VASILIEVA ELENA NIKOLAEVNA, the Liquidator of Agricultural Productive Cooperative <>>>, a Russian corporate (in liquidation) v Dragon Seafoods Ltd

HCA 1240/2017

[2019] HKCFI 1287

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1240 OF 2017

_________

BETWEEN
VASILIEVA ELENA NIKOLAEVNA, Plaintiff
the Liquidator of Agricultural Productive Cooperative
<<Fishing Collective Farm <<Severnaya Zvezda>>>>,
a Russian corporate (in liquidation)
and
DRAGON SEAFOODS LIMITED Defendant

__________

Before: Madam Recorder Yvonne Cheng SC in Chambers
Date of Hearing: 15 May 2019
Date of Judgment: 27 May 2019

 

___________________

J U D G M E N T

___________________

A. INTRODUCTION

1. By summons of 1 September 2017 (“the Summons”), the defendant applied, inter alia, for a stay of this action pending the final determination of the disputes between the parties by the court of the Russian Federation.

2. The plaintiff is a Russian company and the supplier of fish products. The defendant is a Hong Kong company and a purchaser of fish products.

3. The parties entered into a “Master Agreement for Fish Supplies”on 17 December 2010 (“the Agreement”), by which the plaintiff agreed to sell, and the defendant agreed to buy, various fish or fish products. The plaintiff claims for outstanding payment and interest under the Agreement in an amount of US$3,387,116.25.

B. THE PARTIES’ RESPECTIVE POSITIONS

B1. The defendant’s case

4. The defendant’s case is that the proceedings should be stayed in favour of a court of the Russian Federation pursuant to Order 12, rule 8 of the Rules of the High Court, which provides (in material part) as follows:

“ (2) A defendant who wishes to argue that the Court should not exercise its jurisdiction in the proceedings on one or more of the grounds specified in paragraph (2A) or on any other grounds shall also give notice of intention to defend the proceedings and shall, within the time limited for service of a defence, apply to the Court for:

(b) an order staying the proceedings …

(2A) The grounds specified for the purposes of paragraph (2) are that—

(a) considering the best interests and convenience of the parties to the proceedings and the witnesses in the proceedings, the proceedings should be conducted in another court,

(b) the defendant is entitled to rely on an agreement to which the plaintiff is a party, excluding the jurisdiction of the Court, …

…”

5. The defendant says that:

(1) clause 5 of the Agreement contains an exclusive jurisdiction clause which excludes the jurisdiction of the Hong Kong Courts (applying Order 12, rule 8(2A)(b));

(2) alternatively, applying the principles in Spiliada Maritime Corp v Cansulex Ltd [1987] AC 460, the courts in Russia rather than those in Hong Kong are the more appropriate forum to determine the parties’ dispute (applying Order 12, rule 8(2A)(a)).

B2. The plaintiff’s case

6. The plaintiff says that:

(1) clause 5 of the Agreement has been held by the Commercial Court of Murmansk Oblast of the Russian Federation (“the Russian Commercial Court”), upon application by the defendant, to be invalid, so that there is no jurisdiction clause which excludes the jurisdiction of the Hong Kong Court;

(2) the Russian Commercial Court has also held, again upon the defendant’s claim, that the parties’ dispute is not within the jurisdiction of the commercial courts in the Russian Federation. Accordingly, the defendant fails to show that there is another available forum which is clearly or more distinctly appropriate than Hong Kong to determine the dispute.

C. THE RELEVANT PRINCIPLES

7. There is no dispute as to the applicable principles.

8. On an application for a stay of proceedings on the grounds that there is an exclusive jurisdiction clause, the Court should exercise its discretion to grant a stay unless strong cause for not doing so is shown: The “El Amria” [1981] 2 Lloyd’s Rep 119 at 123.

9. If a stay is sought not on the basis that there is an exclusive jurisdiction clause, but pursuant to Order 12, rule 8(2A)(a), which is a statutory recognition of the traditional forum non conveniens challenge, the applicable principles are as stated by the Court of Final Appeal in SPH v SA (2014) 17 HKCFAR 364 at [51] (citing DGC v SLC (née C) [2005] 3 HKC 293):

“ 1. The single question to be decided is whether there is some other available forum, having competent jurisdiction, which is the appropriate forum for the trial of an action ie in which the action may be tried more suitably for the interests of all the parties and the ends of justice?

2. In order to answer this question, the applicant for the stay has to establish that first, Hong Kong is not the natural or appropriate forum (‘appropriate’ in this context means the forum has the most real and substantial connection with the action) and second, there is another available forum which is clearly or distinctly more appropriate than Hong Kong. Failure by the applicant to establish these two matters at this stage is fatal.

3. If the applicant is able to establish both of these two matters,then the plaintiff in the Hong Kong proceedings has to show that he will be deprived of a legitimate personal or juridical advantage if the action is tried in a forum other than Hong Kong.

4. If the plaintiff is able to establish this, the court will have to balance the advantages of the alternative forum with the disadvantages that the plaintiff may suffer. Deprivation of one or more personal advantages will not necessarily be fatal to the applicant for the stay if he is able to establish to the court’s satisfaction that substantial justice will be done in the available appropriate forum.”

10. Where jurisdiction is founded in the Hong Kong Court as of right—as in the present case—the party seeking the stay has to establish that there is another available forum which is clearly or distinctly more appropriate than the Hong Kong forum: SPH at [52].

D. THE DEFENDANT’S GROUNDS FOR SEEKING A STAY OF PROCEEDINGS

D1. Whether there is exclusive jurisdiction clause ousting jurisdiction of Hong Kong Courts

11. The defendant relies on clause 5 of the Agreement, which provided as follows:

“ 5. Consultations and Arbitration, Legal Force

Consultations

In the event a dispute arises in connection with the interpretation or implementation of this Agreement, the Parties shall attempt to resolve such dispute through consultations. … If the dispute cannot be resolved in this manner within thirty (30) days after the commencement of discussion, any Party may submit the dispute to arbitration.

Arbitration

If the Party of this Agreement fails to perform its obligations, the other Party shall have the right to address for the security of its rights to the permanently acting Arbitration tribunal under the Limiter Liability Company ‘Murmansk shore’ having its location at: 450008, Bashkortostan Republic, Ufa, Kirov Street, building 1, office 338. The Arbitration tribunal decides the disputes in accordance with the regulations of the Arbitration tribunal and the substantive laws of the Russian Federation.

The Parties agreed to consider that the decision of the Arbitration tribunal is final, not appealed, enters into the effect immediately after the declaration, acts directly and does not require the confirmation of the other authorities and officials. …

Legal Force of the Agreement

Any illegality, invalidity or unenforceability of any provision of this Agreement under the law of any jurisdiction shall not effect [sic] its legality, validity or enforceability under the law of any other jurisdiction nor the legality, validity or enforceability of any other provision.

This Agreement is severable in that if any provision hereof is determined to be illegal or unenforceable, the offending provision shall be declared void and without any legal effect, but without affecting the legal validity of the remaining provisions of the Agreement.

…”

12. The defendant says that Russian law governs the Agreement.

13. In a judgment of 27 November 2014, the Russian Commercial Court held that the arbitration clause contained in clause 5 was invalid, or void. The defendant had applied to the Russian Commercial Court for voidance of the arbitration clause as the administrator of the plaintiff had a connection with the nominated arbitral tribunal. The court agreed, coming to the conclusion that the agreement to arbitration “ensures no compliance with the principles of legality, independence and fairness”, and that there would be reasonable doubts as to the fairness of any decision pursuant to the arbitration.

14. The defendant’s own expert witness on Russian law, Andrey Shashorin, acknowledged that the Russian Commercial Court had held the arbitration clause to be invalid (although he opined that the parties’ agreement as to the choice of Russian Federation law as the governing law of the Agreement was still valid).

15. Counsel for the defendant, Mr Toby Brown, submitted that even if clause 5 was invalid, it nevertheless showed that the parties had agreed to resolve their disputes in Russia. However, even on its face, clause 5 is not an exclusive jurisdiction clause, since:

(1) it is expressed in permissive, rather than mandatory terms. It merely gives an aggrieved party the right to refer a dispute to arbitration (“may”; the aggrieved party “shall have the right”). This may be contrasted with dispute resolution through the use of consultations, which under the same clause 5 is expressed to be mandatory (“shall”);

(2) that part of the clause under the sub heading “Legal Force of the Agreement” appears to envisage enforceability in more than one jurisdiction.

16. In the circumstances, I find that there is no exclusive arbitration clause which excludes the jurisdiction of the Hong Kong Court.

D2. Whether there is another available forum which is clearly or distinctly more appropriate than Hong Kong

17. The defendant says that Russia, rather than Hong Kong, is clearly the more appropriate forum for the determination of the parties’ disputes, being the forum with which the action has the most real and substantial connection. Mr Brown submitted that that part of clause 5 which contained the parties’ choice of Russian law was not held to be invalid by the Russian Commercial Court, or that even if it was invalid, clause 5 nevertheless evidenced the parties’ intention that Russian law should be the governing law of the Agreement, and that on the facts, the law with the closest connection to the Agreement was Russian law. He further submitted that as a number of the defences relied on by defendant to resist the plaintiff’s claim for payment under the Agreement involved issues of Russian law, it would be appropriate for the dispute to be resolved in the Russian courts. In addition, the relevant witnesses were mostly located in Russia.

18. Counsel for the plaintiff, Mr Barrie Barlow SC, submitted that what the governing law of the Agreement might be, or where the witnesses were located, was of no importance, given that the defendant had to establish that there was another available forum in which the dispute could be determined. In the present case, there was no such forum, the Russian Commercial Court already having ruled that it had no jurisdiction to determine the dispute.

19. It is an unusual feature of this case that the Russian Commercial Court has already ruled as to its jurisdiction. The plaintiff had commenced proceedings in the Russian Commercial Court against the defendant for the outstanding payment and interest due under the Agreement, that is, the very claim being made in the present proceedings. The defendant had claimed that the court had no jurisdiction to hear the claim. In a judgment of 20 April 2016, the Russian Commercial Court held that:

“ … the consideration of the dispute in respect of a foreign legal entity, and namely Dragon Seafoods Limited is not within the competence of the commercial courts in the Russian Federation, and therefore the proceedings in the part regarding the requirements for Dragon Seafoods Limited pursuant to Clause 1 of Part 1 of Article 150 of the Arbitration Procedural Code is subject to termination.”

20. The plaintiff’s expert witness on Russian law, Mr Rinat Salyaev, opined that as a result of this judgment (and the earlier judgment of 27 November 2014):

“ … resolution of the dispute between [the plaintiff] and [the defendant] by a Russian court is impossible.”

21. The response of the defendant’s expert witness was that whilst the Russian Commercial Court’s judgment was binding on state bodies, local government bodies, other bodies, organisations official bodies and citizens of the whole territory of the Russian Federation, it was not binding on another Russian court, so that another court could come to its own decision as to whether it had jurisdiction over the parties’ dispute.

22. However, the defendant has not identified any other Russian court as having jurisdiction over the parties’ dispute.

23. I therefore find that the defendant has not even established that there is another available forum to determine the dispute, let alone that such a forum is clearly or distinctly more appropriate than Hong Kong. In these circumstances, I agree with Mr Barlow SC that I should not proceed to the next stage of the Spiliada test. As Recorder Geoffrey Ma SC (as he then was) said in Rambas Marketing Co LLC v Chow Kam Fai David [2001] 3 HKC 250 at 253H:

“ … the court will not even begin to exercise its discretion to stay until it is satisfied that there exists an available alternative forum”.

E. CONCLUSION

24. I therefore dismiss the Summons and make an order nisi that the costs of and occasioned by the Summons be to the plaintiff, to be taxed if not agreed.

 

(Yvonne Cheng SC)
Recorder of the High Court

RW Health Partnership Pty Ltd v Lendlease Building Contractors Pty Ltd [2019] VSC 353 (29 May 2019)

IN THE SUPREME COURT OF VICTORIA
AT MELBOURNE
COMMERCIAL COURT
TEC LIST

 

RW HEALTH PARTNERSHIP PTY LTD (ACN 110 677 702)

Plaintiff
v

LENDLEASE BUILDING CONTRACTORS PTY LTD (ACN 002 625 130)

First Defendant
– and –

AQUATHERM AUSTRALIA PTY LTD (ACN 059 578 782)

Second Defendant

JUDGE:
RIORDAN J
WHERE HELD:
Melbourne
DATE OF HEARING:
15 February 2019 and 22 March 2019 (Written submissions)
DATE OF RULING:
29 May 2019
CASE MAY BE CITED AS:
RW Health Partnership Pty Ltd v Lendlease Building Contractors Pty Ltd
MEDIUM NEUTRAL CITATION:
[2019] VSC 353

ARBITRATION – Whether dispute resolution clause required expert determination or arbitration – Principles for the construction of dispute resolution clauses considered.

CONTRACT – Whether the parties correspondence in preparation for an arbitration constituted an ad hoc agreement to arbitrate.

ELECTION – Whether by its correspondence the first defendant had elected to arbitrate the relevant dispute – Whether to choose arbitration rather than expert determination was to elect between inconsistent substantive rights.

WAIVER – Principles of waiver considered – Whether by its correspondence the first defendant has unequivocally abandoned its right to expert determination.

 

HIS HONOUR:

1 By summons filed 14 December 2018, the plaintiff (‘Project Company’) seeks the following orders:

  1. Pursuant to s 8(1) of the Commercial Arbitration Act 2011 (Vic), the Plaintiff and First Defendant are referred to arbitration in respect of the Plaintiff’s claims against the First Defendant made in this proceeding, and the proceeding against the First Defendant is stayed.
  2. Further and in the alternative, upon the Plaintiff undertaking that within 7 days of the date of order it will discontinue the proceeding against the Second Defendant, the proceeding against the First Defendant is stayed in the inherent jurisdiction of the Court.

2 The first defendant (‘Lendlease’) opposes the stay of the proceeding.

The relevant facts

3 Project Company is a special purpose entity responsible for the design, construction, commissioning, managing and maintenance of the Royal Women’s Hospital (‘the Hospital’).

4 By D&C Contract dated 5 June 2005 (‘the Contract’), Project Company subcontracted its demolition, design, construction and commissioning obligations with respect to the Hospital to Lendlease. The terms of the Contract included the following dispute resolution provisions:

74 Dispute Resolution74.1 Establishment of panel

(a) Any party to a Dispute may by notice (Referral Notice) to the other party refer the Dispute to the Panel for resolution. The referral notice must specify in reasonable detail the nature of the Dispute.

(g) If the Panel does not meet, resolve the Dispute or reach unanimous agreement on any matter within the Resolution Period, the Dispute is hereby:

(i) referred to expert determination under clause 74.3 [Expert determination] if this Contract expressly provides for that Dispute to be resolved in accordance with expert determination as described in this Contract;

(ii) referred to expert determination under clause 74.3 [Expert determination] in the case of Disputes in relation to Compensation; or

(iii) referred to an arbitrator under clause 74.4 [Arbitration] in the case of all other Disputes.

74.2 Commencement of legal proceedings

(a) A party shall not commence legal Proceedings in respect of a Dispute other than in accordance with paragraph (b).

(b) If a Dispute is referred to expert determination or to arbitration no party shall oppose an application for a stay of any legal Proceedings in respect of the Dispute pending the expert determination or the handing down of the award in an arbitration as the case may be.

74.3 Expert determination

(a) The independent expert shall:

(i) initiate such enquiries and investigations as it considers necessary or desirable for the purposes of performing its functions; and

(ii) determine and inform the parties to the Dispute of the procedure for determining the Dispute and of a time for presentation to the independent expert by the parties of their respective positions. Unless the Panel otherwise agrees the presentation must be no later than 5 Business Days after the constitution of the independent expert.

(b) The independent expert must make its determination or finding in respect of the Dispute according to law within 10 Business Days after the presentation referred to in paragraph (b). Any determination of a Dispute by the independent expert must be in writing, shall contain a statement of reasons in such a form as the independent expert considers reasonably appropriate having regard to the nature of the Dispute and shall include a determination as to the award of costs. The independent expert shall not tax the costs of a party. The fees and expenses of the expert shall be borne by the parties equally.

(e) Other than a determination of a Dispute in relation to clause 22.3, any determination made by the independent expert shall be final and binding on all parties unless the dispute is greater than $250,000 in value and either party notifies the other of its intention to commence court proceedings within 15 Business Days of the determination. A determination made by the independent expert of a Dispute in relation to clause 22.3 shall be final and binding on all parties.

(f) The independent expert shall act as an expert and not an arbitrator.

74.4 Arbitration

If under clause 74.1(g)(iii) [Establishment of panel] a Dispute is referred to arbitration the following provisions shall apply:

(a) The arbitrator appointed under clause 74.1 [Establishment of panel] shall constitute the arbitration board.

(b) The arbitration shall be conducted in accordance with and subject to the Commercial Arbitration Act 1984  (Vic).

5 The following definitions are relevant to the above dispute resolution provisions.

Compensation means compensation for Loss or damage suffered by a party as a result of a Default or other failure to perform by the other party payable in accordance with this Contract, as agreed between the parties or pursuant to a determination under clause 74 [Dispute Resolution].Default means:

(a) a Major Default; or

(b) any other breach by the Builder of, or other failure by the Builder to comply with, an obligation of the Builder under this Contract or any other State Agreement to which it is a party; or

(c) a representation, warranty or statement made or given by the Builder in this Contract being false or misleading when made or given,

except to the extent caused or contributed to by an event described in paragraphs (a) or (b) of the definition of Project Company Extension Event or paragraphs (a), (b) or (d) of the definition of State Extension Event.

Dispute means a dispute between the Project Company and the Builder in connection with this Contract or the Project, including a dispute as to whether a Default is capable of cure or remedy but not:

(a) a dispute in connection with the choice of rights, remedies or powers of the Project Company arising from or in connection with a Default where the Project Company has the sole discretion;

(b) a decision made pursuant to this Contract which is final and binding; or

(c) a dispute referred to in clause 30.6(f) [Completion Activities] or a certificate issued under clause 22.3.

Loss means any liability (including legal expenses) of any kind whatsoever and includes but is not limited to direct and indirect, consequential or special damage, loss of profits, loss of use, loss of revenue, anticipated revenue, interest or other such claim arising from any cause whatsoever whether or not such loss, damage or claim is based on contract, statute, warranty, tort (including negligence), indemnity or otherwise.

Resolution Period means:

(a) the period of five Business Days from the date a Referral Notice described in clause 74.1(a) [Establishment of panel] is served on the other party; and

(b) where the essence of the Dispute is whether there has been a Default, two Business Days from the date a Referral Notice described in clause 74.1(a) [Establishment of panel] is served on the party.

6 On or about 20 March 2008, an occupancy permit was issued in relation to the Hospital. Section 134 of the Building Act 1993 (Vic) provides as follows:

Despite anything to the contrary in the Limitation of Actions Act 1958 or in any other Act or law, a building action cannot be brought more than 10 years after the date of issue of the occupancy permit in respect of the building work (whether or not the occupancy permit is subsequently cancelled or varied) or, if an occupancy permit is not issued, the date of issue under Part 4 of the certificate of final inspection of the building work.

The solicitors for Project Company and Lendlease were each aware that the 10 year period provided by s 134 of the Building Act 1993 (Vic) would expire in relation to the Hospital on or about 20 March 2018.

7 By letter dated 6 March 2018 to Lendlease, Project Company gave a referral notice under cl 74.1(a) of the Contract (‘Referral Notice’) which alleged that Lendlease’s design and construction of the Domestic Water System was defective (‘the Dispute’). The notice described the Domestic Water System as follows:

The Builder designed and constructed the water/hydraulic pipework system (“the Domestic Water System”) for the Royal Women’s Hospital (“Hospital”) using a pipe product known as “Aquatherm”. The Domestic Water System is comprised of pipes in the basement of the Hospital, vertical risers and a horizontal pipework system. The pipes in the basement supply, via a flow and return system, hot water to vertical risers which in turn supply water to the upper floors of the Hospital. Each floor above the basement has its own horizontal reticulation to take water to clinical and other areas of the Hospital. The Domestic Water System supplies hot water to the Hospital, at 65 Degrees Celsius, as a pressurised system.

The notice demanded that Lendlease rectify the Domestic Water System including the replacement of the Aquatherm type product. It requested that Lendlease:

(a) nominate its representative on the Panel for the purposes of cl 74.1(b)(ii) of the Contract; and

(b) confirm its attendance for a meeting of the Panel.

8 On 14 March 2018, after the Dispute did not resolve in the Resolution Period, Project Company issued a notice to Lendlease referring the Dispute to arbitration pursuant to cl 74.1(g)(iii) (‘Referral to Arbitration’), or alternatively to Expert Determination. Relevantly, the notice stated as follows:

1 Referral of Dispute to arbitration1.1 As of the date of this notice, the Resolution Period in respect of the Dispute (being a period of 5 Business Days from the date of the Referral Notice, which is dated 6 March 2018) has expired.

1.2 Pursuant to clause 74.1(g)(iii) of the D&C Contract, as the Panel has not resolved the Dispute within the Resolution Period, the Dispute is now referred to an arbitrator.

2 Referral of Dispute to expert determination (in the alternative)

2.1 Without prejudice to paragraph 1 of this notice and to the extent that the D&C Contract requires this Dispute to be referred to expert determination rather than arbitration, the Dispute is referred to expert determination in accordance with clause 74.1(g)(ii) of the D&C Contract.

2.2 The referral (whether to arbitration or expert determination) has effect from the date of this notice.

9 On 15 March 2018, Project Company filed this proceeding against Lendlease and the second defendant, Aquatherm Australia, with the following indorsement of claim:

INDORSEMENT OF CLAIM

  1. Each of the plaintiff (RWHP), the first defendant (Lendlease) and the second defendant (Aquatherm Australia) is and was at all material times a corporation registered under the Corporations Act 2001 (Cth).
  2. On or about 11 April 2005, RWHP entered into an agreement with the State of Victoria (the Project Agreement) that it would design, construct, and finance the redevelopment of the Royal Women’s Hospital (the Hospital) and deliver maintenance and services at the Hospital.
  3. By an agreement between RWHP and Lendlease (then known as Baulderstone Hornibrook Pty Ltd) made on or about 5 June 2005 and amended on 5 June 2005, (the D&C Contract), Lendlease agreed, for reward, to carry out demolition, design, construction and commissioning works to allow RWHP to fulfil its obligations under the Project Agreement in relation to the design, construction and commissioning of the Hospital.
  4. The D&C Contract contained terms (among others):
    1. that required Lendlease to fulfil RWHP’s obligations under the Project Agreement and for the completion of the Facility Works (as defined) diligently and in a thorough and workmanlike manner in accordance with Industry Best Practice, the D&C Contract and the Design Requirements (including Volume 4 of the Project Brief) and all applicable Laws and Quality Standard; and
    2. by which Lendlease warranted that (among other things) the Facility will be fit for the purposes and for the uses specified in the D&C Contract including use by the FPH Operator and by the Hospital Operator to perform the Hospital Functions specified in the Design Requirements for the remainder of the Contract Term provided the facility is maintained in manner at least equivalent to the manufacturers requirements and in accordance with the Project Agreement, and so as to allow the Services to be delivered in accordance with and to the standards specified in the Services Specifications.
  5. As part of the Facility Works, Lendlease designed and constructed a water/hydraulic pipework system (the Domestic Water System) for the Hospital using a pipe product known as “Aquatherm”. It engaged Aquatherm Australia to supply the Aquatherm pipe. The Domestic Water System supplies hot water to the Hospital as a pressurised system.
  6. In addition to Lendlease’s contractual obligations, each of Lendlease and Aquatherm Australia owed RWHP a duty of care to undertake their respective obligations with due care and skill.
  7. Lendlease has breached its contractual obligations and both Lendlease and Aquatherm Australia have breached their respective duties of care in relation to the Domestic Water System supplied for the Hospital. The Domestic Water System has suffered repeated failures and leaks in the basement, vertical risers and horizontal reticulation systems and is experiencing oxidation and cracking.

8. As a result, RWHP has suffered loss and damage.AND THE PLAINTIFF CLAIMS AGAINST THE DEFENDANTS:

A. Damages.

B. Interest.

C. Costs.

D. Such further or other orders as the Court considers appropriate.

10 The reason for the filing of the originating process was explained by the plaintiff’s solicitor in her affidavit affirmed 14 December 2018 as follows:

By the morning of 15 March 2018, Project Co did not know the position of the Builder as to the referral to arbitration. In these circumstances, the pending expiry of the limitation period caused Project Co difficulty. If the Builder’s position transpired to be that the Dispute was not referable to arbitration, and this came to be accepted, court proceedings in relation to the Dispute might end up being necessary, given clause 74.3(e), but in the meantime the limitation period under section 135 of the Building Act would have expired.Furthermore, if court proceedings are required and the Builder joined a third party for apportionment purposes under Part IVAA of the Wrongs Act 1958 (Vic), Project Co could not recover any loss apportioned to the third party unless that third party was joined as a defendant by Project Co before the expiry of the limitation period.

In these circumstances, as a purely precautionary measure, Project Co instructed MCL to prepare and file an originating process in respect of the Dispute, before the limitation period expired. On behalf of Project Co, MCL filed an originating process …

11 By email of 15 March 2018 at 11:38 am to the Commercial Court registry, the solicitor for Project Company confirmed the filing of the Originating Process and stated:

Our client does not intend to serve the Originating Process in the short term and therefore requests that the Court does not list this matter for directions at this time and also that the Court does not send any notifications to the named Defendants.

The registry replied by email at 12:02 pm stating that the registry would hold off listing the proceeding for a hearing.

12 By emailed letter of 15 March 2018, Lendlease replied to the Referral Notice and Referral to Arbitration stating:

We refer to your correspondence dated 6 March 2018 titled ‘Referral Notice’ purportedly issued under clause 74.1 of the D&C Contract and to your letter dated yesterday in which you seek to refer the alleged Dispute to arbitration, alternatively expert determination.We think it would be in the interests of both the parties and the efficient conduct of the arbitration if the time set down in clause 74.1(h) of the D&C Contract for the Panel to agree an arbitrator is extended. Clause 74.1(h) provides that the Panel must meet to agree the arbitrator within two business days of the matter being referred to arbitration. An extension would allow the parties to ensure the arbitrator who is selected has the knowledge, experience and availability to determine the matter in a manner that is both reasonable and efficient.

We are of the view it is particularly important that an appropriate arbitrator be selected in circumstances where the D&C Contract is not proscriptive as to the arbitral process once selection of the arbitrator has been confirmed. Should the nomination or selection process fail, we are also concerned to avoid – for the sake of both parties – the situation where the selection of arbitrator is left to a third party. We note that under section 74.1(j) of the D&C Contract, if nomination and selection process fails then either the Project Company or the Builder is entitled to request that the President of the Institute of Arbitrators and Mediators Australia appoint the arbitrator for determining the dispute.

Given the importance that the selection of arbitrator will have for the arbitral process going forward, we suggest the parties agree to extend the time period within which the Panel must agree an arbitrator be extended to until close of business on Friday, 30 March 2018.

We would be grateful if you could please let us know by no later than 5.00 pm today if you agree to our proposed extension.

13 By letter dated 15 March 2018 to Lendlease, Project Company agreed to the requested extension of time and stated as follows:

We refer to:

  1. the D&C Contract between RW Health Partnership Pty Ltd ACN 110 677 702 (Project Company) and Lendlease Building Contractors Pty Ltd ACN 002 625 130 (Builder) dated 5 June 2005, as amended on 5 June 2005 (D&C Contract);
  2. Project Company’s Referral Notice dated 14 March 2018, by which this Dispute is referred to arbitration under clause 74.4 of the D&C Contract; and
  3. your letter dated 15 March 218 (sic) wherein it is proposed that the parties agree to extend the period provided in clause 74.1(h) of the D&C Contract by which the Panel are to agree to an arbitrator. You have proposed that this period be extended to close of business on Friday, 30 March 2018.

Given the significance of the arbitral appointment, Project Company consents to the Builder’s proposal that the date for appointment be extended to close of business on Friday, 30 March 2018.As to the appointment, could you please provide by 5 pm on Tuesday, 27 March 2018 the names of three potential arbitrators which the Builder consider (sic) suitable for this appointment for Project Company’s consideration. Project Company will also put forward its recommended candidates for the parties consideration.

14 By emailed letter of 28 March 2018 to Project Company, Lendlease suggested the names of three potential arbitrators and stated as follows:

We refer to:

  • your letter dated 14 March 2018 entitled “notice referring Dispute to arbitration”;
  • our letter dated 15 March 2018 proposing that the time for agreement of the Panel be extended to Friday, 30 March 2018; and
  • your letter dated 15 [M]arch 2018 accepting the proposed extension and requesting a list of three potential arbitrators that the Builder considers suitable for appointment to the Panel.

As to Project Company’s request, the names of three potential arbitrators that Builder considers suitable, based on experience and expertise, are:1. Mr Toby Shnookal QC

2. Mr Charles Scerri QC

3. Prof John Sharkey AM.

15 By letter dated 29 March 2018 to Lendlease, Project Company enclosed a draft letter to Professor Sharkey seeking his consent to his appointment as arbitrator and stated as follows:

We refer to your letter dated 27 March 2018 (sic) in relation to the appointment of an arbitrator in our dispute.Project Company has reviewed the three potential candidates provided by the Builder and confirms that it considers that Prof John Sharkey AM to be (sic) suitable for appointment as arbitrator.

Project Company has had its legal advisors prepare the enclosed draft letter to Prof Sharkey seeking his consent to his appointment as arbitrator. Could you please advise Project Company by 5pm on Wednesday, 4 April 2018 if the Builder requires any changes to this letter. Otherwise, Project Company will proceed to finalise the letter and arrange for it to be issued to Mr Sharkey for consideration.

16 By email of 4 April 2018 to Project Company, Lendlease requested an extension of time to review the proposed letter to Professor Sharkey and by reply of the same date Project Company agreed to the suggested extension which it presumed to be 10 April 2018.

17 On 11 April 2018, Lendlease filed an appearance in this proceeding, which it served on 12 April 2018.

18 In fact:

(a) Lendlease had been aware of this proceeding since a litigation search of the Court registry on 21 March 2018; and

(b) On 16 March 2018, Lendlease commenced separate proceedings in the Supreme Court of Victoria against the following parties:

(i) Paul & Partners Hydraulics Pty Ltd (‘Paul & Partners’) relating to the alleged defective water supply/hydraulics pipework at the Hospital. Lendlease engaged Paul & Partners by agreement dated 9 September 2005 to carry out hydraulic consulting services for the Hospital project, including preparing design documentation for the water supply and reticulation system.

(ii) Cooke & Carrick (Vic) Pty Ltd (‘Cooke & Carrick’) relating to the alleged defective water supply/hydraulics pipework at the Hospital. Lendlease engaged Cooke & Carrick by agreement dated 5 May 2006 to carry out hydraulic services for the Hospital project, including the design, supply and installation of pipework and fittings for the hot water service.

In an affidavit sworn 30 January 2019, the solicitor for Lendlease explained that two separate proceedings were filed because Cooke & Carrick’s registration had to be reinstated for the proceeding against it to proceed. His instructions are that Lendlease would seek to join the proceedings against Paul & Partners and Cooke & Carrick to the current proceeding if the application for a stay is dismissed.

19 The directions hearing in the current proceeding listed on 4 May 2018 was adjourned on a number of occasions to 15 February 2019 pursuant to a ‘standstill’ agreement between Project Company and Lendlease for the purposes of commercial discussions aimed at resolving the dispute.

The issues for determination on this application

20 The determination of this application raises the following issues.

21 Issue 1 – Is the Dispute ‘the subject of an arbitration agreement’ within the meaning of s 8 of the Commercial Arbitration Act 2011 (Vic) (‘the Act’)?

22 Issue 2 – If no to Issue 1, did the parties’ correspondence between 6 March 2018 and 4 April 2018 constitute an agreement that the Dispute be arbitrated?

23 Issue 3 – If no to Issues 1 and 2, such that there is no arbitration agreement, has Lendlease waived its right under the Contract for the dispute to be referred to expert determination, with the result that it is referred to arbitration under cl 74.1(g)(iii) of the Contract?

24 Issue 4 – If yes to Issue 1, is the Court required to refer the parties to arbitration, under s 8 of the Act, because Project Company requested the referral ‘not later than when submitting [its] first statement on the substance of the dispute’?

25 Issue 5 – If yes to Issue 1 or 2 but no to Issue 4, such that there is an arbitration agreement but s 8 of the Act is not engaged:

(a) Is Lendlease prevented from opposing a stay pursuant to cl 74.2(b) of the Contract?

(b) Should the Court nonetheless exercise its discretion to refuse the stay?

26 It is common ground that if Issues 1 to 3 are answered in the negative, Issues 4 and 5 do not arise.

Issue 1 – Is the Dispute ‘the subject of an arbitration agreement’ within the meaning of s 8 of the Act?

27 Section 8(1) of the Act provides:

A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

It is agreed that if the Dispute is required by the Contract to be referred to arbitration (and Project Company’s request was within time), the Court must order this proceeding against Lendlease to be stayed.

28 It is common ground that the Panel did not meet, resolve the Dispute or reach unanimous agreement on any matter within the Resolution Period. Because cl 74.1(g)(i) does not apply, the Dispute should either be:

(a) referred to expert determination under cl 74.3 in the case of Disputes in relation to Compensation (cl 74.1(g)(ii)); or

(b) referred to an arbitrator under cl 74.4 in the case of all other Disputes (cl 74.1(g)(iii)).

29 Accordingly, Issue 1 turns on whether the Dispute is ‘in relation to Compensation’. If answered in the positive, the Dispute should be referred to expert determination, and is therefore not ‘the subject of an arbitration agreement’ within the meaning of s 8 of the Act.

Project Company’s submissions

30 Project Company contended that the Dispute was not in relation to compensation, and therefore fell in the category of ‘all other disputes’, because the expression ‘Disputes in relation to Compensation’ should be interpreted narrowly to mean disputes about the amount of Loss or damage (‘the narrow construction’). It was submitted as follows:

(a) Clause 74.1(g)(ii) should not be construed so as to encompass all disputes in which a breach of the Contract is alleged and loss or damage is claimed (‘the broader construction’). Such a reading would be unduly wide, and would leave little room for the operation of cl 74.1(g)(iii), in circumstances where the wording and structure of cl 74.1(g) conveys that arbitration is intended to be the principal means of dispute resolution.

(b) The definition of Compensation in the Contract is:

… compensation for Loss or damage suffered by a party as a result of a Default or other failure to perform by the other party payable in accordance with this Contract, as agreed between the parties or pursuant to a determination under clause 74 [Dispute Resolution].

This definition supports the narrow construction because in its terms ‘Compensation’ is for loss or damage, and the question of liability is not in issue in disputes in relation to ‘Compensation’. The words used in the definition ‘embed the position that the default or failure to perform has been established. It’s a given. It’s either agreed or previously determined.’ Accordingly, the reference in cl 74.1(g)(ii) to expert determination for ‘Disputes in relation to Compensation’ ‘arises where the contract provides for something to be paid, e.g. liquidated damages or progress payments, and because of the failure to perform or other default, there’s an issue about how much is to be paid’.

(c) The broader construction would be uncommercial, unworkable and unjust. The informal, summary procedure for expert determinations set out in cl 74.3 is inappropriate for the resolution of disputes regarding defaults and breaches. This includes the provision of short time frames, and the lack of provision for legal representation or the calling of evidence.

(d) Conversely, the arbitration procedure provisions set out in cl 74.4 are appropriate for, and objectively intended for, determination of disputes regarding defaults and breaches.

(e) Lendlease’s broader construction renders the arbitration provision with no work to do.

(f) The fact that cl 74.3:

(i) contemplates that the parties are to give a presentation to the independent expert within 5 days of its constitution; and

(ii) requires the expert to make its determination within 10 business days;

is not consistent with it being intended to be the mechanism for the resolution of complex liability disputes.

Lendlease’s submissions

31 Lendlease contended that the Dispute was ‘in relation to Compensation’ within the meaning of cl 74.1(g)(ii) of the Contract, and should be referred to expert determination under that clause, not arbitration under cl 74.1(g)(iii). It was submitted as follows:

(a) Clause 74.1(g) of the Contract is a split regime, which mandates that certain disputes are to be referred to expert determination, and the remainder to arbitration. Arbitration ought not to be assumed to be the default dispute resolution mechanism — rather, the default position is to refer to expert determination. This is a commercially efficient regime, whereby small disputes (being less than $250,000) are referred to an expert, with a right to commence court proceedings should the result be challenged.

(b) In this context, the phrase ‘in relation to’ in cl 74.1(g)(ii) should be given wide meaning, and it would be wrong for the Court to read it down or substitute the phrase with alternative words (e.g. ‘disputes about Compensation’ or ‘restricted to Compensation’).

(c) The terms of the Contract demonstrate that the meaning of ‘Compensation’, which is defined in cl 1.1 of the Contract, is broad and goes beyond what might traditionally be thought of as matters of quantum.

(d) Disputes under the following clauses, which have nothing to do with quantum, are expressly referred to expert determination:

(i) Clause 12.5 with respect to determinations of the Independent Certifier (relating to matter such as an extension of time under cl 50.4), if the dispute exceeds $250,000;

(ii) Clause 28 with respect to completion;

(iii) Clause 30.5 with respect to a Certificate of Final Completion;

(iv) Clause 56(f) with respect to the refusal to grant an extension to an Applicable Cure Period; and

(v) Clause 22.3 (which cl 74.3(e) expressly refers to ‘final and binding’ expert determination regardless of quantum) with respect to the project financier’s right to review Lendlease’s performance of Lendlease’s design and construction and completion obligations.

(e) On the broader construction, the referral to arbitration under cl 74.1(g)(iii) still has significant work to do under the Contract including the following clauses:

(i) Clause 2.4 with respect to determinations where Lendlease’s entitlements are linked to the State Linked Entitlement;

(ii) Clause 2.5 with respect to Project Company’s obligations not to amend the Project Agreement so as to affect Lendlease’s rights;

(iii) Clause 9.2 with respect to sub-contractors;

(iv) Clause 23 with respect to Lendlease’s obligation to design and develop;

(v) Clause 24 with respect to Project Company’s right to inspect and test; and

(vi) Clause 70.6 with respect to the format of manuals, plans and reports.

(f) The narrow construction leads to unworkable consequences because, after the arbitrator determines liability, cl 74.1(g)(ii) would require that the assessment of quantum be referred to expert determination.

(g) It is inherently unlikely that Lendlease would have accepted unlimited claims being subjected to an arbitration clause in circumstances where such a clause would preclude it from joining its responsible subcontractors, which it always proposed to engage.

Principles of construction

32 Dispute resolution clauses are construed using the same principles that apply to other commercial contracts.To determine the meaning of the terms of a commercial contract, the Court will ask the question: ‘What would a reasonable business person have understood those terms to mean?’ For the purpose of answering that question, ‘the reasonable businessperson [is] placed in the position of the parties’, and the Court applies the following principles:

(a) The terms are construed objectively and the subjective intentions of the parties are irrelevant. A court ‘cannot receive … evidence from one party as to its intentions and construe the contract by reference to those intentions’.

(b) The Court will consider not only the text and the ordinary meaning but also:

(i) the context, being the entire text of the contract including matters referred to in the text of the contract; and

(ii) the commercial purpose and object of the contract.

33 The identification of the commercial purpose and object of a contract ‘presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating’. For this purpose, the Court may have regard to the surrounding circumstances known to the parties. It is also entitled to assume ‘that the parties intended to produce a commercial result’; and will avoid a construction that renders it ‘commercial nonsense or working commercial inconvenience’.

Determination of Issue 1

34 In my opinion, the expression ‘Disputes in relation to Compensation’ in cl 74.1(g) should be read as including disputes with respect to liability for compensation and should not be limited to disputes with respect to the assessment of compensation. Accordingly, I find that the Dispute is ‘in relation to Compensation’ within the meaning of the Contract, and is therefore not ‘the subject of an arbitration agreement’ within the meaning of s 8 of the Act. My reasons for this conclusion are as follows.

35 On a plain reading of the ordinary English words, in my opinion, a reasonable business person in the position of the parties would understand ‘a Dispute in relation to Compensation’ as unambiguously including a dispute as to the liability to pay compensation particularly in the context of a dispute in relation to compensation arising out of a building contract. To read the expression as ‘a dispute in relation to the assessment of Compensation’ requires the insertion of the underlined words, which is not justified in the context of the terms of the Contract; and could easily have been added by the parties if it was intended. The phrase ‘in relation to’ is wide in its connotation; and does not warrant reading words of limitation into the expression.

