Ministry of Defence & Support for Armed Forces of the Islamic Republic of Iran v International Military Services Ltd [2019] EWHC 1994 (Comm) (24 July 2019)

Neutral Citation Number: [2019] EWHC 1994 (Comm)
Case No: CL-2001-000289 and CL-2001-000290

IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
BUSINESS & PROPERTY COURTS
COMMERCIAL COURT

Royal Courts of Justice
7 Rolls Building, Fetter Lane,
London EC4A 1NL
24/07/2019

B e f o r e :

MR. JUSTICE PHILLIPS
____________________

Between:

MINISTRY OF DEFENCE & SUPPORT FOR ARMED FORCES OF THE ISLAMIC REPUBLIC OF IRAN

Claimant

– and –
INTERNATIONAL MILITARY SERVICES LIMITED 
 

Defendant

 

____________________

Andrew Fletcher QC and David Davies (instructed by Stephenson Harwood LLP) for the Claimant
Joe Smouha QC and Tom Ford (instructed by Clifford Chance LLP) for the Defendant

Hearing dates: 21 and 22 May 2019
____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Crown Copyright ©

 

MR. JUSTICE PHILLIPS:

    1. By application notice dated 11 September 2012 (“the 2012 Application”) the claimant (“MODSAF”) seeks to enforce two ICC arbitration awards (“the Awards”) against the defendant (“IMS”) by way of the entry of judgment and a declaration that sums currently held in court as security for the Awards are held for MODSAF’s benefit.
    2. However, it is common ground that, due to EU santions against Iran, IMS cannot currently pay the Awards and the court cannot enforce payment of the sums awarded (whether or not, as MODSAF contends, judgment can nevertheless be entered against IMS).
    3. It is important to emphasise, not least because of press interest and the intervention of The Times newspaper (resulting in my decision to order that the hearing and this judgment be public, the reasons for which I gave in an earlier judgment), that the hearing before me was concerned solely with the quantum of the Awards which may, at some future time, be paid or otherwise enforced. The principal issue debated at the hearing and determined below is whether IMS is liable to interest on the Awards during the period during which it has not been permitted to satisfy the Awards because EU sanctions have been in force.

Background

    1. MODSAF is the Iranian Ministry of Defence. IMS is an English company, all but one of its shares being owned by the UK Ministry of Defence, that one share being owned by HM Treasury.
    2. The underlying dispute between the parties arose out of two contracts concluded in the 1970s pursuant to which IMS agreed to supply Chieftain tanks and Armoured Recovery Vehicles to MODSAF. The contracts were terminated on 6 February 1979 following the Iranian revolution, leaving disputes between the parties as to the balances payable. This led to two related ICC arbitrations, one commenced by MODSAF in 1990 and the other by IMS in 1996. On 2 May 2001 the ICC tribunal rendered final awards in both arbitrations, the Awards referred to above.
    3. In the dispositive part of its Award on MODSAF’s claim (“the 7071 Award”), the tribunal found:

(1) That [IMS] is liable to pay to [MODSAF] the sum of £Stg. 140,599,570 in respect of termination of the P4030 and the ARVs Contracts;

(2) That interest on the said sum should be paid from 28 July 1984 to the date of payment at the LIBOR rate +0.5%;

(3) That [IMS] should pay [MODSAF] US$6,255,404 in respect of its costs in this arbitration.

(4) The total amount of the costs of arbitration fixed by the ICC is US $ 1,800,000. Therefore, [IMS] is responsible for an amount of US $ 1,143,750 in respect of the arbitration costs and expenses and [MODSAF] is responsible for the remaining amount of US$656,250.

    1. The ICC tribunal dismissed IMS’s claim (“the 9268 Award”) for the same reasons as it gave in the 7071 Award. In the 9268 Award the tribunal also ordered IMS to pay $3,127,701 in respect of MODSAF’s costs.
    2. By without notice arbitration applications dated 30 July 2001, MODSAF applied to this court pursuant to section 101 of the Arbitration Act 1996 (“the Act”) to enforce the Awards in the same manner as a judgment of the High Court. On 31 July 2001 Morison J granted leave to enforce, but subject to the usual provision that the Awards were not to be enforced until after any application to set aside the orders was finally disposed of.
    3. On 16 August 2001 IMS issued applications to set aside or, alternatively, to adjourn MODSAF’s enforcement proceedings, in particular in view of IMS’ challenge to the Awards before the Dutch courts. By a consent order dated 5 December 2002, MODSAF’s enforcement proceedings were indeed adjourned pending the final resolution of IMS’s challenge in the Netherlands. The consent order provided that the adjournment was conditional on IMS paying £382,500,000 into court by way of security in respect of any sums that might ultimately be determined to be due from it to MODSAF pursuant to the Awards. On 18 December 2002 IMS provided the required security. That sum has now increased, by te accrual of interest, to just over £500,000,000.
    4. On 21 December 2006 the Court of Appeal in The Hague partially set aside the 7071 Award by reducing IMS’s liability to MODSAF to £127,651,823. In all other respects the Awards were upheld. On 24 April 2009 the Supreme Court of Netherlands dismissed an appeal from the Court of Appeal’s decision.
    5. By then MODSAF had been added to the list of entities subject to sanctions imposed against Iran by EU Council Regulation 423/2007 (presently Regulation 267/2012 (‘Regulation 267’)). The sanctions against MODSAF had taken effect on 24 June 2008. As a result, it is common ground that the sums due under the Awards cannot presently be paid to MODSAF.
    6. Nevertheless, MODSAF’s position was (and remains) that there is no impediment to the English Court entering judgment in terms of the Awards pursuant to the enforcement regime contained in sections 100-104 of the Act. Accordingly, on 11 September 2012, MODSAF issued the 2012 Application seeking the dismissal of the Defendants’ applications to set aside, judgment in terms of the Awards and a declaration that the funds held by the Court Funds Office are held for the benefit of MODSAF.
    7. The 2012 Application has taken an unusually convoluted procedural course. It was initially listed to be heard on 23-24 January 2013 but adjourned five times. Meanwhile, on 16 January 2016, the Central Bank of Iran (‘the CBI’) was removed from the list of sanctioned entities under Regulation 267. In the light of this development MODSAF applied for a further adjournment. This was intended to allow MODSAF time to make an application to the Office of Financial Sanctions Implementation of HM Treasury (‘OFSI’) for a licence under Article 25(a) of Regulation 267 that, MODSAF says, will facilitate payment of the sums due under the Awards to the CBI (‘the Licence Application’). MODSAF’s position is that, if its Licence Application is successful, it could, following the entry of judgment, invite the court to direct that the sums due under the Awards be paid to the CBI from the funds held in the Court Funds Office. On 2 December 2016, Blair J ordered that the hearing of the 2012 Application be re-listed for hearing on 4-6 October 2017 and directed that MODSAF pursue the Licence Application with all due diligence. MODSAF made the Licence Application on 14 March 2017. However, a decision on the application had not become available by October 2017. Accordingly, the hearing set for 4-6 October 2017 was not effective and was adjourned three further times until it came before Moulder J on 1 May 2019.
    8. At the 1 May hearing Moulder J determined that the following issues should be determined prior to the full hearing of the 2012 Application:

1. Subject to whether in due course upon the hearing of the 2012 Application MODSAF is entitled to have leave to enforce the Awards and to have judgment entered in terms of the Awards:

i) What are the “terms” of the Awards for the purpose of s 101(2) and (3) of the Arbitration Act 1996 (“the terms of the Awards issue“)?

ii) Should the Court refuse enforcement of any post-award interest element of the Awards pursuant to Articles 42 and/or Article 38 of the Regulation 267 and/or s. 103(3) of the 1996 Act in relation to the period since MODSAF became a designated entity (it being agreed that IMS is and has been unable to make payment to MODSAF since MODSAF was designated as a specific target of EU sanctions on 24 June 2008) (“the interest during the sanctions period issue“)?

iii) Is MODSAF entitled to post-award, pre-judgment interest on costs and if so at what rate (“the interest on costs issue“)?

iv) What would be the relevant quantum for the purposes of the 2012 Application (when determined) taking into account (a) the proper calculation of interest in conformity with the answers to the issues at (ii) and (iii) above and (b) giving credit for amounts previously paid (“the total quantum calculations issue“)?

2. In the light of the determination of the issues above, what balance of its funds currently held in the Court Funds Office should now be returned to IMS?

    1. Molder J further gave directions for those issues to be determined at the hearing before me on 21 and 22 May 2019.
    2. MODSAF has in the event abandoned its claim for post-award, pre-judgment interest on costs.
    3. Moreover, I do not consider that it would be appropriate to determine the terms of the Awards issue at this stage in circumstances where the prior question of whether the Awards are enforceable in England remains to be decided. In my judgment, it would be more appropriate for the terms of the Awards to be considered alongside the question of whether the Awards are enforceable. I raised this point with the parties during oral argument and both parties confirmed that they were content with this course.
    4. That leaves the interest during the sanctions period issue, to which I will now turn. Determination of that issue will enable the parties to agree the total quantum issue and, correspondingly, the balance of the funds in court which can be returned to IMS, it being accepted that the sums in court exceed IMS’ total liability in any event, not least because of the revision to the principal amount of the sum awarded.

The interest during the sanctions period issue

    1. As set out in paragraph 4 above, sub-paragraph (2) of the dispositive part of the 7071 Award (as varied) provides that IMS should pay interest to MODSAF on the sum of £127,651,823 from 28 July 1984 to the date of payment at LIBOR +0.5%. MODSAF wishes to enforce this component of the 7071 Award in full. IMS contends that MODSAF is not entitled to enforce the interest component of the 7071 Award insofar as it relates to the period during which MODSAF was subject to the sanctions imposed by Regulation 267 namely, from 24 June 2008 onwards. In substance this is because, during the sanctions period, IMS was prevented from making payments to MODSAF to discharge its liability pursuant to the Awards.
    2. For the purposes of the hearing before me, it was common ground between the parties that, in the period during which MODSAF was a sanctioned entity, IMS has been (and is) unable to make payments to MODSAF in respect of the sums due under the Awards. Indeed, in her formulation of this issue Moulder J noted that the parties were “agreed that IMS is and has been unable to make payment to MODSAF since MODSAF was designated as a specific target of EU sanctions on 24 June 2008“.
    3. As mentioned above, MODSAF’s position is that the de-listing of the CBI as a sanctioned entity under Regulation 267 opens up a licensing route pursuant to which it could procure that IMS discharge its liability under the Awards by making payments to the CBI. If MODSAF’s Licence Application is successful, it will wish to invite the court to make an order directing the payment of the sums due under the Awards to the CBI from the funds in the Court Funds Office. IMS does not accept that this licensing route is available to MODSAF. The parties have not invited me to decide whether the licensing route is indeed open to MODSAF, not least because the outcome of its Licence Application remains unknown. In this judgment, therefore, I will proceed on the basis that the sanctions regime prevented (and prevents) IMS from making payments to MODSAF to satisfy the Awards.
    4. Based on the premise that the sanctions regime prevented (and prevents) IMS from making payments to discharge its liability to MODSAF under the Awards, IMS argues that MODSAF is not entitled to enforce the interest component of the 7071 Award in respect of the period during which MODSAF was a sanctioned entity. In support of that contention, IMS relies on Articles 38 and 42 of Regulation 267.
    5. Articles 38 and 42 appear in Chapter VII of Regulation 267 which is entitled ‘General and Final Provisions’.
    6. Article 38 provides that:

1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of this type, such as a claim for compensation or a claim under a guarantee, notably a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied, if they are made by:

(a) designated persons, entities or bodies listed in Annexes VIII and IX;

(b) any other Iranian person, entity or body, including the Iranian government;

(c) any person, entity or body acting through or on behalf of one of the persons, entities or bodies referred to in points (a) and (b).

2. The performance of a contract or transaction shall be regarded as having been affected by the measures imposed under this Regulation where the existence or content of the claim results directly or indirectly from those measures.

3. In any proceedings for the enforcement of a claim, the onus of proving that satisfying the claim is not prohibited by paragraph 1 shall be on the person seeking the enforcement of that claim.

    1. Article 42 provides that:

1. The freezing of funds and economic resources or the refusal to make funds or economic resources available, carried out in good faith on the basis that such action is in accordance with this Regulation, shall not give rise to liability of any kind on the part of the natural or legal person, entity or body implementing it, or its directors or employees, unless it is proved that the funds and economic resources were frozen or withheld as a result of negligence.

    1. In order to understand the context of Articles 38 and 42, it is necessary to consider, in particular, two other provisions of Regulation 267. The first is Article 23, which appears in Chapter IV under the title ‘Freezing of Funds and Economic Resources’. In one sense, Article 23 is the centrepiece of the sanctions regime. It has the effect of freezing all funds and economic resources belonging to certain persons, bodies and entities related to Iran. Thus, Article 23(1) provides that:

All funds and economic resources belonging to, owned, held or controlled by the persons, entities and bodies listed in Annex VIII shall be frozen…

    1. In identical language, Article 23(2) provides that all funds and economic resources belonging to persons, bodies and entities listed in Annex IX of Regulation 267 shall be frozen. Then, Article 23(3) states as follows:

No funds or economic resources shall be made available, directly or indirectly, to or for the benefit of the natural or legal persons, entities or bodies listed in Annexes VIII and IX.

    1. Secondly, Article 29 of Regulation 267 clarifies that Article 23(3) does not have the effect of preventing the payment of sums into a frozen account so long as those additional funds also remain frozen. Article 29(1) provides that:

Article 23(3) shall not prevent financial or credit institutions from crediting frozen accounts where they receive funds transferred onto the account of a listed natural or legal person, entity or body, provided that any additions to such accounts shall also be frozen…

    1. Then, Article 29(2) goes on to state that:

Article 23(3) shall not apply to the addition to frozen accounts of:

(a) interest or other earnings on those accounts; or

(b) …

provided that any such interest or other earnings and payments are frozen in accordance with Article 23(1) or (2).

    1. In the formulation of the issues by Moulder J and in IMS’ written submissions for this hearing, apart from the provisions of Regulation 267, reference was also made to section 103(3) of the Arbitration Act 1996. Section 103(3) provides that:

Recognition or enforcement of the award may also be refused if the award is in respect of a matter which is not capable of settlement by arbitration, or if it would be contrary to public policy to recognise or enforce the award.

    1. However, it became apparent in the course of the oral argument that section 103(3) was not an independent ground upon which IMS sought to resist enforcement of the interest component of the 7071 Award. Therefore, IMS’s contention that MODSAF should not be allowed to enforce the 7071 Award insofar as it related to interest during the sanctions period turns solely on Articles 38 and 42, it being contrary to public policy within the meaning of section 103(3) of the Act to recognise or enforce the Awards if Articles 38 or 42 prevent the same.
    2. In its written submissions MODSAF relied upon a number of authorities for the proposition that, as a matter of English law, interest will continue to accrue in favour of a creditor even if, for a particular period, it was legally impossible for the debtor to discharge the debt, in particular, The Berwickshire (No 2) [1950] P 204, Mamodoil-Jetoil Greek Petroleum Company SA v Okta Crude Oil Refinery AD [2003] 1 Lloyd’s Rep 42, Biedermann v Allhausen (1921) 37 TLR 662, Ledeboter v Hibbert [1947] KB 964 and McGregor on Damages (20th edition, 2017) at [19-082], [30-22]. However, during his oral submissions, Mr Fletcher QC, for MODSAF conceded that these authorities were unlikely to assist me in deciding the interest during the sanctions period issue.
    3. On that basis, the only question for me to decide is whether Articles 38 and 42, properly construed, prevent MODSAF from enforcing the interest component of the 7071 Award in respect of the sanctions period. Before I consider that question in more detail, though, it is necessary to examine the principles by reference to which Articles 38 and 42 fall to be interpreted.

Interpretation of EU Instruments

    1. The principles by reference to which EU instruments are to be interpreted have been considered numerous times both by the Court of Justice of the European Union and by the English Courts. I will not attempt an exhaustive restatement of all the principles of construction. It will suffice for me to state the relevant rules relatively briefly.
    2. In general, the authorities emphasise that both the language and the purpose of EU instruments are significant. Thus, in his opinion in Möllendorf and Möllendorf-Niehuus (Case C-117/06), Advocate General Mengozzi observed at [68] that “for the purposes of interpreting a provision of Community law account must be taken not only of the letter of the provision but also of its context and of the aims pursued by the legislation of which it forms part“. In Möllendorf, the European Court interpreted Council Regulation (EC) No 881/2002 which imposed restrictive measures against certain persons and entities associated with Usama bin Laden, the Al-Qaida network and the Taliban. In doing so, the Court took into account both the wording and the purpose of the UN Security Council Resolution 1390 (2002), which Regulation 881/2002 was designed to implement (see [54] in particular).
    3. Although language and purpose are both important aids to construction, the authorities suggest that the English and European methods of interpretation may approach these indicia slightly differently: see Bennion on Statutory Interpretation (7th edition, 2019) 748-750. Lord Steyn put the point in the following way in his speech in Shanning Ltd v Lloyds TSB Bank plc [2001] 1 WLR 1462 at [24]:

There is an illuminating discussion in Cross, Statutory Interpretation, 3rd ed (1995), pp 105-112 of the correct approach to the construction of instruments of the European community such as the regulation in question. The following general guide provided by Judge Kutscher, a former member of the European Court of Justice, is cited by Cross, at p 107:

You have to start with the wording (ordinary or special meaning). The court can take into account the subjective intention of the legislature and the function of a rule at the time it was adopted. The provision has to be interpreted in its context and having regard to its schematic relationship with other provisions in such a way that it has a reasonable and effective meaning. The rule must be understood in connexion with the economic and social situation in which it is to take effect. Its purpose, either considered separately or within the system of rules of which it is a part, may be taken into consideration.”

Cross points out that of the four methods of interpretation—literal, historical, schematic and teleological—the first is the least important and the last the most important. Cross makes two important comments on the doctrine of teleological or purposive construction. First, in agreement with Bennion, Statutory Interpretation, 2nd ed (1992), section 311, Cross states that the British doctrine of purposive construction is more literalist than the European variety, and permits a strained construction only in comparatively rare cases. Judges need to take account of this difference. Secondly, Cross points out that a purposive construction may yield either an expansive or restrictive interpretation. It follows that Regulation No 3541/92 ought to be interpreted in the light of the purpose of its provisions, read as a coherent whole, and viewed against the economic and commercial context in which the regulation was adopted.” (emphasis added)

    1. From this passage, and from the decision of the CJEU in Möllendorf, it appears that the difference between the European and English approaches to construction is no more than a difference in emphasis. Both approaches consider the language and the purpose of a legislative provision to be relevant. While the English approach places relatively more weight on language, the European approach leans in favour of giving effect to the purpose that the provision (or the instrument of which it forms a part) is intended to achieve. This is not to say that language is irrelevant under the European approach. Indeed, Judge Kutscher’s observations suggest that, even under the European approach, one would start the process of interpretation by paying attention to the text of the relevant provision.
    2. The principle of proportionality is another well-established rule of EU law that informs the interpretation of EU legislation. Proportionality requires that EU instruments must be interpreted such that the measures sought to be implemented by them are appropriate for attaining the legitimate objectives pursued by the instrument and do not go beyond what is necessary to achieve those objectives: Rosneft & Others v Council & Others (Case T-715/14) at [202]. In this regard, it is necessary to have particular regard to whether the interpretation of EU instruments affects any of the fundamental rights guaranteed under EU law. If so, the court must adopt an interpretation that avoids disproportionate infringement of such rights: R v R [2016] Fam 153 at [28] (Arden LJ), Möllendorf at [79].
    3. In the context of those principles, I turn to consider Articles 38 and 42.

Article 38

    1. As noted earlier, Article 38(1) provides that:

1. No claims in connection with any contract or transaction the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation, including claims for indemnity or any other claim of this type, such as a claim for compensation or a claim under a guarantee, notably a claim for extension or payment of a bond, guarantee or indemnity, particularly a financial guarantee or financial indemnity, of whatever form, shall be satisfied, if they are made by:

(a) designated persons, entities or bodies listed in Annexes VIII and IX;

(b) any other Iranian person, entity or body, including the Iranian government;

(c) any person, entity or body acting through or on behalf of one of the persons, entities or bodies referred to in points (a) and (b).

    1. IMS argues that this provision precludes MODSAF from enforcing the interest component of the 7071 Award insofar as it relates to the period during which IMS was precluded from making payments to MODSAF by virtue of MODSAF’s status as a sanctioned entity. In assessing that contention, I will start by analysing the language of Article 38 and then consider its purpose. That does not mean that I consider the language of Article 38 to be more significant than its purpose. Indeed, it will be apparent from what I say below that, in my view, the language and purpose of Article 38 are not at odds with each other; rather, they reinforce each other.
    2. As Mr Smouha QC, for IMS, pointed out, the language of Article 38(1) consists of five material components: (i) no claims (ii) in connection with any contract or transaction (iii) the performance of which has been affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation (iv) shall be satisfied (v) if they are made by designated persons, entities or bodies listed in Annexes VIII and IX.
    3. As to the first element, the term ‘claim’ is defined in Article 1(c) of Regulation 267 as:

any claim, whether asserted by legal proceedings or not, made before or after the date of entry into force of this Regulation, under or in connection with a contract or transaction, and includes in particular:

(v) a claim for the recognition or enforcement, including by the procedure of exequatur, of a judgment, an arbitration award or an equivalent decision, wherever made or given.

    1. The relevant ‘claim’ for the present purposes is MODSAF’s Application for judgment to be entered in terms of the Awards. Plainly, that is “a claim for the recognition or enforcement… of… an arbitration award” and, therefore, falls within the scope of Article 1(c). It follows, in my view, that IMS can satisfy the first element of Article 38.
    2. Mr Fletcher argued that the definition of “claim” in Article 1(c) was not intended to apply to the construction of Article 38(1). To substantiate that contention, he referred to Regulation (EC) 1110/2008, an earlier version of Regulation 267. It was by Regulation 1110 that a provision corresponding to Article 38 (then Article 12a) was inserted for the first time into the EU sanctions regime against Iran. Mr Fletcher pointed out that the definition of “claim” in Regulation 1110 was narrower than the definition that is presently contained in Regulation 267. In particular, Regulation 1110 did not contain a provision corresponding to sub-paragraph (v) of Article 1(c). The present expansive definition of “claim” was first introduced by Article 1(s) of Regulation 961/2010.
    3. Mr Fletcher submitted that the reason why Regulation 961 expanded the scope of the definition of “claim” was to increase the scope of application of a specific derogation from the sanctions regime that was contained in Article 17 of Regulation 961 (now, Article 25 of Regulation 267). In broad terms, Article 17 provided that, by way of derogation from the sanctions regime, the competent authorities of the Member States may authorise the release of certain frozen funds if, inter alia, the funds are subject to a pre-existing judicial, administrative or arbitral lien and they will be used exclusively to satisfy claims secured by such a lien. On this basis, Mr Fletcher submitted that the purpose of expanding the scope of the definition of “claim” was to increase the scope of a derogation from the sanctions regime, not to expand the scope of the sanctions. Therefore, he argued, the broad definition of “claim” in Article 1(c)(v) must not be used to interpret Article 38. To do so would run counter to the purpose for which that definition of “claim” was introduced.
    4. I am unable to accept this submission for two reasons. First, it is far from clear that the reason for introducing the broader definition of “claim” in Regulation 961 was particularly concerned with the scope of the derogation contained in Article 17. Plainly, as with any other provision in the Regulation that employs the term “claim“, the expanded definition would have had an impact on Article 17. Beyond that, there is no reason to think that the amendment to the definition was specifically concerned with the scope of Article 17. This is especially so since the derogation contained in Article 17 was not introduced for the first time by Regulation 961. Regulation 423/2007 contained a similar provision (see Article 8). It is, however, significant that Regulation 423 did not adopt the expansive definition of “claim” that is currently found in Regulation 267. Therefore, I find it difficult to accept Mr Fletcher’s contention that the reason for the introduction of the expanded definition of “claim” in Regulation 961 was specifically linked to the derogation provision.
    5. Second, Mr Fletcher’s submission assumes that, while deciding to expand the scope of the definition of “claim” in Regulation 961/2010, those who drafted the Regulation did not foresee the impact that this would have on other provisions in the Regulation, most relevantly Article 29 (now Article 38). In my view, that is highly unlikely. If the intention was that the definition of “claim” should control the derogation provision alone, and not Article 29, one would have expected language to that effect or, at the very least, for the expanded definition of “claim” to appear as part of Article 17 and not alongside the general definitions in Article 1.
    6. The second element of Article 38, that the claim must be “in connection with any contract or transaction“, is also satisfied in my judgment. The relevant “transaction” is the arbitration award that MODSAF seeks to enforce. Mr Fletcher submitted that it was an “extremely difficult use of language” to describe the arbitration award as being a “transaction“. Although I recognise some force in this contention, I reject it for two reasons. First, Regulation 267 defines the term “transaction” fairly broadly. In Article 1(d) it is defined with the introductory phrase “any transaction of whatever form and whatever the applicable law…”. Second, in Article 1(c), the term “claim” is defined as “any claim… under or in connection with a contract or transaction, and includes in particular… (v) a claim for the recognition or enforcement… of a judgment an arbitration award or an equivalent decision“. As Mr Smouha pointed out, this definition appears to presuppose that, for the purposes of Regulation 267, judgments, arbitration awards and equivalent decisions do fall within the expression “contract or transaction“.
    7. The third element of Article 38 requires that the performance of the relevant contract or transaction must have been “affected, directly or indirectly, in whole or in part, by the measures imposed under this Regulation“. Notably, Article 38 contemplates that the performance of the transaction may be affected “in whole or in part” by the sanctions. Therefore, IMS may resist enforcement of the interest component of the 7071 Award alone if it can establish that that part of the Award was affected by the measures imposed by Regulation 267.
    8. Further, Article 38(2) clarifies that the performance of a contract or transaction shall be regarded as having been affected by the measures imposed by the Regulation where “the existence or content of the claim results directly or indirectly from those measures“. For the purposes of the interest during the sanctions period issue, the relevant “claim” is MODSAF’s application to enforce the interest component of the 7071 Award in respect of the sanctions period. As Mr Fletcher rightly pointed out, since the Awards pre-dated the sanctions, it is difficult to see how the “existence” of the claim can be said to have resulted from the sanction. However, in response, Mr Smouha submitted that even though the existence of the claim may not have been based on the sanctions, its content (insofar as it concerns interest) did result from the sanctions. I agree. As noted previously, during the sanctions period IMS was precluded from making payments to MODSAF to discharge its liability under the Awards. Thus, insofar as MODSAF seeks interest from IMS in respect of the sanctions period, it is seeking to enforce a liability of IMS whose content (i.e. the quantum of interest) is conditioned by, and in that sense “results directly or indirectly from“, the sanctions.
    9. The fourth and fifth elements are relatively straightforward, and I will consider them together. The fourth element simply sets out the consequence of the other components of Article 38(1) being satisfied namely, that the claim “shall not be satisfied“. The fifth element is not contentious either. It is common ground that during the relevant period MODSAF was listed as a designated entity in Annex IX of Regulation 267.
    10. For those reasons, I am satisfied that the language of Article 38 supports IMS’s contention that, insofar as the interest component of the 7071 Award concerns the period during which MODSAF was a sanctioned entity, the enforcement of the Award is precluded by Article 38.
    11. In my view, that result is reinforced by the purpose of Article 38, which I will now consider.
    12. Regulation 267 does not contain a recital that explains the object or purpose of Article 38. As Mr Smouha pointed out, therefore, for guidance regarding the reason for introducing Article 38 one needs to turn back to Regulation 1110/2008. Regulation 1110/2008 is an earlier version of Regulation 267 which introduced a ‘no claims’ clause corresponding to Article 38 into the Iranian sanctions regime for the first time. Recital (4) of Regulation 1110 sheds some light on the purpose of Article 38. It reads as follows:

Regulation (EC) No 423/2007 imposed certain restrictive measures against Iran, in line with Common Position 2007/140/CFSP. As a result, economic operators are exposed to the risk of claims and it is therefore necessary to protect such operators permanently against claims in connection with any contract or other transaction the performance of which was affected by reason of the measures imposed by that Regulation.”

    1. In this context, my attention was also drawn to the decision in Shanning where the House of Lords interpreted a ‘no claims’ provision similar to Article 38 in the context of sanctions against Iraq. The relevant provision in Shanning was Article 2 of Council Regulation (EEC) No 3541/91 which provided as follows:

1. It shall be prohibited to satisfy or to take any step to satisfy a claim made by: (a) a person or body in Iraq or acting through a person or body in Iraq… (e) any person or body making a claim arising from or in connection with the payment of a bond or financial guarantee or indemnity to one or more of the above-mentioned persons or bodies, under or in connection with a contract or transaction the performance of which was affected, directly or indirectly, wholly or in part, by the measures decided on pursuant to the United Nations Security Council Resolution 661 (1990) and related resolutions.

    1. The question before the House of Lords in Shanning was whether the ‘no claims’ clause in the Iraqi sanctions regime continued to have effect even after the sanctions were lifted. Although that question that does currently arise in the present case, Lord Bingham’s explanation of the intent and effect of Article 2 of Regulation 3541/91 is, in my view, equally relevant here. Lord Bingham said (at [18] and [19]) that:

…The embargo on trade and financial dealings with Iraq was imposed in the immediate aftermath of the Iraqi invasion of Kuwait in the hope that it would coerce Iraq to withdraw its forces within its own borders. This embargo had the inevitable and intended effect of halting the performance of current contracts. This prevented non-Iraqi contractors and suppliers from fulfilling their contractual obligations and so put them in breach of contract, subject to any defence of frustration or force majeure which might (or might not) be available to them under any relevant law or in any relevant court… Resolution 687 plainly looked forward to the end of the embargo, but it also expressed a very clear intention that no claim should lie at the instance of any Iraqi entity in connection with any transaction where performance had been affected by the embargo. The Community travaux préparatoires and Regulation (EEC) No 3541/92 expressed the same clear intention. Were the ending of the embargo to be accompanied by removal of the prohibition on satisfaction of claims against non-Iraqi contractors and suppliers, it is obvious that those who had been involuntarily prevented from performing their contracts would or might become liable to their Iraqi opposite numbers, with the result that the ultimate losers as a result of Iraq’s gross violation of international law would be the non-Iraqi contractors and suppliers and not the Iraqi entities (including the government) which the embargo was intended to injure.

…Shanning had performed a very substantial part of its contract. It had almost earned its contractual reward. It was prevented by the embargo from completing the contract and earning its reward. But for the embargo it seems fair to assume that it would have done so. It may be regarded as an innocent victim of the international community’s response to Iraqi lawlessness. It would be extraordinary if, even when the embargo is lifted and normal commercial relations are restored, it were to be exposed even to the risk of claims (and it is “the risk of claims” to which the fourth recital refers) by the Iraqi side.

    1. Similarly, in the context of the sanctions imposed against Russia pursuant to Regulation No 833/2014, in Rosneft v Concil & Others (case T-715/14) the CJEU considered the purpose of Article 11, a provision materially identical to Article 38 of Regulation 267. At [206] of its judgment, the CJEU observed as follows:

In so far as the applicants also challenge the proportionality of Article 11 of the contested regulation, as the Council contends, the provision precluding the satisfaction of claims laid down in that article is intended to prevent an entity targeted by the restrictive measures at issue from being able to procure performance of a prohibited transaction, contract or service or from obtaining a remedy under civil law for non-performance of such transactions, contracts or services. Such a provision thus ensures the effectiveness of the restrictive measures at issue, by reflecting in private law the effects of measures that have been properly adopted by the European Union, for so long as those measures are applicable. In that sense, Article 11 of the contested regulation must be considered a proportionate means of achieving the objective of the contested acts.

    1. Based on these authorities, I consider that the purpose of Article 38 is to prevent civil claims being brought against a party as a result of the fact that their performance of a contract or transaction was impeded by the operation of the sanctions. I am satisfied that the application of Article 38 to prevent MODSAF from enforcing the interest component of the 7071 Award in respect of the sanctions period falls well within that purpose. As noted previously, the relevant transaction for these purposes is the 7071 Award. During the sanctions period, the existence of the sanctions prevented IMS from discharging its liability to pay the sums due under the Award. That is the reason why, during the sanctions period, IMS came under a liability to pay interest on the principal sum due under the Award. By seeking leave to enforce the interest component of the 7071 Award in respect of the sanctions period, MODSAF is now bringing a claim to hold IMS liable as a result of the fact that IMS’s performance of the relevant transaction, i.e. discharge of the debt due under the Award, was affected by the existence of the sanctions. In my view, that runs counter to the object of Article 38.
    2. In the context of the debate about the object and purpose of Article 38, Mr Fletcher drew my attention to the English translation of a French article by Bastid-Burdeau published in (2003) 3 Comité Français de l’Arbitrage at page 752. The title of the article translates as “Multilateral and unilateral embargoes and their impact on international commercial arbitration – States in international economic litigation“. In this article, the author traces the history of the ‘no claims’ provisions to the Gulf crisis in the 1990s and the fact that Iraqi domestic law did not permit non-Iraqi parties to invoke the defence of force majeure on the basis of the embargo against Iraq (see pages 766-767). That apart, I was unable to find anything in this article that sheds light on the purpose of Article 38 as derived from the authorities cited above.
    3. Mr Fletcher also argued that interpreting Article 38 so as to deprive MODSAF of the opportunity to enforce the interest component of the 7071 Award in respect of the sanctions period would amount to giving it confiscatory effect. He placed particular emphasis on Recital 26 of Regulation 267 which provides that:

This Regulation respects the fundamental rights and observes the principles recognised in particular by the Charter of Fundamental Rights of the European Union and in particular the right to an effective remedy and to a fair trial, the right to property and the right to protection of personal data. This Regulation should be applied in accordance with those rights and principles.” (emphasis added)

    1. Mr Fletcher submitted that MODSAF’s right under the Award to receive post-award interest is akin to a property right. Article 38 should not be interpreted so as to deprive MODSAF of that right.
    2. Developing this point further, Mr Fletcher relied on Recital (1) of Regulation (EC) No 423/2007 (an earlier version of Regulation 267) to submit that the purpose of the sanctions regime is to “persuade” Iran to comply with UN Security Council Resolution 1737 (2006). The sanctions are meant to be rehabilitative rather than punitive. As he put it, they use a ‘carrot and stick’ approach to have persuasive effect. Mr Fletcher submitted that confiscation, being permanent, is ‘stick’ alone. It is, therefore, inconsistent with the purpose of Regulation 267.
    3. I am unable to accept those submissions for two reasons. First, regardless of the objective that Regulation 267 as a whole seeks to achieve, I consider that Article 38 serves a specific purpose. As explained above, that is to protect parties against claims being brought against them by virtue of their non-performance of a contract or transaction that was caused by the sanctions. Put differently, the objective of Article 38 is to ameliorate the impact of the sanctions regime on private relationships. As the Bastid-Burdeau article clarifies, provisions like Article 38 are “unusual” in that they concern private relationships although the Regulation as a whole primarily concerns “essentially interstate issues” (see page 767). For the same reason, the purpose of Article 38 may be said to be ancillary to the objective of the Regulation as a whole. In my view, therefore, a purposive interpretation of Article 38 must pay attention not just to the objective of the Regulation as a whole but also to the specific legislative aim that underlies Article 38.
    4. Second and in any case, I am not persuaded that depriving MODSAF of its right to claim interest during the sanctions period is inconsistent with the objective of the Regulation as a whole i.e., to persuade Iran to comply with UN Security Council Resolution 1737 (2006). On the construction of Article 38 that I regard as being correct, the longer Iran continues to remain non-compliant with Resolution 1737, the longer Regulation 267 remains in place, and the longer is the period for which MODSAF is deprived of post-award interest under the 7071 Award. It is difficult to see why this is inconsistent with what Mr Fletcher described as the ‘carrot and stick’ approach of the sanctions regime.
    5. In support of MODSAF’s preferred construction of Article 38, Mr Fletcher also prayed in aid Article 29 of Regulation 267. As noted earlier, Article 29 provides that:

1. Article 23(3) shall not prevent financial or credit institutions from crediting frozen accounts where they receive funds transferred onto the account of a listed natural or legal person, entity or body, provided that any additions to such accounts shall also be frozen…”

2. Article 23(3) shall not apply to the addition to frozen accounts of:

(a) interest or other earnings on those accounts; or

(b) payments due under contracts, agreements or obligations that were concluded or arose before the date on which the person, entity or body referred to in Article 23 has been designated by the Sanctions Committee, the Security Council or by the Council;

provided that any such interest or other earnings and payments are frozen in accordance with Article 23(1) or (2).

    1. Plainly, Article 29(1) is inapplicable to IMS; it is restricted to the crediting of frozen accounts by “financial or credit institutions“. IMS is not a “financial institution” or a “credit institution” according to the definition of those terms in Articles 1(i) and 1(f) of Regulation 267. Understandably, therefore, Mr Fletcher relied more heavily on Article 29(2). However, I am not persuaded that Article 29(2) takes matters much further either.
    2. Mr Fletcher relied on Article 29(2)(a) as evidence of the fact that the Regulation does not prevent interest from accruing even during the period when the sanctions remain in force. He submitted that, in view of what Article 29 provides, it would be odd if Article 38 had the effect of preventing the accrual of interest during the sanctions period. The difficulty with this argument is that it can be turned on its head. If, as Mr Fletcher contends, Article 38 does not prevent interest from accruing during the sanctions period, then what purpose does Article 29(2) serve?
    3. As Mr Smouha pointed out, therefore, the better view is that Article 29 and Article 38 are intended to cater to two different scenarios. Article 29(2)(a) is a statement of the general rule that Article 23(3) does not prevent the addition of interest or other earnings into a frozen account. This general rule is not concerned with the nature of a party’s entitlement to interest. The application of Article 38, in contrast, is contingent on the reason why the claim for interest arises. It bites only if the claim for interest is a claim “in connection with any contract or transaction the performance of which was affected” by the sanctions. Therefore, I do not consider that Article 29 provides any support for Mr Fletcher’s interpretation of Article 38.
    4. For all those reasons, I am satisfied that Article 38 precludes MODSAF from enforcing the interest component of the 7071 Award in respect of the sanctions period.

Article 42

    1. In the light of the conclusion that I have reached in relation to Article 38, the interpretation of Article 42 does not strictly arise for determination. Nevertheless, having heard submissions on this topic, I will express my conclusions briefly.
    2. The material part of Article 42 reads as follows:

1. The freezing of funds and economic resources or the refusal to make funds or economic resources available, carried out in good faith on the basis that such action is in accordance with this Regulation, shall not give rise to liability of any kind on the part of the natural or legal person, entity or body implementing it, or its directors or employees, unless it is proved that the funds and economic resources were frozen or withheld as a result of negligence.”

    1. Article 42(1) is an expansively drafted provision. If it were to be construed in a purely literal fashion, it seesm to me that Article 42(1) would have the effect of precluding MODSAF from enforcing the interest component of the 7071 Award in relation to the sanctions period. During the sanctions period, IMS failed to make payments that were due to MODSAF under the Awards. This constitutes a “refusal to make funds or economic resources available“. Further, IMS’s actions were taken in good faith, non-negligently and on the basis that they were in accordance with Regulation 267. Solely by reference to the text of Article 42(1), therefore, the consequence that IMS’s actions “shall not give rise to liability of any kind” must follow. In broad terms, this was the thrust of Mr Smouha’s submissions on this issue.
    2. Mr Fletcher sought to resist this conclusion as a matter of the language of Article 42(1). He submitted that, in order to attract the application of Article 42(1), it must be IMS’s refusal to make funds or economic resources available that ‘gave rise to’ its liability for interest. He argued that IMS’s liability for interest arose from the 7071 Award, not its non-payment to MODSAF. As evidence of this, he pointed to the fact that IMS’s liability for interest existed even before the sanctions regime came into force.
    3. The difficulty with this argument is that it assumes that the 7071 Award and IMS’s non-payment during the sanctions period are mutually exclusive reasons for IMS’s liability to pay interest. I am not persuaded that this is the case. The better view is that the 7071 Award and IMS’s non-payment are both necessary (but not independently sufficient) reasons for IMS’s liability to pay interest in respect of the sanctions period. In that sense, they could both be said to have ‘given rise to’ IMS’s liability for interest.
    4. Nevertheless, I consider that the proper scope of Article 42(1) is narrower than a plain reading of its language suggests. As Mr Fletcher argued in his written submissions, the purpose of Article 42(1) is to provide protection for those who have mistakenly (but non-negligently) frozen funds or economic resources, or refused to make them available, by reference to the sanctions regime. The scope of its operation must accordingly be restricted. That is to say, the scope of Article 42(1) must be confined to cases of incorrect but non-negligent actions taken in good faith by reference to the sanctions regime. It follows that it has no application in cases where the relevant liability arises from a proper application of Regulation 267.
    5. There are a number of indications in Regulation 267 that the scope of Article 42(1) was intended to be restricted in this way.
    6. First, if Article 42(1) was intended to protect parties whose liability resulted from a proper (i.e. non-mistaken) application of Regulation 267, the requirement that their actions must have been “carried out in good faith” would be an odd stipulation. This would mean that, in order to be protected from liability by Article 42(1), not only must a party apply Regulation 267 correctly it must also do so in good faith. Moreover, the protection offered by Article 42(1) is not available if the funds or economic resources were frozen or withheld as a result of negligence. It is difficult to see how the negligence exception can have any useful role to play in cases where the Regulation was correctly applied.
    7. Second, the inference that Article 42(1) is intended to protect parties against liability arising from mistaken applications of the sanctions regime is reinforced by the context in which Article 42(1) appears. Thus, Article 42(2) protects parties from liability for violating the prohibitions contained in Regulation 267 if “they did not know, and had no reasonable cause to suspect” that their actions would have that effect. Similarly, Article 42(3) protects parties from liability arising from good faith disclosures made pursuant to Articles 30, 31 and 32.
    8. Third, as set out above, what is now Article 38 was first introduced as Article 12a of Regulation 1110/2008. Alongside Article 12a, Regulation 1110 also introduced Recital (4) that sought to explain its purpose by reference to the need to “protect economic operators against claims in connection with any contract or other transaction the performance of which was affected by reason of the measures imposed by that Regulation“. Notably, a provision corresponding to Article 42 was already part of the sanctions regime even before the introduction of Article 12a by Regulation 1110 (see Article 12 of Regulation 423/2007). If Article 42 and its predecessor provisions were intended to have the broad scope that Mr Smouha wishes to ascribe to them, one would have expected a recital corresponding to Recital (4) to have been part of the scheme of the Regulations even before the introduction of Article 12a by Regulation 1110/2008.
    9. In response to these points, Mr Smouha did not seek to argue that Article 42(1) was inapplicable to mistaken, non-negligent and good faith applications of Regulation 267. His contention was that Article 42(1) was not confined to such cases. He submitted that it would be “bizarre” for the Regulation to protect parties from liability arising from a mistaken application of the Regulation but to offer no protection where liability arises from actions taken properly in accordance with it. While I accept that this would be a bizzare consequence, I am not persuaded that the narrow construction of Article 42(1) leads to that result. This is because, independently of Article 42(1), insofar as liability is incurred as a result of actions taken in accordance with the Regulation, parties are likely to be protected by Article 38(1). Indeed, one of the consequences of Mr Smouha’s expansive construction of Article 42(1) is that it leaves very little scope for the operation of Article 38. In my view, this is yet another reason that reinforces the narrow interpretation of Article 42(1).
    10. For those reasons, I am satisfied that the expansive language of Article 42 must be construed narrowly such that its scope is restricted to cases where liability arises from mistaken, but non-negligent, actions taken by reference to Regulation 267. It follows that Article 42 has no application in the present case.

