. Submit what is now a dispute on the rent that is to apply from 1 July 2015 to arbitration in accordance with the Arbitration Act 1996 before a sole arbitrator whose award shall be final and binding on them. … The terms of reference for the arbitrator shall include a requirement for his/her determination of the rent that is to apply to be at a level not less than the rent that applied immediately prior to 1 July 2015.”
[17]A draft letter for the proposed arbitrator, Mr Fisher, was attached.
[18] Mr Salmon did not immediately respond. Mr Crombie then spoke directly to Mr Salmon and prompted him for a reply to his letter of 16 June.
[19] Mr Salmon replied by an email of 24 June 2016 that he was happy for Mr Crombie to send the letter to the proposed arbitrator and continued:
As discussed, my client raised a query about the proposed change to point 4 of the Process Agreement which I will need to clear up before confirming those changes, but this does not need to hold you up in sending a letter to Mr Fisher.
[20] The letter to the proposed arbitrator stated the parties had agreed to refer their dispute to arbitration in accordance with the Arbitration Act. Mr Fisher confirmed his availability in a letter of 28 June. He suggested the parties complete a fresh submission to arbitration.
[21] On 5 August Mr Crombie wrote to Mr Salmon seeking confirmation in writing that the variations suggested in paragraph 2 of his email message of 16 June had been
agreed. He also raised a concern about the approach the Lessor’s expert Mr Lowe of KPMG had adopted in carrying out its assessment of the market rental. Mr Crombie recorded the Lessee’s view was that the Direct Comparison Methodology was agreed by the parties to be the primary approach the experts were required to consider. The Lessee believed the approach adopted by KPMG was contrary to the agreed approach.
[22] Mr Crombie noted that unless the matter could be resolved the Lessee intended to raise it (the requirement for the Direct Comparison Methodology approach to be applied) with the arbitrator as a preliminary issue to be determined prior to the substantive hearing. Mr Crombie and Mr Mills QC then prepared the Lessee’s memorandum for the first telephone conference with the arbitrator noting, inter alia, the Process Agreement was varied in June 2016 and that it was agreed steps 2 and 3 in the Rental Assessment Determination Process section of the Process Agreement would be waived and that the substantive issue for determination was to fix the Current Market Rent for the subject property as at 1 July 2015 having regard to the Process Agreement and the deed of lease. The memorandum then made reference to a preliminary issue Mr Crombie had raised with Mr Salmon and focused on the methodology to be considered.
[23] In his memorandum prepared for the conference of 22 August (which may not have been received by the Lessee or arbitrator prior to the conference) Mr Salmon noted that the Lessor disagreed with the propositions raised by the Lessee that:
·KPMG had not undertaken a Direct Comparison Methodology analysis; or
·the Lessor’s ability to reach appropriate conclusions on the probative value of relevant evidence was fettered by the Process Agreement; or
·any such fetter survived the reference to arbitration.
[24] In a minute issued following the conference the arbitrator suggested the definition of the dispute be:
“The rent review as at 1 July 2015 arising from the lease of 22 October 1969 of the Waiotapu Geothermal Wonderland, Rotorua.”
[25] The arbitrator then went on to discuss what had been described as the preliminary issue. He suggested a pragmatic approach to the issue would be for both parties to include a Direct Comparison Methodology analysis in the evidence which they put forward in the arbitration. He said he could see room for argument over the role of the methodology’s requirement given that steps 2 and 3 in the agreed process had been dropped. He could also see room for argument over whether:
to “consider… a [Direct Comparison Methodology]” necessarily involves using that methodology to then arrive at a conclusion.
He suggested that both ensure that their valuation experts used, among other things, a Direct Comparison Methodology and a conclusion which resulted from that approach.
[26] Mr Crombie subsequently circulated a proposed arbitration agreement to Mr Salmon which defined the issue as:
What is the Current Market Rent as at 1 July 2015 … pursuant to clause 8(b) of a deed of lease … and in accordance with [the process agreement] in August 2015 and subsequently varied in June 2016?