36 Further to the above conclusion on the basis of ordinary English words, the words ‘Dispute’ and ‘Compensation’ are both defined, and those definitions refer to other words defined in the Contract. The relevant definitions are set out in paragraph 5 and in particular:

(a) Compensation is defined as ‘compensation for Loss or damage suffered by a party as a result of a Default’;(b) Default is defined broadly and includes breaches by Lendlease under the Contract;

(c) Dispute is defined as ‘a dispute between the Project Company and [Lendlease] in connection with the Contract’, with some further specific exclusions; and

(d) Loss is defined to mean ‘any liability … of any kind whatsoever’.

Accordingly, as defined, the independent expert is required to determine the relevant dispute in relation to compensation for ‘liability … of any kind whatsoever’ or damage suffered by a party as a result of breaches of the Contract. In my opinion, a reasonable business person in the position of the parties would consider that such disputes would require the determination of:

(e) whether a party was liable or in breach of the Contract; and(f) the extent to which loss or damage was caused by the breach of contract or other basis of liability.

37 This broader construction produces a commercially sensible result. Reasonable business persons in the position of the parties would be well aware of the difficulties of achieving cost efficient resolution of building construction disputes. The reference of such compensation claims to expert determination within very tight timeframes has been adopted to resolve other disputes in the building industry. Clause 74.3(e) contemplates that the parties are bound to accept the independent expert determination for claims of less than $250,000, but allows the parties to litigate greater claims in Court. This provides the opportunity in larger claims for other allegedly responsible parties to be joined in the dispute.

38 On a plain reading of the narrow construction, only the question of liability would be submitted to arbitration; but the assessment of compensation would be required to be determined by expert determination. Such an interpretation would result in an inefficient bifurcation of dispute resolution and appear to work a commercial nonsense.

39 If cl 74.1(g) was construed so that disputes involving both liability and quantum were wholly referred to an arbitrator (to avoid the bifurcation referred to in the previous paragraph), then the reference for expert determination under cl 74.1(g)(ii) would be limited to circumstances where a party had admitted liability. Given the nature of building disputes, the clause would likely have a very limited application if construed this way.

40 I accept Lendlease’s submissions that the broader interpretation still leaves the reference to an arbitrator under cl 74.1(g)(iii) significant work to do with respect to disputes under the Contract, including the clauses referred to by counsel for Lendlease.

Issue 2 – If no to Issue 1, did the parties’ correspondence constitute an agreement that the Dispute be arbitrated?

Project Company’s submissions

41 Project Company contended that if the Contract did not provide for the Dispute to be referred to arbitration, the parties entered into an ad hoc agreement to arbitrate the Dispute. It was submitted that the agreement should be inferred from the following correspondence between 6 March 2018 and 4 April 2018 referred to in paragraphs [7], [8] and [12] to [16] above (‘the Relevant Correspondence’):

(a) After Project Company served the Referral Notice on 6 March 2018 and Referral to Arbitration on 14 March 2019, Lendlease responded by email of 15 March 2018 making it absolutely clear that it agreed that the matter was to be arbitrated. The letter referred to a number of matters with respect to the arbitration and, in particular it stated:

We think it would be in the interests of both the parties and the efficient conduct of the arbitration if the time set down in clause 74.1(h) of the D&C Contract for the Panel to agree an arbitrator is extended.

(b) By letter dated 15 March 2018 to Lendlease, Project Company agreed to the requested extension of time and requested the names of three arbitrators.

(c) By emailed letter of 28 March 2018, Lendlease gave the name of three arbitrators; and by letter of 29 March 2018 Project Company advised that Professor Sharkey was suitable, enclosed a draft letter seeking his consent to appointment, and requested a response to the proposed letter by 4 April 2018.

(d) By email of 4 April 2018 to Project Company, Lendlease requested an extension of time to review the proposed letter to Professor Sharkey and by reply of the same date Project Company agreed to the suggested extension which it presumed to be 10 April 2018.

42 Counsel for Project Company did not contend, in my opinion properly, that the circumstances gave rise to an estoppel against Lendlease.

Lendlease’s submissions

43 Lendlease submitted that the Relevant Correspondence did not constitute an agreement to submit to arbitration for the following reasons:

(a) It is common ground that, assuming the Dispute is in relation to Compensation, the effect of cl 74.1(g)(ii) was that the Dispute was automatically referred to expert determination after the specified events did not occur within the Resolution Period. Accordingly, by 15 March 2018, the Dispute was referred to expert determination.

(b) No arbitrator was appointed and no steps were taken in the arbitration.

(c) An ad hoc agreement would constitute an amendment to the Contract, however, cl 76.2 states:

No amendment or variation of this Contract is valid or binding on a party unless made in writing executed by both parties, provided that amendments to the Services Specifications can be made by agreement in writing executed by the Project Director …

(d) There was no document executed by the parties to evidence this agreement (while this is not a legal requirement, its absence points against the formation of an agreement).

(e) Under the terms of the Contract, a dispute is not referred to arbitration because a party gives a notice saying the dispute is to go to arbitration. Under the terms of the Contract, there is no such thing as a ‘notice of arbitration’ or a ‘Referral to Arbitration’ – these are simply terms which Project Company assigned to its communication dated 14 March 2018.

(f) The Relevant Correspondence rose no higher than an effort to discuss arrangements for a potential arbitration in accordance with the terms of the Contract, and ‘all the parties [were] doing is acting consistently with what … is an erroneous construction of the Contract; that is, that they had to arbitrate. … If anything, it’s an agreement that has as its genesis a mistake’.

(g) Any purported new agreement suffered from a lack of certainty of terms and/or a clear offer and acceptance of those terms.

Determination of Issue 2

44 Pursuant to the Contract, it is common ground, given my finding that the Dispute is in relation to Compensation, that the effect of cl 74.1(g) is that the Dispute was automatically referred to expert determination on the expiration of the Resolution Period on 11 March 2018, being 5 days after the Referral Notice under cl 74.1(a) was served on Lendlease on 6 March 2018.

45 Accordingly, Issue 2 turns on whether the parties contracted to terminate the expert determination mechanism under the Contract and submit the Dispute to arbitration.

46 It is trite law that the major elements necessary for the formation of a contract are:

(a) offer and acceptance;

(b) consideration;

(c) intention to create legal relations; and

(d) certainty of terms.

47 Although a contract may be inferred without proof of offer and acceptance, the circumstances in which a contract will be inferred were explained by Sundberg J in Adnunat Pty Ltd v ITW Construction Systems Australia Pty Ltd as follows:

A contract may in certain circumstances be inferred from conduct, even where no offer and acceptance can be identified. However the existence or otherwise of an enforceable agreement depends ultimately on the manifest intention of the parties, objectively ascertained. Where mutual promises are sought to be inferred, the conduct relied upon must, on an objective assessment, evince a tacit agreement with sufficiently clear terms. It is not enough that the conduct is consistent with what are alleged to be the terms of a binding agreement. The evidence must positively indicate that both parties considered themselves bound by that agreement.

48 In Woolcorp Pty Ltd v Rodger Constructions Pty Ltd, the Court of Appeal identified the following considerations to be ‘kept in mind’ in considering whether the facts allow a contract to be inferred:

(1) Circumstances in which a contract will be inferred are rare.(2) Before the inference may be drawn, a party must establish that the conduct positively indicated that both parties considered themselves bound by the contract. It is not enough to establish that conduct was merely consistent with the alleged terms of the contract.

(3) In the absence of an offeree’s express consent, acceptance of an offer may be inferred if an objective bystander would conclude from the offeree’s conduct, including its silence, that the offeree has accepted the offer and has signalled that acceptance to the offeror.

49 I do not consider that a contract to submit to arbitration can be inferred from the Relevant Correspondence for the following reasons:

(a) The Relevant Correspondence and in particular the Referral to Arbitration of 14 March 2018 and the response from Lendlease of 15 March 2018 specifically purport to be steps in accordance with the Contract. The Relevant Correspondence is not consistent with, and does not demonstrate any intention, to vary the Contract. Similar issues arose in Hi-Fert Pty Ltd v United Shipping Adriatic Inc, where Emmett J found on the facts before him that Hi-Fert’s participation in an arbitration, including the nomination of its own arbitrator, was conducted on the mistaken basis that there was an existing arbitration clause incorporated in the bill of lading. He found that the correspondence between the parties, with respect to the arbitration, did not demonstrate an intention to enter into a separate arbitration agreement. He explained:

I do not consider that, objectively considered, the communications … evidence any intention to submit to arbitration an issue which was not otherwise the subject of an enforceable arbitration clause. I would not put that conclusion on the basis of a vitiating mistake but that, on the true construction and interpretation of the correspondence, there was no intention to submit to arbitration a matter which was not already the subject of arbitration.

(b) I accept the submission of Lendlease that objectively there is nothing that can be inferred from the Relevant Correspondence, other than that the parties were preparing to put steps in place for an arbitration under the mistaken apprehension that arbitration was the appropriate mechanism provided for under the Contract for their Dispute.

(c) The inference that the parties had entered into a variation agreement is not supported by the fact that:

(i) the preparatory steps for an arbitration were at an early stage – an arbitrator had not been appointed and the terms of appointment for the proposed arbitrator had not yet been agreed; and

(ii) the Contract specifically provided, in cl 76.2, that the Contract can only be amended or varied in writing.

(d) Although the existence of a contract to submit a dispute to arbitration must be determined on the particular facts of each individual case, I was not referred to any case where such a contract to submit to arbitration had been inferred prior to the appointment of the arbitrator.

(e) In Balfour Beatty Power Construction Australia Pty Ltd v Kidston Gold Mines Ltd, Dowsett J considered the refusal by an arbitrator, after two weeks of hearing, to permit the amendment of points of defence to plead that a particular issue was beyond the scope of the agreement to arbitrate. Dowsett J noted the different considerations to be applied in determining whether a party has submitted to the jurisdiction of an arbitrator as opposed to the jurisdiction of a court. He said:

Submission to jurisdiction in the curial sense involves only an answer to the question namely, “Has there been a submission?” However, submission to the jurisdiction of an arbitrator depends upon the answer to the question “Has there been an agreement to arbitrate?” The law of contract applies to answer that question, not the law relating to submission to the jurisdiction of a court.

His Honour found that the arbitrator was not bound to refuse the application for the amendment. In doing so, he distinguished cases where it had been found that allowing the arbitration to proceed to the point of an award constituted an ad hoc agreement to arbitrate. He did not accept that even participation in an arbitration by filing points of claim or defence would necessarily be a sufficient basis to infer a contract to submit a dispute to arbitration.

Issue 3 – If no to Issues 1 and 2, such that there is no arbitration agreement, has Lendlease waived its right under the Contract for the dispute to be referred to expert determination, with the result that it is referred to arbitration under cl 74.1(g)(iii) of the Contract?

Project Company’s submissions

50 Project Company submitted that by its conduct from 15 March to 4 April 2018, Lendlease had waived any right under the Contract for the Dispute to be the subject of expert determination, with the result that pursuant to cl 74.1(g)(iii) it was referred to arbitration. It was submitted that this result arose by the application of:

(a) waiver by an unequivocal abandonment of a right; and

(b) the doctrine of election.

51 It was contended that the facts giving rise to the unequivocal abandonment of the right to proceed under the expert determination provision arose from the Relevant Correspondence as follows:

(a) Project Company’s Referral to Arbitration of 14 March 2018 maintained that the effect of cl 74 was that the Dispute was to be arbitrated but specifically reserved the alternative, which allowed for the possibility that Lendlease could assert that the proper course was expert determination. In these circumstances ‘the imperative for Lendlease to identify its position was particularly acute’, but it did not do so.

(b) Lendlease, by its responses on 15 March, 28 March and 4 April 2018, represented an abandonment by it of any contractual right to expert determination of the Dispute. The present case was a stronger instance of waiver than Whelan J found in La Donna Pty Ltd v Wolford AG.

(c) There is nothing in the correspondence that conveys ‘any doubt, equivocation or reservation of rights on the part of Lendlease’.

52 Further, it was submitted that Lendlease’s correspondence during the relevant period constituted an election between alternative and inconsistent rights. Clause 74 of the Contract provides for expert determination and arbitration as alternative remedies, and the expert determination process cannot occur if the arbitration process has been engaged. It was submitted that the choice between expert determination and arbitration was distinguishable from the choice between arbitration and court processes for the following reasons:

Unlike court processes, which can co-exist to some extent with arbitral or expert determination processes (such as in applications for urgent relief), the two processes, and the actions which they prescribe, are wholly incompatible with one another.In this respect, whilst participation in curial proceedings might not necessarily be inconsistent with arbitration … the same cannot be said of the choice between the expert determination and arbitration processes in this case. In contrast to the position with court proceedings, there is no entitlement to expert determination as of right, absent agreement of the parties.

53 Accordingly, it was submitted that to allow Lendlease to maintain a right to refer the Dispute to expert determination would be to allow it to ‘approbate and reprobate’.

Lendlease’s submissions

54 Lendlease submitted that its correspondence in the relevant period did not amount to an unequivocal abandonment of the right to have the Dispute determined by an expert, nor was it an election between inconsistent rights.

55 It did not constitute an unequivocal abandonment for the following reasons:

(a) The reasoning of Whelan J in La Donna did not assist the contention of Project Company because Whelan J found that by making an application for security for costs the defendant had ‘sought an advantage, or at least sought to impose upon La Donna a burden, which was based upon the proposition that litigation would proceed in this Court, [and] that the defendant would take steps … in that litigation …’.

(b) Lendlease’s engagement in the arbitral process is considerably less than was observed in La Donna and Zhang v Shanghai Wool and Jute Textile Co Ltd, which both involved a defendant taking active and deliberate steps in court proceedings.

(c) The correspondence from Lendlease is consistent with the party preparing to explore the possibility of arbitration without committing to it.

(d) The evidence of Mr Croagh, Lendlease’s solicitor, is that at the time of receiving Project Company’s letter dated 6 March 2018, it was not apparent to Lendlease what loss or damage Project Company alleged it suffered as a result of the defects in the water system and pipe work.

(e) Although Lendlease did not expressly reserve its position on expert determination, it is not essential to do so.

56 It was further submitted that the relevant correspondence could not constitute an election between inconsistent rights for the following reasons:

(a) The effect of cl 7.1(g) of the Contract is that on the expiry of the Resolution Period, the Dispute was referred to expert determination. There was no choice conferred on the parties. Accordingly, on 15 March 2018, Lendlease did not have the option of choosing between two alternative rights because there was no choice under the terms of the Contract.

(b) If there was a right to choose between expert determination and arbitration, those courses are no more consistent or inconsistent than arbitral and curial proceedings (assuming the proceedings do not involve inconsistent rights).

Principles of waiver

57 Waiver is an imprecise term and must often be defined according to its context. As McHugh J said in Commonwealth v Verwayen, ‘[m]ost cases which purport to apply the doctrine of waiver are really cases of contract, estoppel or election’. I have considered the implied contract above, and Project Company does not press a claim based on estoppel. However, as noted above, Project Company does press claims based on election and waiver.

58 In the context of an application for a stay of proceedings on the basis of an arbitration clause, Austin J in Tridon, reviewed the authorities and identified the following three relevant forms of waiver:

(a) waiver by election (or common law waiver);

(b) waiver by abandonment; and

(c) waiver by non-insistence.

Waiver by election

59 In Zhang, Chernov JA said that ‘waiver by election may be established by demonstrating that the party in question had elected to pursue a substantive right that is inconsistent with that which it is now seeking to press’. His Honour referred to the statement by Brennan J in Verwayen that ‘[e]lection consists in a choice between rights which the person making the election knows he possesses and which are alternative and inconsistent rights’.

60 An example of an election between inconsistent rights arises when an innocent party entitled to terminate a contract for repudiation acts on the basis that the contract still exists. In such circumstances, the innocent party will be said to have elected to maintain the contract and will not be permitted to subsequently terminate for repudiation.

Waiver by abandonment

61 A right may be waived although there is no alternative inconsistent right. Austin J described this as ‘waiver in the stronger sense’; and said it was explained in Verwayen by Toohey J as follows:

Waiver is the abandonment of a right in such a way that the other party is entitled to plead the abandonment by way of confession and avoidance if the right is thereafter asserted, and is either express or implied from conduct. It may sometimes resemble a form of election, and sometimes be based on ordinary principles of estoppel, although, unlike estoppel, waiver must always be an intentional act with knowledge.

62 In Zhang, Chernov JA said that ‘waiver is constituted by the deliberate, intentional and unequivocal release or abandonment of the right that is later sought to be enforced’. He referred to the following statement by Brennan J in Verwayen, which speaks of the waiver constituting a new relationship:

The time when waiver of a right occurs depends on the relationship between a party possessed of such a right and the party whose interests may be affected by exercise of the right. When the party possessed of the right knows that a new legal relationship is to be constituted between him and the party whose interests are liable to affection by the exercise of the right and that the right, if exercised, might affect the new relationship, the party possessing that right must enforce the right before the new relationship is constituted or he will be held to have waived that right.

63 Gaudron J similarly observed the significance of a waiver resulting in a change in the relationship of the parties saying:

Perhaps there is a principle of wider application, but it is clear that a party to litigation will be held to a position previously taken (that position having been intentionally taken with knowledge) if, as a result of that earlier position, the relationship of the parties has changed.

64 Gaudron J gave the following examples of a change in relationship:

(a) A failure to raise a jurisdictional defect or irregularity results in the parties becoming or being treated as having become parties to a proceeding.

(b) A failure to raise a matter going to the disqualification of the person constituting a court results in the parties entering into a new relationship, namely parties to a proceeding which is in the course of adjudication.

(c) Allowing a matter to pass into judgment results in the relationship of the parties being in accordance with the judgment.

(d) A failure to object to an appeal not being properly instituted results in the parties being in a new relationship – that of appellant and respondent.

65 In Zhang, Chernov JA also adopted the elements of waiver identified in Wilken and Villiers The Law of Waiver, Variation and Estoppel being:

  1. an unequivocal representation by X either by words or conduct that it will forgo certain rights;
  2. X makes that representation when it is aware of the facts that give rise to the rights which are being forgone, of the right to forgo those rights and the connection between the two.

Waiver by non-insistence

66 Austin J identified a further form of waiver arising from the non-insistence on a right, which was not a legal doctrine, but would be relevant to the exercise of a discretion. He referred to this as waiver in the ‘weaker sense’, and cited as an example ‘[d]elay in an application to refer a dispute to arbitration [which] might, eventually, give rise to discretionary grounds for refusing the application’.

67 Project Company did not rely on waiver by non-insistence.

Equitable doctrine of election

68 For completeness, I should refer to the equitable doctrine of election. Project Company submitted that to permit Lendlease to refuse to arbitrate would be to allow it to approbate and reprobate. The complaint of ‘approbation and reprobation’ is a reference to the equitable doctrine of election which has limited application. The doctrine ‘fastens upon the conscience of a party taking under a deed or will and requires the party to choose between taking the benefit and accepting the burden of any stipulated conditions or rejecting the benefit’. It has no application to the facts before me.

Determination with respect to Issue 3

Election

69 I accept the submission of Lendlease that the effect of cl 74.1(g) was that, on the specified events not occurring within the Resolution Period, the Dispute was referred to expert determination under cl 74.3. Each party had a choice to insist on enforcement of cl 74 or to agree to determine it in some other manner. I do not consider that choosing to select another procedure for the adjudication of the Dispute would constitute an election between inconsistent substantive rights, any more than selecting between arbitration and litigation.

70 Neither do I consider that the Relevant Correspondence, in which Lendlease acquiesced in the preliminary stages of the appointment of an arbitrator, constituted an unequivocal election to arbitrate and not to enforce rights under the Contract. As Whelan J observed in La Donna:

If all that was relied upon here were the steps taken on the interlocutory injunction, the directions and the mediation, I would find … that there had been no abandonment, as a party could rationally take the view that it was desirable to participate in those steps even though one believed, and intended to persuade the Court at an appropriate time, that the dispute should be arbitrated.

However, Whelan J found that applying for security for costs was an attempt to take advantage of the litigation process and fell ‘into an entirely different category’. In that case, the application for a stay was made only after the application for security for costs, which proceeded on the basis that the litigation would proceed to trial, had been dismissed. It is unsurprising that the application for a stay was unsuccessful.

Waiver by abandonment

71 Similarly, the Relevant Correspondence cannot constitute a waiver by abandonment. The Relevant Correspondence does not constitute an unequivocal representation that Lendlease will forego certain rights. There is no reference to the foregoing of rights and a reasonable business person reading the correspondence would infer no more than that the parties believed (wrongful as I have found) that the Contract did require arbitration of the Dispute.

72 Further, the fact that no arbitrator was appointed militates strongly against a conclusion that a ‘deliberate, intentional and unequivocal … abandonment of the right’ to an expert determination was demonstrated by the Relevant Correspondence.

73 In the circumstances, I do not consider that Lendlease’s conduct relevantly changed the relationship of the parties in the manner discussed by Brennan J and Gaudron J, as referred to above.

74 Even if it could be said that Lendlease had waived its right to have the Dispute referred to expert determination pursuant to cl 74.1(g)(ii), it is not apparent how that could give rise to the result that pursuant to cl 74.1(g)(iii) it was referred to arbitration. Under the terms of the Contract, the Dispute was not referred to arbitration. For Lendlease to be compelled to arbitrate, it must have entered into an agreement to arbitrate.

75 I have already concluded, in determining Issues 1 and 2, that there was no such agreement by Lendlease and Project Company to arbitrate.

Conclusion

76 As I have found there is no agreement between Project Company and Lendlease to arbitrate the Dispute, which is the subject of this proceeding, the plaintiff’s application must fail. It is not necessary for me to determine Issues 4 and 5.

77 I will dismiss the summons.

Maharaj v Petroleum Company of Trinidad and Tobago Ltd (Trinidad and Tobago) [2019] UKPC 21 (20 May 2019)

Easter Term

[2019] UKPC 21

Privy Council Appeal No 0047 of 2018

 

 

JUDGMENT

MAHARAJ
(Appellant)

V

PETROLEUM COMPANY OF TRINIDAD AND TOBAGO LTD
(Respondent)

FROM THE COURT OF APPEAL OF THE REPUBLIC OF TRINIDAD AND TOBAGO

BEFORE:
LORD WILSON
LORD HODGE
LADY ARDEN
LORD KITCHIN
LORD SALES

 

 

LORD SALES:

  1. This appeal concerns a request made by the appellant (Mr Maharaj) pursuant to the Freedom of Information Act 1999 (“FOIA”) for disclosure of certain documents by the Petroleum Company of Trinidad and Tobago (“Petrotrin”), a state-owned company. The documents in issue are certain witness statements filed in arbitration proceedings between Petrotrin and World GTL Inc and World GTL St Lucia Ltd (together, “World GTL”).
  1. Petrotrin refused Mr Maharaj’s request for disclosure. Mr Maharaj made an application for leave to apply for judicial review of that refusal. By a decision of 31 March 2017 des Vignes J dismissed that application. In a short ruling delivered ex tempore on 10 July 2017, the Court of Appeal dismissed Mr Maharaj’s appeal. He now appeals to the Board.
  1. The threshold for the grant of leave to apply for judicial review is low. The Board is concerned only to examine whether Mr Maharaj has an arguable ground for judicial review which has a realistic prospect of success: see governing principle (4) identified in Sharma v Brown-Antoine [2006] UKPC 57; [2007] 1 WLR 780, para 14.

The legislative regime

  1. The long title of the FOIA is:

“An Act to give members of the public a general right (with exceptions) of access to official documents of public authorities and for matters related thereto.”

  1. The definition of “public authority” in section 4 includes “a company incorporated under the laws of the Republic of Trinidad and Tobago which is owned or controlled by the state”. It is common ground that Petrotrin is a public authority for the purposes of the Act.
  1. The definition of “official document” in section 4 is:

“a document held by a public authority in connection with its functions as such, whether or not it was created by that authority, and whether or not it was created before the commencement of this Act and, for the purposes of this definition, a document is held by a public authority if it is in its possession, custody or power.”

It is common ground that the witness statements in issue are official documents held by Petrotrin.

  1. Section 3 provides:

“(1)     The object of this Act is to extend the right of members of the public to access to information in the possession of public authorities by –

(a)       making available to the public information about the operations of public authorities and, in particular, ensuring that the authorisations, policies, rules and practices affecting members of the public in their dealings with public authorities are readily available to persons affected by those authorisations, policies, rules and practices; and

(b)       creating a general right of access to information in documentary form in the possession of public authorities limited only by exceptions and exemptions necessary for the protection of essential public interests and the private and business affairs of persons in respect of whom information is collected and held by public authorities.

(2)       The provisions of this Act shall be interpreted so as to further the object set out in subsection (1) and any discretion conferred by this Act shall be exercised as far as possible so as to facilitate and promote, promptly and at the lowest reasonable cost, the disclosure of information.”

  1. Section 11(1) provides:

“Notwithstanding any law to the contrary and subject to the provisions of this Act, it shall be the right of every person to obtain access to an official document.”

  1. Section 13 deals with the process for making a request to obtain access to official documents.
  1. Section 39(1) provides that a person aggrieved by a decision of a public authority under the FOIA may apply to the High Court for judicial review of the decision.
  1. Part 4 of the FOIA sets out provisions which identify certain documents or types of document as exempt documents. Section 32(1) provides:

“A document is an exempt document if its disclosure under this Act would divulge any information or matter communicated in confidence by or on behalf of a person or a government to a public authority, and –

(a)       the information would be exempt information if it were generated by a public authority; or

(b)       the disclosure of the information under this Act would be contrary to the public interest by reason that the disclosure would be reasonably likely to impair the ability of a public authority to obtain similar information in the future.”

  1. A public authority may be under a duty to disclose an exempt document if section 35 applies. It provides:

“Notwithstanding any law to the contrary a public authority shall give access to an exempt document where there is reasonable evidence that significant –

(a)       abuse of authority or neglect in the performance of official duty; or

(b)       injustice to an individual; or

(c)       danger to the health or safety of an individual or of the public; or

(d)       unauthorised use of public funds,

has or is likely to have occurred or in the circumstances giving access to the document is justified in the public interest having regard both to any benefit and to any damage that may arise from doing so.”

  1. It is common ground that section 35 has two distinct limbs. A public authority is required to give access to an exempt document (i) where there is reasonable evidence that one or more of the matters set out in the sub-paragraphs has or is likely to have occurred, or (ii) where, in the circumstances, giving access to the document is justified in the public interest having regard both to any benefit and to any damage that may arise from doing so.
  1. Section 5(3) of the Judicial Review Act 2000 sets out a non-exhaustive list of grounds for judicial review, including:

“(a)     that the decision was in any way unauthorised or contrary to law;

(c)       failure to satisfy or observe conditions … required by law;

(e)       unreasonable, irregular or improper exercise of discretion;

(i)        conflict with the policy of an Act;

(j)        error of law, whether or not apparent on the face of the record;

(l)        breach of or omission to perform a duty;

(o)       an exercise of a power in a manner that is so unreasonable that no reasonable person could have so exercised the power.”

Factual background

  1. For present purposes, the factual background can be summarised shortly as follows. Mr Maharaj describes himself as a concerned citizen and social activist. He is also a member of the opposition United National Congress political party. He has a particular interest in matters relating to good governance, accountability, transparency and the rule of law.
  1. In 2005 Petrotrin and World GTL embarked upon a joint venture to build, finance and operate a gas-to-liquids plant in Trinidad. Mr Malcolm Jones (“Mr Jones”) was the Executive Chairman and a member of the board of directors of Petrotrin at this time and was involved in the decision to proceed with the venture. Petrotrin was to supply the feedstock for the plant and to acquire its output, while World GTL was to supply the technology for the plant and be responsible for its management and operation.
  1. As part of the arrangements to finance the construction of the plant, in September 2006 Petrotrin’s board, including Mr Jones, caused Petrotrin to give a guarantee in respect of the financing provided by Credit Suisse. In particular, Petrotrin undertook to assume liability in respect of costs incurred in excess of those budgeted for the project.
  1. The venture foundered in 2009 when Petrotrin elected to declare an event of default after construction delays and extensive cost overruns. The failure of the venture has been very costly for Petrotrin. It has had to meet substantial claims brought against it under the guarantee.
  1. Petrotrin brought International Chamber of Commerce proceedings against World GTL. In December 2012 Petrotrin secured an arbitration award in its favour. However, that arbitration award has not been paid.
  1. Meanwhile, in November 2011 World GTL commenced its own arbitration proceedings against Petrotrin in the London Court of International Arbitration (“LCIA”), alleging that Petrotrin’s termination of the venture had been in breach of duty and claiming compensation (“the LCIA arbitration”). In those proceedings, Petrotrin relied on witness statements from, among others, Charmaine Baptiste (dated 2 July and 21 December 2012) and Anthony Chan Tack (also dated 2 July and 21 December 2012). World GTL also filed witness statements.
  1. Article 30 of the LCIA Arbitration Rules applicable at the relevant time made provision for confidentiality of documents. Article 30.1 provided:

“Unless the parties expressly agree in writing to the contrary, the parties undertake as a general principle to keep confidential all awards in their arbitration, together with all materials in the proceedings created for the purpose of the arbitration and all other documents produced by another party in the proceedings not otherwise in the public domain – save and to the extent that disclosure may be required of a party by legal duty, to protect or pursue a legal right or to enforce or challenge an award in bona fide legal proceedings before a state court or other judicial authority.”

  1. In April 2013 Petrotrin commenced a claim against Mr Jones for alleged failure to take proper care in the conduct of Petrotrin’s business and for breach of fiduciary duty in relation to the decision to enter into the guarantee (“the negligence claim”). Petrotrin alleged that the decision was taken without adequate due diligence or assessment of the commercial risks and in the knowledge that World GTL would not be able to reimburse Petrotrin if payments fell to be made under the guarantee. The claim was for compensation in a sum in excess of US$97m. A detailed Statement of Case running to 42 pages was served. The action was commenced on the basis of a legal opinion written by Mr Vincent Nelson QC dated 1 March 2011 and a further opinion written by Mr Russell Martineau SC dated 21 June 2011. The Statement of Case was signed by two other lawyers, Gerald Ramdeen and Varun Debideen. In due course Mr Jones served a detailed Defence.
  1. In April 2014 an award was made in favour of Petrotrin in the LCIA arbitration, dismissing World GTL’s claims.
  1. On 7 September 2015 there was a general election in Trinidad and Tobago, which resulted in a change of government. Shortly after this a new board of directors of Petrotrin was appointed.
  1. On 8 October 2015 Mr Jones was appointed by the new Government to the Cabinet Standing Committee on Energy. On 8 and 9 October 2015 the Minister of Communications was reported as saying that he thought that the claim against Mr Jones was heading in the direction of being dropped.
  1. However, on the information currently available as gathered by Mr Maharaj, it seems that it was only on 11 October 2015 that relevant legal advice was obtained by Petrotrin regarding its claim against Mr Jones, in the form of a short written advice from Mr Nelson QC. Mr Nelson advised that it was likely that the court would order disclosure to Mr Jones of the witness statements deployed by Petrotrin in the LCIA arbitration. Mr Nelson further advised, in a single paragraph, that he had considered the witness statements of Charmaine Baptiste and Anthony Chan Tack, which had not been available to him previously, and that it was now his view, in light of what they said, that “there is a reasonable likelihood that a judge will be persuaded that there was a bad business decision but no negligence”. Mr Nelson did not set out what was said in the witness statements which caused him to take that view. These witness statements have not been released into the public domain.
  1. On 1 March 2016 the Attorney General for Trinidad and Tobago announced that the board of Petrotrin had decided in February 2016 to withdraw its claim against Mr Jones in the light of Mr Nelson QC’s advice of 11 October 2015, which the Attorney General published on the same day as his announcement. There was media and public interest in the discontinuance of Petrotrin’s claim. Questions were raised as to the reasons for that decision, whether the Attorney General had been involved in it and regarding the sums of money involved in giving up the claim and settling the action. Petrotrin maintains that adequate answers have been given.
  1. On 2 March 2016, a letter dated 2 February 2016 to the Attorney General from Mr Varun Debideen (one of the attorneys who had signed the Statement of Case against Mr Jones) was published in the press. This letter gave an account of Mr Debideen’s involvement in the case, denied that he had acted unprofessionally in any way and stated that he would “not allow [himself] to be used as the scapegoat in the event there exists a political intention to scuttle or sabotage these matters so that they do not proceed to trial”.
  1. On 9 March 2016 the Attorney General referred himself to the Law Association of Trinidad and Tobago in relation to his conduct concerning the discontinuance of the claim against Mr Jones.
  1. On 11 March 2016 Mr Maharaj sent his freedom of information request to Petrotrin. He expressed concern about the discontinuance of the claim against Mr Jones and, pursuant to section 13 of the FOIA, asked for disclosure of the arbitration award in the LCIA arbitration and all witness statements filed in that arbitration.
  1. On 21 March 2016 the Joint Select Committee of Parliament on State Enterprises commenced a public hearing into the management and operations of Petrotrin. The Select Committee released a number of relevant documents into the public domain, including documents pertaining to the joint venture with World GTL.
  1. Petrotrin responded to Mr Maharaj’s request by letter dated 22 April 2016 (“the Decision Letter”). Petrotrin provided a copy of the award in the LCIA arbitration, which had by that stage come into the public domain. However, it refused Mr Maharaj’s request for the witness statements. It wrote:

“The documents relating to the second request are exempt under section 32(1) of the Freedom of Information Act as they would disclose information or a matter communicated in confidence by or on behalf of persons to Petrotrin and (a) the information would be exempt information if it were generated by Petrotrin; and (b) the disclosure of the information would be contrary to the public interest by reason that the disclosure would be reasonably likely to impair the ability of Petrotrin to obtain similar information in the future. If witnesses who have given witness statements in confidence are to have those statements disclosed, future potential witnesses would not be willing to give such evidence. Similarly, arbitration proceedings are confidential and the arbitration court which receives witness statements given in confidence will not, in future, be willing to provide arbitration services to Petrotrin. The second disclosure sought, if granted, is likely to destroy the usefulness of the Rules of the London Court of International Arbitration (LCIA) as an alternative form of resolving disputes to the Supreme Court so far as Petrotrin and similar state entities of Trinidad and Tobago are concerned. Further, the agreement of Petrotrin and such state bodies in the conduct of their business would be of greatly reduced, if any, value.

The disclosure of the witness statements would amount to a divulgence of information contrary to the provisions of the LCIA which governed the arbitration in question. Article 30 of the LCIA Arbitration Rules obligates parties to keep confidential all awards in the arbitration, together with all materials created for the purpose of the arbitration and all other documents produced by another party in the proceedings. Those rules also provide in part that the deliberations of the Arbitral Tribunal shall remain confidential to its members. The witness statements and award were communicated in confidence to the LCIA and to Petrotrin but the award is already in the public domain so that Petrotrin is able to disclose same to you.

In short, in view of the public interest provisions at section 32(1)(b) divulgence of the second requested information can impair Petrotrin’s ability to obtain similar information in the future. If such divulgence occurs, witnesses may be less likely to give testimony if it is known that notwithstanding an undertaking of confidentiality by Petrotrin to an arbitration Tribunal, such statements can be disclosed to third parties.

Further, consideration has been given to the overriding general public interest considerations at section 35 of the Freedom of Information Act. Having regard to any benefit and to any damage that may arise from disclosure, disclosure is not justified in the public interest in that damage would be done to the public interest which encourages litigants to settle their differences utilizing alternative dispute resolution processes such as arbitration by the LCIA. Disclosure will jeopardise the usefulness and availability of that procedure and is likely to deter witnesses from participating in the same in a full and frank manner. Further there is a public interest in protecting an individual’s personal information and right to privacy (see the Constitution section 4 and the Data Protection Act section 6). The witness statements contain such personal information which should not be disclosed without consent.”

  1. In the present legal proceedings, Mr Maharaj has narrowed down his request for disclosure of all the witness statements filed in the LCIA arbitration to a claim for disclosure of the witness statements of Charmaine Baptiste and Anthony Chan Tack (“the Baptiste and Chan Tack statements”), ie the statements relied upon by Mr Nelson QC for his advice of 11 October 2015. Both these witnesses were employees of Petrotrin at all material times. It therefore seems likely that, by virtue of their contracts of employment, they were under an obligation to provide Petrotrin with information in their knowledge regarding its affairs to the extent that such information was needed by Petrotrin for the conduct of its business.
  2. Mr Maharaj and Petrotrin engaged in a round of correspondence in advance of litigation in an effort to resolve their differences, but without success. However, as a result, no point has been taken regarding any delay in the issue of proceedings. Mr Maharaj filed his application for leave to apply for judicial review on 24 October 2016. It was supported by a lengthy affidavit and exhibits which gathered together relevant information in the public domain. Mr Maharaj presented his claim for disclosure of the Baptiste and Chan Tack statements in reliance on both limb (i) and limb (ii) of section 35 of the FOIA.

The judgments below

  1. A hearing before des Vignes J took place on 31 March 2017. Although an application for leave to apply for judicial review is made ex parte, the judge had invited submissions from counsel for Petrotrin so as to have the benefit of legal arguments on both sides. The judge helpfully provided a written judgment the same day, dismissing Mr Maharaj’s application for leave. The judge considered the claim as put on behalf of Mr Maharaj under several heads, reflecting particular sub-paragraphs in section 5(3) of the Judicial Review Act. The critical point made by des Vignes J was that the Baptiste and Chan Tack statements were exempt documents within the meaning of section 32 of the FOIA and that Petrotrin had not acted irrationally in deciding whether, notwithstanding this, they should be disclosed pursuant to section 35 of the FOIA: see, in particular, paras 22, 33 and 38-40.
  1. In the Court of Appeal it was common ground, as it is before the Board, that the Baptiste and Chan Tack statements are exempt documents within the meaning of section 32. It appears that at the hearing before the Court of Appeal counsel for Mr Maharaj placed more emphasis on limb (i) of section 35, although limb (ii) of section 35 was also relied upon. Mr Maharaj’s appeal was dismissed on the basis that the court considered that it was concerned with the judge’s exercise of discretion; that he had “quite clearly considered, himself, the section 35 considerations”; and “we cannot say that the judge was plainly wrong”. The Board respectfully considers that the court’s view that des Vignes J weighed the section 35 considerations for himself in relation to limb (ii) of that provision is erroneous, as the judge’s approach was only to inquire whether Petrotrin had acted irrationally.