Conclusion

    1. For the above reasons, I conclude that Article 38 of Regulation 267 precludes MODSAF from enforcing the interest component of the 7071 Award in respect of the sanctions period. Although Article 42 is expansively worded, when properly construed, I do not consider that it is applicable in the present case.
    2. In passing, I note that the above conclusion is consistent with the position stated in the OFSI’s ‘Financial Sanctions Guidance’. Although the guidance clarifies that “OFSI cannot issue definitive guidance on how an EU or UK court might interpret these laws“, in reponse to question 3.4.10 of the ‘Frequently Asked Questions’ (page 31), the Guidance states as follows:

If a court has ordered a judgment in favour of a person subject to an asset freeze, under EU regulations, and there are no licensing grounds to allow the payment to be made, the third party cannot be made subject to any further liability (such as accruing interest) for their non-payment while the sanctions continue to apply”.

  1. It follows that the total quantum due in respect of the Awards should be recalculated on the above basis, following which the amount of security which may now be returned to IMS may readily be ascertained. I invite the parties to agree those figures.

Dublin Waterworld Ltd. v National Sports Campus Development Authority [2019] IECA 214 (24 July 2019)

THE COURT OF APPEAL

Neutral Citation Number: [2019] IECA 214

Record Number: 2017/336

Birmingham P. 
Irvine J. 
Costello J. 

BETWEEN/

DUBLIN WATERWORLD LIMITED

APPELLANT/

PLAINTIFF

– AND –

NATIONAL SPORTS CAMPUS DEVELOPMENT AUTHORITY

RESPONDENT/

DEFENDANT

JUDGMENT of Ms. Justice Irvine delivered on the 24th day of July 2019

Index 
Procedural History 12

High Court judgment 17

DWW’s submissions 33

CSID’s submissions 42

Legal principles 50

Decision

A. On basis of Arbitrator’s decision 56B. On basis of evidence in the round

i. Revenue guidance, VAT community, advice to DWW 61ii. Failure to call witnesses 64

iii. Non-engagement with two emails 72

iv. Non-engagement with evidence re Valuation Report 78

v. Internal inconsistency within judgment 99

Conclusion 107
1. This is an appeal against the judgment and order of the High Court (Twomey J.) dated the 10th and 24th May, 2017 respectively whereby he dismissed the claim of Dublin Waterworld Limited (“DWW”) against National Sports Campus Development Authority (“NSCDA”) for, inter alia , damages for the tort of malicious abuse of the civil process in pursuing an action to recover VAT in respect of a lease dated the 30th April, 2003 to DWW of the National Aquatic Centre, Abbotstown, County Meath (“the Aquatic Centre”). 

The parties 
2. NSCDA, the defendant to the within proceedings, is a statutory authority established pursuant to the National Sports Campus Development Authority Act 2006. It is the legal successor and transferee of all assets and liabilities of Campus and Stadium Ireland Development Limited (“CSID”) which was, as a result of that legislation, dissolved and replaced by NSCDA. CSID had been a private limited company established by the Government in 2000 to develop a sports campus at Abbotstown, County Meath. At that time CSID was 50% owned by the Minister for Sports, Arts and Tourism, 25% owned by the Minister for Finance and 25% owned by the Taoiseach. All references in this judgment to CSID should be taken to include NSCDA, unless otherwise stated.

3. In 2001, DWW commenced negotiations with CSID with a view to entering into a lease in respect of the Aquatic Centre. On the 30th April, 2003 CSID granted a lease (“the lease”) of the Aquatic Centre to DWW for a term of thirty years commencing the 30th April, 2003. Pursuant to Clause 4.30 of the said lease DWW covenanted to pay to CSID all VAT payable on the grant of the lease.

4. Following advices received as to whether or not VAT was chargeable in respect of the lease, on the 15th May 2003, CSID issued an invoice to DWW claiming a sum of €10,254,600 in respect of VAT, stating that the sum so claimed had been calculated in accordance with Regulation 19 of the VAT Regulations of 1979 (S.I. No. 63/79, as amended by S.I. 219/02). The invoice detailed the relevant calculation.

5. In circumstances where DWW considered that CSID was not entitled to claim VAT on the lease, it refused to discharge CSID’s invoice with the result that in December 2003, CSID’s solicitors, McCann Fitzgerald, issued a formal letter demanding payment of the said sum of €10,254,600 in respect of VAT.

6. Notwithstanding the said demand DWW continued to dispute the sum so claimed with the result that on the 26th April, 2005 CSID issued proceedings (“the primary litigation”) in the High Court ([2006] IEHC 200) which included a claim for payment of the aforementioned sum in respect of VAT on the lease. Relevant in this regard is the fact that the claim for VAT was pursued in the context of proceedings brought by CSID to forfeit the lease due, inter alia , to the alleged failure on the part of DWW to comply with certain covenants in the lease including the assignment of the lessee’s interest in the lease without the prior consent of CSID.

7. In its High Court proceedings CSID maintained that there were three methods of establishing whether VAT might be charged on the lease. It maintained that Regulation 19(1)(i), which sets out what is commonly referred to as the “rent formula method” of calculating the open market price of the lease, entitled it to pursue its claim in respect of VAT.

8. Following the issue of the proceedings, DWW brought a motion to have the VAT element of the dispute between the parties referred to arbitration in accordance with the arbitration clause in the lease. That application was successful and Kelly J. referred the dispute concerning CSID’s claimed entitlement to VAT to arbitration ([2005] IEHC 201). Mr. Dermot O’Brien, chartered accountant, was appointed arbitrator. I will return shortly to provide somewhat greater detail concerning the outcome of the arbitration and CSID’s further efforts to recover the VAT claimed on the lease. Suffice to say at this juncture that the arbitrator decided that CSID was entitled to charge VAT on the Lease and that decision was later upheld by the High Court on CSID’s application to enforce the award of the arbitrator notwithstanding the challenge made by DWW to the lawfulness of that award. Ultimately that decision of the High Court was reversed by the Supreme Court which determined that the arbitrator had made a fundamental error in interpreting Regulation 19 of the VAT Regulations of 1979 (as amended) so as to find that CSID was entitled to claim VAT on the lease. 

Relevant regulations 
9. In order to understand the progress of CSID’s claim to VAT on the lease it is necessary to consider the Regulations which, at the relevant time, determined a lessor’s entitlement to impose such a charge. Furthermore, familiarity with these provisions is essential in order to fully understand and contextualise the evidence given over the course of the 20 days that the within proceedings, being the secondary litigation, were at hearing in the High Court. Indeed, absent an understanding of the relevant provisions, it would be impossible to determine whether or not the High Court judge acted lawfully and in accordance with the evidence in concluding, as he did, that CSID’s primary litigation did not amount to a malicious abuse of the process of the Court.

10. In circumstances where the High Court judge considered the purpose and effect of Regulation 19 of the VAT Regulations of 1979 (as amended) and neither party takes issue with his analysis, I will gratefully adopt his summary of the said Regulation which appears at paras. 6-12 inclusive of his judgment:-

“6. The Value-Added Tax Act, 1972 (the ‘VAT Act’) provides that the granting of a lease is a taxable supply of immoveable goods for VAT purposes if the lease is a long lease, i.e. for a period of 10 years or more. In this case, the lease of the NAC was signed by DWW as lessee and by CSID as lessor on the 30th April, 2003, for a period of 30 years (‘the Lease’). Thus, the Lease was one which was capable of being subject to VAT.7. Section 10(9) of the VAT Act provides that the value of the leasehold interest for the purposes of calculating the VAT thereon, is the ‘open market price of such interest ‘. For this reason, section 10(10) of the VAT Act is also relevant, since it states:-

“the open market price –(a) in relation to the value of an interest in immovable goods which is not a freehold interest, means the price, excluding tax, which the right to receive an unencumbered rent in respect of those goods for the period of the interest would fetch on the open market at the time that the interest is disposed of.”8. On this basis, the open market price of the lease was the price or value attributable to the right to receive the unencumbered rent and s. 10 (1) of the VAT Act defined the ” unencumbered rent ” as the ” rent at which an interest would be let, if that interest was let on the open market free of restrictive conditions .”9. Section 32(1)(t) of the VAT Act delegated authority to the Revenue Commissioners to make Regulations in relation to the valuation of leases for the purposes of the VAT Act. Pursuant to this section, the Revenue Commissioners drafted the Value-Added Tax Regulations, 1979, which were duly passed into law. Regulation 19 of those Regulations set out further provisions regarding the valuation of leases. Insofar as relevant, Regulation 19 states:-

“(1) Where –(a) it is necessary to value an interest in immovable goods for the purposes of section 10 (9) of the Act […]the value of such rent to be included in the consideration for the purposes of ascertaining the open market price of the interest disposed of shall, in the absence of other evidence of the amount of that price, be –(i) three quarters of the annual amount of the rent multiplied by the number of complete years for which the rent has been created, or(ii) the annual amount of the rent multiplied by the fraction of which the numerator is 100 and the denominator is the rate of interest (before deduction of income tax, if any) on the security of the Government which was issued last before the date of the creation of the rent for subscription in the State, and which is redeemable not less than five years after the date of issue (allowance having been made in calculating the interest for any profit or loss which will occur and the redemption of the security),

whichever is the lower.”

These two methods for the valuation of leases set out at (i) at (ii) above are known as the ‘Formula Method’ and the ‘Multiplier Method’, respectively.10. Regulation 19 of the 1979 Regulations was amended by the Value-Added Tax (Amendment) (Property Transactions) Regulations, 2002, and the only change to the 1979 Regulations, which is of relevance to these proceedings, was the deletion of the words “whichever is the lower ” and the insertion of the following wording in its place:-

“However, where the rent payable in respect of the interest so created is less than the unencumbered rent in respect of that interest, the value of the rent to be included in the consideration for the purpose of ascertaining the open market price of the interest disposed of shall be calculated using the unencumbered rent.”
It is this Regulation 19, as so amended, which is particularly relevant to the issue of whether the Lease was vatable in this case, in conjunction with s. 99 of the Finance Act, 2002, to which reference will now be made.Anti Avoidance amendment of legislation regarding VAT on leases:

11. Section 99 of the Finance Act, 2002 amended the VAT Act and inserted a new provision, section 4(3A), into that Act. This was enacted as an anti-avoidance provision to ensure that leases were not subject to VAT where the value of the interest in the lease did not equal or exceed the cost of acquiring and developing the property being leased. For a long lease to be taxable after the date of enactment of s. 99 of the Finance Act, 2002, which was the 25th March, 2002, section 4(3A) required the value of the interest in the lease to be equal to, or greater than, the cost of acquiring or developing the property being leased. This test for determining whether leases were vatable is known as the Economic Value Test (‘the EVT’).

12. The general aim of this provision appears to have been to ensure that if a lessor developed a property then that lessor could not enter into an artificial lease solely for the purpose of his reclaiming VAT on the development costs of the property being leased. For example, if a lessor developed a property at a cost of say €10 million and wanted to reclaim the VAT on his development costs, then that lessor could not enter into an artificial lease which was entered solely for the purpose of his reclaiming VAT on the development costs by entering into a lease with a related lessee at an artificially low rent of say only €100 per annum. Prior to the enactment of the anti-avoidance legislation, this approach would have enabled the lessor to reclaim the VAT from the Revenue on the €10 million of costs incurred in developing the property. This would have meant that the Revenue would get little or no VAT from the lessee since the rent was only €100, yet the Revenue would have to repay hundreds of thousands of Euro in VAT to the lessor on the development costs incurred of €10 million. As noted by two experienced VAT advisers, Dermot O’Brien and Tom Corbett in a conference paper dated 2nd May, 2002, entitled Section 99 of Finance Act 2002 and subsequently published in the Irish Tax Review:-

“The introduction of Section 4 (3A) into the VAT Act was designed as an anti-avoidance measure. Previously, while VAT was charged on the capitalised value of a lease, it was possible in certain circumstances that the value of the lease could be significantly less than the actual cost of development of a property. Therefore, a person who was not entitled to deduct VAT on expenditure could, by virtue of a lease and leaseback arrangement, incur VAT on a lower leasehold value than on the higher cost of construction, thereby effecting a significant VAT saving. These provisions are designed to counter this.”11. As can be seen from the aforementioned provisions, key to whether or not VAT was chargeable on a long lease was the “open market price” of the leasehold interest and in particular Regulation 19 which provides two methods by which the open market price may be calculated ” in the absence of other evidence of the amount of that price ” [emphasis added]. It is this Regulation and in particular the words to which emphasis has been added that are core to the claim of DWW in the within proceedings. In this context it is important to record at this stage of the judgment that CSID had received a report from a Mr Liam Cahill of the Valuation Office on the 25th October 2002 (“the Valuation Office Report”) which stated that the estimated rental value was €3,376,048 and the estimated open market price of the lease for VAT purposes was, €35,054,725 i.e. circa €35m.12. It is not in dispute that in order for a lessor to claim VAT on a long lease, it had to be in a position to establish that the value of its interest in the lease was equal to or greater than the cost of acquiring or developing the property the subject matter of the lease (see s. 4(3A) of the VAT Act 1972, as amended by s. 99 of the Finance Act, 2002). Thus, in the circumstances of the present case VAT could not have been charged unless CSID was in a position to show that the open market price of the lease was above €63m., that being the development cost.

13. The Valuation Office Report is of particular importance in the context of the present proceedings in that DWW maintains that the valuation of the lease in that report of €35m. was “other evidence” of the open market price within the meaning of Regulation 19. That being so, there was no lawful basis upon which CSID might claim VAT on the lease. Instead of relying upon the open market price of the lease set out in the Valuation Office Report, as it was obliged to do, CSID had impermissibly calculated the value of the lease by using the rent formula method. It had taken three quarters of the unencumbered rent i.e. €2,532,000 and multiplied it by the number of years of the lease i.e. thirty years, a calculation which resulted an open market price for the lease of €75,960,000. That figure being above the development cost, the lease was vatable at 13.5%.

14. In circumstances where DWW claims that CSID had actual knowledge of the fact that its claim for VAT was unlawful, being contrary to the clear wording of Regulation 19, it maintains that the primary litigation against DWW was commenced without reasonable or probable cause. 

Key persons 
15. For ease of reference, what appears below is a list containing the names of a number of individuals’ material to the decision of the High Court judge and the positions which they held at the relevant time:

Name Position
John Moriarty Managing Director, Dublin Waterworld Limited
Terry O’Neill Partner, KPMG
Keith Loughman Director, KPMG
Donagh Morgan Former Chief Executive of Campus Stadium Ireland Development Ireland (“CSID”) and its statutory successor, National Sports Campus Development Authority (“NSCDA”)
Sean Benton Former Chief Executive and Director, CSID
John Mulcahy Former Non-Executive Director, CSID
Michael Walsh Former Non-Executive Director, CSID
Con Haugh Former Non-Executive Director and Chairman CSID
David Conway Former Director of Sport, Magahy & Company (member CSID’s Executive Services Team) and current Director of NSCDA
Laura Magahy Magahy & Company (member of CSID’s Executive Services Team)
Colm Dunne Magahy & Company (member of CSID’s Executive Services Team)
Della O’Donoghue Magahy & Company (member of CSID’s Executive Services Team)
Fergal O’Rourke Partner, PwC & Tax Relationship Partner for CSID
John Fay Partner, PwC
Thomas O’Reilly Manager/Senior Manager, PwC
Lonan McDowell Consultant and Former Partner, McCann Fitzgerald

16. Several of the above individuals were members of what is referred to as the Executive Services Team (“EST”) of CSID. Those individuals, namely David Conway, Laura Magahy, Colm Dunne and Della O’Donoghue, were employed by a company called Magahy & Company and were contracted to provide executive services to CSID, the board of which they reported to regularly. They were the core group dealing with the day-to-day operations of the Aquatic Centre, and were involved in the making of decisions regarding its establishment, including the decision, which was ultimately made by the Board, to pursue the primary litigation which included the claim for VAT on the lease. Throughout this judgment I shall for the purposes of convenience refer to these individuals as being “of CSID”, however it should be noted that in strictness they are not employees of CSID but are simply contracted by CSID to act on the EST. Price Waterhouse Cooper (“PwC”) has been described as being a part of the EST, although it may be more apt to say that they provided professional advice to the EST and to the Board of CSID, including tax advice in relation to the charging of VAT on the lease. 
Procedural history 

The primary litigation i.e. the forfeiture proceedings which included the claim for recovery of VAT on the Lease and the High Court proceedings seeking to enforce the Arbitrators Award

17. As already stated, shortly after CSID commenced its High Court proceedings and these had been transferred to the Commercial Court, DWW applied to stay that part of the litigation that claimed recovery of the sum allegedly due in respect of VAT on the lease so that it might be referred to arbitration. It would appear that it was in the course of the exchange of affidavits between the parties on this application that DWW became aware, for the first time, of Mr. Cahill’s estimation of the market price of the lease as contained in the Valuation Office Report.18. The questions posed by the Arbitrator for his determination were as follows:

1. If the valuer has given his opinion as to the market value of the interest to be disposed of, is CSID then entitled to rely on one of the other formula-based methods of capitalising the lease set out in Regulation 19?2. Is CSID entitled to rely on the opinion of its appointed valuer or does it need to question his method of valuation?

19. In the course of the arbitration CSID argued that the VAT Regulations provided for three alternative methods of valuing the lease and that the conditions for VAT liability were fulfilled by the use of the rent formula method. It also argued that there was no clear or adequately established evidence of the open market value of the lease with the result that the Valuation Office Report, which had estimated the open market price as €35m., did not constitute “evidence” of an open market value for the purpose of Regulation 19.20. DWW, on the other hand, contended that VAT was not properly chargeable. It refused to accept Mr Cahill’s valuation either in respect of the unencumbered rent or his opinion as to the open market price in the sum of €35m. It had engaged the services of Osborne King, valuers and estate agents, who had given a substantially lower rental figure which if accepted and used on the same basis of calculation as that proposed by CSID would not yield a figure which would meet or exceed the economic value of €62 million.

21. On the 1st July, 2005, the Arbitrator published his Award which determined, inter alia , that VAT of €10,254,600 was due by DWW to CSID in respect of the lease. He concluded that the opinion of Mr Cahill of the Valuation Office was not “evidence of an open market value” for the purpose of Regulation 19 but was merely his estimate of the value of the lease. This was, he concluded, because the property under consideration was unique and had no close comparison in the State. That being so, CSID was entitled to apply the rent formula method determine whether VAT was chargeable. Thus it was that the Arbitrator decided that VAT had been correctly charged.

22. On the 14th July 2005, CSID issued further High Court proceedings seeking an order permitting it enforce the Arbitrator’s Award ( Campus Stadium Ireland Development Ltd. v. Dublin Waterworld Ltd. [2005] IEHC 334). In response, DWW applied under s. 38 of the Arbitration Act 1954, as amended, to have the Award set aside on the basis that the Arbitrator had misconducted himself. It was argued on behalf of DWW that if the Arbitrator was intent on discounting Mr Cahill’s opinion as the opinion of a competent valuer for the purposes of Regulation 19 because of the unique nature of the property, which would be a radical departure from the ordinary procedure, he should have flagged that issue at the hearing and allowed DWW the opportunity to address it. In so doing, it was argued that the Arbitrator failed to answer the very question he had posed for himself as to whether CSID was entitled to rely upon one of the formula methods if the valuer had given his opinion as to the open market value of the lease. It was further argued that the approach of the Arbitrator was inconsistent and unfair insofar as he accepted that it would be absurd for him to question the professional judgment of the valuer in producing the unencumbered rent of the property and yet proceeded to refuse to accept the evidence of the valuer as to the open market price of the lease. Finally, it was submitted on behalf of DWW that there was an error of law on the face of the award wherein the Arbitrator stated that the VAT system could not function effectively if a supplier’s VAT charge was subject to review by his customer in circumstances whereas in fact a customer is entitled by law to question any charge in relation to VAT.

23. In the High Court, Gilligan J. concluded that the decision of the Arbitrator was one of the possible conclusions that he could have arrived at having regard to the issues before him. The High Court judge concluded that, contrary to the case advanced by DWW, CSID had argued before the Arbitrator that the opinion of Mr Cahill did not constitute “evidence” for the purposes of Regulation 19 and that the Arbitrator was entitled to come to the conclusion which he did. He so found notwithstanding his acceptance that the approach of the Arbitrator had brought about a situation whereby he had not decided the central issue which he had posed for his consideration, namely, whether in light of Mr Cahill’s opinion as to the open market value of the interest being disposed of, CSID was entitled to rely upon one of the other formula-based methods of valuing the lease as provided for in Regulation 19. In circumstances where the Arbitrator had concluded that he did not have evidence of the open market price of the interest to be transferred before him, it was not, according to the High Court judge, necessary for him to determine that issue.

24. DWW appealed the decision of Gilligan J. to the Supreme Court ( Campus Stadium Ireland Development Ltd. v. Dublin Waterworld Ltd [2010] IESC 25). A judgment was given on 30th April, 2010 wherein the Court unanimously overturned the High Court decision which had affirmed the Arbitrator’s Award. Hardiman J. concluded that notwithstanding the Revenue’s guidelines and the apparent Revenue approval for the position adopted by CSID in raising a claim to VAT on the lease, the absence of other evidence of open market value was a condition precedent to the use of either of the other formulae provided for valuing the lease in Regulation 19.

25. The Court also concluded that neither the Arbitrator nor the Revenue, in publishing their guidance on the issue, had paid sufficient attention to the presence in Regulation 19 of the phrase “in the absence of other evidence of the amount of that price”. In this case there was not an “absence of other evidence”. Mr Cahill’s expert opinion as to the open market value of the lease, as contained in the Valuation Office Report, was evidence of the value of the lease for the purposes of Regulation 19. Thus, CSID was not entitled to use either of the other methods prescribed in Regulation 19 for the purposes of calculating the value of the interest to be transferred and thus determining whether the lease was chargeable in respect of VAT. Accordingly, the Court made an order remitting the dispute back to the arbitrator for his lawful determination. Not unsurprisingly in light of the Supreme Court’s decision, DWW was awarded its costs of the hearing in both courts. Furthermore, CSID later agreed to pay DWW’s costs in respect of the arbitration proceedings. 

Proceedings for the tort of malicious abuse of the civil process 
26. At the time it commenced the within proceedings, DWW maintained that the conduct of CSID in seeking (i) to recover VAT on the lease, (ii) to enforce the Arbitration Award and defend the challenge of DWW thereto and (iii) to defend DWW’s appeal to the Supreme Court against the High Court decision to enforce the Award amounted to an abuse of the court’s own processes. It claimed that CSID had at all stages acted maliciously, in bad faith and without probable cause in circumstances where it knew it was not entitled to charge VAT under the relevant VAT legislation and that the proceedings would result in severe financial and reputational damage to DWW. Hence the judgment of Twomey J. in the High Court deals with each of these claims in turn. However, by the time the proceedings were heard in this Court, DWW had confined its complaint to CSID’s conduct in commencing its High Court proceedings to seek recovery of VAT on the lease. For this reason, this judgment will focus upon the decision of the High Court judge to the effect that DWW had failed to show that CSID lacked reasonable or probable cause to issue the proceedings which included a claim for VAT on the lease.

27. Without wishing to oversimplify matters, DWW maintains that it was clear from the evidence that at the time CSID issued its proceedings to recover VAT on the lease it well knew, from advices that it had received from PwC, that it was not lawfully entitled to make that claim. This is because it had “evidence” as to the open market price of the interest to be transferred, i.e. the €35m. valuation contained in the Valuation Office Report. Thus, CSID was precluded as a matter of law from using the mathematical formula on which it had relied when it issued its invoice claiming VAT and later commenced its proceedings to seek recovery of the sum so claimed, and had no reasonable or probable cause to rely on that approach.

28. It is not necessary in the course of this judgment to deal with the loss said to arise as a result of the alleged abuse of the court’s process as the hearing in the High Court was confined to determining the issue of liability with the issue of quantum being postponed to the outcome of the court’s determination on that issue.

29. Following a 20-day hearing in the High Court, the High Court judge delivered a lengthy and detailed judgment on the 10th May, 2017 which I will now endeavour to summarise. 

Judgment of the High Court 
30. The judgment of the High Court judge is one which is extremely detailed in terms of its engagement with the law regarding the tort of malicious abuse of the court’s process, the primary litigation pursued by CSID, and the evidence heard by the court in the within proceedings.

31. What follows may well appear to be a somewhat overly detailed summary of that judgment and the criticism that it attracted on this appeal. However, in light of the extraordinarily broad canvas of the grounds of appeal a more skeletal approach would, in my view, be less than satisfactory.

32. It is clear that the High Court judge determined the proceedings in favour of CSID on two alternative bases. First, he concluded that the outcome of the proceedings before the Arbitrator and the decision of the High Court judge to uphold the Arbitrator’s Award to the effect that VAT was chargeable on the lease was determinative of the issue in these proceedings, namely that CSID had reasonable and probable cause to issue the proceedings to recover VAT on the lease. Second, he concluded that the evidence “in the round” was sufficient to establish that CSID had reasonable or probable cause to commence those proceedings.

33. I will now briefly summarise, in turn, how the High Court judge reached the aforementioned conclusions. However, before doing so, I consider it important to record that it is apparent from his judgment (see para. 27) that the High Court judge was clear in his own mind that the issue which he had to determine, namely as to whether CSID had maliciously abused the process of the court in instituting proceedings to recover VAT on the lease, had to be decided based upon the knowledge of CSID when it instituted the proceedings. 

The effect of the first instance decisions of the Arbitrator and High Court (Gilligan J.) 
34. Notwithstanding the recognition by the High Court judge that he was required to determine the central issue in the proceedings on the evidence and state of mind of CSID as it existed at the time it commenced the proceedings to recover VAT on the lease, at a very early stage of his judgment he identified what he stated he considered was a “key issue in the trial”. He described that issue in the following way at para. 4 of his judgment:-

“A key issue in this trial, and one that does not appear to have been considered by the Irish courts to date, is whether a plaintiff, who wins his litigation initially before a lower court or tribunal before losing on appeal, can nonetheless be found by the courts to be someone who should never have litigated in the first place, such that he is guilty of malicious abuse of court process and therefore liable for the damage caused to the defendant, over and above the plaintiff’s liability for the legal costs incurred by the defendant.”35. In addressing this issue the High Court judge referred to a number of authorities concerning the tort of malicious abuse of the court’s process. In particular, he referred to the decision of Clarke J. in Independent Newspapers (Ireland) Ltd. v. Murphy [2006] 3 IR 566 and to his observation concerning the impossibility of a court finding a litigant guilty of malicious prosecution where the court had found, at the conclusion of the primary litigation, in their favour. This was because the court could not entertain a second set of proceedings which was predicated upon establishing that the original finding of the court was incorrect.36. It was as against the backdrop of the decision of Clarke J. in Independent Newspapers (Ireland) Ltd. that the High Court judge then went on to consider the legal effect of the decisions made by the Arbitrator and the High Court on DWW’s claim that the proceedings seeking to recover VAT on the lease had been brought without reasonable and probable cause. In so doing, he observed that whilst both decisions, which supported CSID’s entitlement to claim VAT on the lease, were later established to be fundamentally flawed, this had only become obvious after the Supreme Court decision of the 30th April 2010.

37. Thus, it was that at para. 116 of his judgment the High Court judge raised the following question for his consideration:-

“In the current case, the application of these legal principles raises the question of whether a litigant could be said to have taken a case without reasonable or probable cause, where he was successful at first instance, but loses his case on appeal. No authorities were opened to the Court where a litigant was found to have been guilty of malicious abuse of court process where that litigant had been successful in this claim at first instance.”38. Commencing at para. 144 of his judgment the High Court judge carried out what he described as an “analysis of the three decisions in the primary litigation”, i.e. the Arbitrator’s Award, the decision of the High Court to enforce that Award, and the decision of the Supreme Court to set aside the Award as fundamentally flawed. In so doing he characterised the outcome of the arbitration and the High Court proceedings as “wins” for CSID which he could not ignore.39. In considering the effect of the decision of the Arbitrator upon the claim that CSID had reasonable or probable cause to issue and maintain its proceedings to recover VAT, the High Court judge attached weight to the qualifications and expertise of the Arbitrator, a former president of the Irish Taxation Institute and a leading VAT practitioner. He was satisfied that his decision should be given the same status as a decision of a court when assessing the relevance of that decision in the context of DWW’s claim that CSID had instituted proceedings to recover VAT on the lease without reasonable and probable cause.

40. As to the effect of the Arbitrator’s decision on DWW’s claim, the High Court judge concluded as follows at para. 156 of his judgment:-

“It is this Court’s view that the fact that a court, or an arbitrator, found that the Lease was vatable must mean that there was reasonable or probable cause for a claim that the Lease was vatable. To put the matter another way, the very fact that on the 1st July, 2005, an independent and experienced arbitrator, with particular expertise in VAT, found that the Lease was vatable proves to this Court that there must always have been a reasonable chance of such a finding from the moment when CSID decided to issue the proceedings on 26th April 2005. This is because the very winning of the primary litigation at first instance, whether before the court or, as in this case, before an arbitrator, must prove that there was always a reasonable chance that the case would be won, and so establishes that there was reasonable or probable cause for the proceedings.”41. A similar view was taken by the High Court judge regarding the significance of the decision of the High Court to uphold the Arbitrator’s Award, notwithstanding that said decision was not one on the merits of the case. In the view of the High Court judge, the fact that both decisions had upheld the entitlement of CSID to charge VAT on the lease proved that the proceedings instituted by CSID always had a reasonable chance of success.42. Notwithstanding that the Supreme Court later made clear that Regulation 19 did not permit CSID to charge VAT on the lease having regard to the existence of the Valuation Office Report, the High Court judge went on to conclude that it was his view that “a determinative factor in deciding whether a litigant has reasonable or probable cause will, in most cases, be the existence of a first instance decision in favour of the litigant.” Furthermore, he stated that it was difficult to conceive of a better factor for determining whether a litigant had reasonable or probable cause to litigate than a first instance decision in their favour. This was because the litigant was not required to establish that they were guaranteed to win the litigation proposed rather only that there was a reasonable chance they would be successful in their proceedings. In the Court’s view, that reasonable chance of success was established by a win at first instance even though the litigant might later fail in their claim on the appeal.

43. Concerning the nature and effect of the Supreme Court decision on DWW’s claim, the High Court judge observed that the Supreme Court had concluded that the legal error made by the Arbitrator concerning Regulation 19 was so fundamental that it warranted an order to set aside his findings. However, he went on to state that it was equally clear that Gilligan J. at first instance had not regarded this legal error as obvious or, if obvious, as being so fundamental as to justify it being set aside. In this respect, the decision of Gilligan J. had demonstrated the unpredictability of the outcome of litigation and why a court should not readily criticise a litigant, in the sense of finding him guilty of malicious abuse of court process, for failing to exhibit the wisdom of one court, in this case the Supreme Court, but not the wisdom of the court of first instance, at the time they decided to commence proceedings later challenged as amounting to an abuse of the court’s process.

44. Thus it was that, based upon the decision of the Arbitrator and the High Court (Gilligan J.), the trial judge concluded that CSID had reasonable or probable cause for commencing its proceedings to recover VAT on the lease. 

The evidence “in the round” established that CSID had reasonable or probable cause to commence the proceedings to recover VAT on the lease 
45. Notwithstanding his conclusion as to the determinative effect of the decisions of the Arbitrator and the High Court (Gilligan J.) on the viability of DWW’s claim of malicious abuse of court process, the High Court judge nonetheless proceeded to consider whether, regardless of those two decisions in its favour, CSID had reasonable or probable cause for the primary litigation. He stated that it was necessary for him to review in detail much of the evidence provided to the Court on behalf of CSID concerning its interpretation of Regulation 19 to the effect that it had a choice of three methods of valuing the lease, and also some of the evidence relied upon by DWW to support its claim that CSID did not have reasonable or probable cause to interpret Regulation 19 in that manner.

46. Thus it was that the High Court judge considered in great detail a significant number of documents relied upon by the parties in the course of the hearing. He carried out a like exercise in relation to certain aspects of the oral evidence. This evidence and the findings of fact made in relation thereto are recorded at paras. 26 to 99 of his judgment.

47. Having regard to his overall assessment of the evidence and in particular those aspects of the evidence highlighted in his judgment, the High Court judge concluded (see para. 184) that “viewed in the round” that evidence was sufficient to establish that CSID had reasonable or probable cause for issuing the proceedings.

48. For the sake of completeness, it is important at this stage of the judgment, particularly in light of the submissions made to this Court on behalf of DWW, to record that the High Court judge reached the aforementioned conclusion notwithstanding his finding of fact that CSID, both at board level and at EST level, had been advised and was aware of the distinction between the wording of the Regulation and Revenue practice. He was nonetheless satisfied as a matter of fact that CSID and its advisors PwC believed that the lessor had the choice of three methods of valuing the lease and that the intended claim for VAT on the lease was lawful. Furthermore, he was also satisfied that this had been the advice of CSID’s professional advisers at the time, particularly PwC. 

The evidence relied upon by the High Court judge to support his conclusion that CSID had reasonable and probable cause to issue the primary proceedings 
49. I will now refer to some aspects of the evidence relied upon by the High Court judge to support his conclusion that CSID had reasonable and probable cause to commence proceedings against DWW to recover VAT on the lease.

50. The High Court judge identified a number of documents which he considered lent support to the claims of CSID and its professional advisers, PwC, that they believed the lessor had the choice of three methods of valuing the lease.

51. He first identified documentation which established that Revenue was of the opinion that the lessor had the choice of three methods of valuing the lease. Apart from other exchanges between PwC and Revenue evidencing Revenue’s approval of CSID’s intended imposition of VAT on the lease and to which I will later refer, the High Court judge relied upon a document issued by Revenue’s VAT Policy and Legislation Branch on the 6th June 2002 entitled ” Notes for Guidance of Inspectors ” which includes the following statement concerning the relevant Regulations :-

“The Value-Added Tax (Amendment) (Property Transactions) Regulations 2002 provide that a taxable person may now use any of the three methods of valuation provided for even where an increase in the rent is due to take effect within five years of the date of the creation of the interest.”

52. According to the High Court judge, this guidance established that Revenue, who had drafted the Regulations, believed that Regulation 19 should be interpreted as permitting the use of any of the three methods of valuation. Of particular importance in this regard is the fact that Revenue’s interpretation of Regulation 19 as provided for in the Notes for Guidance of Inspectors was not only known and relied upon by PwC but was transmitted to CSID in emails dated 27th November 2002 and 19th June 2003.53. The High Court judge next relied upon the fact that there was significant evidence to show that the professional view within the VAT community at the relevant time was that the lessor had a choice of the three methods of valuing the lease for the purpose of establishing whether or not VAT was chargeable. Whilst the documentation to which I am about to refer was not known to CSID when it made its decision to commence its VAT proceedings against DWW, it is evidence which the trial judge clearly relied upon to support his conclusion that the advice given by PwC was that CSID might lawfully claim VAT on the lease, regardless of the wording of Regulation 19.

54. Commencing at para. 29 of his judgment the High Court judge relied upon the following documents which may be summarised as follows: –

(i) Revenue booklet entitled ” VAT and Property Transactions ” dated October 2001, concerning the interpretation of Regulation 19 and how the “open market price” of a long lease might be ascertained.(ii) The leading textbook VAT on Property (June 2006, Irish Taxation Institute), authored by Mr Fergus Gannon who gave evidence supporting the three-way choice of valuing a long lease for VAT purposes.

(iii) An article authored by Mr Fergus Gannon in the Irish Tax Review (May 1995).

(iv) An article by Mr Jim Somers published in May 1998 in the Irish Tax Review, which again stated that the landlord had the right to choose any of the three methods for calculating the “open market price”.

(v) A joint seminar paper dated the 2nd May, 2002 authored by Mr Dermot O’Brien and Mr Tom Corbett, both experienced tax advisors, which opined that the changes to the VAT Regulations 1979 introduced in the Finance Act 2002 continued to permit a landlord to use any of the three methods earlier identified for the purposes of determining whether a lease was taxable.

55. The High Court judge also relied upon the fact that Mr Terry O’Neill, a partner in KPMG who gave evidence for and tax advice to DWW, accepted that the professional views identified in the aforementioned documents corresponded with Revenue’s own interpretation of Regulation 19 to the effect that the lessor had a choice of three methods of valuing a lease for VAT purposes.56. Likewise, the High Court judge considered it material that DWW’s own tax advisors, Andersen, prior to their merger with KPMG in 2002, had advised DWW that there was a choice of three methods for valuing the lease. He referred to a draft report prepared by Mr Keith Loughman of Andersen which had been sent to Mr John Moriarty of DWW on the 1st July, 2002 and a subsequent memo dated the 6th August, 2002, both of which made clear his opinion that the lessor had a choice of three methods of valuing the lease.

57. Thus it was that the High Court judge concluded that CSID’s interpretation of Regulation 19 was shared by DWW’s own advisors at one stage, even if that had changed by June 2003.

58. The High Court judge also relied upon the fact that Mr O’Neill, when under cross examination, had not been prepared to state that in his view CSID had no reasonable basis for its view that the lease was vatable. While he had protested that he had not read all of the PwC advice and thus could not furnish an opinion on the question posed by counsel for CSID, the High Court judge was satisfied that on the basis of the documents which had been put to Mr O’Neill in the course of cross-examination, he should have been in a position to answer what was, in effect, a straightforward question. In the view of the High Court judge, Mr O’Neill had refused to state that CSID had no reasonable basis for its view that the lease was vatable at a time when as DWW’s witness he would have expected him to have been able to support to DWW’s claim in those terms.

59. The High Court judge next moved to consider the evidence which established that Revenue had confirmed that VAT was chargeable on the lease. He referred in this regard to the fact that Revenue had been furnished with a copy of the Valuation Office Report on the 27th November, 2002 which showed the open market price of the lease as €35m. and an unencumbered rent of €3.376m. The High Court judge considered the furnishing of this document to Revenue to be consistent with PwC’s confident opinion that the lessor was entitled to choose any of the three methods for valuing the lease.

60. The High Court judge observed that the letter to Revenue enclosing the Valuation Office Report referred to CSID’s intention to value the lease for VAT purposes by using the unencumbered rent as determined by the Valuation Office and by applying the formula set out in Regulation 19(1)(i) and had asked Revenue to “confirm that our understanding set out above is correct.” He relied also upon the fact that, by fax dated the 1st May, 2003, Mr Michael Kelly of Revenue had confirmed to Mr John Fay of PwC that the methodology CSID proposed to use to value the lease was satisfactory, albeit that he commented that he was not aware that DWW had accepted the valuation of the unencumbered rent as determined by the Valuation Office.

61. The High Court judge also referred to a number of further documents to which CSID was privy, and which confirmed that it was the opinion of Revenue that the lease was vatable. The first was an email received by Mr Colm Dunne, a member of the EST on the 7th July, 2004, which referred to a meeting with a number of Revenue officials wherein it had been confirmed that the VAT due had been determined in accordance with the VAT legislation. A further confirmation by Revenue that the lease was vatable was, according to the High Court judge, contained in an email dated the 7th January, 2005 to Mr Fay of PwC. It had confirmed that, as per the earlier email of the 7th July, 2004, “the VAT due has been determined in accordance with the VAT legislation and any revision in VAT liability must also be carried out in accordance with the legislation”.

62. The High Court judge also relied upon what he described as a fourth and final confirmation from Revenue that the lease was vatable. This was to be found in a letter dated the 26th September, 2011 from Revenue to Mr O’Rourke of PwC. Whilst postdating the Supreme Court judgment, it was, the High Court judge concluded, relevant to demonstrate that at the relevant time when CSID had sought to recover VAT on the lease it was the Revenue’s view that Regulation 19 permitted a lessor to choose between the valuation methods outlined in that Regulation and that this was apparent from its published guidelines on VAT and Property Transactions.

63. Thus it was that the High Court judge concluded that, notwithstanding its knowledge of the existence of an open market price of €35m., Revenue had confirmed that CSID’s interpretation of Regulation 19, and that of its tax advisor, PwC, was correct.

64. Commencing at para. 62 of his judgment, the High Court judge analysed a number of the documents relied upon by DWW in support of its contention that the primary proceedings were brought without reasonable or probable cause. He referred, inter alia , to three particular emails dated the 27th November, 2002, the 28th November, 2002 and the 17th June, 2003. I pause here to observe the use by the trial judge of the words ” inter alia ” in introducing this section of his judgment in circumstances where it is contended on the appeal that he excluded from his consideration two other emails dated 20th December, 2002 and 23rd December, 2002 to which I will later return.

65. The first email, of the 27th November 2002, was from Mr Fay of PwC to Mr Conway and Ms Magahy of CSID and Mr O’Rourke and Mr O’Reilly of PwC wherein he enclosed a copy of the letter he proposed to send to Mr Michael Kelly of Revenue concerning CSID’s intended claim and calculation in respect of VAT on the lease. In the course of his email Mr Fay stated that “there are three valuation methods permitted under the VAT Regulations”. He went on to advise that the Regulation provided that the mathematical methods of valuing the lease (including the method proposed by CSID) could only be used in the absence of other evidence and that CSID had other evidence, namely the €35m. value in the Valuation Office Report. However, he also advised that Revenue had stated in their Notes for Guidance to Inspectors that any of the three permitted methods might be used in practice. Nonetheless, he anticipated “some pushback from Michael Kelly” of Revenue because they intended to disregard the valuation of the open market price. He enclosed with his email the Valuation Office Report. In this regard it is relevant to note that one of the principal submissions advanced by DWW on this appeal was that no advice was ever later furnished to CSID which contradicted this clear statement regarding the lawfulness of the proposed claim for VAT. According to DWW, this email establishes that PwC knew and had advised CSID that it was not lawfully entitled to charge VAT on the lease.

66. The second email, dated the 28th November, 2002, was sent by Mr O’Rourke to Mr Fay and was copied to Mr Conway and Ms Magahy and Mr O’Reilly. In it, Mr O’Rourke states that he had agreed the text of the letter drafted by Mr Fay which was intended to be sent to Mr Kelly of Revenue. He also advised that the methodology proposed in the letter was “not ‘perfect'” but that it should, nonetheless, prove acceptable. It is perhaps relevant to observe at this point that the letter to be forwarded to Mr Kelly, which included the Valuation Office Report containing the valuation of €35m., was also copied to three senior members of Revenue namely Ms Betty Collins, Ms Clodagh Ní Eidhin and Mr Oliver Curran. This, the High Court judge concluded, demonstrated confidence on the part of PwC that VAT might lawfully be charged on the lease.

67. The third email of the 17th June, 2003 was sent by Mr Tom O’Reilly, to Ms O’Donoghue and was copied to Ms Magahy, Mr Conway, Mr Fay and Mr O’Rourke. In his email which enclosed a draft reply to a letter received from Mr Moriarty of DWW of the 16th June, 2003, Mr O’Reilly stated as follows:-

“…You should note that use of any one of three methods is an extra statutory practice only. In strictness, CSID should use the valuation (circa €35M) determined by the Valuation Office.”68. Notwithstanding these advices, the enclosed draft letter addressed to Mr Moriarty contended that Regulation 19 provided three methods for valuing long leases and that, having applied the rent formula method, the capitalised value of the lease was €75,960,000. The letter also advised that Revenue had confirmed that the methodology used by CSID was satisfactory and he asked Mr Moriarty to note that “it has always been the practice that the lessor can choose whichever method he wishes and this is confirmed in the Revenue Commissioners ‘VAT and Property Transactions’ booklet published in October 2001”.69. In the course of his judgment, the High Court judge noted that Mr Conway had forwarded Mr O’Reilly’s email of the 17th June, 2003 to Mr Lonan McDowell, solicitor with McCann Fitzgerald, who had stated that he was happy for the proposed letter to be sent but that a meeting might be advisable in light of Mr O’Reilly’s views. Mr McDowell considered that a difficulty might arise as a result of differences between tax practice and legislation and that “the full tax and legal implications of this for CSID will have to be worked through and understood before steps are taken to enforce recovery of the VAT.”