[27] In a letter of 18 October 2016 Mr Salmon confirmed the Lessor’s experts had been asked to further consider the Direct Comparison Methodology to the extent they felt in their opinion they properly could. The letter also noted that the draft arbitration agreement was acceptable except that they considered the qualifying words of the definition of the dispute as otiose.
[28] Mr Crombie replied by letter of 19 October noting that the Lessee did not accept the reference in the schedule to the Process Agreement was otiose. He argued:
“Current Market Rent” must be fixed in accordance with both the lease and the process agreement. The lease makes no reference to “market rent”. The parties’ agreement to the rent being based on the “market” arises from the process agreement. It also provides the arbitrator with the parties agreed definition of “Current Market Rent” and requires a determination to be within certain range. It also prescribes certain factors that are relevant to the determination of market rent.
[29] As will be seen from the exchanges between counsel from June 2016 the parties’ focus was on the Current Market Rent and the methodology to be applied to set it. Mr Crombie noted that he considered the arbitrator had acknowledged that he must derive the Current Market Rent inter alia pursuant to the Process Agreement.
[30] Mr Salmon replied by letter of 2 November noting that the Lessor’s position was that the inclusion of:
additional definition beyond market rent referring to the direct comparison approach might create the false impression that one subset of potentially relevant evidence may be thought to impliedly exclude others. The parties have not agreed such a substantive result. They have [simply] agreed to consider the available evidence to make a direct comparison. This makes the point one of procedure, rather than one that goes to the essence of the disputed issue.
[31] In the interests of finalising the agreement both parties’ position was set out in the definition of the dispute in the arbitration agreement finally executed on 20 December 2016:
NATURE OF DISPUTE
The lessee contends that the issue for determination is:
What is the Current Market Rent as at 1 July 2015 of the property known as Waiotapu pursuant to clause 8(b) of a deed of lease dated 1 July 1967 and the Agreement made by the parties (called “Joint Brief: Waiotapu Geothermal Wonderland 1 July 2015 Rent Review”) in August 2015 and subsequently varied in June 2016?
The lessor contends that the issue for determination is:
What is the Current Market Rent as at 1 July 2015 of the property known as Waiotapu pursuant to clause 8(b) of a deed of lease dated 1 July 1967 on the basis that the parties agree that the references in clause 8 of the said lease to “annual rental” and “rental” means “Current Market Rent”.
[32] There then followed a second teleconference with the arbitrator on 22 December 2016. In a minute following that conference the arbitrator recorded that:
It is agreed that the dispute for determination is “What was the current market rent for the subject property as at 1 July 2015?”
[33] Mr Crombie’s evidence was that while the Lessee’s counsel was content for the dispute to be defined in that way the Lessee was not agreeing the Process
Agreement was no longer binding or that the rental could be fixed without its requirements being applied.
The issue arises at the arbitration
[34] The Lessor adduced evidence both from Mr Lowe of KPMG (who maintained the rental should be $972,000 per annum) and from Mr Cheyne, a valuer, whose rental assessment was $1,139,400 per annum. In contrast the Lessee’s expert Mr Lucas of PwC maintained the rental should be $300,000 and Mr Wilson, the Lessee’s valuer, suggested $287,200.
[35] Towards the conclusion of the arbitration and after counsel for both parties had presented closing submissions the arbitrator noted the written closing submissions for the Lessor did not actually refer to the rental being contended for. At that stage Mr Salmon responded, saying “My witnesses have under-estimated the rental”. He suggested the Lessor could contend for a rental of $2.4 million per annum.
[36] Understandably, Mr Mills took objection to that development. He raised an issue of jurisdiction. He submitted the range clause in the Process Agreement placed a fetter on the arbitrator’s jurisdiction and submitted the Lessor was departing from the Process Agreement.