Discussion

  1. It is not the Board’s role at this early stage in proceedings to express any final view on the merits of Mr Maharaj’s claim for judicial review. However, the Board considers that Mr Maharaj has an arguable claim for judicial review based on limb (ii) of section 35 of the FOIA in relation to Petrotrin’s decision to refuse to disclose the Baptiste and Chan Tack statements. That claim has a realistic prospect of success.
  1. The law of Trinidad and Tobago regarding the application of the FOIA appears to be in a state of development. The Board notes the leading decision of the Court of Appeal in Minister of Planning and Sustainable Development v Joint Consultative Council for the Construction Industry, 28 October 2016 (Civil Appeal No P200 of 2014) and the recent summary of relevant principles by Rampersad J in Maharaj v Port Authority of Trinidad and Tobago, 22 January 2019 (Claim No CV2018-01817), at para 27. The present appeal in relation to a refusal of leave to apply for judicial review is not an appropriate occasion for the Board to seek to lay down any definitive principles in this area. On any future appeal the Board will no doubt be assisted by further examination and development of the law by the courts in Trinidad and Tobago.
  1. As emerges from these and other cases, an important issue is the proper legal approach to judicial review of a decision of a public authority not to disclose an exempt document taken under limb (ii) of section 35. Is such a decision to be reviewed according to a simple rationality standard or does the court have a role itself as primary decision-maker to decide how the public interest factors for and against disclosure of that document are to be balanced? If the latter, the court would have to make its own decision after being informed by evidence from the public authority in relation to the damage to the public interest which disclosure of a document might involve and giving due weight to that evidence; it would then have to balance those concerns against any benefit to the public interest associated with such disclosure.
  1. The Council for the Construction Industry case concerned an application for disclosure of legal advice given to the Minister. The relevant documents were exempt documents, but by a majority the Court of Appeal held pursuant to limb (ii) of section 35 that disclosure should be given. Bereaux JA noted that the intention of the FOIA in making information available about the operations of public authorities “is a radical departure from the culture of secrecy and confidentiality which pervaded the public service at the time of the Act’s passage” (para 69). He observed that in that case it did not appear that any section 35 balancing exercise had been performed by the Minister (para 71), and it was on that basis that he held that it fell to the court to decide the public interest issues under limb (ii) of section 35 (para 75). His conclusion, after performing the relevant balancing exercise, was that the legal advice in question should be disclosed (para 84). Although Bereaux JA appears to have considered that it was the absence of consideration by the Minister of the balance between any benefit and any damage to the public interest which opened the way to consideration of that balance by the court itself, he did not propose that the decision should be remitted to the Minister, as might have been expected if he was of the view that the Minister should be treated as the primary decision-maker subject to ordinary judicial review on grounds of rationality.
  1. Although he was in the minority as to the result in the case, Narine JA regarded the issue of deciding how the balance was to be struck in relation to the public interest as one for the court, and did not suggest that it was a precondition that the Minister had failed to carry out the relevant balancing exercise himself: see paras 71-81 of his judgment.
  1. Jamadar JA was explicit at para 40 of his judgment that “when one comes to the evaluative exercise demanded by section 35 of the FOIA, in so far as denial of access to information is justified, both a public authority (initially) and a court of review (subsequently) are obliged to carry out the required balancing exercise in the context of the … statutory and constitutional framework and values”. That is to say, although the public authority must carry out the relevant balancing exercise for the purposes of limb (ii) of section 35 in the first place, the court has an independent role in carrying out its own balancing exercise thereafter to rule on whether the right of a member of the public to be given access to information in the possession of a public authority has been infringed by the decision taken by that authority. After performing that balancing exercise in the case at hand, Jamadar JA concluded, in agreement with Bereaux JA, that the legal advice in question should be disclosed (para 47). Jamadar JA’s statement at para 40 of his judgment was cited by Rampersad J as part of the relevant guidance regarding the application of section 35, at para 27.13 of his judgment in the Port Authority case cited above.
  1. In the present proceedings, the Board considers that Mr Maharaj has a reasonably arguable claim for judicial review and that this is so regardless of whether the correct legal approach under limb (ii) of section 35 is a normal rationality approach, or a hybrid approach as might be indicated by Bereaux JA in the Council for the Construction Industry case, or an approach in which the court itself has to conduct the relevant balancing exercise as indicated by Jamadar JA in that case. This is because, as regards the first two approaches, it is arguable that in the Decision Letter Petrotrin failed to bring into account any aspect of the public interest which pointed in favour of disclosure of the Baptiste and Chan Tack statements and hence, as in the Council for the Construction Industry case, did not itself carry out the relevant balancing exercise as required under section 35. If such an argument were accepted after full examination at the substantive judicial review hearing, that would mean that it is arguable that either the Decision Letter should be quashed and the matter remitted to Petrotrin to consider the balance of public interest factors properly or the court should proceed to conduct the balancing exercise itself.
  1. If the proper approach to limb (ii) of section 35 is that indicated by Jamadar JA, the Board again considers that Mr Maharaj has a reasonably arguable claim for judicial review of the Decision Letter. This is on the basis that there is a realistic prospect that the court might conclude, on conducting the relevant balancing exercise itself, that disclosure of the Baptiste and Chan Tack statements is required in the public interest pursuant to that provision. On the basis of such a conclusion it would be open to Mr Maharaj to contend that the Decision Letter is contrary to law, that it failed to observe conditions required by law, that it conflicted with the policy of the FOIA, that it proceeded on the basis of an error of law or that it involved a breach of or omission to perform a duty, within the meaning of one or more of the subparagraphs in section 5(3) of the Judicial Review Act set out above.
  1. As regards such a balancing exercise, the Board notes that there is undoubtedly a public interest in preserving the confidentiality of arbitration proceedings, so that they can be effective and the state can have access to private forms of dispute resolution where that may serve the common good. However, the confidentiality requirement in article 30 of the LCIA Arbitration Rules is not absolute and the strength of the public interest in confidentiality is arguably somewhat attenuated in the present case by the facts that it is disclosure of statements by Petrotrin’s own employees which is sought and that it may well have been the case that Petrotrin could have required them to provide such information in the course of their employment whether arbitration proceedings were on foot or not. Petrotrin would have had a clear interest in understanding what had happened in relation to the failure of the joint venture for construction of the gas-to-liquid plant quite apart from any arbitration proceedings, including as part of its consideration whether it had any good claim against Mr Jones. Arguably, it is an adventitious feature of the case that Petrotrin happened to have conveniently at hand relevant information from Ms Baptiste and Mr Chan Tack in respect of its claim against Mr Jones, in the form of their witness statements prepared for the LCIA arbitration, thereby making it unnecessary to obtain fresh statements from them for the purposes of the court proceedings against Mr Jones. Also, it is arguable that the force of Petrotrin’s contention that witnesses might not be forthcoming in similar circumstances in other cases if disclosure is ordered might be considered to be reduced if Ms Baptiste and Mr Chan Tack had a legal duty to provide Petrotrin with the information in question. The courts below will have to consider to what extent this means that cases which discount arguments based on the threat to “frankness and candour” on the part of civil servants, as referred to by Jamadar JA at para 46 of his judgment in the Council for the Construction Industry case, might provide a relevant analogy in the present case.
  1. So far as concerns possible benefits for the public interest of disclosure of the Baptiste and Chan Tack statements, the Board considers that it is arguable that they are of significant weight, with a view to securing transparency and accountability in relation to relevant decisions in a number of respects. Without seeking to be in any way exhaustive, the Board refers to the following possible public interest benefits of disclosure: (a) to enable the public to understand and, if appropriate, criticise decisions taken by Petrotrin in embarking on the joint venture and in entering into the guarantee which have proved to be so costly to it; (b) to enable the public to be fully informed about those matters and Mr Jones’s involvement in them so that they could, if appropriate, criticise or oppose the appointment of Mr Jones to roles within government with a focus on energy matters, such as his appointment as a member of the Cabinet Standing Committee on Energy; and (c) to enable the public to understand, and if appropriate criticise, the decisions to bring the civil claim against Mr Jones in the first place and then to abandon it.
  1. In relation to point (c), it appears to the Board that as the available evidence stands at the moment, there are some grounds for thinking that the decision to abandon the claim against Mr Jones may have been influenced by political factors. This is in view of the comments reportedly made by a government minister on 8 and 9 October 2015, in advance of receipt of the written advice of 11 October 2015 from Mr Nelson QC, indicating that the claim against Mr Jones was likely to be abandoned; the very summary and tentative consideration given to the merits of the claim against Mr Jones in that written advice (in particular as compared to the previous detailed advices of counsel when the claim was commenced), on the basis of which Petrotrin seems to have been willing to abandon the claim without further review; and the appearance of involvement of the Attorney General in taking that decision. Against this, Mr Roe QC for Petrotrin rightly emphasised that Mr Maharaj has not suggested that Mr Nelson QC acted improperly in giving his advice of 11 October 2015. And, of course, Petrotrin and the Attorney General may be able to dispel any concerns by evidence they may file in answer to Mr Maharaj’s claim. But if they do not, the public interest in having disclosure of the Baptiste and Chan Tack statements in the interests of transparency and securing accountability of government and public authorities might be thought to be increased.
  1. For the reasons given above, the Board allows Mr Maharaj’s appeal in so far as it is based upon limb (ii) of section 35.
  1. Finally, the Board turns to deal briefly with Mr Maharaj’s claim based on limb (i) of section 35. Mr Clayton QC, for Mr Maharaj, all but abandoned this part of the claim. He made no oral submissions about it, relying simply on what was said in a single brief paragraph of his written submissions. In the Board’s judgment, on the materials deployed by Mr Maharaj in his affidavit, there is no realistic prospect that a court would conclude that reasonable evidence exists that any of the matters referred to in the subparagraphs in section 35 has or is likely to have occurred. The courts below plainly thought that Mr Maharaj has no arguable claim based on limb (i) of section 35. The Board agrees. To say that there is a public interest in understanding the role that political factors may have played in the decision to abandon the claim against Mr Jones (see para 47 above) is very different from saying that there is evidence that significant abuse of authority, neglect in the performance of official duty or unauthorised use of public funds has occurred or is likely to have occurred. Accordingly, the Board dismisses Mr Maharaj’s appeal in so far as it is based upon limb (i) of section 35.

V Hazelton Limited v. Perfect Smile Dental Inc., 2019 ONCA 423

COURT OF APPEAL FOR ONTARIO

CITATION: V Hazelton Limited v. Perfect Smile Dental Inc., 2019 ONCA 423

DATE: 20190523

DOCKET: C65696

Watt, Hourigan and Huscroft JJ.A.

BETWEEN

V Hazelton Limited

Applicant (Appellant)

and

Perfect Smile Dental Inc., Outhere by Marcus Chaves Corp.,

Outhere by Marcus Chavez and Marcus Chaves

Respondents (Respondents)

Heard: March 15, 2019

On appeal from the judgment of Justice Edward M. Morgan of the Superior Court of Justice, dated June 22, 2018, with reasons reported at 2018 ONSC 3958 (CanLII).

Hourigan J.A.:

Part I: Overview

[1]         This appeal engages fundamental issues regarding the nature and operation of commercial tenancies and in particular the impact of a sublease on the relationship between landlord and tenant. It arises from a situation where the appellant, V Hazelton Ltd. (“Hazelton”), leased commercial premises from the respondent, Perfect Smile Dental Inc. (“Perfect Smile”). Pursuant to the lease, Hazelton had a right to renew for an additional five years on the expiry of the initial seven-year term. Hazelton proceeded to sublet the premises to a third party but did not reserve the last day of the head lease term to itself.

[2]         Hazelton attempted to exercise the option to renew the lease, but Perfect Smile maintained that it no longer had that option. On an application for relief brought by Hazelton, the principal issue to be decided was whether, by reason of its failure to reserve the last day of the head lease term, Hazelton had in effect made an assignment and forfeited its leasehold rights. The application judge failed to provide an answer to that question. Instead, he ruled that Hazelton had a claim for breach of contract against Perfect Smile, but that it had suffered no damages. He therefore dismissed the application.

[3]         In these reasons, after a brief factual review and a consideration of the decision below, I analyze the nature of commercial tenancies, the effect of Hazelton’s failure to reserve the last day of the head lease, whether Hazelton breached the lease, and whether the application judge erred in his analysis of damages. Ultimately, I conclude that the appeal must be allowed and an order should go permitting Hazelton to renew the lease and providing other related relief.

Part II: Facts

[4]         Hazelton operated a retail clothing business at Hazelton Lanes in Toronto. Perfect Smile owns the premises at issue, which are located on Bay Street, as well as a dental practice nearby.

[5]         In September 2010, Hazelton entered into an agreement with Perfect Smile to lease the premises. The initial term of the agreement was seven years, commencing October 1, 2010 and expiring September 30, 2017. There was also a five-year renewal option for Hazelton in s. 9 of the agreement. Perfect Smile and Hazelton entered into a formal lease on October 1, 2012. The option to renew became s. 7 of the lease, which provides:

OPTION TO RENEW

Provided the Tenant is not in default under the lease as to the time of the notice and provided the Tenant gives the Landlord six (6) months prior written notice, the Tenant shall be given the option to renew for an additional term of Five (5) years on the same terms and conditions, save for any further options to renew and save and except for rent which will be mutually agreed upon by the Tenant and Landlord, both acting reasonably, failing which this option to renew shall go to arbitrationunder the Arbitration Act of Ontario.

[6]         Hazelton completed substantial renovation work on the premises, including the removal of a bathroom. Whether the removal of the bathroom was undertaken with the consent of Perfect Smile remains an issue between the parties. Hazelton contends that the renovations concluded in 2013 and that the total cost was about $280,000. Further, it says that it obtained a loan for the work, of which $70,000 remains owing, and submits that it would not have spent money to renovate without the benefit of the seven-year term and the additional five-year renewal term.

[7]         In August 2016, with Perfect Smile’s consent, Hazelton entered into a sublease with a retail clothing store called Outhere by Marcus Chaves (“Outhere”), operated by the respondent Marcus Chaves. The term of the sublease was from September 1, 2016 to September 30, 2017. The sublease did not reserve the last day of the head lease’s term to Hazelton; instead, the head lease and the sublease were set to expire on the same day.

[8]         In the sublease agreement, Hazelton expressly exempted and excluded the five-year renewal term, per section C of Schedule “A”, which reads as follows:

Sub-lease: notwithstanding that the head Lease contains a provision allowing the Tenant to renew the Lease for a further term as set out therein, there is no obligation by the Sub-Landlord to renew in favour of the Sub-Tenant and the Sub-Tenant acknowledges that they have no such right of renewal or extension of the Lease. The Sub-Lease is only for the term set out herein.

[9]         On March 2, 2017, Hazelton purported to exercise its right to renew the lease for a further five-year term. Hazelton and Perfect Smile began negotiating rent through email exchanges but could not agree on a new rental rate.

[10]      On September 28, 2017, counsel for Perfect Smile delivered a letter to Hazelton stating it had no right to exercise the five-year renewal option. The lease expired on September 30, 2017. Pursuant to an arrangement with Perfect Smile, Outhere remained in possession of the premises after the sublease ended. Outhere paid Perfect Smile the same rent it had previously paid under the sublease.

[11]      Hazelton commenced an application seeking various heads of relief, including:

  •                 A declaration that it had rightfully exercised its option to a five-year renewal of its lease starting October 1, 2017;
  •                 An order that Perfect Smile and Outhere deliver vacant possession of the premises; and
  •                 An order that, in accordance with the terms of the lease, an arbitrator be appointed to determine the rent payable during the five-year renewal period.

Part III: Decision of the Application Judge

[12]      The application judge began his analysis by finding that Perfect Smile had initially accepted Hazelton’s exercise of its renewal option under the lease and that it understood arbitration was the mandated manner under the lease to resolve an impasse over the new rental rate. He also found that Hazelton was not in default under the lease because Perfect Smile had never given Hazelton notice of the alleged default with respect to removal of the bathroom, despite knowing about the renovations by at least early 2017.

[13]      The application judge then stated that, generally speaking, where rights granted in a sublease are more restrictive than those contained in a head lease, the result is that the rights not granted to the subtenant are reserved to the tenant. In support of that proposition, he relied on Letourneau Developments v. Red Fort Realty Ltd. (1985), 1985 ABCA 201 (CanLII), 40 Alta. L.R. (2d) 397 (C.A.), at p. 398. He found that this general principle applied in this case, as Hazelton had specifically reserved the renewal option in the sublease.

[14]      The application judge then commented that Perfect Smile relied on “ancient common law” for the proposition that where a tenant has sublet the tenancy but has not reserved the last day of the head lease term for itself, the sublease is deemed to be an assignment. He cited, among other cases, Selby v. Robinson (1865), 15 U.C.C.P. 370.

[15]      The application judge did not resolve the apparent conflict in the case law. Instead, he noted that while counsel for Perfect Smile “may well be correct in his analysis of the estate aspect of a commercial Lease”, there was also a contractual element to a commercial lease. He found that Perfect Smile breached its contractual duty of good faith, as enunciated in Bhasin v. Hrynew, 2014 SCC 71 (CanLII), [2014] 3 SCR 494, by failing to negotiate or arbitrate the renewal in good faith.

[16]      According to the application judge, Hazelton could claim damages as a consequence of this contractual breach. However, the application judge found that Hazelton had not suffered any loss. He acknowledged that Hazleton could have sublet the premises again but considered it unclear whether the sublet would have been profitable because the rent was unknown. The application judge presumed, based on the circumstances of the case, that the current rent paid by Outhere reflected fair market value. Thus, Hazelton would have at best only broken even.

[17]      With respect to Mr. Chaves, the application judge concluded that he also breached a duty of good faith owed to Hazelton, as he knew about Hazelton’s renewal option but deliberately engaged in conduct that undermined its rights. However, the application judge concluded that the breach caused no economic loss. Since Mr. Chaves had provided a $10,000 deposit to Hazelton, the application judge ordered that it should be returned to Mr. Chaves.

[18]      No party drew to the application judge’s attention s. 3 of the Commercial Tenancies Act, R.S.O. 1990, c. L. 7 (the “CTA”), which is key to the disposition of this appeal.

[19]      The application judge did not award costs because there was mixed success on the application.

Part IV: Analysis

(i)           Jurisdiction of this Court

[20]      Perfect Smile raised a threshold issue about this court’s jurisdiction to hear the appeal. It submitted that where a judge grants or refuses a writ of possession over leased premises, any appeal lies to the Divisional Court, pursuant to s. 78 (1) of the CTA, which provides:

  1. (1) An appeal lies to the Divisional Court from the order of the judge granting or refusing a writ of possession.

[21]      During oral argument this jurisdictional objection was dismissed with reasons to follow. It may be dealt with summarily.

[22]      The application judge refused an order for delivery of vacant possession, which is arguably captured by this section. However, he also refused declaratory relief and declined to order that an arbitrator be appointed. These aspects of the decision are beyond the ambit of s. 78.

[23]      Pursuant to s. 6(2) of the Courts of Justice Act, R.S.O. 1990, c. C. 43, this court retains the discretion to combine and hear all the issues raised on this appeal. I would exercise that discretion, given the interconnected nature of the issues and the resultant risk of inconsistent judgments.

(ii)         Right of Renewal

[24]      I start from the premise that the application judge was obliged to resolve the apparent discrepancy between the lines of authority relied on by the parties. One line of cases suggests that a sublessor must reserve the last day of the term of the head lease in the sublease. The other stands for the proposition that where the rights granted in a sublease are more restricted than those contained in the head lease, the rights not granted are reserved to the sublessor. That tension was the principal issue raised on the application.

[25]      Further, as will be discussed in more detail below, Hazelton was not seeking to enforce its contractual rights to sue for damages. Rather, it was attempting to take possession of the leased premises. Thus, the application judge had to resolve the issue argued before him, because resort to Hazelton’s contractual rights to damages could not result in obtaining the relief sought.

[26]      In this section of my reasons, I will consider: the nature of a commercial lease, the common law rule regarding the failure to reserve the last day of a sublease, case law that has expanded the notion of a reversionary interest, s. 3 of the CTA, and how s. 3 impacts the common law. I will then apply the legal principles to the facts of this case.

(a)         Nature of a Commercial Lease

[27]      Professor Anne Warner La Forest describes the nature of a landlord and tenant relationship at common law and some of the relevant terminology in Anger & Honsberger Law of Real Property, vol. 1, 3d ed. loose-leaf (consulted on 7 May, 2019) (Toronto: Canada Law Book, 2006) at §7:10:

The relationship of landlord and tenant is an interest in land created by a contract, express or implied, by which one person who is possessed of an interest in real property, and who is called the “landlord” or “lessor”, confers on another person, called the “tenant” or “lessee”, the right to exclusive possession of the real property or some part of it for a period of time which is definite or can be made definite by either party, usually in consideration for a periodic payment of “rent” in either money or its equivalent. The interest in the property remaining in the landlord, being the interest which is not disposed, is called the “reversion”. The interest or estate which the tenant has in the land is known as the “term”. [Citations omitted; emphasis added.]

[28]      At common law, a lease has long been viewed as creating a property relationship between the lessor and lessee once the lessee goes into possession. A lease does not simply create a licence to occupy property; rather, it conveys a legal interest in the property: Jason Brock & Jim Phillips, “The Commercial Lease: Property or Contract?” (2001), 38 Alta. L. Rev. 989, at p. 990.

[29]      Despite the property origins of leases, it is important to understand that a commercial lease also has contractual elements. The leading case on the dual nature of a commercial lease is the judgment of Justice Bora Laskin in Highway Properties Ltd. v. Kelly, Douglas and Co. Ltd., 1971 CanLII 123 (SCC), [1971] S.C.R. 562. Justice Laskin considered the issue of the availability of contractual remedies in a commercial lease. He took a practical approach to the issue, finding it “no longer sensible to pretend that a commercial lease … is simply a conveyance and not also a contract”: Highway Properties, at p. 576.

(b)         Assignment

[30]       In this part of my reasons, I will consider the impact of failing to reserve the last day of a head lease term on a sublessor’s property rights under the head lease.

[31]      Critical to the analysis in this case is the distinction between an assignment of a lease and a sublease. When a lease is assigned to a third party, the third-party assignee becomes the tenant of the landlord and a privity of estate is established between the two. When the lease is assigned, the landlord’s privity of estate with the original tenant comes to an end, but the privity of contract remains: Crystalline Investments Ltd. v. Domgroup Ltd., 2004 SCC 3 (CanLII), [2004] 1 S.C.R. 60, at para. 29. In contrast, a sublease creates no direct relationship between the subtenant and the landlord – there is neither privity of estate nor privity of contract between them. Rather, the head tenant stands in the position of landlord vis-à-vis the subtenant, while retaining its position as tenant vis-à-vis the original landlord.

[32]      There is a long line of case law dating back hundreds of years that holds that a sublease of the entire term of the head lease operates as an assignment because there is no reversionary interest in the original tenant to support a tenurial relationship: see, for e.g., Hicks v. Downing (alias Smith v. Baker) (1696), 1 Ld. Raym. 99, 91 E.R. 962Selby; Jameson v. London and Canadian Loan and Agency Co. (1897), 1897 CanLII 4 (SCC), 27 S.C.R. 435; and Mount Citadel Ltd. v. Ibar Developments Ltd. (1976), 1976 CanLII 770 (ON SC), 73 D.L.R. (3d) 584 (Ont. H.C.). Thus, as a matter of law, the head lease is assigned unless the sublessor retains a reversionary interest by reserving for itself the last day or some other time period at the end of the term. This was the line of the authority relied on by Perfect Smile on the application.

[33]      In a seminal article on leasehold interests, Professor Ralph Scane summarized the common law’s view of leasehold interests: “The Relationship of Landlord and Tenant” in Special Lectures of the Law Society of Upper Canada 1965: The Lease in Modern Business (Toronto: Richard De Boo Ltd., 1965). He described the common law position as follows, at p. 3:

The common law’s view of a non-freehold estate, or a leasehold estate, is that it is a grant of exclusive possession of land for a determinate period of time, which is an interest less in quantity than the grantor himself possesses. The definition requires a determinate period of time because if the estate granted is limited to last for an uncertain period of time, you would be granting an estate of freehold. Also, at common law, the estate granted by the landlord must be a lesser estate than the landlord himself has. In other words, there must be a reversion in the landlord if, at common law, there is to be a landlord-tenant relationship. The landlord’s estate can be either freehold or leasehold, so long as it is greater than the estate granted to the tenant.

[34]      Current practice and more recent case law are consistent with this “ancient” common law. For example, in Sussex Square Apartments v. R.[1999] 2 C.T.C. 2143, (Tax. Ct.), at para. 31, aff’d 2000 CanLII 16119 (FCA), [2000] 4 C.T.C. 203 (F.C.A.), the court noted, “It is trite law that there is a fundamental legal difference between an assignment of a lease, where the assignor retains no reversion, and a sublease where the lessee sublets a portion of the term to a sublessee and retains a reversionary interest”. Similar comments were made by this court in Goldman v. 682980 Ontario Ltd. (2002), 2002 CanLII 20987 (ON CA), 62 O.R. (3d) 21 (C.A.), where the court noted, at para. 3, that “the leasehold interest must be supported by privity of estate and thus the assignor must reserve the last day in order to preserve the original landlord tenant relationship.” (See also Dental Co. of Canada v. Sperry Canada Ltd., 1971 CanLII 7 (SCC), [1971] S.C.R. 266; Canada Safeway Ltd. v. Surrey (City), 2004 BCCA 499 (CanLII), 35 B.C.L.R. (4th) 73, leave to appeal refused [2004] S.C.C.A. No. 577; Bengro Holdings Inc. v. Tax to Go Inc. (1996), 7 O.T.C. 283 (Gen. Div.); andDamack Holdings Ltd. v. Saanich Peninsula Savings Credit Union (1982), 19 B.L.R. 46 (B.C. S.C.).)

[35]       Consistent with this well established view, an experienced commercial leasing lawyer in Ontario, writing on the topic of assignments and subleases, has said that he could not recall any transfer in which he had been involved that was for the balance of the term that was not intended to be a full assignment: Darrell M. Gold, “Assignment v. Sublease – Reserving the Last Day” in The Six-Minute Commercial Leasing Lawyer 2008(Toronto: Law Society of Upper Canada, 2008), at pp. 22-7.

(c)         Alternative Approach

[36]      Notwithstanding the foregoing, cases from other jurisdictions demonstrate that some courts have interpreted the notion of a reversionary interest more expansively. In these cases, courts have found that there was a reversionary interest even where the last day was not reserved.

[37]      Letourneau was such a case and, as noted above, it was cited by Hazelton to the application judge. In Letourneau, the tenant sublet the premises to a third party for the balance of the term of the lease but with a more limited option to renew than that contained in the head lease. In brief reasons, the Court of Appeal agreed with the trial judge that the sublease did not amount to an assignment. At p. 398, Belzil J.A. stated:

It is evident from the fact that the trial judge awarded judgment against the original lessee Red Fort that he did not consider the sublease to be an assignment of the lease, and indeed in that he was correct because the option to renew was more restricted in the sublease than that contained in the head lease and it could not be said that the sublessor had assigned its full reversionary interest. The appellant did not argue that the lease had been fully assigned.

…It is clear that the sublessor remained tenant under the head lease and no privity between the sublessee and the appellant as head lessor was created by the sublease.

[38]      This case suggests that a tenant’s “full reversionary interest” is not assigned even where premises are sublet for the balance of the term of the lease, where the sublease provides for a more restricted option to renew than the head lease.

[39]      Another Alberta case has similarly applied a broad notion of a “reversionary interest”: Anthem Heritage Hill Ltd. v. Just One Stop Ltd.: 2006 ABQB 113 (CanLII), 389 A.R. 1, aff’d 2006 ABCA 72 (CanLII), 384 A.R. 231. The case involved a lease between Anthem, the landlord, and Crafter’s Marketplace, the head tenant. Crafter’s retained a portion of the premises and sublet a portion to Just One Stop Ltd. The issue was whether Just One Stop had a right to renew the sublease.

[40]      The head lease contained a renewal option. The sublease also included a renewal option. However, the sublease expressly noted that if Crafter’s elected not to exercise the renewal option, the sublease would terminate on the lease expiry date.

[41]      Crafter’s surrendered the lease to Anthem before the lease expired. Just One Stop tried to renew the lease, but Anthem sought a declaration that the subtenant could not do so because renewal was contingent on Crafter’s renewal of the head lease. Just One Stop argued that the sublease was an assignment because Crafter’s did not retain a reversionary interest in the head lease, as it failed to reserve the last day of the head lease’s term. It further argued that it had the same right to renew as Crafter’s under the head lease, albeit in respect of the sublet premises only.

[42]      The application judge agreed that on the grant of a sublease the sublessor must retain a reversion (i.e., an interest in the lease). Rooke J. noted that “[a]lmost without exception, the authorities define the requisite reversionary interest as a term-related one”: Anthem, at para. 26. He also noted that “the last day of the term of a headlease is an undoubted, and perhaps the most common, term-related reversionary interest”, but added that there were others: at para. 26. He was satisfied that Crafter’s had retained a reversionary interest in the head lease based on the language of the renewal option in the sublease. At para. 27, Rooke J. explained:

Just One’s right to renew the sublease was not absolute but expressly contingent on Crafter’s Marketplace’s renewal of the Headlease. Thus, while, on the grant of the Sublease, Crafter’s Marketplace did not retain a reversionary interest in the nature of the last day of the term of the Headlease, Crafter’s Marketplace did retain a term-related reversionary interest in the Headlease in order to preserve the relationship between itself and Anthem under the Headlease in respect of the Sublease premises, that being its right to renew the Headlease.

[43]      Anthem’s application was granted. The Alberta Court of Appeal dismissed an appeal from Rooke J.’s decision but did not deal with the question of whether there was a sublease or an assignment because Just One Stop abandoned its argument that the sublease was an assignment.

[44]      Similarly, Chater v. Elia, 1998 CanLII 2123 (NS CA), 1998 NSCA 39, 167 N.S.R. (2d) 166, involved a lease between the landlord and the tenant, Mr. Al-Farkh. Mr. Al-Farkh, in turn, entered into a sublease with Ms. Elia. It was argued that the subtenancy was really an assignment because Mr. Al-Farkh did not retain a reversionary interest in the premises. Cromwell J.A. rejected this argument at para. 14:

In my opinion, Elia’s submission on this point cannot succeed. As I understand the principle involved, it is this: if a tenant gives up his or her whole interest under a head lease by a purported subtenancy, the transaction is in law an assignment. In other words, there can be no sublease when there remains no tenancy to which the undertenancy is subordinated. In this case, the subtenancy related only to a portion of the premises demised under the head lease. Thus, the tenant did not, and did not intend, to give over to the “subtenant” his whole interest under the head lease. Therefore, there was in law no assignment: see Mount Citadel Ltd. v. Ibar Developments (1976), 1976 CanLII 770 (ON SC), 73 D.L.R. (3d) 584 (Ont. H. Ct.) at 589. I conclude therefore that prior to Al-Farkh’s bankruptcy, there was, as the trial judge held, a subtenancy between Al-Farkh and Elia to which the landlord consented.

[45]      These three cases from other provinces, which are outliers in Canadian law, broaden the notion of a reversionary interest beyond temporal reservations.

[46]      Some U.S. courts have also taken a more flexible view of what amounts to a reversionary interest. Andrew R. Berman, writing in Friedman on Leases, 6th ed. vol. 1 (New York: Practising Law Institute, 2017) explains the split in U.S. law, at pp. 7-92 – 7-93:

If a tenant sublets for the balance of his term there is, a priori, no intervening time between the scheduled expiration of the prime lease and that of the sublease. If a reservation is to be found, it must be of something other than time. Courts have seized on a tenant’s right of reentry for breach by the subtenant, or of a rent or of covenants that differ from those in the prime lease, or a combination of these items. Some cases have held that a subtenant’s covenant to surrender possession on the last day of the term of the prime lease leaves a “fragmentary” reversion. These have not escaped the obvious criticism that the coterminous periods permit a simultaneous expiration with no temporal gap. There is a split of American authority on what constitutes a reversion for the purpose of making a transaction a sublease rather an assignment. This might suggest the existence of some clear distinctions. Instead, there is an inconsistent and bewildering group of cases seizing upon some item as, or as not, a reversionary interest, and with little consistency within at least several states. [Citations omitted.]

[47]      As Professor Berman indicates, the desire to stretch the bounds of the common law in some states has given rise to “inconsistent and bewildering” case law. Other states still apply the traditional common law approach and the practice for creating a sublease in those states is to make sure the term expires at least one full day before the stated expiration of the prime or head lease: at p. 7-96.

[48]      These cases reflect an effort by some courts to avoid characterizing a putative sublease as an assignment by expanding the notion of a revisionary interest beyond temporal limits. Arguably, such judicial efforts are unnecessary in Ontario by reason of s. 3 of the CTA. I turn next to a consideration of that section.

(d)         Section 3 of the CTA

[49]      Neither party referred the application judge to of s. 3 of the CTA, which provides:

  1. The relation of landlord and tenant does not depend on tenure, and a reversion in the lessor is not necessary in order to create the relation of landlord and tenant, or to make applicable the incidents by law belonging to that relation; nor is it necessary, in order to give a landlord the right of distress, that there is an agreement for that purpose between the parties.

[50]      On its face, s. 3 stipulates four “negatives”:

(1)  The relation of landlord and tenant does not depend on tenure;

(2)  A reversion in the lessor is not necessary in order to create the relation of landlord and tenant;

(3)  A reversion in the lessor is not necessary in order to make applicable the incidents by law belonging to the landlord-tenant relation; and

(4)  An agreement is not necessary in order to give a landlord a right of distress.

[51]      This provision has been part of Ontario law in some form since 1895: Ontario Law Reform Commission, Report on Landlord and Tenant Law(Toronto: Ministry of the Attorney General, 1976), at p. 5; An Act respecting the relations of Landlord and Tenant, (1895) 58 Vic. c. 26, s. 4. When first introduced, it read as follows:

The relation of landlord and tenant shall be deemed to be founded in the express or implied contract of the parties, and not upon tenure or service, and a reversion shall not be necessary to such relation, which shall be deemed to subsist in all cases where there shall be an agreement to hold land from or under another in consideration of any rent. And nothing in this Act shall affect any pending litigation.

[52]      A year after the relevant provision was first introduced, it was amended: An Act respecting the Law of Landlord and Tenant, (1869) 59 Vic. c. 42, s. 3. The new section read as follows:

(1) The relation of landlord and tenant is not hereafter to depend on tenure, and a reversion or remainder in the lessor shall not be necessary in order to create the relation of landlord and tenant; or to make applicable the incidents by law belonging to that relation nor shall any agreement between the parties be necessary to give the landlord the right of distress.

(2) It is hereby declared that the said section was intended to express the same meaning as this section and no other.

[53]      Justice Rose described the amended provision in Kennedy v. Agricultural Development Board (1926), 1926 CanLII 323 (ON SC), 59 O.L.R. 374 (H.C.), which is the leading case on s. 3. In Kennedy, there was a question whether an owner in fee simple could also be a tenant under an attornment clause in a mortgage agreement even if there was no reversion in the chargee. The attornment clause stated that “[t]he mortgagor hereby attorns to the Board and becomes tenant of the said lands during the term of this mortgage”. Rose J. concluded that “in Ontario the basis for holding that the attornment clause is ineffective as against persons other than the parties and their privies [was] swept away by s. 3”: at p. 376.

[54]      Rose J. went on to discuss the effect of s. 3 at p. 378:

The relation cannot depend on the landlord’s tenure, but, apart from the statute, it does depend upon the tenant’s tenure from the landlord. Therefore, in my opinion, the statutes of 1896 and 1914 must mean that a man can be tenant although he does not hold from the landlord; and, as I have said, if he can be tenant without holding from the landlord, I do not see what is to prevent his being at one and the same time holder in fee simple and tenant to the landlord.

[55]      There have been only a few cases since Kennedy that discuss the interpretation of s. 3 or even mention it. In Wotherspoon v. Canadian Pacific Ltd. (1979), 1979 CanLII 2049 (ON SC), 22 O.R. (2d) 385 (H.C.), Hughes J. commented on s. 3, at p. 523:

…I should append a note about one aspect of a lease which I suggested earlier must be for a term less than the life of the interest of the lessor. Such was the invariable principle observed by the common law, but by 1896 (Ont.), c. 42, s. 3, the substance of the provision which is still s. 3 of the Landlord and Tenant Act, R.S.O. 1970, c. 236, was introduced into the law of Ontario…

So in Ontario at least the distinction between a lease and an assignment was obliterated and the term of a lease could be coterminous with the extent of the interest of the lessor.

[56]      The appeal from Hughes J.’s decision was allowed, although this court did not comment on s. 3. The matter went to the Supreme Court, which dismissed the appeal and allowed the cross-appeal: 1987 CanLII 2807 (SCC), [1987] 1 S.C.R. 952. The Supreme Court affirmed the “ancient” common law but noted the existence of what became s. 3 of the CTA, at p. 1016:

An underlease of the whole term of a lease operates as an assignment in law… Furthermore, if a lessee for a term of years makes a lease for a term greater than his own, this second lease operates as an assignment… but see Anger and Honsberger Law of Real Property (2nd ed. 1985), vol. 1, pp. 259-64, for a comment on a possible interpretation of s. 3 of the Landlord and Tenant Act, R.S.O. 1980, c. 232 on this point.

[57]      In Goldman, this court considered the impact of s. 3 of the CTA on the common law rule requiring a reservation of the last day of the head lease term. In that case, the parties executed a commercial lease for two units in a shopping centre. The lease contained an option to purchase and a right of first refusal to purchase the entire shopping centre. During the term of the lease, with the consent of the landlord, the tenant entered into a sublease. The sublease was for the entirety of the leasehold term but did not include the option or the right of first refusal. Subsequently, the tenant gave notice of the exercise of the option. However, the landlord took the position that the tenant could not exercise the option due to its failure to reserve the last day of the head lease term. The landlord then brought a successful application for a declaration supporting its position, and the tenant appealed.

[58]       This court’s analysis of the impact of s. 3 of the CTA was as follows:

[4] [The application judge] would not adopt the appellant’s argument that s. 3 of the Commercial Tenancies Act, R.S.O. 1990, c. L.7 supersedes the common law. That section provides in part, ‘[t]he relation of landlord and tenant does not depend on tenure and a reversion in the lessor is not necessary in order to create the relation of landlord and tenant . . . .”

[5] The appellant traces this provision, unique to Ontario and, at one time, Ireland, through various statutes back to 1860 in Ireland. In the only Ontario case dealing with the section, Harpelle v. Carroll (1896), 27 O.R. 240 (Q.B.) and in a context of permitting distress, Meredith C.J. had this to say at p. 246 O.R.:

It is highly probable that if the framer of the Ontario Act, had had before him the caustic criticism which the Irish Act as a whole, and its several parts, including section 3, — as would appear from the reports of the cases to which I shall afterwards refer, — received from the Judges of the Courts of that country during the short time the Act was in force there, he would have chosen different language to express the idea which he probably had, that of doing away with the necessity of the having of the immediate reversion to entitle to distrain one who had let lands to another.

[6] I would not be so dismissive of the legislative intent but do sidestep consideration of its application to the present facts. In my view, the motions judge erred in another respect, which is sufficient to dispose of the appeal, and I leave resolution of any conflict between the statute and the common law for another day when the broader ramifications of altering the course of landlord and tenant law in Ontario alone can be adequately canvassed.

[59]      Given the dearth of jurisprudence, academic commentary on this section is helpful. In the 1985 version of Anger & Honsberger, at p. 260, the authors note:

The plain language of this section would lead me to assume that a tenant could create a sublease notwithstanding his failure to reserve to himself some residue of the original term.

[60]      In discussing s. 3 of the CTA, these authors refer to comments by Edward Douglas Armour, Q.C., in A Treatise on the Law of Real Property,1st ed. (Toronto: Canada Law Book, 1901). Like others, Mr. Armour expressed surprise and uncertainty about the 1895 and 1896 legislation, at p. 135:

It will be noticed that the present enactment contains no affirmative declaration that the relationship is to depend on contract, but contains simply four negatives, of which one is that the relationship of landlord and tenant is not to depend on tenure. The notion of an estate in land being inseparable from tenure, it may be that the consequence of the abolition of tenure in this connection reduces the relationship of landlord and tenant to a contract of hiring of land, and that there is no such thing, properly speaking, as an estate for years in land arising from the making of a lease. It was held in Harpelle v. Carroll, however, that the first enactment did not abolish the relationship of landlord and tenant and make the bargain a mere contract, but merely altered the mode of creating the ancient relationship. If this be the effect of the enactment, then it worked no change in the law, except that the relationship may probably now exist where the so-called landlord parts with his whole interest in the land, retaining no reversion, thus extending the whole law of landlord and tenant to such a case. [Citations omitted.]

[61]      The current edition of Anger & Honsberger, cited above, reiterates what was said about s. 3 in the earlier edition of the text: at §7:10. The only case it cites is Kennedy. It also references Professor Scane’s article. In that article, he says that “[t]he effects of [the] section are obscure” and describes s. 3 as “curious” and “mysterious”: at pp.3-5. He muses about the section as follows, at pp. 4-5:

As I sat preparing this lecture, wondering why such a curious section should be in the Ontario Act ̶ a section which politely thumbs its nose at several centuries of accumulated law, and yet sits in dusty obscurity, unnoticed by most of flipping through the Act on our way to Part III ̶ I began to wonder whether we are not missing a bet in Ontario, and whether it might not be time to drag this section into the light and have a good look at it.

The section also poses another interesting problem. Anywhere but in Ontario, or other jurisdictions, if any, having a similar section, a tenant who assigns the whole of the remaining term of his lease creates an assignment, not a sub-lease. If you desire a sub-lease, you must reserve part of the term to the original tenant. Is it possible under the Ontario statute to create a sub-lease of the entire balance of the term? On a literal reading, it would seem so.

[62]      It would appear that the time has come for this court to determine how s. 3 of the CTA impacts the common law requirement to reserve the last day of a head lease term in a sublease.

(e)         Impact of s. 3 of the CTA on the Common Law

[63]      Before turning to a consideration of the impact of s. 3 of the CTA on the common law, a word about the Canadian cases referred to above that expand the definition of a reversionary interest beyond a temporal reservation. Recall that Hazelton relied on one of these cases, Letourneau, in its submission to the application judge.