70. The High Court judge proceeded to place each of the aforementioned emails in the context of a raft of other documents to which he made reference (see para. 71 onwards). I will summarise these as follows:-

• Letter of the 6th January, 2003 sent by Mr Fay to Mr Conway and copied to Mr O’Rourke and Mr O’Reilly wherein he states his view that CSID was entitled to use the rent formula method of valuation.• Email of the 31st January, 2003 from Mr Fay to Mr O’Rourke and Mr O’Reilly of PwC and copied to Mr Conway and Ms Magahy which states that the onus rested with CSID to put a value on the taxable supply of the property to DWW and that it had a basis for valuing the lease in such a way as to make it chargeable to VAT. He states “[a]s I see it, there is no basis for KPMG/Dublin Waterworld to contend that the lease is not subject to VAT”.

• Email of the 19th February, 2003 sent by Mr Fay to Mr O’Reilly and copied to Mr O’Rourke and Mr Conway. With reference to a proposal by DWW that the issue as to whether VAT was chargeable on the lease be referred to an independent expert, Mr Fay expressed the view that he did not believe this would be of any benefit. Neither did he consider it would be appropriate “given that the matter has been referred to the Revenue Commissioners. If the Revenue holds that the lease is taxable, that is it and no matter what any other advisor may say CSID will have to charge VAT.”

• Email of the 14th May, 2003 sent by Mr O’Rourke to Mr Conway, Mr Dunne and Ms Magahy of CSID and copied to Mr Fay and Mr O’Reilly wherein he states:-

“I think the Revenue are really out of the loop now as far as we are concerned. They agree that VAT should be charged and the methodology is as provided by law, so they really have no further role to play in this.”
• Letter of advice of the 11th September, 2002 from PwC to Mr Sean Benton, acting CEO of CSID, referring to the fact that CSID could determine the open market value of the lease either “by reference to the formulae contained in the VAT Regulation or by a professional valuer”.• Letter of advice of the 19th June, 2003 sent by PwC to Mr Morgan, CEO of CSID, in response to Mr Moriarty’s letter of the 16th June, 2003 which claimed that the VAT charge was incorrect and that the “rent formula” or “multiplier” methods could only be used in the absence of other evidence as to the value of the lease. In its letter of advice, signed by Mr O’Reilly, PwC advised CSID that the VAT charge outlined in its invoice dated the 15th May 2003 was correct.

• Draft report of the 30th April, 2003 sent by Mr O’Reilly to Mr Conway, Mr Dunne and Ms Magahy. The draft report was re-issued in June 2003 in substantially the same terms. That report refers to the valuation of the lease for VAT purposes. The three possible methods of calculating the capitalised value of the lease is set out. The report refers to the valuation received from the Valuation Officer which shows the capitalised value at €35,540,725 and given that that valuation did not pass the economic value test it is stated that PwC advised that the unencumbered rent of €3,376,048 be used in one of the mathematical valuations permitted by the VAT Regulations. Of relevance in the context of the submissions advanced on behalf of DWW is that it does not advise CSID that this method was only permissible “in the absence of other evidence” regarding the value of the lease.

71. The High Court judge then proceeded, commencing at para. 87 of his judgment, to consider the emails referred to earlier in this judgment at paras 64-66, in the context of the oral evidence heard by the Court. He referred to the evidence given by members of the EST and directors of CSID to the effect that it was their understanding of the advice received that VAT was chargeable. In particular, he referred to the unchallenged evidence of Mr Walsh and Mr Mulcahy that CSID had received highly competent professional advice from a tax expert and on foot of which the Board had acted. Furthermore, the High Court judge noted that the evidence of Mr Walsh and Mr Mulcahy was consistent with the evidence of Mr Conway of CSID who, notwithstanding that he accepted that he was made aware of the dichotomy between the Regulation and Revenue practice, was found by the High Court judge to have understood the advice of PwC to be that VAT could be lawfully charged and to have, as a non-expert, relied upon that advice.72. The High Court judge also relied on the oral testimony of Mr O’Rourke which he clearly considered to be credible (see paras. 97 – 99) noting that he had said, inter alia , that CSID had been informed of the divergence between the language of the Regulation 19 and the Revenue practice. Thus, at para. 99 of his judgment the High Court judge found as a fact that CSID, both at board level and EST level, was aware that there was a dichotomy between the law and practice concerning Regulation 19. However, he went on to state that he also accepted as fact that “it was PwC’s advice to both the board of directors and the EST that the Lease was vatable”.

73. It is apparent from the judgment of the High Court judge that he considered that much of the aforementioned documentation established that PwC’s view of its own advice was consistent with how that advice had been understood by CSID both at EST and board level.

74. Thus it was that the High Court judge was satisfied first, that when “viewed in the round” the evidence received by CSID from PwC was that whilst the claim for VAT on the lease could not be guaranteed, because of the dichotomy earlier referred to, it was nonetheless PwC’s professional opinion that the lease was vatable. Second, he was satisfied that CSID had accepted PwC’s advice in this regard. Third, CSID had also been advised by its solicitors, McCann Fitzgerald, that it was arguable that DWW was legally obliged to accept CSID’s decision that the lease was vatable and, finally, that counsel had advised that the claim for VAT should be included in the forfeiture proceedings. All of these factors weighed in favour of concluding that CSID had reasonable or probable cause to issue the proceedings. 

The appeal 
75. In its notice of appeal dated 4th April 2018, DWW advanced to some sixteen grounds of appeal. As these were reduced to 6 by the time the appeal was heard in this court I will confine my summary to these more focused submissions. 

DWW’s submissions 
76. In respect of the first basis upon which the High Court dismissed its claim, DWW submits that the High Court judge erred as a matter of law in concluding that CSID’s success before the Arbitrator and before the High Court (Gilligan J.) was determinative in CSID’s favour. In particular, he erred in concluding, as he did at para. 156 of his judgment, that “the very winning of the primary litigation at first instance… must prove that there was always a reasonable chance that the case would be won, and so establishes that there was a reasonable and probable cause for the proceedings.” DWW disputes this statement of the law which it claims is both unsupported by legal authority and defies logic. If the proceedings were issued without reasonable and probable cause, the party that issued those proceedings could not later be absolved of that wrongdoing merely because of the happenstance that an Arbitrator or judge incorrectly decided some leg of their case in their favour, such as has happened here.

77. DWW also contends that the trial judge erred in his reliance upon the decision of the Arbitrator in favour of CSID to retrospectively attribute reasonableness to its earlier decision to bring proceedings. DWW maintains that there were a number of flaws with the High Court judge’s analysis in this regard. It queries how could it be said that a decision at first instance, which was later found to be fundamentally flawed (and the Arbitrator’s decision in this case was found to be so), could have the effect of retrospectively providing a party with reasonable and probable cause in law for initiating those proceedings. Either a party did or did not have reasonable or probable cause to issue the proceedings. This had to be assessed at the time that the proceedings are issued. A subsequent decision by a court of first instance, or an Arbitrator, cannot impact upon the assessment of whether there was or was not cause at that earlier time.

78. Counsel further submits that the High Court judge’s decision was in any event, wrong as a matter of principle. In its proceedings to recover VAT, CSID contended that Regulation 19 allowed for three methods of valuing the lease. It did not succeed in that proposition either before the Arbitrator or before the High Court. In both instances the decision in CSID’s favour was reached on the basis that the Valuation Office Report was not “other evidence” with the result that CSID had been found entitled to use the rent formula method to value the lease. The only determination as to the entitlement of CSID to claim VAT on the lease was that made by Hardiman J. in the Supreme Court when he concluded that the Arbitrator had gravely misled himself concerning Regulation 19. The Valuation Office Report was “other evidence” and that being so CSID was not permitted the option of using one of the alternative formulae therein provided.

79. Furthermore, DWW submits that as a matter of law the High Court judge was not entitled to determine the proceedings on the aforementioned basis as CSID had never advanced this point in the High Court. Neither in its oral or written submissions had CSID sought to argue that because it had succeeded before the Arbitrator and later before the High Court it followed that the proceedings could not have been an abuse of the court’s process. DWW maintains that the decisive reliance by the trial judge on this point was a total surprise. If it had been forewarned as to the importance that this novel proposition of law was to have in deciding the case, it would have taken the opportunity to address it.

80. In respect of the alternative basis upon which the High Court judge had rejected DWW’s claim, namely his conclusion at para. 184 of his judgment that when “viewed in the round” CSID had reasonable or probable cause to issue the proceedings, counsel for DWW submits that this conclusion was not supported by the evidence. It was based upon an incomplete and erroneous assessment of the evidence and in particular the documentary evidence.

81. First, counsel submits that the High Court judge made a fundamental error when, for the purposes of determining whether CSID had reasonable and probable cause to issue proceedings claiming VAT, he relied upon the documentation identified earlier at paras. 53-54 of this judgment. Whilst that documentation was available to what he described as the “VAT community” there was no evidence that CSID was aware of any such documentation or its contents. Thus, whether tax or VAT practitioners considered there was a choice of three valuation methods available under Regulation 19 at the time CSID issued its proceedings was irrelevant as it was not within the knowledge of CSID at the time it commenced the VAT proceedings. For the same reason that it could not have operated on the mind of CSID when it made its decision to initiate proceedings, DWW submits that it was impermissible for the High Court judge to rely upon, as he did, the advice which DWW’s own tax experts had at one time provided which was to the effect that a lessor could choose between the three methods of valuation of the lease. By reason of these errors alone, counsel submits, the subsidiary basis upon which the High Court judge rejected DWW’s claim is flawed with the result that a retrial is warranted.

82. Second, as to the High Court judge’s conclusion that CSID had been advised by its tax advisers that the lease was vatable, that finding was not supported by the evidence. The evidence established that CSID had been apprised of the reality that the Regulations did not permit a free choice between the three methods of valuation where “other evidence” was available. And in this case CSID had other evidence of the open market valuation of the interest in the lease by virtue of the Valuation Office Report.

83. In particular, DWW relies upon the email of 27th November, 2002 wherein Mr Fay had advised CSID and the EST that there was a problem with CSID charging VAT on the lease because the Regulation only permitted the use of the mathematical methods of valuation “in the absence of other evidence” and wherein he went on to state that “we have other evidence (the valuation from the Valuation Office which gives a value of the open market price of €35m).”

84. DWW also laid emphasis upon an email sent in reply by Mr O’Rourke the following day, which was copied to the same two directors of CSID, and in which he concurred with the view earlier expressed by his colleague, Mr Fay, that the proposed methodology, i.e. the use of the multiplier method, was “technically… not perfect”.

85. Particular reliance was also placed upon a third email sent by Mr O’Reilly on the 17th June, 2003 to Ms O’Donoghue and copied to Mr Conway and Ms Magahy as well as Mr Fay and Mr O’Rourke, wherein Mr O’Reilly stated as follows:

“You should note that use of any one of three methods is an extra statutory practice only. In strictness, CSID should use the valuation (circa €35M) determined by the Valuation Office.”86. DWW maintains that in these emails, quite apart from any others, PwC clearly expressed the view, confirmed as correct by the Supreme Court some years later, that the use by CSID of the mathematical formulae was not permitted by the Regulations, which advice must have been understood by the directors of CSID. Indeed, DWW submits that the High Court judge himself, having considered at length these emails, their context and the oral evidence offered in respect of them, found at para. 99 of his judgment that CSID was in fact “both at board level and at EST level, aware that there was a dichotomy between what Regulation 19 stated and the practice”. Given this finding, DWW argues that it was not open to the trial judge to subsequently conclude that CSID had been advised or had actually believed that the lease was vatable. At most, according to DWW, CSID could have understood the advice to mean that the lease was vatable in practice . However, what was required was that it was vatablein law . In this respect his judgment was internally inconsistent. According to DWW, it could avail CSID nothing to rely on evidence that established that PwC had advised that their intended approach to the valuation of the lease was acceptable in practice , as this could provide no basis in law for the proceedings which they later initiated. Counsel for DWW stressed that the directors of CSID were very experienced professionals who would have appreciated the distinction between law and practice and would have been aware that their choice to pursue a course of action which was extra statutory entailed forfeiting the protection of the law.87. According to counsel, there was no evidence of any advice furnished by PwC that stated that the claim for VAT under the Regulation was in accordance with law. The only advice provided was that the Regulation did not permit the charging of VAT on the lease but that Revenue “would run with it”. PwC had made clear that CSID had no case to make for VAT under the Regulation and its advice was unequivocal in this respect. Yet, CSID had commenced proceedings on the basis that it was entitled to make that claim. Accordingly, there was no basis upon which the High Court judge could have concluded that CSID had reasonable and probable cause to bring the VAT proceedings on foot of advice it had received from PwC.

88. Objectively assessed, counsel submits that the reasonable actor in the shoes of CSID at the time, and receiving the advice that it did, would have understand that there was a fatal problem with CSID claiming VAT on the lease due to the existence of the Valuation Office Report of the 25th October 2002 which rendered the approach proposed unlawful.

89. Counsel for DWW further submits that CSID was not entitled to rely upon the fact that its solicitors and counsel lent their support to the claim made in respect of VAT insofar as CSID had not sought any legal advice from McCann Fitzgerald or from counsel on its entitlement to claim VAT on the lease. It had taken its advice from PwC. Neither was there evidence to demonstrate that McCann Fitzgerald was privy to those advices which, counsel submits, were to the effect that the claim for VAT on the lease could not lawfully be made under Regulation 19.

90. Third, counsel for DWW submits that the High Court judge, in general, failed to engage with the evidence. In particular, he had ignored and failed to attach any weight to DWW’s heavy reliance upon two emails dated the 20th December, 2002 and 23rd December, 2002.

91. In the first of these emails, Mr O’Reilly recommended that CSID postpone giving the Valuation Office Report to DWW/KPMG in advance of an upcoming meeting between the parties because it “shows a valuation of the lease of circa €35m. which does not suit our requirements”. DWW submits that this email is evidence that CSID could not but have been aware that the Valuation Office Report made its claim in respect of VAT unlawful, yet it had been ignored by the High Court judge in his assessment of the evidence.

92. The second email, of the 23rd December, 2002, is relied upon as further proof that CSID did not actually believe it had reasonable or probable cause to bring the proceedings. Sent by Mr Fay to Mr Conway, the email sets out that the approach which was being adopted “while in accordance, we believe, with Revenue guidelines” was “not ‘perfect’ when read with the actual Regulations”. It further expressed a need for CSID and their advisors to “stick to [their] guns re the method of valuation [they] had used”. DWW argues that this email again demonstrates that while CSID may have viewed its approach as consistent with practice, Revenue or otherwise, it well understood that it was not in accordance with the actual law. As experienced professionals it is said that the executives privy to this correspondence would have understood that “guidance” or “practice” was not the same as law, even when issued by Revenue, and thus that they could not rely on it to bring their actions into line with the Regulations.

93. Once again DWW submits that the failure of the High Court judge to refer to this email in his judgment, and weigh its content in his assessment, is striking given the reliance that DWW placed on it for the purposes of proving that CSID did not actually believe it had a case in law when it commenced its proceedings to recover VAT on the lease. His omission was sufficient to undermine the validity of his conclusion on the issue of reasonable and probable cause because, in the submission of DWW, reasonable and probable cause cannot exist absent an actual belief in the validity of the proceedings.

94. Third, counsel submits that the clear inference to be drawn from the conduct of CSID in withholding the Valuation Office Report, was that it well knew that it was not entitled to claim VAT under the Regulation because the report contained a valuation of the lease at €35m., thus rendering its purported reliance upon the rent formula method to calculate the value of the lease as without foundation in law. Despite the fact that this was a key part of the case made by DWW, the trial judge had failed to address the adverse inferences which he had been asked to draw from this conduct. His failure to do so undermined the validity of his judgment that CSID had reasonable and probable cause to issue the VAT proceedings.

95. The only reasonable conclusion that the High Court judge could have drawn from the evidence was that the executives in CSID, and in particular the EST team, were fully aware that VAT was not chargeable in accordance with law and in accordance with Regulation 19, particularly in light of the advices received concerning the consequences of the Valuation Office Report, and thus they did not in fact believe that they had reasonable and probable cause to bring the proceedings.

96. Fourth, in its closing submissions in the High Court, DWW had asked the trial judge to draw adverse inferences from the fact that certain witnesses, who could have given direct evidence regarding critical issues, including the decision made by CSID to commence proceedings to recover VAT, had not been called to give evidence. These were Mr O’Reilly of PwC and Ms Magahy, Mr Dunne, and Ms O’Donoghue of the EST. DWW point to the fact that a great part of its submissions before the High Court focused on the argument that the Court should infer, having regard to the failure of CSID to call these witnesses, that they would not have been in a position to rebut assertions made by DWW in relation to the key events in which they were involved, which would go some way to proving that CSID did not have reasonable and probable cause to bring the proceedings that they did. The High Court judge did not address this issue in his judgment and this omission on his part was, according to counsel, sufficient to cast in doubt the validity of the decision and warrant a retrial. Counsel relied upon the decision of Laffoy J. in Fyffes plc v. DCC [2009] 2 IR 417.

97. Accordingly, whilst CSID had maintained that it was sufficient to present witnesses from each “category” (i.e. the Board, EST and PwC) to avoid such adverse inferences being drawn, DWW argues that in the absence of a finding by the trial judge it cannot be said he engaged with this crucial aspect of DWW’s submissions with the unfortunate result that a retrial is warranted.

98. Fifth, counsel submits that the judgment of the High Court judge should be set aside as one which is inherently inconsistent. Having found that the dichotomy between Revenue practice and Regulation 19 had been explained to and understood by the executives of CSID, they must have known from the outset that they were not entitled to charge VAT. Once aware of the difference between the Regulation and Revenue practice there was no basis upon which the court could have concluded that CSID had reasonable and probable cause to issue the VAT proceedings particularly in circumstances where that claim was made pursuant to Regulation 19.

99. Without prejudice to its submissions that the evidence did not support the High Court judge’s conclusion that CSID actually believed it had reasonable and probable cause to issue the VAT proceedings, DWW further submits that such a belief would in any case, objectively assessed, have been unreasonable. That is to say that the reasonable actor in the shoes of CSID would not have considered that they had reasonable and probable cause to bring the proceedings. It was obvious that VAT was not chargeable on the lease. The Supreme Court decision in 2010 had merely confirmed the advice CSID had earlier received, which in turn reflected the plain words of the Regulations. It was readily apparent that CSID was not permitted to use the mathematical methods of valuation where they had “other evidence” of the value of the interest in the lease. CSID had been explicitly advised that it was acting outside of the Regulations. Further, insofar as the High Court judge concluded that CSID had in fact received advice that VAT was chargeable, DWW submits that the trial judge erred in finding that such advice was a complete defence – another proposition in law for which DWW say there is no foundation. Irrespective of any advice CSID received, it was unreasonable for it to have taken the view that it had reasonable cause in law to contend that VAT was chargeable on the lease. 

CSID’s submissions 
100. CSID maintains that the High Court judge was entitled, having regard to the evidence, to find that it had reasonable and probable cause to initiate the VAT proceedings, in the objective sense required by Dorene Ltd v. Suedes (Ireland) Ltd [1981] I.R. 312. Whereas a good part of DWW’s submissions are focused on the subjective belief in the proceedings which CSID is said to have lacked, CSID submit that such belief or a lack thereof is relevant only to the question of malice, and not to the question of reasonable and probable cause. Following Dorene , CSID argues that reasonable and probable cause is to be assessed objectively, based on the facts which operated on the party initiating litigation at the time. Thus, for the purposes of reasonable and probable cause, the question is not what CSID actually believed, but whether the reasonable actor, given the same information as CSID had, would have considered that there was a proper case to be laid before the courts.

101. CSID contends that the finding of the judge at para. 184 of his judgment, namely that CSID had been advised that the lease was vatable, provides a standalone basis for the conclusion he drew at the same paragraph that it had reasonable and probable cause to bring the proceedings. His finding regarding the nature of the advice was a finding of fact and, per the principles outlined in Hay v. O’Grady [1992] 1 I.R. 210, it should not be disturbed on appeal where it is supported by credible evidence.

102. Such evidence, CSID submits, is plentiful in the instant case. It accuses DWW, in its submissions to this Court, of attempting to take various snippets of communications out of their rightful context in order to portray them in a light favourable to their case, whereas the clear overall thrust of the advice and communications received from PwC was to the effect that CSID could proceed to use the rent formula method of valuation and thus could charge VAT on the lease.

103. CSID rejects as artificial the sharp distinction which DWW seeks to draw between law and practice. In reality, it argues that even in the emails on which DWW place reliance, it is at all times clear that the advice of PwC was that CSID was entitled to charge VAT on the lease.

104. In the email of the 27th November, 2002, Mr Fay says that he only raises the point about other evidence “for completeness” whereas he states clearly that “[t]here are three valuation methods under VAT Regulations” and that “Revenue have stated in their Notes for Guidance to Inspectors that any of the three permitted methods may be used in practice”.

105. With respect to the email of the 28th November, 2002, CSID places reliance on the fact that, while Mr O’Rourke acknowledges that the methodology proposed is “not ‘perfect'”, he also states that “practically… should be acceptable to Revenue”.

106. CSID maintains that, in his email of the 17th June, 2003, Mr O’Reilly endorsed the valuation method being used. Insofar as DWW seeks to argue that this advice was only to the effect that the valuation might be used in practice but does not advise that it was permitted by law, CSID contends that that distinction, if it can even be made out from the correspondence, would have been far from clear to CSID as the recipient of professional advice. Counsel for CSID points to the fact that Regulation 19, the interpretation of which is at the centre of this case, was promulgated by Revenue itself. Thus, the guidance it provided could easily be understood to carry significant weight. Certainly, the evidence was that CSID placed great weight upon the fact that Revenue was satisfied that its intended approach was fully in accordance with its lawful entitlement.

107. CSID maintains that it is easy for DWW to look back with the benefit of a detailed Supreme Court judgment and say that it was clear that the Regulations did not permit the choice between the three valuation methods, but this could not have been obvious to CSID from the advice it had received from PwC at the relevant time. In particular, CSID draws attention to a draft report which was prepared by PwC on the VAT issue for the benefit of CSID, one version of which was sent to CSID on the 30th April, 2003. Insofar as DWW contends that this report is merely a historic account of advice given, rather than a letter of advice itself, the report is, according to CSID, nonetheless proof of the unambiguous advice of PwC that VAT was chargeable on the lease. In relevant part it reads: “we advised that the unencumbered rent figure of €3,376,048 should be used in one of the mathematical valuation methods as permitted by VAT Regulations”. The advice was not given on the basis of practice, but rather on the basis of the Regulations.

108. CSID further relies upon a letter of advice issued by PwC to CSID on the 19th June, 2003 (just two days after the email of Mr O’Reilly which described the choice between three methods as an “extra statutory practice”). This letter, in responding to the claim made by Mr Moriarty in his letter of the 16th June, 2003 that VAT was not chargeable on the lease, stated that the methodology adopted by CSID had “always been the practice” and had been confirmed by the Revenue Commissioners, and concluded with the unequivocal statement of advice that, contrary to the contention of Mr Moriarty, “the VAT charge outlined on your invoice dated 15th May 2003 is correct”.

109. CSID submits that, inter alia , these unequivocal pieces of advice provide credible evidence from which the High Court judge was entitled to conclude, as he did at para. 184 of his judgment, that CSID was advised by PwC that VAT was chargeable on the lease, and that it had reasonable and probable cause to bring proceedings in support of that understanding.

110. The High Court judge was entitled, in the view of CSID, to conclude from the oral evidence given on behalf of the directors of CSID that the advice had been a key item operating on their minds at the time they made the decision to initiate proceedings. Applying the test in Dorene v. Suedes , CSID submits that, armed with the information they had been given, the actions of the relevant persons on the board of CSID and on the EST, in relying on professional advice received and initiating proceedings, were eminently reasonable. Counsel emphasises the trust which the directors of CSID placed in their professional advisors, especially in an area as complex and technical as VAT. In fact, CSID submits that it would have been extraordinary if they had departed from this advice and had decided not to charge VAT on the lease notwithstanding advice to the effect that they could do so. Consequently, CSID submits that the advice which it received from PwC provided a standalone basis for the High Court judge to conclude as he did at para. 184 of his judgment that CSID had reasonable and probable cause to bring the VAT proceedings, in the objective sense that the law requires. This finding should not, in CSID’s submission, be disturbed on appeal.

111. With regard to the first basis on which the High Court judge made his decision, although CSID concedes that the conclusion regarding the effect of the decision of the Arbitrator was not based on a point which was canvassed at trial, it submits that the judge was nonetheless correct. It was not clear that counsel for CSID was willing to go as far as to defend the absolutist formulation espoused by the trial judge that a favourable decision at first instance was necessarily dispositive of a claim in the tort of malicious prosecution, but certainly he contended that it was appropriate to consider it as a “powerful indicator” of the reasonableness of the belief of CSID in the proceedings it initiated. Notwithstanding that CSID did not know what the decision of the Arbitrator would be when it commenced the proceedings, CSID contend that the decision was nonetheless evidence not only that the case could be won, but that it had a reasonable chance of success. The fact that an independent third party, with expertise and all of the relevant information, decided in favour of CSID is, according to CSID, objective evidence that it had a stateable case.

112. Further, CSID rejects the submission on behalf of DWW that the Arbitrator decided the case on a different point. The key question in the VAT proceedings was whether CSID was bound to use the open market valuation of the lease in the Valuation Office Report or whether it was entitled to choose between the three methods of valuation provided for in Regulation 19. The Arbitrator decided that it was entitled to do the latter, having determined that the open market valuation was not “other evidence” for the purpose of Regulation 19. Thus the crux of the case was decided in favour of CSID, and this decision, notwithstanding that it was ultimately found to be flawed, was good evidence of the reasonableness of the belief of CSID in the prospects of its VAT litigation.

113. By a similar logic, CSID rejects the submission that the views of the VAT community and the initial view of DWW’s tax advisors Andersen were irrelevant because they were not known to CSID at the time. Again CSID submits that these views are evidence of the reasonableness of the position it took that VAT was chargeable. The fact that there was significant confusion regarding the interpretation of the Regulations goes some way to showing that it had taken a reasonable approach at the time.

114. As aforementioned, CSID maintains that it need only demonstrate reasonable and probable cause in the objective sense, and that its subjective belief about whether it had such cause at the time is relevant only to the question of malice which does not arise in circumstances where the High Court judge decided the case on the question of reasonable and probable cause. Without prejudice to this approach, CSID argues that in any case it did in fact actually believe it had reasonable and probable cause to bring the proceedings. It submits that it was clear from the oral evidence provided by its directors that CSID understood the advice of PwC to mean that VAT was lawfully chargeable on the lease. CSID contends that this evidence, even taken by itself, is sufficient to support the trial judge’s finding that the relevant persons in CSID held an actual belief that they had reasonable and probable cause to pursue the proceedings. That belief, CSID argues, was consonant with the trust which the directors of CSID placed in their professional advisors in the technical area of VAT, a dynamic which was brought out strongly in the oral evidence. Accordingly, CSID submits that the trial judge’s finding that it had been advised by PwC that VAT was chargeable led inexorably to his conclusion that it genuinely believed that it had reasonable and probable cause. So long as this belief was reasonable, which of course CSID maintains it was, and which argument I have detailed above, this finding provides a sufficient standalone basis on which the trial judge was entitled to decide the case.

115. In respect of the email of the 23rd December 2002, in which Mr Fay acknowledges the assessment of his colleague Mr O’Rourke that the approach being taken was “not ‘perfect’ when read with the actual Regulations”, CSID contends that this email could not possibly have sufficed to displace the finding of the trial judge that CSID had been advised that VAT was chargeable. This is especially so when it is read in the overall context of the advice provided by PwC to CSID, as outlined above. CSID accuses DWW of engaging in precisely the exercise which is condemned by MacMenamin J. in Leopardstown v. Templeville Developments [2017] IESC 50, that is of reducing an appeal to “a piece-by-piece analysis of the evidence, in an effort to show… that the trial judge might have laid more emphasis, or attached more weight, to the evidence of one witness, or a number of witnesses, or one document, or a number of documents, rather than others on which he or she relied”. Taken at its highest, CSID submits that DWW is attempting to bring this Court on a selective tour of the documents which best highlights its preferred interpretation of events. CSID contends that parsing of this kind cannot fall within the remit of an appellate court which should only intervene with findings of fact where they could not in all reason be held to be supported by the evidence. DWW had the opportunity to put all of this evidence to witnesses at trial, and having done so the trial judge took a view on the evidence, holding clearly that CSID had been advised and believed that it had reasonable and probable cause for the proceedings. CSID thus argues that is impermissible for DWW to, at this late stage, seek to frustrate the findings of the High Court judge by urging this Court to take its own view on the evidence, beyond a review of the findings already made.

116. CSID applies the same objections to DWW’s submissions regarding the email of the 20th December 2002, and other evidence which is said to demonstrate that CSID executed a conspiracy to conceal the open market valuation provided by the Valuation Office from DWW. While CSID accepts that there was a reluctance on its part to provide DWW with the open market valuation, it strongly disputes the proposition that the clear inference to be drawn from this conduct is that it knew that it had no cause to charge VAT on the lease. Further, CSID contends that it should be clear that the trial judge was not willing to draw this inference from the evidence, all of which was before him. It is perfectly clear from his judgment that he accepted that CSID, at the material time, believed that it had reasonable and probable cause.

117. Moreover, the inference which DWW seeks to have drawn from the conduct of CSID is entirely inconsistent, in the submission of CSID, with the fact that CSID sent the Valuation Office Report to Revenue. It is of significance that the emails of the 27th and 28th November, 2002, upon which DWW places great reliance, and which discuss a letter which is to be sent to Mr Michael Kelly of Revenue, result in the Valuation Office Report being sent to Mr Kelly. This report included the open market valuation of the lease, which DWW accuse CSID of attempting to “bury”. CSID further point out that the letter enclosing this report was copied to three senior Revenue officials. CSID argues that, if it truly was attempting to conceal the open market valuation and construct a valuation which it knew to be contrary to law, it would not have so candidly brought its proposed approach to the attention of four senior Revenue officials. Contrary to the submission of DWW, CSID contends that these were not the actions of a party who knew itself to be acting outside of the Regulations, and the trial judge was entirely correct to give no weight to the submissions of DWW in this regard. There can be no question but that CSID believed it had reasonable and probable cause, and the finding of the trial judge in that respect should not be disturbed.

118. In reply to DWW’s complaint concerning its alleged failure to call certain individuals to give oral evidence, CSID maintains that its approach of calling witnesses “by category” was sufficient, notwithstanding the fact that not every witness that DWW would have liked it to call had been called. CSID submits that it is clear that the High Court judge had the opportunity to consider DWW’s submissions on the subject, and by the absence of any reference to this point in his judgment this court can safely infer that he did not see fit to draw the adverse inferences requested. Again CSID makes the point that it is highly undesirable for DWW at this stage in proceedings to pick holes in the way in which the High Court judge expressed his decision, in circumstances where it is clear that it failed to convince him of the necessity of drawing adverse inferences. Moreover, CSID submits, it is plain from his judgment that the High Court judge found that CSID actually believed they had reasonable and probable cause; and to displace that finding on the basis that he did not specifically dismiss every argument made to attack it would be to seriously distort his clear intention. 

Legal principles of relevance to the submissions made by the parties on the appeal 
119. Before moving to discuss and determine the issues raised for the Court’s consideration on the appeal I believe it would be helpful to refer briefly to a number of the authorities relied upon by the parties insofar as they consider the tort of malicious abuse of the court’s process. However, because there is little dispute regarding the test to be applied by the Court, I do not intend to consider these authorities in any real depth but will do so principally for the purposes of identifying the prevailing principles and where they are to be found. 

Boundaries of the tort of malicious abuse of the court’s process 
120. The boundaries and component parts of the tort of malicious abuse of the court’s process are best found in the what is perhaps the leading decision in this jurisdiction on the tort, namely that of Costello J. in Dorene Ltd v. Suedes (Ireland) Ltd [1981] I.R. 312. I will later return to the facts of this decision, but for the moment will confine my observations to the principles that emerge therefrom.

121. At p. 316 of his judgment, Costello J. describes the essential ingredients of the tort as follows:-

“The authorities, it seems to me, establish that a claim for damages at common law will lie for the institution or maintenance of a civil action if it can be shown that the action was instituted or maintained (a) without reasonable or probable cause (b) maliciously and (c) that the impugned action was one which the law presumes will have caused the claimant damage.”122. Concerning the test to be applied for the purpose of determining reasonable and probable cause, at p. 318 of his judgment Costello J. provides the following guidance:-“As to reasonable and probable cause, it is now well established that the test to be applied by the court is an objective test and so when considering a claim for damages based on a civil action the court must itself examine the facts and consider the legal principles applicable to them and decide whether there were reasonable grounds for instituting or maintaining the action which it is claimed was wrongfully instituted or maintained”.123. That malice is an additional ingredient of the tort, as advised by Costello J. in Dorene , is clear also from the decision of Toulson L.J. in Willers v. Joyce [2016] UKSC 43. At para.. 55 of his judgment he states concerning malice:-“Malice is an additional requirement… As applied to malicious prosecution, it requires the claimant to prove that the defendant deliberately misused the process of the court. The most obvious case is where the claimant can prove that the defendant brought the proceedings in the knowledge that they were without foundation… But the authorities show that there may be other instances of abuse. A person, for example, may be indifferent whether the allegation is supportable and may bring the proceedings, not for the bona fide purposes of trying that issue, but to secure some extraneous benefit to which he had no colour of a right. The critical feature which has to be proved is that the proceedings instituted by the defendant were not a bona fide use of the court’s process.”124. For the purpose of defeating a claim for malicious abuse of the court’s process it will suffice for the litigant concerned to establish that their claim was stateable. Thus, as was stated by Devlin L.J. in Glinski v. McIver [1962] AC 726, in order to have reasonable and probable cause the defendant does not have to believe that the proceedings will succeed, it is enough that “there is a fit case to be tried”. In Bank of Ireland Finance v. McSorley & Macari [1994] WJSC-HC2085 the test applied by Murphy J. was whether it was “by no means impossible” that the claim would succeed. Thus the plaintiff alleging and abuse of the court’s process faces a heavy burden.125. Concerning this statement of the law, which was relied upon in Dorene , Costello J. stated:-

“As to malice, it is to be borne in mind that even if it is shown that the proceedings had been instituted without reasonable or probable cause it is necessary to show in addition that they were instituted maliciously. Malice means the presence of some improper and wrongful motive.”126. Thus, it would appear that the test for reasonable and probable cause is one which is essentially objective in nature with the subjective belief of the defendant being of particular significance when the Court comes to consider the second element of the tort i.e. malice.127. As to how the trial judge should approach his or her assessment of a claim for damages for malicious abuse of the court’s process, although stated in the context of a claim for malicious prosecution of criminal proceedings, the following guidance of Denning L.J. in Tempest v. Snowden[1952] 1 K.B. 130 is of assistance:-

“In my opinion in order to determine the question of reasonable and probable cause, the judge must first find out what were the facts as known to the defendant, asking the jury to determine any dispute on that matter, and then the judge must ask himself whether those facts amounted to reasonable and probable cause. In Herniman v. Smith [1938] 1 All E.R. 9, Lord Atkin put it quite clearly:
‘The facts upon which the prosecutor acted should be ascertained. In principle, other facts on which he did not act appear to be irrelevant. When the judge knows the facts operating on the prosecutor’s mind, he must then decide whether they afford a reasonable or probable cause for prosecuting the accused.”
If these facts do afford reasonable and probable cause, then the prosecution is justified, and it is not as a rule necessary for an inquiry to be made into the prosecutor’s belief. The state of his belief goes to malice, but not, as a rule, to reasonable and probable cause . This view is supported by the observations of the Lord Goddard C.J., in Tims v. John Lewis & Co., Ltd. , where he said ([1951] 2 K.B. 472):
“The question whether there was a reasonable or probable cause is not, I think, to be determined subjectively, as has been suggested. It is a question which objectively the court has to decide on the evidence before it.”
….Apart from exceptional cases….I think it right to say that, once the facts as known to the prosecutor are ascertained, the state of his belief goes only to malice and not to reasonable and probable cause.” (Emphasis added).128. As to the relevance or weight to be attached to any legal or other advice received by a party before they commenced the proceedings alleged to be an abuse of the court’s process, the Court of Appeal of England and Wales in Abbott v. Refuge Assurance Co. [1962] 1 Q.B. 432 held that the fact that counsel in that case had advised that a prosecution lay was not conclusive on the issue of reasonable and probable cause, and that the court itself should consider whether counsel’s advice was correct.129. In Murphy v. Kirwin [1993] 3 I.R. 501, Finlay C.J. at p. 508 of his judgment, when considering the elements of the tort, also reflected upon the weight that might be attached to any advice received by a party from their advisers prior to instituting the proceedings alleged to constitute an abuse of the court’s process:-

“If the client stated the facts of the case correctly to his legal advisers and was advised not to proceed (as happened in Dorene Ltd v. Suedes (Ireland) Ltd [1981] I.R. 312) this would support an allegation of abuse of process. If the client stated the facts correctly and was advised to proceed this would tend to negative it. And if the client misstated the facts to his legal advisers this would strengthen a claim that the proceedings had been instituted for an improper purpose.”130. On the same issue, in Dorene Costello J. stated as follows:-“Obviously where a Plaintiff has obtained legal advice before instituting or pending legal proceedings the nature of that advice could be a highly material factor in considering whether he was motivated by an indirect or improper motive, as it may assist in showing whether the Plaintiff was using the proceedings for some legally inappropriate purpose.”131. Finally, it is readily apparent from the authorities cited above that the circumstances which are material to the court’s assessment when it comes to considering a claim that proceedings were issued in the absence of reasonable and probable cause are those that were known at the time that step was taken. And, if the claim extends to the maintenance as opposed to the commencement of proceedings, as was the case here and inDorene , the circumstances which prevailed at the time any decision was taken to maintain the proceedings are those that are relevant. 
Some general observations 
132. Few would dispute the importance to society that the law should be available to all who wish to employ its process for the purpose of claiming what they believe to be their rights without their being subjected to any additional liability should they fail, over and above the costs of the proceedings, unless they can be shown to have acted maliciously and without reasonable or probable cause. In my view it would be extremely undesirable if a person who had a claim worthy of being decided by the courts were to find themselves faced with secondary litigation simply because their claim ultimately failed.

133. As was cautioned by Mance L.J., albeit in the context of his dissenting judgment in Willers , the tort of malicious abuse of the court’s process is, in many ways, unattractive because it, inter alia, invites fresh litigation about prior litigation and a consideration of the soundness of the bases and motivations underlying those proceedings.

134. Nonetheless, many of the cases to which this court’s attention was directed in the course of this appeal serve to demonstrate the good public policy reasons which underlie this particular tort given that it provides a means of deterring parties from instituting proceedings which are vexatious and brought for a malicious purpose. It is important to remember that even when a defendant succeeds in defending a claim made against them they will, in all probability, sustain some degree of financial loss, given that it is only in the rarest of cases that costs will be awarded against a plaintiff who fails in their claim otherwise than on a party and party basis. Further, even if the successful defendant should manage to obtain a costs order on a solicitor and own client or indemnity basis, the plaintiff may not be a mark for those costs or the defendant may have difficulty executing such an order. A good example of this type of prejudice is to be found in the facts of Willers where Mr Willers sought to recover the sum of £2m. sterling as damages, that sum representing the difference between the costs awarded in his favour when he succeeded in his primary litigation and his actual bill of costs.

135. Another matter worth noting is that in almost all of the claims which have proved successful it is easy to identify some obvious collateral objective or ulterior motive underlying the proceedings. For example, in Dorene , by issuing its proceedings Dorene was in a position to register a lis pendens over the property concerned thus rendering it unsaleable to anyone else and placing Dorene in a very favourable position to negotiate its cheap purchase.

136. Finally, I would observe that in a very significant number of the leading cases the claim for malicious abuse of the court’s process was raised as a counterclaim in the proceedings alleged to be an abuse of the court’s process. Perhaps this is unsurprising given that it is the circumstances which prevailed at the time the proceedings were issued that will determine liability. There are, of course, cases in which the claim not made prior to the secondary litigation, however this seems to occur in cases where it was not until after the primary proceedings were concluded that documentation or information came to hand which exposed the possibility that the proceedings had been pursued maliciously and without reasonable or probable cause. 

Decision

A. The trial judge’s conclusion that the decisions of the Arbitrator and the High Court (Gilligan J.) in favour of CSID were determinative of the claim 

137. It goes without saying that all parties to litigation are entitled to a hearing that accords with the rules of natural justice and fair procedures. It follows that in the great majority of cases where it is established on appeal that in some material respect the first instance hearing was grossly unfair to the losing party, the appellate court has little option but to direct a retrial, regardless of the delay, cost and expense that will result.

138. Essential to a fair and just hearing is the right of both parties to be heard on all issues crucial to the court’s ultimate determination. In the vast majority of cases it happens quite naturally that the judgment of the trial judge will follow closely the approach taken by the parties to the major issues canvassed in the course of the proceedings. This is particularly so in cases which involve complex issues of law and fact where, at the close of proceedings, the court will likely be guided by the parties’ oral and/or written submissions as to the issues they consider need to be addressed in the court’s judgment. This was one such case. At the close of the 20 day hearing the parties delivered extensive written submissions.

139. It is accepted by CSID that neither in its written nor oral submissions did it argue that its success before the Arbitrator, or before the High Court on its application to enforce the Arbitrator’s Award, was fatal to DWW’s claim that CSID did not have reasonable and probable cause to issue the VAT proceedings.

140. In these circumstances it is understandable that, when the trial judge determined that DWW’s claim was to be rejected because CSID had succeeded in its claim before the Arbitrator and later before the High Court (Gilligan J.), DWW considered that it had not been afforded a fair hearing.

141. The potential for injustice to one or other party should a judge decide a case on a point not advanced in the course of the hearing is obvious. There may be a perfect answer to the point that the trial judge considers unanswerable and had it been raised at the hearing the error in the trial judge’s thinking would have been corrected. A similar injustice would arise if, after the conclusion of a hearing, the trial judge was to come across a legal authority not referred to in the course of the hearing and, believing it provided the answer to the claim, decided the case on that basis. However, had that authority been brought to the attention of the parties it might have been distinguished successfully.

142. It follows that if, when a trial judge comes to write his or her judgment, a point comes to mind or a legal authority is unearthed which was not canvassed in the course of the hearing and is one which they consider crucial to the determination of the claim, in order to do justice between the parties a further hearing will normally be required so that the parties may be afforded an opportunity to address the said issue or authority.

143. The importance of a such an approach is heightened due to the fact that an appellate court cannot, save in special circumstances, decide a point not argued in the court below. This is because constitutional justice requires that the unsuccessful party in High Court proceedings have an automatic right of appeal from every first instance decision. In other words, every litigant gets two chances to argue in favour of their stated position. However, where a trial judge decides a case on a point not argued at first instance, that error is not remedied by the fact that the party aggrieved by the decision has a right of appeal. This is because the appellate court will be hearing the parties for the first time on this particular issue as if it was a first instance court and there will be no automatic right of appeal from its decision.

144. It follows that I consider that there is merit in the submission of DWW that it did not get a fair hearing in circumstances where the High Court judge determined that its claim must fail by reason of the decision of the Arbitrator and/or the High Court judge on the application to enforce his Award. However, in circumstances where the High Court judge decided the proceedings on what I consider to have been a valid alternative basis, there is no need to reach any definitive conclusion as to the consequences that might otherwise result from the approach adopted by the trial judge.

145. In circumstances where I am satisfied that this appeal may safely be determined by addressing the alternative basis upon which the High Court judge rejected DWW’s claim, it is unnecessary to engage to any real extent with the submissions of DWW concerning the relevance or otherwise of the decision of the Arbitrator and later the High Court judge upon CSID’s application to enforce the Arbitrator’s Award. I will nonetheless offer a number of brief observations concerning the determination of the High Court judge that, on the facts of this case, the success of CSID at first instance was determinative of the issue as to reasonable and probable cause.