[37] There then followed a discussion between counsel and the arbitrator. Mr Salmon’s position, which remains the Lessor’s position, was that the parties had departed from the Process Agreement by the arbitration process. The arbitrator had confirmed the issue for determination in his second minute. There was no mention of any range. The Lessee’s position was that the arbitrator took the place of the independent third expert referred to in step 4 of the first part of the Process Agreement but otherwise, apart from steps 2 and 3, the Process Agreement was applicable. The arbitrator accepted that the competing positions raised a jurisdictional issue which ought not be dealt with summarily. The arbitrator called for memoranda and evidence on the issue.
Further submissions as to the range
[38] The parties then exchanged submissions by way of further memoranda. The Lessee also filed affidavit evidence from its chief executive officer and solicitor. The Lessee argued that the range clause in step 4 of the Process Agreement still applied and the rental fixed had to be within the range set by the original experts appointed under step 1 of the Process Agreement of between $300,000 and $972,000.
[39] The Lessor took the position that by submitting the dispute to arbitration the parties had departed from the expert Process Agreement. The arbitrator’s scope in relation to rental was unfettered. Alternatively, the Lessor argued that even under the terms of the Process Agreement the arbitrator had jurisdiction to fix a rental which was supportable on the full evidential record, (in other words, a rental substantiated by any assessment by any of the expert witnesses).
[40]The arbitrator ultimately concluded:
[208] Given the conclusions I have just expressed, I do not need to delve further into the additional evidence and argument on this subject. The latest controversy was confined to the implications of agreements and communications made in 2016. All of that was overtaken by the basis on which the parties conducted the hearing in February of this year. Whatever might have gone before, the overriding consideration now is the basis on which the hearing was conducted without objection from either side.
[41] The reference to the earlier conclusions were to paras [194]–[203] of the interim award, and particularly [201]–[203] in which the arbitrator rejected Mr Salmon’s argument that it was open for the arbitrator to fix a value of $2.4 million for the rental:
[201] The final and crucial obstacle to the Lessor’s figure is one of procedural fairness. I put to one side step 4 in the Process Agreement, which may or may not have continued relevance as a matter of contract. But it is clear that during the entire arbitral sequence, including the hearing until the last few minutes, the Lessee understood that the case it had to meet was a Lessor claim to rent of no more than $1,139,400 (Mr Cheyne’s valuation). It was only in his closing address that Mr Salmon contended for $2.4 million. If
$2.4 million had been claimed from the outset the Lessee might have conducted its case very differently or negotiated a compromise.
[202] For similar reasons I cannot accept the Lessee’s post-hearing contention that the available range is confined to the difference between the assessments of the two accounting experts, Mr Lucas ($300,000) and Mr
Lowe ($972,000). The contention is based on the Lessee’s interpretation of the Process Agreement. The Process Agreement may or may not have impacted on the available range at the time it was agreed on but it has since been overtaken by the way in which the hearing was willingly conducted by both parties. Mr Cheyne’s evidence was served well before the hearing. During the hearing the Lessor relied on that evidence, as well as that of Mr Lowe without procedural objection from the Lessee. It was only after the hearing was completed, when I sought submissions on the jurisdictional point, that the Lessee raised for the first time its objection to extending the jurisdictional range above the figure advocated by Mr Lowe.
[203] My conclusion is that as a matter of jurisdiction the range of annual rents now available to me lies between Mr Wilson’s figure of $287,200 and Mr Cheyne’s of $1,139,400.
[42] The arbitrator did not conclusively rule on whether step 4 in the Rental Assessment Determination Process still applied, instead finding that that aspect of the Process Agreement had in any event been overtaken by the conduct of the hearing and no objection had been taken by the Lessee to Mr Cheyne’s evidence.
Did clause 4 of the Process Agreement survive the reference to arbitration?
[43] Fundamental to the Lessee’s first two grounds of challenge to the interim award is the proposition that the arbitration (and arbitrator) should have proceeded on the basis that the Process Agreement was to apply to the arbitration and particularly that step 4 of the Rental Assessment Determination Process, which provided the determination was to be within the range supported by the parties’ experts’ assessments, constrained the outcome available to the range provided by Mr Lucas and Mr Lowe, namely between $300,000 and $972,000.