[64]      I would not import these cases into Ontario law for two reasons. First, they expand the notion of a reversionary interest in a manner that appears to be results-driven and without regard to hundreds of years of jurisprudence that makes clear that an assignment is made when no temporal reservation is made. Second, the decisions of the Alberta and Nova Scotia courts to expand the meaning of a reversionary interest at common law were made in a legal milieu where there was no equivalent to s. 3 of the CTA. That said, I make no comment on the result in Elia or Anthem, which dealt with subleases of only portions of the leased premises. The sublease in the case at bar was for the whole premises.

[65]      In assessing the impact of s. 3 of the CTA, it is important to focus on the breadth of the provision. The section makes clear that a reversion in the lessor is not necessary in order to create the relationship of landlord and tenant. What the section does not say is what, in fact, is necessary to create that legal relationship.

[66]      If we accept, based on the plain wording of s. 3, that a reversionary interest is not required, it is possible to conclude that there is no need to reserve the last day of the lease term for there to be a landlord and tenant relationship. In that case, it would be unnecessary to engage in the type of analysis undertaken in the three outlier cases cited above, where courts searched for a reversionary interest that went beyond temporal limits.

[67]      In my view, there is a danger in interpreting s. 3 to mean that a landlord and tenant relationship is always established between the purported sublessor and subtenant regardless of whether there is a reversionary interest. The danger is that the distinction between subleases and assignments would be lost. This would be contrary to the provisions of the CTA, which maintain such a distinction: see ss. 23(2) and 25. It could also have a disruptive effect on existing transfers where the last day of the head lease term has not been reserved. Recall that it was suggested by Mr. Gold that in those cases the failure to reserve the last day is usually deliberate in order to create an assignment.

[68]      Reading s. 3 in context, I interpret it to mean that there may be a sublease even if the last day in the head lease is not reserved, but only when there is sufficient evidence to show that the objective intention of the parties, as reflected in the sublease, was not to create an assignment. Recognizing that a commercial lease is not only a conveyance but also a contract, courts should be permitted to consider the objective intentions of the parties to a purported sublease in order to determine the nature of the impact on the subletting party vis-à-vis its rights under the head lease. In other words, a party may demonstrate that, notwithstanding a failure to reserve the last day of the head lease term, an assignment was not intended by the parties.

[69]      Interpreting s. 3 in such a way maintains the distinction between subleases and assignments, which is consistent with the scheme of the CTA. It is also consistent with the wording of s. 3.

[70]      Practically speaking, this interpretation does not have the effect of forcing parties to continue a legal relationship when they have no desire to do so. In addition, I do not anticipate that the impact of this approach will be far-ranging because I expect that most parties to a commercialsublease will follow the usual practice and simply reserve the last day in order to avoid an assignment. However, in the limited number of cases where that is not done and the tenant under the head lease wishes to maintain its rights under the head lease, it may be possible to prove that an assignment was not intended by examining the terms of the purported sublease.

(f)           Application to the Case at Bar

[71]      There is no question that Hazelton failed to reserve to itself the last day of the head lease term. In the absence of s. 3 of the CTA, the purported sublease would have operated as an assignment.

[72]      The question that remains is whether the sublease provides sufficient evidence to show an intention to maintain a landlord and tenant relationship between Hazelton and Perfect Smile. In my view, it does.

[73]      On the plain wording of section C of Schedule “A” in the sublease, it is clear that the parties turned their minds to the impact of the sublease on Hazelton’s rights under s. 7 of the head lease. In section C, the parties agreed as follows:

Sub-lease: notwithstanding that the head Lease contains a provision allowing the tenant to renew the Lease for a further term as set out therein, there is no obligation by the Sub-Landlord to renew in favour of the Sub-Tenant and the Sub-Tenant acknowledges that they no such right of renewal or extension of the Lease. The Sub-Lease is only for the term set out herein.

[74]      This provision makes plain that Hazelton has a right to renew the lease but that it is not obliged to renew on behalf of Outhere. It further makes clear that Outhere has no right to renew and that its rights under the sublease expire at the end of the term.

[75]      In my view, despite the fact that Hazleton did not reserve to itself the last day of the head lease term, the sublease provides sufficient evidence that the parties did not intend an assignment. Accordingly, I would not treat the sublease as an assignment and would hold that Hazelton has the right to renew the lease provided that it exercises its renewal right in accordance with the terms of the lease. I will consider Perfect Smile’s argument about compliance with the renewal term in the next section of my reasons.

(g)         Breach of Lease

[76]      In the alternative, Perfect Smile argues that Hazelton has no right to renew the lease because, at the time of the putative renewal, Hazelton had breached the lease. Specifically, Perfect Smile submits that Hazelton breached the lease by removing the bathroom from the premises without its permission.

[77]      The application judge found that Perfect Smile “knew of the renovation and the missing bathroom at least by early 2017, since its principal deposes in his affidavit that this is when he discovered the fact that the bathroom had been removed”. The application judge noted that the respondent failed to give notice to Hazelton of any objections to the bathroom renovations. He also found that Perfect Smile’s “complaint about the state of the Premises is a position adopted late in the day in order to justify its dealing directly with Chaves.”

[78]      The application judge misstated Perfect Smile’s principal’s evidence when he stated that the principal testified that he found out in early 2017 about the removal of the bathroom. In fact, the principal stated that he found the information out at some unspecified date in 2017.

[79]      Despite this misstatement, I am of the view that it was open to the application judge to find that Perfect Smile knew about the removal of the bathroom and that it was using the removal to justify its dealing with Mr. Chaves. There was uncontested evidence that the principal of Perfect Smile knew generally about the renovations. In addition, as discussed above, the principal admitted that he knew specifically about the removal of the bathroom in 2017. Further, these findings are supported by the “With Prejudice” letter of September 28, 2017 written by counsel for Perfect Smile, Robert W. Trifts. In that correspondence, Mr. Trifts cites the failure to reserve the last day of the head lease term and the allegedly vague wording of the right to renew as the reasons why Hazelton cannot renew the lease. The only reference to the bathroom comes at the very end of the letter and refers to a potential claim for damages. Mr. Trifts does not purport to support Perfect Smile’s position that the lease could not be renewed on the basis of the bathroom renovation.

[80]      In summary, there is no basis to interfere with the application judge’s conclusion that Hazelton did not breach the lease.

(iii)        Damages

[81]      The application judge undertook a damages analysis. He remarked that he did not know what rent the arbitrator would have fixed. Nor did he know whether it would have been profitable for Hazelton to sublet the premises. However, he assumed that the rent paid by Outhere reflected fair market value. Based on that assumption, he concluded that Hazleton had suffered no damages because it could only have sublet the premises at the same rate it was paying Perfect Smile.

[82]      The notice of application did not seek damages. It sought declaratory and injunctive relief exclusively related to Hazleton’s right to reoccupy the premises and renew the lease. We expect litigants to limit the evidence they tender and the arguments they make to the issues raised within the four corners of their pleadings: Louis Vuitton Malletier S.A. v. Wakilzada, 2017 ONSC 2409 (CanLII), 145 C.P.R. (4th) 253, at para. 15 (reiterating that pleadings establish a benchmark to determine the relevance of evidence).

[83]      The corollary to that proposition is that courts should limit their decisions to the relief sought by the parties: Sobeski v. Mamo, 2012 ONCA 560(CanLII), 112 O.R. (3d) 630; Kalkinis (Litigation guardian of) v. Allstate Insurance Co. of Canada (1998), 1998 CanLII 6879 (ON CA), 41 O.R. (3d) 528 (C.A.). This case illustrates the dangers of straying from what is actually in issue. The application judge commented that he had little evidence before him to determine the issue of damages. There was a reason for that: Hazleton was not seeking damages and did not therefore tender evidence in support of a damages claim.

[84]      The application judge erred in undertaking a damages analysis in these circumstances. His order finding that Hazelton suffered no damages must be set aside.

(iv)        Costs of the Application

[85]      Perfect Smile seeks leave to appeal the costs award made by the application judge, and requests an order for costs payable to it for the application. Given the disposition of the substantive issues on this appeal, leave is refused. Instead, I would order that Hazelton is entitled to an order for its costs of the application payable by Perfect Smile.

[86]      I would not interfere with the application judge’s order regarding costs for the Chaves respondents. Mr. Chaves was found to have breached his obligation to act in good faith and thus it is an equitable result that he should not be awarded his costs. He played a minor role on the application, so I would not order him to pay costs to Hazelton.

(v)         Mr. Chaves’ Deposit

[87]      The application judge ordered that the $10,000 deposit paid by Mr. Chaves be returned to him. That order was not challenged on appeal.

Part V: Disposition

[88]      I would allow the appeal and set aside the judgment of the application judge, save for the order for the return of Mr. Chaves’ deposit. Further, I would grant  an order:

(1)  Declaring that Hazelton has rightfully exercised its option to renew the lease for a five-year period starting October 1, 2017, and as a result has a right to lease the premises for that period;

(2)  Requiring Perfect Smile to give possession of the premises to Hazelton as soon as possible, subject to item (5) below, and restraining Perfect Smile from denying possession or purporting to lease the premises to any other party in contravention of Hazelton’s leasehold rights;

(3)  Requiring Perfect Smile and Hazelton to submit to arbitration as contemplated under the lease to determine the rent;

(4)  Declaring that the Chaves respondents no longer have any leasehold interest in the premises, and that any agreement or arrangement with Perfect Smile to the contrary is void; and

(5)  Requiring the Chaves respondents to give possession of the premises to Hazelton as soon as possible, and at any rate within 30 days of the release of these reasons.

[89]      If Hazelton and Perfect Smile cannot agree on the costs of the application below, they may make written submissions to this court.

[90]       The Chaves respondents played a minor role on the appeal akin to interveners. In the circumstances, I would make no order for or against them for costs. Instead, I would order Perfect Smile to pay the costs of the appeal to Hazelton in the all-inclusive sum of $12,000.

Released: “D.W.” May 23, 2019

“C.W. Hourigan J.A.”

“I agree. David Watt J.A.”

“I agree. Grant Huscroft J.A.”

Koza Ltd & Anor v Akcil & Ors [2019] EWCA Civ 891 (23 May 2019)

Neutral Citation Number: [2019] EWCA Civ 891
Case Nos: A3 2018 0190
A3 2018 1620

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Mr Richard Spearman QC; The Hon Mr Justice Morgan
[2017] EWHC 2889 (Ch); [2018] EWHC 1612 (Ch)

A3 2018 1620
Royal Courts of Justice
Strand, London, WC2A 2LL
23/05/2019

B e f o r e :

LORD JUSTICE PATTEN
LORD JUSTICE FLOYD
and
LORD JUSTICE PETER JACKSON

____________________

Between:

(1) KOZA LTD

(2) HAMDI AKIN IPEK

Claimant/
Appellant
Claimant
– and –
 
(1) MUSTAFA AKCIL
(2) HAYRULLAH DAGISTAN
(3) MAHMUT HIKMET KELES
(4) HAMZA YANIK
(5) ARIF YALCIN

(6) KOZA ALTIN ISTEMELERI AS

Defendants

Defendant/
Respondent

____________________

Lord Falconer of Thoroton, Vernon Flynn QC, Siward Atkins and Andrew Scott (instructed by Gibson Dunn and Crutcher UK LLP) for the Appellant
Jonathan Crow QC and David Caplan (instructed by Mishcon de Reya LLP) for the Respondent

Hearing dates: 9-10 April 2019 
____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Crown Copyright ©

 

Lord Justice Floyd:

    1. There are two appeals before the court, both arising out of undertakings given to the court by the appellant, Koza Ltd, that it would not “dispose of, deal with or diminish the value of any funds belonging to [it] or held to [its] order other than in the ordinary and proper course of its business“. The first, which I will call “the ICSID funding appeal”, is from the order of Mr Richard Spearman QC, sitting as a deputy High Court Judge in the Chancery Division, sealed on 21 December 2017. By his order, Mr Spearman declared that Koza Ltd’s proposed provision of funding to Ipek Investment Limited (“IIL”) to finance fees, disbursements and a possible adverse costs order in an arbitration to be launched by IIL against the Republic of Turkey before the International Centre for the Settlement of Investment Disputes (“ICSID”) would not be in the ordinary and proper course of the business of Koza Ltd. The second, which I will call the “extradition expenses appeal”, is from the order of Morgan J, sealed on 21 June 2018. By that order, Morgan J declared that proposed payments to solicitors for fees incurred in relation to legal advice, assistance and representation provided to the second defendant and sole director of Koza Ltd, Mr Hamdi Ipek, in connection with the Republic of Turkey’s request that Mr Ipek be extradited to Turkey, would not be in the ordinary and proper course of the business of Koza Ltd.
    2. The parties are engaged in a hard-fought dispute in the Chancery Division over the control of Koza Ltd. I explained the background to the dispute in my judgment, with which Flaux LJ agreed, in a previous appeal to this court in these proceedings, Koza Ltd and another v Akcil and others[2017] EWCA Civ 1609. In brief summary, Mr Ipek is a director of Koza Ltd and a member of the family (“the Ipek family”) which owns the corporate group to which Koza Ltd belongs (“the Koza Group”). The Koza Group is a large Turkish-based media and mining conglomerate. Koza Ltd was incorporated in this jurisdiction in March 2014 and capitalised with £60 million provided by the respondent (“Koza Altin”) to undertake mining operations outside Turkey, including ventures with other established international mining companies. Koza Altin is another member of the Koza Group and Koza Ltd is its wholly owned subsidiary.
    3. The claimants allege in these proceedings that the state authorities in Turkey are engaged in an attempt to take control of the Koza Group from the Ipek family, alleging that the group is involved in criminal activities; the family alleges that the attempt is politically motivated. At all events, following a raid on the headquarters of the group in Ankara in September 2015, the boards of various companies in the group were replaced by state-appointed trustees. The trustees have taken various steps to attempt to recover the £60 million held by Koza Ltd, but have been unsuccessful.
    4. In July and August 2016, Koza Altin purportedly served notices under the Companies Act requisitioning a general meeting of Koza Ltd to pass resolutions replacing its directors with the first to third defendants. The meeting was not called, Koza Ltd contending that any meeting that was called could not validly pass the resolutions because of the weighted voting rights of Mr Ipek and his brother. Koza Ltd also challenges the authority of the first to fifth defendants to act on behalf of Koza Altin. On 16 August 2016 the claimants commenced these proceedings, seeking declarations that the Companies Act notices were ineffective and an injunction restraining the defendants from holding any meeting of Koza Ltd pursuant to the notices. On the same day Snowden J granted an injunction, without notice to the defendants, preventing any meeting of Koza Ltd from taking place for the purpose of passing the resolutions. On the initial return date of the without notice injunction, the injunction was continued on undertakings given by the claimants not to dispose of, deal with or diminish the value of any funds belonging to Koza Ltd, substantially in the form subsequently given to the court in December 2016, to which I shall come.
    5. A host of applications came before Asplin J (as she then was) in December 2016. Foremost amongst these was the application by the defendants to challenge the exclusive jurisdiction of the English court to determine the claimants’ claim. Asplin J dismissed the defendants’ jurisdiction challenge, but it is important to record that the challenge is still on foot, and nothing done by the defendants is to be treated as a submission to the jurisdiction of the English court. An appeal to the Supreme Court from this court’s judgment upholding Asplin J on the jurisdiction issue remains pending. That appeal was argued in the Supreme Court in March 2019, but the Supreme Court’s judgment is not yet available.
    6. Asplin J continued the injunction concerning the holding of company meetings and the passing of resolutions. The first schedule to Asplin J’s order contained the following undertaking:

“2. …

(1) [Koza Ltd, defined in the order as “the Company”] will not dispose of, deal with or diminish the value of any funds belonging to the Company or held to the Company’s order other than in the ordinary and proper course of its business.

…”

    1. Paragraph 2 of the first schedule went on to provide for the giving of advance notice of any payment of more than £25,000 or any transaction which would create a liability of over £25,000, “apart from any payment of or incurring of liability in respect of legal fees in connection with this litigation“. Paragraph 3 of the first schedule is also of importance:

“3. These undertakings shall not prohibit the Company from spending a reasonable sum on legal advice and representation, provided that the funds spent on liabilities incurred in this connection properly relate to legal advice and representation for the Company’s benefit.”

The ICSID funding appeal

    1. By an application notice dated 20 June 2017, Koza Ltd applied for orders relating to four classes of expenditure. The only class of expenditure which remains relevant is expenditure of up to £1.5 million over an 18 month period, and £1.5 million to be held on account against an adverse costs order, to enable an Investment Treaty arbitration to be pursued by IIL (“the ICSID expenditure”). The application was argued on the twin bases (i) that the ICSID expenditure fell within the scope of the undertaking, or, if not, (ii) that the undertaking should be varied so as to permit the ICSID expenditure. Koza Ltd no longer seeks a variation.
    2. IIL is a company incorporated in England and Wales and is said by Koza Ltd to have become the ultimate holding company of the whole of the Koza Group pursuant to a share purchase agreement dated 7 June 2015 (“the SPA”). The SPA is said to have been made between (1) the Ipek family, as sellers of their shares in Koza-Ipek Holding A.S. (“Koza Holding”) the ultimate holding company of the Koza Group as at 7 June 2015, (2) IIL as purchaser of those shares in consideration for issuing shares to the Ipek family in IIL, and (3) Koza Holding. The SPA recites that Koza Holding had agreed to obtain a board resolution to register IIL as the new owner of the shares in Koza Holding. The purported effect of the transaction was to place IIL, an English company, into the corporate hierarchy below the Ipek family and above Koza Holding, by exchanging the family’s shares in Koza Holding for shares in IIL, and registering IIL as the owner of the shares in Koza Holding
    3. On 6 March 2017, IIL issued a notice to the Government of Turkey under the terms of the Bilateral Investment Treaty between the Governments of the United Kingdom and Turkey (“the BIT”). On 5 April 2017, IIL requested Koza Ltd to assist it with funding for the arbitration and Koza Ltd agreed. Koza Ltd explained that the takeover of Koza Altin and the other companies in the Koza Group had cut off Koza Ltd’s sources of funding for larger scale mining projects. The ICSID proceedings would be of great importance to Koza Ltd in establishing (a) that Koza Ltd and the Koza Group have been the subject of a politically motivated takeover and (b) that the allegations of criminality made against the Koza Group are baseless and politically motivated. The ICSID arbitration had the potential to add significantly to the ability of Koza Ltd to regain its sources of funding from the Koza Group and to engage constructively with current and potential investors in the company. Koza Ltd also contended that the arbitration would prevent the enforcement of a seizure order granted by the Turkish courts of funds belonging to Koza Ltd and held in the client account of its then solicitors, Morgan Lewis. It was on this basis that Koza Ltd contended before the judge that the ICSID expenditure would be in the ordinary and proper course of Koza Ltd’s business.
    4. The respondent argued that the ICSID expenditure was prohibited by the undertaking on the grounds (a) that any payment made on the basis of the SPA was not a proper use of Koza Ltd’s funds because it was “a sham and backdated, created in order to engineer a position in which IIL can attempt to bring an ICSID arbitration” (“the authenticity issue”); (b) that the proposed arbitration was wholly or substantially concerned with furthering the interests of the Ipek family and would not be of commercial benefit to Koza Ltd; (c) that there were serious issues about the jurisdiction of the ICSID to hear the dispute (“the jurisdiction issue”); and (d) that the evidence did not establish that Koza Ltd was the only source of funds available to IIL (“the alternative funding issue”).

The judgment of Mr Spearman QC

    1. Mr Spearman reviewed the points made by the respondent on the authenticity of the SPA between [75] and [86] of his judgment. At [88] and [89] he concluded that, although the explanations given by Koza Ltd to the points made by the respondent were unsatisfactory, “this application is not the occasion to try those issues.” At [90] he said:

“In these circumstances, I consider that, on the materials at present available to the court, the authenticity of the SPA is open to very serious doubt. If Koza Limited was a freezing injunction defendant, the healthy scepticism which is typically justified with regard to assertions made by such a defendant that are not firmly supported by seemingly reliable evidence might present a fatal obstacle to an application to use frozen funds for a purpose which depends on the authenticity of the SPA. However, Koza Limited is not a freezing injunction defendant, and I therefore consider that it would not be appropriate to follow this precise approach in the present case. At the same time, it would be wrong to ignore the doubts that exist concerning the SPA.”

    1. Mr Spearman accepted, at [97], that it was, at the lowest, seriously arguable that a successful outcome of the ICSID arbitration for IIL would be of substantial commercial benefit to Koza Ltd, not least by allowing it to obtain further funding from the Koza Group. This was a separate benefit from any benefit Mr Ipek or his family would obtain from the ICSID arbitration.
    2. At [101], the deputy judge held that, if the expenditure on the ICSID arbitration fell outside what was permitted by the undertaking (but not otherwise), it was relevant to consider alternative sources of funding. He accepted that IIL had no funds, but considered the evidence as to Mr Ipek’s own assets to be “exiguous”. He pointed as well to the absence of any evidence at all as to the availability of other sources of funding, which, in the light of what was at stake in terms of the fruits of the arbitration, the availability of which could not be said to be unreal. These considerations played a part in considering the overall justice of the case and militated against a release of the undertaking.
    3. As to the jurisdiction issue, Mr Spearman embarked, between [103] and [122], on a detailed analysis of the jurisdiction of the ICSID tribunal. The jurisdiction issue turned on the question of whether IIL had made a qualifying investment. The deputy judge had been supplied with, and had been referred to, three full lever-arch files of ICSID materials, and further materials had been added in the course of the hearing. At [121] he concluded that the various transactions in shares undertaken in pursuance of the SPA were:

“… not an investment for the purposes of the BIT or the ICSID Convention, even applying the approach which is most favourable to Koza Limited that I consider arguable based on the ICSID cases to which I have been referred”.

    1. The judge summarised his conclusions on the ICSID expenditure at [126] as follows:

“Pulling all these strands together, I conclude as follows with regard to the first class of expenditure:

(1) Funding the successful pursuit of an ICSID arbitration by IIL would be of benefit to Koza Limited, and thus in the ordinary and proper course of business.

(2) However, even if its authenticity was not in issue, the SPA did not give rise to a qualifying investment under the ICSID Convention and the material BIT.

(3) Moreover, there are good grounds to doubt the authenticity of the SPA, not least in light of Mr Ipek’s failure to address that in his evidence in these proceedings.

(4) Those concerns are relevant not only to whether the expenditure would be made in good faith, consonant with Mr Ipek’s fiduciary duty to Koza Limited, and in the ordinary and proper course of business, but also to whether or not the ICSID tribunal would have jurisdiction based on the SPA; and it is right for the court to take them into account when determining this aspect of the application.

(5) Further, based on Mr Ipek’s evidence and the lack of evidence about whether litigation funding has been explored, I am not satisfied that there is no available source of funding other than the assets of Koza Limited, and, in particular, that if this aspect of the application is refused it will not be possible to commence an ICSID arbitration to seek redress in respect of the alleged egregious conduct of the government of Turkey in respect of which Koza Altin has filed no evidence.

(6) I am not persuaded that the circumstances which are said to justify this proposed expenditure are so different from those which appear to me to have been contemplated or intended to be governed by the Undertaking at the time that it was given that it would be appropriate to release Koza Limited from the burden of the Undertaking which it chose to give as an uncontested part of the Order.

(7) In light of those factors, I do not consider that the proposed expenditure falls within the scope of the Undertaking, or that it would accord with the interests of justice overall to approve the expenditure, or that the balance of justice between the parties would make it appropriate to vary the Undertaking to permit it.

(8) Accordingly, this part of the application fails and must be dismissed.”

    1. Given that the deputy judge concludes in sub-paragraph (7) that the expenditure does not fall within the scope of the undertaking, and is therefore not within the ordinary and proper course of business, his conclusion in sub-paragraph (1) that the expenditure “would be of benefit to Koza Ltd, and thus in the ordinary and proper course of business” must be understood to be subject to at least some of what follows in sub-paragraphs (2) to (6). That would appear to indicate that he considered that it was the ICSID jurisdiction issue which took the expenditure outside the ordinary and proper course of business, particularly when read with [101] where he said, “in the event that [the ICSID expenditure] falls outside that ambit (as I consider that it does in light of my findings on jurisdiction below)”. Moreover, in [101], the deputy judge clearly indicates that the possible availability of alternative funding was not something on which he relied to take the expenditure outside the scope of the ordinary and proper course of business. It is less clear whether the grounds for doubting the authenticity of the SPA formed part of his decision that the ICSID expenditure was not in the ordinary and proper course of business, as opposed to a reason for not exercising his discretion to grant a variation. He says in (4) that the grounds for doubting the authenticity were relevant to whether the expenditure was in the ordinary and proper course of business, but given the view he expresses in [88], which I understand to mean that he is not able to reach a concluded view on the issue, it is difficult to see how this could provide a basis for saying, definitively, that the expenditure was not in the ordinary and proper course of business.
    2. Lord Falconer and Mr Vernon Flynn QC, who appeared on behalf of Koza Ltd, submitted that the deputy judge had fallen into four errors. First, the judge should not have addressed the merits of the ICSID jurisdiction issue. That was a decision for the board of Koza Ltd. Provided that they were acting in good faith, the court should not interfere with their decision making. Secondly, the judge had made no finding of a lack of good faith, and he could not do so on the material before him, so that the authenticity issue could not lead to a conclusion that the expenditure was not proper. Thirdly, the deputy judge’s finding on the ICSID jurisdiction issue was wrong. Fourthly, the question of alternative funding was not relevant on the facts of this case.
    3. Mr Crow QC, who argued the case for the respondent, submitted first, on the basis of his respondent’s notice, that the judge had erred by not adequately addressing the logically prior question of whether the ICSID expenditure was in the “ordinary” course of business. Had he done so he ought to have held that the expenditure was not within the ordinary course of Koza Ltd’s business because Koza Ltd was not a litigation funder but a mining company. Further, the arbitration was primarily for the benefit of IIL and the Ipek family. The benefit to Koza Ltd conferred by IIL’s pursuit of the ICSID arbitration was too tenuous to lead to the conclusion that it was in the ordinary course of business.
    4. Secondly, Mr Crow invited this court to hold that the ICSID expenditure was not within the ordinary and/or proper course of business because the SPA on which the ICSID arbitration was founded was a fraudulent document. He accepted that to invite a court, particularly an appellate court, to make a finding of this nature on the basis of written evidence and without disclosure or cross-examination was a “big ask”, but he nevertheless submitted that such a conclusion was open to us, particularly in the absence of sworn evidence from Mr Ipek himself refuting the allegation.
    5. Thirdly, Mr Crow invited us to hold that the ICSID expenditure was not in the ordinary and proper course of business in circumstances where the appellant had not discharged the burden of demonstrating that there were no alternative sources of funding. This was so given that the expenditure was largely for the benefit of others, and the benefits, such as they were, for Koza Ltd could be obtained without the need to incur the expenditure. Further, to the extent that the deputy judge had held that the availability of alternative funding was not relevant at all to whether the expenditure was in the ordinary and proper course of business, this was an error, as it was plainly so relevant.

Law on “ordinary” and on “proper” course of business

    1. We were referred to a number of cases in which the courts in this country and elsewhere have had to consider the meaning of “ordinary course of business” and “ordinary and proper course of business”. Whilst these cases are, in a general sense, informative as to the way in which courts have approached these issues, they arise in widely differing factual and legal contexts. Thus, in Countrywide Banking Corporation Ltd v Dean [1998] AC 338, the Privy Council declined to formulate a universally applicable test for what was in the ordinary course of business for the purposes of a provision of the New Zealand Companies Act concerned with the avoidance of corporate transactions having a preferential effect. The judgment of the Board (given by Gault J sitting as an additional member) nevertheless stressed the need for “examination of the actual transaction in its factual setting”, an examination which is “undertaken objectively by reference to the standard of the ordinary course of business”. The judgment also noted that “there may be circumstances where a transaction, exceptional to a particular trader, will nonetheless be in the ordinary course of business” and that “[t]he particular circumstances will require assessment in each case” (page 349H-350B).
    2. In Ashborder BV and others v Green Gas Power Ltd and others [2004] EWHC 1517 (Ch); [2005] 1 BCLC 623, financing arrangements included debentures including charges over assets of the Octagon group of companies. One issue was whether a transferee could take free of the charge because the transfer was “in the ordinary course of its business”. At [227], Etherton J (as he then was) ventured a number of conclusions which he had reached in the context of assessing whether a transaction was in the ordinary course of business for the purposes of a floating charge. Whilst some of these are perhaps of more general application, others reflect the fact that the use of the expression occurs in the specific context of the interpretation of a charge document. For present purposes it is enough to say that I agree with Etherton J’s proposition numbered (5) that “subject to any special considerations [arising out of the interpretation of the charge document] there is no reason why an unprecedented or exceptional transaction cannot, in appropriate circumstances, be regarded as in the ordinary course of the company’s business.” Like Countrywide, Ashborder was not concerned with whether the transaction was within the proper course of a company’s business. Thus propositions (6) and (7) which state that a transaction may be within the ordinary course of a company’s business if it is a fraudulent preference of one creditor over another, or in breach of a director’s fiduciary duty, cannot, if correct, be read across to the present case.
    3. JSC BTA Bank v A [2010] EWCA Civ 1141 concerned a freezing order which, by its terms, did not prevent A from dealing with or disposing of his assets in the ordinary and proper course of any business conducted by him personally, subject to a right to apply for express sanction from the court. At [75] to [76] the court explained that this format pointed to a narrower as opposed to a wider construction of the order, as unobjectionable transactions could always be sanctioned by the court. In the end, however, it was held that the transactions did not fall within the exception because they were either not Mr A’s personal transactions but transactions carried out on the independent decision of the vendor companies or were the activities of a private investor falling short of an investment business (see [78]).
    4. In Michael Wilson & Partners Ltd v Emmott [2015] EWCA Civ 1028, the issue was whether certain payments were breaches of a freezing order which contained an exception in favour of dealing with or disposing of assets in the ordinary and proper course of business. Lewison LJ, with whom Gloster and Black LJJ agreed, said at [19] – [21]:

“19. The issue was whether the payments made fell within the exception to the freezing order. In order to fall within the exception a disposal of assets (including a payment) must be both (a) in the ordinary course of business and (b) in the proper course of business. These are separate and cumulative requirements. They are also highly fact-sensitive questions. What is in the ordinary and proper course of business will, of course depend on what business is carried on by the respondent in question, and how it is carried on. A payment which might be made in the ordinary and proper course of one business may not satisfy that description in the case of a different business. Likewise, a payment which might be made in the ordinary and proper course of a business carried on in one location, may not satisfy that description in the case of the same kind of business carried on in a different location. In the present case the business of MWP is that of the provision of legal and business consultancy services, principally in Kazakhstan.

20. …

21. So the question then was: were the payments made “in the ordinary … course of business”. That is not necessarily the same as asking whether the payments themselves were “ordinary”: it is the course of business that the exception deals with. It is thus the course of business that must be “ordinary”.”

    1. The present case does not involve a freezing order, although there is some force in the suggestion that it was entered into in similar circumstances. Just as with a freezing order, the purpose of the undertaking was not to interfere with the ability of Koza Ltd to carry on its ordinary business. Given that the defendants’ purpose was to obtain control of Koza Ltd, however, it is understandable that they required reassurance that the assets would not be disposed of other than for the benefit of Koza Ltd’s business. I think, therefore, that Lewison LJ’s analysis is apt in relation to the present undertaking as well.
    2. I would draw from these authorities the following propositions of relevance to the present case:

i) The question of whether a transaction is in the ordinary and proper course of a company’s business is a mixed question of fact and law;

ii) “Ordinary” and “proper” are separate, cumulative requirements;

iii) The test is an objective one, making it necessary to consider the question against accepted commercial standards and practices for the running of a business;

iv) The question is not whether the transaction is ordinary or proper, but whether it is carried out in the ordinary and proper course of the company’s business;

v) The questions are to be answered in the specific factual context in which they arise.

Discussion of the ICSID funding appeal

    1. In approaching this issue, it is important to bear in mind a number of preliminary points. First, relief is now sought by Koza Ltd only on the basis that the ICSID expenditure falls within the undertaking. That is a hard-edged question about whether, on the facts found, the funding is or is not in the ordinary and proper course of Koza Ltd’s business. It does not involve any exercise of the court’s discretion. The court’s discretion, and considerations of the interests of justice generally, were relevant to the variation originally sought by Koza Ltd, and refused by the deputy judge, but which is now no longer sought. Secondly, in terms of relief, it must be recalled that the court is being asked to grant a positive declaration that the ICSID funding is in the ordinary and proper course of business. The grant of such a declaration is discretionary, and may well be refused if there are serious doubts about the subject matter of the declaration, even if the court is not in a position to reach a concluded view one way or the other on the issue in question.
    2. The third preliminary point is that, as Lord Falconer pointed out, there were three potential outcomes to the application which Koza Ltd made to the deputy judge. The first outcome – a positive declaration – would be a finding, and therefore a declaration, that the ICSID expenditure was within the ordinary and proper course of Koza Ltd’s business. The second outcome (which the deputy judge adopted) would be to make the opposite finding and grant a negative declaration, namely that the expenditure was not within the ordinary and proper course of business. The third and final possible outcome would be to refuse any declaration because Koza Ltd had not satisfied the court to the civil standard of proof that the ICSID expenditure was within the ordinary and proper course of business, and the respondent had not satisfied the court that it was not. In those circumstances the court could simply dismiss Koza Ltd’s application. Lord Falconer’s primary position was that the judge should have granted the positive declaration, but his fallback position was that the judge should have dismissed the application rather than grant the negative declaration.
    3. The key to the resolution of Koza Ltd’s primary argument, in my judgment, is the authenticity issue. It is not necessary for me to rehearse all the arguments which led the judge to hold that the authenticity of the SPA was open to very serious doubt. On the basis of those arguments, which were repeated before us, the judge was plainly correct to reach that conclusion, and was in no position to accept the SPA as definitely authentic. Equally, in my judgment, he was correct not to go on and decide the very serious allegations against Koza Ltd and Mr Ipek which were engaged by the authenticity issue. What is clear is that, once there is accepted to be a seriously arguable case that the SPA was a forgery, as the respondent alleges, it was impossible for the deputy judge to declare, in advance of the expenditure being made, that the expenditure was in the ordinary and proper course of Koza Ltd’s business. The court plainly should not lend its authority to a transaction by granting a positive declaration that it is in the ordinary and proper course of business when there is a real possibility that the transaction is a fraudulent one.
    4. Lord Falconer and Mr Flynn sought to avoid this conclusion by submitting that a valid SPA was not essential given that the share swap had been carried out and the shares in Koza Holding were now owned by IIL. Koza Altin contends, however, that the shares have not yet been registered in the name of IIL and could not be validly so registered. Ownership of the shares is governed by Turkish law, as to which there is no evidence. I do not think this argument provides a route to a potentially viable arbitration claim in the absence of the SPA. It follows that the positive declaration falls out of the picture.
    5. For similar reasons, it seems to me that the authenticity issue could not itself form the basis of a negative declaration that the expenditure would not be within the proper course of Koza Ltd’s business, given that neither the judge nor this court is in a position to make findings of this seriousness on the basis of the written evidence.
    6. The remaining questions, therefore, concern whether any of the other grounds relied on by the deputy judge, or the additional grounds relied on by the respondent, are sufficient to support the negative declaration. It is an oddity of this case that when draft orders were exchanged following the issue of the draft judgment, it was Koza Ltd who proposed to the deputy judge that he grant a negative declaration, whilst the respondent’s draft contented itself with a dismissal of the application. Be that as it may, the order we are concerned with is the one which the judge made, and the respondent is entitled to seek to uphold it.
    7. The first ground which it is necessary to consider is that based on the judge’s decision that the ICSID tribunal would not have jurisdiction. We heard some detailed and extremely able submissions from Mr Flynn both on the question of whether a domestic court is entitled to decide an issue of jurisdiction of the ICSID tribunal, or whether that is a question exclusively for the tribunal itself, and also on the correctness of the judge’s decision that IIL had not made a qualifying investment for the purposes of the BIT or the ICSID Convention. Those submissions were responded to with equal ability by Mr Crow.
    8. In order to bring itself within the jurisdiction of ICSID, it is necessary for IIL to show that the dispute falls (a) within Art 25(1) of the ICSID Convention, and (b) within Article 1 of the BIT.
    9. Art 25(1) of the ICSID Convention provides that the jurisdiction of ICSID extends to “any legal dispute arising directly out of an investment”. The Convention contains no definition of “investment”. As the Executive Directors said in their Report on the Convention (the travaux preparatoires):

“No attempt was made to define the term “investment” given the essential requirement of consent by the parties, and the mechanism through which the Contracting States can make known in advance, if they so desire, the classes of dispute which they would or would not consider submitting to the Centre (Article 25(4)).”

    1. The BIT does contain a definition of “investment”, albeit in apparently broad terms. Art 1 provides:

“For the purposes of this Agreement:

(a) “investment” means every kind of asset and in particular, though not exclusively, includes:

(ii) shares in and stock and debentures of a company and any other form of participation in a company”

    1. The issue between the parties is whether the mere holding of shares by IIL in a Turkish company is sufficient to give the ICSID tribunal jurisdiction under these two instruments, as Koza Ltd contends, or whether something more is needed, as Koza Altin contends. So far as the BIT is concerned, Mr Flynn showed us some tribunal decisions (albeit not ICSID tribunals) which had adopted constructions of the term “investment” in similar bilateral investment treaties which were consistent with Koza Ltd’s case. Mr Crow submitted that, even taking these at face value, it was necessary for Koza Ltd to show that the investment also satisfied Art 25(1) of the ICSID Convention, and there were decisions, on which the judge relied, which showed that for that purpose something more than a mere holding of shares was necessary. Mr Flynn’s response was that it would be surprising if the broad definition of “investment” agreed by the governments of Turkey and the United Kingdom for the purposes of their BIT, was constrained by a narrower one in the ICSID Convention, notwithstanding that “investment” in Article 25(1) of the Convention was deliberately left undefined. This was particularly so as the BIT was the means, referred to by the Executive Directors, through which Contracting States expressed their consent to the class of disputes which were intended to be subject to arbitration.
    2. I think, however, that attempting to resolve the issue of the jurisdiction of the ICSID tribunal in the meticulous and detailed manner attempted by the deputy judge, and repeated by the submissions made to us, is to approach the problem from the wrong end. The issue was whether providing funding for this arbitration was in the ordinary and proper course of the business of Koza Ltd. The decision to pursue the funding of the arbitration is taken before, not after, the ICSID tribunal has ruled on its jurisdiction. It is therefore a matter to be considered from the perspective of the board of Koza Ltd, deciding whether to embark on the funding. In my judgment, therefore, unless the prospects of success in the arbitration are so manifestly poor that they throw doubt on the board’s motives in pursuing it, those prospects do not have any relevance to the issue.
    3. Support for that approach can be seen in Halifax v Chandler [2001] EWCA Civ 1750, where Clarke LJ, with whom Dyson LJ agreed, said at [18]:

“In cases of what may be called ordinary business expenses the court does not usually consider whether the business venture is reasonable, or indeed whether particular business expenses are reasonable. Nor does it balance the defendant’s case that he should be permitted to spend such monies against the strength of the claimant’s case, or indeed take into consideration the fact that any monies spent by the defendants will not be available to the claimant if it obtains judgment. As I see it, that is because the purpose of a freezing injunction is not to interfere with the defendant’s ordinary business or his ordinary way of life.”