146. It seems to me that there is merit in the general proposition, as contended for by counsel for DWW, that a plaintiff’s claim based on the tort of malicious abuse of the court’s process will not necessarily fail simply because the defendant was successful at some stage of the primary litigation. It would, I believe, be unjust if, having deliberately set out to damage their opponent by issuing proceedings which they knew were without foundation, the malicious litigant could be saved from their wrongdoing by the fact that a judge in the primary litigation had incorrectly found in the defendant’s favour at first instance, even though the decision was later corrected on appeal. It is difficult to see why the happenstance of that error should deny a claimant the damages to which they would otherwise be entitled had the claim been correctly decided at first instance.

147. I am also satisfied that, as a matter of law, the court’s decision as to whether a litigant did or did not have reasonable or probable cause to issue the proceedings is a decision which must be made based on the facts and circumstances that existed at the time the proceedings were issued and which were known to the litigant. Applying an objective test to the circumstances as they existed, there either was or was not reasonable and probable cause for CSID to issue the proceedings. As was stated by Denning L.J. in Tempest v. Snowden and Atkin L.J. in Herniman v. Smith , the role of the judge is to first find out what facts were known to the prosecutor and then decide whether these amounted to reasonable or probable cause. Facts upon which the prosecutor did not act were held to be irrelevant. It follows that in a civil claim for abuse of the court’s process the court will seek to establish the facts known to the plaintiff at the time they issued their proceedings and then objectively determine whether they had reasonable or probable cause to issue the proceedings. Facts as later established or which were unknown to the litigant have no part to play unless there is a claim that by continuing to maintain the proceedings the plaintiff acted without reasonable and probable cause. And, that is what actually happened in the present case, an approach which, in my view, impacted significantly on the manner in which the High Court judge approached a number of the core issues.

148. The claim advanced by DWW (see para. 21 and following of statement of claim) not only maintained that the commencement of the claim for VAT on the lease constituted an abuse of the court’s process, but it also claimed that CSID’s (i) maintenance of those proceedings (ii) its maintenance of the Arbitration proceedings (iii) its commencement of the proceedings to enforce the Arbitrator’s award and (iv) its defence of DWW’s challenge to same, each amounted to malicious prosecution of DWW.

149. Whilst DWW on this appeal confines its challenge to the High Court decision insofar as it relates to CSID’s conduct in issuing the forfeiture proceedings including a claim for VAT, that was not its approach in the court below and for this reason the High Court judge is not to be faulted for engaging with all of what happened in terms of litigation between the parties after those proceedings were issued. He was clearly drawn into an analysis of the facts as they were known to CSID at varying stages of the primary litigation. An examination of those facts would have been unnecessary had the claim for abuse of the court’s process been confined to the issuing of the proceedings rather than their subsequent maintenance and the efforts later made to enforce the Arbitrator’s award.

150. It is abundantly clear from para. 27 of the High Court judge’s judgment that he well recognised that in deciding whether CSID did or did not have reasonable or probable cause to issue the proceedings he was obliged to confine his consideration to the circumstances as they existed at the time that that step was taken. Thus, much of the criticism directed to his consideration of circumstances which post-dated the issue of the proceedings, was, in my view unwarranted. 

B. Subsidiary basis for the Court’s decision that CSID had reasonable and probable cause to issue the VAT proceedings

(i) Revenue Guidance – Views of the VAT community – Advice received by DWW 

151. DWW submits that the High Court judge made a number of legal and evidential errors in concluding that CSID had reasonable and probable cause to issue the VAT proceedings. DWW submits that in so deciding it was not open to him to rely upon the documentation containing the guidance of Revenue because PwC well knew and CSID had been advised that such guidance was out of kilter with the Regulation. Furthermore, the High Court judge had wrongly imputed to CSID knowledge of certain materials and publications circulating within the accountancy profession at the time concerning the proper interpretation of Regulation 19, despite the fact that there was no evidence to show it was aware of those materials. Further, DWW submits that the High Court judge impermissibly relied upon the advice which DWW had received from its own expert concerning the vatability of the lease, when those advices were also unknown to CSID at the relevant time. Thus, DWW maintains that the conclusion of the High Court judge that CSID had reasonable and probable cause to issue the proceedings, which was influenced by this evidence, must be seen as fundamentally flawed.

152. I am not satisfied that there is any real validity to the aforementioned submission for reasons I will now summarise.

153. First, in its email of the 19th June 2003, PwC enclosed for CSID’s attention Revenue’s Notes for Guidance of Inspectors and its booklet on VAT and Property Transactions concerning Regulation 19. Accordingly, it cannot be said that the High Court judge wrongly imputed knowledge of Revenue’s interpretation of Regulation 19 to CSID when he concluded that it believed that as lessor it could choose any one of the three methods of valuing the lease and thus had reasonable and probable cause to issue the proceedings to recover VAT on the lease.

154. Second, whilst the High Court judge stated that he intended to detail all of the documentation referred to at para. 151 above, which he observed had been provided by CSID in support of its belief that it had a choice of three methods of valuing the lease, he did not proceed on the basis that CSID had, with the exception of the Revenue documentation, itself actually seen these published materials or was aware of the advice initially received by DWW from its own tax advisors concerning Regulation 19.

155. The High Court judge explicitly stated that the aforementioned evidence had been put forward to demonstrate that it was reasonable for PwCto conclude that, regardless of the wording of Regulation 19 and the existence of the Valuation Office Report, the lessor could choose any one of the three methods of valuing the lease and to that extent it added valuable support to Mr O’Rourke’s evidence that the content of its advice to CSID had been to the effect that the lease was vatable.

156. I am fully satisfied from what the High Court judge stated at paras. 29, 33, 34 and 35 of his judgment that he well understood that he was being asked to consider this particular evidence as strongly favouring a finding that it was the bona fide professional opinion of PwC that CSID was entitled to charge VAT on the lease, and furthermore that this was, as a matter of fact, the professional advice transmitted to CSID.

157. That this evidence was clearly relevant to the High Court judge’s consideration of a number of disputed issues relevant to the issue of reasonable and probable cause, cannot be doubted. These included:

(i) whether it was in fact PwC’s professional opinion that CSID was entitled to claim VAT on the lease;(ii) the import of the professional advice furnished to CSID by PwC concerning its entitlement to claim VAT on the lease; and

(iii) what CSID understood that advice to be.

158. The fact that Revenue and other leading tax experts at the time were agreed with the professional opinion of PwC that, regardless of the wording of Regulation 19, the lessor could choose any one of the three methods of valuing the lease, lent significant support to the position proposed by CSID on each of these issues.159. It is to be remembered that Mr O’Rourke’s evidence was (i) that he bona fide believed VAT might lawfully be claimed on the lease (ii) that he had so advised CSID and (iii) had made clear that PwC’s advice was in accordance with Revenue’s opinion concerning Regulation 19. DWW, on the other hand, had challenged PwC’s opinion as to the lawfulness of charging VAT on the lease and had maintained that the actual advice given was that the claim for VAT was in conflict with the wording of the Regulation and was therefore unlawful. Understanding that to be PwC’s advice, CSID could not have believed it had reasonable and probable cause to issue the proceedings.

160. In light of that contest the High Court judge was entitled to consider how likely it was that PwC’s opinion or advice would have been inconsistent with the views of other leading tax professionals at the time or with Revenue’s own view of the relevant Regulation.

161. If DWW had been in a position to establish that PwC’s professional opinion had been out of line with Revenue guidance and practice and/or had been contrary to the prevailing views of leading experts in the VAT community at the time, that evidence would have weighed in favour of DWW’s contention that PwC never believed that VAT might lawfully be claimed on the lease and would have added force to its contention that PwC had never advised CSID that VAT could be lawfully claimed on the lease. Once satisfied that the bona fide opinion of PwC at the time was that VAT was lawfully chargeable and that this advice had been communicated to CSID, it was for the judge then to decide the weight to attach to these facts when deciding what CSID understood the position to be when it decided to sue to claim the VAT on the lease.

162. Furthermore, the High Court judge’s reliance upon the aforementioned evidence was entirely logical and appropriate in light of DWW’s submission that Regulation 19 could never have been understood to mean that the lessor could choose between any of the three methods for the purposes of valuing the lease. As the High Court judge correctly noted, it was easy with the benefit of hindsight and the judgment of Hardiman J. to so contend. However, what the evidence recorded in this section of the High Court judge’s judgment demonstrated was that there was very weighty professional opinion at that time, including that of Revenue who after all was responsible for the implementation of the Regulation, which took the alternative professional view.

163. Accordingly, I reject the submission that, insofar as the High Court judge may have been influenced by this evidence when he came to consider the issue of reasonable and probable cause, his judgment should be considered flawed. The prevailing views of tax advisors at the time, including DWW’s own advisors, and Revenue guidance as to the meaning of Regulation 19 were relevant to the High Court judge’s assessment as to whether CSID subjectively believed it was entitled to claim VAT on the lease and whether objectively assessed, it had reasonable and probable cause to issue the proceedings. 

(ii) CSID’s failure to call witnesses who DWW maintained well knew that VAT could not lawfully be claimed in light of the Valuation Office Report 

164. DWW is of course correct when it submits that as a matter of law a court is entitled to draw an adverse inference from the failure of a party to call a witness who is available to give evidence in relation to a fact in issue. In the present case, DWW submits that the High Court judge failed to have regard to its submission that adverse inferences were to be drawn from the failure on the part of CSID to call as witnesses Mr Thomas O’Reilly of PwC and Ms Magahy, Mr Dunne and Ms O’Donoghue, all members of the EST.

165. However, before addressing the facts which DWW maintains mandated the calling of those witnesses in this case, it is necessary to identify the circumstances which have been considered sufficient to warrant the drawing of adverse inferences.

166. The principles by which a court should consider a submission that an adverse inference be drawn due to the failure of a party to call a certain witness or witnesses are set out with particular clarity by the Court of Appeal in Wisniewski v. Central Manchester Health Authority [1998] Lloyds Rep Med 223 where Brooks L.J. summarised the position as follows:

“(1) In certain circumstances the court may be entitled to draw inferences from the absence or silence of a witness who might be expected to have material evidence to give on an issue in an action.(2) If a court is willing to draw such inferences, they may go to strengthen the evidence adduced on that issue by the other party or to weaken the evidence, if any, adduced by the party who might reasonably have been expected to call the witness.

(3) There must, however, have been some evidence, however weak, adduced by the former on the matter in question before the court is entitled to draw the desired inference: in other words, there must be a case to answer on that issue.

(4) If the reasons for the witness’s absence or silence satisfies the court, then no such adverse inference may be drawn. If, on the other hand, there is some credible explanation given, even if it is not wholly satisfactory, the potentially detrimental effect of his/her absence silence may be reduced or nullified.”

167. The aforementioned principles have since been approved of in this jurisdiction by Laffoy J. in Fyffes plc v. DCC plc [2005] IEHC 477, and more recently by the Supreme Court in Whelan v. AIB [2014] IESC 3.168. In Fyffes, the plaintiff alleged that the defendant had engaged in insider dealing in its shares. It submitted that the Court should draw certain inferences from the failure of the defendants to call a number of witnesses, including a stockbroker whom it maintained was a critical witness in relation to the question of whether the defendant had dealt in the plaintiff’s shares.

169. In rejecting that submission Laffoy J. cautioned against an overbroad application of the principles laid down in Wisniewski , stating at p. 510 of her judgment that:-

“As a general proposition, the fact that every witness who may have material evidence on a particular issue was not called, cannot, in my view, give rise to an adverse inference against the party who might have been expected to call all of the witnesses.”170. In so stating, Laffoy J. emphasised the fact that the onus of proof in respect of the “dealing issue” in that case was on the plaintiff who was aware of the fact that the stockbroker concerned was in a position to give material evidence. Accordingly, he could have been subpoenaed by the plaintiff to give evidence, an approach which, she noted, had not been pursued. She went on to state that whilst she considered the approach of the plaintiff in this regard to be a legitimate tactical decision the same was to be said of the defendant’s decision not to call the stockbroker. This relatively restrictive approach to the drawing of adverse inferences was also adopted by Hogan J. in Leopardstown Club Ltd v. Templeville Developments Ltd [2015] IECA 164, who stated at para. 108 of his judgment that the “starting point is that a court should generally be reluctant to draw an inference from a failure to call a witness”.171. Whilst it would undoubtedly have been more satisfactory had the High Court judge addressed the submission made by DWW in the court below that adverse inferences should have been drawn from the failure on the part of CSID to call a number of witnesses, parties to litigation need to understand that that they cannot expect trial judges to address every submission advanced, particularly in lengthy and complex litigation such as this, where a myriad of arguments are advanced by each of the parties in support of their respective positions. In some instances, a decision on one point necessarily precludes success on a separate point. In those circumstances it is not necessary for a judge to address each and every argument advanced. Judges in general, but particularly those who are charged with deciding cases of the type under consideration here, carry out their role in extraordinarily pressurised circumstances. Unlike in many other jurisdictions, for the most part they are expected to write extensive and learned judgments concerning cases recently heard at a time when they are invariably presiding over yet another equally complex case. Thus, as counsel for CSID observed in the course of his submissions, trial judges routinely find themselves confining their judgments to the issues of law and fact which they consider critical to their conclusions. They cannot be faulted for failing to engage with every submission made by the parties, who must be content to receive a judgment which explains to them, in terms, the principal reasons why they were or were not successful in their litigation, as is explained in the judgment of Clarke J. in Doyle v. Banville [2012] IESC 25 at p. 25.

172. Having considered the lengthy and detailed judgment of the High Court judge in this case, I think it only reasonable to infer that in light of his primary findings of fact he considered it unnecessary to address this submission.

173. Whilst it may be considered inappropriate for this Court to posit any view on how the High Court judge might have addressed this issue, had he chosen to engage with it, it can be stated nonetheless with some certainty that in accordance with the prevailing principles to be applied he would have been obliged to reject DWW’s submissions for reasons which I will now identify.

174. The burden of proof in this case was on DWW to prove an absence of reasonable and probable cause. Critical in this regard was its contention that CSID had been advised by PwC that it could not lawfully claim VAT on the lease and that it understood this to be the position at the time it issued its proceedings. I will assume for present purposes that DWW had made out a prima facie case in this regard, although I note the submission of CSID that the claim of DWW in this regard was no more than an assertion of the type deprecated by O’Donnell J. in Whelan .

175. It is important to record that this is not a case in which CSID called no evidence to displace the prima facie case which DWW maintains it established in the course of its evidence. CSID called a significant number of witnesses to deal with the core issues in the case, which included the nature of the advice furnished by PwC to the EST and Board of CSID and what was understood to be the import of that advice. In this respect the circumstances of this case are to be contrasted with those cases in which the evidence on some particular issue was exclusively held by a particular witness who was not called to give evidence, thus leading to an inference that had they been called they would not have been in a position to disprove the prima facie case.

176. Concerning the advice given by PwC to the EST and the Board of CSID, Mr O’Rourke, who was at all relevant times intimately involved in the giving of that advice, was called to give evidence. He was, as a result, subjected to a rigorous cross-examination not only in respect of his own advice but also in respect of the advice and understanding of Mr O’Reilly, who according to DWW did not share his view of Regulation 19, concerning CSID’s entitlement to claim VAT on the lease. Material also in this regard is the fact that, in circumstances where all of the discovery documentation pertinent to this issue was admitted into evidence without the necessity for formal proof, DWW was not only in a position to itself to rely upon the opinion and views of Mr O’Reilly as expressed in his emails but also to cross-examine Mr O’Rourke as to his opinion and the advice tendered based on those documents.

177. Furthermore, as was the case in the Fyffes , DWW was aware, particularly from the discovery documentation, that Mr O’Reilly was one of a number of members of PwC involved in advising CSID in relation to Regulation 19 and its entitlement to claim VAT on the lease. Thus, it was open to DWW to subpoena Mr O’Reilly to give evidence, albeit that there possibly were sound tactical reasons why such an approach was eschewed. Also, as was observed by Laffoy J., it is an equally legitimate tactical approach for a defendant not to call every single witness in relation to any particular issue. A party should not be left open to the risk of adverse inferences being drawn just because they do not call all of the witnesses their opponent would like them to call, particularly in a case such as the present one, which was to be both lengthy and costly. If parties felt exposed to such a threat the result would be that litigation would become even more lengthy and expensive and the court’s scarce resources would be intruded upon to no useful purpose.

178. It is not only understandable but reasonable that parties should be entitled to choose to call who they consider to be their stronger witnesses on any particular issue. In this regard, I accept as valid the argument made by counsel on behalf of CSID that it was reasonable for his client to call witnesses of its own choosing in relation to each of the issues in the proceedings. It called evidence to prove the state of knowledge and understanding of PwC, the EST and the Board in relation to the entitlement of CSID to claim VAT on the lease. Relevant in this regard is the fact that Mr Conway, a member of the EST, gave evidence in the course of the High Court proceedings and was thus available to be cross-examined as to the knowledge of members of the EST concerning the advice of PwC and the reasons underlying any decisions which it had made.

179. Furthermore, four members of the Board of CSID were called to give evidence and were thus available for cross-examination as to their knowledge and understanding of the advice of PwC and the basis upon which the Board decided to commence the proceedings. Whilst not directly addressed by the High Court judge in the course of his judgment, it was strongly argued in the closing oral submissions in the High Court that it was only knowledge that the Board possessed at the time it decided to issue the proceedings that could be relevant to the issue of reasonable and probable cause. The company could not fall foul of the tort of malicious abuse of the court’s process by reason of the independently held knowledge or state of mind of one or more of its employees or advisors. It must be the state of mind of the person or body who decides to sue, in this case the Board, which is material.

180. For these reasons, I am quite satisfied that, even if it be the case that DWW had made out a prima facie case that at EST level and/or at Board level it was understood that the claim for VAT was not in accordance with Regulation 19, and I note CSID’s challenge to this proposition, no adverse inference could reasonably have been drawn by the High Court judge for the failure on the part of CSID to call witnesses such as Ms Magahy, Mr Dunne or Ms O’Donoghue, all members of the EST, to speak to their understanding of PwC’s advice or to cast more light than the other aforementioned witnesses in relation to why the Valuation Office Report was not furnished to KPMG, DWW’s advisors, in January, 2003 and their understanding of the lawfulness of the proposed claim for VAT.

181. In this regard, it is perhaps also relevant to note that that DWW might have, but did not, challenge the statement of evidence provided by Mr John Mulcahy of CSID wherein he advised (i) that he was satisfied that the advice from PwC was that VAT was chargeable on the lease, (ii) that as a member of the Board he had taken great comfort from Revenue approval of CSID’s proposed approach and (iii) that at a board meeting on the 6th April, 2005 the Board had been advised that the Department for the Arts, Sports and Tourism, on the explicit advice of the Attorney General, had instructed that the claim for the unpaid VAT be included in the forfeiture proceedings. Neither had DWW seen fit to challenge the evidence of Mr Michael Walsh that (i) he understood the advice of PwC to be that VAT was chargeable, (ii) that it had never been suggested that there was any issue with PwC’s advice and (iii) that CSID might have been pursuing a course of action contrary to the advice it had received or one which was doubtful. Both statements had been accepted without challenge.

182. Thus, I am satisfied that this is not a case where no evidence was called as to the advices furnished by PwC which would have denied DWW the opportunity of converting through cross-examination its prima facie case to actual proof.

183. Accordingly, whilst it would have been preferable that the sought-after inferences pursued by DWW were rejected explicitly by the High Court judge, his failure to do so does not in any way cast in doubt the validity of his conclusion that CSID had reasonable and probable cause to issue the VAT proceedings. In the context of this litigation which was heard over a lengthy period and in which very many issues of law and fact had to be determined, I have no doubt that the High Court judge is to be excused of this omission, given the clear primary findings of fact which he made in respect of the issues which it is alleged that these witnesses might have been expected to address had they been called. 

(iii) Failure to engage with two emails 
184. DWW submits that it is not evident from his judgment that the High Court judge had at all considered the content of two emails dated the 20th and 23rd December 2002 which it had relied upon to support its contention that PwC did not itself believe and consequently had not advised CSID that the latter might lawfully claim VAT on the lease.

185. DWW does not, however, contest the fact that in the course of his judgment, the High Court judge considered in significant detail three of the emails which it had relied upon for the purpose of demonstrating that CSID had no basis for believing that the lease was vatable and could therefore not have had reasonable and probable cause to issue the proceedings. They are dated the 27th November, 2002, the 28th November, 2002 and the 17th June, 2003 respectively, and are referred to with some degree of particularity at paras. 64-69 of this judgment. The content of these three emails, which the High Court judge considered in detail, is relevant to DWW’s submission concerning the weight it maintains that the High Court judge impermissibly failed to attach to the two emails of the 20th and 23rd December, 2002.

186. I have already referred to these emails in some detail at paras. 65-68 of this judgment. Accordingly, suffice at this stage to summarise their content. In the first email, Mr Fay made clear that he was live to the fact that Regulation 19 provided that the method of valuing the lease proposed by CSID could only be used in “the absence of other evidence” as to value and that CSID had other evidence, namely the €35m. valuation in the Valuation Office Report. Nonetheless he went on to advise that Revenue in practice permitted such an approach. In the second, Mr O’Rourke had advised that whilst the methodology proposed by CSID was “not perfect” it should nonetheless prove acceptable. In the third, Mr O’Reilly had advised that the approach proposed represented extra statutory practice only and that “in strictness” CSID should use the €35m. valuation in the Valuation Office Report.

187. Moving to the evidence in the other two emails, the first email of the of 20th December, 2002 was sent by Mr O’Reilly to Mr Conway of CSID and copied to his PwC colleagues, Mr Fay and Mr O’Rourke. It reads as follows:-

“Dear David,John will be available for the meeting on 9 January.

Valuation:

The correspondence from the Valuation Office detailing the valuation should not be given to DWW/KPMG in advance of the meeting.

The valuation used for the purposes of the Form VAT4A is based on the unencumbered rent determined by the Valuation Office and the multiplier provided for in VAT regulations, resulting in a capitalised value of circa €65M. The correspondence from the Valuation Office also shows a valuation of the lease of circa €35M which does not suit our requirements (i.e. it is not in excess of the build cost).

These matters can be discussed on the day of the meeting.

Regards

Tom [O’Reilly]”.

188. The email of the 23rd December, 2002 was sent by Mr Fay to Mr Conway and was copied to Mr O’Reilly and Mr O’Rourke. It reads as follows:-“David; further to your email on Friday I will be able to attend the proposed meeting on 9th Jan.As you know we have traded voicemails with Clodagh Ní Eidhin in Dublin Castle; we will try and get to speak to her before the meeting with DWW given that if she accepts that FA2002 rules do not apply the valuation issue is not as sensitive. However, if she insists that FA2002 rules do apply we need to stick to our guns re the method of valuation we have used and as Feargal would have explained previously (see email of 29 Nov) our approach while in accordance, we believe, with Revenue guidelines is not “perfect” when read with the actual regulations. Will touch base early in the New Year. In the meantime happy Christmas to you and the team and best wishes for 2003.

Kind regards

John”.

189. Much of what I have earlier stated regarding the obligations of a trial judge to deal with submissions made by the parties in complex litigation applies with equal force to this submission on the part of DWW that the trial judge failed to direct his attention to these two emails in the course of his judgment so as to demonstrate that he allocated appropriate weight to them. In my view, this criticism as a ground of appeal is one which is without merit.190. This submission, I believe, must be considered in the context of a 20-day hearing in the High Court and an appeal in which the Core Book of Documents runs to some 423 pages made up of 136 entries. More than 50 such entries were referred to in the course of the appeal alone. In cases such as this, it cannot be expected that every document relied upon by one or other party will be addressed in the court’s judgment, particularly where there is nothing unique or exceptional about the document. As can be seen from the content of the two emails, they relate to the same issues as were discussed in the emails of the 27th November, 2002 and the 28th November, 2002, which emails received significant attention.

191. Obviously, there are cases in which the failure of a judge to address a particular document might sound in a successful appeal and a retrial. Take for example proceedings defended on the basis that the claim was statute barred or that there was no evidence to satisfy the Statute of Frauds. In either case a single document might hold the key to the success or failure of the defence and if not addressed by the court might provide a sound basis upon which the court’s judgment might be set aside. This is not such a case.

192. Furthermore, it cannot be assumed that the High Court judge did not consider the emails simply because he did not refer to them individually. It is unnecessary for me to second-guess why he might not have done so but, insofar as I might, it seems far more likely that the High Court judge simply chose to focus upon what he considered to be the highlights of DWW’s evidence to support its claim that CSID well knew and understood from the advices received from PwC that its claim for VAT was not in accordance with law, and for these purposes had focused upon the three emails earlier discussed.

193. What is important is that the High Court judge made clear at para. 184 of his judgment that he was deciding DWW’s claim, which he stated, as is correctly claimed, had focused upon the three emails earlier referred to, having regard to the evidence ” in the round ” (my emphasis). It was this approach that led him to conclude that “the advice received by CSID was to the effect that while the recommended approach was not perfect, in the sense that it could not be guaranteed that the interpretation by PwC would be upheld by a court, it was nonetheless PwC’s professional advice that the lease was vatable”. CSID understanding this to be the position, as was his conclusion, the High Court judge was satisfied that it had reasonable and probable cause to issue the proceedings.

194. As is clear from this particular paragraph of his judgment, the High Court judge accepted as a matter of fact that CSID had been told that what was proposed amounted to “extra statutory practice”, was “not perfect” and that the result “could not be guaranteed”. Even when taken at their height from DWW’s perspective, these two additional emails add nothing new to the advices furnished. They traverse much the same ground as the three emails highlighted in the judgment and are consistent with the trial judge’s findings. Accordingly, insofar as these emails are relied upon to prove the nature of PwC’s advice, they raise nothing new. They do not say that the proposed claim for VAT is unlawful and are equally consistent with the professed entitlement of CSID to use the unencumbered rent formula for the purposes of claiming VAT on the lease.

195. I nonetheless recognise that DWW lays particular emphasis on the advice contained in the emails of the 20th and 23rd December, 2002 respectively to the effect that “the correspondence from the Valuation Office should not be given to DW/KPMG in advance of the meeting” and “we need to stick to our guns”, as relevant to the failure of the High Court judge to address the evidence and submissions made on by DWW concerning what it maintained was the concealment of that report and its consequences for the issue of reasonable and probable cause. That being so, I have addressed this aspect of DWW’s submission in the next section of this judgment.

196. Also of relevance to this issue is the fact that when the High Court judge came to his conclusion he clearly took into account the reservations expressed by PwC in the three emails earlier referred to and to which the emails of the 20th and 23rd of December, 2002 in my view add nothing. In the course of his judgment, he is seen to weigh this evidence in the context of (i) the entirety of the written advice furnished by PwC, (ii) the oral evidence of Mr O’Rourke as to the nature of that advice, and (iii) the oral evidence of the witnesses called on behalf of CSID and the content of the uncontested statements of evidence of Mr Walsh and Mr Mulcahy as to their understanding of that advice. It is, I believe, worth commenting on one or two aspects of that evidence.

197. Much of the documentary evidence relied upon by the High Court judge post-dated the emails now referred to and this is clearly relevant insofar as the test to be applied by the High Court judge required him to take into account all of the circumstances as they were known at the time the VAT proceedings were commenced. There was, I would observe, a lot of water that went under the bridge, so to speak, in terms of tax advice between the date upon which these two emails were written in December 2002 and when the proceedings were actually issued in April 2005. One such example is the formal letter of advice sent by Mr O’Reilly of PwC to Mr Donagh Morgan of CSID on the 19th June, 2003. In his letter he referred to Regulation 19 and the method adopted by PwC to determine the capitalised value of the lease. He stated that Revenue had specifically confirmed that the methodology used by CSID was satisfactory. Mr O’Reilly also confirmed that it had always been the practice that the lessor was entitled to choose which method it wished to adopt for the purpose of valuing the lease, supporting his advices by reference to the Revenue’s booklet ” VAT and Property Transactions ” and its ” Guidance Notes for Inspectors “.

198. Even more fundamental to this issue are the findings of primary fact made by the High Court judge concerning the nature of the professional advice furnished by PwC to CSID in the run-up to the decision made by the Board to institute the proceedings for VAT, and those concerning CSID’s understanding of that advice, findings made based upon the oral testimony of witnesses including Mr O’Rourke, Mr Benton, Mr Conway, Mr Morgan and Mr Haugh. Those findings are of course protected by the principles advised by McCarthy J. in Hay v. O’Grady given that they were manifestly supported by credible evidence. As MacMenamin J. advised in Leopardstown Club Limited v. Templeville Developments Limited [2017] IESC 50, a decision which I will consider in greater detail later in this judgment, when primary findings of fact have been made, the fact that there was other evidence inconsistent with those findings cannot dislodge the decision if the primary findings were based on credible evidence. If the complaint is that there was non-engagement with evidence that was inconsistent with findings of primary fact, the appellant must be in a position to show that there was “something truly glaring” about the default. For the reasons stated, I am quite satisfied that the trial judge’s omission to deal with the two emails relied upon by DWW cannot be so described.

199. Finally, in the context of this ground of appeal and indeed the approach of DWW to many other aspects of this appeal, I consider it would be remiss not to refer to the salient observations of MacMenamin J. in Leopardstown , regarding the role of the appellate court. In particular he stated that an appellate court was not to be used as a forum for permitting what he described as:-

“a piece by piece analysis of the evidence, in an effort to show, on appeal, that the trial judge might have laid more emphasis on, or attached more weight to the evidence of one witness, or a number of witnesses, or one document, or a number of documents, rather than others on which he or she relied.”That is what is attempted by DWW in this aspect of its appeal.200. For the aforementioned reasons, and for those referred to in the next section of this judgement, I reject the arguments advanced based on the emails of the 20th and 23rd December, 2002. 

(iv) Non-engagement with evidence regarding the alleged concealment of the Valuation Office Report 
201. In the High Court, a considerable part of the submissions of DWW was concerned with the argument that CSID had conspired to conceal the Valuation Report, which of course contained the open market valuation of the lease, from DWW. DWW emphasised that, despite multiple requests by Mr Moriarty on behalf of DWW, CSID refused to hand over the report. The submission of DWW is that the inference to be drawn from this conduct is that CSID knew it was obliged to use the open market valuation of the lease, and that same would render no VAT chargeable on the lease and so they hid the valuation from DWW who, once they knew of its existence, would be in a position to insist on their legal entitlement to have it used. In this respect DWW relies upon the oral testimony of Mr Conway, Mr Benton and Mr Morgan of CSID to the effect that they understood themselves to have been advised by PwC that they should not hand over the report as it did not suit CSID’s purposes. If this inference were to be drawn, DWW submits that it would demonstrate that CSID did not, at the relevant time, believe that VAT was properly chargeable on the lease, and thus did not actually believe it had reasonable and probable cause to initiate proceedings.

202. On appeal, DWW submits that this argument, notwithstanding the reliance placed on it by counsel in the High Court, was not addressed by the High Court judge in his judgment. Counsel for DWW argues that the assumption that this Court must draw from such omission is that the High Court judge simply did not consider the evidence in relation to it. It is argued that this evidence goes directly to the state of mind of CSID at the time of the decision to initiate proceedings, and thus to the question of whether it actually believed that it had reasonable and probable cause to take that decision. DWW submits that the failure of the trial judge to engage with this evidence renders his finding that CSID believed that VAT was chargeable on the lease, and thus that it had cause to bring proceedings, unsafe. In circumstances where it maintains that a central finding grounding the decision of the trial judge cannot stand, DWW submits that a retrial is warranted.

203. In response, CSID first submits that any question about the subjective belief which it held as to the viability of its proceedings is an issue which goes only to malice, and not to the absence of reasonable and probable cause. Given that the High Court judge decided the case in its favour on the basis of reasonable and probable cause, he was under no obligation to consider the issue of malice. Accordingly, any question regarding the belief of CSID about the prospects of its litigation did not fall for consideration and the High Court judge did not err in neglecting to advert to it in his judgment.

204. The essential argument of CSID is that the subjective belief of the alleged malicious prosecutor/claimant about their intended litigation forms no part of the test for reasonable and probable cause. The test is objective, based on the information which was before the party at the relevant time. As argued in CSID’s written submissions to this Court:

“in order to establish a want of reasonable or probable cause, it is not enough to demonstrate that the defendant was aware (or keenly aware) that his case was problematic, or even seriously problematic: if a reasonable man faced with the same information as the defendant would have considered that there was a proper case to lay before the court, then reasonable and probable cause exists”.205. This interpretation of the law would appear to be consistent with the decision in Dorene, the leading Irish case on the issue. At p. 318 of his judgment in that case, Costello J. stated that the test for want of reasonable and probable cause was an objective one, and in that respect he quoted from the judgment of Denning L.J. in Tempest v. Snowden [1952] 1 K.B. 130, p. 138-140, in the following terms:“In my opinion in order to determine the question of reasonable and probable cause, the judge must first find out what were the facts as known to the prosecutor , asking the jury to determine any dispute on that matter and then the judge must ask himself whether those facts amounted to reasonable and probable cause. In Herniman v. Smith 9 [1938] A.C. 305, Lord Atkin put it quite clearly: ‘The facts upon which the prosecutor acted should be ascertained; in principle, other facts on which he did not act appear to be irrelevant. When the judge knows the facts operating on the prosecutor’s mind, he must then decide whether they afford a reasonable or probable cause for prosecuting the accused.'” (emphasis added).206. Accordingly, it appears that the test for want of reasonable and probable cause proceeds in two steps. First, the court must ascertain the facts as known to the prosecutor/plaintiff; second, there must be an objective assessment as to whether those facts gave rise to grounds for reasonable and probable cause. This view is supported by the recent decision of the UK Supreme Court, Willers v. Joyce [2016] UKSC 43, wherein Toulson L.J stated that, in order to defeat an allegation of want of reasonable and probable cause, “[i]t is enough that, on the material on which he acted, there was a proper case to lay before the court.”207. As a matter of logic, it seems to follow that in applying this test for want of reasonable and probable cause the High Court judge was justified in not considering the question of the subjective belief of CSID. He was entitled to consider the information that CSID had before it at the time it initiated proceedings, and assess objectively whether that gave rise to reasonable and probable cause. In other words, it was not necessary for the High Court judge to inquire as to what CSID in fact believed about whether it had cause to initiate proceedings, what was relevant was whether the facts as known to CSID would have led the reasonable man to the conclusion that they had such cause.

208. Indeed, continuing the quotation by Costello J. in Dorene of Denning L.J.’s judgment in Tempest v. Snowden, it becomes clear that this is the very conclusion that was reached:

“If these facts [operating on the mind of the prosecutor] do afford reasonable and probable cause, then the prosecution is justified, and it is not as a rule necessary for an inquiry to be made into the prosecutor’s belief. The state of his belief goes to malice but not, as a rule, to reasonable and probable cause. This view is supported by the observations of the Lord Chief Justice in the recent case of Tims v. John Lewis & Co. 7 [1951] 2 K.B. 459. : ‘The question whether there was a reasonable or probable cause is not, I think, to be determined subjectively, as has been suggested. It is a question which objectively the court has to decide on the evidence before it.’ It is sometimes said that, in order to have reasonable and probable cause there must be an honest belief in the guilt of the accused. But I do not think that should be regarded as a universal proposition applicable to all cases. It depends on the particular case . . . I do not say, of course, that the prosecutor’s belief can never come into the question of reasonable and probable cause. If the prosecutor believed that the man was innocent and preferred the charge simply as a means of inducing him to pay over money to him, there would be no reasonable and probable cause for the prosecution . . . Apart from exceptional cases . . . I think it right to say that, when once the facts as known to the prosecutor are ascertained, the state of his belief goes only to malice, and not to reasonable and probable cause.”209. Further, it seems to me that the exclusion of subjective belief from the test for want of reasonable and probable cause is consistent with the fact that malice is a separate ingredient to the tort. At the hearing before this Court, counsel for DWW advanced the proposition that the test for malice would be satisfied where the prosecutor/plaintiff could be shown not to have believed that he had reasonable and probable cause to bring the proceedings. At the same time, it seeks to maintain that a lack of actual belief will be fatal to the issue of reasonable and probable cause. However, if both of these propositions are true, then the subjective belief of the prosecutor would be decisive in two purportedly separate parts of the test. Therefore, a party could be guilty of the tort of malicious abuse of the court’s process solely based on their subjective beliefs about the litigation, quite apart from its actual merits. In this understanding, a person with a perfectly good case to lay before the courts could be found to have committed the tort on the basis of their mistaken belief about the viability of the grounds. Such a result is starkly at odds with the fact that the test for reasonable and probable is described throughout the case law as an objective test. The approach which DWW take on this point comes close to requiring CSID to positively prove its subjective belief in the validity of the proceedings – if the test for want of reasonable and probable cause were understood in the manner for which it contends, in what way could it be considered an objective test?210. Denning L.J. was alive to this contradiction at p. 5 of his judgment in Tempest v. Snowden , where he provided the following illustration, in a criminal context:

“Take a prosecutor, a fair-minded man, who… does not himself think the evidence is sufficient to justify a prosecution. His solicitor advises him that the evidence is sufficient. He may well say to himself: ‘I do not myself believe there is sufficient evidence, but my solicitor says there is, so I feel justified in going on.’ If the judge afterwards takes the same view as the solicitor, I should have thought that such a man would have reasonable and probable cause for instituting a prosecution, even though he did not himself affirmatively believe there were reasonable grounds for it.”211. It seems to me the correct view that a person should be entitled to bring litigation so long as there is reasonable and probable cause in the objective sense. Or, to put it another way, they should not be barred from bringing litigation which they personally do not believe in, so long as there are in fact reasonable and probable grounds for it. As it was put by Denning L.J. in Tempest :“It has to be remembered that, even though a prosecutor is actuated by the most express malice, nevertheless he is not liable so long as there was reasonable and probable cause for the prosecution. If envy, hatred, malice and all other uncharitableness do not deprive him of this defence, I do not see why his state of belief should necessarily do so.”212. Admittedly, the picture is complicated somewhat by the decision of the House of Lords in Glinski v. McIver [1962] A.C. 726, to which both parties have made reference. In the leading judgment in that case, Viscount Simonds held that the question of want of honest belief was relevant to that of want of reasonable and probable cause. For my part, I find that pronouncement difficult to square with the professedly objective nature of the test. It is a contradiction in terms to say that a test that mandates an inquiry into the subjective beliefs of a party about the grounds for their litigation is an objective test. In this respect it is to be noted that, although in Glinski four detailed judgments were handed down on the subject of the tort of malicious prosecution, no reference was made to this case in the leading Irish case of Dorene v. Suedes .213. Even if it were the case that Glinski is good law in this jurisdiction, I would observe that it could provide only limited assistance to DWW. First, it is notable that in his judgment Viscount Simonds saw fit to distinguish the case where a prosecutor believes the facts and is advised that they amount to an offence but is not himself sure of the latter which is a question of law. In circumstances where the prosecutor at every step acted upon competent advice, the learned judge stated that he would find it difficult to hold that he had acted without reasonable and probable cause. Albeit in a civil context, were the circumstances in which CSID was found to have acted not the same? The High Court judge clearly found that CSID had been advised that VAT was chargeable on the lease. At its height the submission of DWW is that an inference should be drawn from the conduct of CSID to the effect that it did not itself believe in the proceedings. However, as I shall discuss further below, there was no real evidence that CSID actively believed that the proceedings were not viable, merely that it was unsure about the prospects of its claim such that it was unwilling to hand over the valuation the potential subject matter of dispute. In these circumstances I would think it open to the High Court judge to find that the advice CSID received was decisive as to the question of reasonable and probable cause. It is to be remembered that the burden of proof at all times remained with DWW to positively establish that CSID did not have reasonable and probable cause to commence the VAT proceedings. It is evident that it failed to convince the High Court judge that, notwithstanding the evidence regarding the advice of PwC, there was a question to be answered regarding the subjective belief of CSID.

214. Second, and in further support of the above, the judgment of Denning L.J. in Glinski is to be noted insofar as he states that “the question and answer as to ‘honest belief’ should not be used in every case”, consistent with the views he had earlier expressed in Tempest v. Snowden. Whilst he acknowledged that it might be possible to infer from the conduct of the prosecutor that he was conscious that he had no reasonable and probable cause for the prosecution, and that same would mean he that indeed he did not have such cause, he was anxious to caution at p. 762 of his judgment that such cases “must be carefully watched so as to see that there really is some evidence from his conduct that he knew it was a groundless charge”. It must be questioned whether the evidence adduced by DWW could ever have proved that CSID knew, in the words of Denning L.J., that it had “no good ground” for the proceedings.

215. This standard is to be starkly distinguished from a standard which would require CSID to positively believe that the litigation would succeed. Stateability is the appropriate standard for reasonable and probable cause, in which respect counsel for CSID relied upon the Irish case of Bank of Ireland Finance Ltd v. McSorley [1994] WJSC-HC 2085. Even if the High Court judge had accepted the evidence tendered by DWW in respect of the alleged concealment of the Valuation Office Report, it is doubtful that this could have ever proved that CSID did not believe that it had a stateable case. Whilst the fact, if accepted, that it kept the open market valuation from DWW might go to show that it was not absolutely certain that VAT was chargeable on the lease, it could never have established that CSID knew it had no grounds to seek to enforce the charge. At its height, it demonstrates that CSID may not have been sure that it was entitled not to use the open market valuation and that in order to avoid that risk it decided to postpone as long as it could, handing over the Valuation Office Report to Mr Moriarty. However, crucially, it cannot be inferred from these actions that CSID knew the proposed litigation to claim VAT on the lease was groundless, which is the standard required. Further, given that at the time the Valuation Report was held back there was a dispute brewing in respect of the chargeability of VAT, it is perhaps not surprising that CSID was reluctant to hand over a valuation which would have weakened its case. Whilst some might view this conduct as a form of “sharp practice”, it was nonetheless wholly insufficient for the purposes of establishing that CSID did not believe it had any case to lay before the courts, especially in circumstances where the High Court judge found that it had been advised that the lease was vatable.

216. It appears to me that in effect DWW is attempting, on this appeal, to bring subjective belief through the back door into the question of reasonable and probable cause. It was unable to persuade the High Court judge that CSID had been advised that it had no cause to enforce the VAT charge. Instead he found that CSID had been advised and had believed that it had reasonable and probable cause for commencing its proceedings to recover VAT on the lease. To defeat this, DWW relies upon email exchanges with Mr Moriarty, from which it has asked the Court to infer that CSID knew it had no reasonable and probable cause. However, the evidence does not go that far. At best it cast some doubt upon how certain CSID was that it would succeed in its claim for VAT on the lease. It is quite another thing to say that it showed that CSID knew it had no claim to make and it is rather speculative to suggest that the High Court judge should have concluded that from the evidence that was put before him.

217. Relevant in this regard is the fact that the burden was on DWW to prove want of reasonable and probable cause. It is apparent from the High Court judgment that DWW failed to persuade the trial judge of the key elements of its case. He reached clear conclusions as to the nature of the advice tendered by PwC to CSID and as to what CSID understood that advice to mean. It was open to DWW to make the case that CSID did not believe it had good grounds to commence its proceedings to recover VAT on the lease However, it failed in its efforts to displace the assumption that CSID had reasonable and probable cause for that litigation. Even taking the authorities at their most favourable to DWW and accepting that subjective belief could be relevant to reasonable and probable cause in some cases (though Denning L.J. stresses that it does not come into play in all cases), nonetheless it was for DWW to convince the High Court judge that its submissions in respect of the Valuation Office Report should go to reasonable and probable cause. From the absence of this argument in the High Court judgment it can be inferred that the High Court judge was not convinced that said submissions had any purchase with respect to reasonable and probable cause.

218. In the preceding paragraphs I have proposed that a party’s subjective belief as to the stateability of litigation is not relevant to the question of reasonable and probable cause, and that further or in the alternative the submissions highlighted by DWW could not prove that CSID believed that it did not have a stateable case. However, even if I am wrong about all of this, I am in any event satisfied that the finding that the High Court judge made regarding the subjective belief of CSID was a finding of fact which should not be disturbed on appeal.