[44] The fundamental basis of an arbitrator’s jurisdiction is contractual. Article 28(4) of cl 1 of the Act provides that the arbitral tribunal is required to decide the dispute in accordance with the terms of any contract. If the parties contracted that step 4 was to apply the arbitrator was obliged to make his award in accordance with that provision, subject to any issues of subsequent waiver. The Lessor argues step 4 did not apply to the arbitration.
[45] In my judgment the Lessor’s argument is correct. The parties changed the Rental Assessment Determination Process aspect of the Process Agreement so that step 4 did not apply to the arbitration. The parties moved from the appointment of
experts and the staged process to follow from the exchange of the experts’ reports in clauses 2 and 3, with, if necessary, the rental to be fixed by an independent third expert under step 4 to a quite different process, namely an arbitration. By the submission to arbitration, the parties abandoned the Rental Assessment Determination Process aspect of the Process Agreement including step 4.
[46] The Lessee refers to Mr Crombie’s evidence of the discussion with Mr Salmon following the letter of 16 June. Mr Crombie understood the range would need to be retained in the submission to arbitration. The Lessor accepts that Mr Salmon observed during the conversation that the value range restriction had not been adopted in the proposed agreement to arbitrate.
[47] But importantly, the Lessee proceeded on the basis the matter was agreed and accepted that the clause had been removed by agreeing to the submission to arbitration and by later referring to the June variation without any reference to the retention of the value range. The Lessor never sought to maintain the value range. Further, step 4 could not remain with the reference to arbitration. As noted above, it was inconsistent with it. Mr Salmon agreed that the draft letter for the arbitrator could be sent. That confirmed the decision to go to arbitration which could only occur if the parties abandoned step 4. Step 4 was abandoned in June and there was no fresh agreement to incorporate a value range in the submission to arbitration.
[48] It is not possible to read the reference to the independent third expert in step 4 as a reference to the arbitrator. The process involving the third independent expert and the appointment of such independent third expert was only to be engaged in the event that the process set out in steps 1 to 3 had not led to an agreed rental. Steps 2 and 3 were waived. Step 4 in the Rental Assessment Determination Process required the independent third expert’s determination to be within a range determined from step 3. Step 3 was never undertaken. The range provided for in clause 4 was not imported into the arbitration process. Only the remaining aspects of the Process Agreement relating to the basis of reviewed rental and the methodologies to be considered were incorporated into the arbitration.
[49] Further, by waiving steps 2 and 3, and replacing the independent expert process in step 4 with reference to arbitration, the parties changed the basis upon which the determination would be made. Step 4 in the Rental Assessment Determination Process had provided the third independent expert’s view would be final with no right of appeal. By changing to an arbitration process the parties agreed to a quite different process to resolve the rental issue.
[50] The arbitration agreement is the best evidence of the terms of the agreement between the parties. Unfortunately that recorded different contentions between the parties as to the nature of dispute. The only issue on which the parties agreed was that the arbitrator was required to determine the Current Market Rent as at 1 July 2015 of the property known as Wai-O-Tapu.
[51] The arbitrator clarified the conflict at the second pre-hearing conference. He recorded in his minute no. 2 following the conference that the issue he was to determine was “What was the Current Market Rent for the subject property as at 1 July 2015”. There was no reference to a fetter on the range of that Current Market Rent. The arbitrator was not constrained by step 4 of the Process Agreement. The lessee did not challenge that statement of the issue by the arbitrator.
[52] Even accepting the Lessee’s explanation for not responding to the arbitrator’s minute, the Lessee made its position clear in its definition of the dispute in its submission to arbitration. In that definition of the dispute it relied on the Process Agreement “as varied in June 2016”. The variation in June 2016 was the variation promoted by the Lessee at that time. The variation was set out in Mr Crombie’s letter of 16 June, namely clauses 2 and 3 of the Rental Assessment Determination Process were waived, and clause 4 of the Rental Assessment Determination Process no longer applied and was to be replaced by the reference to arbitration. Nowhere in that letter or in any other correspondence from the Lessee in June was there a reference to retaining the range provided for in clause 4.