    1. I therefore respectfully disagree with the deputy judge that his conclusion on the merits of the jurisdiction issue took the ICSID expenditure outside the scope of the undertaking. In my judgment, the judge should have gone no further into the merits than was required to satisfy himself that IIL had a case which Koza Ltd’s board could properly support in good faith. Had he approached the matter in that way, I have no doubt he would have concluded that IIL had such a case, and that the merits of the arbitration therefore fell away as a relevant consideration.
    2. That brings me to the question of whether we should nevertheless hold that the expenditure is outside the ordinary course of business of Koza Ltd for the reasons advanced by the respondent in its first additional ground. I agree with Mr Crow that it does not follow from the fact that a particular activity will benefit the company that it will be in the ordinary course of the company’s business. An unprecedented new venture for a company, though deemed beneficial, would not necessarily be in the ordinary course. It is necessary to examine the existing business of the company, and decide whether, in the light of all the circumstances prevailing at the time when the activity is embarked on, it can properly be described, objectively, as within the ordinary course.
    3. It is relevant, therefore, to consider the circumstances in which Koza Ltd finds itself at the time at which it wishes to incur the ICSID expenditure. It is clear, on the basis of the judge’s findings, that the board of Koza Ltd thought it reasonable, in order to protect the company’s core mining business and its access to funding for larger projects, to embark on support for the arbitration. Whilst this might be described as exceptional expenditure, I am far from being persuaded that it was, in the circumstances in which Koza Ltd found itself, expenditure outside the ordinary course of Koza Ltd’s core business. It was expenditure which was targeted at protecting that core business, notwithstanding that it was unprecedented. It was only unprecedented because Koza Ltd had not faced these circumstances before.
    4. I think the critical question is whether the fact that the arbitration is being prosecuted by IIL rather than Koza Ltd takes the funding of it outside the ordinary and proper course of Koza Ltd’s business. There is, of course, no possibility of Koza Ltd commencing the arbitration itself, because it is not a holder of any shares in a Turkish enterprise. There is, therefore, a rational commercial explanation for proceeding in this way. It is true that a consequence is that the arbitration will also benefit others, in particular IIL, and that the benefit to Koza Ltd is in one sense indirect, but I do not think those factors are sufficient to take the funding outside the ordinary and proper course of Koza Ltd’s business. It is true that Koza Ltd is a mining company and not a litigation funder, but to view the transaction as one in which Koza Ltd is embarking on a new business of litigation funding is to misdescribe it. Koza Ltd is funding the litigation because it considers that doing so will facilitate the continuation of the ordinary and proper course of its mining business, which is currently being constrained in its access to the funding it requires.
    5. Finally, there is the question of whether the judge was wrong not to have treated the absence of evidence as to alternative sources of funding as relevant to whether the expenditure was in the ordinary and proper course of business. There is no dispute that considerations of alternative sources of funding can be relevant to whether there should be a variation of an undertaking to permit a particular type of expenditure. Where the court is exercising a discretion to vary the undertaking, it may be reluctant to allow access to the funds which are otherwise protected against disposal where this is not shown to be necessary. The ability of a party to fund expenditure from outside the frozen fund may also be relevant when a court decides whether to write in an exception to a freezing order to permit such expenditure, which is also a discretionary exercise. I think this is what Clarke LJ had in mind when he said in Halifax v Chandler (cited above) that “in the Mareva case, in order to be allowed to spend from frozen monies, the defendant must show that he has no other assets which he can use.” I do not understand Clarke LJ to be saying that, where an exception has been allowed in an order or undertaking in favour of “the ordinary course of business” or for legal expenses, the party restrained must show, in the case of each individual payment, that he has no other assets to which he can have recourse.
    6. I would be reluctant to lay down any rigid rule that alternative funding is a factor which is irrelevant to whether expenditure is in the ordinary or proper course of business. Depending on the facts, it may or may not be relevant. To my mind, however, it is not a factor which carries much if any weight in the case of the ICSID funding in this case. Other factors aside, it was entirely reasonable and proper, in my judgment, for Koza Ltd to decide to fund the litigation itself, rather than call upon IIL to resort to outside sources of funding.
    7. Overall, the question which the court must ask itself (on the assumption for these purposes that the SPA is shown to be genuine) is whether it is shown that the provision of funding to IIL for an arbitration (a) which is arguable, and (b) which could be of benefit to Koza Ltd’s core business by unlocking access to funding, is within the ordinary and proper course of Koza Ltd’s business in circumstances where it is not shown that IIL could fund the arbitration from other sources. I would, on balance, have concluded that the ICSID expenditure was within the ordinary and proper course of that business.
    8. In the result, however, I would allow the appeal from Mr Spearman’s order to the extent of discharging the negative declaration which he granted. I would not replace the negative declaration with a positive declaration, because the authenticity of the SPA remains in doubt. It follows that if Koza Ltd pursues the funding of the ICSID arbitration it will do so at their own risk that it may be shown to be in breach of its undertaking to the court.

The extradition expenses appeal

    1. On 2 February 2017, the 4th High Criminal Court of the Republic of Turkey issued an extradition request directed at the United Kingdom seeking the extradition to Turkey of Mr Ipek. The request itemised nine offences, including “Attempting to Violate the Constitution of the Government of the Republic of Turkey” and “Attempting to Abolish the Government”, both of which were said to carry sentences of “Aggravated Lifelong Imprisonment”.
    2. On 2 May 2018, an arrest warrant was issued against Mr Ipek under the Extradition Act 2003 for the purposes of securing his return to Turkey. Mr Ipek was arrested by voluntary attendance and, at a preliminary hearing at Westminster Magistrates Court on 23 May 2018, he was granted bail. On 7 June 2018, a request was made pursuant to Asplin J’s order in these proceedings for a payment of £75,000 to be made to BCL Solicitors for legal advice to be provided to Mr Ipek in connection with the extradition proceedings. The defendants objected to the payment.
    3. On Saturday 16 June 2018, the defendants issued an urgent application for a declaration that the payment to BCL solicitors was prohibited under the terms of Asplin J’s order. The application was supported by the eighth witness statement of Hugo Plowman which asserted that, whilst Koza Altin recognised that Mr Ipek was running Koza Ltd as its sole director, it was concerned that he was not exercising independent judgment in the best interests of the company and was prioritising his own interests above those of Koza Ltd. Mr Plowman went on to say that he believed that Mr Ipek could finance his defence to the extradition proceedings from his own funds.
    4. On 18 June 2018, Mr Ipek responded by way of his fifth witness statement to the assertions concerning his funds. He referred to an earlier witness statement where he had explained that the vast majority of his assets were in Turkey and out of his reach as they had been seized by what he described as the Erdogan Regime. He said that before his arrest in connection with the extradition proceedings his available assets were just over £500,000, but these had been depleted by deposits with his solicitors and a sum lodged for bail. He accepted that his company Encore Mining Consultancy Limited was drawing a fee of £250,000 a year from Koza Ltd, but explained how his family and other expenses were high, and that he “simply [did] not have the resources to also fund the defence of the extradition proceedings.” Koza Ltd also served the second witness statement of Mehmet Evran, the Business Development Manager of Koza Ltd since October 2016, who explained Koza Ltd’s business and Mr Ipek’s role. He repeated, and confirmed as still correct, what he had said in an earlier witness statement:

“Mr Ipek is unquestionably the driving force behind Koza Ltd and is involved on a daily basis. He has significant experience in mining projects from their early stages through to full production. In addition to providing valuable industry expertise and access to a wide network of business contacts in the mining sphere and beyond, Mr Ipek’s work for Koza Ltd in the time since I joined the company has included: determining the vision for the company and developing a strategy consistent with this vision; setting the criteria against which projects should be assessed …; assembling a team in the UK to run the company effectively; making the key decisions, namely whether to proceed or to withdraw from an existing one; and taking the lead role in negotiations with potential business partners. I speak with Mr Ipek daily to provide an update on all matters, including issues raised by our geologists and business partners. On a day-to-day basis Mr Ipek oversees the due diligence process for each new project, evaluates the updates from existing projects, follows up with business contacts and monitors all corporate expenses. He is extremely focussed on the detail of Koza Ltd’s projects and is kept abreast of all developments. I am clear that Koza Ltd would have little chance of surviving, let alone prospering, as a business without his energy, contacts, insight and judgment”.

    1. In a further witness statement served on the day of the hearing Mr Plowman exhibited a number of bank statements showing substantial balances moving through accounts with which Mr Ipek was associated, albeit in 2015. The judge offered Koza Ltd an adjournment if it wished to answer this evidence. Mr Ipek’s position has been that he does not wish to disclose details of his assets for fear that they will be targeted by the defendants and the Turkish state.
    2. The application came before Morgan J in the Interim Applications List in the Chancery Division on 19 June 2018. The Judge granted declarations that:

“(1) It would not be in the ordinary and proper course of the First Claimant’s business, within the meaning of paragraph 2(1) of the First Schedule to the Order of Mrs Justice Asplin DBE herein dated 21 December 2016 (the Order), for the First Claimant to make payments to BCL Solicitors for fees incurred or in relation to legal advice, assistance and representation to the Second Claimant in connection with the Republic of Turkey’s request that he be extradited to Turkey (BCL Payments).

(2) BCL Payments would not constitute payments that properly relate to legal advice and representation for the First Claimant’s benefit within of paragraph 3 of the First Schedule to the Order.”

The judgment of Morgan J

    1. The judgment of Morgan J was delivered extempore at the conclusion of the hearing, amongst the usual pressures of the business of the applications court in the Chancery Division. Having summarised the background and the evidence, he said he would give his provisional views on what the terms of the undertaking meant.
    2. In his view “the reference to the ordinary and proper course of its business … would appear to require an assessment of an objective character”. He pointed out that his provisional view was that it was implicit in the structure of the order that the controls on disposals and dealing were in the context of Mr Ipek continuing to be in control of the business until trial or further order. So it was not open to Koza Altin to say that something was impermissible because it was being done by Mr Ipek, in control of the business. Similarly, if the company was able to make good an assertion that something is in the best interests of the company because it enables the company to retain Mr Ipek, that too should not be open to challenge just because it is Mr Ipek who is being retained and is being said to be of assistance to the company.
    3. The judge went on to say that it was common ground between counsel that “ordinary” is not to be contrasted with “extraordinary”. It was not said that defending an extradition warrant expressed in the terms of this extradition warrant brought by the Republic of Turkey was so extraordinary as to be outside the ordinary course of business. The judge went on to say:

“what “ordinary” seems to be endeavouring to describe is that one is looking at something which is much more like the established course of business rather than a fundamental departure from the established course of business. That, as such, does not cause a particular difficulty in this case.”

    1. Next the judge explained his view of the requirement that the disposal be “proper”. He said:

“It seems to me that if it is not proper for Mr Ipek, as a director of Koza Limited, to procure Koza Limited to make a substantial payment to him, the payment would not be in the ordinary and proper course of the company’s business.”

    1. On the question of legal advice and representation, the judge read paragraph 3 of schedule 1:

“in the sense contended for by the claimants. In other words, the paragraph does extend to legal advice and representation for someone, which is not necessarily the company, but that is subject to the proviso that the funds spent must properly, again the word “properly”, relate to legal advice and representation for the company’s benefit.”

    1. The judge went on to reject Koza Ltd’s submission that Mr Ipek’s ability to pay his legal fees in connection with the extradition from the financial resources available to him was irrelevant. He thought it was plainly relevant as a matter of construction of the ordinary words of paragraph 2(1) and paragraph 3, because those paragraphs refer to “proper” expenditure by Koza Ltd and Mr Ipek’s ability to pay the fees himself will be relevant to that matter.
    2. The judge concluded that, although there was plainly some room for doubt, it was more probable than not that Mr Ipek could pay for his own defence from the financial resources available to him. The evidence as to the very substantial sums at his disposal, in comparatively recent times, pointed strongly to that conclusion. The judge went on to hold:

“35. That finding, that Mr Ipek has money available to him, adequate to fund his defence, seems to me to provide the answer to the issues which have been argued.

36. Dealing with paragraph 2.1 of the first schedule, can it be said that the company is acting in the ordinary and proper course of its business by funding Mr Ipek’s legal expenses?

37. The case for the company is that it wishes to see Mr Ipek succeed. It wishes Mr Ipek to remain in this jurisdiction. It does not wish to see him extradited to Turkey. But there is no reason for the company to fund Mr Ipek’s defence. On my findings, Mr Ipek can fund his own defence.

38. Of course, insofar as Mr Ipek controls Koza Limited, and Koza Limited has the necessary funds, Mr Ipek appears to be saying that he should be free to fund his defence from the company’s money and not from his own money. I do not regard that as the proper course of the business of Koza Limited. It appears to be a case of a director of a company acting in breach of his fiduciary duty by using the company money for something which is not the ordinary course of the company’s business but is primarily for the benefit of the director on a personal level.

40. So my conclusion is that the intended payment by Koza Limited to Mr Ipek to enable him to pay his legal fees, is not a payment in the ordinary and proper course of a company’s business.

41. As to paragraph 3, the intended payment by Koza Limited to Mr Ipek does not “properly” relate to legal advice and representation for the company’s benefit.

42. First of all, if I am right that it is not a proper item of expenditure, it does not properly relate to that matter.

43. Secondly, it is not for the company’s benefit because the company does not need to make the payment to improve its prospects of retaining Mr Ipek within the jurisdiction. Mr Ipek has his own resources. There is no question of Mr Ipek not using his own resources to resist the extradition warrant. Mr Ipek will use his own resources for that purpose.

44. If he is extradited, it will not be for want of a payment by the company. If he is not extradited, again, it will not be anything to do with payment or non-payment by the company.”

Discussion

    1. Lord Falconer submitted that Morgan J had erred in essentially two ways. First, there was no basis for the judge’s factual conclusion that Mr Ipek could afford to pay for the extradition case. Secondly, he was wrong as a matter of law to regard the availability of alternative funding as necessarily fatal to the application.
    2. As with the ICSID funding appeal, Mr Crow advanced a number of points by way of respondent’s notice. First, he contended that the expenditure was not within the ordinary course of Koza Ltd’s business, contrary to the judge’s provisional view. This argument followed the lines of that advanced in relation to the ICSID funding appeal. Secondly, he argued that availability of alternative funding was relevant not only to whether the funding was proper but also to whether it was ordinary. Thirdly, the judge had been wrong to hold provisionally that paragraph 3 of the undertaking was not confined in its scope to the legal expenses of Koza Ltd. Fourthly, although not with much vigour, Mr Crow contended that the extradition expenditure could not fall within paragraph 3 because it did not constitute a reasonable sum within the meaning of that paragraph in circumstances where Mr Ipek could pay the relevant expenses himself.
    3. I deal first with Lord Falconer’s argument that we should upset the judge’s factual finding that Mr Ipek could pay for his own defence of the extradition proceedings. Whilst Mr Ipek’s desire not to expose his assets to scrutiny by his opponents in this litigation and elsewhere is, perhaps, understandable, the court can only act on the material before it. The judge’s factual conclusion is reasoned, and based on the material which was before him. There is no proper basis on which we could interfere with it.
    4. Lord Falconer is on firmer ground with his second argument, however. The judge appears to have regarded Mr Ipek’s ability to pay for the extradition expenses as determinative of whether to do so would be proper. I do not agree.
    5. In my judgment the phrase “proper course of business” in the present undertaking means that the course of business must be in accordance with acceptable standards of commercial behaviour in conducting that business. It would be unwise to attempt a categorisation of what would not satisfy this definition. For present purposes it is enough to say that it does not necessarily exclude disposals which can be regarded as unnecessary.
    6. Whilst it may be described as uncommercial or imprudent for a company to pay for something which its director or employee might or would pay for if the company did not, the decision of the company to pay for those expenses in those circumstances is not necessarily outside the proper course of its business. From the point of view of Koza Ltd, Mr Ipek is a vital asset. The fact that he would pay his expenses if Koza Ltd does not is not asufficient reason for regarding their payment by Koza Ltd as outside the proper course of its business.
    7. I would also reject the suggestion that the payment of the extradition expenses becomes the payment of an unreasonable sum on the footing that Mr Ipek can pay them himself. The phrase “reasonable sum” in paragraph 3 of the undertaking is directed to the quantum of the payment for legal advice and representation, and does not import considerations of necessity or prudence.
    8. I take next the question of whether paragraph 3 of the undertaking, in its reference to “spending a reasonable sum on legal advice and representation, [which] properly relate to legal advice and representation for the Company’s benefit” is restricted to payments for the legal representation of Koza Ltd, and cannot extend to other legal advice taken for Koza Ltd’s benefit.
    9. Mr Crow drew our attention to the standard form of wording of the undertaking in a freezing order which is:

“This order does not prohibit the Respondent from spending £x a week towards its, her or his ordinary living expenses and also £y [or a reasonable sum] on legal advice or representation”

    1. Mr Crow submitted that the words “for the Company’s benefit” were intended to cut down, not to expand the scope of the exception. It was therefore only payments for legal advice to and representation of Koza Ltd which fell within the scope of the exception. It excluded legal advice to and representation of Mr Ipek.
    2. I cannot accept that argument. It seems to me that the meaning of “legal advice or representation for the Company’s benefit” is clear, and the only requirement for the payments to be permitted is that the legal advice and representation should be of benefit to Koza Ltd. It therefore seems to me that the expenditure on advice to and representation of Mr Ipek in defending him against the extradition request fell squarely within the legal expenses exception in paragraph 3 of the undertaking. The phrase “legal advice or representation” in the standard form of freezing order takes its meaning from the different context.
    3. Paragraph 2(1) of the undertaking requires the expenditure to be in the ordinary as well as the proper course of business. Mr Crow said there were five reasons why the extradition expenditure was not in the ordinary course of Koza Ltd’s business. These were: (i) Koza Ltd was a mining not a litigation funding company; (ii) the extradition expenditure would not involve the settling of a pre-existing liability; (iii) the extradition expenditure would only be of direct benefit to Mr Ipek personally; (iv) the indirect benefit to Koza Ltd was intangible and unquantifiable; and (v) the expenditure did not relate directly to Mr Ipek’s activities as a director of the company. Although he accepted that a successful extradition of Mr Ipek would result in Koza Ltd losing his services, he submitted that Mr Ipek was not irreplaceable.
    4. I do not accept these arguments either. Because these arguments are similar in many respects to those advanced in relation to whether the ICSID expenditure was in the ordinary course of business, I can deal with the points made by Mr Crow very shortly. As to point (i), it is not fair to characterise the payment of Mr Ipek’s extradition expenses as litigation funding, and therefore as a new departure from the ordinary course of Koza Ltd’s business. The payments are made to protect Koza Ltd’s existing and legitimate mining interests. My answer to point (ii) is that the exception to the undertaking is not restricted to the settling of pre-existing liabilities. Were it to be so restricted, it would effectively freeze Koza Ltd’s business, contrary to the underlying purpose of the undertaking, namely to allow Koza Ltd to continue to trade. Points (iii) and (iv) create a distinction between direct and indirect benefit to the company which, in my judgment, deflects attention from the real issue. What matters is whether what is proposed is in the ordinary course of business. As to point (v), the payments were designed to secure the retention of Mr Ipek’s services as a director of the company and were consequently sufficiently closely related to his activities as a director.
    5. I would therefore allow the extradition expenses appeal.

Conclusion

    1. For the reasons I have given I would (i) allow the ICSID funding appeal only to the extent of discharging the negative declarations in Mr Spearman’s order; and (ii) allow the extradition expenses appeal and substitute for the negative declarations in Morgan J’s order, positive declarations that the payments fall within both paragraphs of the undertaking.

Lord Justice Peter Jackson:

    1. I agree.

Lord Justice Patten:

  1. I also agree.

Weili Su and Another v. Shengkang Fei and Others [2019] HKCFI 1257; HCCT 54/2018 (15 May 2019)

HCCT 54/2018

[2019] HKCFI 1257

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 54 OF 2018

______________

IN THE MATTER of Order 73 rule 5 of the Rules of High Court (Cap 4A)
and
IN THE MATTER of Arbitration Award dated 25 May 2018 in Case No HKIAC/PA15047 made by the Hong Kong International Arbitration Centre
and
IN THE MATTER of section 81 of the Arbitration Ordinance (Cap 609) and Article 34 of The UNCITRAL Model Law on International Commercial Arbitration

______________

BETWEEN
WEILI SU 1st Plaintiff
FLASH BRIGHT POWER LIMITED 2nd Plaintiff
(Respondents in the Arbitration)
and
SHENGKANG FEI 1st Defendant
RICHARD YUQIANG LU 2nd Defendant
RANRAN XU 3rd Defendant
(Claimants in the Arbitration)

______________

Before: Hon Mimmie Chan J in Chambers

Date of Hearing: 3 May 2019

Date of Decision: 7 May 2019

Date of Reasons for Decision: 15 May 2019

_________________________

REASONS FOR DECISION

__________________________

Background

1. By an Originating Summons issued on 24 August 2018, the Plaintiffs in these proceedings applied to set aside an arbitral award dated 25 May 2018 (“Award”) made in an arbitration by HKIAC in Hong Kong (“Arbitration”). The Arbitration concerns a dispute between the Defendants as Claimants, and the Plaintiffs as Respondents, arising under a Shareholders Agreement dated 22 January 2010 (“Agreement”) made between the parties concerning their shareholding in Sky Solar Holdings Co Ltd (“Company”), a Cayman Islands company. The 1st and 2nd Plaintiffs (and Respondents in the Arbitration) were respectively the founder and controlling shareholder of the Company. The Defendants (and Claimants in the Arbitration) were the minority shareholders of the Company.

2. In the Arbitration, the Claimants complained that the Respondents had restructured the Company to exclude the Claimants from the benefit of an initial public offering (“IPO”) of shares. As part of the restructuring, there was a share swap whereby shareholders in the Company were given the right to swap their shares in the Company for the shares in Sky Power Group Ltd (“New Solar”). A new company Sky Solar Holdings Limited (“Listco”) was then formed as a subsidiary of New Solar, and Listco was then listed, instead of the Company. The Claimants complained that this was in breach of the covenants given by the Respondents in the Agreement. In particular, the Claimants alleged in the Arbitration that the Respondents had acted in breach of their obligations under the Agreement to use “commercially reasonable best efforts” to facilitate an IPO for the Company.

3. The tribunal in its Award found the Respondents to be in breach of the Agreement, and ordered the Respondents to pay to Mr Shengkang Fei (the 1st Claimant) the sum of US $7,552,500, to Mr Richard Yuqiang Liu (the 2nd Claimant) the sum of US $4,531,500, and to Madam Ranran Xu (the 3rd Claimant) the sum of US $377,625, together with interest and the costs and fees of the Arbitration, totaling US $13.7 million.

4. By these proceedings, the Plaintiffs (namely, the Respondents in the Arbitration) applied to set aside the Award, on the grounds that: (1) there was no valid arbitration agreement between the parties; (2) the composition of the tribunal was not in accordance with the agreement; (3) the Defendants (as Claimants in the Arbitration) had failed to plead and particularize their case, as a result of which the tribunal had acted in excess of jurisdiction, and/or contrary to public policy and/or the Plaintiffs were deprived of a fair opportunity to present their case; (4) the tribunal had made findings without evidential basis, in excess of jurisdiction and/or contrary to public policy and/or the Plaintiffs were deprived of a fair opportunity to present their case. A final catchall paragraph was included in the Originating Summons, to cover “any other grounds pursuant to section 81 of the Arbitration Ordinance or otherwise as the Court sees fit”.

5. In opposition to the Plaintiffs’ application to set aside, and by way of counterclaim, the Defendants seek leave to enforce the Award, and further seek security under section 86 (4) of the Arbitration Ordinance (“Ordinance”) and O73 r 10A RHC as a condition for the further conduct of the setting aside application.

6. On 20 November 2018, the Defendants in this action applied for and obtained an ex parte injunction order (“HK Injunction”) against the 1st Plaintiff (“Su”) and a third party (“Chen”), whereby Su was restrained from removing or disposing of any of his assets in Hong Kong, and from using any legal or beneficial shareholder equity which forms part of his assets, or cause such equity to be used, so as to cause or procure Sky Solar (Hong Kong) International Co Ltd (“SS HK”) and other named companies (“Scheduled Companies”) to dispose of any of their assets, other than in the ordinary course of their business. Under the HK Injunction, Chen was also restrained from disposing of the shares in SS HK, and any assets within Hong Kong held by Chen for, on behalf of and/or on trust for Su, and from using any shareholder equity to cause or procure SS HK and the Scheduled Companies to dispose of any of their assets, other than in the ordinary course of their business.

7. The HK Injunction requires Su to inform the solicitors for the Defendants all of his assets of an individual value of HK $50,000 or more in Hong Kong, and all the assets held by each of the Scheduled Companies of an individual value of HK $50,000 or more in Hong Kong, as at the date of the HK Injunction, whether in Su’s own name or not, and whether jointly or solely owned.

8. On 9 April 2019, Su applied to Set Aside the HK Injunction. Upon joint application made by the Plaintiffs and the Defendants, directions were made by the Court, by consent, on 12 April 2019, for the Defendants’ application to continue the HK Injunction and Su’s application to discharge the same to be heard together. These have been fixed for hearing on 4 June 2019.

9. On 30 October 2018, again on the parties’ joint application, directions were made by the Court by consent, giving leave to the parties to file evidence in opposition and reply to the Defendants’ application for security, for the application for security to be adjourned for argument, and at the same time, for evidence to be filed in relation to the Plaintiffs’ application to set aside the Award, and the Defendants’ application (by counterclaim) for leave to enforce the Award. The setting aside application and the counterclaim have been scheduled for hearing on 30 May 2019.

Application for security

10. The Defendants’ application for security came up for hearing by this Court on 3 May 2019.

11. Dealing first with the Plaintiffs’ objection on the basis that the Defendants’ application for security has not been made by summons as required under O 73 rr 1 and 2, any irregularity arising therefrom does not nullify the proceedings. Having been given notice of the substance of the application, having consented to a full contested hearing of the application and to directions for the filing of evidence in connection with such application, and having filed evidence in opposition to the application for security, the Plaintiffs have clearly consented to the application being put before the Court for determination, and waived any irregularity. Further, I can see no prejudice whatsoever having been sustained by the Plaintiffs as a result of any such irregularity. They have considered the Defendants’ evidence and arguments in support of the application for security, made their arguments to oppose the application, and have filed all the evidence they seek to adduce in opposition.

12. The legal principles applicable to determination of an application for security are not disputed between the parties. They are as set out in Soleh Boneh International Ltd v Government of the Republic of Uganda [1993] 2 Lloyd’s Rep 208 at 212, applied in Guo Shun Kai v Wing Shing Chemical Co Ltd [2013] 3 HKLRD 484 and Dana Shipping and Trading SA v Sino Channel Asia Ltd [2017] 1 HKC 281. They will not be repeated here.

The strength of the argument that the Award is invalid

13. The strength of the argument that the Award is invalid, as perceived on a brief consideration by the court, is the first important factor to be considered on an application for security. As Staughton LJ explained in Soleh Boneh, if the award is manifestly invalid, there should be an adjournment and no order for security, and if it is manifestly valid, there should be either an order for immediate enforcement, or else an order for substantial security. In between where there are various degrees of plausibility in the argument for invalidity, the court must be guided by its preliminary conclusion on the point.

14. On my brief consideration of the grounds set out in the Originating Summons, I take the view that the Award is manifestly valid. The following are my preliminary but clear views.

Whether there was an arbitration agreement between the parties

15. The Plaintiffs do not dispute that the Defendants were parties to the Agreement (paragraph 20 of the 1st affidavit of Michael Kan, solicitor for the Plaintiffs, sworn on 24 August 2018 (“Kan Affidavit”)). However, they allege that the Defendants are not parties to the arbitration agreement contained in clause 15 of the Agreement.

16. Clause 15.2 of the Agreement provides that “any dispute or claim arising out of or in connection with or relating to” the Agreement, “of the breach, termination or invalidity thereof (including the validity, scope and enforceability of this arbitration provision)” shall be finally resolved by arbitration. The same clause provides that “the Investors” (who were also parties to the Agreement) were to select one arbitrator, the Company and the 2nd Plaintiff (which was a party to the Agreement as the Controlling Shareholder) were to jointly select one arbitrator, and the Chairman of the Arbitration Center was to select the third arbitrator. The Investors were originally included as respondents in the Arbitration, but the claims against them were not pursued.

17. According to the Plaintiffs, the minority shareholders of the Company, including the Defendants, were never intended to have an arbitrable dispute under the Agreement as against the Plaintiffs or the Investors. Hence, they do not have the contractual right of appointment of arbitrator. The Agreement was to facilitate the investment made by the Investors in the Company, in preparation of the intended IPO of the Company. The Agreement was to define the rights and obligations between the Investors on the one hand, and the Company and Controlling Shareholder on the other.

18. Read as a whole, and having regard to the relevant context as well as the language of the Agreement as well as the arbitration clause, I cannot agree that objectively construed, clause 15 of the Agreement excludes the Defendants as parties.

19. A right to appoint an arbitrator and a right to arbitrate should be distinguished. A party to an arbitration agreement may not necessarily have the right to appoint an arbitrator. A party to an arbitration agreement may even agree to have an arbitrator appointed by a designated third party. In this case, the Agreement was made between the Investors, the Company, the Controlling Shareholder of the Company (the 2nd Plaintiff in this case), the founder of the Company (the 1st Plaintiff in this case), and a group of 22 named minority shareholders (which include the 1st and 2nd Defendant in this case), to govern the investment brought into the Company by the Investors, the continuation of the business of the Company, and the terms and conditions under which shares in the Company are to be held – not only by the controlling shareholder, but the minority shareholders as well. The minority shareholders assumed obligations such as restrictions on transfer of their shares.

20. Clause 15 is widely drafted, to include arbitration of “any dispute or claim”, “arising out of or in connection with or relating to” the Agreement, which Agreement sets out rights and obligations of the minority shareholders as against the other parties. Clause 15 extends to disputes or claims relating to “the breach” of the Agreement, and expressly extends to any dispute or claim as to the “validity, scope and enforceability of” the arbitration provision contained in the Agreement.

21. Although the 22 named minority shareholders were not given the express right under clause 15.2 (a) to select an arbitrator, the third arbitrator to the dispute was to be selected by the Arbitration Center. All the parties to the Agreement agreed to this process, as arguably protecting the interests of those parties which did not have the right to select the arbitrator of their choice.

22. Clause 15.2 (d) states that “each Party” irrevocably consents to the service of process, notices or other paper in connection with or in any way arising from the arbitration or the enforcement of any arbitral award. This would include the service of any notice of the Arbitration.

23. Clause 15.2 (e) also provides that “the Parties” agree to facilitate the arbitration by cooperating in good faith to expedite the conduct of the arbitration, using their best benefits to observe the time periods established by the UNCITRAL Arbitration Rules or by the Arbitration Board for the submission of evidence, etc. By clause 15.2 (f), the costs and expenses of the arbitration, including the fees of the Arbitration Board, were to be “allotted between each Party” as the Arbitration Board deems equitable.

24. Finally, clause 15.2 (g) states that any award made “shall be final and binding on each of the Parties that were parties to the dispute”.

25. “Parties” and “Party” are defined in the Agreement to mean “any signatory or the signatories to the Agreement” and any person who subsequently becomes a party to the Agreement as provided in the Agreement. The 3rd Defendant signed a Deed of Adherence to the Agreement.

26. The construction of an arbitration clause should start with the presumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of the relationship into which they had entered to be decided by the same tribunal, unless the language makes it clear that certain questions were intended to be excluded from the arbitrator’s jurisdiction (Fili Shipping Co Ltd and others v Premium Nafta Products Ltd and others [2007] UKHL 40; The Incorporated Owners of Hamden Court v Mega Miles Construction Co Ltd HCCT 32/2014, 2 June 2015; Giorgio Armani SPA v Elan Clothes Co Ltd [2019] HKCFI 530). It would require plain provision before clause 15.2 can be construed to mean that despite its clear language, references to “Parties” and “Party” should exclude from its operation and effect the minority shareholders who signed and became parties to the Agreement, who clearly have rights and obligations under the terms of the Agreement, and when the dispute which arose between the Plaintiffs and the Defendants as minority shareholders clearly arose out of or in connection with or relating to the Agreement, and the breach thereof by the Plaintiffs.

27. The Company was not a party in the Arbitration. However, at all material times, the 2nd Plaintiff was the controlling shareholder of the Company, and Su was the Chairman of the board of directors of the Company. There is only the bare assertion made by the solicitor for the Plaintiffs, in the Kan Affidavit, that the Company was not involved in the selection of the arbitrator nominated by the Plaintiffs under the Agreement, such that it constitutes a departure from the express agreement between the parties. Su’s 2ndaffirmation signed and filed on 26 April 2019 simply stated that he would not repeat the Plaintiffs’ responses to the factual allegations made in the affirmations of the Defendants’ solicitor, where the same have been stated in the Kan Affidavit, stating only that the “content of which (had) been reviewed and approved by” him.

28. As the Defendants pointed out, they had no knowledge in the Arbitration as to whether the Company had jointly appointed the arbitrator selected by the Plaintiffs, but the Plaintiffs had never raised this in the Arbitration, when they challenged the jurisdiction of the tribunal. There is an extremely strong argument that the Plaintiffs had waived any objection on the basis that the Company (controlled by the Plaintiffs) had not made the joint nomination of the Plaintiffs’ arbitrator.

29. In any event, I fail to see what prejudice the Plaintiffs had or could have sustained as a result of their own failure to seek the Company’s participation in the joint appointment of their arbitrator. By clause 15.2 of the Agreement, the Plaintiffs had agreed to arbitration, and they had selected an arbitrator of their choice, who had proceeded to deal with the Arbitration. Even if a ground of serious irregularity could be made out, the Court has a residual discretion to enforce the Award, if no prejudice has been shown to have been suffered as a result of the irregularity complained of (Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1 (CA)).

30. As for the claim that the 3rd Defendant was not a party to the arbitration agreement because the Deed of Ascension she signed to confirm her acceptance of the terms and obligations of the Agreement made no reference to and adoption of the arbitration agreement contained in Clause 15, again, this was not raised for argument before the tribunal in the jurisdiction challenge. The Statement of Objection to Jurisdiction served on behalf of the Plaintiffs in the Arbitration pointed out that the 3rd Defendant was not named or listed as a party to the Agreement, but the Plaintiffs accepted that the 3rd Defendant subsequently became a party by executing the Deed of Adherence (claiming only that the Defendants had not produced copies of the Deeds). By participating in the Arbitration without raising the objection as to the absence of adoption or incorporation of the arbitration clause in the Agreement, and depriving the Plaintiffs and the tribunal of the opportunity to deal with such challenge, the Plaintiffs must have waived any such irregularity.

Whether the Defendants failed to plead and particularize their case, depriving the Plaintiffs the opportunity to present their case

31. In gist, the Plaintiffs’ complaint is that the tribunal had decided the dispute in the Arbitration by reference to unpleaded and unparticularised claims of the Defendants, such that the tribunal had acted in excess of jurisdiction, depriving the Plaintiffs of a fair opportunity to present their case.

32. The Defendants’ pleaded claims of the Plaintiffs’ breach are clear: that the Plaintiffs had arranged to have another related entity engage in the IPO, rather than make their best efforts to complete an IPO with respect to the Company, and this was in order to deny the Defendants the benefits of the IPO and to keep all of the value of the IPO for themselves.

33. The Plaintiffs allege that the Defendants had given no particulars as to why “best efforts” had not been made by the Plaintiffs as shareholders of the Company, only that another entity had been listed. They had therefore defended the claim on the basis of the transfer of assets to enable the IPO to be carried out by another entity under the restructuring, and on the basis that the restructuring was commercially reasonable from the perspective of the Plaintiffs as shareholders of the Company.

34. The Plaintiffs claim that in reaching the Award, the tribunal had allegedly deviated from the Defendants’ arguments made in the course of the Arbitration, by holding that “evidence that the Plaintiffs could have achieved an IPO at a given point in time, but failed to do so, will be sufficient to establish breach of section 8.1 (d) of (the Agreement)”. They also complain that the tribunal had placed emphasis on the fact that the Plaintiffs had failed to demonstrate that the restructuring was necessary to effect the IPO, when this was never pleaded as the reason for the breach of the “commercially reasonable efforts” provision of the Agreement.

35. In my view, the Plaintiffs are purely seeking to challenge the merits of the Award and the findings made by the tribunal. The Defendants are not required to argue their case on any pleadings, to show how or why the Plaintiffs were in breach of the relevant clauses of the Agreement, or how they had not made their best endeavors. They had already pleaded the necessary and essential facts relied upon: the failure to make their best endeavors to complete an IPO with respect to the Company. That was the case the Plaintiffs were given ample notice to meet in the Arbitration, with the reasonable opportunity to present their case. The Plaintiffs did present evidence to meet the Defendants’ case of breach of the Agreement, and they made detailed submissions in the Arbitration.

36. Any claim that an award is outside the terms of the submission to arbitration is narrowly construed. It only includes those decisions which are “clearly unrelated to or not reasonably required for the determination of the issues that have been submitted to arbitration” (Grant Thornton International Limited v JBPB & Co (A Partnership) HCCT 13/2012, 5 April 2013). I fail to see how it can be said that the findings made by the tribunal on the allegedly unpleaded and unparticularised issues (even if such complaint can be made) are outside the submission to arbitration.

37. Errors of fact or law are not grounds to set aside an Award. Nor is a claim that a decision of the tribunal was made without evidential basis. This is trite. The arguments made by the Plaintiffs under the alleged grounds of absence of a pleaded case, the tribunal acting in excess of jurisdiction, and the Plaintiffs having been deprived of a fair opportunity to present their case, are all in truth attempts at challenging the correctness of the Award. Even on the brief consideration of the case at this stage, they can be seen as devoid of merit.

38. It is totally insufficient and improper for Counsel to suggest at this stage that the Plaintiffs should be given the opportunity to consider putting in further evidence to explain any point relating to their challenge of the Award. The grounds relied upon to set aside an arbitral award “must” be stated in the Originating Summons and, if the application is founded on evidence, a copy of every affidavit intended to be used “must” be served with the Originating Summons (O 73 r 5 (4) (a) and (b) (i)). If the grounds of the application and the evidence relied upon to support the application are not set out in the Originating Summons and the affidavits served with the Originating Summons, that application can be dismissed as abuse of process (Po Fat Construction Co Ltd v Incorporated Owners of Kin Sang Estate HCCT 15 & 23/2013). If the Plaintiffs have not put in any or any adequate evidence before the Court to establish any ground of objection, that is the end of the matter.

Whether the tribunal made findings without evidential basis and acted in excess of jurisdiction

39. The Plaintiffs’ complaint is that the tribunal had made findings as to the Plaintiffs’ breach of clause 3.8 of the Agreement (concerning the requirement to give notice after registering any transfer of shares), and had awarded damages, all without evidential basis. These only serve to attack the correctness and merits of the Award, and I repeat paragraphs 36 and 37 above.

Whether the Award should be set aside on the ground of public policy

40. The ground on public policy should be narrowly construed. The Plaintiffs in this case are only relying on the arguments of alleged absence of arbitration agreement, defect in the composition of the tribunal, and making findings without pleaded particulars and/or evidential basis to assert that the tribunal had acted in excess of its jurisdiction, and that accordingly, it would be contrary to public policy to enforce the Award. Having rejected the primary grounds, there is no basis to refuse enforcement on the ground of public policy. On the contrary, there are public policy interests in upholding parties’ agreement to arbitrate their dispute, facilitating enforcement of arbitral awards, and observing obligations assumed under the New York Convention for enforcement of arbitral awards, and it would be against such public policy interests to permit the Plaintiffs to delay enforcement of the Award and to avoid the obligations thereunder in the absence of any substantial grounds.

The ease or difficulty of the enforcement of the Award

41. Much reliance was placed by Counsel for the Plaintiffs on the fact that the Plaintiffs have no assets, or no substantial assets, in Hong Kong, such that any delay in enforcement would not, in fact, make enforcement more difficult. This is based on the second point of importance highlighted by Staughton LJ in Soleh Boneh International:

“The second point is that the court must consider the ease or difficulty of enforcement of the award, and whether it will be rendered more difficult, for example, by movement of assets or by improvident trading, if enforcement is delayed. If that is likely to occur, the case for security is stronger; if, on the other hand there are and always will be insufficient assets within the jurisdiction, the ease for security must necessarily be weakened.” (Emphasis added)

42. Leading Counsel emphasized that in determining whether security should be ordered, the focus should be on whether difficulty of enforcement here is increased due to delay, as security is not to facilitate the enforcement process by requiring assets to be brought into a jurisdiction where there were none before. According to Counsel, if the Plaintiffs did not have assets in the jurisdiction in the first place, this is a factor against the grant of security. Whilst I agree this is one factor, it should not be treated as the one and only or determining factor.

43. It has also been pointed out that there is only a period of approximately 4 weeks between the hearing of the application for security and the substantive hearing for setting aside the Award. Security should not be ordered, in circumstances when the time gap is short and the debtor is able to pay the award on evidence of its worldwide assets (as in the case of Karaha Boda LLC v Persusahaan Pertambangan Minydak Dan Gas Bumi Negara (2003) 2 HKC 200).

44. The particular facts of Karaha Boda have to be borne in mind. The evidence there was that the debtor had assets in Hong Kong, shares in 3 private companies, which were already frozen by an injunction and garnishee and charging orders nisi. There was apparently evidence of the value of the shares, being in the region of US $40-65 million. Significantly, the Court was able to say that the debtor was “plainly able to pay the award”, on evidence that the debtor had assets worldwide of over US $7 million, and profits of over US $350 million. There was no evidence of any dissipation of assets in Hong Kong. These are all the distinguishing features of Karaha Boda, totally different to the facts in the present case, to which I will turn.

45. On Su’s own sworn evidence, I find it impossible to believe his assertion that he has no assets of worth in Hong Kong. The case presented by the Plaintiffs is paradoxical, full of contradictions, and incredulous.