219. The essence of DWW’s argument on appeal is that the finding of fact made by the High Court judge that CSID actually believed it had reasonable and probable cause is endangered by the way in which he approached the evidence. In relation to this submission I intend first to detail some of the legal principles which I consider material to my conclusions and then to apply them to the circumstances of this case.

220. In Delany and McGrath on Civil Procedure (4th ed., Round Hall, 2018), the authors explain at p. 903 that, for the purposes of appellate jurisdiction, a special importance is to be attached to what are described as “findings of primary fact”. These are, as defined by Henchy J. in JM v. An Bord Uchtala [1987] I.R. 510, 522-523, “determinations of fact depending on the assessment of the trial judge of the credibility and quality of the witnesses”. Such findings are to be distinguished from findings of secondary or inferred facts, which do not follow directly from an assessment of the credibility of the witnesses or the weight to be attached to their evidence, but derive from the inferences which a judge draws from the facts found or admitted.

221. Consistent with the well-established notion that a trial judge is best placed to observe and assess oral evidence, the case-law demonstrates that an elevated level of deference is paid to findings of primary fact when reviewed by an appellate court. (See for example decision of Finlay C.J. in in Pernod Ricard & Comrie plc v. FFI Fyffes plc ) (Supreme Court, 11th November 1988.)

222. In the often-cited case of Hay v. O’Grady [1992] 1 I.R. 210, McCarthy J. summarised the principles applicable to a review of evidence on appeal as follows:

“1. An appellate Court does not enjoy the opportunity of seeing and hearing the witnesses as does the trial Judge who hears the substance of the evidence but, also, observes the manner in which it is given and the demeanour of those giving it. The arid pages of a transcript seldom reflect the atmosphere of a trial.2. If the findings of fact made by the trial Judge are supported by credible evidence, this Court is bound by those findings, however voluminous and, apparently, weighty the testimony against them. The truth is not the monopoly of any majority.

3. Inferences of fact are drawn in most trials; it is said that an appellate Court is in as good a position as the trial Judge to draw inferences of fact… I do not accept that this is always necessarily so. It may be that the demeanour of a witness in giving evidence will, itself, lead to an appropriate inference which an appellate Court would not draw. In my judgment, an appellate Court should be slow to substitute its own inference of fact where such depends upon oral evidence of recollection of fact and a different inference has been drawn by the trial Judge. In the drawing of inferences from circumstantial evidence, an appellate tribunal is in as good a position as the trial Judge.”

223. That is not to say that findings of fact are considered unassailable. In Wright v. AIB Finance and Leasing Ltd. [2013] IESC 55, Clarke J. made clear that findings of fact could be disturbed where there had been “a material and significant error in the assessment of the evidence or a failure to engage with a significant element of the evidence put forward”. In Doyle v. Banville [2012] IESC 25, Clarke J. stated that a judgment must engage with the key elements of the case made by both sides and explain why one or other side has been preferred. In that case, a retrial was ordered in circumstances where the trial judge had accepted the evidence of two witnesses in full notwithstanding that they gave contradictory evidence on a matter of central importance. Likewise, a retrial was ordered in Lynch v. Cooney [2016] IECA 1 in circumstances where the trial judge was found to have failed to engage fully with the evidence. In the context of an unsuccessful claim by a victim of assault against the trustees of a rugby club which was the alleged site of the assault, Hogan J. held that the failure of the trial judge to analyse or explain how the assault occurred if not in the rugby club was itself an error of law justifying the intervention of the Court of Appeal to set aside the finding of fact that the assault had occurred outside the premises. In a similar vein, the Supreme Court in Healy v. Ulster Bank [2015] IESC 106 held that the failure of the trial judge to address the evidence of an important witness, which contradicted his finding on a key issue of fact, was a material and significant error.224. Of course, in the above cases the errors of the respective trial judges in engaging with the evidence had grave consequences for the validity of their overall findings, and it should be clear that not every such error would be considered “material and significant”. In ICDL v. The European Computer Driving Licence Foundation Ltd. [2012] IESC 55, it was pointed out on appeal that the trial judge had in his judgment mistakenly referred to the evidence of a witness who had furnished a witness statement but not actually been called to give evidence, and had stated that the witness statement of another witness who had given evidence had been withdrawn. Nonetheless, the Supreme Court refused to remit the case for a retrial in circumstances where it was satisfied that these errors had not led to a “substantial error” in the conclusion reached by the trial judge such as might warrant a new trial.

225. Useful guidance as to the circumstances in which errors in engagement with evidence will negate findings of fact was provided in a case which was the subject of a great part of the oral submissions of counsel for both parties in the instant case, that of Leopardstown Club Ltd. v. Templeville Developments Ltd. [2017] IESC 50. In that case, Denham C.J. in finding that the Court of Appeal had exceeded its jurisdiction in allowing an appeal against the order of the High Court, held that the principles in Hay v. O’Grady were properly understood as meaning that “an appellate court should not interfere with a primary finding of fact by a trial court which has heard oral evidence, unless it is so clearly against the weight of the evidence as to be unjust.” Explaining the line to be drawn regarding the failure of a trial judge to engage with evidence, MacMenamin J. in his concurring judgment at paras. 7-8 stated as follows:

“Save where there is a clear non-engagement with essential parts of the evidence, therefore, an appeal court may not reverse the decision of a trial judge, by adverting to other evidence capable of being portrayed as inconsistent with the trial judge’s primary findings of fact.‘Non-engagement’ with evidence must mean that there was something truly glaring, which the trial judge simply did not deal with or advert to, and where what was omitted went to the very core, or the essential validity of his findings. There is, therefore, a high threshold. In effect, an appeal court must conclude that the judge’s conclusion is so flawed, to the extent that it is not properly ‘reasoned’ at all. This would arise only in circumstances where findings of primary fact could not ‘in all reason’ be held to be supported by the evidence… ‘Non-engagement’ will not, therefore, be established by a process of identifying other parts of the evidence which might support a conclusion, other than that of the trial judge, when there are primary facts, such as here. Each of the principles in Hay v. O’Grady are to be applied.”

226. As adverted to at the outset of this section, DWW’s argument is that the alleged failure of the trial judge to engage with the evidence concerning the Valuation Office Report undermines the credibility of his finding that the relevant persons in CSID actually believed that VAT was chargeable on the lease and thus that they believed they had cause to initiate proceedings. The issue as to the state of mind of the directors of CSID with respect to the legality of the VAT charge was examined by the trial judge at paras. 90-96 of his judgment in a section entitled “Evidence by members of the EST and directors of CSID regarding advice received”.227. In this section, the trial judge first quoted from the oral evidence of Mr Michael Walsh, a non-executive director of CSID, who said that he “always understood PwC’s advice to be that VAT was chargeable”. The trial judge noted that this evidence was “not controverted by DWW”. Next, the trial judge placed reliance on the likewise uncontroverted evidence of Mr Mulcahy of CSID that he did not have any reason to doubt that VAT was chargeable on the lease, as he understood the advice of PwC to mean. Finally, the trial judge considered the evidence of Mr Conway of CSID and concluded at para. 96 that “on Mr. Conway’s own evidence he was aware of the dichotomy between the practice and the law, [and] he understood PwC’s advice was that the Lease was nonetheless vatable.”

228. From the foregoing it is clear that the trial judge was of the view that the directors of CSID understood the advice of PwC to mean that VAT was chargeable on the lease and believed that that advice was true. Thus, having considered the oral evidence of the directors, what emerges from a plain reading of the judgment is that the trial judge accepts their evidence that they believed that they had reasonable and probable cause to initiate proceedings to enforce the VAT charge on the lease.

229. Although the argument that CSID had deliberately concealed the open market valuation because it knew that it was obliged to use it did not receive mention in the High Court judgment, which is regrettable, it is implicit in the finding of the trial judge to the effect that CSID believed that VAT was lawfully chargeable on the lease that he did not accept that argument. Quite clearly, given that he found that the relevant persons in CSID believed that VAT was chargeable, he could not have given any credence to the suggestion that they had hidden a valuation on foot of a belief that it legally precluded them from charging VAT. The trial judge had the opportunity to hear all of the evidence in relation to the alleged concealment of the open market valuation due to lack of belief in the VAT charge, in particular the exchanges between CSID and Mr Moriarty in respect of the disclosure of the Valuation Report, and in the end produced a conclusion that was fundamentally inconsistent with that version of events.

230. The question for this Court on appeal is really: to what extent did the failure to engage with this argument go to the essential validity of the finding that CSID actually believed in the lawfulness of the VAT charge?

231. In answering this question, the first thing to note is that, once it is understood that the trial judge accepted the evidence of CSID that it believed VAT was chargeable, it becomes rather easy to explain the nature of the exchanges between CSID and Mr Moriarty. It is worth remembering that the key contention of DWW is not merely that CSID deliberately withheld the open market valuation of the lease, as this argument alone would avail it nothing. The crux of its argument is that CSID withheld the valuation because it did not believe the VAT charge was valid. But of course, as the trial judge found it did believe in the VAT charge this places an entirely different colour on the highlighted correspondence.

232. In other words, the key dispute between the parties was and is not whether CSID in effect withheld the valuation from Mr Moriarty, but itsstate of mind when it did so. In particular, did it do it because it knew that it would be required to use that valuation and that this would in turn negate its ability to charge VAT? When the question is framed this way, it becomes clear that the trial judge has, in effect, already decided this question. He has clearly accepted that CSID’s state of mind was not such that it did not believe in the validity of the VAT charge. That being so the exchanges with Mr Moriarty are much less significant than is contended for by DWW. If CSID genuinely believed it was entitled to charge VAT, any unwillingness to hand over the open market valuation would likely be understood as a reluctance to assist the company with whom it was trading in seeking to resist this charge. This is hardly an alien practice to anyone who has worked in business. CSID did not have to be certain that VAT was chargeable. It was enough that it reasonably believed that it was chargeable, and at that level of certainty it is understandable why it might not wish to give Mr Moriarty and DWW ammunition with which to fight the proposed imposition of VAT.

233. All this is said merely to demonstrate that, if the trial judge’s finding regarding the state of mind of CSID remains valid, his failure to reach a conclusion as to why he considered the Report had been withheld cannot afford DWW an independent ground of appeal. So understood, the evidence regarding the withholding of the Report, and the non-engagement with same, is only useful to DWW insofar as it undermines the credibility of the trial judge’s finding regarding the belief of CSID. The mere exclusion of an account of the otherwise motivations of CSID in withholding the report is alone not sufficient to undermine the essential validity of that finding – more narrowly, the question must be whether the failure of the trial judge to consider how the alleged concealment actually went to the state of mind of CSID renders his finding on that issue so flawed as to be unreasoned.

234. Before considering this question, it is worth pausing for a moment to consider the circumstances in which a failure to engage with evidence has been determined sufficiently fatal to the credibility of a finding of fact in the case-law. In Doyle v. Banville , the failure to engage with evidence which was identified by the Supreme Court was not a neglect to mention particular evidence as in this case. In Doyle , the trial judge had made a finding in the context of a road traffic accident that the defendant’s car had not dragged the plaintiff as a result of the crash, which was a finding of great significance because the position of the plaintiff subsequent to the crash otherwise had the effect of absolving the defendant from blame. However, the trial judge had purported to accept in full the evidence of a witness which included evidence that the plaintiff had been dragged by the defendant’s car, in direct contradiction to the trial judge’s finding. Accordingly, it was found that the trial judge’s finding regarding whether the plaintiff had been dragged a distance by the car was deemed the result of clearly flawed reasoning, and a retrial was ordered. In Lynch v. Cooney , as discussed above, the material error was the failure of the trial judge to consider how the assault might have occurred outside the rugby club if it did not occur inside it. In essence the finding on appeal was that whereas the trial judge had determined that the assault did not occur on the premises, he had not examined properly the evidence as to whether it happened outside, and thus the determination regarding location was incomplete. In Healy v. Ulster Bank , the trial judge found that the plaintiff’s mother was present for discussions which were the subject of the key dispute and that she had heard the relevant bank official say that the plaintiff was “in the clear with Ulster Bank”. However, the trial judge proceeded to reject the plaintiff’s account of the meeting with no reference to the evidence that the bank official had in fact assured the plaintiff that he was in the clear. This was found by the Supreme Court to be a “material and significant error”.

235. I am of the view that the error of the trial judge in the present case is not of the order described above. While it was undoubtedly undesirable that he did not explicitly consider the bearing that the exchanges with Mr Moriarty had on the state of mind of the CSID directors, it cannot be said that this omission renders his determination regarding their state of mind so flawed as to be unreasoned. In the above cases, the findings of fact interfered with were fatally undermined by the respective errors. In Doyle , the trial judge accepted evidence which was fundamentally contradictory to the finding. In Lynch , the trial judge failed to reason out the finding in relation to the location of the assault. In Healy , the trial judge made reference to the evidence of a witness who was present at the material time and undermined the bank’s core case, but made no finding in relation to same.

236. In stark contrast, what remains in this case is a finding of fact in relation to the state of mind of the directors of CSID which is supported by a wealth of credible evidence. The core logic of the trial judge was that the advice of PwC was that VAT was lawfully chargeable, that CSID understood the advice as such, and that they therefore believed the VAT charge on the lease was valid. Thus, in essence, DWW’s argument, in relation to the withholding of the report, even if correct, does not avail them on this appeal.

237. To what extent does the failure to engage with DWW’s argument regarding the concealment of the open market valuation negate this core logic? Perhaps not as far as DWW has suggested. Its evidence in relation to concealment is one of several sources of evidence which go to the state of mind of CSID at the relevant time. As explained above, the evidence as to the exchanges with Mr Moriarty concerning the Valuation Office Report are not per se inconsistent with the trial judge’s finding of actual belief. It is only the allegation that CSID was of a particular nefarious state of mind when engaging in this correspondence that is material. And insofar as that allegation is concerned, it clear that there was other evidence regarding the state of mind of CSID which was preferred by the trial judge. As I have discussed, the trial judge in his judgment examined the evidence of the CSID directors as to their beliefs regarding the legal validity of the VAT charge at the material time, and came to the conclusion that their evidence was credible.

238. Whilst it is true that CSID’s efforts to withhold the Valuation Office Report from DWW suggests at least some lack of confidence in the validity of its claim for VAT on the lease and to that extent might be seen to be in conflict with the ultimate finding of the trial judge, these facts are not sufficient to dislodge his findings. It is required that failure to consider the contradictory evidence is material in the sense that it renders the findingnot properly reasoned . So, in Healy , the issue was that it was not clear why the trial judge had come to the conclusion that the plaintiff’s account of the meeting was not credible. In such circumstances the failure to consider evidence from someone present at the meeting was material. In contrast, in this case, the train of logic employed by the trial judge is clear. He came to the conclusion that the directors of CSID genuinely believed the advice of PwC to the effect that VAT was chargeable on the lease, and as a consequence of that he does not consider that the exchanges with Mr Moriarty carry the inference of guilt that DWW says they do. Again, admittedly it is the case that the trial judge should have explicitly expressed his rejection of that desired inference. But, on appeal, the question for this Court is whether his neglect to do so is material in the sense that it renders his finding not properly reasoned. And to that question I would answer in the negative.

239. It is worth emphasising again that the trial judge had the benefit of observing in person all of the oral evidence, including the demeanour of the witnesses, in order to determine their credibility. It is clear to me, although perhaps imperfectly expressed in his judgment, that the trial judge preferred evidence to the effect that the directors of CSID believed that VAT was lawfully chargeable. Significant deference ought to be paid to this reasoned conclusion. I find myself in agreement with the comments of MacMenamin J. in Leopardstown Club Ltd. v. Templeville Developments Ltd. , where he held that the role of an appellate court was not to be:

“9. reduced to a piece-by-piece analysis of the evidence, in an effort to show, on appeal, that the trial judge might have laid more emphasis, or attached more weight, to the evidence of one witness, or a number of witnesses, or one document, or a number of documents, rather than others on which he or she relied.10. The trial judge’s major role is to determine facts. To that extent, the role must have a degree of autonomy. With experience in fulfilling that role, there comes expertise. As has been pointed out in other jurisdictions, duplication of the trial judge’s assessments by an appeal court will very likely only contribute negligibly to the accuracy of fact determination, but at significant cost in the diversion of judicial resources. Parties to a case on appeal have already concentrated their energies and resources on persuading a trial judge that their account of the facts is the correct one; requiring them to persuade three more judges at the appellate level is requiring too much. A trial on the merits should be ‘the “main event” … rather than a “tryout on the road.’ (See the judgment of White J., speaking for the Supreme Court of the United States, in Anderson v. City of Bessemer , 470 U.S. 564 [1985], page 574/575).

11. By virtue of sitting through the entire case the trial judge will be familiar with the evidence. The insight gained by a trial judge, who has lived with the case for several days, weeks or even months, may be far deeper than an appeal court, whose view of the case is much more limited and narrow, often being shaped simply by the issues which are placed before it. As the Supreme Court of Canada pointed out in Housen v. Nikolaisen [2002] 2 S.C.R. 235, at paragraph 14, appeals are necessarily ‘telescopic’.”

240. For this and all of the above reasons, the finding of the trial judge that CSID believed they had reasonable and probable cause for the proceedings should be upheld.241. To summarise my findings on this issue, the evidence in relation to the alleged concealment of the Valuation Office Report was evidence regarding the subjective beliefs of CSID about the litigation, which is a question going only to malice and not to reasonable and probable cause, which is tested objectively, and so the High Court judge would have been justified in not considering it. In any case, the evidence proffered could never have proved that CSID did not even believe its litigation to be stateable. Finally, even if subjective belief is relevant to reasonable and probable cause, the High Court judge addressed that question in his judgment and arrived at a reasoned conclusion, which should not be disturbed on this appeal notwithstanding that he did not make mention of the highlighted argument in his judgment.

242. In coming to these conclusions, it does not escape my attention that much confusion on appeal could have been avoided had the High Court judge made explicit mention of the argument advanced by DWW in that Court. Notwithstanding my finding on appeal that the High Court judge was not obliged to examine the subjective beliefs of CSID about the litigation, it would have been to the benefit of both parties if this rationale had been made explicit in his judgment. Further, to the extent that he did go on to consider at least to some extent the subjective belief of CSID, it would have been preferable for him to have made mention of the argument in relation to alleged concealment, if only to reject it in favour of the other evidence on which he legitimately chose to place weight. As I have explained, the High Court judge’s findings can be upheld based on the principles in Hay v. O’Grady , however it is far from ideal that this Court become engaged in disputes about the logic and reasoning employed by a judge in the court below, after the fact. Although I have clearly found that the neglect to make reference to this argument does not endanger the still reasoned conclusion of the High Court judge, it is further important that, within reason, the judgment in any case, but especially one where a great deal is at stake for the parties, serves to provide them with a relatively comprehensive explanation as to why the case was decided the way it was. And in this respect, I think it is to be regretted that this argument did not receive some discussion in the High Court judgment. 

(v) Internal inconsistency in judgment – dichotomy between law and practice 
243. DWW submits that there is an internal inconsistency in the High Court judge’s judgment such that it casts in doubt the validity of his conclusion that CSID had reasonable and probable cause to maintain its claim for VAT on the lease.

244. To understand this submission, it is necessary to have regard to what was stated by the High Court judge at paras. 99 and 184 of his judgment:-

“99. It was clear therefore that CSID, both at board level and at EST level, was aware that there was a dichotomy between what Regulation 19 stated and the practice, but it is also clear that Mr. O’Rourke’s evidence is that it was PwC’s advice to both the board of directors and the EST that the Lease was vatable…184. For the sake of completeness, this Court would add that if it had to determine that issue, it would conclude that when viewed in the round (i.e. not just the three emails which have been the focus of the plaintiff’s case), the advice received by CSID was to the effect that while the recommended approach was not perfect, in the sense that it could not be guaranteed that the interpretation taken by PwC would be upheld by a court, it was nonetheless PwC’s professional advice that the Lease was vatable. In addition, it received advice from McCann Fitzgerald that it was arguable that DWW was legally obliged to accept CSID’s decision that the Lease was vatable and advice from Counsel that the claim for VAT should be included in the proceedings before the Commercial Court for the forfeiture of the Lease. While it is true that Mr. O’Reilly, a relatively junior employee in PwC referred in an email to reliance being placed on ‘extra-statutory practice’ which email was sent to Ms. Magahy and Mr. Conway, it is also the case that Mr. Fay, the partner in the firm who was advising on VAT, stated in another email to Ms. Magahy and Mr. Conway in the most unequivocal terms that ‘there is no basis for KPMG/Dublin Waterworld to contend that the lease is not subject to VAT.’ This, it should be noted, is a long way from a situation in which a client proceeds with his litigation, even though he is told in unequivocal terms that his claim ‘would not succeed’ as occurred inDorene v. Suedes . Therefore, if the Court had to decide the case on this basis, which it does not have to, it would conclude that CSID had reasonable or probable cause for issuing the proceedings in this case.”

245. It is submitted that on the one hand the High Court judge found as a fact that PwC’s advice to the EST and the Board of CSID was that the lease was vatable. Yet, he had also found that at EST and Board level there was an awareness of the dichotomy between Regulation 19 and Revenue practice. It followed from the latter finding, according to DWW, that the trial judge was bound to conclude that the advice of PwC had been understood to mean that the proposed claim was contrary to law. This is because the reference to Regulation 19 had to be understood to be a reference to the law and, when read as such, meant that the claim proposed, whilst one that might have met with Revenue approval, was in fact unlawful. Given that CSID was aware of this dichotomy, it could not have believed that the lease was vatable.246. Accordingly, it is contended that the evidence did not support the trial judge’s finding that PwC had advised that the claim for VAT on the lease was in accordance with law. This finding was, according to counsel for DWW, the result of his “wholesale failure” to engage with the evidence. PwC had done no more than suggest that as a matter of practice such a claim would not be challenged by Revenue. Indeed, DWW goes so far as to submit that “the learned trial judge has himself confused the import of the PwC advice. There was no evidence PwC ever said the lease was vatable at law”.

247. The first matter of import in relation to this submission, in my view, is that it ignores that the trial judge’s finding that it was PwC’s advice to CSID that the lease was vatable, was a primary finding of fact. In so concluding the High Court judge had clearly relied upon the credibility of the evidence of Mr O’Rourke which, as he observed, was consistent with the opinion of other VAT professionals at the time. Mr O’Rourke, when under cross examination, as is referred to in para. 97 of his judgment, had stated as follows:-

“Our advice was that the taxpayer had the option – had the alternative of selecting any of the three options available to him. And that, certainly in my view, was consistent with the law, both the VAT Act itself and indeed the import of the anti- avoidance legislation that was brought in.”248. Furthermore, there was a swathe of other documentary evidence which lent support to the High Court judge’s finding that Mr O’Rourke’s advice to CSID was that the claim for VAT under Regulation 19 was lawful. I will mention but a few:(i) Letter of advice from PwC to CSID dated the 11th September, 2002, advices which pre-dated the Valuation Office Report.(ii) Email of the 6th January, 2003 from Mr Fay to Mr Conway. This email post-dates the Valuation Office Report but states that PwC remains of the view that CSID may use the alternative basis proposed for valuing the lease.

(iii) Email of Mr Fay of the 31st January, 2003 to Mr O’Rourke and Mr Conway stating that there was no basis for DWW to contend that the lease was not subject to VAT.

(iv) Email dated the 30th April, 2003 from Mr Fay to Ms Magahy, Mr O’Rourke and Mr O’Reilly stating that they were purporting to value the lease using one of the three permissible methods under the Regulation. No distinction was drawn between the Regulation and Revenue practice for this purpose.

(v) Email dated the 14th May, 2003 from Mr O’Rourke to Mr Conway, Mr Dunne, Ms Magahy, Mr Fay and Mr O’Reilly. The email, which does not concern itself with Revenue guidelines or practice, queries, inter alia :-

“Have the lawyers advised as to how we can proceed with WW for the VAT due?I think the Revenue are really out of the loop now as far as we are concerned. They agreed that VAT should be charged and the methodology is as provided by law, so they really have no further role to play in this.” (my emphasis)

(vi) Formal VAT report of 13th June, 2003. This report maintains that the lessor has the option of the three methods for valuing the lease for the purposes of the Regulation.249. It was not, in my view, inconsistent with his finding as to the nature of the advice given to CSID for the trial judge also to have found that CSID, at EST and Board level, was aware that “there was a dichotomy between what Regulation 19 stated and the practice”. That was, after all, the evidence. Indeed, the meeting proposed by Mr. Lonan McDowell of McCann FitzGerald in his email of the 17th June, 2003 arose precisely because of that dichotomy. Mr McDowell, in that email referred to that which had earlier been circulated by Mr O’Reilly and which had pointed to the possibility that a difficulty might arise as a result of difference between tax practice and the legislation which he considered, needed “to be worked through and understood before steps were taken to enforce recovery of the VAT”.250. In my view, it does not follow from the High Court judge’s finding concerning CSID’s knowledge of the dichotomy between the wording of Regulation 19 and Revenue practice that he was bound to conclude that PwC had advised CSID that its claim was contrary to law or that CSID understood this to be the position. The High Court judge was entitled to accept Mr O’Rourke’s evidence that at the meeting of the 25th June, 2003 he had explained to those present the divergence between the language of the Regulation and Revenue practice but had nonetheless advised he was satisfied that the lease was vatable. In other words, he was content to accept Mr O’Rourke’s evidence that he had explained to CSID that while the success of the proposed claim could not be guaranteed, it was nonetheless one which he considered to be in accordance with law. Likewise, I am satisfied that he was entitled to conclude that regardless of the dichotomy between the wording of the Regulation and the practice of Revenue, as had been explained by Mr O’Rourke, CSID understood the advice of PwC to be that its proposed claim for VAT was lawful.

251. Whilst DWW contends that the trial judge’s finding as to CSID’s knowledge of the dichotomy between the Regulation and Revenue practice was only consistent with its understanding that the advice of PwC had been that the intended claim for VAT was unlawful, that submission is not supported by the evidence.

252. The unchallenged evidence of Mr. Mulcahy was that he was satisfied from the advice of PwC that VAT was chargeable. The statement of Mr Michael Walsh was also not challenged. He too understood that VAT was chargeable on the lease and he stated that the EST had confirmed that this approach was correct. As far as he was concerned, it had never been suggested that there was any issue that CSID might be pursuing a course of action contrary to the advice it had received or that that advice was doubtful. Furthermore, Revenue had approved the methodology which, he was satisfied, meant the lease was subject to VAT.

253. Furthermore, Mr Benton, in his evidence, stated that Revenue had advised and confirmed that CSID was entitled to charge VAT and if it had advised otherwise that VAT would not have been charged. He also stated that he understood PwC’s advice to be that, notwithstanding the Valuation Office Report, VAT was nonetheless chargeable.

254. DWW maintains that the trial judge ought to have found CSID guilty of the tort of malicious abuse of the court’s process because, having been apprised of a difference between the wording of a complex tax regulation and the prevailing practice of the Revenue and other tax professionals at the time, it failed to appreciate that its proposed claim was unlawful and as a result jettison the advice of PwC that its proposed claim, which had at least been informally endorsed by its lawyers following the meeting of the 25th June, 2003, was lawful.

255. Whilst the advice of PwC and the practice of Revenue and other tax professionals at the time was ultimately established to be legally incorrect, the High Court judge was satisfied that that was not obvious at the time the proceedings were issued, as was apparent from the evidence of the wider VAT community which clearly considered that the Regulation permitted the approach advised by PwC. Clearly, the dichotomy should not have existed and Revenue should not have been operating outside of the Regulation. However, it is beyond doubt that PwC was led into error by Revenue practice and it was not on its own in this regard. Its professional opinion was mirrored in the approach of other tax experts at the time including those who had initially advised DWW.

256. Accordingly, it cannot in my view be successfully contended that just because the High Court judge concluded that CSID had been apprised, in what can only be described as pretty opaque terms, of a possible legal obstacle to its claim for VAT at the same time as it was being advised by PwC that it was entitled to claim VAT on the lease, he was bound to conclude that CSID knew, as Mr O’Moore S.C. submits, that the law didn’t allow VAT to be imposed and that their claim was “going to hit that reef” but they had decided nonetheless to go ahead. If CSID understood its claim was going to “hit a reef and fail”, why would it have decided to commenced the claim for VAT? Whilst not crucial to the outcome of this appeal, I note that at no stage in the course of the High Court proceedings did DWW go so far as to even hint at the existence of a potential ulterior motive in an effort to explain why, as it maintained, CSID would have chosen to ignore what is claimed to have been the clear and explicit expert advice it had received to the effect that its claim for VAT on the lease would fail in light of the immense repercussions in terms of costs and professional reputation that such an approach would as matter of certainty follow such an approach.

257. I am accordingly satisfied that it was perfectly open for the trial judge to make each of the findings that he made at paras. 99 and 184 of his judgment and that these are not inconsistent with each other. There was nothing inconsistent with his conclusion that CSID knew of the dichotomy between the Regulation and Revenue practice but nonetheless reasonably understood the advice of PwC to be that it was entitled to claim VAT on the lease. 

General concluding observations 
258. It is easy, armed with the benefit of the judgment of Hardiman J. to say that Regulation 19 could never have been interpreted other than in the manner therein set forth. But if this was so obvious at the time the proceedings were commenced to recover VAT on the lease, why did DWW not apply to dismiss that claim as one which was bound to fail based upon what it now states is such a clear interpretation of the Regulation? Why did DWW instead apply to remit the claim to arbitration?

259. It is understandable perhaps that DWW did not seek to counter claim for malicious prosecution as was done in Dorene v. Suedes , once the proceedings issued, given that it maintains that it was not until it obtained disclosure of the advices received by CSID from PwC that it considered it had sufficient evidence to establish the tort of malicious abuse of the court’s process, but it could have applied to dismiss that aspect of the claim as related to VAT on the lease as bound to fail. Neither did those representing DWW demand, as had been done in the Dorene case, that the claim be withdrawn on the grounds that it simply could not succeed. Instead, the claim was treated as one which was arguable and merited the determination of a tax expert, hardly the actions of a party who believed the claim to be without prospect of success.

260. Having reviewed in some detail the evidence put before the High Court and the submissions of the parties before that Court and this Court on the appeal, I am satisfied that the facts of the present case could hardly be further from those in Dorene where clear legal advice had been obtained that the claim was unstateable and where, in light of the lis pendens which had been registered, the High Court judge was content to conclude that the proceedings were being used for completely improper motive, namely to ensure that Suedes could not sell their premises and might, as a result, be forced to deal favourably with Dorene 

Conclusion 
261. Whilst I am satisfied that the High Court judge erred in law when he concluded that DWW’s claim must fail because of the decision of the Arbitrator and the High Court (Gilligan J.) in the primary litigation, I am nonetheless satisfied that his alternative basis for rejecting DWW’s claim, namely that it had not established that CSID did not have reasonable and probable cause to issue the proceedings, cannot be faulted in any material respect.

262. In concluding, as he did, that DWW had not discharged the requisite burden of proof, the High Court judge did not, as alledged, reach his decision based on an incomplete and erroneous assessment of the evidence. In particular, he did not take an impermissible approach to documentation emanating from the Revenue Commissioners evidencing its interpretation and practice concerning Regulation 19. Neither did he do so in respect of the documentation and materials which highlighted the considered opinion of tax professionals at the time as to their understanding of Regulation 19.

263. As explained earlier, trial judges cannot be expected to address each and every issue or submission advanced by parties, particularly in the context of lengthy and complex litigation. Neither can they be expected to direct their judgment to each and every document relied upon by either party. Unless it can be shown that the failure of a trial judge to address his or her mind to an issue, submission or document gravely casts in doubt the validity of their findings and/or conclusions, the appellate court should not interfere with the judgment so delivered.

264. Thus, I am satisfied that the failure of the High Court judge to address with particularity DWW’s submission that the deliberate withholding of the Valuation Office Report from DWW until after the commencement of the within proceedings does not cast in doubt the judgment of the High Court judge. The findings of fact made by the High Court judge that CSID had been advised by its tax advisors and furthermore believed when it issued its proceedings for VAT that its claim was lawful was supported by credible evidence. Furthermore, those findings were in large part made on foot of the trial judge’s assessment of the credibility of the relevant witnesses or on the basis of unchallenged witness statements, and as such are protected by the principles that emerge from Hay v. O’Grady .

265. For similar reasons, I reject the claim of DWW that the conclusions of the High Court judge are fatally undermined by his failure to consider in detail the emails of the 20th and 23rd December, 2002 or by his failure to formally rule upon its submission that adverse inferences be drawn from the failure on the part of CSID to call a number of identified witness.

266. Neither is there merit in the claim that the High Court judge fell into some fatal error when, for the purpose of determining if CSID had reasonable and probable cause to issue the VAT proceedings, he attached weight to the fact that the claim had been supported by CSID’s solicitors.

267. I also see no merit in DWW’s submission that there was a fatal inconsistency in the trial judge’s determination that CSID had reasonable and probable cause to issue the proceedings in light of his finding that both at EST level and board level, CSID was aware of the dichotomy between the Revenue practice and the strict wording of the Regulation.

268. Finally, I am fully satisfied that objectively assessed, as is the test to be applied when considering the issue of reasonable and probable cause, the evidence overwhelmingly favoured a conclusion that the reasonable actor in the shoes of CSID would have considered it had reasonable and probable cause to issue the VAT proceedings. It would in my view have been perverse had the trial judge, on the evidence and in particular having regard to his primary findings of fact, reached any other conclusion, regardless of CSID’s knowledge of the dichotomy between the strict wording of the Regulation and Revenue practice and/or the possible consequences for its claim by reason of the valuation contained in the Valuation Office Report. As to the subjective belief of CSID in the lawfulness of its claim for VAT, that is an issue relevant only in my view to malice rather than reasonable and probable cause, although if I am wrong about that the trial judge’s finding in respect of the belief of CSID is one based, inter alia , on primary findings of fact which are in any event protected by the Hay v. O’Grady principles.

269. For all of the reasons earlier identified in this judgment, I would dismiss the appeal.

Bulkbuild Pty Ltd v Fortuna Well Pty Ltd & Ors [2019] QSC 173 (16 July 2019)

SUPREME COURT OF QUEENSLAND

CITATION:
Bulkbuild Pty Ltd v Fortuna Well Pty Ltd & Ors [2019] QSC 173
PARTIES:
BULKBUILD PTY LTD ACN 136 952 102

(plaintiff)v

FORTUNA WELL PTY LTD ACN 169 357 233 AS TRUSTEE OF THE FORTUNA WELL FAMILY TRUST UNDER INSTRUMENT 715956160
(first defendant)
ANTHONY MARK FENDT
(second defendant)
PROJECT & RETAIL MANAGEMENT PTY LTD ACN 010 935 645
(third defendant)
FILE NO/S:
BS No 5640 of 2019
DIVISION:
Trial Division
PROCEEDING:
Application
DELIVERED ON:
16 July 2019
DELIVERED AT:
Brisbane
HEARING DATE:
26 June 2019
JUDGE:
Bowskill J
ORDER:
There will be an order that the proceeding against the first defendant is stayed, and the matter is referred to arbitration pursuant to s 8 of the Commercial Arbitration Act 2013 (Qld).
I will give the parties the opportunity to consider these reasons, and make further submissions if they wish to, in relation to the second and third defendants’ stay application and the court’s power to make directions. I will also hear the parties in relation to costs.
CATCHWORDS:

ARBITRATION – THE ARBITRATION AGREEMENT AND REFERENCE – ARBITRATION AGREEMENT AS A DEFENCE AND AS A GROUND FOR STAY OF PROCEEDINGS – STAY OF PROCEEDINGS – POWER OF COURT TO STAY – GENERALLY – where the plaintiff contractor claims that the first defendant principal breached the design and construction contract between them by failing to pay for the work performed – where the contract included a dispute resolution clause that constituted an arbitration agreement under s 7 of the Commercial Arbitration Act 2013 (Qld) – where the first defendant applies for an order that the proceeding be stayed until the dispute resolution clause is complied with – where the plaintiff claims that the arbitration agreement is “incapable of being performed” – whether the court must refer the parties to arbitration, and therefore necessarily grant the stay, under s 8 of the Commercial Arbitration Act 2013ARBITRATION – THE ARBITRATION AGREEMENT AND REFERENCE – HOW MATTERS MAY BE REFERRED – GENERALLY – where the second and third defendants were the superintendent at varying times under the contract between the plaintiff and first defendant – where the second and third defendants also apply for a stay of the proceedings against them – whether the second and third defendants are each a “party” to the arbitration agreement under the Commercial Arbitration Act– whether the second and third defendants are claiming (or defending) “through or under” the first defendant – alternatively, whether the court has discretionary power to grant the stay, and should exercise this discretion

 

First defendant’s stay application

[1] The plaintiff (as contractor) and the first defendant (as principal) entered into a contract for the design and construction of serviced apartments at Windsor. The plaintiff contends the first defendant has breached the contract, by failing to pay for work performed under the contract. By this proceeding, commenced on 28 May 2019, the plaintiff seeks to recover just over $4.3 million damages for that breach, or alternatively to recover that amount on a quantum meruit basis. The second and third defendants were, at varying times, the superintendent under the contract. The plaintiff also claims damages against them for negligence in relation to, inter alia, the issue of payment certificates and the treatment of variations.[2] The contract included a dispute resolution clause, in the following terms:

“41 Dispute resolution

41.1 Notice of dispute

If a difference or dispute (together called a ‘dispute’) between the parties arises in connection with the subject matter of the Contract, including a dispute concerning:

(a) a Superintendent’s direction; or(b) a claim:

    • (i) in tort;
    • (ii) under statute;
    • (iii) for restitution based on unjust enrichment or other quantum meruit; or
    (iv) for rectification or frustration,

or like claim available under the law governing the Contract,

then either party shall, by hand or by registered post, give the other and the Superintendent a written notice of dispute adequately identifying and providing details of the dispute.

Notwithstanding the existence of a dispute, the parties shall, subject to clauses 38 and 39 and subclause 41.4, continue to perform the Contract.

41.2 Conference

Within 14 days after receiving a notice of dispute, the parties shall confer at least once to resolve the dispute or to agree on methods of doing so. At every such conference each party shall be represented by a person having authority to agree to such resolution or methods. All aspects of every such conference except the fact of occurrence shall be privileged.

If the dispute has not been resolved within 28 days of service of the notice of dispute, that dispute shall be and is hereby referred to arbitration.

41.3 Arbitration

If within a further 14 days the parties have not agreed upon an arbitrator, the arbitrator shall be nominated by the person in Item 37(a). The arbitration shall be conducted in accordance with the rules in Item 37(b).

The arbitration shall be held at the location stated in Item 37(d).

41.4 Summary relief

Nothing herein shall prejudice the right of a party to institute proceedings to enforce payment due under the Contract or to seek injunctive relief or urgent declaratory relief.”

[3] It is uncontroversial that this clause constitutes an “arbitration agreement” within the meaning of s 7 of the Commercial Arbitration Act 2013 (Qld). Section 7 provides, in part:

“(1) An arbitration agreement is an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.

(2) An arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement. …”

[4] Although the contract is said to have been terminated on or about 27 or 28 March 2019, it is also uncontroversial that an arbitration agreement is independent of the underlying contract in which it is contained and therefore that the enforceability of the arbitration agreement survives the termination of the contract it relates to.[5] The first defendant applies for an order that the proceeding “be stayed until there has been compliance with the dispute resolution procedures contained in clause 41” of the contract.

[6] The first defendant argues that, by operation of s 8 of the Commercial Arbitration Act, the court must grant the stay. Alternatively, if s 8 does not apply, the first defendant seeks to invoke the court’s inherent jurisdiction to stay the proceeding until the dispute resolution provisions under clause 41 of the contract have been complied with.

[7] For the following reasons, I find that s 8 of the Commercial Arbitration Act does apply, such that the court must refer the parties to arbitration. It follows that it is appropriate to stay the proceeding as against the first defendant.

[8] Section 8 of the Commercial Arbitration Act provides:

8 Arbitration agreement and substantive claim before court (cf Model Law Art 8)

(1) 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.

(2) Where an action referred to in subsection (1) has been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the court.”

[9] This provision differs markedly from the provision which formerly applied, s 53 of the Commercial Arbitration Act 1990 (Qld), which conferred a discretion on the court to stay the proceedings if satisfied “there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement” (s 53(1)(a)). The 1990 Act was repealed by the 2013 Act (see s 41).[10] By the enactment of the Commercial Arbitration Act 2013, the Queensland Parliament adopted the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration (as adopted in June 1985, and amended in July 2006) with some adaptations for application to domestic arbitrations in Queensland. As recorded in the note within part 1A of the 2013 Act, the Act closely follows commercial arbitration legislation enacted in other Australian jurisdictions “to ensure the greatest possible harmonisation across Australian jurisdictions”. The paramount object of the Act is “to facilitate the fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense” (s 1AC(1)). Section 2A(1) of the Act provides that, in the interpretation of the Act, “regard is to be had to the need to promote, so far as practicable, uniformity between the application of this Act to domestic commercial arbitrations and the application of provisions of the Model Law …” and s 2A(3) provides that in interpreting the Act, reference may be made to the documents relating to the Model Law.

[11] Relevantly, the explanatory notes to article 8 of the Model Law (on which s 8 of the 2013 Act is based) provide as follows:

“Articles 8 and 9 deal with two important aspects of the complex relationship between the arbitration agreement and the resort to courts. Modelled on article II (3) of the New York Convention, article 8 (1) of the Model Law places any court under an obligation to refer the parties to arbitration if the court is seized with a claim on the same subject-matter unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed. The referral is dependent on a request, which a party may make not later than when submitting its first statement on the substance of the dispute. …”

[12] There is no discretion under s 8(1) of the 2013 Act. If the action brought by the plaintiff is in a matter which is the subject of an arbitration agreement, unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed, the court must refer the parties to arbitration.[13] It is not in issue between the parties that this proceeding is an action “in a matter which is the subject of an arbitration agreement”. The first defendant’s request, under s 8, has been made at an appropriate time, that is, before and certainly “not later than when submitting the party’s first statement on the substance of the dispute”. Those circumstances being met, the court must refer the parties to arbitration unless it finds that the arbitration agreement is null and void, inoperative or incapable of being performed.

[14] The plaintiff does not contend the agreement is null and void, or inoperative, but argues the arbitration agreement is “incapable of being performed” for the purposes of s 8 because the plaintiff’s respective claims against the first defendant, on the one hand, and the second and third defendants, on the other, will require the court to determine a number of similar factual matters, and there is a risk that if the claim against the first defendant is determined at arbitration, and the claim against the second and third defendants is determined by a court, the two different forums may reach different factual conclusions. It is on the basis of that risk of different factual findings that the plaintiff contends the arbitration agreement is “incapable of being performed”.

[15] I do not accept that argument. The meaning of “incapable of being performed” in a provision such as s 8 is discussed in Novawest Contracting Pty Ltd v Brimbank City Council [2015] VSC 679 at [22]- [30]and in Broken Hill City Council v Unique Urban Built Pty Ltd [2018] NSWSC 825 at [33]- [58]. In both cases, reference is made to a decision of the High Court of Singapore in Sembawang Engineers and Constructors Pte Ltd v Covec (Singapore) Pte Ltd [2008] SGHC 229 in which the following was said in relation to the term “incapable of being performed” (at [42]):

“[T]his term would relate to the capability or incapability of parties to perform an arbitration agreement. In Mustill & Boyd, Commercial Arbitration, it is stated the expression would suggest ‘something more than mere difficulty or inconvenience or delay in performing the arbitration’ (at p 465). There has to be ‘some obstacle which cannot be overcome even if the parties are ready, able and willing to perform the agreement’ (id at p 465). In Margaret L Moses, The Principles and Practice of International Commercial Arbitration (Cambridge University Press, 2008), some examples of situations where an arbitration agreement has become incapable of being performed are given. It is stated (id at pp 32-33):

‘An arbitration agreement could be incapable of being performed, if, for example, there was contradictory language in the main contract indicating the parties intended to litigate. Moreover, if the parties had chosen a specific arbitrator in the agreement, who was, at the time of the dispute, deceased or unavailable, the arbitration agreement could not be effectuated. In addition, if the place of arbitration was no longer available because of political upheaval, this could render the arbitration agreement incapable of being performed. If the arbitration agreement was itself too vague, confusing or contradictory, it could prevent the arbitration from taking place.’”