[53] While Mr Mills pointed to the fact Mr Salmon did not directly confirm the Lessor’s acceptance to that proposal and noted that Mr Crombie had sought to clarify
it in his later letter of 5 August, there was no other amendment to the Process Agreement made or proposed in June 2016.
[54] When read in context the focus of the Lessee’s correspondence following the exchange in June was to ensure that the balance of the Process Agreement, which referred to the basis of reviewed rental as Current Market Rent and the methodologies to be considered, and particularly the Direct Comparison Methodology was to apply. That is apparent from the correspondence and memoranda for the conferences before the arbitrator.
[55] The Lessee makes the point that the parties referred to the Process Agreement during the arbitration. But it is relevant that the Process Agreement comprised several different and distinct parts. The first part, the Rental Assessment Determination Process was abandoned with the submission to arbitration. The later parts provided for the methodology to be applied. The arbitrator engaged with those aspects of the Process Agreement.
[56] For the above reasons I conclude that the arbitrator was not constrained by the range that step 4 would have provided for if the Rental Assessment Determination Process had been followed. In rejecting Mr Salmon’s submission the rental should be at $2.4 million the arbitrator considered himself to be constrained by the broader range provided by the evidence of both the expert witnesses for the Lessor and Lessee, namely between $287,200 and $1,139,400 but that was because of the way the arbitration had been conducted, not because of step 4 of the Process Agreement.
[57] The finding that the arbitrator was not bound by the range set by step 4 of the Rental Assessment Determination Process is sufficient to dispose of the first two grounds of challenge, as the natural justice point relies on the Lessee’s argument it was not able to respond to the way the arbitrator dealt with the post-hearing submissions as to whether the range provided by step 4 applied. For the reasons given, step 4 did not apply. Even if there were a breach of natural justice in the way the arbitrator dealt
with the issue it could not make a difference.4 The second ground, that the arbitrator exceeded his jurisdiction by going outside the range cannot be sustained either.
[58] Nevertheless, in deference to counsel’s submissions, and in fairness to the arbitrator, I briefly consider the submissions and objection raised on the natural justice point.
Natural justice in the arbitration setting
[59] There is no real challenge to the applicable principles. An award is in conflict with public policy where there has been a breach of natural justice.5 Articles 34(2) and 32(6) of cl 1 of the Act make it clear natural justice is required during the arbitration process. In Trustees of Rotoaira Forest Trust v Attorney-General the Court discussed the requirements of natural justice in the context of an arbitration.6 The arbitrator is required to apply the principles of natural justice during the arbitration process.
[60] As outlined above from [35], the Lessee raised the issue of jurisdiction at the end of the arbitration, arguing that step 4 of the Process Agreement fettered the arbitrator’s jurisdiction. The arbitrator decided this point based on the parties’ conduct during arbitration, rather than by deciding whether step 4 of the Process Agreement applied.
[61] Mr Mills argued that there was nothing in the way the jurisdictional issue was dealt with by the arbitrator at the end of the arbitral hearing that made it reasonably foreseeable to the Lessee that instead of addressing the issue the arbitrator was asked to address he would avoid that issue and set the Lessee’s objection aside on the basis on which he did.
[62] Mr Mills argued that if the Lessee had been given the opportunity the following matters would have been put to address the arbitrator’s reasoning on the point:
4 Downer Connect Ltd v Pot Hole People Ltd HC Christchurch CIV-2003-409-2878, 19 May 2004 at [11].
5 See David Williams and Amokura Kawharu Williams & Kawharu on Arbitration (2nd ed, LexisNexis, Wellington, 2017) at [17.6.1] for a discussion of the relevant authorities.