46. First, in opposition to the application for security to be ordered against him, Su has repeatedly asserted in his affirmations that he has more than sufficient assets to satisfy the Award, and has no reason to dissipate his assets in order to defeat the Award. Examples can be found in paragraph 28 of his 2nd affirmation (“My assets outside jurisdiction are more than sufficient to satisfy the Final Award”), paragraph 29 of his 2nd affirmation (“My worldwide assets are significantly more than the amount awarded to the Defendants in the Final Award”), paragraph 36 of his 2nd affirmation (“I simply cannot understand why the Defendants would suggest that I had the intention to dissipate my assets solely to defeat an arbitral award of relatively small sum compared to my assets in Mainland China and also my shareholding in Sky Solar Holdings, Limited… In any case, …the Plaintiffs have significant assets in other jurisdictions, which is more than sufficient to satisfy the award debt under the Final Award”), paragraph 14 of his 3rd affirmation (“the Final Award is just a relatively small sum compared to my assets worldwide”), and paragraph 13 of his 2nd affirmation (“it is entirely open for the Defendants to seek recognition and enforcement of the Final Award in other jurisdictions”).

47. To be fair, Su did state in his 2nd affirmation that the 2nd Plaintiff was the holder of 24.5% of the total share capital of Sky Solar Holdings Ltd which is listed on NASDAQ. He claims that the value of the 2nd Plaintiff’s shares is over US $12.57 million. He also claims that he has shareholding in companies based on the Mainland.

48. However, in response to the HK Injunction and the order made therein, to inform the Defendants of all his assets of an individual value of HK $50,000 or more in Hong Kong, Su deposed in his 1st affirmation that he has no such assets in Hong Kong. It is on this basis that he has opposed any order requiring him to bring any assets into Hong Kong as security.

49. Whilst asserting that he has more than sufficient assets to satisfy the relatively small sum of the Award, Su nevertheless claimed that to order security against him would stifle his claim to set aside the Award. I fail to see the logic of this, to suggest that he would somehow not able to present his case to set aside the Award, if he should be required to make payment of substantial security from his significant assets. If he should ultimately succeed in setting aside the Award, any security paid would of course be returned to him. He should have no difficulty to provide security from his significant assets.

50. As for Su’s assets on the Mainland, where he ordinarily resides, he has since June 2018 been declared and listed by the Supreme People’s Court on the Mainland as a “Dishonest Person Subject to Enforcement in China” (失信被執行人) (“Dishonest Person Listing”), because of his failure to pay a judgment debt of RMB 100,984,385 and for violating his obligations to report to the Mainland court on his assets. The Mainland courts have not been able to locate any of Su’s assets for enforcement of the debt of over RMB 100 million. As a result of this Dishonest Person Listing, there are restrictions on Su’s ability to travel, make investments and do business on the Mainland.

51. Su claims in his 2nd affirmation served on 28 December 2018 that he was in the process of being removed from the Dishonest Person Listing, and that he would be removed “shortly”, but according to the Defendants’ latest search conducted on 24 April 2019, Su’s Dishonest Person Listing remains unchanged.

52. The Plaintiffs argued that security should not be ordered by this Court, as the Defendants are sufficiently and adequately secured by virtue of the different injunctions and orders they have applied for, in different jurisdictions, by way of enforcement of the Award. It is not disputed that in March 2019, the Defendants obtained a temporary restraining order (“US Restraining Order”) and an order of prejudgment attachment from the US District Court for the Southern District of New York (“US Court”). The US Restraining Order was to prohibit the 2nd Plaintiff from dealing with 13.38 million American Depositary Shares in Sky Solar Holdings, Limited. In their application to set aside the default judgment against the 2nd Plaintiff and the attachment order, the Plaintiffs disputed the New York Court’s jurisdiction over the 2nd Plaintiff. As director of the 2nd Plaintiff, Su deposed to the fact that the 2nd Plaintiff did not own any property, did not have any bank account or trading account, and never had any offices in New York. Su also declared that the 2nd Plaintiff does not own any American Depositary Shares in Sky Solar Holdings, Limited, that it only holds an American Depositary Receipt, which is a certificate of American Depositary Shares of Sky Solar Holdings, Limited registered under the name of the 2nd Plaintiff. In particular, Su declared that until December 2018, the American Depositary Receipt which evidences 13.38 million American Depositary Shares of Sky Solar Holdings, Limited, registered in the name of the 2nd Plaintiff, was held in Zürich, but since December 2018, the said Receipt “has been held in another place outside the United States”.

53. Whatever this somewhat convoluted statement may mean, Su has declared in the US proceedings that the relevant American Depositary Receipt was not in New York, and that the New York Court has no jurisdiction over the 2nd Plaintiff. He has declared that the Receipt is held outside the United States, in an undisclosed place.

54. Leading Counsel for the Plaintiffs confirmed at the hearing before this Court that the Plaintiffs do not dispute the Defendants’ case, that Citibank controls the relevant American Depositary Shares certificates of the 2nd Plaintiff. However, according to the Defendants, Citibank has confirmed that it does not hold the relevant certificates in New York.

55. It is therefore totally unclear whether the US Restraining Order affords to the Defendants the security which the Plaintiffs maintain (to this Court) that the Defendants have. The premise of the 2nd Plaintiff’s opposition to the US proceedings and US Restraining Order is that the 2nd Plaintiff has no assets in New York against which the Award can be enforced by the US Court.

56. Also in March 2019, the Defendants obtained a worldwide freezing order against the assets of the 2nd Plaintiff (a BVI company) (“BVI Order”). The application for enforcement of the Award in the BVI has been opposed by the 2nd Plaintiff and is stayed pending resolution of the setting aside application in Hong Kong.

57. In April 2019, the Defendants also obtained a domestic freezing order from the English court against the 2nd Plaintiff, directed at the American Depositary Receipt, on the basis that the Receipt was held in London. It is not known if this will be maintained.

58. On the evidence, therefore, the Plaintiffs have been far from candid, if not deliberately evasive, in disclosing the location and value of their assets, in Hong Kong or elsewhere, a far cry from the facts of Karaha Boda. This is notwithstanding the disclosure requirements contained in the BVI Order, whereby the Plaintiffs (with Su being ordered as the sole director of the 2nd Plaintiff) were compelled to disclose the 2nd Plaintiffs’ assets worldwide.

59. On the issue of the assertions made in Su’s affirmations filed in these proceedings, and his overall credibility, one point has to be made. In this case, apart from the 1st affirmation of Su’s disclosure of assets made pursuant to the HK Injunction, which was in Chinese and signed by Su on 14 December 2018, with a notarial certificate issued on 14 December 2018 attesting to Su’s attendance and signature on the same day, the other affirmations of Su which are relied upon by the Plaintiffs in these proceedings were all signed and filed after the event. On 28 December 2018, a solicitor of Dentons Hong Kong LLP made an affirmation on behalf of the Plaintiffs, exhibiting a copy of “the finalized draft 2nd affirmation” of Su, said to have been confirmed by the Plaintiffs to be accurate and correct. The solicitor stated that the Plaintiffs undertook to file the signed affirmation with the Court “as soon as practicable”. On 9 April 2019, the solicitor made another affirmation on behalf of the Plaintiffs, exhibiting a copy of “the finalized draft 3rdaffirmation” of Su, stating again that the Plaintiffs undertook to file the signed affirmation with the Court “as soon as practicable”. The exhibited drafts of Su’s 2nd and 3rd affirmations were not signed nor dated.

60. It was only on 26 April 2019, after protests from the Defendants’ solicitors, that the Plaintiffs’ solicitors filed with the Court signed versions of Su’s 2nd and 3rd affirmations. According to the notarial certificates issued on 25 April 2019, these affirmations were only purported to have been signed by Su on 22 April 2019.

61. No explanation whatsoever has been offered by or on behalf of the Plaintiffs, as to why, despite their undertakings to the Court, the 2 affirmations of Su exhibited to affirmations filed on 28 December 2018 and 9 April 2019 were only signed on 22 April 2019 and filed on 26 April 2019. The Court can only infer that either Su had been reluctant to sign to affirm the contents of his affirmations, or he was totally indifferent to the affirmation. Little credibility can be attached to these contents.

62. It is also material to the Court’s consideration and exercise of discretion that the Plaintiffs have taken steps, upon receiving notice of the Defendants’ enforcement proceedings in Hong Kong and in New York, to dispose of their assets.

63. The Defendants highlight the fact that within days of being notified of the Defendants’ intention to seek enforcement of the Award in Hong Kong, when the Defendants served their evidence on 24 October 2018 and made their counterclaim for enforcement, Su transferred the entire ownership of his shares in SS HK to Chen on 2 November 2018. In the 1st affirmation of Kang Jian (the Defendants’ solicitor) sworn and filed on 24 October 2018 (“Kang 1”), the Defendants made reference to the availability of Su’s assets in Hong Kong for enforcement of the Award, and to the shares in the two Hong Kong companies, SS HK and Sino Sea International Resource Development Group Limited, wholly and directly owned by Su.

64. Su maintains on the one hand that he has no substantial assets in Hong Kong, such that he should not be compelled to bring in assets by way of security. In this regard, he explained in his 2nd affirmation that SS HK had been “effectively dormant since 2008” and is “of little or no value”, that SS HK ceased business since 2008, and no longer maintains any bank account in Hong Kong. According to Su, SS HK has subsidiaries, incorporated only recently, but the subsidiaries have no business operations or assets.

65. Despite the assertion that SS HK is an asset of no or little value, Su cannot dispute the transfer of his shares in SS HK to Chen (an employee of the 2nd Plaintiff) on 2 November 2018 (“Transfer”), shortly after learning that the Defendants seek to enforce the Award against his shares in SS HK. To explain this Transfer, Su claimed that it was necessary for “valid and legitimate business reasons”. He also claimed that prior to the grant of the HK Injunction on 20 November 2018, he had been advised by his solicitors that there was no constraint on him to deal with the shares in SS HK in the ordinary course of business operations.

66. Su then sought support from the Dishonest Person Listing, which puts constraints on his ability to travel freely out of the Mainland, to make investments, and to carry on businesses in general. According to Su, the Transfer was to enable subsidiaries of SS HK to open bank accounts in Hong Kong and to begin operations in Hong Kong, to further the “joint ventures” he had set up with his other business partners for the “international expansion of the corresponding businesses operated by (Su)”, and his business partners, on the Mainland. Su stated that Chen had been his business partner for some 5 years, and that the Transfer was made to Chen, as she has full understanding of the strategy and needs of the businesses. He claims that the subsidiaries of SS HK were not “solely owned by him.

67. As the Defendants have noted, Su’s own evidence shows that SS HK (wholly owned by him prior to the Transfer) has interests in business ventures which even now are being expanded. The shares in SS HK cannot be worth less than HK $50,000 as Su suggests in his 1st affirmation of disclosure of assets. The Defendants maintain that the Transfer to Chen for HK $10,000 was disproportionately below value, given SS HK’s active and substantive business and assets. They refer to the 2017 Annual Report of Listco, which reflects outstanding loans of US $2,181,000 from SS HK, and outstanding loans of US $1,339,000 due to SS HK during the year of 2017. The Defendants claim that the Transfer was made by Su to Chen, in order to frustrate the enforcement of the Award.

68. The Defendants further highlight that Su has never stated that he has not retained a beneficial interest in SS HK and its subsidiaries, after the Transfer to Chen for the purposes of his business ventures with his partners. Despite the long explanation Su sought to make, he has not stated that after the Transfer, he would no longer have interests in or profit from the planned international business development and expansion. Su’s own evidence refers to and acknowledges his interests in these joint ventures with his business partners for the expansion of the corresponding businesses operated by him, and his business partners, on the Mainland. The Transfer was made to Chen, referred to as Su’s business partner, for the stated purpose that she may “facilitate” the opening of the corporate bank accounts, the setting up of the business platforms for the joint ventures, and in order for her to “undertake the contemplated matters”. All these can be understood to mean that they were all made and done on Su’s behalf.

69. Su’s answer to the loans from SS HK, as recorded in the Annual Reports of Listco, is that they have been settled under a “settlement agreement” between Listco and Su in September 2017, so that no further debt is due.

70. As the Defendants have pointed out, Su has not chosen to exhibit any of the accounts and financial records of SS HK to support the assertion made in his 2nd affirmation, that the company had been dormant since 2008. The 2008 tax return he did produce stated that SS HK did not cease business during the period from 1 January to 31 December 2008. The Defendants have also produced evidence to show that SS HK did conduct business transactions, and entered into contracts with third parties to purchase components worth over EUR 9 million in August and September 2009, and RMB 27 million in 2012, and entered into other transactions for payment of substantial amounts of money in December 2009. It continued to conduct transactions with Sky Solar Holdings Ltd worth millions of dollars, until 2014.

71. These could not be disputed by Su, who only claimed in his 3rd affirmation that he had been misled by the accountant and company secretary of SS HK. He changed his evidence instead to say that no business activity of SS HK could be identified beyond 2014, and that he could not recall why SS HK had entered into the relevant transactions in 2009 to 2014. Despite being the sole shareholder and director of SS HK, Su’s excuse was that it was only his “impression” that SS HK had been “effectively” dormant since around 2008, and that as the director of different companies in different places around the world, it was hard for him to keep track of the activities of each and every single company. This casts doubt on the veracity of his broad statements and claims concerning his assets in Hong Kong and the value of SS HK.

72. Further, after the Defendants commenced enforcement proceedings in New York on 29 January 2019, the 2nd Plaintiff (Su being its controlling shareholder and sole director) entered into a Stock Purchase Agreement, whereby the 2nd Plaintiff’s 13.38 million American Depositary Shares (each representing 8 ordinary shares) and its 2.6 million ordinary shares in Sky Solar Holdings Limited were sold for approximately US $27 million. A deposit of US $1.9 million was already been paid to the 2nd Plaintiff.

73. The Plaintiffs emphasized that this sale was before the making of the US Restraining Order on 3 March 2019.

74. The Defendants’ case is that the disposition was nevertheless part of the evidence of the Plaintiffs’ movement of assets after having been given notice of the Defendants’ enforcement proceedings in the different jurisdictions, highlighting the likelihood of enforcement being rendered more difficult by any further delay.

75. In all, I do not believe Su’s self-serving assertion that he has no assets in Hong Kong. He has demonstrated little regard for orders made by the courts, and I believe that he will have no hesitation to dissipate and remove the Plaintiffs’ assets in order to frustrate the effects of any order of any court, and to defeat the Defendants’ actions to enforce the Award made against him and the 2nd Plaintiff. His Dishonest Person Listing is specimen example of his inclinations and propensity. From Su’s own evidence, it would appear that he regards truth to be fluid and flexible, to be bended and stretched to fit such case as he sees necessary and convenient to present for his own immediate purpose. On his presentation, the facts are as readily changeable as the patterns of a kaleidoscope at the slightest movement. For this Court, he is a totally unreliable witness.

Conclusion

76. Having considered the lack of merits of the Plaintiffs’ setting aside application, the absence of any frank disclosure of the Plaintiffs’ assets, and the conduct of the Plaintiffs since enforcement proceedings have been commenced, I take the view that despite there being less than 4 weeks before the hearing of the setting aside application, enforcement of the Award will be rendered more difficult by further delay, and security must be ordered as a condition for the further conduct of the Plaintiffs’ application for setting aside.

77. On that basis, on 7May 2019, in the absence of any acceptable undertaking provided by the Plaintiffs despite having been invited to do so, this Court ordered the Plaintiffs’ provision of security within 7 days of 50% of the Award, by payment of US 6,850,000 into court or by provision of a guarantee issued by a bank in Hong Kong for the said sum. It was further ordered that unless such security be furnished by 4 pm on 14 May 2019, the Plaintiffs’ application to set aside the Award be dismissed, with costs, on indemnity basis.

78. The costs order nisi for the security application is that the Plaintiffs are to bear the Defendant’s costs, on indemnity basis.

Final Remarks

79. By way of final observation, it is astonishing how ready lawyers now are to swear affidavits and make affirmations as to factual matters on behalf of parties to contested litigation. The Hong Kong Civil Procedure 2019 sets out reminders on good and bad practice so far as the swearing of affidavits is concerned. Paragraph 41/5/4 states:

“An affidavit should where possible be sworn by the person with the most direct knowledge of the matters deposed to. This will usually be the party rather than his solicitor. Solicitors should only give evidence on behalf of their client in exceptional circumstances which should be justified. The court may require solicitors to explain why it is proper for them to make an affidavit on behalf of the client, and the costs of adducing such evidence may be disallowed in the absence of a satisfactory explanation. See UES International (HK) Ltd v Maritima Maruba SA (unrep, HCA 632/2011, [2013] HKEC 1831).”

80. In this modern age, the fact of a party not being in Hong Kong would very rarely be a satisfactory explanation for not having an affidavit being sworn and signed by the party outside Hong Kong, and being exhibited. Of course, the original, duly signed, sworn and attested copy of the party’s affidavit or affirmation should in all cases be filed as soon as possible after having being produced as an exhibit.

81. In the present case, it is extremely regrettable that the best practice mentioned above has not been followed. To discourage such practice, the Court may in the future refuse to allow affidavits on facts which are made for a party by solicitors who do not have direct knowledge of the matters deposed to, in the absence of a satisfactory explanation. This is particularly so in cases where the facts are disputed and the decision of the Court turns on the very facts.

 

(Mimmie Chan)
Judge of the Court of First Instance
High Court

Boskalis Offshore Marine Contracting BV v Atlantic Marine and Aviation LLP (The “Atlantic Tonjer”) [2019] EWHC 1213 (Comm) (14 May 2019)


Neutral Citation Number: [2019] EWHC 1213 (Comm)
Case No: CL-2018-000726; CL-2018-000722; CL-2019-000222

IN THE HIGH COURT OF JUSTICE
IN THE BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QUEEN’S BENCH DIVISION)
IN THE MATTER OF THE ARBITRATION ACT 1996
AND IN THE MATTER OF AN ARBITRATION CLAIM

Royal Courts of Justice
Strand, London, WC2A 2LL
14/05/2019

B e f o r e :

SIR ROSS CRANSTON
(sitting as a High Court Judge)

____________________

Between:

BOSKALIS OFFSHORE MARINE CONTRACTING BV
Claimant
– and –
 
ATLANTIC MARINE AND AVIATION LLP (the “ATLANTIC TONJER”)
Defendant

____________________

James M. Turner QC (instructed by HFW) for the Claimant
Robert-Jan Temmink QC and Robert Scrivener (instructed by Stephenson Harwood LLP) for the Defendant
Hearing date: 10 April 2019 

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

Sir Ross Cranston:

Introduction

    1. These appeals raise a short point on the interpretation of clause 12 (e) of the BIMCO SupplyTime 2017 Charter Party for Offshore Support Vessels (“BIMCO Charterparty”), which is set out below in paragraph [7] in the context of other clauses in the form relevant to this case.
    2. In general terms the defendant owners, Atlantic Marine and Aviation LLP (“Atlantic Marine” or “the Owners”) contend that the clause means that payment under the charterparty has to be made or disputed within the number of days agreed from the receipt of an invoice. The claimant charterers, Boskalis Offshore Marine Contracting BV (“Boskalis”) deny that the clause has this effect, since it would mean that a failure to challenge an invoice before the due date for payment would result in the loss of any substantive defence to it, with limited prospects of recovering any sums overpaid as a result.
    3. The dispute between the parties was referred to arbitration, and the Tribunal agreed with the Owners’ interpretation.

Background

    1. The Atlantic Tonjer (‘the vessel’) is a multi-purpose support vessel. On 9 April 2018, Atlantic Marine as disponent Owners chartered the vessel to Boskalis for 21 days, plus 21 daily options in the Charterers’ favour. The delivery date was to be 2 June 2019. There was an addendum to the BIMCO Charterparty dated 22 May 2018. Together they are called the Charterparty in this judgment.
    2. The BIMCO Charterparty used for the charter contained in Part I a number of boxes which the parties had to complete. In this case, hire was agreed at €35,050 per day (Box 20); invoices were to be issued 14 days in arrears (Box 22); payment of hire etc was to be made 21 days after that (Box 24); and the maximum audit period chosen was 4 years (Box 26).
    3. Part II of the BIMCO Charterparty contains standard clauses. In this case they were modified in various respects. Additions were made in red and excisions by clauses being crossed out in blue.
    4. Clause 12 is headed “Hire and Payments”. Clauses 12(b) and 12(c) had additions in red. Clauses 12(e), (f) and (g) were as in the original form. They read in their relevant parts as follows:

“(e) Payments – Payments of hire, fuel invoices and disbursements for the Charterers’ account shall be received within the number of days stated in Box 24 from the date of receipt of the invoice. Payment shall be received in the currency stated in Box 20(i) in full without discount or set-off to the account stated in Box 23… If payment is not received by the Owners within five (5) Banking Days following the due date the Owners are entitled to charge interest at the rate stated in Box 25 on the amount outstanding from and including the due date until payment is received.

If the Charterers reasonably believe an incorrect invoice has been issued, they shall notify the Owners promptly, but in no event no later than the due date, specifying the reason for disputing the invoice. The Charterers shall pay the undisputed portion of the invoice but shall be entitled to withhold payment of the disputed amount…

(f) Suspension and termination –

…(ii) At any time while hire or other sums due and payable to the Charterers to Owners remain outstanding the Owners shall be entitled to suspend the performance of any or all of their obligations under this Charter Party until such time as all the hire due to the Owners’ under the Charter Party has been received by the Owners. ….

(iii) If after five (5) days of the written notification referred to in Subclause 12(f)(i) the sums referred to have still not been received, the Owners may at any time while such sums remain outstanding terminate the Charter Party…

(g) Audit – The Charterers shall have the right to appoint an independent qualified accountant to audit the Owners’ books directly related to work performed under this Charter Party at any time after the conclusion of the Charter Party, up to the expiry of the period stated in Box 26, to determine the validity of the Owners’ charges hereunder. …. Any discrepancies discovered in payments made shall be promptly resolved by invoice or credit as appropriate.”

    1. Clause 13 is the off-hire clause. It provides in part (as modified by the parties) that any hire paid in advance shall be adjusted accordingly, provided always that hire shall not cease in the event of the vessel being prevented from working as a result of specified events in the clause.
    2. On 2 June 2018, at 19.45, Boskalis and the Master signed an on-hire certificate. The vessel proceeded from Rotterdam to Waalhaven. Then at 06.00 on 7 June 2018, Boskalis and the Master signed an off-hire certificate. The vessel was at Franklin Shipyard to load an Ampelmann gangway. At 23.45 that day, Boskalis and the Master signed an on-hire certificate. The vessel returned to Waalhaven and from then until termination of the Charterparty it was occupied by Boskalis.
    3. Atlantic Marine rendered invoices for hire, accommodation, meals and other services between 16 June 2018 (14 days after hire commenced) and 13 July 2018. They amount in total to €1,475,029.26 and £42,683.04. Boskalis did not pay the invoices and they remain unpaid. It has raised an off-hire defence, namely, that the largest item in dispute (€1,115,276.30) is not due because the vessel was offhire throughout.
    4. Under the dispute resolution clauses in the Charterparty Atlantic Marine initiated arbitration in accordance with London Maritime Arbitrators Association terms. It applied to the Tribunal for a partial final award on their invoices.
    5. In their First Partial Final Award dated 3 September 2018 the Tribunal identified three issues (at para [16]):

a) When were Atlantic Marine entitled to issue invoices to Boskalis under clause 12(d) and what is the consequence if they were issued prematurely;

b) When was the “due date” by which Boskalis should notify Atlantic Marine that they believed an incorrect invoice had been issued under clause 12(e) and what is the consequence if they failed to do so by that date;

c) Did Boskalis notify Atlantic Marine before the due date that they believed an incorrect invoice had been issued.

    1. The Tribunal found in favour of Atlantic Marine on the first issue. Boskalis do not appeal that finding.
    2. On the second issue, the Tribunal found that Boskalis had not challenged any of the invoices before their due date for payment (21 days after their receipt of each invoice) and that the proper construction of clause 12(e) meant that Boskalis had to pay the invoiced amounts. The Tribunal determined as follows:

“(c) If Boskalis wished to avoid their obligation to pay Atlantic Marine’s invoices within 21 days from receipt of an invoice . . . they had to notify Atlantic Marine within 21 days from receipt of the invoice that they believed that an incorrect invoice had been issued…; and

(d) The consequence if Boskalis failed to notify Atlantic Marine within the relevant period (as in para. 1(c) above) that they believed that an incorrect invoice had been issued is that they came under an obligation to pay Atlantic Marine the amount invoiced which they had not disputed within the relevant period.”

    1. In its Reasons, the Tribunal said in part as to the construction of clause 12(e):

“46. [T]he context in which clause 12(e) appears is in a time charter where ‘cash flow has become a matter of considerable, sometimes crucial importance’ to owners of ships…

48. In our view, the focus of Clause 12(e) is on Atlantic Marine’s cash flow. This much is apparent from the provision that ‘Payment shall be received in the currency stated in Box 20(i) in full without discount or set-off to the account stated in Box 23’. The intention of this provision plainly is that Atlantic Marine should receive payment in the first instance for sums to which they might ultimately prove not to be entitled because Boskalis has a valid counterclaim which, but for this provision, would operate as a defence or set-off.

49. A similar intention is apparent in clause 12(g) which provides that the validity of Atlantic Marine’s charges can be re-opened up to 4 years after the conclusion of the Charterparty…

50. It follows from this, that clause 12(e) is not a time bar provision and Boskalis’s characterisation of it as such is misconceived. The clause gives Boskalis a relatively short period of 21 days within which to dispute an invoice (although the length of that period is a matter for negotiation between the parties when they enter into the Charterparty). Once that period has expired, Boskalis is under an obligation to pay any undisputed sum to Atlantic Marine, whether they are liable for such sums or not, and disputed sums are left over to be subsequently resolved. Boskalis’s obligation to pay any undisputed sum to Atlantic Marine is also subject to their right to subsequently challenge their liability for such sums either by requiring an audit under clause 12(g) and a credit (if appropriate) or by way of a counterclaim.

51. We also consider that there is considerable force in Atlantic Marine’s contention that their interpretation is the only one which would give clause 12(e) any real effect. We agree that if Boskalis were correct, clause 12(e) becomes a dead letter…

52…[I]f Boskalis wished to avoid their obligation to pay Atlantic Marine’s invoices within 21 days from receipt…they had to notify Atlantic Marine that they believed that an incorrect invoice has been issued…The consequence if they failed to do so within the relevant period, is that they came under an obligation to pay Atlantic Marine the amount invoiced which they had not disputed.”

    1. Boskalis asked the Tribunal to clarify the First Award on its interpretation of clause 12(e). On 26 October 2018 the Tribunal replied that there was no ambiguity in, or need for any clarification or explanation of the Award: para [7]. However, it added:

“9. As the Stage 1 Award makes clear if an invoice from Atlantic Marine was not disputed, either wholly or in part, within the relevant period…Boskalis came under an obligation to pay the amount of that invoice (or, if part only was disputed, the undisputed part) within that relevant period.

10. Clause 12(e) of the Charterparty makes clear that such amount had to be paid ‘in full without discount or set-off’… The effect of the clause is such as to exclude any defence or right of set-off in respect of invoiced sums which had not been disputed within the relevant period…

13. As the Stage 1 Award also makes clear, and as in any event the Tribunal’s view, the only ground upon which Boskalis might be entitled thereafter to seek any form of reimbursement in respect of a sum which they had paid, whether voluntarily or pursuant to an award, in respect of an undisputed invoice, would be if Boskalis had a counterclaim in respect of the financial loss resulting from such payment, or if they were entitled to recover any such sum in the exercise of the audit rights – see paras 48 and 50 of the Reasons.”

    1. The third issue in the Third Partial Award was adjourned to a second hearing. It resulted in the Second Partial Final Award dated 1 November 2018. The Tribunal awarded Atlantic Marine all the invoices forming part of the application for an award. No appeal is made against that finding.
    2. The Third Partial Final Award dealt with costs.
    3. In early December 2018 Bryan J gave Boskalis permission to appeal the First and Second Awards under section 69 of the Arbitration Act 1996 on two questions of law:

(1) Does clause 12(e) of the BIMCO Supplytime 2017 form, on its proper construction, debar Charterers from raising defences against Owners’ invoices if and to the extent that they have failed to notify Owners that they believed those invoices to be incorrect because of those defences by the due date of those invoices;(2) If the answer to the first question is “yes”, are Charterers entitled to recover sums paid to Owners which were not in fact due because Charterers had a defence to Owners’ claim for those sums even if that defence (i) did not give Charterers an independent counterclaim; and (ii) was not an “accounting” defence suitable for resolution by an audit under clause 12(g).

    1. All three Awards turn on the same point of principle. Consequently, permission was given to appeal the Third Award, to consolidate the appeals and to dispense with a formal response to the third appeal.

Legal framework

    1. The principles of contractual interpretation are well known: see for example Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173, [10]-[13], per Lord Hodge; Arnold v Britton [2015] UKSC 36; [2015] AC 1619, [13]-[14], per Lord Neuberger. The aim is to ascertain the objective meaning of the parties’ language by considering the contract as a whole in its wider context. On asks what a reasonable person with the background knowledge reasonably available to the parties at the time of the contract would understand was meant. Where there are rival meanings, the court can consider which one is consistent with business common sense. There is the possibility that one side may have agreed to something which with hindsight is not to its advantage, and the terms may be a compromise or something where more precise agreement could not be reached.
    2. The courts have long required a clarity of contractual language with provisions which restrict the rights and remedies normally available to a party. Lord Diplock’s oft quoted dictum to this effect in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 was described by Moore-Bick LJ in Seadrill Management Services Ltd & Anor v OAO Gazprom [2010] EWCA Civ 691 as “essentially one of common sense; parties do not normally give up valuable rights without making it clear that they intend to do so”: para [29].
    3. Giving up contractual rights can take various forms. One example is the exclusion or limitation clause. The courts have exhibited a traditional hostility to such clauses. Notwithstanding this Lewison LJ recently noted in Interactive E-Solutions JLT v O3B Africa Ltd [2018] EWCA Civ 62(by reference to a number of authorities) that, at least in commercial contracts made between parties of equal bargaining power, exclusion and limitation clauses are an integral part of pricing and risk allocation, and must be interpreted as with any contractual term: para [14].
    4. Another example is the time bar clause; claims have to be advanced within a specified period to be valid. Pera Shipping Corp v Petroship SA (The Pera) [1985] 2 Lloyd’s Rep 103 involved the construction of a time bar clause in a demurrage clause. The Court of Appeal held that the clause was ambiguous and, since the charterparty had been prepared by the charterers, it should be construed against them so as not to bar the owners’ claim. Griffiths LJ saw interpreting the ambiguity in the clause as falling within “the fundamental rule that a contractual clause intended to cut down the rights which a party to a contract would otherwise enjoy, must be expressed in clear and unambiguous language.” In Odfjell Seachem A/S v Continentale des Petroles et d’Investissements [2004] EWHC 2929 (Comm) Teare J (as he now is) referred to the principle that time bar clauses should be construed strictly and held that, objectively construed, the clause at issue was not intended to include claims for damages: para 18.
    5. A third example is the issue in European Grain & Shipping Ltd v R&H Hall plc [1990] 2 Lloyd’s Rep 139. There a clause in GAFTA100 provided that if either party was dissatisfied with the default price set by the clause, and damages could not be mutually agreed, their assessment should be settled by arbitration. Steyn J held that while that clause contemplated arbitration, it did not place on a dissatisfied party a duty to claim arbitration if it wished to avoid the default price becoming the conclusive yardstick to be set against the contract price. Steyn J added that on the construction adopted in the arbitration the default clause took away, or diminished, the litigant’s right to advance his case by all relevant evidence. To achieve such a result clear language was required: at 143.

Question 1

The charterer’s case

    1. Boskalis submitted that the Tribunal’s interpretation of clause 12(e) was wrong. The clause needed to be interpreted against the background that there could be many reasons why an invoiced sum was not due, such as the vessel being off-hire, the wrong hire rate being applied, more meals being invoiced than eaten, or costs being invoiced for the owners’ rather than the charterers’ account. There might equally be a number of reasons for a charterer failing to dispute an invoice. It might simply be that in the time available they have not formed a reasonable belief one way or the other as to whether it is properly payable. The period chosen to insert in box 24 could be a few days and apply whether hire was payable in advance or in arrears.
    2. In its submission, the words of clause 12(e) are unclear, possibly ambiguous. That is because they do not state that a failure to give notice will debar the charterers from raising any defence to the sums claimed. In fact the clause is silent as to the consequence of non-compliance on the part of the charterers. It is also silent as to what is to happen if the charterers have not formed a belief as to the correctness of the invoice, or a belief which is unreasonable.
    3. Since the clause has this character, the legal authorities on exclusion, time bar and conclusive evidence clauses come into play by way of analogy, as do those on notification clauses and conditions precedent. In broad terms, Boskalis submitted, the Tribunal’s interpretation of clause 12(e) restricts the rights and remedies ordinarily available to charterers. The clause is insufficiently clear and unambiguous to have the effect posited by the Tribunal. In effect, Boskalis contended, the Tribunal’s construction was functionally indistinguishable from the implication of a term, but none of the usual requirements were satisfied: Marks & Spencer plc v BNP Paribas [2016] AC 742.
    4. In addition, Boskalis submitted, the Tribunal’s interpretation was uncommercial. It would have to work where the period in Box 24 was far shorter than the 21 days agreed in this case, say 2 or 3 business days. There was no commercial basis for barring a failure to respond within such a short period. And it contrasted with the far longer period for a clause 12(g) audit. Moreover, if hire were payable in advance the charterers might be unable to raise an off-hire event when no hire was payable in respect of the period in question. On the Tribunal’s construction the charterers would have to pay and be unable to reclaim the overpaid hire.
    5. In support of its construction Boskalis referred to the BIMCO Guidance Notes relevant to this charterparty form, which in its submission do not suggest the construction found by the Tribunal, and to Rainey on The Law of Tug and Tow and Offshore Contracts, 4th edn., which is likewise silent on the possibility.

Discussion

    1. In my view clause 12(e) is clear and unambiguous. A reasonable person with the background knowledge available to the parties at the time of the contract would understand that invoices had to be paid within 21 days of their being received. (With invoices being issued in arrears that meant a maximum of 35 days after the invoiced expenses were incurred.) The language that payment “shall be received within the number of days stated in Box 24 from the date of receipt of the invoice” is precisely equivalent, as McNair J put it in Metalimex Foreign Trade Corp v Eugenie Maritime Co Ltd [1962] 1 Lloyd’s Rep 378, to what might be equally stated in a negative form, namely, that charterers are barred from disputing the payment of invoices unless done within the 21 days referred to in the contract.
    2. Those time periods had been negotiated by two commercial parties. There was no suggestion that they were not of equal bargaining power in the shipping market. Consequently, the hypothetical case of a challenge to an invoice having to be given in 2 or 3 business days has no traction. Even if that had been the case it would have been the period freely negotiated and determined by express agreement. In any event, clause 12(e) does not preclude charterers from bringing claims (in our case the counterclaim referenced by the Tribunal) or withholding payment (that being subject, of course, to notice being given, so that if no notice if given a defence to payment cannot be raised). What clause 12(e) requires is prompt payment or prompt identification of any issue preventing payment.
    3. On this reading of the clause, if charterers reasonably believe that there is an error in the invoice they can withhold payment of the disputed amount by notifying the owners under the clause within the period they have agreed in the contract. They also have the audit rights under clause 12 (g) to reclaim amounts paid through accounting-type errors (wrong hire rate, wrong number of meals and so) up to four years ahead. Further, as the Tribunal correctly concluded, the charterers can always bring a counterclaim if they have paid sums which they later believe were not properly payable. Counterclaims in this context would include a claim for breach of contract or one for unjust enrichment.
    4. In other words, clause 12(e) is not analogous to a time bar clause or any other type of clause limiting or excluding liability. Nothing is being implied into the clause. It may be that the charterers are required by clause 12(e) to act in a certain way if they dispute an invoice and wish to withhold payment. But as Lewison LJ said in the Interactive E-Solutions case [2018] EWCA Civ 62, this type of clause is to be construed in accordance with the same principles as any other clause. Adopting that approach, the clause properly construed means that, within 21 days of receipt of an invoice, charterers have to form a view about it. If they reasonably believe it is incorrect they do not have to pay, but they must give the requisite notice.
    5. This interpretation of clause 12(e) is in line with commercial common sense. In paragraph 46 of its Reasons, the Tribunal quoted the impeccable authority of Robert Goff J in The Kostas Melas [1981] 1 Lloyd’s Rep 18, that cash flow is a matter of considerable, sometimes crucial, importance to the owners of ships. That dictum has been underlined in later cases and is undisturbed by anything said in the judgments in Spar Shipping AS v Grand China Logistics (Group) Co Ltd [2016] EWCA Civ 982; [2017] Bus LR 663. In my view there is nothing uncommercial in charterers being obliged to raise bona fide disputes timeously, at a time when the owners have an opportunity to exercise the rights and remedies they have under the charterparty such as under clause 12(f).
    6. There is nothing in the BIMCO Guidance Notes which undermines this interpretation. The Notes on clause 12(e) explain:

“Sub-clause 12(e) (Payments) – This subclause requires payment of hire, fuel and disbursements to be received by the owners within the specified number of days in Box 24 from the date of the receipt of the invoice. Account details should be described in Box 23. The charterers are not allowed to make deductions or set-off for claims they may have, with the exceptions for advances for disbursements made on behalf of and approved by the owners, and disputed parts of invoices as per the last paragraph of this subclause. The charterers should notify owners at the earliest opportunity, but not later than the due date, if they reasonably believe that an incorrect invoice has been issued.”

    1. If anything this to my mind supports the interpretation outlined above. There is no hint in the BIMCO Guidance Notes that charterers need not pay within the time period the parties agree in the form; need not raise a dispute within that period; or can avoid the consequences of non-compliance for unstated reasons. Likewise, there is nothing in Rainey on The Law of Tug and Tow and Offshore Contracts to support the Charterers’ case.

Question 2

    1. Boskalis contended that the Tribunal was wrong in determining that under the BIMCO Charterparty charterers cannot recover sums paid (including pursuant to an award from the Tribunal) even though they have a defence, if that defence is not a counterclaim in respect of financial loss resulting from such payment or by way of an audit under clause 12(g). The Tribunal’s conclusion, Boskalis submitted, means that charterers under this standard form charterparty cannot raise off-hire defences which do not constitute a breach of contract unless they have notified the owners of it before the due date of an invoice, however short that period might be. This would be the case even if that date came before the charterer could reasonably have discovered that the vessel had in fact been off-hire, or even if the vessel had not by then gone off-hire.
    2. On Boskalis’s case a term for the repayment of overpaid hire should be implied: The Trident Beauty [1994] 1 WLR 161, at 164D; The Riza and The Sun [1997] 2 Lloyd’s Rep. 314, 320-321. There is no inconsistency between the implication of such a term even if sums that have been invoiced and not challenged should be paid. Cashflow is ensured but defences are not debarred, nor the recoupment of overpaid sums prevented. The result would be consistent with the general law and make commercial sense.
    3. To my mind the Tribunal’s conclusion makes commercial sense and is consistent with the wording of clause 12(e). The BIMCO Charterparty provides that hire is payable within the period the parties agree after the invoice. In this case the parties also agreed that it was payable in arrears. Consequently, an off-hire event would have happened by the time the charterers needed to serve a notice of disputed payment under the clause. As mentioned earlier, the parties were of equal bargaining strength and able to negotiate on how payment was to occur and the period to be entered in Box 24 which sets the date by which notice of any dispute must be served. To put it another way, the parties have bargained for how disputed payments are to be raised. The upshot is that the charterers are precluded from raising a defence which is not done timeously and the subject of a valid notice. Owners are not deprived of their contractually agreed remedies in clause 12(f) (which is the result of the Charterers’ submissions), and charterers are not precluded from advancing a counterclaim (as explained previously) or taking advantage of the long stop in clause 12(g).
    4. As to the implication of a term, that is not a matter the Tribunal has yet considered. It would be wrong for it to be determined now when the Tribunal will have an opportunity to address it at Stage 3 of the proceedings. Whether a counterclaim could include an action for unjust enrichment is also a matter for the future.

Conclusion

  1. For the reasons given above the first question is answered in the affirmative and the second in the negative. The appeals themselves are dismissed.