[16] Mere inconvenience, such as might arise if the claims against the second and third defendants were permitted to be actively pursued in the court, at the same time as the arbitration of the claim against the first defendant, does not render the arbitration agreement “incapable of being performed”.[17] However, for reasons I will address under the next heading, that inconvenience does support the exercise of the discretion to stay the proceeding against the second and third defendants.

[18] Apart from this argument, the plaintiff contended that clause 41, in particular sub-clause 41.4, preserves its right to bring this proceeding in the court and prosecute it, without having it referred to arbitration. At one stage, counsel for the plaintiff articulated this in terms of the parties having “contracted around” s 8. I reject this argument also. Whatever the scope of clause 41.4 might be (that is, whether it extends to a claim to recover money such as in this proceeding, or is limited to enforcing payment certificates), s 8 of the Commercial Arbitration Act is clear in its terms. Where the circumstances apply, and the arbitration agreement is not found to be null and void, inoperative or incapable of being performed, the court must refer the parties to arbitration. The plaintiff accepts the circumstances set out in s 8 apply (relevantly, that this proceeding is an action brought in a matter which is the subject of an arbitration agreement, and the first defendant has made its referral request at an appropriate time); and I have rejected its argument that the agreement is incapable of being performed. Accordingly, the referral must be made.

[19] The balance of the plaintiff’s submissions concerned discretionary considerations, on the assumption (which I find is incorrect) that the court retains a discretion whether or not to refer the matter to arbitration. It is accordingly unnecessary to address those matters.

[20] Although the Act does not expressly provide for the proceeding to be stayed as a consequence of a referral to arbitration under s 8, such an order necessarily follows.

[21] The appropriate order to make, in relation to the first defendant’s application, is therefore that the proceeding against the first defendant is stayed, and the matter is referred to arbitration pursuant to s 8 of the Commercial Arbitration Act 2013.

[22] For completeness, I note that counsel for the plaintiff raised an issue about the scope of any arbitration, following a referral (in terms of whether it would be limited to the matters in respect of which notices of dispute have been given, or extend to all matters of dispute between the parties). Counsel for the first defendant confirmed that the first defendant wanted all issues between the plaintiff and the first defendant to be dealt with in the arbitration, and there appears to be no reason why that could not occur.

Second and third defendants

[23] The second and third defendants supported the application by the first defendant, but did not initially bring their own application for a stay of the proceedings against them. An oral application was made during the hearing; formalised by the filing of an application on 26 June 2019.[24] In the Commercial Arbitration Act 2013 “party” means a party to an arbitration agreement and includes “any person claiming through or under a party to the arbitration agreement” (s 2(1)).

[25] When read with s 8, this definition enables a person claiming through or under a party to an arbitration agreement to be referred to arbitration, even if they themselves are not a party to the agreement.

[26] The second and third defendants are not parties to the arbitration agreement. But they would appear to be persons “claiming through or under a party to the arbitration agreement”. As the High Court recently affirmed, the leading authority as to the meaning of “through or under” in this context is the decision in Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332. In Tanning at 342 Brennan and Dawson JJ said:

“… a person who claims through or under a party may be either a person seeking to enforce or a person seeking to resist the enforcement of an alleged contractual right. The subject of the claim may be either a cause of action or a ground of defence. Next, the prepositions ‘through’ and ‘under’ convey the notion of a derivative cause of action or ground of defence derived from the party. In other words, an essential element of the cause of action or defence must be or must have been vested in or exercisable by the party before the person claiming through or under the party can rely on the cause of action or ground of defence.”

[27] As the plurality in Rinehart v Hancock Prospecting summarised, at [67]:

“To similar effect, but more explicitly, Deane and Gaudron JJ reasoned that whether a party to proceedings is advancing a defence through or under a party to an arbitration agreement is necessarily to be answered by reference to the subject matter in controversy rather than the formal nature of the proceedings or the precise legal character of the person initiating or defending the proceedings.”

[28] And, further, at [68]:

“… as Deane and Gaudron JJ went on to explain, it is unnecessary that the issues that the defence puts in controversy in the proceedings be limited to the matter capable of settlement by arbitration. The two need not be coextensive. It is sufficient that the defence puts in issue, among other things, some right or liability which is susceptible of settlement under the arbitration agreement as a discrete controversy.”

[29] Appreciating that no defences have been filed yet (given the timing requirement of s 8), it was nevertheless common ground that the plaintiff’s claims against the first defendant, and the second and third defendants, are closely related, and depend upon findings about the same factual matters. It was common ground that unless the plaintiff succeeds in establishing its claim for payment against the first defendant, it cannot succeed against the second and third defendants. It is essentially the same case against all parties. As the plaintiff says in its written submissions:

“23. The respective claims will involve the Court determining a number of similar factual matters, including, inter alia:

(a) whether certain building works were defective or properly carried out;(b) whether proper waterproofing was installed;

(c) whether certain works were within the contracted scope of works;

(d) whether certain variations were authorised, or validly rejected.

  1. It is necessary for those factual matters to be determined in both claims, because they go to:

(a) the amount the plaintiff is to be paid for building work under the Contract; and

(b) whether the second and third defendants ought to have certified those works, entitling the plaintiff to payment.”

[30] It follows from the overlap between the plaintiff’s claims as against the first defendant, and the second and third defendants, that it is likely an essential element of the defence by the second and third defendants will rely upon the rights vested in the first defendant under the contract, and in that sense the second and third defendants can be said to claim (or defend) “through or under” the first defendant. On this analysis, the second and third defendants are a “party”, and the referral under s 8 applies to them also.[31] Even if the second and third respondents are not within the meaning of “party”, such that the mandatory referral under s 8 applies to them also, it is within the discretionary power of this Court to stay the proceedings against the second and third defendants in any event. As it is common ground between the parties that the plaintiff must make out its claim against the first defendant, in order to succeed in its claim against the second and third defendants, it can be said that the claims against the second and third defendants are ancillary to the matters the subject of the claim against the first defendant; and that the decision of an arbitrator in relation to the latter will be determinative of the former. It therefore makes sense, as a matter of discretion, to stay the plaintiff’s claim against the second and third defendants, pending completion of the arbitration.

[32] As indicated at the hearing, however, I will give the parties the opportunity to be heard further in relation to this, should they wish to, before making orders.

Directions

[33] At the hearing, I raised with the parties whether the court has power to make directions, at the same time as a referral under s 8.[34] Section 8 of the Commercial Arbitration Act 2013 does not expressly provide for the court to do more than refer the parties to arbitration (cf s 53 of the repealed Act, which expressly provided for the court to “give such directions with respect to the future conduct of the arbitration as [it] thinks fit”).

[35] In addition, s 5 of the Commercial Arbitration Act 2013 provides that “[i]n matters governed by this Act, no court must intervene except where so provided by this Act”. Section 6 confers particular functions on the Supreme Court, but not a general power to make directions following a referral to arbitration. The conduct of arbitral proceedings is dealt with in part 5 of the Act. Those provisions make it plain that it is the arbitral tribunal which is to determine the rules of procedure. There is a general obligation imposed on the parties by s 24B(1) to “do all things necessary for the proper and expeditious conduct of the arbitral proceedings”, which includes taking without undue delay any necessary steps to obtain a decision (if required) of the court in relation to a function conferred on the court under s 6 (s 24B(2)(b)).

[36] From a consideration of the provisions of the Commercial Arbitration Act 2013, it does not seem to me this Court has power to make any directions, further to the referral to arbitration. However, I will give the parties an opportunity to be heard further in relation to this also, at the time of delivering my reasons.

Orders

[37] There will be an order that the proceeding against the first defendant is stayed, and the matter is referred to arbitration pursuant to s 8 of the Commercial Arbitration Act 2013.[38] I will give the parties the opportunity to consider these reasons, and make further submissions if they wish to, in relation to the second and third defendants’ stay application and the court’s power to make directions. I will also hear the parties in relation to costs.

Dandy Dan’s Fish Market Limited v. Fish, Food and Allied Workers-Unifor, 2019 NLSC 140

IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR

GENERAL DIVISION

Citation: Dandy Dan’s Fish Market Limited v. Fish, Food and Allied Workers-Unifor, 2019 NLSC 140

  Date: July 18, 2019

Docket: 201801G2759

BETWEEN:

DANDY DAN’S FISH MARKET LIMITED

APPLICANT

AND:

FISH, FOOD AND ALLIED WORKERS – UNIFOR

FIRST RESPONDENT

AND:

ASSOCIATION OF SEAFOOD PRODUCERS

SECOND RESPONDENT

 

Before:  Justice Alphonsus E. Faour

 

Place of Hearing:                             St. John’s, Newfoundland and Labrador

Date(s) of Hearing:                          February 8, 2019

Summary:

 

The Applicant/Processor sought judicial review of the decision of an Arbitrator.  The arbitration arose from a grievance by the Respondent/Union that the Applicant/Processor had breached a term of a collective agreement covering the conditions attached to a price-setting mechanism for payment to its fish harvester members.  The Applicant/Processor submitted that the Arbitrator’s decision was unreasonable when he upheld the validity of the terms of the collective agreement and related documents.

The decision of the Arbitrator was upheld.  There was authority to impose a condition imposing levy to ensure there was adherence to grading protocols.  The application for judicial review was dismissed, with costs to the Respondent.

 

REASONS FOR JUDGMENT

 

FAOUR, J.:

INTRODUCTION

[1]            This is an application for judicial review of a decision of an arbitrator.

[2]            The Applicant, Dandy Dan’s Fish Market Limited (the “Applicant/ Processor”) is a fish processor, and was subject to an Agreement between the Respondent Union and the Respondent Association respecting the setting of prices to be paid by processors for fish in the Province.  The Applicant/Processor takes issue with the findings of an Arbitrator who found that it was liable to pay certain amounts to the Union in pursuance of the Union’s role in the grading of fish.  The decision of the Arbitrator was issued to the parties on February 26, 2018.  This application was filed April 20, 2018 and was heard on February 8, 2019.  The Association did not play a role in these proceedings.

[3]            There is no disagreement as to the facts.  The parties agree that the legislative regime required submission of a payment by the Applicant/Processor for a specific purpose.  They also agree that the Applicant/Processor did not submit the payments as required.  They disagree on the interpretation of the legislation, the Agreement and the Schedule as it applies to the requirement that the Applicant/Processor make payments to the Union.

[4]            The matter was submitted to an Arbitrator.  Both parties agreed that the arbitration was properly constituted, and neither had any objections to the process during the hearing before the Arbitrator.  The Arbitrator resolved the issue in favour of the Union, and ordered payment of the fees in accordance with the agreement.  The Applicant/Processor seeks judicial review from this court.

[5]            The issues raised in this proceeding focused on the interpretation of the legislation and Agreement as it related to the imposition of a levy in favour of the Union to provide for a verification process.  Both counsel have raised several issues.  The first, arising in any case involving judicial review of the decision of an administrative tribunal, is the appropriate standard of review.  In addition, the Applicant/Processor has raised several points where it is argued the Arbitrator committed errors giving rise to either reversal, or remittance for further consideration.  Before addressing the issues, I will review the background to this matter.

THE LEGAL FRAMEWORK

[6]            The Agreement between the parties is made under the authority of the Fishing Industry Collective Bargaining Act, R.S.N.L. 1990, c. F-18(FICBA).  The Agreement was set, following submissions, by the Standing Fish Price-Setting Panel (the “Panel”), which is established under the authority of section 19.1 of the FICBA.  Its authority arises from section 19.2, which states, in part:

             19.2     The duties of the panel are

            . . .

             (d)      to set prices and conditions of sale for a fish species where parties have engaged in collective bargaining and have been unable to agree or where parties have refused to engage in collective bargaining;

[7]            Prices have been set by virtue of a Master Collective Agreement (MCA) issued by the Panel on January 30, 2015, to have effect during 2015, and thereafter from year to year unless notice to terminate is provided by either party.

[8]            The MCA has a series of Schedules attached, dealing with the details associated with different species of fish.  The Atlantic Cod Schedule (the “Schedule”) was accepted by the Panel on May 20, 2016, and applies to purchases of cod during the period relevant to these proceedings.

[9]            The provision of the Schedule at issue is section 27.  It reads:

  1.    Each processer will pay $0.01 per pound of fish purchased, either directly or through sub-agents, to pay for union graders to independently check the sampling and grading process to ensure that the protocols set forth, attached to this schedule, are being adhered.  This payment will be forwarded to the FFAW|Unifor on a weekly basis.

[10]        The Applicant/Processor did not remit funds in compliance with section 27 during the relevant period.  The Union filed a grievance alleging breach of the Agreement, seeking payment.  The issue raised by the Applicant/Processer is whether it is obligated to remit these payments to the Union.  Arbitrator Ronald W. McCabe was appointed to hear the grievance, and issued his decision on February 20, 2018.  He allowed the grievance, and found that the Applicant/Processor had violated the MCA by its failure to make payments pursuant to section 27.

[11]        At paragraph 34 of his decision, the Arbitrator defined two broad issues succinctly:

[34]  The parties admit that a Collective Agreement, comprised of the Master Collective Agreement and the Schedule is binding, but diverge over the validity and interpretation of section 27 of the Schedule.  The Processor questions the jurisdiction of the Panel to make section 27 because it suggests the jurisdiction is limited to price setting.  The Union responds that any challenge to jurisdiction of the Panel is a matter for judicial review rather than arbitration.

[12]        I will address the jurisdictional issue, and then deal with the Applicant/Processor’s submissions on the Arbitrator’s interpretation of section 27 of the Schedule.  The Standard of Review is the first issue which must be addressed.

The Standard of Review

[13]        As for the current state of the law, the Applicant/Processor argues that for most of the questions arising from this matter, the standard of reasonableness applies.  The Union does not take issue with this characterization.  However, in one respect, the Applicant/Processor argues that the higher standard of correctness applies.  It says that on one issue, the Arbitrator actually amended the Collective Agreement, and that one decision ought to attract the more rigid standard of correctness.

[14]        The MCA governs the authority of the Arbitrator.  Article 11.07 sets out the scope of review when a matter proceeds to arbitration.  It reads as follows:

The decision of the arbitrator on the matter at issue shall be final and binding on the parties involved in the dispute, but in no event shall the arbitrator have the power to add to, subtract from, alter or amend this Agreement in any respect.

[15]        The Applicant took the view that the Arbitrator, in reaching his decision, went beyond the terms of the Agreement, and effectively amended the terms of the Agreement.  Counsel also argued that the validity of section 27 was in doubt thereby bringing into question the entire scheme outlined in the agreement.

[16]        Counsel cited N.A.P.E. v. Newfoundland (Treasury Board), 2011 NLTD(G) 82, where Justice Dunn held that if the court finds the agreement was amended, then correctness applies, at paragraph 27:

  1.    The foremost question to be answered is whether or notArbitrator Scott exceeded his jurisdiction by amending or changing previous awards as submitted by the applicant/Union. As set out in Section 40(4) it is correct to say an arbitration board shall not make an award which would amend or change a collective agreement, a judgment or an earlier award. On this argument an award which amends an earlier award is an excess of jurisdiction.

[17]        The Applicant/Processor correctly states the law.  A question of jurisdiction does attract the higher standard of correctness.  However, as I will elaborate below, I am not convinced that this situation can be characterized as amendment.  The Arbitrator did not add the levy to the agreement.  He provided an interpretation that it applied to the Applicant/Processor.  Accordingly, I find that the lower, reasonableness standard applies to his decision.  The issue in this matter will relate to the reasonableness of his interpretation.  The approach to be taken is guided by the statement of the Court of Appeal in Layman v. Layman Estate, 2016 NLCA 13 (CanLII), where the interpretation placed on a private agreement by an arbitrator was in issue.  The court noted, at paragraph 23:

  1.    The applications judge failed to undertake the analysis of the decision required by Nurses’ Union. . . . The applications judge found that the arbitrator did not explain why he concluded that the Contract was not ambiguous, or why no interpretation of the Contract could permit the estate of Patrick Layman to recall the Large License or confer any rights upon the estate. However, those were not the relevant questions that a judge must ask when applying a reasonableness standard on judicial review either of an administrative tribunal or of a commercial arbitrator, particularly in light of Sattva Capital Corp.The real questions the applications judge had to ask herself were:

  1.   Whether in light of the record before him, the reasons reveal that the arbitrator chose an interpretation of the Contract that its words could bear.

  1.  Whether the interpretation chosen by the arbitrator was justifiable in light of the facts and the law, even if there were competing interpretations.

[18]        This is the approach that I am bound to take in a review of the Arbitrator’s decision and reasons.  I will assess the decision on the standard of reasonableness and address the questions posed by the Court of Appeal in the extract from the Layman case, above.

 

The Merits of the Decision

[19]        There are several questions raised by the parties, and for each, the direction of the Court of Appeal in Layman is relevant.   The first relates to whether the Panel’s issuance of the Schedule, in particular, section 27, was valid as being within its authority.  The Union submitted that this argument was prohibited as a collateral attack on the Panel’s jurisdiction.  Several other issues focusing on the reasonableness of the interpretation of section 27 of the Schedule will also be addressed.  Accordingly, I will deal with the following issues:

1)   Whether the argument concerning the Schedules is a collateral attack on the Panel’s jurisdiction;

2)   Nature of the Levy and Grading Scheme;

3)   Whether Graders were to be Qualified under the Fish Inspection Act;

4)   Whether payment was required in the absence of grading;

5)   Whether it was appropriate to apply the levy; and,

6)   Whether the Arbitrator amended the Agreement.

Collateral Attack

[20]        The Applicant/Processor submitted that the Panel exceeded its jurisdiction on several grounds.  First, it submitted that by virtue of Article 3 of the MCA, its jurisdiction was limited to setting the price of fish, and that accordingly, the Schedule to the MCA which set conditions as well as price, was without authority.  Article 3.01 reads:

During the term of this Agreement, the parties agree that all purchases of fish shall be made in accordance with prices set forth in the Schedules executed between the parties at which time such Schedules will be deemed to be part of this Agreement.

[21]        Second, it submitted that the Panel did not have the jurisdiction to bind processors who did not make submissions before it.  And finally, that since section 27 was improperly inserted into the Schedule, the Panel is limited by the MCA to deal only with the price of fish, and nothing else.

[22]        Overall, the Applicant/Processor submitted that there was insufficient authority in either the MCA or the FICBA to permit the Panel to include grading of fish as a condition in the Schedule.

[23]        The Respondent Union argued that these arguments were an impermissible attack on the Panel’s authority.  It submitted that it was not open to the Applicant/ Processor to launch an attack on the validity of section 27 of the Schedule in a review of an Arbitrator’s decision. There may be another forum for attacking the decision of the Panel, but it is not in this proceeding.  It pointed out that the Panel is a statutory tribunal, and relies on the terms of the FICBA for its jurisdiction.

[24]        These arguments were made before the Arbitrator, who dismissed the Applicant/Processor’s submission that the Panel had exceeded its authority.  Following a review of the history of the legislation and Collective Agreement, and the relationship of the price-setting mechanism to the overall economy of the Province, the Arbitrator concluded that the Panel’s decision to provide for conditions in the Schedule was within its jurisdiction.  He cited a decision of this Court, and then went on to reach a determination on jurisdiction, at paragraphs 37 and 38 of his decision:

[37] . . . . Hoegg, J also considered the authority of the Panel in Association of Seafood Processors Inc. v. Standing Fish Price-Setting Panel, 2008 NLTD 93 (CanLII) where she commented on the privative clause 19.11(2), at paragraph 26, as follows:

This privative clause states that the panel’s decision is final and binding on the parties.  Of further note is the time frame for a Panel to make decisions.  I see this as an indication that the Legislature recognizes the sensitivities of timing in the fishing industry and trusts the Panel to make speedy decisions which take immediate effect.  This privative clause suggests to me that some deference ought to shown [sic] to the Panel’s decision.

[38]  I do not consider it necessary to rule on the Union submission that a challenge to the jurisdiction of the Panel should be made by judicial review, because in addition to the rulings of the learned judges cited above, I find that the plain words of the noted provisions of FICBA clearly establishes that the Panel has authority over both prices and conditions of sale which define all aspects of the interaction between fishers and processors not simply limited to price.

[25]        I note that specific authority is provided in paragraph 19.2(d) of that Act:

19.2 The duties of the panel are

            (d)  to set prices and conditions of sale for a fish species where parties have engaged in collective bargaining and have been unable to agree or where parties have refused to engage in collective bargaining;

[26]        In addition, where a collective agreement is in place, section 19.11 provides authority to set both price and conditions of sale:

19.11 (1) Notwithstanding subsection 19.9(3), where the parties to collective bargaining are a certified bargaining agent and an accredited processors’ organization or a processors’ organization that represents processors in the province that process the majority percentage of a fish species and those parties appear before the panel under subsection 19.9(2), the panel shall hear and consider their positions on price and conditions of sale and shall, in accordance with the regulations, make a decision with respect to the matters in dispute between the parties relating to price and conditions of sale.

[27]        The FIBCA clearly provides authority for the establishment of the Panel, and for the Panel to establish both price and conditions of sale.  The decisions of the Panel, in this case, are set out in the Schedule to the MCA, and in particular, section 27.  In raising this issue, the Applicant/Processor is questioning the authority of the Panel to set conditions.  The Respondent/Union responds that attacking the Panel is not permissible in the context of a judicial review of the Arbitrator’s decision.

[28]        In Memorial University of Newfoundland v. NAPE, Local 7804, 2014 NLTD(G) 128, where a similar challenge of a panel’s authority was taken before an arbitrator, Justice Paquette stated, at paragraphs 28 to 29:

  1.    Memorial could have challenged the Board’s decision before the proper forum: through review proceedings before the Board or by way of an application to the Court for judicial review.Arbitrator Browne was not in a position to conduct an appeal of the Board’s order, just as the Board could not conduct a review of the previous arbitration awards. The Supreme Court of Canada in Figliola at paragraph 47 describes the constraint as follows, citing the trial judge’s reasons:

  1. … The complainants are attempting to pursue the matter again, within an administrative tribunal setting where there is no appellate authority by one tribunal over the other. [para. 54]

  1.    Memorial’s position thatArbitrator Browne committed a jurisdictional error by accepting the Board’s referral to arbitration of “outstanding matters” is an impermissible collateral attack on the Board’s decision. Nothing in this decision is to be taken as an adjudication of the Board’s authority to have made its order.

[29]        In reviewing the arguments of the Applicant/Processor about the jurisdiction of the Panel, I find they are wanting.  It first says that the Panel was limited only to setting the price of fish.  It’s authority to do so is contained in Article 3.01 of the MCA.  That provision does not limit the Panel’s authority, and does not exclude the Panel’s authority to make other determinations in accordance with the legislative scheme.

[30]        Next, the Applicant/Processor argued that because it did not make submissions before the Panel on price and conditions, the provisions of the Schedule should not bind it.  The Arbitrator articulated the binding nature of the agreement at paragraph 41:

[41]   An agreement binding on all processors of a species arises in three circumstances:

(a) direct negotiations between parties to the agreement (FIBCA subsection 19.8(2));

(b) order of the Panel (FIBCA subsection 19.9(3), 19.10 or 19.11)); or

(c) in the absence of an accredited processors’ organization, by negotiation between a certified bargaining agent and processors who process the majority percentage of the fish species (FIBCA subsection 21.1(1)).

[42]   Although the Master Collective Agreement is between the Union and ASP, the processor’s organization did not negotiate the Schedule and consequently authority for the formation of a binding agreement must be found in action by the Panel. . . . [The decisions of the Panel] support a finding that the Schedule constitutes an agreement binding on all processors pursuant to the authority of the Panel exercised in accordance with sections 19.9…

[31]        Finally, the Applicant/Processor challenged the insertion of section 27 in the Schedule on the basis that the MCA limits the Panel’s authority to setting price.  I am satisfied that this is an incorrect interpretation of the legislative provision.  I have referred elsewhere to provisions which explicitly provide authority to establish both prices and conditions of sale (see section 19.11(1) of FIBCA).

[32]        I am satisfied that the Panel does have authority to deal with both price and conditions of sale, based on the clear direction contained in the legislative scheme.  More importantly, the additional issue of collateral attack is relevant.  The Applicant/ Processor is in error when it asks the Court to assess the Panel’s authority within the context of judicial review of an Arbitrator’s decision.  Even though the Arbitrator responded to the Applicant/Processor’s arguments and validated the jurisdiction of the Panel, it was not the Arbitrator’s role to review the Panel’s authority.  That is the province of a superior court.  This proceeding is not about the validity of the Schedule, or the authority of the Panel to make the decision.  It is about whether the Arbitrator’s decision conformed to the requisite standard.  The Applicant/Processor has not sought judicial review of the Panel’s determination of the issues contained in the Schedule.  Therefore, this proceeding must be limited to an assessment of the Arbitration Award.

[33]        I accept the finding of the Arbitrator that the Panel had the authority to set the conditions in the Schedule as binding on all processors.  I also accept the Union/Respondent’s submission that this argument constitutes an impermissible collateral attack on the Panel’s jurisdiction.  The Applicant/ Processor submitted that its argument was not that the Panel had no jurisdiction generally, but lacked jurisdiction only on this one issue.  This, I took as an acknowledgement that it was an attack on the Panel’s jurisdiction, even if limited to this one issue.  It was the jurisdiction of the Panel, on the issue of the inspection regime, that was the core of the argument.  This kind of attack is not appropriate in the context of a judicial review of the decision of the Arbitrator.  This argument of the Applicant/Processor on this point must fail.

Nature of the Levy and Grading Scheme

[34]        The parties disagreed on whether the levy imposed on processors was a payment for the service of grading, or the provision of revenue for the Union to establish a monitoring process.  It was argued that the Arbitrator improperly re-interpreted the words “union grading” and “grading process” in that section to mean a “… system of cross check or monitoring …” to ensure adequate quality.  (Award: paragraph 60.)

[35]        A proper reading of section 27 does not disclose a reference to “union grading”.  It does refer to “union graders” who are to “check the sampling and grading process”.  The Arbitrator interpreted this provision in light of the preceding sections which set out the obligations of processors and harvesters with respect to quality control.

[36]        In arguing that the Arbitrator’s interpretation of the nature of the levy was in error and unreasonable, the Applicant/Processor referred to other sections in the Schedule.  Section 18 of the Schedule requires grading before processing.  Therefore, it was argued that section 27 placed an obligation on the Union to perform grading of fish as it arrived at a plant for processing.  However, this is a misreading of that provision, which is part of the obligations of harvesters before delivering catch to processors, and does not bear on the scheme contemplated in section 27.

[37]        It was also suggested that the protocols set out in sections 3 to 22 of the Schedule raised an obligation on the Union to participate in grading activities.  Again, this, in my view, misreads the Schedule, which does not place any obligation on the Union in this regard.  The only part of the Schedule which provides for Union activity is section 27, which imposes a levy to support the Union’s monitoring activities with respect to the grading process, and does not impose an obligation to be involved in “grading”.

[38]        The Arbitrator decided, at paragraph 59, that the levy was to finance the work of the Union to monitor employees of processors:

[59]   Upon consideration of the factual matrix of the Collective Agreement as a whole, the parties’ significant focus on quality of their product and the historic labour relations between the parties that sometimes manifests skepticism or distrust, I find the work required of the Union by section 27 is to check, monitor, observe or audit the work of the Processor’s employees taking samples and grading the fish delivered by fishers against the procedures and protocols set out in the Collective Agreement (including the Schedules that establish the attributes for each grade of fish) as verification that such processes are being performed correctly.  “Check” does not mean “grade.”

[39]        The terms “Check” and “grade” are a reference to section 27 of the Schedule.  It requires that the Union graders “… independently check the sampling and grading process to ensure that the protocols … are being adhered.”  It does not require that the Union employees be engaged in grading of fish as contemplated by the Fish Inspection Act, R.S.N.L. 1990, c. F-12 (FIA).   In setting out a series of obligations on harvesters and processors in sections 3 to 22, the Schedule then goes on to assign to the Union the task of monitoring adherence to these protocols.  The $0.01 levy on each pound of fish processed was meant to finance these activities.

[40]        Applying the questions articulated by the Court of Appeal in the Layman case, I am satisfied that the interpretation of the nature of the scheme set out in section 27  was reasonably based on the wording of the MCA and the Schedule, and the evidence presented.  Accordingly, the interpretation was justifiable and logically flowed from both the evidence before the Arbitrator, and his assessment of the legislative scheme.  The Arbitrator met the standard of reasonableness on this point.

Whether Graders were to be Qualified under the Fish Inspection Act

[41]        The Applicant/Processor argued that “union graders” should have been qualified as inspectors under the FIA, and since they were not, it was an error for the Arbitrator to find the contrary.  Reference was had to Article 5:03 of the MCA, which set the standards to be observed when a dockside grading program is in place.  Paragraph 5:03(c) requires that any grading contractor be independent of the processors’ association, the Union, or any individual harvesters or processors, and be licensed, presumably under the FIA.

[42]        On a review of the MCA including the Schedule, it becomes apparent that the Applicant/Processor’s submission is not supported by the plain meaning of those documents.  First, Article 5 of the MCA is only relevant when a dockside grading program is in effect.  It did not apply generally to inspections and grading of fish.

[43]        Second, a reading of the Schedule shows that the Panel intended for each of the actors in the system to have certain responsibilities.  Sections 3 to 11 imposed certain obligations respecting inspection on the Applicant/Processor.  In section 3 it is the processor who must have employees to perform quality control.  It reads in part:

  1. Sampling and grading will be conducted by qualified personnel employed by the processer purchasing the fish.

[44]        This part of the Schedule imposes obligations respecting grading on the Applicant/Processor.  It is not relevant to the responsibilities of the Union under section 27.  Accordingly, this portion of the Schedule does not engage the requirements of the FIA, and does not impose an obligation on the Union.

[45]        Sections 12 to 22 impose obligations on fish harvesters.  It requires harvesters to maintain certain protocols to ensure a high quality product is delivered to processors.

[46]        Finally, section 27 establishes a verification process, or auditing process, by which the Union had a role to “… independently check the sampling and grading process …” established under other sections in the Schedule.

[47]        The Arbitrator interpreted these provisions in light of evidence from several witnesses called by the Union which emphasized the importance of the maintenance of a quality product to the fishing industry generally.  He described the context for these provisions at paragraph 48 of his decision:

[48]  What then is the context against which I am to interpret this agreement?  The fishing industry is a heavily regulated endeavor greatly impacted by the vagaries of nature.  The product of the fishing industry is not produced under controlled conditions in a manufacturing facility, but rather the availability, quantity, quality and value of its output is subject to natural phenomena beyond the participants’ control.  The influence of fishers and processors on the ultimate value of product is limited to their methods and procedures for handling a wild and perishable resource to maximize its value for all participants.  Attention to specifying such procedures seems to be a reasonable area for attention in the commercial relationship between the parties.  One would expect agreements governing this relationship to contain provisions setting out the methods to be employed by the parties to enhance product value.  In fact, the Schedule, and its appendices, mostly contain provisions establishing the manner in which fish are to be handled prior to and at the point of delivery to the processor.  From directives to bleed, gut and wash fish at sea within 15 minutes of landing and then store in ice to maintain temperature below 4C, documenting the chain of possession and finally sampling and grading of the product at the fish plant, the Schedule sets out the conditions that must be followed by the fishers to get paid in accordance with the grade applicable to the quality of the fish that they deliver.  These descriptions of what fishers must do to get paid, constitutes “conditions of sale.”  The first aspect of the factual matrix informing my interpretation of the Collective Agreement is that the parties have incorporated detailed provisions prescribing procedures for handling fish prior to, and at the point of, delivery to the Processor as conditions of sale prescribing things that must be done by the fisher to get paid.

[48]        Having articulated the importance to all actors in the industry of ensuring a quality product, the Arbitrator interpreted the Schedule in a manner that affirmed the duties and roles of each of the players in the system.  Processors are required to have employees to follow certain quality protocols after fish is delivered to their plants.  Harvesters are required to follow quality protocols after fish is taken from the water.  And the Union’s role is to undertake a process to verify that there is adherence to the protocols.  The Arbitrator was clearly alive to the context within which the legislative scheme was established, and interpreted section 27 in that light.

[49]        I conclude that the Arbitrator has satisfied the requirements for justification and logic within the decision-making process.  His interpretation is supported by his assessment of the evidence and the law, and fall well within the range of possible competing interpretations.  Accordingly, his decision on this point meets the standard of reasonableness.

Whether payment was required in the absence of grading

[50]        The Applicant/Processor took the position that the Arbitrator was in error in his interpretation that payment was required under section 27 even in the absence of grading at the premises of the plant.  It was submitted that as Union staff did not actually monitor the processing of fish at the Applicant/Processor’s plant, no obligation to pay arose.  While staff visited the Applicant/Processor’s plant on at least thirteen occasions, no production was taking place on those occasions, so therefore no observations were made in respect of the processing of fish.

[51]        The Union responded that the Arbitrator’s conclusion concerning the nature of its obligations under section 27 was reasonable.  The section provided direction for “… Union graders to independently check the sampling and grading process to ensure that the protocols … attached to this Schedule, are being adhered.”  According to the Union, this approach required its staff to monitor the process for grading in place at each processor, and whether the responsibilities set out in the Schedule for quality control were being followed.

[52]        The Union pointed out two aspects of the regime established under section 27 that appeared relevant.  First, that an auditing or “checking” program would not require attendance at the plant each time production was carried on.  The notion of “spot checks” would be consistent with the nature of the monitoring program which was envisaged by the Schedule.  Second, the Union submitted that most of the Applicant/Processor’s arguments focus on the failure to perform “grading”.  The interpretation taken by the Arbitrator, that the program did not involve “grading” by the Union, but did involve a monitoring and checking of the grading protocols in place at the various processors, would answer that argument.

[53]        The Arbitrator’s decision on the nature of the levy, that is, to establish a system of monitoring to check that there is adherence to the quality protocols, leads directly to a conclusion that payment of the levy is not tied to grading services being performed by the Union at the Applicant/Processor’s plants.  It was a reasonable finding that payment was required whether or not the Union staff attended at the plant while processing was being carried on.

Authorization to Charge the Levy

[54]        The Applicant/Processor argued that the Arbitrator unreasonably found that the Union had the authority to impose the levy, without it having received services.  It suggested that the reasonable interpretation of the Schedule, including section 27, was that the levy was not unconditional, but was conditional on the Union doing certain grading-related work.  It cited three conditions implicit in the terms of section 27.  The first, that the persons who participated in the monitoring of the quality protocols must be “union graders”.  It submits that there was no evidence of the qualifications of the individuals concerned to enable a reasonable finding that they were able to competently carry out the assigned task.

[55]        The second condition outlined by the Applicant/Processor involved the requirement “… to independently check of the sampling and grading process.”  It submitted there was no evidence of any checking at the plant of the Applicant/ Processor.  In fact, the evidence was to the contrary, that every time the Union employees attended at the plant, the Applicant/Processor was not actually processing fish.

[56]        The third condition is related to the other two.  The Applicant/Processor submitted that there was no evidence of ensuring that there was adherence to the protocols set out in the Schedule.  This condition, like the other two, was impossible, it was submitted, because no Union employee attended at the plant while product was being processed.

[57]        The Union submitted that in citing these conditions as a prerequisite to charging the levy, the Applicant/Processor misapprehended the nature of the monitoring scheme as set out in the Schedule.  It cited the Arbitrator’s decision at paragraph 60, where he stated:

[60]  . . . The evidence discloses that union staff made 13 visits to the Processor’s plant during 2017 but did not observe any sampling or grading because the Processor was not in production during any of those attendances.  Just as it is not feasible to grade each fish (hence the sampling protocol) the oversight function carried out by the Union cannot reasonably be expected to observe the grading and processing of each fish delivered to a processor, or to specifically observe operations of the Processor.  It seems to me that the purpose of section 27 is to provide a system of cross check or monitoring that benefits all parties engaged in the fishery by providing assurance of proper treatment to the fishers and a vehicle to investigate and respond to quality issues…

[58]        In answer to the submission of the Applicant/Processor that there was no evidence presented concerning the Union’s monitoring process, the Union cites a further quote from paragraph 60:

. . . The evidence of Messrs. Broderick and Hedderson that the Union employs people experienced in the fishery who receive training and familiarization in the processes and protocols under observation, permanently stations staff at the largest cod processing facility in the province, perform random, but regular, inspections of other plants and responds to complaints from fishers or processors satisfies me that the Union is performing the services contemplated by the words used in section 27.

[59]        There was evidence that responding to complaints from various players in the fishery was an important part of the monitoring process (Arbitration Award, paragraph 19).  The Arbitrator heard evidence that no complaints had been received about the Applicant/Processor’s handling of product.  This fact, together with the thirteen visits by Union graders to the plant, provided the Arbitrator with a picture of a multi-faceted monitoring process.

[60]        The Arbitrator dealt with each of these arguments of the Applicant/Processor in his examination of different aspects of the legislative scheme.  With respect to the first, that there was no evidence of the qualifications of the Union staff, the Arbitrator’s reference to the evidence called by the Union answered this issue.  The second condition, that there was no evidence of checking adherence to the protocols because there was no processing being carried on each time Union staff visited the Applicant/Processor’s premises, is answered by the finding on the nature of the monitoring scheme.  The Arbitrator found that this was a “checking” and “monitoring” program, not a grading program.  Accordingly, as long as the Union established such a program, it met its obligations under the Schedule.  The third condition is related to the other two.  The nature of the program answers the Applicant/Processor’s argument on this point.

[61]        Accordingly, the Arbitrator’s decision is based on a rational and logical assessment of both the evidence and the legislative scheme.  The conclusion is also justifiable among the competing interpretations and therefore meets the standard of reasonableness.

Whether the Arbitrator Amended the Agreement

[62]        The Applicant/Processor argued that the Arbitrator engaged in an impermissible amendment to the agreement by removing the Union’s obligation to be engaged in “grading”.  The Arbitrator acknowledged his limits to amend the agreement at paragraph 51, where, after citing a case from Ontario, he noted:

. . . such an interpretation would conflict with my authority under section 11:07 of the Master Collective Agreement by constituting an amendment of the agreement by subtracting words therefrom.

[63]        The Applicant/Processor, however, argued that he did just that by requiring payment of the $0.01 fee without requiring that the Union take “… any role in the Processor’s grading actions.” (Applicant’s Brief, paragraph 52).

[64]        It was argued that the Arbitrator, in effect, re-wrote the meaning of section 27, by not applying the provisions of the FIA to Union “graders”.  Article 5 of the MCA was cited as authority for requiring the application of the FIA to this process.  However, it is clear that these provisions apply only where a dockside grading program (DGP) is in existence.  The evidence was that a DGP only exists with respect to crab and shrimp landings.  All other programs require grading by processors within their respective plants.

[65]        In arguing that the Union graders were required to be registered under the FIA, the Applicant/Processor misses the point that there is no requirement in either the MCA or the Schedule for the Union to be engaged in grading of fish landings.  The Arbitrator summarized the requirements at paragraph 55 of the Award:

[55]   . . .  I find that the parties intended “union graders” to describe personnel employed by the Union whose training and experience in the fishery enables them to competently conduct the oversight to be performed by the Union, by reason of being able to independently observe the quality of a particular fish sample against the established criteria and pass judgement that the sampling procedure and assigned grade appeared appropriate and in accordance with the specified protocols.

[66]        The Applicant/Processor’s argument is based on requiring licensing under the FIA and its regulations.  However, there is nothing in the MCA or the Schedule which makes this requirement.  In fact, since neither the MCA nor the Schedule refers to “licensed union graders”, for the Arbitrator to have required licensing under the FIA would be an impermissible amendment to the agreement.

[67]        For the reasons articulated above, I find that there was no amendment to the agreement by the Award.  The Arbitrator engaged in an exercise in interpretation, which was the purpose of the arbitration itself.   He went through a process of examination of the relevant documents, applying it to the record, including the testimony of several witnesses, as presented during the hearing.  His conclusion was based on a review of the law and the evidence, and rather than amend, he provided an interpretation of the Schedule which is both logical and justifiable.  Since there was no amendment, the Arbitrator did not reach a prohibited conclusion.

CONCLUSION

[68]        The Applicant/Processor sought judicial review of the decision of an Arbitrator that it was subject to a levy imposed by section 27 of the Master Collective Agreement entered into under the authority of the FICBA.  Following a review of the decision, and the arguments of the parties, I am satisfied that the Arbitrator’s decision met the applicable standard of reasonableness, and therefore his decision should stand.

[69]        Accordingly, the application is dismissed, and the Award of Arbitrator McCabe, issued on February 26, 2018 as between the parties, is hereby affirmed.  The Respondent/Union will have its costs in accordance with Column 3 of the Scale of Costs contained in the Appendix to Rule 55 of the Rules of the Supreme Court, 1986, S.N.L. 1986, c. 42, Sch. D.

                                                                 _____________________________

                                                                 ALPHONSUS E. FAOUR

Justice

Sunnybrook Health Sciences Centre v. Aramark Canada Ltd., 2019 ONSC 4183

CITATION: Sunnybrook Health Sciences Centre v. Aramark Canada Ltd., 2019 ONSC 4183

DIVISIONAL COURT FILE NO.: 494/18

DATE: 20190719

ONTARIO

SUPERIOR COURT OF JUSTICE

DIVISIONAL COURT

Swinton, Tzimas and Myers JJ.

BETWEEN: )

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SUNNYBROOK HEALTH SCIENCES CENTRE

Applicant

– and –

ARAMARK CANADA LTD., CANADIAN UNION OF PUBLIC EMPLOYEES, LOCAL 790, and RUSSELL GOODFELLOW

Respondents

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) )

) )

) )

) )))))))

Brian Smeenk and Megan Beal, for the Applicant

 

 

Adam Guy, for the Respondent Aramark Canada Ltd.

Mark Wright and Mary-Elizabeth Dill, for the Respondent Canadian Union of Public Employees, Local 790

  )  
  )  
  ) HEARD at Toronto: June 20, 2019

Swinton J.

 

Overview

[1]               The applicant, Sunnybrook Health Sciences Centre (“Sunnybrook”), has brought an application for judicial review seeking to quash an arbitration award dated March 19, 2018.  Sunnybrook was not given notice of the arbitration hearing, which dealt with a policy grievance brought by the respondent Canadian Union of Public Employees, Local 790 (the “Union”) claiming that the respondent Aramark Canada Ltd. had breached the collective agreement to which they were parties.  That collective agreement applies to a bargaining unit of employees at St. John’s Rehabilitation Hospital in Toronto (“St. John’s”).

[2]               The Union had claimed that Aramark violated the collective agreement by contracting out patient food services work to employees at Sunnybrook, resulting in the lay-off of a large number of bargaining unit employees. The arbitrator held that Aramark had violated the collective agreement.  In the present proceeding, Sunnybrook seeks an order quashing the arbitration award on the basis that it was denied natural justice because it was not given notice of the arbitration hearing nor an opportunity to participate in the hearing.

[3]               For the reasons that follow, I would dismiss this application, as there was no denial of natural justice.

Factual Background

[4]               Sunnybrook is an acute care, rehabilitation, long-term care and research health sciences complex in Toronto.  It operates from three sites: Bayview Avenue, Holland Orthopaedic and Arthritic Centre on Wellesley Street, and St. John’s on Cummer Street.

[5]               Aramark has been the food services provider at St. John’s since 1966.  The Union and Aramark are parties to a collective agreement that applies to “all employees engaged in the food services at St. John’s Rehabilitation Hospital” except certain management employees.