6 Trustees of Rotoaira Forest Trust v Attorney-General [1999] 2 NZLR 452 (HC).
(a)prior to the hearing the Lessee’s position was the Process Agreement defined the agreed basis upon which the arbitrator was appointed;
(b)the Lessor did not rely on Mr Cheyne’s evidence as a figure at which the new Current Market rental should be set;
(c)the Lessee’s understanding that the purpose of Mr Cheyne’s evidence was to give support to Mr Lowe’s assessment of the Current Market Rent was confirmed in both written and oral opening submissions for the Lessor;
(d)the fact the Lessor relied on Mr Cheyne’s evidence during the hearing without objection from the Lessee was because there was no reason to object when the stated purpose of Mr Cheyne’s evidence was to support Mr Lowe’s figure;
(e)the fact the Lessee’s objection was raised for the first time at the end of the hearing was because this was the first time the Lessor made it clear that it was seeking to depart from its previous reliance on Mr Lowe’s evidence as a rental that was sought and was contending that it was entitled to move outside the range set by the Process Agreement.
[63] Underlying the submission are the propositions that the Lessor effectively accepted it was bound by step 4 of the Process Agreement which prevented the Lessor from relying on Mr Cheyne’s evidence and that the Lessor accepted that aspect of the Process Agreement limiting the range to the valuations of Mr Lowe and Mr Lucas applied. Mr Cheyne’s evidence was only to support Mr Lowe’s evidence.
[64] However, the background correspondence, submission to arbitration, pre- hearing conferences and the conduct of the arbitration do not support the Lessee’s argument.
[65] The subjective opinion of the Lessee’s chief executive subsequent to the arbitration cannot alter the position. The relevant correspondence and contemporaneous documents speak for themselves.
[66] A fundamental and important thread running through the Lessee’s argument is that the Lessor did not rely on Mr Cheyne’s evidence as anything other than support for Mr Lowe’s figure. However, the Lessee’s submission in relation to that is not borne out by the Lessor’s submissions to the arbitrator or the record of the arbitration. Nowhere in the Lessor’s opening submissions was it said Mr Cheyne’s evidence was advanced only as support for Mr Lowe’s evidence.
[67]Importantly the Lessor’s opening submissions referred to Mr Lowe’s figure of
$972,000 per annum as an appropriate proportion of the profit to be attributed to rental based on the EBITDA profit before rental of $4,912,000 but the submissions then went on to note that, in reliance on Mr Cheyne’s evidence, and adjusting for the site’s higher EBITDA, a rental at 18 per cent on admissions revenue produced a rental of
$1,139,400 on the site’s admissions revenue uplifted for a ticket price increase during the term.
[68]Mr Salmon did say:
Now, as we will see when the witnesses come on, the extent to which the rental can rise before the actual returns, not turn over but returns match those of the comparable properties, is substantial, indeed it’s well above the rental we’re pitching for.
[69]Mr Mills argued that was a reference to the Lessor pitching for a rental of
$972,000 but it is equally consistent with the Lessor’s argument that an analysis of Mr Cheyne’s evidence would have led to a sum greater than the figure Mr Cheyne ultimately settled on.
[70] More directly, when later discussing Mr Cheyne’s evidence in opening Mr Salmon said:
But that makes the assessment in Mr Lowe’s evidence a starting point, in my submission, and one that we can take some comfort in confirming Mr Cheyne’s Direct Comparison Approach.
[71] Rather than, as Mr Mills suggested, that passage meaning that the Lessor was suggesting Mr Cheyne’s evidence was only used to bolster Mr Lowe’s evidence, as I read it the Lessor was using Mr Lowe’s evidence to provide “some comfort” to confirm Mr Cheyne’s approach. Mr Lowe’s evidence was the starting point, not the end point.
[72] Importantly there is also the passage in the transcript towards the conclusion of the hearing when the issue of jurisdiction was raised. In the course of that discussion counsel for the Lessee said, in responding to the issue raised by Mr Salmon that the evidence supported a rental of $2.4 million:
Now, I would contend that the assessment that’s been made is the 900 odd from Mr Lowe and the 1.1 odd from Mr Cheyne, and for our part the two figures from Mr Wilson and Mr Lucas. And, so my reading of this is that whatever figure you come to, sir, must be within that range, and so the suggestion now they’d go to around 2.5 million or something, I don’t regard that as available.