Rinehart & Anor v Hancock Prospecting Pty Ltd & Ors; Rinehart & Anor v Georgina Hope Rinehart (in her personal capacity as Trustee of the Hope Margaret Hancock Trust and as Trustee of the HFMF Trust) & Ors [2019] HCA 13

This case highlights the High Court's to give a wider interpretation to arbitration clauses and a vital importance to context in interpretation of arbitration clauses, and to be more willing to send parties to arbitration.

The case also demonstrates the persuasive power of Mrs Gina Rinehart in all areas.

 

Rinehart & Anor v Hancock Prospecting Pty Ltd & Ors; Rinehart & Anor v Georgina Hope Rinehart

 

For a free PDF of this Casewatch, please click the link below:

GA-Hyun Chung v Silver Dry Bulk Co Ltd [2019] EWHC 1147 (Comm) (17 May 2019)

Neutral Citation Number: [2019] EWHC 1147 (Comm)
Case No: CL-2018-000112

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)

Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
17/05/2019

B e f o r e :

THE HONOURABLE MRS JUSTICE MOULDER
____________________

Between:

GA-HYUN CHUNG (AS THE FORMER STATUTORY TRUSTEE OF HOMER HULBERT MARITIME CO. LTD.)
(a dissolved Marshall Islands company)

Claimant
– and –

 
SILVER DRY BULK CO. LTD.
Defendant

____________________

Mr T Young QC (instructed by Holman Fenwick Willan LLP) for the Claimant
Mr T Sprange QC & Ms R Byrne (instructed by King & Spalding LLP) for the Defendant
Hearing dates: 15 and 16 April 2019 

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

Mrs Justice Moulder :

Introduction

    1. This is an application made by the claimant pursuant to section 67 of the Arbitration Act 1996. The claimant in this matter is Mr Chung as the “trustee” of Homer Hulbert Maritime Co. Ltd (“HH”).

Background

    1. HH was a corporation incorporated in and under the laws of the Marshall Islands. It is common ground that HH filed articles of dissolution in the Marshall Islands on 28 February 2011.
    2. The application relates to an arbitration award made by Mr Klaus Reichert SC, dated 17 January 2018 (the “Award”).
    3. The arbitration arose out of the sale of a ship, HN 1045 by HH to the defendant, Silver Dry Bulk Co. Ltd (“SDBC”). The memorandum of agreement dated 1 February 2011 contained a London arbitration clause. The only parties to the memorandum of agreement were SDBC and HH.
    4. A notice of arbitration dated 28 October 2014 was filed on 29 October 2014 with the Attorney General of the Marshall Islands. (The claimant’s position is that Mr Chung has no record of having received a copy of the notice of arbitration and the claimant says there is no evidence of it being sent by the Attorney General to HH in Korea).
    5. Mr Reichert accepted the appointment as a sole arbitrator on the basis that HH had not responded to the notice of arbitration or appointed its own arbitrator.
    6. Subsequently the notice of arbitration was sent by the solicitors for the defendant to Sinokor Merchant Marine Co. Ltd. and Sinokor Maritime Co Ltd. According to the evidence for the claimant (paragraph 10 of the witness statement of Mr Poynder), HH was not a subsidiary of Sinokor Merchant Marine Co. Ltd (“Sinokor”). SDBC say that Sinokor (or another entity in the Sinokor group) incorporated HH for the purpose of selling the vessel to SDBC and was the “owner” of HH (paragraph 22 of the witness statement of Ms Patel). SDBC also say that Mr Chung is, according to the corporate filings, the sole owner and director of Sinokor Maritime Co Ltd and the son of the chief executive officer of Sinokor.
    7. Sinokor declined to take part in the arbitration proceedings but (through solicitors and counsel) did attend on occasions before the arbitrator to dispute Mr Reichert’s jurisdiction and in particular whether there was a valid arbitration and whether the tribunal was properly constituted.
    8. SDBC alleged that the purchase price paid by HH to SDBC for the vessel included the payment by HH of a US$5 million secret commission to Hannibal Gaddafi, the fifth son of Colonel Gaddafi and the then controller of General National Maritime Transportation Company (“GNMTC”), the Libyan state maritime company and the parent company of SDBC. The arbitrator found that HH’s payment constituted a bribe and SDBC was entitled to damages.
    9. The claimant’s case is that no arbitration was ever commenced against HH as HH had been finally dissolved and wound up some eight months before the notice of arbitration purported to commence the purported arbitration, on 28 February 2014. Accordingly, the arbitration was a nullity.

Evidence

    1. In support of the application I have witness statements from Mr Poynder, a partner in the firm of Holman Fenwick Willan LLP, dated 13 February 2018 and 19 April 2018. Mr Poynder says that he cannot warrant that he has authority on behalf of HH but has been authorised by Mr Chung to the extent that he has power to do so.
    2. For the defendant in opposition to the application, I have a witness statement from Darshna Patel, a solicitor with King & Spalding, dated 12 April 2018.
    3. I also had expert reports from Mr Frederick Canavor Jr dated 19 November 2018 and Mr Dean Robb dated 10 December 2018 as to the law of the Marshall Islands. Mr Canavor and Mr Robb produced a joint memorandum dated 25 January 2019. Both Mr Canavor and Mr Robb gave oral evidence to the court and were cross-examined. Mr Canavor is a lawyer but has not practised and does not practice in the Marshall Islands; however he was Attorney General of the Marshall Islands from 2009 to 2011. Mr Robb is a partner in a Hawaii-based law firm; he has advised on matters of Marshall Islands corporate, finance and maritime law over many years.
    4. The court had expert evidence as to Delaware law in the form of reports from Ms Elena Norman dated 19 November 2018 and from Mr Myron Steele dated 10 December 2018. Ms Norman and Mr Steele produced a joint memorandum dated 31 January 2019. Ms Norman gave evidence via video link and was cross examined. Due to technical difficulties, Mr Steele was unable to give live evidence. Ms Norman is a partner in a Delaware law firm. Mr Steele is currently a partner in a Delaware law firm but prior to that was a member of the Delaware judiciary for 25 years, in particular holding the office of Chief Justice of the Delaware Supreme Court from 2004 until 2013.
    5. Finally, I have a witness statement of Namho Yoon, a Korean lawyer who acts for Sinokor Maritime Co Ltd, dated 30 October 2018 which deals with a meeting with Ms Caroline Chae of the Korean branch of the International Registries affiliated with the Marshall Islands maritime and corporate registries.

Issues for this court

    1. The following issues arise for determination:

i) whether the challenge brought under section 67 is not a challenge as to “substantive jurisdiction” within the meaning of section 67 of the Arbitration Act 1996 because it is a question of Marshall Islands law and is a question of fact already determined by the arbitrator;

ii) whether pursuant to section 105 of the Business Corporations Act of the Marshall Islands (“BCA”), HH existed as a corporate entity on 28 October 2014; in particular whether pursuant to section 105(2) HH continued to exist as a corporate entity in the form of a “trusteeship” of its sole director, Mr Chung for the purposes of defending any claim brought against the company after the expiry of the three year period in section 105(1);

iii) whether HH has waived any right to challenge the arbitrator’s jurisdiction.

Waiver

    1. The third issue in the list of issues can be dealt with shortly. SDBC relied on section 73 of the Arbitration Act 1996 (the “1996 Act”) which provides:

“73. Loss of right to object.”

(1) If a party to arbitral proceedings takes part, or continues to take part, in the proceedings without making, either forthwith or within such time as is allowed by the arbitration agreement or the tribunal or by any provision of this Part, any objection—

(a) that the tribunal lacks substantive jurisdiction,

(b) that the proceedings have been improperly conducted,

(c) that there has been a failure to comply with the arbitration agreement or with any provision of this Part, or

(d) that there has been any other irregularity affecting the tribunal or the proceedings,

he may not raise that objection later, before the tribunal or the court, unless he shows that, at the time he took part or continued to take part in the proceedings, he did not know and could not with reasonable diligence have discovered the grounds for the objection.”

    1. It was submitted for SDBC that the purpose of section 73 was to prevent parties from seeking to delay payment under an award by raising arguments they could and should have raised earlier. It was further submitted that since HH/Mr Chung was validly served with the arbitration proceedings, the affiliate of the primary party, Sinokor, participated heavily in the proceedings and the primary party now seeks to challenge the outcome, this should be regarded as a case falling within section 73 of the Arbitration Act.
    2. It was submitted for the claimant that HH did not appear and was not represented before the arbitrator since HH had ceased to exist and thus as no representation could have been made on behalf of HH, no question of waiver could be sustained. The claimant relied on the following dicta in Baytur SA v Finagro Holdings SA [1992] 1 QB 610 at 622B:

“I can find nothing in what the plaintiff said or did which could amount to a clear or unequivocal representation on the part of the plaintiffs that they were accepting the board’s jurisdiction to determine the issue. On the contrary they made it clear from as early as 7 August that they were accepting no such thing.”

The claimant accepted that counsel and solicitors were instructed by Sinokor to appear before the arbitrator but made it clear that they contested jurisdiction.

    1. SDBC appears to accept the limited role played by Sinokor before the arbitrator (paragraph 6 of counsel for SDBC’s skeleton argument). Although a passing reference was made in submissions to piercing the corporate veil, this was not pursued in this context.
    2. In my view on the evidence it is clear that there was no representation by HH that they were accepting the jurisdiction of the arbitrator and although Sinokor did appear, it made it clear that it was contesting jurisdiction. Accordingly, in the circumstances of this case, section 73 does not apply so as to preclude this application by the claimant to the court.

Is the challenge brought under section 67 a jurisdictional challenge within the meaning of section 67 of the Arbitration Act 1996?

    1. Section 67 (1) provides:

“(1) A party to arbitral proceedings may (upon notice to the other parties and to the tribunal) apply to the court—”

(a) challenging any award of the arbitral tribunal as to its substantive jurisdiction; or

(b) for an order declaring an award made by the tribunal on the merits to be of no effect, in whole or in part, because the tribunal did not have substantive jurisdiction.

A party may lose the right to object (see section 73) and the right to apply is subject to the restrictions in section 70(2) and (3).”

    1. Section 82(1) includes the following:

“substantive jurisdiction”, in relation to an arbitral tribunal, refers to the matters specified in section 30(1)(a) to (c), and references to the tribunal exceeding its substantive jurisdiction shall be construed accordingly.

    1. Section 30 “Competence of tribunal to rule on its own jurisdiction” provides:

“(1) Unless otherwise agreed by the parties, the arbitral tribunal may rule on its own substantive jurisdiction, that is, as to—

(a) whether there is a valid arbitration agreement,

(b) whether the tribunal is properly constituted, and

(c) what matters have been submitted to arbitration in accordance with the arbitration agreement.

(2) Any such ruling may be challenged by any available arbitral process of appeal or review or in accordance with the provisions of this Part.”

Submissions

    1. It was submitted for SDBC that the 1996 Act represented a sea change in the approach to arbitration in this jurisdiction and in particular the drafters were concerned to answer criticisms as to what was seen as the excessive intervention of English courts in international arbitrations prior to that date. Counsel for SDBC referred to section 1 of the 1996 Act and the decision in C v D1, D2, D3 [2015] EWHC 2126 (Comm) at [8]. Section 1 of the 1996 Act reads:

“Section 1 General principles.”

The provisions of this Part are founded on the following principles, and shall be construed accordingly-

(a) the object of arbitration is to obtain the fair resolution of disputes by an impartial tribunal without unnecessary delay or expense;

(b) the parties should be free to agree how their disputes are resolved, subject only to such safeguards as are necessary in the public interest;

“(c) in matters governed by this Part the court should not intervene except as provided by this Part.” [emphasis added] Carr J in C v D1 said:

“[8] The 1996 Act introduced radical changes to English arbitration law, as Lord Mustill and Stewart Boyd QC put it in the preface to Commercial Arbitration: 2001 Companion Volume to the Second Edition , giving it ” an entirely new face, a new policy and new foundations “. As Lord Steyn commented in Lesotho Development v Impregilo SpA [2006] 1 AC 221 (” Lesotho “) (at paragraph 18), the ethos of the 1996 Act is to give to the court only those essential powers which it should have, namely to render assistance when arbitrators cannot act in the way of enforcement or procedural steps, or alternatively in the direction of correcting very fundamental errors. Arbitration, as far as possible, and subject to statutory guidelines, should be regarded as a freestanding system, free to settle its own procedure and its own substantive law. A major legislative purpose of the 1996 Act was “to reduce drastically the extent of intervention of courts in the arbitral purpose ” (see paragraph 26) and to promote ” one-stop adjudication ” (see paragraph 34).” [emphasis added]

    1. In that case Carr J had to decide whether a challenge to the decision of the tribunal that it had power under the relevant arbitral rules to join a party to the arbitral proceedings fell within section 67. Carr J concluded that it did not. Carr J held that C’s challenge did not involve any challenge falling within s.30(1). She referred at [134] to the decision of Burton J in CNH Global v PGN Logistics Ltd [2009] 1 CLC 807 where he said:

“I have no doubt whatever that s.67 relates to situations in which it is alleged that the arbitral tribunal lacks substantive jurisdiction i.e. that there was in fact no arbitration clause at all, and no jurisdiction for the arbitrators to act at all at any rate in relation to the relevant dispute, and not situations in which arbitrators properly appointed were alleged to have exceeded their powers.”

    1. Carr J continued at [135]:

“It seems to me that s.30 is likely to contain an exhaustive definition of jurisdictional matters, particularly when s.82 is taken into account. Its wording, namely “that is”, is consistent only with such a conclusion. And, like Eder J, I can see no basis for an expansive approach, particularly given the policy behind the 1996 Act.”

    1. It was submitted for SDBC that the only relevant point before the arbitrator and the only relevant point before this court is the question of whether HH continues and continued to exist in the guise of Mr Chung under section 105(2) of the BCA; that this is a question of the status of Homer Hulbert as a matter of Marshall Islands law, which is not a question falling within any of the three prongs of the definition of substantive jurisdiction under section 30 of the 1996 Act.
    2. For the claimant it was submitted that the challenge fell within both subparagraph (1) (a) and (b) of section 30.

Discussion

    1. The claim in this case (as set out in the claim form) is for a declaration that the notice of arbitration dated 28 October 2014 was incapable of commencing a valid arbitration against HH which did not exist at that time, or that the notice did not commence a valid arbitration.
    2. The memorandum of agreement dated 1 February 2011 between HH as Seller and SDBC as buyer provided in clause 16 for the agreement to be governed by English law and any dispute arising out of the agreement to be referred to arbitration in London. Clause 16 (a) stated:

“this Agreement shall be governed by and construed in accordance with English law and any dispute arising out of this Agreement shall be referred to arbitration in London in accordance with the Arbitration Acts 1950 and 1979 or any statutory modification or re-enactment thereof for the time being in force, one arbitrator being appointed by each party. On the receipt by one party of the nomination in writing of the other party’ arbitrator, that party shall appoint their arbitrator within 14 days, failing which the decision of the single arbitrator appointed shall apply. If two arbitrators properly appointed shall not agree they shall appoint an umpire whose decision shall be final.”

    1. It is the claimant’s case that no valid notice could be given as HH had ceased to exist. Accordingly, the appointment of the arbitrator was not valid.
    2. It was submitted for SDBC that when the arbitrator was dealing with questions as to the status of HH he described his analysis as an analysis as to jurisdiction but that any such characterisation by the arbitrator was obiter and unnecessary to his conclusions.
    3. A challenge under sections 67 and 68 of the 1996 Act proceeds by way of re-hearing, not review: Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs of the Government of Pakistan [2011] 1 AC 763 (” Dallah “) at [25] and [26]; nevertheless, the Court will have regard to the Tribunal’s reasoning if helpful (Dallah at [31] ).
    4. At paragraph 7 of the Award the arbitrator stated:

“The outline summary described at paragraph 6 just above encapsulates the key question for the sole arbitrator in determining his jurisdiction; did, prior to the commencement of this arbitration, HH cease to exist in any way. If HH did cease to exist before the commencement of this arbitration then it stands to reason that the arbitration agreement in the Agreement could not be engaged. This is the proposition found in English law in Baytur v Finagro

    1. In my view if HH did not exist, clause 16 could no longer operate: HH could not appoint an arbitrator, no notice of arbitration could be sent to it and no arbitrator could be appointed in default of a response, since HH was no longer in a position to appoint its own arbitrator or to respond to the notice. Accordingly, if HH had ceased to exist, Mr Reichert could not be validly appointed and the tribunal was not properly constituted. Thus it seems to me that this question falls squarely within subparagraph (1)(b) of section 30 “whether the tribunal is properly constituted”. The fact that the finding as to the interpretation of Marshall Islands law is itself a finding of fact does not mean that this issue is not within section 67. The tribunal cannot give itself jurisdiction in reliance on a finding of fact as to the status of HH, if in fact there is no jurisdiction.
    2. If I were wrong on that, in the alternative, the present challenge, in my view, also falls within subparagraph (1)(a) of section 30 “whether there is a valid arbitration agreement”.
    3. It was submitted for SDBC that there is no stand alone or independent challenge grounded in any of the three exhaustive grounds for challenge in section 30 of the Act; that if it were common ground that HH continued to exist at the time when the arbitration was commenced there would be no attack on the validity of the arbitration clause and no attack on the appointment of the Tribunal, and as such to seek to characterise the challenge as a section 67 challenge was wrong.
    4. As noted by the arbitrator, the original formation of the arbitration agreement is not in issue, but it is the claimant’s case that HH had ceased to exist when the arbitration was commenced. In my view, if HH had ceased to exist, then SDBC no longer had HH as a counterparty to the agreement and thus even though at the outset there was a valid arbitration agreement, there could be no continuing agreement once one of the parties to the agreement ceased to exist. If the arbitration agreement had come to an end, there could no longer be any arbitration commenced pursuant to the agreement. This is clear in my view from the decision in Baytur S.A. v Finagro Holding S.A. In that case a dispute was referred to arbitration, each side appointed an arbitrator, and the two arbitrators appointed a third arbitrator. The parties presented their cases in writing over a period of 18 months but prior to publication of the award, the buyers had ceased to exist. Lloyd LJ held that the assignee had not become a party to the arbitration and since the buyer had ceased to exist the arbitration lapsed. Lloyd LJ said:

“What is the consequence? The immediate consequence was, undoubtedly, that the arbitration lapsed. An arbitration requires two or more parties. There cannot be a valid arbitration when one of the two parties has ceased to exist.”

    1. I cannot see that this conclusion in Baytur that there needs to be two parties in order to have a valid arbitration is in any way affected by the new approach introduced by the 1996 Act and the principle is therefore equally valid following the introduction of the 1996 Act. As such the challenge falls within section (1)(a) of section 30.

Conclusion on scope of section 67

    1. Accordingly, for the reasons discussed above, I find that the challenge brought by the claimant is within section 67 of the 1996 Act as being either within section 30 (1)(b) or, in the alternative, section 30(1)(a).

Pursuant to section 105 of the Business Corporations Act of the Marshall Islands (“BCA”), did HH exist as a corporate entity on 28 October 2014?

The decision of the arbitrator

    1. The arbitrator concluded that HH existed by reason of the trusteeship of Mr Chung (paragraph 41 of the Award): the arbitrator’s reasoning was that interpreting section 105 of the BCA in a uniform manner with the laws of Delaware meant that any trustee appointed pursuant to subsection (2) of section 105 continued in office until the expiration of all possible limitation periods.
    2. Counsel for the claimant stressed that this application proceeds by way of rehearing-Jiangsu Shagang Group Co Ltd v Loki Owning Company Ltd [2018] EWHC 330 (Comm) at [13] and [14]:

“[13] It is common ground that JSG’s challenge under s. 67 of the Act proceeds by way of re-hearing rather than review (see for example Azov Shipping Co v Baltic Shipping Co (No 1) [1999] 1 Lloyd’s Rep 68 ), and a party is (in general) entitled to adduce evidence which was not before the Arbitrators. …

[14] JSG is thus entitled to a full judicial determination on the evidence now, without any preconception that the Arbitrators reached the correct conclusion. This is an ” unfettered right ” – see People’s Insurance Co of China (Hebei Branch) v Vysanthi Shipping Co Ltd (The Joanna V) [2003] 2 Lloyd’s Rep 617 In The Kalisti [2014] 2 Lloyd’s Rep 449 Males J confirmed (at [9]) that the Court is ” not confined to a review of the arbitrators’ reasoning but effectively starts again…the decision and reasoning of the arbitrators is not entitled to any particular status or weight, although (depending on its cogency) the reasoning will inform and be of interest to the court”.”

    1. Counsel for SDBC appeared to accept that the matter proceeds before this court by way of a rehearing although counsel submitted that the arbitrator’s reasoning and his conclusion should be treated as “beyond reproach” and “highly persuasive”.
    2. Counsel for the claimant pointed out (fairly in my view) that, in reaching his decision, the arbitrator did not have the benefit of the evidence of Mr Steele on Delaware law or of cross examination of Mr Canavor or Ms Norman and in my view, this significantly affects any assistance which the court might otherwise have derived from the arbitrator’s reasoning.
    3. Counsel for SDBC referred in oral submissions to the factual findings of the arbitrator concerning the circumstances of the payment of the alleged bribe. In response, it was submitted for the claimant that firstly, the issue of the knowledge of SDBC was never tested in the arbitration (by reason of the fact HH was not and could not in the view of the claimant, be represented) and secondly, that the alleged payments were made by SDBC to HH and thence by HH to the order of SDBC with the full knowledge of SDBC. Accordingly, the claimant’s position is that the payments were neither corrupt nor bribes.
    4. It seems to me that on this application this court is not concerned with, and cannot express a view on, the merits of the substantive allegations which do not have any bearing on the issue of statutory construction before this court.
    5. Similarly, in my view the point, which was made on several occasions by counsel for SDBC, that HH filed for dissolution a matter of days after the payment was made, is irrelevant to the issue of statutory construction of section 105 of the BCA.

Relevant statutory provisions

    1. Section 105 of the BCA “Winding up affairs of corporation after dissolution” provides:

“(1) Continuation of corporation for winding up.

All corporations, whether they expire by their own limitations or are otherwise dissolved, shall nevertheless be continued for the term of three (3) years from such expiration or dissolution as bodies corporate for the purpose of prosecuting and defending suits by or against them, and of enabling them gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities, and to distribute to the shareholders any remaining assets, but not for the purpose of continuing the business for which the corporation was organized. With respect to any action, suit, or proceeding begun by or against the corporation either prior to or within three (3) years after the date of its expiration or dissolution, and not concluded within such period, the corporation shall be continued as a body corporate beyond that period for the purpose of concluding such action, suit or proceeding and until any judgment, order, or decree therein shall be fully executed. [emphasis added]

(2) Trustees.

Upon the dissolution of any corporation, or upon the expiration of the period of its corporate existence, the directors shall be trustees thereof, with full power to settle the affairs, collect the outstanding debts, sell and convey the property, real and personal, as may be required by the laws of the country where situated, prosecute and defend all such suits as may be necessary or proper for the purposes aforesaid, distribute the money and other property among the shareholders after paying or adequately providing for payment of its liabilities and obligations, and do all other acts which might be done by the corporation, before dissolution, that may be necessary for the final settlement of the unfinished business of the corporation. [emphasis added]

(3) Supervision by court of liquidation.

At any time within three (3) years after the filing of the articles of dissolution, the High Court of the Republic, in a special proceeding instituted under this subsection, upon the petition of the corporation, or of a creditor, claimant, director, officer, shareholder, subscriber for shares, incorporator or the Attorney-General on behalf of the Government of the Republic, may continue the liquidation of the corporation under the supervision of the court in the Republic and may make all such orders as it may deem proper in all matters in connection with the dissolution or in winding up the affairs of the corporation, including the appointment or removal of a receiver, who may be a director, officer or shareholder of the corporation. [emphasis added]

    1. Section 13 of BCA “Construction; adoption of United States corporation law” provides:

“This Act shall be applied and construed to make the laws of the Republic, with respect to the subject matter hereof, uniform with laws of the State of Delaware and other states of the United States of America with substantially similar legislative provisions. Insofar as it does not conflict with any other provision of this Act, the non-statutory law of the State of Delaware and of those other states of the United States of America with substantially similar legislative provisions is hereby declared to be and is hereby adopted as the law of the Republic, provided however, that this section shall not apply to resident domestic corporations.” [emphasis added]

    1. Section 278 of the Delaware Code provides:

“278. Continuation of corporation after dissolution for purposes of suit and winding up affairs:”

All corporations, whether they expire by their own limitation or are otherwise dissolved, shall nevertheless be continued, for the term of 3 years from such expiration or dissolution or for such longer period as the Court of Chancery shall in its discretion direct, as bodies corporate for the purpose of prosecuting and defending suits, whether civil, criminal or administrative, by or against them, and of enabling them gradually to settle and close their business, to dispose of and convey their property, to discharge their liabilities and to distribute to their stockholders any remaining assets, but not for the purpose of continuing the business for which the corporation was organized. With respect to any action, suit or proceeding begun by or against the corporation either prior to or within 3 years after the date of its expiration or dissolution, the action shall not abate by reason of the dissolution of the corporation; ?the corporation shall, solely for the purpose of such action, suit or proceeding, be continued as a body corporate beyond the 3-year period and until any judgments, orders or decrees therein shall be fully executed, without the necessity for any special direction to that effect by the Court of Chancery.

    1. Section 279 of the Delaware Code provides:

“279. Trustees or receivers for dissolved corporations; appointments; powers; duties “

When any corporation organized under this chapter shall be dissolved in any manner whatever, the Court of Chancery, on application of any creditor, stockholder or director of the corporation, or any other person who shows good cause therefor, at any time, may either appoint 1 or more of the directors of the corporation to be trustees, or appoint 1 or more persons to be receivers, of and for the corporation, to take charge of the corporation’s property, and to collect the debts and property due and belonging to the corporation, with power to prosecute and defend, in the name of the corporation, or otherwise, all such suits as may be necessary or proper for the purposes aforesaid, and to appoint an agent or agents under them, and to do all other acts which might be done by the corporation, if in being, that may be necessary for the final settlement of the unfinished business of the corporation. The powers of the trustees or receivers may be continued as long as the Court of Chancery shall think necessary for the purposes aforesaid. [emphasis added]

Expert evidence

    1. The principles concerning the interpretation of foreign statutes are well known. Where foreign law applies, it must be proved as a fact. Proof is obtained through experts familiar with the foreign law. Where there is no authority directly in point, it is for the expert to assist the English court in making a finding as to what the foreign court ruling would be if the issue was to arise for decision there.

Evidence of Mr Canavor

    1. The following evidence is derived from Mr Canavor’s report:

i) under section 105, trustees arise by automatic operation of law and have an indefinite term to allow them to dispose of pending litigation (paragraph 20, 34 of his report)ii) this is consistent with the BCA’s “sister provisions” under the Delaware code- section 105(2) serves the “same purpose” as section 279 of the Delaware code but by a “different method”; the automatic succession of the corporate being and with no requirement of “good cause” or an application to the court (paragraph 21, 34 of his report).

iii) In Krafft- Murphy, the Supreme Court of Delaware explained that a body corporate ceased to exist after the expiry of the three-year period under section 278 but section 278 did not extinguish the corporation’s underlying liability to third parties and thus section 279 enables a dissolved corporation (through a receiver) to sue and be sued after the expiry of the three-year period under section 278 (paragraph 30 of his report).

iv) The statute of limitation for claims is six years, there is no specific limitation period for claims based on fraud. In the case of fraud, statute provides for the cause of action to begin only when the innocent party discovers the cause of action in fraud or has had reasonable opportunity to discover the cause of action. It was not the intention that the BCA would allow dishonest companies to avoid liability by voluntarily winding themselves up. It would be inequitable and impermissible to deny a party a right to bring a claim in fraud. Under Delaware law the courts have referred to their “inherent equitable power to appoint a receiver” even where this remedy is not expressly available by statute (paragraph 36 – 42 of his report).

Mr Robb’s evidence

    1. The following evidence is derived from Mr Robb’s report:

i) there is no case law in the Marshall Islands on the true construction and effect of section 105 insofar as relevant (paragraph 23 of his report);ii) pursuant to section 13 of the BCA, Delaware case law can be used to interpret a statute of the Marshall Islands only if the Marshall Islands statute is “substantially similar” to the Delaware statute and that is not the case here: sections 278 and 279 are not substantially similar to sections 105 (1) and 105 (2) (paragraph 27 of his report);

iii) there is no exception in the language of section 105 (1) to allow for an exception for a fraud claim; six years is the residual limitation period for all actions not just for fraud actions and the omission of any exception for fraud is deemed under the rules of statutory interpretation to be intentional (paragraph 47 of his report).

Ms Norman’s evidence

    1. Ms Norman’s evidence was that under Delaware law section 278 permits the court in its discretion and prior to the expiry of three years from the date of dissolution to continue the corporate existence for an additional period of time in order to complete the winding up of its affairs. Section 278 applies only to actions commenced prior to the corporate dissolution or within the three-year period after dissolution (paragraphs 52 – 54 of her report). It may be possible to bring a suit against a dissolved entity under section 279 which provides for an application to the court to appoint a trustee or receiver and is directed to the restoration of corporate existence (paragraph 59 of her report).

Evidence of Mr Steele

    1. In his report Mr Steele stated that:

i) although the language contained in section 105 (1) of the BCA is “arguably similar” to section 278, the Delaware code contains a number of statutory guidelines governing the post dissolution that are either not analogous to section 105 or are not reflected in section 105 or elsewhere in the BCA (paragraph 19 of his report);ii) while section 279 could be considered “analogous in broad strokes” to section 105, there are significant differences, namely that section 279 explicitly provides that the Court of Chancery may appoint a trustee or receiver for a dissolved corporation “at any time” to wind up the corporation’s affairs under court supervision.

Submissions

    1. It was submitted for SDBC that that the exercise under section 13 of BCA is not to try and discover a perfect match in the wording of a statute, but rather to look to analogous statutes that seek to achieve the same purpose and then seek any guidance from it. It was submitted that if one accepts that section 13 is a tool to help interpretation where required, you look at the purpose of the Delaware legislation and then apply the same purpose in interpreting section 105 of the Marshall Islands.
    2. It was also submitted for SDBC that, as a matter of Delaware law, in the three years after the dissolution, the company continues to exist as a body corporate and “body corporate” denotes that it has a body and that is the directors. Counsel advanced two possibilities: firstly, that the directors also have the power of trustees during the three years after dissolution in parallel but do not need to exercise them during the three years; alternatively, that the word “dissolution” means that the directors become trustees at the end of the three years. Counsel submitted that whichever it is, it does not change the outcome: after the three year period expires, section 279 of the Delaware Code empowers the court to oversee and facilitate by appointing a trustee or receiver. It was submitted that the trusteeship permits all acts which might be done by the corporation before it was dissolved that may be necessary for the final settlement of the “unfinished business” of the corporation (as referred to in section 279) and continues until that has been done. So, when the corporation has, in its post-life form, no unfinished business then a trustee can approach the court and seek confirmation to that effect but there is no limit.
    3. Counsel for SDBC submitted that the decision in Krafft establishes that section 278 does not extinguish the corporation’s underlying liability to third parties. To the contrary, section 279 enables a dissolved corporation through a receiver or trustee to sue and be sued after the expiration of the three-year period under section 278.
    4. Counsel for SDBC submitted that similarly, under section 105(1) there is a body corporate for a purpose which is defined. When that body corporate ceases to exist and is dissolved, a trustee is in place under section 105(2) with full power to do a range of things including, take care of “unfinished business”, as expressly referred to in section 105 (2). So, if it is a very simple company and it has no ongoing activities, section 105(1) is likely to be all that is needed. If the situation is more complex and the company’s business and activities are more complex and more long-standing the body corporate may dissolve after three years but that does not extinguish that dissolved corporation’s underlying liabilities, which will continue to exist and if required will be dealt with by a trustee under its power to deal with the unfinished business of the corporation.

For the claimant

    1. It was submitted for the claimant that the structure of section 105 was clear from the plain language:

i) the general rule was that the corporation continued for three years from the articles of dissolution being filed. After the expiry of that three-year period, the general rule was that the corporation ceased to exist.ii) the three-year period is only for certain discrete purposes enabling the company gradually to close its business, discharge its liabilities and distribute assets to shareholders; that is why directors become trustees from the date of dissolution. Subparagraph (2) provides the machinery to give effect to the general impact of section 105.

iii) The exceptions to the three-year period are only where legal actions are commenced within the three-year period or where under sub paragraph (3) the High Court orders the continuation of the liquidation under the supervision of the court.

    1. Counsel for the claimant accepted that under section 279 the Delaware court has the power to restore the corporate existence of a company. This can be done at any time if “good cause” is shown. However, counsel submitted that no such application has been made in Delaware or the Marshall Islands and so even if this jurisdiction were available, the issue is moot.

Discussion

Approach to interpretation

    1. It was submitted for SDBC that you look at the purpose of the Delaware legislation and then apply the same purpose in interpreting section 105 of the Marshall Islands. In Krafft-Murphy it was said (page 6 of the report) that whilst at common law dissolution marked a corporation’s “civil death”, the statutory provisions in sections 278 – 282 supplant and supersede the common law “by prolonging a corporation’s existence and its exposure to liability.” Thus, it was submitted that the purpose of the Delaware provisions was to extend the life of the company and to allow for claims to be brought.
    2. The approach to interpretation of statutes in the Marshall Islands was set out in the Supreme Court decision in Lekka v Kabua. This stated that:

“The pre-eminent canon of statutory interpretation requires us to presume that the legislature says in a statute what it means and means in a statute what it says there… Thus statutory interpretation begins with the statutory text… If the statutory language is unambiguous and the statutory scheme is coherent and consistent, judicial enquiry must cease… Resorting to legislative history as an interpretive device is inappropriate if the statute is clear… When a statute designates certain persons, things, or manners of operation, all omissions should be understood as exclusions…” [emphasis added]

    1. Counsel for SDBC seemed to accept that these prinicples were relevant, relying in particular on the final sentence cited above of the extract from Lekka as part of his closing submissions. In cross examination Mr Canavor seemed reluctant to accept that these were the guiding principles. However, the weight to be given to Mr Canavor’s evidence must be assessed in the light of the following matters:

i) Mr Canavor was attorney general of the Marshall Islands from October 2009 to October 2011 but he is not currently practising as a lawyer in the Marshall Islands nor had he done so prior to his appointment as Attorney General.ii) During his period as Attorney General Mr Canavor had not had to consider section 105 BCA or the Delaware uniformity principle on the operation and effect of section 105. He accepted that he had not previously considered section 105 until asked to prepare an expert report for the arbitration.

In the light of this it seems to me that his expertise in relation to the issue before the court is in fact extremely limited and the court can derive little or no real assistance from his views.

    1. I proceed on the basis that the principles in Lekka are both relevant and should be applied. Whilst the provisions of section 13 provide for “uniform interpretation” with the laws of the State of Delaware, in my view the correct starting point is the language of section 105 and the interrelationship of subsections (1) and (2). Mr Canavor was expressly asked in cross examination how section 13 should operate where Delaware and the Marshall Islands depart from a template; should one ignore the changes and apply Delaware law come what may or does one take the approach that the legislature of the Marshall Islands has tried to do something different from Delaware and therefore the statute in the Marshall Islands should be given a potentially different effect. Mr Canavor seemed reluctant to answer the question directly; eventually he said that one would start with the Marshall Islands law if there was a case in point but if there was no case in point Delaware law was incorporated into Marshall Islands law. I do not understand how this answer sits with the approach taken in Lekka. As I have already indicated Mr Canavor’s evidence appears to be his view without any experience or knowledge to substantiate his view and I do not accept his evidence on this point.
    2. It was submitted for SDBC that subparagraph (2) might mean that trustees were appointed from the expiry of three years from dissolution rather than immediately upon filing articles of dissolution. This submission of counsel for SDBC was a construction which had found favour with the arbitrator. However, although the arbitrator had expert evidence in the form of a report from Mr Canavor, Mr Canavor was not cross-examined before the arbitrator. In cross examination the evidence of Mr Canavor on this point was clear and to the contrary:

“Q. … You say: upon the filing of articles of dissolution directors become trustees.

A. Under 105(2), that’s correct.

Q. Now, that means that at the beginning of the process of continuation rather than the end of the process of continuation, the trusteeship has been established?

A. That would be correct.”

    1. This view is consistent with the evidence of Mr Robb (paragraph 21 of his report). On the basis of the expert evidence I therefore reject the submission for SDBC and proceed on the basis that the appointment of the directors as trustees in subsection (2) occurs immediately upon the articles of dissolution being filed and thus is coterminous with the initial 3 year period.
    2. Counsel for SDBC submitted that both the function of directors and trustees carried on after dissolution. He relied on section 102(7) of BCA which provides for the revocation of the dissolution of the company by the board of directors resolving to revoke the dissolution. This proposition was not put to the experts and therefore the court has no expert evidence as to how this fits with the scheme of section 105. In any event in cross examination Mr Robb rejected the proposition that there was a distinction between a company existing as a body corporate and a company that does not exist as body corporate but has a trustee with certain powers. Mr Robb said:

“I think if there’s a trustee appointed, … it’s not a trustee in the classic law of trust. It’s telling the director, you’re no longer a director for the purpose of continuing the business. You are now to act as a trustee to wind up and settle the affairs of this corporation, and indeed as a trustee you have a fiduciary obligation to the shareholders and creditors, which the director normally would not have. So I think it’s just saying, hey, director, you know,things have changed. You’ve dissolved. You got three years to wrap this up, act as a trustee in doing so.”

    1. Mr Canavor’s evidence was that section 105(2) creates an indefinite existence for the company subject only to limitation. His evidence as to the nature of the continuing entity was unclear: he appeared to say that the company continued through the trustees and not as a corporate body, but when asked to explain what happened to litigation that was started prior to the expiry of the three year period against the corporate body, he could not explain how that liability then transferred to the trustees.
    2. Mr Canavor’s evidence in cross-examination appeared to be that the company ceased to exist as a corporate body but continued in some form through the trustees for so long as any claims might be brought against the company. He was asked:

“… assuming that the criterion of corporate existence is the availability somewhere in the world of an arguable cause of action — cause of action which won’t be struck out — then no Marshall Islands company will ever cease to exist upon the expiry of three years from filing of articles of dissolution?”

    1. Mr Canavor responded:

“I would agree with that.”

    1. In cross-examination Mr Robb was asked whether it would “make sense” that the directors continue on as trustee post the three-year period, exercising the full powers they have under section 105 (2). Mr Robb responded that, where there is a need to continue the liquidation of the company one should apply to the court under section 105(3). He observed that the automatic continuation of a statutory trustee would mean that a company in the Marshall Islands could never die but would continue potentially forever and he expressed the view that this would be unique among USA common law jurisdictions and that he did not think that would be anything that the court and the Marshall Islands would agree to.
    2. Counsel for SDBC submitted that the reference to “unfinished business” in section 105(2) would extend to any potential claim in the future. Counsel submitted that for practical purposes straightforward companies would be wound up within the three-year period.
    3. It seems to me that the interpretation advanced by counsel for SDBC for subsection (2) would mean that in effect the company would always continue in existence beyond the three years in sub paragraph (1) albeit through the mechanism of the trustees. This would have the result that there would appear to be no purpose to the three year limitation in subparagraph (1).
    4. Further there was no evidence to support the submission for SDBC that the otherwise indefinite trusteeship could be brought to an end by an application to the court. Even if such an application could be brought, it is unclear how this would operate given that companies would not know if there were latent claims e.g. environmental or hidden property defects, which according to Mr Canavor would mean that the company continued in existence.
    5. The proposition of an automatic and indefinite trusteeship is very different from the position in Delaware where the company will come to an end after three years but there is express provision for a company to be resuscitated if “good cause” is shown to the court.
    6. Counsel for SDBC also relied on the Nevada case of Canarelli but in my view, that did not establish that (as a matter of Nevada law) the trusteeship continued indefinitely (or could be ended by an application to the court). It is clear from the judgment that under Nevada law:

“winding up is complete upon the final disposition of assets to the shareholders and the payment of debt to creditors… While the corporation continues as a legal entity for the purpose of post dissolution claims,… a director trustee’s statutory power to act on behalf the dissolved corporation terminates once the wind-up process is complete”

There was express provision under Nevada law for an application to be made to the court following the dissolution of the corporation to continue the director trustees but the court held that the relevant statute did not confer authority on the court to appoint an unwilling director trustee of the dissolved corporation, whose winding up process had been completed, to serve as director trustee of the dissolved corporation.