[6]               Prior to 2012, St. John’s was a stand-alone facility not affiliated with another hospital.  However, in 2012, St. John’s merged with Sunnybrook.  Initially, the merger did not affect the operation of food services at St. John’s.  Aramark continued to provide the food services there.  However, retail and food services for Bayview and Holland were generally centralized at Bayview, and food for patients was distributed from that site.  At the Bayview and Holland sites, Sunnybrook contracted out the management of food services to Compass Group Canada.  With respect to patient food services, Compass managed Sunnybrook employees who were members of the SEIU.

[7]               Sunnybrook wished to integrate the food services at St. John’s with the other two sites and issued a Request for Proposal (“RFP”) in February 2016.  Sunnybrook wished to select a single food services operator to deliver patient and retail food services from Bayview. Aramark was the successful bidder and entered into a Retail and Patient Food Services Agreement with Sunnybrook on July 1, 2017.  The agreement is for a ten year term.

[8]               In May 2017, Aramark advised most of its employees at St. John’s that they would be laid off in the fall, because food preparation and plating for patients would be carried out at Sunnybrook by Sunnybrook employees, and the food then brought to St. John’s for distribution.  Ultimately, Aramark issued 20 layoff notices in a bargaining unit that had approximately 22 employees, and 16 employees were laid off and two were reduced from full-time to part-time status.

The Arbitration Award

[9]               The Union filed a grievance respecting the transfer of retail and patient food services to the Bayview site. The arbitrator rejected the grievance with respect to retail food services, but upheld the grievance with respect to patient food services, finding it was an unlawful contracting out under article 25.03 of the collective agreement.  That article states,

No job category covered by the scope of this agreement shall be contracted out if it shall cause the demotion or lay-off of bargaining unit employees or suffer in a reduction in his regular hourly rate.

[10]           The arbitrator described contracting out as “simply the giving outside of bargaining unit work to be performed by the employees of another employer on the first employer’s behalf” (Award, p. 12).   He concluded that all of the patient food services preparation and plating work “for the Employer at St. John’s has been transferred to employees of Sunnybrook at Bayview” (Award, p. 12).

[11]           The arbitrator observed that Aramark did not attempt to argue that there would be no contracting out to Sunnybrook, because Sunnybrook was keeping the work to be performed by its own employees.  He assumed that Aramark had not made this argument because it had “acquired from Sunnybrook the contractual right and responsibility to perform all of the patient food services work for all three sites” (Award, pp. 12-13).

[12]           He rejected Aramark’s argument that article 25.03 did not apply because the entire “job category” had not been contracted out.  He concluded that the parties were referring to a kind or type of work transferred to a third party, and the clause was violated if the contracting out results in demotion or lay-off or reduction in hourly rate of pay of bargaining unit employees (Award, p. 14).  He then gave a declaration that “the patient food services side of the transaction, to the extent that it involves any of the consequences to employees identified in Article 25.03, is prohibited by Article 25.03.”

[13]           Sunnybrook then sought to reopen the hearing on the basis that it should have been given notice and an opportunity to participate.  The arbitrator concluded that his decision was final, and he was functus officio, except in relation to disputes over the implementation of the award and remedy, as he had remained seized with respect to these issues.

The Issues

[14]           Sunnybrook raised two issues in this application for judicial review: first, that it was denied natural justice; and second, the arbitration award was unreasonable.  While Aramark supported Sunnybrook’s position with respect to the denial of natural justice, it took no position on the reasonableness of the award.

[15]           During oral argument, the Court indicated that it would not hear the second argument with respect to the reasonableness of the award, since Sunnybrook sought to raise an argument concerning the application of the collective agreement that had not been raised before the arbitrator.  Specifically, Sunnybrook sought to argue that the arbitrationaward was unreasonable because the arbitrator found that Aramark transferred work to Sunnybrook, when the work was not Aramark’s to contract out.   Sunnybrook takes the position that in its contract with Aramark, it reserved to itself the St. John’s patient food preparation, so that the work could be performed by its employees at Bayview.

[16]           It is not appropriate for a court on judicial review to determine an issue squarely within the expertise of the arbitrator that was not raised before him or her (Alberta (Information and Privacy Commissioner) v. Alberta Teachers’ Federation, 2011 SCC 61 (CanLII), [2011] 3 S.C.R. 654 at paras. 23-26).  Accordingly, the only issue before the Court in this application for judicial review is whether the arbitrator denied natural justice by failing to give notice of the hearing to Sunnybrook and an opportunity to participate in the arbitration hearing.

The Law

[17]           Arbitrators and the courts have been cautious in granting standing to third parties in grievance arbitrations, given that arbitration is a private dispute resolution process.  Normally the parties to a grievance arbitration are the parties to the collective agreement – the union with bargaining rights and the employer.

[18]           There are limited circumstances where a third party has been found to have a direct legal interest that will be affected by the arbitrator’s decision, and this has warranted granting notice and rights of participation to a third party.  Some of these cases were the result of judicial review proceedings in the courts, where an arbitration award was quashed because a person or entity was not granted notice and given a chance to participate.  Other cases which have discussed the legal principles respecting third party standing arose because an arbitrator was asked to grant intervenor standing to the third party.  The outcome in some of those cases was guided by principles of natural justice; however, other cases are justified on the basis of the arbitrator’s exercise of discretion to grant standing.

[19]           First, standing has been recognized where individual employees have a direct personal interest in the outcome of the arbitration proceeding, and that interest is not represented by the union or the employer.  In Hoogendoorn v. Greening Metal Products and Screening Equipment Company, 1967 CanLII 20 (SCC), [1968] S.C.R. 30, an employee had refused to join the union or authorize deduction of monthly union dues.  The employer and union had proceeded to an arbitration, and the arbitrator ordered the employee dismissed.  The Supreme Court of Canada held that the employee was denied natural justice because his bargaining agent had taken an adverse position to his interest that affected his ongoing right to employment.  In the circumstances, he should have been given notice and a chance to participate.

[20]           Similarly, in Bradley v. Ottawa Professional Fire Fighters Association (1967), 1967 CanLII 160 (ON CA), 63 D.L.R. (2d) 376 (Ont. C.A.), the arbitrator interpreted a collective agreement provision dealing with promotions and ordered that a number of the incumbents, who had been promoted in a job competition, should lose their positions and be demoted.  Again, given that the union was taking an adverse position to these employees’ interests under the collective agreement, and their rights to employment in their positions were at stake, the Court of Appeal held that they should have been given notice of the arbitration hearing as a matter of natural justice.

[21]           Second, notice has been required in jurisdictional disputes, where two different trade unions claim the same work or bargaining rights in a workplace.  For example, in Canadian Union of Public Employees v. Canadian Broadcasting Corp. (1990), 1990 CanLII 8078 (ON CA), 70 D.L.R. (4th) 175,  the Court of Appeal held that rival unions, claiming the same work with the employer that was the subject of an arbitration hearing, were entitled to notice of that hearing and an opportunity to participate.  The concern, if the unions were not present, was that there would be further grievances and potentially conflicting arbitration awards.  On appeal, the Supreme Court of Canada, in brief reasons, dismissed the appeal, stating (Canadian Union of Public Employees v. Canadian Broadcasting Corp., 1992 CanLII 108 (SCC), [1992] 2 S.C.R. 7 at para. 4):

The important issue resolved by this appeal is that those to be significantly affected by the arbitration should receive notice of the proceedings. Fairness and natural justice require no less.

[22]           A third set of cases in which arbitrators have granted third party standing are ones where  the remedy sought would fundamentally alter an employment relationship.  This includes cases where the union seeks a finding that an employee notionally employed by another entity is in fact an employee of the employer bound by the collective agreement (Vancouver Hospital and Health Sciences Centre v. British Columbia Nurses Union (1998), 72 L.A.C. (4th) 297 (Kinzie) at paras. 7 and 36).  As well, this explains the result in Finning International Inc. v. IAM & AW, Local 99 (2008), 173 L.A.C. (4th) 170 (Ponak), where the Northern Alberta Institute of Technology (“NAIT”) was granted standing in an arbitration in which the union claimed that students on a work study program were bargaining unit employees.  The arbitrator concluded that NAIT had an important interest to protect as the educational supervisor of the students (at paras. 22-24).

[23]           Finally, arbitrators have also granted standing to third parties to avoid duplicate litigation of the same issue – for example, granting standing to an insurance company where the union and the employer are contesting benefit entitlement under the terms of the insurance company’s policy (Greater Essex County District School Board v. Canadian Union of Public Employees, Local 27 (1998), 74 L.A.C. (4th) 58 (Samuels) at paras. 27-29.)

Analysis

[24]           In the present case, Sunnybrook argues that it has a direct and significant interest in the outcome of the arbitration, and therefore, the arbitrator denied it natural justice by failing to require that it be given notice and a chance to participate.  Sunnybrook wants to participate in a new arbitration hearing, because it wishes to argue that it “owns” the patient food services work and is entitled to decide how that work will be performed.  It takes the view that the work was contracted out to Aramark by it.  Sunnybrook also wishes to lead evidence and argue that it will be unable to fulfil some of its key objectives in triggering the RFP process – enhancing patients’ experience, improving the quality and efficiency of food services, protecting the work and job security of its employees, and controlling its costs.  Sunnybrook also wishes to lead evidence of the decision’s effect on the quality of the food services that can be provided to patients.

[25]           I accept that Sunnybrook has an interest in the outcome of the arbitration, but it does not have a direct and significant legal interest that gives it a right to participate in the arbitration hearing.  The arbitration jurisprudence on third party standing has distinguished a “direct personal legal interest” from a “commercial or incidental, or legally remote interest.” Even if there is an economic impact on another entity as a result of an arbitration – for example, in a contracting out dispute – that has not been characterized as the kind of direct legal interest that justifies an award of standing or requires notice and participation rights as a matter of natural justice (see, for example, Residential Framing Contractors’ Association of Metropolitan Toronto & Vicinity Inc. v. Labourers’ International Union of North America, Local 1832016 CarswellOnt 1049 (Surdykowski) at paras. 10-11Finning, above, at para. 20; and Re Avenor Inc. v. I.W.A.-Canada, Local 26931995 CarswellOnt 5660 (Bendel) at paras. 22-23).  As stated by Arbitrator Burkett in Air Canada v. Air Canada Pilots Association2010 CarswellOnt 9380 (at para. 14):

I have a broad discretion to decide if intervenor status should be granted.  While intervenor status should not be granted where the interest of the entity seeking status is purely commercial in nature, where the outcome may result in findings or remedies that affect the legal interests or legal status of that entity, natural justice requires that intervenor status be granted.

[26]           Sunnybrook’s interest in the arbitration proceeding is commercial and indirect in nature.  While it argues that the arbitrator has ruled on its rights under the contract with Aramark, that it is not the case.  The arbitrator’s task was to interpret the collective agreement between the Union and Aramark.  He did so and gave a declaration that Aramark had violated the collective agreement.  He made no ruling with respect to the legal rights of Sunnybrook.  Thus, this was not a situation like Hoogdendoorn or Bradley, above, where the rights of individuals under the collective agreement were being determined in a situation where the union took a position adverse to their interests, and where the remedy adversely affected their employment position.

[27]           Sunnybrook’s interests are aligned with Aramark’s in respect to the desired outcome of the arbitration. Aramark could have made the argument about the ownership of the work and called evidence on the impact of the interpretation of the contracting out clause on Sunnybrook.  The fact that it chose not to do so does not result in a denial of natural justice to Sunnybrook, as there was no ruling on its legal rights in the arbitration.

[28]           Sunnybrook relies on Bloorview School Authority v. Canadian Union of Public Employees, Local 4400 (2015), 2015 CanLII 362 (ON LA), 252 L.A.C. (4th) 87 (Knopf)in support of its argument that it was denied natural justice.  It submits that it has an interest analogous to that of the Bloorview hospital, because the arbitrator’s decision affects the quality of food services provided to patients, as well as patient experience.  It also states that it will suffer adverse effects, because it will not be able to realize some of the key objectives underlying the RFP project.  It also wishes to protect the workload and job security of its food service employees at Bayview.

[29]           This is not a case like Bloorview.  There, a school was located in a hospital, and the union representing educational workers at the school challenged the employer’s application of a hospital policy to them.  The policy required mandatory influenza vaccinations or the wearing of masks, and the grievance claimed that the policy should not apply to those working in the school area.  The arbitrator exercised her discretion to grant standing to the third party hospital. She observed that this was an unusual case where standing should be granted, because a ruling in the union’s favour had the potential to adversely affect the hospital’s ability to maintain reasonable health and safety standards both for its own employees working in the school area and the patients of the hospital.  Moreover, the hospital had no other forum in which to protect the health and safety interest in enforcing its policy.  As the arbitrator stated (at para. 37):

If a ruling in the Union’s favour has the potential of adversely affecting the Hospital’s ability to maintain reasonable health and safety standards for its own staff and patients, this is a legitimate legal interest that cannot be ignored.

[30]           The circumstances of the present case are very different.  There is no concern here with patient health and safety.  Sunnybrook has commercial concerns, but it has other ways to address its issues with Aramark’s ability to perform its contractual obligations with Sunnybrook, either through the exercise of rights under their contract and/or in the civil courts.

[31]           I note as well that Sunnybrook’s interest is not grounded in labour or employment law principles, a factor at issue in cases like CBC above.  The collective agreement that the arbitrator interpreted has no application to Sunnybrook or its employees.  The Sunnybrook employees have never performed the food services work for St. John’s, and they will continue to perform that work for Bayview and Holland at Bayview.  Any negative impact on them because of the arbitration is at most speculative.

[32]           Sunnybrook also relies on National Automobile, Aerospace, Transportation and General Workers Union of Canada (CAW-Canada) v. Pharma Plus Drugmarts Ltd., 2011 ONSC 4188 (CanLII).  This is a decision of the Divisional Court that overturned a decision of the Ontario Labour Relations Board respecting approval of a settlement agreement between Pharma Plus and the United Food and Commercial Workers Union (“UFCW”).  The effect of this settlement was to allow UFCW to represent Pharma Plus employees in Rexall stores throughout Ontario when in the past, the CAW had represented employees of Pharma Plus in the Ottawa region.  Given the impact of the settlement on future bargaining rights of CAW, the Court held that CAW should have been given notice of the Board proceedings.

[33]           Again, that case is distinguishable, as it was, in effect, a jurisdictional dispute case between unions.  Here, as I have said before, the arbitrator made no ruling on the legal rights of Sunnybrook under its contract with Aramark.

[34]           The arbitrator did not purport to bind Sunnybrook to use the employees of Aramark at St. John’s to cook and plate food for Sunnybrook’s patients there. Here, as counsel for the Union quite properly conceded during the hearing, Sunnybrook remains free to carry out its food services restructuring and to utilize its own employees to cook and plate food as it wishes. The effect of the arbitration decision is that by contracting to participate in Sunnybrook’s restructuring plan, Aramark has agreed to act in violation of its collective agreement with the Union.

[35]           Whether Aramark can perform its agreement with Sunnybrook is an issue between Aramark and Sunnybrook that was not before the arbitrator. Nothing decided by the arbitrator determines Sunnybrook’s rights under its agreements or otherwise.  Sunnybrook’s interest in the arbitration is commercial in nature in the sense that it is now faced with a contractual counterparty who may have a problem performing an agreement in the manner that it has agreed. This may cause inconvenience and, depending on what Aramark chooses to do, may give a cause of action or other legal rights to Sunnybrook. But the arbitrator’s decision does not determine or affect Sunnybrook’s entitlement to contract for food services as it wishes. As Sunnybrook does not have a direct legal interest at issue in the arbitration proceeding, it was not entitled to notice of the arbitration.  There was no denial of natural justice.

Conclusion

[36]           For these reasons, the application for judicial review is dismissed.  Aramark does not seek costs.  Costs to the Union are fixed at $7,500.00, an amount agreed upon by the parties, and payable by Sunnybrook.

_______________________________

Swinton J.

I agree               _______________________________

Tzimas J.

I agree               _______________________________

Myers J.

Released: July 19, 2019

CFL Finance Ltd v Bass & Ors (Good faith to voluntary arrangements : consumer credit law) [2019] EWHC 1839 (Ch) (15 July 2019)

Neutral Citation Number: [2019] EWHC 1839 (Ch)
Case No: BR-2015-002338

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS ENGLAND AND WALES
INSOLVENCY AND COMPANIES COURT

Rolls Building
7 Fetter Lane
London
EC4A 1NL
15/07/2019

B e f o r e :

CHIEF INSOLVENCY AND COMPANIES COURT JUDGE BRIGGS
____________________

Between:

CFL FINANCE LIMITED
Applicant/Petitioner
– and –
 
(1) JONATHAN BASS
(2) FREDDY KHALASTCHI
(3) MOISES GERTNER

Respondents


(4) LASER TRUST

Opposing Creditor

____________________

STEPHEN ATHERTON QC AND BLAIR LEAHY (instructed by Mishcon de Reya LLP) for the Applicant/Petitioner
ANDREW SHAW (instructed by Isadore Goldman) for the First and Second Respondents
MARK PHILLIPS QC, JONATHAN KIRK QC, FREDERICK PHILPOTT and HANNAH THORNLEY (instructed by Teacher Stern LLP) for the Third Respondent
FELICITY TOUBE QC AND ROBERT AMEY (instructed by Stephenson Harwood LLP) for the Opposing Creditor

Hearing dates: 25, 26, 28 June 2019 
____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Crown Copyright ©

Application of Good faith to voluntary arrangements; application of consumer credit law to Tomlin Order; treatment of evidence given by witness statements.

Chief Insolvency and Companies Court Judge:

Introduction

    1. This is the final hearing of a bankruptcy petition. It has a long history and considerable sums are involved. The petitioning creditor seeks a bankruptcy order. Its debt arises out of a settlement agreement where proceedings were compromised in the form of a Tomlin Order. The schedule to the Tomlin Order provided for the debtor to pay a sum by instalments. One of the questions asked is do such compromises offend the provisions of the Consumer Credit Act 1974 making the compromised debt unenforceable?
    2. An opposing creditor (the “Laser Trust”) is an assignee of a debt of £799,360,216 (as at March 2019), far in excess of the petitioning creditor’s debt. The opposing creditor seeks an adjournment to allow a meeting to be convened for the purpose of putting proposals for an Individual Voluntary Arrangement to creditors. This raises the question of what principles should be applied to an adjournment application. The context is important. The debtor had previously obtained a voluntary arrangement when the assignor, Kaupthing Bank hf (“Kaupthing”) had voted in favour of proposals put to creditors. The voluntary arrangement was revoked by the Court on a challenge by the petitioning creditor. The Court found that the debtor and Kaupthing had agreed to a private agreement whereby Kaupthing would financially benefit from assets outside of the voluntary arrangement. This constituted a breach of good faith. The Court of Appeal agreed and found that there was a material irregularity. This judgment addresses whether the debtor should be given a second chance to put proposals to creditors in such circumstances. The petitioning creditor argues that it is against principle, and an abuse of process to have a “second bite of the cherry”. This judgment also takes account of the evidence produced by the petitioning and opposing creditor in order to reach conclusions about the nature and quality of their debts.

The background

    1. The background to the debt and the Individual Voluntary Arrangement (“IVA”) has been set out in detail in two previous judgments. The first is the judgment of HHJ Keyser QC (sitting as a judge of the High Court) [2017] EWHC 111 (Ch) (the “First Judgment”) and the second the Court of Appeal comprising Patten, Floyd and Coulson LJJ [2018] EWCA Civ 1781 (the “Appeal Judgment”). I have been addressed on the background by counsel, but it is unnecessary to repeat the detail in this judgment. I shall set it out in brief and refer to the First Judgment and Appeal Judgment where required.
    2. CFL Finance Limited (CFL) served a statutory demand on Moises Gertner (MG) dated 10 September 2015 demanding he pay £11,128,611. The demand was not met and was not set aside. CFL petitioned for MG’s bankruptcy. The petition was adjourned pending the outcome of a creditors’ meeting called to consider a proposal made by MG for the IVA. The proposal was approved by 97.85% of creditors in value with Kaupthing constituting 90.43% by value. Two creditors, including CFL, who together constituted 2.15% of the creditors voted against the proposal. If Kaupthing’s votes were excluded, the value of the debts of the two creditors who voted against the proposal would have exceeded 50% of the value of unconnected creditors’ claims with the result that the proposal would not have been approved.
    3. The origin of the debt owed by MG to CFL is succinctly set out by Patten LJ in the Appeal Judgment. In short, the CFL debt arose by reason of a personal guarantee entered into by MG on 13 June 2008 to guarantee a loan made to Lanza Holdings Limited (“Lanza”), a Gibraltaran company, owned by a Gertner family trust. Patten LJ explains (paragraphs 1-5 of the Appeal Judgment):

“Lanza defaulted and in November 2010 CFL sued Mr Gertner on his guarantee for some £1.7m together with compound interest from June 2008 which was payable under the loan agreement in the event of a default.In October 2011 the proceedings were compromised on terms recorded in a Tomlin Order under which Mr Gertner agreed to pay £2m to CFL by instalments together with a further £50,000 on account of its costs. It was a term of the settlement that if Mr Gertner failed to make the instalment payments as agreed then the entire amount claimed in the proceedings would become due and payable. By early 2013 that had happened. Later in March 2015 Mr Gertner’s solicitors, Teacher Stern, offered CFL the sum of £10,000 in full and final settlement of the debt which was stated then to amount to £2,185,973. With interest this would have increased to £10,857,183 but Mr Gertner disputes his liability for interest even though under the terms of the settlement with CFL interest was payable.

In the event the negotiations came to nothing and on 11 September 2015 CFL served a statutory demand on Mr Gertner in respect of the debt which with interest was then over £11m. An offer was made to settle the debt with a payment of £487,500 which was rejected but no application was made by Mr Gertner to set aside the statutory demand. CFL presented a bankruptcy petition on 6 October 2015 which was served on 22 October 2015 and the hearing of the petition was fixed for 23 November 2015.

On 20 November 2015 CFL was served with a proposal by Mr Gertner for an IVA. This included CFL as a creditor in a sum of £11,128,611. Although no application had been made for an interim order, CFL agreed to the hearing of the bankruptcy petition being adjourned over the creditors’ meeting and it now stands adjourned generally with liberty for it to be restored.

In Mr Gertner’s Estimated Statement of Affairs attached to his IVA proposal his father was shown as a creditor in the sum of £28,666,666. The proposal stated that his father had agreed to subordinate his claim for dividend purposes to those of the other unsecured creditors whose claims totalled £582,809,270. Of these the largest debt was £547,261,182 owed to Kaupthing [an Icelandic bank] ……”

    1. The Kaupthing debt also arose out of a personal guarantee. Patten LJ explains:

“Mr Gertner’s liability to Kaupthing is based on a personal guarantee dated 19 September 2008 which was given to secure loans made to Crosslet Vale Limited (“Crosslet Vale”) which was another Gertner family company. The loans had been made to finance various investments by Crosslet Vale including in September 2008 the purchase of some 18.5m shares in Kaupthing. Crosslet Vale also defaulted and proceedings for the recovery of the loans and under the guarantee were commenced by Kaupthing in October 2010. Mr Gertner was sued for over £300m. The proceedings were stayed by agreement and negotiations took place. Mr Gertner has asserted in evidence that the loan made in September 2008 was part of a fraud on the part of Kaupthing’s directors and was therefore unenforceable. But that point has never been pursued in the litigation and no discount was made on account of it when formulating the IVA proposal.”

    1. I shall be returning to look at the Appeal Judgment in more detail when I consider the debt owned by the Laser Trust and in particular when deciding if the Laser Trust is entitled to vote at a meeting of creditors for the Arrangement (as defined below). For now, the proposals for the IVA included an expected return to creditors of £0.07 in the pound. This was to be achieved by a single payment of £487,500 provided by a third party. It was proposed that MG’s tax liability would be paid in full.
    2. Prior to the creditors’ meeting, Kaupthing entered into a settlement agreement (the “KSA”) with MG, his brother Mendi Gertner, Crosslet Vale Limited and the Laser Trust. The KSA was described as being in full and final settlement of the liabilities owed by MG, Mendi and Crosslet Vale to Kaupthing. The Appeal Judgment refers to the creditors noting, at the creditors’ meeting “that Mr Gertner was a party to arbitration proceedings in Israel which appeared to include claims for high value assets, and asked for details of the litigation and why any possible recoveries were not included in the proposal”.
    3. Under the terms of the KSA, Kaupthing would receive $6 million from the Laser Trust by “close of business on 15 December 2015”. By clause 3.6 of the KSA “on or before execution of this agreement the parties shall enter into or procure that the relevant parties enter into and adhere to the profit sharing agreements in substantially the form of the draft agreements in Appendices 2, 10 and 11 regarding the future profits of Indus Trading Limited, Maskelyn Limited and Readinise Limited respectively.” The profit-sharing agreements gave Kaupthing a “potential share in the recoveries in the Israeli arbitration” (the Appeal Judgment at para 25). This is because the agreements set out in the Appendices to the KSA referred to in clause 3.6 are with three named companies each of which is a claimant in the arbitration. “The claim is being pursued by Mr Gertner and his brother, Mendi, against a Mr Dan Gertler and various of his family trusts and companies. The arbitration includes a cross-claim. The evidence of Mr Gertner is that the claims have been brought by him and his brother on behalf of the Gertner family trusts but the effect of clause 3.6 of the KSA and the profit sharing agreements was to give Kaupthing an entitlement to share in any recoveries made in the arbitration in return for a release of the named companies from certain liabilities to Crosslet Vale and the Gertner family trusts” (paragraph 21 of the Appeal Judgment).
    4. By clause 5 of the KSA “the parties shall within 90 days” of the payment made by Laser Trust to Kaupthing in accordance with clause 3.1, “enter into an agreement in substantially the form of the draft agreement in Appendix 6 which transfers the benefit of the Facility Agreement and the Guarantees from Kaupthing to Laser Trust…”. Appendix 6 is described in the First Judgment (at 56):

“The draft agreement in Appendix 6 was an Assignment of Debt and Security to be made between the parties to the KSA. The recitals recorded that the parties to the Kaupthing Proceedings had settled their differences on a binding basis by way of [the KSA]’. Clause 2 provided:

“2.1 The Assignor [ie Kaupthing], with effect from the date of this Deed, irrevocably assigns to the Assignee [ie Laser Trust] absolutely all of the Assigned Assets and the Assignee hereby accepts the assignment. 2.2 With effect from the date of the Deed, the Assignee agrees to assume, perform and comply with the Obligations under the Assigned Assets as if originally named as an original party in the Assigned Assets.”

‘Assigned Assets’ was defined to mean all of Kaupthing’s rights and benefits under or in respect of the Facility Agreement and the Guarantees, save that Kaupthing’s security rights were expressly excluded. (cl 3 of the KSA itself made provision in respect of the enforcement of Kaupthing’s security.) ‘Obligations’ was defined to mean all of Kaupthing’s obligations ‘(if any)’ under or in respect of the Assigned Assets. Other provisions of the Assignment of Debt and Security purported to release Kaupthing from all liability and obligations in respect of the Assigned Assets. Clause 5 of the Assignment of Debt and Security contained a very wide exclusion and waiver of warranties or representations by Kaupthing in respect of the assignment.”

    1. Before turning to the challenge to the IVA I mention a further debt owed by MG in 2015. Bank Leumi (the “Bank”) had presented a bankruptcy petition. The Bank’s debt also arose by reason of a guarantee. MG had given a guarantee for £7,500,000 in respect of the borrowings of Fordgate Limited, a company largely owned by Gertner family trusts but in which Mr Gertner personally owned a 10% shareholding. Mendi had provided a similar guarantee. Fordgate Limited failed, and in July 2013 the Bank made demands on the guarantees. A payment of £100,000 was made to the Bank by the Gertner No 1 Settlement on behalf of MG. MG is a discretionary beneficiary of the Gertner No 1 Settlement. No other payment was made but a settlement was reached in July 2014, and the petition was dismissed. That settlement, provided for a further payment of £100,000 from the Gertner No 1 Settlement, and required MG and Mendi to pay £10m to the Bank on 28 November 2014. They failed to make that payment, and the Bank presented a further bankruptcy petition against MG in February 2015. Subsequently MG and Mendi entered into a second settlement agreement with the Bank under which they were required to provide to the Bank (1) £3m, (2) an affidavit containing sufficient information to verify their representation, on which the bank had relied in entering into the settlement, that they had ‘negative net assets worldwide’, and (3) an irrevocable undertaking to make an ‘Uplift Payment’, the size of which would be dependent on the amount of money recovered in the Israel Gertler Arbitration. The Bank withdrew its petition. In the proceedings before HHJ Keyser QC, MG explained that the payment of £3m was made from a trust controlled by a family friend, Mr Leib Levison. He reappears in this matter. MG’s affidavit of means showed that his only assets were a car worth £25,000 and personal effects worth £25,000 and that his liabilities amounted to some £417m. The undertaking regarding the Uplift Payment concerned the disposition of trust moneys, of which Mr Gertner and Mendi were not trustees.
    2. Returning to the IVA, CFL challenged the approval of the IVA pursuant to section 262 of the Insolvency Act 1986. CFL claimed that Kaupthing should not have been entitled to vote.
    3. In the First Judgment HHJ Keyser QC revoked the IVA, finding that (i) there had been a telephone call between CFL’s solicitor, Kaupthing’s solicitor and representatives of Kaupthing in which Kaputhing “confirmed that, having concluded that Mr Gertner had very limited assets personally and that a trustee in bankruptcy would be unable to undermine the Gertner family’s trust structure, it had agreed in principle to support an IVA on the basis that it would recover 1% of its debt”; (ii) the principle of good faith applied between a debtor and a creditor, and between creditors inter se; (iii) the KSA had put Kaupthing into a position of conflict with other creditors; (iv) the KSA entitled Kaupthing to assets that were to be outside of those available for the creditor class as a whole; and (v) there had been a failure to disclose the side agreement and a breach of the good faith principle. The Court declined an invitation to direct a second meeting of creditors. His decision was upheld by the Court of Appeal which also found that the admission of Kaupthing to vote also constituted a material irregularity.
    4. Permission to appeal to the Supreme Court was refused on 11 February 2019. At this time Kaupthing, having been in receipt of the assignment sum of $6m since 2015, had not entered into the assignment with Laser Trust. Four days after permission to refuse an appeal to the Supreme Court, Kaupthing assigned its debt to the Laser Trust. CFL sought to restore the petition and MG sought to summon a meeting of creditors to vote in favour of a second individual voluntary arrangement (the “Arrangement”).

The challenge to the CFL debt

    1. The CFL debt is challenged on the basis that it contravenes the provisions of the Consumer Credit Act 2006 (“CCA”) and is unenforceable. The Court is asked to decide if the Tomlin Order provided MG with “credit” or a “financial accommodation”. This requires a true interpretation of the compromise (embedded in the Tomlin Order) and the application of the CCA. There is scant authority on the proposition that instalment payments provided in a compromise are required to comply with the CCA. MG also argues that the interest payments agreed by compromise are so extreme that they constitute a penalty. I start by identifying what type of debt can support a petition for bankruptcy.
    2. A creditor’s petition must identify a liquidated debt. Section 267 Insolvency Act 1986 provides the grounds upon which a bankruptcy petition may be presented:

“(1) A creditor’s petition must be in respect of one or more debts owed by the debtor, and the petitioning creditor or each of the petitioning creditors must be a person to whom the debt or (as the case may be) at least one of the debts is owed.(2) Subject to the next three sections, a creditor’s petition may be presented to the court in respect of a debt or debts only if, at the time the petition is presented—

(a) the amount of the debt, or the aggregate amount of the debts, is equal to or exceeds the bankruptcy level,(b) the debt, or each of the debts, is for a liquidated sum payable to the petitioning creditor, or one or more of the petitioning creditors, either immediately or at some certain, future time, and is unsecured,

(c) the debt, or each of the debts, is a debt which the debtor appears either to be unable to pay or to have no reasonable prospect of being able to pay, and

(d) there is no outstanding application to set aside a statutory demand served (under section 268 below) in respect of the debt or any of the debts.”

    1. There is no argument that subsection (1) is satisfied and subsection (2) (a), (c) and (d) of section 267 of the Insolvency Act 1986 are not contested. MG argues that subsection 2 (b) is not satisfied in that the debt is not for a liquidated sum payable to the petitioning creditor, either immediately or at some certain, future time.
    2. As has been explained, the debt owed to CFL arises out of a guarantee for sums lent to Lanza. MG has not denied that the sums were lent to Lanza nor that he guaranteed the loan. He has not denied that Lanza defaulted nor that he was unable to repay the debt himself. In his defence to the Part 7 proceedings he accepted that he owed the capital sum lent to Lanza under the guarantee but argued that pursuant to clause 2.6 of the guarantee the sum did not include interest. The clause reads it “shall not exceed the sum of £3,500,000“. As he had paid £1,800,000 he argued that he owed no more than £1,700,000. He also argued that the interest provisions in the Lanza Facility were penal or unfair and pleaded in aid section 19 of the CCA (now effectively section 140A). The relevant parts of the defence (that is the parts of the defence that are the same or similar to the arguments before the Court now) are as follows:

“16. Further and in the alternative, the interest and the rates of interest which the claimant seeks to charge under the Facility Letter amount to a penalty in that they do not represent a genuine rate to compensate the Claimant for any default by Lanza and/or in the alternative an unfair credit transaction under Section 19 of the Consumer Credit Act 2006.

17.The interest claimed in paragraph 13.2(c) of the Particulars of Claim is at 2.5% on a compound basis. On this basis, the interest which is purported to accrue on the loan following partial repayment on the 23 September 2008, i.e a period of just over 2 years, amounts to £1,686,232.70 from 14 October 2008 to 7 September 2010 as stated by the Claimant’s solicitors in a letter dated 7 September 2010.”

    1. The proceedings were compromised by way of a Tomlin Order dated 26 September 2011 that by consent provided: “all further proceedings in this action between the Claimant and the Defendant be stayed upon the terms set out at Schedule 1 to this Order, save for the purposes of carrying the said terms into effect for which the Claimant and the Defendant are at liberty to apply”. The consent order was signed by solicitors acting on behalf of MG, Teacher Stern LLP. The recitals state that “the parties wish to settle the Proceedings upon the terms set out in this Agreement” in which CFL is the Claimant, and MG the Defendant. The recitals record:

“(2) CFL claims the following sums from Mr Gertner in the Proceedings

(a) The capital sum of £1,700,000;

(b) Simple interest at the rate of 2.25 per cent per month on £3,500,000 from 13 June 2008 to 23 September 2008;

(c) Simple interest at the rate of 2.25 per cent per month on the sum of £1,700,000 from 24 September 2008 to 13 October 2008;

(d) Compound interest on the outstanding balance at 2.5 per cent per month from 14 October 2008 to the date of payment

(3) The Parties wish to settle the Proceedings upon the terms set out in this Agreement”

    1. By operative clause 2. “£2,000,000 shall be paid to CFL on the dates and on the terms set out below.” Set out are specified dates for payment and the sums that have to be paid on the agreed payment date, such as (a) £325,000 on or before 26 October 2011. The last date for payment was on 26 September 2013. In addition, MG was to pay a contribution to CFL’s costs. Clause 5 constitutes a secondary obligation clause. It states:

“if, in breach of paragraph 2 and 3 above, the sums payable under paragraphs 2 (a), 2 (b) and 3 (b) shall not be paid in cleared funds to the account by close of business on the dates identified in paragraphs 2(a), 2(b) and 3(b) or within seven days of the dates identified in paragraphs 2(a), 2(b) and 3(b) or if the sums payable under paragraph 3(a) shall not be paid in cleared funds to the client account of Mishcon de Reya on the date identified in paragraph 3(a):5.1 the following sums claimed by CFL from Mr Gertner in the Proceedings shall become immediately due and owing from Mr Gertner to CFL:

(a) the capital sum of £1,700,000;(b) simple interest at the rate of 2.25 per cent per month on £3,500,000 from 13 June 2008 to 23 September 2008;

(c) simple interest at the rate of 2.25 per cent per month on £1,700,000 from 24 September 2008 to 13 October 2008; and

(d) compound interest on the outstanding balance at 2.5 per cent per month from 14 October 2008 until the date of payment.”

    1. It may be observed that clause 5, if triggered, made MG immediately liable for the sums claimed by CFL in the Part 7 proceedings. I infer from this acceptance that MG was no longer contesting the sums pleaded by CFL. The schedule included a non-assignment clause and an entire agreement clause so that CFL and MG “agree and acknowledge that this Agreement fully sets out the terms agreed between the Parties and supersedes all previous agreements. The Parties agree that in entering into this Agreement they have not relied on any representations or warranties……..”.
    2. It is accepted by all parties that schedule 1 to the Tomlin Order is a contract (the Contract) between the parties and contractual considerations apply.
    3. It is not said that the Contract is vulnerable to attack by reason of duress, undue influence, mistake, misrepresentation, fraud or other vitiating factor, rather Mr Kirk QC and Mr Philpott with Mr Phillips QC and Ms Thornley, acting for MG, argue that there are three reasons that the Court should find that the debt claimed in the petition is not capable of satisfying subsection 2(b) of section 267 of the Insolvency Act 1986 (it was argued that there is a substantial dispute but my analysis of the argument is as set out here):

23.1. The Contract is a regulated consumer credit agreement under the CCA. CFL has failed to comply with mandatory requirements for such agreements, in particular section 77A and 86B CCA;

23.2. It constitutes an unfair relationship for the purposes of section 140A-D of the CCA because the default payment provision requiring monthly compounding interest was wholly disproportionate and unconscionable; or

23.3. The default payment provision was a penalty at common law.

    1. Mr Kirk QC did not pursue the penalty at common law issue in oral submissions but informed the Court that he could add no more to his argument, than was set out in the skeleton argument. His primary submission was that the Contract is a credit agreement and a regulated credit agreement within the meaning of the CCA. Section 9(1) of the CCA provides: “In this Act “credit” includes a cash loan, and any other form of financial accommodation”.
    2. If he is right that it is a regulated credit agreement, CFL does not have an enforceable present debt because of a failure by CFL to obtain a licence from the OFT to cover the carrying on of a consumer credit business by CFL, and serve multiple documents on MG in the period since the Contract began, concerning the debt and the state of the account, as required by the CCA. I shall turn to this in more detail later.
    3. If the Contract is an agreement for credit (but not regulated) it brings into play the consumer protection provisions of section 140A-D, on unfair relationship. He argues that the compound interest provisions in the Contract are extortionate or unfair. If the Court finds that the relationship was and is unfair, the Court has broad powers under s.140B to grant relief including the power to reduce interest.

(i) Interpreting the Contract

    1. Mr Kirk began his submissions by comparing the debt that had accrued under the personal guarantee and the debt arising from the Contract. Although CFL’s schedules compound interest monthly rather than annually, Mr Kirk argued that the sums claimed in the particulars of claim equated to annual compounding and not monthly compounding. He argues that the Contract was an extension of the debt claimed under the personal guarantee. His submission on the interpretation of the Contract was that the recitals “set out the amounts then owed” which amounted to a liability and “discharge” for that liability. The Contract, it is argued gave MG time to pay a debt, acknowledgement by MG, and as such the payment schedule constitutes “financial accommodation” within the meaning of the CCA because it defers payments. If the payment schedule defers payment, it is “credit” within the meaning of the CCA.
    2. In support of his argument that the Contract provides financial accommodation within the meaning of the CCA, Mr Kirk relies on the second witness statement of MG (providing some background knowledge) where he states [15] “Due to the threat of a summary judgment application, the proceedings against me were compromised by way of an agreement set out in the schedule to a Tomlin Order”. I infer that it was expedient for MG to seek a compromise. His evidence about the reason for entering into the Contract “was to satisfy my personal liability under the personal guarantee I had previously given.” He explains that the Contract contained “provisions for payment of the remainder of the debt by instalments and a provision that provided for the payment of compound interest in default”. I agree that the part 7 proceedings, which followed the claim under the personal guarantee, form part of the relevant background information which may be used when interpreting the meaning of the Contract.
    3. In terms of construing or interpreting a contract, the Supreme Court has dealt with the subject on a number of occasions including recently in Arnold v Britton [2015] AC 1619 and Wood v Capita Insurance Services Ltd [2017] AC 1173. It is sufficient for these purposes to cite Lord Neuberger in Arnold v Britton where he said:

“When interpreting a written contract the court is concerned to identify the intention of the parties by reference to “what a reasonable person having all the background knowledge which would have been available to the parties would have understood them to be using the language in the contract to mean”…focussing on the meaning of the relevant words…in their documentary, factual and commercial context…but disregarding subjective evidence of any party’s intentions.” [15]

    1. The sums claimed in the Part 7 proceedings were defended by MG with the aid of legal advice and representation. I infer that CFL was confident that it would succeed in its claim and its confidence gave rise to its strategy to press for summary judgment once the defence had been filed. I also infer that CFL has good reason to be confident. The inference is consistent with the evidence that MG compromised the Part 7 proceedings as a result of the threat of a summary judgment application. The Contract does not directly acknowledge the debt due under the guarantee, but states that CFL claims the sums set out in the Part 7 proceedings. The sums set out in the proceedings were the sums due under the guarantee. This is an indirect acknowledgment of the debt. By the Tomlin Order the claims in the proceedings were stayed and the rights of the parties became embodied in the Contract. The obligations of each party are now governed by the Contract. The Contract provided that MG would pay £2,000,000. The sum would not alter over the period of the primary obligations. It is true that the sum was not to be paid in one tranche and was to be paid by way of instalments over a short period.
    2. Focusing on the meaning of “credit” Mr Kirk contrasts the position of (i) an agreement where an advance payment for services to be performed in the future does not give rise to the grant of credit as in McMillan Williams v Range [2004] 1 WLR 1854 and (ii) deferred payments. Lord Justice Ward commented in McMillan [16]: “unless there was a debt, there was no credit”. The applicability of the CCA to deferred payments was in issue in Dimond v Lovell [2000] 1 QB 216 where a hire company supplied cars on hire to victims following a road traffic accident, but under the relevant agreement, provided that payments for the hire did not become due until finalisation of the accident claim. The agreement was found to be a credit agreement and a hire agreement. The court was required to decide whether credit was in fact given and if the agreement was a “personal credit agreement” within the meaning of s. 8 of the CCA. The court of first instance had attempted to avoid that conclusion by holding that as there was no contractual obligation to pay hire charges until the debtor’s claim for damages was concluded, no credit was being given. The Vice Chancellor (as he was) held that that was wrong, stating that: “If payment for goods or services or land is deferred after the time when, if nothing about the time of payment had been agreed, the payment would be due, the payer is being given credit.” He quoted with approval from Professor Goode’s Consumer Credit Legislation, Vol 1, para 443, where it is stated: “Debt is deferred, and credit extended, whenever the contract provides for the debtor to pay, or gives him the option to pay, later than the time at which payment would otherwise have been owed under the express or implied terms of the contract.” Passages to similar effect were also quoted from R v Miller [1977] 1 WLR 1129 and Grant v Watton [1999] STC 330, the latter defining credit as “the deferral of payment of a sum which, absent agreement, would be immediately payable” (my emphasis).
    3. The question asked of this Court is whether credit or a financial accommodation as defined by the CCA was provided by the Contract. The operative clauses of the Contract provided that the payment of £2,000,000 would be due on 26 September 2013. That was the agreement. It was not due immediately as submitted by Mr Kirk. There was no absence of agreement as to when the debt was due. In my judgment a reasonable person having regard to all the background available to the parties would have understood the parties to mean, using the language in the contract, and focusing on the meaning of relevant words in their documentary, factual and commercial context, that no credit was extended beyond the due date for payment. Interpretation of a contract is an iterative process. By employing that process, it is apparent that the debt in the Contract was not deferred, and credit was not extended. An objective observer would understand with knowledge of the background facts would think that the Contract did not provide that the sums due by instalments in the Contract were deferred, and credit thereby extended, as it provides for MG to pay the sum agreed by 26 September 2013. It did not give him the option to pay, later than the time at which payment was to be made under the terms of the Contract. A timetable payment of the agreed debt was provided for to assist MG. This was no doubt negotiated to assist MG in satisfying his contractual obligation. It gave him a structured schedule. If there had been no structured payments agreed, the payment of £2,000,000 would have been due on 26 September 2013 in one lump sum. In my judgment the law does not provide that a structured settlement clause making provision for the payment of a debt over time extends credit or financial accommodation.