[73] In that exchange counsel for the Lessee accepted the upper range was Mr Cheyne’s figure.
[74] I accept Mr Mills’ submission before me that the submission to the arbitrator was made on his feet in response to the suggestion $2.4 might have been on the table which no doubt came as a surprise. However, it was made at the conclusion of the arbitration when all relevant issues would have been in the forefront of the parties’ minds. It is contrary to the position now taken by the Lessee. Rather, it is consistent with the arbitrator’s view that that was the basis upon which the arbitration was conducted.
[75] As to the right to present argument, the Lessee was given the opportunity to file submissions on the jurisdiction issue. It filed both an original memorandum on the issue and a reply memorandum in response to the Lessor’s reply memorandum. It also filed evidence. The direct issue it had to respond to, namely that the arbitrator was not bound by the range set by Mr Lowe and Mr Lucas was squarely addressed. Given the conduct of the arbitration (with Mr Cheyne’s evidence being adduced without objection) it should have been reasonably foreseeable the arbitrator might refer to the conduct of the arbitration.
[76] While the arbitrator dealt with the jurisdiction issue without directly resolving the interpretation point, for the reasons given above, nothing turns on that.
[77] If necessary I would have found that there was no breach of natural justice in the way the arbitrator dealt with the issue of jurisdiction.
Did the arbitrator exceed his jurisdiction by not basing the new current market value on “appropriate methodology”?
[78] The Lessee’s case on the third argument is that the Process Agreement required the arbitrator to fix the current market rate on the basis of an “appropriate methodology” and the methodology applied by Mr Cheyne (the figure accepted by the arbitrator) was not an appropriate methodology. It was not an approach which accorded with settled valuation practice.7
[79] The remaining aspects of the Process Agreement that applied to the arbitration provided for the basis of reviewed rental and also the methodologies to be considered. They required the expert assessors to apply an “appropriate methodology” to arrive at their opinion on Current Market Rent. While accepting that the experts were not restricted as to the basis for their opinion the Lessee contends the Process Agreement required the methodology to be one that would seek to determine a Current Market Rent by reference to what a notional lessee would pay and a notional lessor would accept in the defined market, namely comparable land based concessions, leases or licences for tourism or related or similar activities. If the methodologies relied on did not have this as its purpose it was not an appropriate methodology.
[80] The Lessee’s argument proceeds on the basis that the arbitrator fell into error and exceeded his jurisdiction by relying on Mr Cheyne’s valuation. Mr Mills argued that Mr Cheyne arrived at his Current Market Rent by simply applying Mr Lowe’s excess earnings method. The Lessee submitted that Mr Lowe’s corporate finance approach which sought to identify excess profits of a business after allowing a reasonable return on invested capital was not an appropriate methodology. The
7 Wellington City v National Bank of New Zealand Properties Ltd [1970] NZLR 660 (CA); and
Granadilla Ltd v Berben (1999) 4 NZ ConvC 192,963 (CA).
arbitrator had himself concluded there were difficulties with the excess earnings method in not adopting Mr Lowe’s figure.
[81] Mr Mills submitted that while Mr Cheyne had insisted he had arrived at his Current Market Rent assessment using a Direct Comparison Methodology approach that was not, in substance, the approach he adopted. Mr Mills submitted that where Mr Cheyne got to using a conventional Direct Comparison Methodology method, was approximately $540,000 per annum, but he then relied on Mr Lowe’s excess earnings methodology to deliver a rental 240 per cent above the top end of that range. He submitted the arbitrator did not address the submissions for the Lessee that the excess earnings method was not an appropriate methodology and that Mr Cheyne’s Current Market Rent was not based on a Direct Comparison Methodology.