    1. Further on SDBC’s interpretation, the continuation of the company’s existence through the trustees for the purpose of litigation would extend even after the distribution of assets to shareholders pending these unknown claims being brought. It is unclear how any such claims would therefore be satisfied.
    2. Accepting the evidence of the experts that the appointment of the trustees takes effect immediately on the filing of the dissolution, it seems to me that the natural meaning of the language in subparagraphs (1) and (2) is that under subparagraph (1) the company exists for a further three years to allow the company to be wound up. In order to effect the orderly wind down of the company the directors are constituted as trustees with “powers” to carry out the purpose stated in subparagraph (1).
    3. It seems to me contrary to the natural language of “powers” to interpret subsection (2) as giving rise to continuing obligations on the part of the company, independently of subsection (1) albeit through the trustees, in order to preserve any liabilities for future litigation. In my view subsection (2) confers the powers upon the directors to carry out the functions required pursuant to subsection (1). In my view the fact that the trustees are expressly given power under subsection (2) to do all other acts that may be necessary for the “final settlement of the unfinished business” does not independently extend the life of the corporation which under subsection (1) is expressly continued for a term of three years (subject to the express extension for litigation commenced within the three-year period). Subsection (1) expressly refers to “enabling them gradually to settle and close their business” and distributing to shareholders any remaining assets. It is therefore in my view inconsistent with these purposes in subsection (1) to interpret subsection (2) as continuing the life of the corporation beyond the point at which the assets have been distributed to shareholders.
    4. Assuming that a Marshall Island court would have regard to Delaware law as analogous in the circumstances, I note that Ms Norman accepted that under Delaware law the effect of section 278 was that company ceased to exist after 3 years and was only resuscitated if court so ordered.
    5. Further I do not see that the conclusion which I have reached on the language is in any way inconsistent with the decision in Krafft. In Krafft it was held that section 278 prolonged the existence of the body corporate for three years and thereafter section 279 empowered the court to facilitate the completion of unfinished business by appointing a trustee or receiver. Further the court held that section 278 did not operate as a statute of limitations that would extinguish a dissolved corporation’s liability to third parties and thus section 279 enabled a dissolved corporation through a receiver to pursue and be sued after the expiration of the three-year period under section 278. In my view section 279 is dependent on an application being made to the court and there is no such equivalent right under section 105 (unless made within the three year period).
    6. It was submitted by counsel for SDBC (supported by the evidence of Mr Canavor) that there was no such right because the courts in the Marshall Islands would not have the resources to deal with applications and therefore this explained why the provision for trustees under sub paragraph (2) was automatic. I have already expressed my approach to the evidence of Mr Canavor and even if it is correct that the Marshall Islands has limited resources, it does not constitute a basis to override the clear language of section 105. Further it should be noted that there is a right to apply to the court under subsection (3) which would suggest that the court does regard itself as having sufficient resources to deal with applications in certain circumstances.
    7. Finally, on interpretation it seems to me that it is significant that under section 105 (3) the right to apply to the court is within the three-year period only. Counsel for SDBC submitted that this was a provision to enable the court to deal with complicated or difficult liquidations. It is unclear however why if such a supervision is required in these cases, it does not extend to companies once they are continued in the form of the trusteeship. There was no expert evidence which would explain this.

Fraud exception

    1. In my view there is no basis to interpret section 105 as allowing a party to bring a claim in fraud notwithstanding the expiry of the three year period. Section 105(1) expressly deals with litigation commenced after the date of dissolution but imposes a three year time limit. There is no distinction or exception made for fraud claims.
    2. Even if there is an inherent equitable power (as Mr Canavor contends), no application had been made to the courts of the Marshall Islands for the courts to exercise such inherent power prior to the commencement of the arbitration. To the extent that it was submitted in closing for SDBC that the inherent jurisdiction would arise without an application to the court, that seems to me to give rise to an impossible uncertainty as to whether or not the company remained in existence and in any event is contrary both to the provisions of the Delaware case law (as described at paragraph 41 of by Mr Canavor’s report) and paragraph 42 of his report applying such Delaware principles to the Marshall Islands law, both of which contemplate the appointment of a receiver by the court, in exercise of its powers, rather than a continuation of the corporation without any action on the part of the court.

Evidence of change in last known address

    1. A further point was mentioned in submissions concerning an apparent change in the address of HH after the expiry of the three-year period from the date of dissolution. Counsel for SDBC referred to the evidence of Mr Strauss, a lawyer in the Marshall Islands, instructed on behalf of SDBC to serve the notice of arbitration and subsequently other arbitral documents on HH. In emails sent by the trust company designated to administer Marshall Islands entities, Mr Strauss was advised that there had been a change of HH’s “last known address” after the alleged final date of dissolution in 2014.
    2. The evidence of Mr Yoon (paragraph 16 of his witness statement) is that at a meeting with a Ms Chae from the trust company, she told him that the employee concerned seemed to have made a “clerical mistake” in relation to HH’s billing agent address in a situation where she did not “understand the background”.
    3. Counsel for SDBC submitted that it “certainly seems to suggest that our interpretation and view on section 105(2) is right because we have a company that on their case was dissolved and had no life, no pulse, and could never be resurrected still exhibiting something of a pulse”. The submission that the company was still in existence is in my view rebutted by the evidence of Mr Yoon. Further, in my view such evidence is not relevant to the issue of statutory construction and it does not affect my conclusion on the meaning of section 105.

Conclusion on section 105

  1. For the reasons discussed above, I find that the interpretation of section 105 of BCA is that the company exists for three years after the filing of the articles of dissolution and the period is not extended by subsection (2). If claims are brought within the three-year period then the period of the company’s life will be extended under subsection (1). However, the life of the company is not indefinite by virtue of the trusteeship under subsection (2) and subsection (2) does not extend the life of the company in order to dispose of potential claims in the future.
  2. The provisions of section 279 cannot override the language of section 105 merely because they are dealing with the same situation, i.e. the position of the company following dissolution and in that sense “sister provisions”. Delaware law has adopted a different approach namely that the life of a company can be revived after the three year period through an application to the court and the appointment of the directors as trustees. The dissimilarities between section 105 and sections 278 – 279 are significant enough to conclude that it is not possible to construe section 105 in a manner which is “uniform” with section 278-279 of Delaware law.
  3. Accordingly, for all these reasons, I find that pursuant to section 105 of the BCA, HH had ceased to exist by October 2014.

MRC Total Build Ltd. v F&M Installations Ltd., 2019 BCSC 765

IN THE SUPREME COURT OF BRITISH COLUMBIA

Citation: MRC Total Build Ltd. v. F&M Installations Ltd.,
2019 BCSC 765

Date: 20190515

Docket: S1813447

Registry: Vancouver

Between:

MRC Total Build Ltd.

Plaintiff

And

F & M Installations Ltd.

Defendant

Before: The Honourable Madam Justice Fitzpatrick

Reasons for Judgment

Counsel for Plaintiff: D.P. Lucas
Counsel for Defendant: L.M. Low
Place and Date of Hearing: Vancouver, B.C.

April 25, 2019

Place and Date of Judgment: Vancouver, B.C.

May 15, 2019

 

INTRODUCTION

[1]           The plaintiff MRC Total Build Ltd. (“MRC”) and the defendant F & M Installations Ltd. (“F&M”) are parties to a construction subcontract. MRC commenced this action to resolve a dispute that arose from that subcontract.

[2]           F&M takes the position that the resolution of the dispute must be determined by arbitration pursuant to the terms of the Arbitration Act, R.S.B.C. 1996, c. 55 (the “Act”). As such, F&M now applies to stay this action to allow an arbitration to proceed. MRC opposes this relief.

BACKGROUND FACTS

[3]           On July 18, 2016, British Columbia Hydro Power and Authority (“BC Hydro”), as “Owner”, and F&M, as “Contractor”, entered into a construction contract (the “Prime Contract”) to upgrade the Horne Payne Substation in Burnaby, B.C. (the “Project”).

[4]           On August 10, 2016, F&M, as “Contractor”, entered into a subcontract with MRC, as “Subcontractor”, to provide civil construction services relating to the Project (the “Subcontract”).

[5]           I will set out the specific provisions of the Prime Contract and Subcontract below in the discussion of the issues.

[6]           In the summer of 2017, design problems arose in relation to the Project, resulting in delays in completing the work under both the Prime Contract and the Subcontract. These problems and delays caused disputes between BC Hydro/F&M under the Prime Contract and between F&M/MRC under the Subcontract.

[7]           The specifics of the dispute between F&M and MRC are not relevant to this application, other than to note that MRC alleged that F&M failed to address its disputes with BC Hydro under the Prime Contract in a timely fashion, including under the dispute resolution provisions of that contract.

[8]           In October 2018, when the issues with F&M remained unresolved, MRC demobilized its operations and left the Project site.

[9]           On December 14, 2018, MRC filed this action against F&M claiming damages for breach of the Subcontract or, alternatively, a remedy for unjust enrichment or quantum meruit. Neither party have taken any further steps in the litigation beyond F&M’s filing of this application.

THE LAW / ISSUES

[10]        The relevant statutory provisions are s. 15(1) and (2) of the Act:

15        (1) If a party to an arbitration agreement commences legal proceedings in a court against another party to the agreement in respect of a matter agreed to be submitted to arbitration, a party to the legal proceedings may apply, before filing a response to civil claim or a response to family claim or taking any other step in the proceedings, to that court to stay the legal proceedings.

(2) In an application under subsection (1), the court must make an order staying the legal proceedings unless it determines that the arbitration agreement is void, inoperative or incapable of being performed.

[11]        In Prince George (City) v. McElhanney Engineering Services Ltd., (1995), 1995 CanLII 2487 (BC CA), 9 B.C.L.R. (3d) 368 (C.A.) at para. 22, the court set out three prerequisites to the application of s. 15(1):

  1. a) a party to an arbitration agreement has commenced legal proceedings against another party to the agreement;
  2. b) the legal proceedings are in respect of a matter agreed to be submitted to arbitration; and
  3. c) the application is brought before the applicant takes a step in the proceeding.

[12]        The test to be applied as to whether the court should stay legal proceedings in favour of arbitration was addressed in Sum Trade Corp. v. Agricom International Inc., 2018 BCCA 379 (CanLII) at para. 26, applying Gulf Canada Resources Ltd. v. Arochem International Ltd. (1992), 1992 CanLII 4033 (BC CA), 66 B.C.L.R. (2d) 113 (C.A.) at paras. 39-40. At para. 29 in Sum Trade, the court stated “both scope and applicability are appropriate questions for the arbitral tribunal”.

[13]        That is not to say that the Court has no role in the consideration of the first prerequisite under s. 15(1), namely whether an arbitration agreement exists. However, in Sum Trade at paras. 34-35, the court summarized its view that only in “clear” cases will the Court hearing a stay application rule on the existence of an arbitration agreement. If the issue is “arguable”, the Court should grant a stay and leave the question as to whether a party is bound to arbitrate the dispute to be decided by the arbitrator: Prince George at para. 53. This principle similarly applies to any issue as to the scope of the arbitration, however no issue in that respect arises here.

[14]         Accordingly, any challenges to an arbitrator’s jurisdiction should first be determined by the arbitrator, although the Court may consider any challenge as to an arbitrator’s jurisdiction if it involves a pure question of law, or one of mixed fact and law requiring “only superficial consideration of the documentary evidence in the record”: Sum Trade at paras. 34-35.

[15]        If the prerequisites of s. 15(1) are met, a stay of proceedings is mandatory unless the plaintiff establishes that the arbitration agreement is void, inoperative or incapable of being performed pursuant to s. 15(2) of the ActHayes Forest Services Ltd. v. Teal Cedar Products Ltd., 2008 BCCA 283 (CanLII) at para. 67.

[16]        As with issues concerning the existence of the arbitration agreement, the application of s. 15(2) must also be “clear” before the Court will refuse a stay. If it is less than clear or it is arguable, it may be preferable to stay the action and leave these issues for determination by the arbitrator: Sum Trade at paras. 21, 37.

[17]        No issues arise here with respect to the second and third prerequisites under s. 15(1), as stated in Prince George.

[18]        MRC opposes F&M’s application for a stay on two bases, alleging:

  1. a)there is no arbitration agreement between MRC and F&M (the first prerequisite under  15(1)); and
  2. b)in the alternative, if  15(1) is satisfied, the arbitration agreement is “incapable of being performed” by MRC and F&M (s. 15(2)).

IS THERE AN ARBITRATION AGREEMENT?

[19]        The parties agree that F&M bears the onus of proving the prerequisites under s. 15(1), including the only relevant one on this application, namely whether there is an agreement between the parties to arbitrate the dispute.

[20]        The Subcontract does not contain any dispute resolution provisions, let alone any provision requiring arbitration of any disputes. However, the Prime Contract does. F&M takes the position that the Subcontract incorporates the dispute resolution provisions of the Prime Contract such that there is a similar requirement to arbitrate disputes under the Subcontract.

[21]        MRC disagrees. MRC contends that it is clear and unambiguous on the face of the documents that the Subcontract did not incorporate the arbitration provisions found in the Prime Contract into the Subcontract.

[22]        At this stage, the relevant provisions of the Prime Contract and Subcontract bear consideration.

The Prime Contract

[23]        In Section 2.2, “Contract Documents” are defined to be the Prime Contract (the “Agreement”) and various titled appendices.

[24]        The list of appendices includes “Appendix A – General Conditions (Construction)”. The relevant provisions of the General Conditions or “GCs” are:

GC.1   INTERPRETATION

“Agreement” means the form of agreement which is signed by the parties and included in the Contract Documents;

“BC Hydro” means the entity identified as “BC Hydro” on the first page of the Agreement; …

            “Contract” means the agreement between BC Hydro and the Contractor as defined and described in the Contract Documents, as may be amended, supplemented or restated from time to time;

“Contract Documents” means the documents listed and described in Section 2.2 of the Agreement; …

            “Contractor” means the entity identified as “Contractor” on the first page of the Agreement [i.e. F&M]; …

            “Contractor’s Representative” has the meaning set out in GC.2.1; …

            “Dispute Resolution Procedure” means the dispute resolution procedure set out in GC.12; …

            “Hydro’s Representative” has the meaning set out in GC.3.1; …

            “Person” means any individual, sole proprietorship, corporation, company, partnership, unincorporated association, association, institution, entity, party, trust, joint venture, estate, cooperative or other judicial entity; …

            “Representative” means the either Hydro’s Representative or the Contractor’s Representative, as the case may be; …

            “Subcontractor” has the meaning set out in GC.4.14;

            GC.2  CONTRACTOR’S REPRESENTATIVE

            2.1      Appointment of Contractor’s Representative

            The Contractor will, upon executing the Agreement, designate in writing an individual (the “Contractor’s Representative”) to be the Contractor’s representative and single point of contact with respect to the Contract. The Contractor will give prompt written notice of such appointment to Hydro’s Representative. If, for any reason, the appointed Contractor’s Representative is discontinued, then the Contractor will, as soon as practicable, appoint a replacement and give prompt written notice to Hydro’s Representative of such replacement. If, at any time, Hydro’s Representative, acting reasonably, objects to the Contractor’s Replacement, then the Contractor will give consideration to replacing the Contractor’s Representative with a Person acceptable to Hydro’s Representative. The Contractor’s Representative may, at the Contractor’s election, be an employee of the Contractor, or be a consultant or other third party.

            GC.3  HYDRO’S REPRESENTATIVE

            3.1      Appointment of Hydro’s Representative

            BC Hydro will appoint an individual (“Hydro’s Representative”) to be BC Hydro’s single point of contact with respect to the Contract. BC Hydro will give prompt written notice of such appointment to the Contractor. If, for any reason, the appointed Hydro’s Representative’s appointment is discontinued, then BC Hydro will, as soon as practicable, appoint a replacement and give prompt written notice to the Contractor of such replacement. If, at any time, the Contractor’s Representative, acting reasonably, objects to Hydro’s Representative, then BC Hydro will give consideration to replacing Hydro’s Representative with a Person acceptable to the Contractor’s Representative. Hydro’s Representative may, at BC Hydro’s election, be an employee of BC Hydro, or be a consultant or other third party.

            GC.4   EXECUTION OF THE WORK

4.14     Subcontractors

The following will apply with respect to all subcontractors, sub-consultants, suppliers, manufacturers and vendors (each, a “Subcontractor” and the term “Subcontractor” will be deemed to include all further subcontractors, sub-consultants, suppliers, manufacturers and vendors engaged below a Subcontractor) engaged to perform a portion of the Work:

(a)        the Contractor will not, in the aggregate, subcontract more than 75% of the Work (such that no more than 75% of the Contract Price will be in payment for Work performed by Subcontractor(s)) without the prior written consent of Hydro’s Representative, which consent may be arbitrarily withheld;

(f)         the Contractor will:

(i)         require all first tier Subcontractors to perform their work in accordance with the Contract Documents;

(ii)       incorporate the terms and conditions of the Contract Documents into all agreement with first tier Subcontractors, including GC.4.14(d);

(iii)       make commercially reasonable efforts to have the terms and conditions of the Contract Documents incorporated into all agreements with Subcontractors below the first tier to the extent the terms and conditions of the Contract Document are applicable to the Work being undertaken by such Subcontractors; …

(g)        nothing in the Contract will be construed as creating any contractual relationship between BC Hydro and any Subcontractor or any other Persons engaged by or through a Subcontractor.

GC.12  DISPUTES

12.1     Dispute Resolution

Except as expressly set out otherwise in the Contract Documents, all disputes relating to or arising out of the Contract (each, a “Dispute”) will be resolved in accordance with GC.12.

12.2     Good Faith Efforts to Resolve any Dispute

Without in any way limiting the parties’ rights under the Contract, BC Hydro will encourage and support Hydro’s Representative and the Contractor will encourage and support the Contractor’s Representative to use good faith efforts to resolve any Dispute promptly upon becoming aware of the Dispute, and the Representatives will continue to use such efforts after the delivery of a Dispute Notice, including the early full disclosure and exchange of all documents and information that may be relevant to the Dispute.

12.3     Dispute Notice

A party with a Dispute may, at any time, deliver written notice to the other party, with a copy to Hydro’s Representative or the Contractor’s Representative, as applicable, describing the Dispute (the “Dispute Notice”). A Dispute Notice will include, at a minimum:

(a)        a summary of the facts relevant to the Dispute;

(b)        the applicable provisions of the Contract relevant to the Dispute or other basis for the claim upon which the disputing party relies;

(c)        additional supporting documentation, if any, as may be relevant to the dispute and available; and

(d)        a clear statement of the resolution to the Dispute being sought by the disputing party.

12.4     Initial Settlement Meeting

Within 45 days of delivery of a Dispute Notice, or such other time as the parties may agree in writing, the Dispute will, if not already settled, be referred to a representatives(s) of each of the parties who, to the extent reasonably practicable, have not been previously involved in the events leading to the Dispute for a settlement meeting to occur within such 45 day period.

12.5     Additional Settlement

If a Dispute is not settled by a written agreement (a “Settlement Agreement”) signed by authorized representatives of both parties after an initial settlement meeting held in accordance with GC.12.4, then, without extending the time limit set out in GC.12.7(b), BC Hydro may, in its sole discretion, direct in writing that an additional settlement meeting or meetings be convened at which BC Hydro will be represented by a new a representative(s). BC Hydro will give consideration to a request from the Contractor for an additional settlement meeting or meetings and for specific BC Hydro representatives to be in attendance at such meetings, but BC Hydro will not be obligated to agree to convene a requested additional settlement meeting nor to bring the requested individuals.

12.6     Representatives at Settlement Meetings

The parties will send representatives to the settlement meeting(s) as described in GC.12.4 and GC.12.5, in each case with authority to enter into a Settlement Agreement that is binding on the parties, and with instructions to use all commercially reasonable efforts to resolve the Dispute without delay. Except with the express written consent of the Contractor, BC Hydro’s representative(s), in the meetings held pursuant to GC.12.4 or GC.12.5, will include a person(s) other than Hydro’s Representative. Notwithstanding any other provision in GC.12, the parties may have any individuals in attendance at any settlement meeting, including their respective Representatives.

12.7     Ultimate Time for Settlement

If a Dispute is not:

(a)        referred to the parties’ representatives within the time specified in GC.12.4; or

(b)        settled by a Settlement Agreement within 90 days after receipt of the Dispute Notice, or such other time as the parties may agree in writing,

then upon written notice of either party delivered to the other party, the unresolved Dispute will be submitted to arbitration pursuant to GC.12.8.

[25]        GC.12.8 of the Prime Contract sets out specific provisions for the conduct of an arbitration, including that it is to be conducting in accordance with the rules of the British Columbia International Commercial Arbitration Centre and the Act.

The Subcontract

[26]        The Subcontract defines “Contract” as comprising the Subcontract Agreement and various schedules. Schedule I is described as the “Prime Contract documents, drawings & specifications”. “Prime Contract” is defined to mean:

… the general contracting agreement between the Contractor [F&M] and the Owner [BC Hydro] and the plans, specifications and documents comprised therein. …

[27]        Section 6 of the Subcontract , said to be a “key” provision by F&M, states:

  1.         Contract Documents and Drawings

The Prime Contract, associated drawings and specifications for the scope of work are attached in Schedule I and form part of this Subcontract Agreement. Subcontractor is to review in detail to ensure all the information required to perform scope of work has been provided. Subcontractor is to advise the Contractor in writing 14 days in advance of the date you require this information to allow for the Contractor respond or obtain from Owner. Failure to do so may result in delays to the project and potential cost impacts not recoverable from the Contractor or the Owner.

[Emphasis added.]

[28]        The Subcontract does not contain any dispute resolution procedures and particularly, any requirement that the parties arbitrate disputes.

[29]        There are various specific references to the Prime Contract in the Subcontract:

  1. a)Under “Terms of Payment”, payment of holdbacks was to be accordance with the Prime Contract;
  2. b)In Section 2, employees of the Subcontractor must conform to the environmental requirements under the Prime Contract;
  3. c)In Section 5, all materials provided under the Subcontractor must conform to the Prime Contract documents and specifications;
  4. d)In Section 7.2(vi), the limits of insurance to be provided by the Subcontractor must conform to the corresponding limits under the Prime Contract; and
  5. e)In Section 13, the Subcontractor must promptly correct defects and deficiencies in the Work prior to or during the warranty period specified in the Prime Contract.

Discussion

[30]        Per Sum Trade, the nub of the dispute between the parties on this application is whether it is “clear” or “arguable” that the terms of the Prime Contract (which includes an obligation to arbitrate any disputes: GCs 12.1/12.7) are incorporated into the Subcontract to similarly require that disputes under that contract be resolved in that fashion.

[31]        MRC submits that it is clear that the arbitration provisions under the Prime Contract were not incorporated into the Subcontract. MRC further submits that such a conclusion is possible from only a review of the documents themselves. To the contrary, F&M says that it is clear that the requirement to arbitrate in the Prime Contract had been incorporated into the Subcontract. At the very least, F&M says it is “arguable” and the issue should be left for the arbitrator.

[32]        F&M refers to a number of cases that consider whether an arbitration clause can be incorporated by reference from one contract into another to require a party to the latter contract to resolve disputes by arbitration. As F&M argues, incorporation by reference is an efficient drafting mechanism to avoid repeating the other contractual terms in the second contract.

[33]        In Sum Trade, the court was considering agreements for the purchase of lentils that included a reference to a standard form contract drawn by the Grain and Feed Trade Association (“GAFTA”). The GAFTA contract included an express provision requiring arbitration of disputes. The court upheld the finding in this Court that it was arguable that the sale contracts had incorporated the GAFTA rules, including the requirement to arbitrate (paras. 38-42). The evidence before this Court included not only the documents, but evidence of the parties’ exchange of draft contracts and industry practice (para. 39).

[34]        In Rettinger v. Loof[1998] B.C.J. No. 313 (S.C.), the parties had executed shareholders agreements, which contained an arbitration clause, and management agreements that did not provide for arbitration. At para. 29, Justice Drost concluded that the shareholders agreements were intended to be “umbrella agreements” so that their terms with respect to dispute resolution included disputes arising out of the ancillary contracts, namely the management agreements.

[35]        In Mussche v. Voortman Cookies Limited, 2012 BCSC 953 (CanLII), the issue was whether the agreement between the parties included the terms of a policy manual and handbook which mandated arbitration of disputes. At para. 48, the Court found that the issue as to whether the handbook was incorporated into the parties’ agreement was arguable. Applying Prince George, the Court concluded that the issue should be determined by the arbitrator.

[36]        The final “incorporation by reference” case cited by F&M is One West Holdings Ltd. v. Greata Ranch Holdings Corp., 2014 BCCA 67 (CanLII), leave to appeal ref’d [2014] S.C.C.A. No. 177. In One West, there were three agreements: a limited partnership agreement (LPA), a project management agreement (PMA) and a purchase agreement (PA). One of the provisions of the PMA was an “entire agreement” clause in art. 17.1 that stated that the PMA, the LPA and PA constituted the entire agreement between the parties. The LPA contained a requirement to arbitrate disputes. The PMA and PA did not. One West was a party to the PMA but not the LPA.

[37]        A dispute arose between the parties. Greata Ranch initiated an arbitration against the other limited partners and One West. One West argued that it should not be joined as a party to the arbitration because it did not sign the LPA and was therefore, not a party to an arbitration agreement.

[38]        The arbitrator decided that One West was a proper party to the arbitration since the requirement to arbitrate had been incorporated by reference into the PMA by the “entire agreement” clause. The Court of Appeal upheld the arbitrator’s conclusion that the “entire agreement” clause clearly and unambiguously defined the agreement of the parties (paras. 39-40). Accordingly, since One West was a party to the PMA, it had agreed that part of the agreement included the LPA, including the requirement to arbitrate.

[39]        MRC does not take issue with the analysis and findings in the above cases. However, it says that none of the above cases addressed construction contracts and only addressed general contract principles. MRC refers to numerous authorities for the proposition that incorporation of an arbitration clause from a prime contract into a subcontract can only be accomplished by distinct and specific wording and not just a general reference to the prime contract. MRC argues that it is quite common for subcontracts to incorporate by reference only so much of the prime contract as is applicable to the particular work in question.

[40]        In Thomas G. Heintzman, Bryan G. West and Immanuel Goldsmith’s Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. (Toronto: Carswell, 2014) (loose-leaf updated 2019, release 1), the authors state at 12-13 to 12-15:

Since a subcontractor performs part of the work specified in the prime contract, it is quite common for a subcontract to incorporate by reference so much of the prime contract as it applicable to the particular work in question.

Even if the subcontract states that it incorporates the main contract, the meaning and purpose of that wording must be determined. …. How far the incorporation by reference clause should be applied beyond that meaning and purpose will depend upon the true intent of the parties. Even if the terms of the main contract are stated to be incorporated into the subcontract, there will still be an issue of interpretation as to whether the subcontracting parties really intended the disputed terms of the main contract to be incorporated into their contract when those terms are either unusual, or more suited to the main contract or to the relationship between the owner and the main contractor, or are inconsistent with the subcontract. Thus, the incorporation by reference has been held not to include: … dispute resolution …

[41]        In Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc.[1996] O.J. No. 29 (Ont. Gen. Div.) at paras. 11-15, the court considered the documentation and concluded that the manifest intention of the parties to the subcontract was not to include the arbitration clause found in the prime contract since there were no “distinct and specific words” regarding arbitration.

[42]        Dynatec has been followed by other courts in Canada but has not been considered in British Columbia. MRC refers to two other authorities.

[43]        In Sunny Corner Enterprises Inc. v. Dustex Corporation, 2011 NSSC 172 (CanLII) at para. 21, the court similarly framed the discussion as a determination of the intentions of the parties. The court, following Dynatec, stated:

[25] Sunny Corner says that a subcontract only incorporates an arbitral provision of a main contract if it does so expressly, which was not the case here. The authors of Goldsmith make the following remarks about the incorporation of arbitration provisions:

An arbitration clause in the prime contract may be incorporated by reference into the subcontract. However, such an incorporation must be specific. A general incorporation of the prime contract into the subcontract will not normally include the arbitration clause [Goldsmith on Canadian Building Contracts at p. 10/3] ….

[26] In a similar vein, Halsbury’s Laws of England (1992) states:

Where a sub-contractor agrees to be bound by the terms of a principal contract, which contains a clause referring disputes between the employer and the contractor to arbitration, this does not operate as a submission to arbitration of disputes between the contractor and the sub-contractor, unless that term of the principal contract is expressly incorporated in the sub-contract. [Halsbury’s Laws of England 4th edn. Reissue, vol 4(2) (London: Butterworths, 2002) para. 493]

[emphasis added]

[27] A leading Canadian case on the circumstances in which a subcontract will incorporate provisions of a head contract is Dynatec Mining Ltd. v. PCL Civil Constructors (Canada) Inc. (1996), 25 C.L.R. (2d) 259, 1996 Carswell Ont 16 (Ont. C.J. (Gen. Div.)). In that case, Chapnik J. held that “[i]ncorporation of an arbitration clause can only be accomplished by distinct and specific words …” (Dynatic at para. 11). She rejected the submission that an arbitration clause was incorporated by inference in a subcontract by virtue of not appearing on a list of excluded provisions. She concluded that “the manifest intention of the parties, as reflected on the face of the subcontract document, was not to include the arbitration clause therein; in the alternative, the matter was overlooked and cannot now be imposed upon the parties in the absence of agreement between them” (Dynatec at paras. 9 and 15). Dynatec is the authority cited for the statement in Goldsmith respecting the need for “specific” words of incorporation.

[44]        At paras. 37-41, the court in Sunny Corner concluded that the arbitration clause was not incorporated by reference into the subcontract. The court agreed that          an arbitration clause may only be incorporated by express and specific language and that a general incorporation of the prime contract into the subcontract will not normally include the arbitration clause. Here, the court did not find any express incorporation of the arbitration clauses in the prime contract into the subcontract.

[45]        In Nodricks Norsask Seeds Ltd. v. Dyck Forages & Grasses Ltd., 2014 MBCA 79 (CanLII), the court similarly considered and applied Dynatec. In the contract, there was a reference to “Arbitration: C.S.T.A.” “C.S.T.A.” referred to the Canadian Seed Trade Association, whose bylaws set out an arbitration process. At para. 29, after noting the lower court’s conclusion that the above term was ambiguous as to whether arbitration was required, the court concluded that there was no distinct and specific wording in the contract to incorporate the right to arbitrate.

[46]        Here, the Subcontract defines the “Contract” to mean the Subcontract and includes the Prime Contract. Section 6 of the Subcontract provides:

The Prime Contract, associated drawings and specifications for the scope of work are attached in Schedule I and form part of this Subcontract Agreement.

[Emphasis added.]

The Prime Contract defines “Contract Documents” to mean the documents listed and described in Section 2.2 of the Prime Contract, which includes the General Conditions, including GC12, the mandatory arbitration provision.

[47]        F&M also places some reliance on GC.4.14(f)(ii) that requires that F&M incorporate the terms of the Prime Contract into any subcontracts. To some extent, this begs the question as to whether that was done in the Subcontract, the seminal question here.

[48]        MRC argues that, if the parties had intended to incorporate the arbitration resolution procedure into the Subcontract, it would expressly say so in the Subcontract. MRC says that the Subcontract only refers to some specific provisions of the Prime Contract, as noted above at paragraph 29.

[49]        MRC further argues that the Prime Contract is attached as a schedule in the Subcontract only for reference purposes and that only those specifically mentioned clauses of the Prime Contract were intended to be binding on the Subcontractor, such as the scope of the work. However, GC.4.14(f)(ii) requires that the terms of the Prime Contract be incorporated into any subcontract and is a separate provision from GC.4.14(f)(iii) which requires incorporation of the Prime Contract “as applicable to the Work being undertaken by such Subcontractors”.

[50]        It is therefore arguable that the references to the Prime Contract in the Subcontract were intended to refer to matters beyond simply the scope of the work and that there is no limitation as to what was incorporated into the Subcontract from the Prime Contract.

[51]        MRC’s primary argument is that there is no express and specific provision in the Subcontract requiring arbitration or, at the very least, a specific reference to GC.12 in the Prime Contract and that it applies in the Subcontract. Accordingly, MRC argues that Dynatec dictates that the parties did not intend to require arbitration under the Subcontract. I agree that the Subcontract only includes a general reference to the Prime Contract and its appendices and that there is no specific reference to the arbitration provisions in GC.12 of the Prime Contract or even just GC.12.

[52]        However, in my view, it is less than clear that the Dynatec approach is an appropriate interpretive approach in discerning the intention of the parties under the Subcontract.

[53]        Firstly, Dynatec has not been followed by any court in British Columbia. That case and the others that followed it are not binding on this Court.

[54]        Secondly, DynatecSunny Corner and Nordricks were all decided before the release of Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53 (CanLII). Sattva has undeniably clarified and/or changed how the court is to approach the interpretation process toward discerning the intentions of the parties in a contract:

47      Regarding the first development, the interpretation of contracts has evolved towards a practical, common-sense approach not dominated by technical rules of construction. The overriding concern is to determine “the intent of the parties and the scope of their understanding” (Jesuit Fathers of Upper Canada v. Guardian Insurance Co. of Canada, 2006 SCC 21 (CanLII), [2006] 1 S.C.R. 744 (S.C.C.), at para. 27 per LeBel J.; see also Tercon Contractors Ltd. v. British Columbia (Minister of Transportation & Highways), 2010 SCC 4 (CanLII), [2010] 1 S.C.R. 69 (S.C.C.), at paras. 64-65 per Cromwell J.). To do so, a decision-maker must read the contract as a whole, giving the words used their ordinary and grammatical meaning, consistent with the surrounding circumstances known to the parties at the time of formation of the contract. Consideration of the surrounding circumstances recognizes that ascertaining contractual intention can be difficult when looking at words on their own, because words alone do not have an immutable or absolute meaning:

No contracts are made in a vacuum: there is always a setting in which they have to be placed…. In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.

(Reardon Smith Line, at p. 574, per Lord Wilberforce)

48      The meaning of words is often derived from a number of contextual factors, including the purpose of the agreement and the nature of the relationship created by the agreement (see Geoffrey L. Moore Realty Inc. v. Manitoba Motor League, 2003 MBCA 71 (CanLII), 173 Man. R. (2d) 300 (Man. C.A.), at para. 15, per Hamilton J.A.; see also Hall, at p. 22; and McCamus, at pp. 749-50). As stated by Lord Hoffmann in Investors Compensation Scheme Ltd. v. West Bromwich Building Society (1997), [1998] 1 All E.R. 98 (U.K. H.L.):

The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean. [p. 115]

[55]        Arguably, the Dynatec requirement is a “technical rule” to interpret construction contracts that is no longer appropriate. All of the cases cited by both MRC and F&M start from the proposition that the fundamental role of the Court is to discern the intention of the parties in terms of the scope of their agreement. It is arguable that DynatecSunny CornerNordricks and other cases that followed them do not rely on any principled basis to interpret construction contracts or arbitration clauses differently. I am not aware of any case law or authority on general contractual interpretation principles that support the argument that arbitration clauses are dealt with any differently than any other clauses, or that construction contracts are dealt with differently from any other contracts. Nor is there anything to suggest that such clauses and contracts are immune from the contractual interpretation principles as set out in Sattva.

[56]        Indeed, the courts in DynatecSunny CornerNordricks all, at the outset of their analysis, purport to discern the intention of the parties to the contract as to whether they intended to arbitrate their disputes.

[57]        Thirdly, Sattva tells us that “surrounding circumstances” or the factual matrix can and generally should be considered in the interpretation exercise: paras. 46-47, 56-58. Here, I have no evidence of the surrounding circumstances that might be of assistance in discerning the intention of the parties on the arbitration issue. In Sum Trade, such evidence was before the Court (para. 39). For example, there may be industry practices that inform the issue of which I am not aware, such as was addressed in Sum Trade to some extent. F&M has referred to certain communications between the parties dealing with the dispute but I agree with MRC that this cannot be considered as surrounding circumstances since those events took place after the Subcontract was entered into.

[58]         Fourthly, as F&M argues, our Court of Appeal in One West found that a reference within an “entire agreement” clause to a separate agreement containing an arbitral clause was sufficient to bind the appellant to the arbitration agreement despite the appellant not being a party or signing the agreement containing the arbitral clause. In this case, there is a more direct reference to the GCs, although I acknowledge there is no specific mention of GC.12 or that GC.12 requires arbitration.

[59]        Moreover, the approach of our Court of Appeal in the interpretation exercise has been inarguably to follow the Sattva paradigm as binding authority on all lower courts: Sum Trade at para. 24.

[60]        I am unable in the above circumstances to conclude that it is “clear” that MRC did not agree to submit disputes under the Subcontract to arbitration. At the very least, it is arguable that it has done so. Accordingly, it is appropriate that the arbitrator undertake the task of determining that matter: Sum Trade at para. 29. At that time, the arbitrator can undertake the interpretation exercise in light of the authorities, including Sattva, and consider the appropriate evidence.

IS THE AGREEMENT INCAPABLE OF BEING PERFORMED?

[61]        In the alternative, MRC contends that it and F&M are incapable of performing the arbitration agreement. The parties agree that MRC bears the onus of proving that the arbitration agreement is “incapable of being performed” and that accordingly, under s. 15(2) of the Act, the Court should not grant a stay.

[62]        The court in Prince George adopted the following definition of “incapable of being performed”:

[35] … “incapable of being performed” connotes something more than mere difficulty or inconvenience or delay in performing the arbitration. For example, it is not sufficient to say it is incapable of being performed where one party could not or would not come up with the deposit necessary to pay the arbitrator. The incapacity must come from something beyond the control of the parties; for example, where the arbitration agreement specifies a particular arbitrator must hear the matter, but he or she is not available.

[63]        In J. Kenneth McEwan and Ludmila B. Herbst’s Commercial Arbitration in Canada: A Guide to Domestic and International Arbitrations (Aurora, Ont.: Canada Law Book, 2004) (loose-leaf updated Nov. 2017, release 15), at 3:40.90.30(d), the authors state:

… An agreement only becomes incapable of performance if the circumstances are such that it could no longer be performed even if both parties were “ready, able and willing” to perform it. …

[64]        MRC argues that the dispute resolution procedure contemplated by GC.12 of the Prime Contract cannot be initiated by either F&M or MRC. It argues that, on any reasonable interpretation of GC.12 of the Prime Contract, the entire dispute resolution scheme relies upon a party to the Prime Contract (BC Hydro or F&M) delivering a “Dispute Notice” to the other party in order to initiate the process. As a result, MRC says that it cannot undertake that process.

[65]        However, I agree with F&M that MRC’s narrow interpretation of GC.12 is questionable. The provisions in GC.12.2-12.6 involve matters specific to BC Hydro and F&M. Each are required to appoint Representatives, who receive any Dispute Notices and then undertake settlement discussions and meetings. Arguably, none of those provisions could apply to the Subcontract without any corresponding appointment by F&M and MRC of a “Representative” under the Subcontract.

[66]        However, leaving that issue aside, GC.12 does not require that the Dispute Notice and settlement process necessarily take place. It is simply an option. GC.12.7 provides that, if that settlement process does not take place, the unresolved dispute will be referred to arbitration upon written notice being given by either party.

[67]        In One West, the court addressed similar arguments that there was a potential conflict between the provisions of the LPA, on the one hand, and the PMA and PA, on the other, such that the incorporation by reference could not have been intended because it would result in an “unworkable agreement”: para. 42. This argument was rejected:

[48]      It is clear that the three agreements involve different aspects of the project and that provisions of each agreement that are specific to a particular aspect of the project likely will not apply to the parties involved in other aspects, but that does not mean provisions common to the project as a whole could not stand. In my view, the commitment to arbitrate is such a provision. I see nothing in the agreements that suggests otherwise.

[68]        In my view, it is arguable that the parties here intended that the arbitration provisions in GC.12.7 were a “common” provision that was equally applicable and workable under both the Prime Contract and the Subcontract. On the face of it, the Subcontract could be interpreted to incorporate GC.12 (or just GC.12.7) such that the reference to BC Hydro as “Owner” and F&M as “Contractor” in the Prime Contract would read as F&M as “Contractor” and MRC as “Subcontractor” in the Subcontract.

[69]        I conclude that it is arguable whether MRC and F&M are incapable of undertaking the arbitration process set out in GC.12. Therefore, it is arguable whether the arbitration agreement in “incapable of being performed” in accordance with s. 15(2) of the Act. Accordingly, it is appropriate that the arbitrator consider that matter in the first instance.

Conclusion

[70]        I order that this action be stayed pursuant to s. 15(1) of the Act pending an arbitration being convened to consider the issues raised on this application and, if appropriate, the merits of the dispute.

[71]        MRC is entitled to its costs of the proceeding in any event of the cause.

“Fitzpatrick J.”