[82] However that was not Mr Cheyne’s evidence. Mr Cheyne said he had not considered the excess profits approach as he was not an accountant and did not have the skill set to do so. Rather, he acknowledged there was a relationship between profitability and rental in general terms as Mr Lowe had set out. He did find that the table prepared by Mr Lowe was helpful and informative because that helped him understand why there was a very broad variation of between 2.5 per cent and 15 per cent for the rental factors. Later Mr Cheyne clarified that Mr Lowe’s graph had demonstrated to him that it was a flawed approach to consider all geothermal tourist attractions as having the same level of profitability. Mr Cheyne was clear that he had still reached his final conclusion using a Direct Comparison Methodology. He acknowledged he had taken profitability into account but only as one factor. He rejected the proposition he had elevated it above a consideration of other matters. The point Mr Mills makes was a point he made in cross-examination of Mr Cheyne. It was open for the arbitrator to have reached the conclusion he did, having had the benefit of hearing and seeing Mr Cheyne’s evidence in full.
[83] As this Court found in the earlier leave application, while Mr Cheyne relied on the figures provided by Mr Lowe, his rent calculation was not an application of the excess earnings method and as noted in that decision:
[44] It is important to record that in adopting Mr Cheyne’s figure the arbitrator was not adopting the excess earnings approach. While the arbitrator
referred to the figure being reinforced in a general way by Mr Lowe’s evidence about excess earnings, it was no more than a test of the result which he adopted.
[84] The reference to that was a reference to the arbitrator’s finding that Mr Cheyne’s figure was:
reinforced in a general way by the excess earnings evidence [of Mr Lowe], however reduced the weight of that evidence might be by the factors … discussed.
[85] The wording of the Process Agreement on this issue is also important. The only requirement was to use an “appropriate method” and to “consider, inter-alia, a Direct Comparison Methodology.” The parties acknowledged that supporting analysis of business trading accounts with reference to relevant factors such as industry metrics, necessary capital employed, lessee improvements, the terminating nature of the concession, forecast tourism activity and economic conditions were to be undertaken. The brief was a general one.
[86]The Lessor relies on the arbitrator’s approach to this issue as follows:
[63] There is a preliminary issue as to whether any part of the antecedent Process Agreement survived the execution of the Arbitration Agreement. But in my view the answer to that issue would not affect the outcome. Several aspects of the Process Agreement show that it was not intended to place any fetters on the methodology or methodologies finally adopted as the basis for the valuation:
(a)The stated object of the Process Agreement was to arrive at the current market rent. It would be odd if the experts were bound to adopt a particular methodology even where, in their view, it would result in something other than the current market rent.
(b)The natural and ordinary meaning of the word “consider” requires merely that the experts genuinely consider the usefulness of the direct comparison method in their assessment of the rental. It does not mean that, having done so, they must rest their valuation upon that method.
(c)Use of the expression “inter-alia” indicates that the experts were to be free to consider other methods.
[64] My conclusion is that even if the relevant part of the Process Agreement is considered to still apply, it would require no more than the inclusion of the direct comparison method among the methodologies to be weighed and considered. If, having considered the effect of the direct
comparison method, a valuer concludes that some other methodology provides a more effective route to the current market rent, he or she is free to abandon all reliance on the direct comparison method. Since all four valuers did consider the effect of applying the Direct Comparison Method, this issue falls away.
[87] I agree with the arbitrator’s reasoning on the point. In particular, as the arbitrator observed, the Direct Comparison Methodology was one method that was to be considered. It was not necessarily to be the exclusive outcome or method. Mr Cheyne considered the Direct Comparison Methodology in arriving at his rental figure.
[88] For the above reasons the applicant is not able to make out a case for setting aside the award on the basis the arbitrator exceeded his jurisdiction by failing to apply an appropriate methodology.
Result
[89]The application is dismissed.
Costs
[90] The respondent is entitled to costs. Costs on a 2B basis would be appropriate. In the event counsel are unable to agree they may exchange memoranda.
Venning J
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