(ii) The essential character of the Contract

    1. Mr Kirk relies upon Holyoake v Candy [2017] EWHC 3397 (Ch), to support the contention that the Contract provided credit and was therefore subject to the rigorous controls on form and content set out in the CCA. Danger lurks when using the facts of one case as an aid to interpreting a contract in another. In my judgment, Holyoake was a very different case which had very specific facts. Unlike the debt said to be due in this case, Mr Justice Nugee explained that the original loan in Holyoake was “a credit agreement as defined in s. 140C(1) as it was an agreement between Mr Holyoake, an individual, and CPC by which CPC provided Mr Holyoake with credit (itself defined in s. 9(1) as including a cash loan, and any other form of financial accommodation)”. He also found that the “subsequent agreements such as the Supplemental Loan Agreement, the various Escrow Deeds, and the Extension Agreements were all either themselves credit agreements or related agreements”. By s.140C(4) and (5) CCA an agreement is “related” to a credit agreement if it is a “linked transaction” in relation to the main agreement and in the case of a credit agreement which is not a regulated consumer credit agreement, a transaction is treated as a linked transaction in relation to that agreement if it would have been had the agreement been a regulated one. The background that informed the Judge’s decision when construing the relevant contract was patently different.
    2. Mr Justice Nugee paid particular attention to clause 3.1(c) in the settlement deed under scrutiny. That provided a release of the “Second Supplemental Extension Agreement”. He found that as that agreement extended time for repayment of the loan debt from 1 May 2013 to 24 January 2014 “financial accommodation” and hence “credit” had been provided. He reasoned “since the effect of cl 3.1(c) was that CPC agreed to enter into the Second Supplemental Extension Agreement (by releasing a signed counterpart to Mr Holyoake), I do not see why that provision did not amount to an agreement by CPC to provide Mr Holyoake with credit, namely the financial accommodation set out in that agreement”. Mr Justice Nugee was finding that the settlement agreement did not cast-out the application of the CCA that governed the pre-existing loans. I reject the submission that Holyoake provides authority for the proposition that all settlement agreements that contain a provision for payment of a sum over a period of time are subject to the rigours of the CCA. As Mr Atherton and Ms Leahy point out there is a real need for certainty when entering into settlement agreements. There is a need for a bright line. In McMillan Williams the Court of Appeal explained [20-23]:

“Bearing in mind the need to decide at the time the contract is entered into whether it makes provision for credit or not, the approach of the court must, in my judgment, be to search for the essence of the contract. So one asks is its essential character an arrangement for making loans or for paying remuneration?” (my emphasis)

    1. If one applies the “essential character” test to the facts in Holyoake where there had been a personal loan providing cash credit to an individual by a lender that was governed by the CCA, related agreements and a settlement agreement that contained clause 3.1(c), few would disagree with the outcome as found by Nugee J. Applying the “essential character” test, which is an objective test, in my judgment the Contract which compromised proceedings for less than the sums claimed in those proceedings, without admission of liability, cannot be characterised as one “for making loans”.
    2. There is support for my finding in Goode’s Consumer Credit Law and Practice at 24.31:

“Even if there is a deferment of debt, the agreement is not one for the provision of credit where the deferment is not by way of financial accommodation and merely arises incidentally from the parties’ accounting arrangements. It is well established that a transaction is not a loan transaction where the credit given is but a normal incident of a wider transaction not involving the lending of money.”

    1. The proceedings gave rise to the settlement. The settlement included the payment of an acknowledged debt. The payment of that debt was to be made by a date certain. It was, in my view, incidental to the settlement that the payment of the debt was structured over time certain.

The effect of the Contract

    1. I was addressed on the effect of the compromise by Mr Phillips QC, Mr Kirk QC and Mr Atherton QC. It was agreed that the compromise that led to the Contract is to be treated as a settlement agreement. Mr Phillips and Mr Kirk argue that the Court may go behind the Contract whereas Mr Atherton argues that it should not as it offends the principle of compromise. Mr Justice Nugee was faced with similar arguments in Holyoake. He provides a most helpful analysis of the competing principles, which I set out in full [500-504]:

“500. Mr Lord’s third submission was that the Settlement Deed was a bona fide compromise of the CCA claims and if it could be unpicked, it would never be possible to settle a CCA claim. That cannot have been intended by the legislature. There appears to be no relevant authority on the CCA itself, but he referred, by way of analogy, to Binder v Alachouzos [1972] 2 QB 151. The plaintiff had sued the defendant on a number of loans, the defendant defending the action on the grounds that the plaintiff was an unregistered moneylender. The action was compromised shortly before trial, the defendant agreeing to abandon the contention that the plaintiff was a moneylender and to pay the plaintiff various sums. When he defaulted and the plaintiff sued him on the compromise agreement, the defendant contended that it was not binding, again relying on the Moneylenders Acts. The Court of Appeal held that he was bound by the agreement. Lord Denning MR said that the Moneylenders Acts were for the protection of borrowers and the judges would not therefore allow a moneylender to use a compromise as a means of getting round the Act; but it was important that the courts should enforce compromises agreed in good faith between lender and borrower (at 158A-B, D-F):

“If the court is satisfied that the terms are fair and reasonable, then the compromise should be held binding. For instance, if there is a genuine difference as to whether the lender is a moneylender or not, then it is open to the parties to enter into a bona fide agreement of compromise. Otherwise there could never be a compromise of such an action. Every case would have to go to court for final determination and decision. That cannot be right….In my judgment, a bona fide compromise such as we have in the present case (where the dispute is as to whether the plaintiff is a moneylender or not) is binding. It cannot be reopened unless there is evidence that the lender has taken undue advantage of the situation of the borrower. In this case no undue advantage was taken. Both sides were advised by competent lawyers on each side. There was a fair arguable case for each. The case they reached was fair and reasonable. It should not be reopened.”

Phillimore and Roskill LJJ agreed. Phillimore LJ said that it was plain that it was a bona fide compromise, the terms of the agreement were not to be described as colourable, and the court (at 159D):

“ought to be very slow to look behind an agreement reached in circumstances like these.”

Roskill LJ said that while it has always been the policy of the courts not to allow the Moneylenders Acts to be evaded (at 160B-C):

“it is the law of this country, as Lord Denning MR has said, where there is a bona fide compromise of an existing dispute and that compromise includes a compromise of what, as Mr Joseph said, is basically an issue of fact, namely whether there had in fact been unlawful moneylending, especially where the compromise has been reached under the advice of counsel and solicitors, that that compromise is enforceable against the party seeking subsequently to repudiate it.”

501. There is an obvious danger in holding that any agreement settling CCA claims is effective to oust the Court’s powers under ss. 140A-C of the CCA , as it would open the way to lenders routinely requiring borrowers to settle any possible CCA claims, which would run the risk, as Mr Stewart submitted, of driving the proverbial coach and horses through the protection afforded by the CCA .

502. Moreover, in Binder the Court of Appeal appears to have laid emphasis on the fact that what was involved was a bona fide compromise of a genuine issue of fact as to whether the Moneylenders Acts applied at all. That principle has been applied to other statutory provisions: cf Foskett on Compromise (8th edn) at §7-32 (although parties cannot contract out of the protection of the Rent Acts, that does not prevent a bona fide compromise of a genuine dispute of fact as to whether a statutory provision applies); A-G v Trustees of the British Museum [2005] EWHC 1089 (Ch) at [28] per Morritt V-C (a bona fide compromise could be made of the question whether a statutory prohibition on disposal of objects vested in the trustees as part of the museum’s collection applied); and FPH Law v Brown [2016] EWHC 1681 (QB) at [29] per Slade J (a bona fide compromise of an issue as to the enforceability of a CFA). But if that is the principle, it does not directly assist CPC. There was no issue, or none at any rate that has been identified, as to whether the agreements preceding the Settlement Deed were credit agreements such that the CCA applied. What was compromised was not any genuine issue of fact which went to the applicability of the CCA . What was compromised was any claim that Mr Holyoake had under the CCA .

503. I proceed therefore on the basis that the Settlement Deed does not act as a jurisdictional bar to the Court considering whether the relationship between the parties was unfair, both in the period up to and including the entry of the Deed and in the period thereafter.

504. On the other hand that does not mean the Settlement Deed is just to be ignored as if it did not exist. The policy considerations referred to in Binder – that it is the policy of the Court to encourage good faith compromises, and to enforce compromises when they are made – seem to me to continue to apply. In considering whether the relationship between the parties is unfair, or in considering what order, if any, to make in the exercise of the discretion in s.140B, it seems to me highly relevant that the parties have reached a compromise of that issue, and for this purpose the matters referred to by the Court of Appeal in Binder – was there a genuine dispute, was there a fair arguable case on each side, was the compromise bona fide or were its terms colourable, are the terms fair and reasonable, has the lender taken undue advantage of the borrower, were both sides advised by competent lawyers – are just as applicable. Roskill LJ gave an example at 160D-E of a liquidator seeking the sanction of the court to a compromise where there is a moneylending defence:

“Is the court to investigate the whole matter, or can it look at the matter broadly and see whether a bona fide compromise should be arrived at or has been arrived at? In such a case it seems to me clear that the court should encourage and when appropriate enforce any bona fide compromise arrived at, especially one arrived at under legal advice.”

    1. Having set out the circumstances leading to the “Settlement Agreement” in Holyoake Mr Justice Nugee said [509]:

“In those circumstances, I am satisfied that the Settlement Deed was a bona fide compromise. In my view it should be given effect to and not disturbed. Taking the matters I have referred to above from Binder: there was indeed a genuine dispute whether Mr Holyoake had any viable CCA claims, there was a fair arguable case on each side, the compromise was bona fide and its terms were not colourable, and Mr Holyoake entered into it after receiving legal advice. Lord Denning MR also refers to whether the agreement reached was fair and reasonable, but this cannot require the Court to undertake a detailed examination of the underlying merits of the claims, as the whole purpose of the compromise is to avoid the necessity for that. That is why Roskill LJ referred to taking a broad view, and, taking a broad view, I consider that the terms were fair and reasonable. In return for giving up his CCA claims, Mr Holyoake not only obtained CCA’s release of its claims under the existing contracts, but also the withdrawal of the proceedings (in which, as Mr Lord submitted, the Qualifying Contract deception would have come to light) and a significant extension of time to sell GGH.”

    1. Like Holyoake the sum lent to Lanza and guaranteed by MG was high value lending between commercial parties. CFL was known to MG as a “lender of last resort” and it was known to him that a loan from CFL would attract high interest. It was agreed by MG that Lanza would repay the sum and interest in four months from the date of the loan. MG explains that he expected one of the discretionary trusts to repay the debt in full in the four-month period. His expectation was not met, and his personal guarantee called upon. The Part 7 claim set out in full the claim made pursuant to the personal guarantee. A defence was filed. A strike-out application threatened, and the proceedings settled. None of these steps were taken by MG alone. He had the benefit of legal advice and in particular solicitors acted for him when he agreed to the Tomlin Order.
    2. MG decided that the pleaded defence, that the sums due under the personal guarantee were governed by the CCA, that no interest was due or that the terms were penal would be compromised; and CFL agreed not to pursue the whole debt but to take part-payment of the sums claimed in full satisfaction. Both parties agreed to give up an entitlement to have their positions determined by a Court. It has not been said that the issues were not compromised. It has not been argued that what was compromised was not any genuine issue of fact or law which went to the enforceability of the debt. There is no claim for rectification and, as I have mentioned, no vitiating factor has been advanced. It is common ground that MG acted on the Contract and satisfied some of his obligations under clause 2 of the Contract. It is unlikely that he would have done so if the Contract had not been a genuine attempt to compromise the Part 7 proceedings.
    3. The Contract was made at arms-length in circumstances where MG agreed, with the assistance of legal advice, that its terms superseded the guarantee: it “fully sets out the terms agreed between the Parties and supersedes all previous agreements”.
    4. Taking account of public policy considerations referred to in Binder that (i) there should be finality, (ii) the same party should not be subject to the same claims by the same person more than once, and (iii) encouraging, and when appropriate enforcing any bona fide compromise, especially one arrived at under legal advice, I find that the terms of the Contract were fair and reasonable and I am satisfied that the Contract constituted a bona fide compromise and the Court should not, in the absence of vitiating factors, go behind the agreement.
    5. My findings make it unnecessary for the Court to consider whether there has been a breach of sections 77A, 86B or section 140A of the CCA.

(iii) Penalty

    1. It is not in dispute that clause 5 of the Contract is a secondary obligation. It is said that the Contract was drafted so that any default, however minor, would result in the debt immediately multiplying to millions. An example of this is that Mr Gertner was 8 days late in making the first instalment payment and this placed him in default such that paragraph 5 required him immediately to pay approximately £5 million. The monthly compounding provision in paragraph 5 has caused the debt to reach £33 million. Mr Kirk argues that this is “out of all proportion” to the legitimate interest of CFL, which has already recovered £3.34 million from the original commercial loan of £3.5 million.
    2. The law of penalties was recently reviewed by the Supreme Court in Cavendish Square Holdings v Makdessi [2016] AC 1172 where previous authority that an agreed damages clause must be a genuine pre-estimate of loss in order to be enforceable was reconsidered. The Supreme Court considered that the inquiry should be whether the relevant clause is justifiable and not unconscionable. The relevant clause has to be a secondary obligation. Lord Neuberger explained [32]:

“The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance. In the case of a straightforward damages clause, that interest will rarely extend beyond compensation for the breach, and we therefore expect that Lord Dunedin’s four tests would usually be perfectly adequate to determine its validity. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations.”

    1. As the purpose of most or a good deal of penalty clauses is to compensate the loss resulting from the breach, if the level of damage is exorbitant or disproportionate to a great extent with “the highest level of damages that could possibly arise from the breach” it is likely to be a penalty. Makdessi considers the position where compensation is not sufficient to compensate for the loss caused to the innocent party because the innocent party has a particular interest in performance. In these circumstances, the parties may agree compensation that goes beyond what may objectively be considered proportionate. The Supreme Court has recognised that arms-length contracting parties may legitimately agree compensation that is extraordinary and is not a genuine pre-estimate of loss. An example of a legitimate interest in the performance of the defaulter’s primary obligations can be gleaned from one of the appeals in MakdessiParkingEye Ltd v Beavis. Lord Neuberger explained [99]:

“In our opinion, while the penalty rule is plainly engaged, the £85 charge is not a penalty. The reason is that although ParkingEye was not liable to suffer loss as a result of overstaying motorists, it had a legitimate interest in charging them which extended beyond the recovery of any loss. The scheme in operation here (and in many similar car parks) is that the landowner authorises ParkingEye to control access to the car park and to impose the agreed charges, with a view to managing the car park in the interests of the retail outlets, their customers and the public at large. That is an interest of the landowners because (i) they receive a fee from ParkingEye for the right to operate the scheme, and (ii) they lease sites on the retail park to various retailers, for whom the availability of customer parking was a valuable facility. It is an interest of ParkingEye, because it sells its services as the managers of such schemes and meets the costs of doing so from charges for breach of the terms (and if the scheme was run directly by the landowners, the analysis would be no different). As we have pointed out, deterrence is not penal if there is a legitimate interest in influencing the conduct of the contracting party which is not satisfied by the mere right to recover damages for breach of contract.”

    1. There is little guidance on what may constitute a legitimate interest, save that there can be no legitimate interest in punishing the defaulting party. The high interest rates that were imposed as a condition for lending to Lanza with very high defaulting rates were in keeping with (i) the nature of the lending that was urgent and very short term and (ii) the nature of the lender which was known as a lender of last resort. Such a lender is only approached in circumstances where the lending is for short term and a borrower is unable to obtain finance elsewhere. I infer that MG was unable to obtain finance for Lanza from other sources. The failure of MG to respond positively in repaying the debt due under his guarantee and submitting to the Tomlin Order as a result of a threat to issue an application for summary judgment many years later may go some way to legitimising CFL’s particular concern or interest in MG’s performance. Although not expressly stated by MG, the argument must be that CFL had no such legitimate interest and therefore the high interest rates found in the secondary obligation contained in Clause 5 of the Contract were intended to punish MG. By accelerating payment and requiring compound interest, Clause 5 went beyond mere compensation for breach of operative clause 2 of the Contract. The full background and legitimacy issue has not been covered by the evidence, but in my judgment find that the observation made by Lord Hodge JSC in Makdessi [266] pushes the penalty argument below the threshold test of a serious and genuine dispute. This is because “the extent of the disproportion is likely to depend on the bargaining power of the parties and their access to legal advice…..the greater the equality of bargaining power, the greater the access to legal advice, the less likely it is that the clause will be held to be a penalty”: Goode on Commercial Law 3.136. As I have mentioned Mr Kirk did not advance the penalty argument in oral submissions but has cited Makdessito advance his case. There has been no submission that there was inequality of bargaining power. MG must accept that he had access to legal advice and was advised by skilled lawyers. In my judgment these factors lead me to conclude that it is not genuinely arguable that there is any disproportion between the parties, or that the Contract was not entered into with eyes wide open and on careful legal advice.
    2. In reaching my conclusion I have in mind that “the power to strike down a penalty clause is a blatant interference with freedom of contract and is designed for the sole purpose of providing relief against oppression for the party having to pay the stipulated sum. It has no place where there is no oppression”: Elsey v J.G. Collins Insurance Agencies Ltd (1978) 83 D.L.R. (3rd) 1, 15. There is no obvious oppression where parties freely enter into a contract at arms-length following litigation and where the challenging party had the benefit of legal advice. This is sufficient to put pay to the argument insofar as it was advanced, but there is an additional reason why I find in favour of CFL on this issue.
    3. HHJ Keyser QC observed at paragraph 27 of the First Judgment that “on 18 November 2015 affidavits by and on behalf of Mr Gertner were served on CFL in opposition to the bankruptcy petition. Although the written evidence disputed the debt relied on in the petition, they did not show any convincing reason why Mr Gertner should not be bound by the settlement agreement; their function seems to have been tactical”. The grounds set out in the evidence mentioned by HHJ Keyser QC included (i) there was an agreement that no interest would be payable and (ii) the interest rates were penal.
    4. I agree with the learned Judge’s observation and adopt his reasoning for finding that the argument is not genuine or substantial. MG has a history of running arguments and then not proceeding with them. One such instance deserved comment from Patten LJ in the Appeal Judgment: “Mr Gertner has asserted in evidence that the loan made in September 2008 was part of a fraud on the part of Kaupthing’s directors and was therefore unenforceable. But that point has never been pursued in the litigation and no discount was made on account of it when formulating the IVA proposal.” The argument set out in the 18 November 2015 affidavits directly challenged the petition debt despite the Tomlin Order. As HHJ Keyser QC observed when construing the KSA, “the Gertner Parties were precluded from asserting any right of claim or counterclaim against Kaupthing; their rights, too, lay only in enforcement of the terms of the KSA under the Tomlin Order”.
    5. I make the same observation in respect of the IVA proposals as Patten LJ, when formulating the proposal, the debt due to CFL under the Contract was accepted in full (calculated at value). The failure to run the penalty claim or not to pursue it by way of a defence when MG had a chance to do so in the Part 7 proceedings, the compromise and the acceptance of the CFL debt in proposals to creditors preclude MG from reopening the issue now. I mention that it is also submitted by Mr Phillips QC that the issue of whether or not the interest and/or the compound interest were penalties, has been raised by Mr Gertner in response to the bankruptcy petition and has not yet been ruled upon because the bankruptcy petition was stayed pending the outcome of the section 262 challenge. That does not diminish the reasoning I have provided above, but in any event the argument of Mr Phillips has only a superficial attraction. There was no challenge to the CFL debt in the section 262 matter. The defence had been compromised in the Part 7 proceedings, and the rights and obligations of MG are now governed by the Contract. One of the rights that he gave up when entering into the Contract was to forfeit the right to defend the claim to interest on the ground it contravened the common law on penalties. That ignores the principle in Johnson v Gore Wood & Co (No 1) [2002] 2 AC 1. The whole picture is needed to be considered. To permit him to re-open that argument at the hearing of a bankruptcy petition in order to argue that the debt contained in the petition is not liquidated, and after failing to contest a statutory demand which set out the same debt, is to argue, in substance, that he may contravene the principle in Turner v Royal Bank of Scotland [2000] BPIR 683 at 687,688, 693-694; and Coulter v Dorset Police (No 2) [2006] BPIR 10 at para 22; Harvey v Dunbar Assets plc [2017] EWCA Civ 60. The fact that the petition for bankruptcy was stayed is not relevant.
    6. I repeat my observations (where relevant) made in paragraph 43 above. There are no vitiating circumstances and “prima facie everybody would suppose that a compromise means that the question is not to be tried over again” (Plumley v Horrell (1869) 20 LT 473, 474). I am of the view that MG cannot, some 8 years after entering into the Contract, claim that the secondary obligations constitute a penalty.

The Laser Trust debt- nature and quality

(i) The Laser Trust

    1. There is a difference of view as to how to interpret the Appeal Judgment where it dealt with the issue of good faith. I shall deal with this below. In this section of the judgment I shall also consider the evidence provided by the Laser Trust. This is essential when determining the nature and weight to be given to a creditor’s view at the hearing of a petition.
    2. As regards the Laser Trust, its origin and identity is not in doubt. It was established by a trust deed (“Trust Deed”) dated 1 July 2003 on the instruction of Mrs Yael Levison. Mrs Levison is the wife of Mr Leib Levison, a businessman in the care home and real estate sectors (it is estimated that the assets in Mr Levison’s nursing home portfolio are over US$100 million). It was Mr Levison who was to make the one-off payment to the IVA. Since 10 December 2018, the sole trustee of the Laser Trust has been Mr Yitzchak Steinberg (“Mr Steinberg”), a lawyer and notary practising in Israel. In his witness statement Mr Steinberg states that the Laser Trust does not have an investment advisor or administrator or any similar service provider. Nor does the Laser Trust have any financial statements or accounts.
    3. It is asserted that the Laser Trust is not an associate of MG and no issue is taken on this, although Mr Atherton sought to differentiate an associate and independence for voting purposes. He submitted that although he was not seeking to:

“extrapolate the idea that if you take an assignment, say, from an associate, you are an associate. That is not the point at all. It is not the difference between associate and non-associate; it is the difference between independent and non-independent. There are many ways that you can have a relationship between debtor and creditor, which is not formally connected for the purposes of the Act, not formally an associateship for the purposes of the Act, that nevertheless require the court to consider the nature of that relationship in terms of the question of independence”

    1. Mr Atherton was pursuing the position that Mr Levison was the person who had been involved in the IVA and is either directly or indirectly connected with the Laser Trust. As such he invites the Court to infer that he is not and neither is the Laser Trust, wholly independent. He also raises the issue of whether MG or one of the family trusts been involved financially in the KSA through the Laser Trust. I shall turn to the evidence later, and in the usual way consider it against the background of all the other admissible evidence and material in order to judge if these allegations can be made good.
    2. One beneficiary only is named in the Laser Trust deed, that is Ponevez Institutions, Israel. Mr Steinberg’s evidence is that the Ponevez institution is an educational organisation that comprises a chain of institutions including Ponevez Yeshiva, which was founded over 80 years ago and is one of the leading (and largest) yeshivas in the world. The institution is very highly regarded within the Orthodox Jewish community, and Mr Steinberg has confirmed that it is entirely independent of MG and his family. Mr Steinberg as trustee, is given wide discretionary powers so that the Ponevez institutions need not be the only beneficiary. He is provided with an express power to make “any investment although of a speculative nature … as the Trustees shall in their absolute discretion think fit” and “to gift all or any part of the Trust fund”. Clause 5 of the Trust Deed sets out the trusts upon which the assets of the Laser Trust are to be held. Subparagraph (e) provides that the Trustees shall hold the Trust Fund “subject to the foregoing trusts upon trust … for such charitable purposes as the Trustees shall determine and in default of and subject to such determination for charitable purposes generally”.
    3. In the First Judgment the Court found that “the purpose of the KSA was to assist Mr Gertner by buying off a creditor, not to enable Laser Trust to sue him”. The Judge was required to construe the KSA. In order to do so he had to take account of the whole document, setting out the relevant clauses. He considered that the definition of “Related Parties” was relevant and noted that Clause 3.1 provided that: “Laser Trust shall pay Kaupthing the total sum of US$6 million by close of business on 15 December 2015”. He explained that it was common ground that the Laser Trust had made the payment of US$6 million in accordance with clause 3.1. and noted that Clause 3.6 provided “On or before execution of this agreement the parties shall enter into or procure that the relevant parties enter into and adhere to the profit sharing agreements in substantially the form of the draft agreements in Appendices 2, 10 and 11 regarding the future profits of Indus Trading Limited, Maskelyn Limited and Readinse Limited respectively.” He said that “each of the three companies mentioned in Clause 3.6 is a claimant in the Gertler Arbitration, and the principal effect of the profit-sharing agreements is to give Kaupthing a share in any recoveries made in that Arbitration in exchange for release of the respective companies from liabilities said to have been owed to Crosslet Vale, the Moises Gertner Trust and the Mendi Gertner Trust. In each of the profit-sharing agreements the recitals mentioned the Dispute and the Proceedings and the parties to them and recorded: “Those parties have settled their differences on a binding basis by way of a settlement agreement dated 11 December 2015.”
    4. The Judge found that “the definition of Related Parties was wide enough to include Laser Trust as assignee” and that Kaupthing was no longer a creditor at the time of the meeting of creditors as the KSA, despite including saving provisions, on his interpretation, prevented its debt from being enforced. He found that if he was wrong and it could be enforced then the debt was contingent and therefore unliquidated or unascertained. He also found, importantly for the matter before the Court now, that there was a breach of good faith because the KSA enabled Kaupthing to receive collateral benefits that were not available to other creditors.
    5. In the Appeal Judgment Patten LJ reached a different conclusion to the first instance Judge and found, that there was no reason in law to find that the Kaupthing debt could not remain live. The saving provisions kept the debt alive for purpose of voting: “I can see no reason in law why a creditor cannot preserve the existence of a debt owed to him whilst at the same time agreeing to take no steps himself to enforce the liability”. He also found that the debt was liquidated and ascertained.
    6. At paragraphs 47-48 Patten LJ explained:

“I agree with the judge that the KSA was not conditional in the sense that neither party came under any contractual obligations on the execution of the agreement and clauses 6 and 7 had no operation at the time of the creditors’ meeting. At the time when the KSA was signed on 11 December Kaupthing was undoubtedly a creditor of Mr Gertner and had commenced proceedings against him under the guarantee. Although Mr Gertner had formally contested liability, there is nothing to indicate that he had any serious defence to the claim and Kaupthing as his largest creditor was in the position to pursue him into bankruptcy unless satisfactory arrangements could be made for the compromise of its claims”.

    1. At paragraph 54 of the Appeal Judgment Patten LJ explained “there is nothing in the KSA which limits the rights of Laser Trust to enforce the liability post assignment of the debt. All that clause 6 and 7 do is to protect Mr Gertner against Kaupthing by restricting its right to enforce the guarantee”.
    2. His observation in respect of the Laser Trust was that “there is no suggestion that the funds which Laser Trust will provide to finance the KSA are in any sense assets that belong to Mr Gertner or would otherwise be available to his general creditors including CFL”.

(ii) The Appeal Judgment – a difference of view

    1. There is a difference of view as to how the good faith principle and the identified breach was applied in the Appeal Judgment. Ms Toube QC argues that paragraph 80 of the Appeal Judgment should be read as if it were dealing with the Kapoor case, so that the words “the vote of the creditor who is a party to the collateral arrangement falls to be excluded” (the “exclusion rule”) were being used to contrast Kapoor with the present case. It is not part of the law, argues Ms Toube, that whenever a creditor has a collateral agreement, that creditor will be automatically excluded. Mr Atherton argues that the Appeal Judgment was addressing the Kapoor position and applying the exclusion rule to the circumstances of the case before it. He argues that the Appeal Judgment reviewed the jurisprudence relating to good faith in the context of individual voluntary arrangements, and found it was not restricted to a failure to disclose a collateral agreement.
    2. The Appeal Judgment upheld the decision of HHJ Keyser QC analysing the extent of the principle by reference to Cadbury Schweppes v Somji [2001] 1 WLR 615, and Kapoor v National Westminster Bank plc [2011] EWCA Civ 1083. Etherton LJ (as he was) explained in Kapoor at paragraphs 67 and 68:

“it was expressly provided in r 5.23(4) of the 1986 Rules that the resolution approving the IVA would be invalid if more than half in value of the independent creditors, that is non-associates of the debtor, voted against the resolution…. The arrangement given effect by the assignment in the present case was patently intended, and intended only, for the purpose of subverting that legislative policy. The contrary is not asserted on behalf of Mr Kapoor. It is at one extreme end of a spectrum of transactions of questionable legitimacy, that is to say consistency with the legislative policy underlying r 5.23(4).”

    1. And he explained why there was a subversion of the policy on the facts of that case:

“Not only was the arrangement wholly uncommercial, from Mr Chouhen’s perspective, in that it inevitably involved him paying more for the assignment than he would ever realise and retain in respect of the assigned debt, but, as Mr Smith forcibly submitted, the obligation to return to Crosswood 80% of the distributions received by Mr Chouhen under the IVA meant that in reality Crosswood only ever parted with a small part of its economic interest in the assigned debt. The assignment was designed to confer voting rights on Mr Chouhen with a value of £4m, but to part with only a fraction of the true financial value of the assigned debt”.

    1. And at paragraph 69 Etherton LJ concluded:

“I agree with Mr Smith that the well-established good faith principle applicable to agreements between a debtor and creditors is capable of colouring, and should colour, the meaning of that expression. That reflects the approach of the Court of Appeal in Somji’s case. In my judgment, interpreting s 262(1)(b) against the background of the good faith principle and the legislative policy reflected in r 5.23(4), it was a ‘material irregularity at or in relation to … [the] meeting’ approving Mr Kapoor’s IVA to take into account Mr Chouhen’s vote for the purposes of r 5.23(4) when to do so would give effect to an arrangement solely, patently and irrefutably designed to subvert the legislative policy underlying that provision and without any commercial benefit intended or claimed for Mr Chouhen. It was an uncommercial arrangement inconsistent with any notion of good faith between Mr Kapoor and his independent creditors, or between Mr Chouhen and Crosswood, on the one hand, and the independent creditors, on the other, and was designed solely to subvert a critical principle of legislative policy as to the conditions for approval of an IVA. That is a perfectly apposite example of ‘irregularity’, giving the word one of its normal meanings as something which is lacking in conformity to rule, law or principle”.

    1. At paragraph 78 of the Appeal Judgment Patten LJ quoted paragraph 74 of the decision of in HMRC v Portsmouth City Football Club Ltd [2010] EWHC 2013 (Ch) where Mann J observed: “If it were the case that these creditors had no real interest in the CVA at all then there might be something in it. Why should those with no interest in the CVA at all, and who were being paid outside it, be entitled to force unwilling creditors into a CVA which is not approved by a requisite majority of that smaller class?”
    2. The mischief identified in the Appeal Judgment is described at paragraph 79:

“Putting aside for the moment questions of non-disclosure, what Kaupthing received under the KSA was a significant financial advantage over what Mr Gertner had offered to his other creditors under the proposal. There has been much argument and not a little evidence about whether the terms of the KSA were intended, so to speak, to buy Kaupthing’s vote. But it is in my judgment obvious, as I have already said, that, looked at objectively, the additional consideration was intended to act and must be presumed to have acted as an inducement to Kaupthing to support an arrangement which would avoid Mr Gertner’s bankruptcy. Although Kaupthing was not in terms required to vote in favour of the proposal, it had every incentive to do so and the KSA was deliberately drafted in such a way as to enable Kaupthing to remain a creditor at the time of the meeting. The remaining creditors by contrast would be limited to the dividend provided under the proposal and any further investigation of Mr Gertner’s asset position (including, for example, in relation to the claims in the arbitration) would be effectively stifled.” (my emphasis)

    1. The undisclosed presumed inducement may have been sufficient in itself to find that there had been a breach of good faith. But it was not the only factor as Patten LJ considered the effect the IVA would have on other creditors (the last sentence of paragraph 79) and went on to cite, with approval, the reasoning of HHJ Keyser QC in the First Judgment that supported the breach of good faith principle:

“First the KSA radically alters the commercial significance of the Proposal for Kaupthing as compared with the other creditors. For CFL and others, the opportunity offered by a bankruptcy was to be replaced by a return that might be regarded as de minimis. Upon the approval of the Proposal, those creditors would, for example, lose any chance to investigate whether potential benefits of the Gertler Arbitration would be the beneficial property of Mr Gertner. Instead they would have a share in what was left of the £487,500 after HMRC had been paid off and the costs of the IVA had been discharged. Kaupthing, by contrast, was to receive a share of whatever proceeds were recovered in the Gertler Arbitration. Mr Gertner confirmed his expectation as to the scale of the benefit that Kaupthing would receive: “The offers to settle [in the Gertler Arbitration] are into the hundreds of millions that have been made, so therefore what I say to you is that any amount that the bank will receive is a substantial amount. It’s not a small amount that the bank is keeping…How much will be out of litigation, I have no idea, but I do not think that it will be whole [i.e. full payment of the amount claimed by Kaupthing], but it will be substantially more than other creditors who borrowed at such a time of very high assets would have repaid the bank, so I hope and I pray that it will be a substantial amount.” The consequence seems to me inevitably to be that Kaupthing’s commercial interests in the outcome of the creditors’ meeting were quite different from those of the other creditors. Indeed, the fact that approval of the Proposal would tend to put investigation of the beneficial interest in the Gertler Arbitration out of the reach of the other creditors indicates the clear conflict that arose between Kaupthing’s interests and those of the general body of creditors. I regard this as a breach of the principle of good faith“. (my emphasis)

    1. Patten LJ was unequivocal in stating, at paragraph 81 of the Appeal Judgment, “I agree with this”.
    2. He then proceeded to differentiate the football creditor cases from this matter and described the KSA as “an ad hoc private arrangement designed to give the largest and most influential creditor an additional financial advantage not made available to any other creditor in the IVA.” In my judgment an arrangement designed to give the largest and most influential creditor an additional financial advantage not available to other creditors is highly relevant, if not critical.
    3. The good faith principle described by Bingham LJ (as he was) in Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989] QB 433, 439-445 is consistent with the findings of HHJ Keyser QC, adopted in the Court of Appeal. He said that the principle “does not simply mean that they should not deceive each other …; its effect is perhaps most aptly conveyed by such metaphorical colloquialisms as “playing fair,” “coming clean” or “putting one’s cards face upwards on the table.” It is in essence a principle of fair and open dealing …” (emphasis supplied).
    4. The ad hoc private arrangement described by Patten LJ, meant that the largest and most influential unsecured creditor could vote for an outcome for which it had little or no interest because it had recourse to assets outside of those which were available for all unsecured creditors. The effect was to create different classes of creditor even though the creditors had no pre-transactional bargain to sit in a different class (such as secured creditors). Creating classes through the medium of a private arrangement, was manifestly unfair and would have serious consequences on the less influential creditors restricted to share a much smaller and distinct pool of assets. In my judgment this is the true interpretation of the Appeal Judgment. The Court of Appeal found that notwithstanding the KSA there was no requirement for Kaupthing to vote in support of the proposal for the IVA. There is no suggestion that that is different in respect of the Laser Trust. The incentive to vote in favour of the proposal was to avoid bankruptcy, and investigation into the affairs of MG and the potential to set aside any antecedent transactions that may include rights provided to support his avoidance of bankruptcy.
    5. This is consistent with the description given in Kapoor, where Etherton LJ cited with approval Marc v Sandford (1859) 1 Giff 288 at 294. In that case Stuart V-C said that the principles employed are “consistent with ordinary principles of morality” and inform us that reference to public policy is significant.
    6. The need for transparency goes hand-in-hand with the good faith principle. Without transparency there can be no good faith. As was observed by Judge LJ in Somji at para 40, voluntary arrangements attract the application of the good faith principle as every proposal for an individual voluntary arrangement should be characterised by “complete transparency and good faith” (emphasis added). And “section 276 and the Rules encapsulate the principles of transparency and good faith” at para 44.
    7. I now turn to the evidence and have in mind the clear guidance provided by Judge LJ in Somji at para 43 that MG has an obligation to provide accurate information in the period up to the date and during a meeting of creditors and that the “information that is provided must be complete”. MG relies on the evidence of Laser Trust to demonstrate that the proposals for the Arrangement provide transparency and fair dealing.

(iii) The evidence

    1. The main evidence from the Laser Trust comes from Mr Steinberg, the sole trustee. He says that when he exercises any discretion as trustee, he has regard to the wishes of Mr and Mrs Levison, but he uses his own independent judgment in the best interests of the trust when making decisions. No reason is provided why he has regard to the wishes of Mr Levison who was not the settlor of the trust. His evidence is that the KSA was entered into prior to his appointment as trustee when Mr Hassan was the “decision-maker”. He therefore relies on evidence provided by Mr Hassan.
    2. Mr Hassan has not provided a witness statement, but Mr Steinberg exhibits a letter from Mr Hassan. In his letter dated 30 May 2019, carrying the heading “Finsbury Trust”, he explains that he was “aware of the debt owed to Kaupthing by Crosslet Vale, (ultimately owned by the Gertner Family Trusts), for which I also act as corporate director for this (sic) company I was also aware that Moises and Mendi Gertner had given personal guarantees on the company’s debt. With the knowledge shared by Mr Levison, it was evident that the Crosslet Vale creditors had a reasonable chance of being repaid a sum in the hundreds of millions. On this basis the opportunity to acquire this debt through the Kaupthing Agreement for just $6m seemed to be a fair value given the possibility of earning a very large profit for the Laser Trust”.
    3. Mr Steinberg says that the letter “indicates, the decision to enter into the KSA was made primarily for commercial reasons”. Mr Hassan does not stop there as he goes on to say “in addition to the profit motive, I should also make clear that I hold the Gertner family in very high regard, especially for their considerable charitable works over many years. I took the view that, even in the event the Trust fails to recoup its investment, the use of the Trust’s resources to intervene in this matter is nonetheless reasonable because the Trust was established for the benefit of an institute of religious education.” This is followed by: “Given the assistance afforded to such institution (sic) over the years by the Gertner family, the replacement of Kaupthing by a more patient creditor is a just recompense for the Gertner family’s works and as a result the Laser Trust had a strong motivation to acquire the debt from Kaupthing.”
    4. There are some obvious gaps and internal inconsistencies in the letter. There is no explanation given as to what was and what was not taken into account when reaching the conclusion that there was a “reasonable chance” or as Mr Steinberg later states (paragraph 23) a “real possibility” of a good return or that the “Crosslet Vale creditors” would be “repaid a sum in the hundreds of millions”. At paragraph 18(1), his statement refers to Mr Hassan’s letter which he says “notes the circumstances in which Mr Levison became aware of the prospect of “earning a very large profit from the Laser Trust. Mr Hassan’s letter refers to Mr Levison informing him that there had been some “settlement offers” in relation to a dispute between the Gertner Family Trusts and corporate entities established for the benefit of Dan Gertler and his family. Mr Steinberg comments in his witness statement that Mr Hassan says that he “made his own independent assessment of the value of the rights” but Mr Hassan says no such thing in his letter. Mr Hassan has failed to provide any reasoning or analysis of how he reached his decision in 2015 or gives any evidence that he had obtained professional advice when making his assessment. This is surprising since Mr Hassan was acting as sole trustee. Mr Steinberg in his witness statement [para 20] refers to “an additional reason why the Laser Trust was willing to enter into a transaction with such a high level of risk”. The term “reasonable chance” or “real possibility” of recovery is inconsistent with “high level of risk”.
    5. Mr Hassan’s position that Laser Trust was established for the benefit of an institute of religious education is inconsistent with purchasing a debt to assist a debtor on grounds that it would be more patient. The charitable purposes are educational although the trust instrument does provide for funds to be used for “charitable purposes generally”. It is not explained how the purchase of a debt with the intention of enforcing the debt even though patience may be shown, or voting in favour of an individual voluntary arrangement, falls within “charitable purpose generally” or what charitable purpose was intended. It has not been said that money was given to a charity for the destitute or even given to MG (Mr Steinberg explains that the Trustee has a right to make a gift under subparagraph 28 of the first schedule). That is unsurprising as a “person” must be nominated under paragraph 24. There is no evidence of a nomination. In any event it is not the case of Mr Steinberg that he gifted any money to MG or that was the intention. Mr Steinberg disavows the notion that the “Laser Trust’s decision to enter into the KSA” was to provide “a mere gift”. None of this explains the charitable purpose of purchasing the debt from Kaupthing. Furthermore, no evidence is provided to demonstrate that Kaupthing was impatient or why the Laser Trust would be more patient than Kaupthing. Indeed, the evidence is that Kaupthing was prepared to be patient, was not commercially interested in a dividend within the IVA and content to obtain a return elsewhere.
    6. Mr Steinberg’s witness statement next deals with issues raised by Ms Blom-Cooper (solicitor in charge of this litigation at Mishcon de Reya acting for CFL). He asserts that “that Mr Gertner’s proposed IVA represents a better deal for the Laser Trust…than bankruptcy…” He fails to explain why there is in his view no prospect of asset recovery if a bankruptcy order were to be made or give any consideration to the possibility of the claw-back provisions. An objectively-minded commercially orientated creditor is more likely than not to consider alternatives when such a low dividend is proposed. His lack of concern or comment about a financial loss for the Laser Trust in terms of the time-value of money (as I have mentioned $6m was paid to Kaupthing in 2015), capital and a dividend is surprising for a sole trustee and unexplained.
    7. The evidence regarding the ability of Laser Trust to recover “large sums” is unsatisfactory because it carries no analysis or reason for why the Laser Trust believes it will recover “large sums”. Mr Steinberg explains in his statement that the assignment of the Kaupthing debt includes not just the rights against MG but rights against Crosslet Vale and Mendi Gertner. It is said that the Laser Trust intends to pursue those claims. I asked Ms Toube QC (and Mr Amey) if any claims had been made against either of these parties. I was informed that instructions would be given. Yet Crosslet Vale has not recovered from the Israel arbitration and Mendi is said to be insolvent. Mr Steinberg states: “I also understand that Mr Mendi Gertner is a wealthy man….”. Ms Toube said that he was insolvent in 2015, but things change. There is no evidence that there has been a change to Mendi’s financial affairs. The statement that he is wealthy remains inconsistent with the evidence before the Court. It is known that Mendi Gertner was a guarantor of the Crosslet Vale debt and that debt has not been repaid. The lack of detail from Mr Steinberg is consistent with his lack of analysis as to the merits of the claims and consistent with Laser Trust not having “an investment advisor or administrator or similar service provider [nor]…financial statements or accounts”.
    8. In any event no proceedings had been issued. Laser Trust relies on the ability of Crosslet Vale to recover sums owed by Pitchley Properties Limited which are said to amount to a considerable sum. In order for that sum, or I infer any sum, to be recovered, Pitchley Properties Limited has to be successful in the arbitration. The arbitration has been proceeding for 10 years. It is surprising, in these circumstances that there has been no analysis or update of the arbitration proceedings and surprising that no detail has been provided in the evidence of Mr Steinberg. In respect of a claim against Mr Gertler (in the arbitration), the height of the evidence produced to demonstrate that he is worth pursuing, comes in the form of a magazine.
    9. Mr Steinberg says that he “categorically” denies that MG used any of his own money to buy the KSA debt or “that the Laser Trust is being used as a conduit to pay Mr Gertner’s own money to the trustees”. He asserts that the “funds held by the Laser Trust were provided ultimately by Mrs Levison”. There is no explanation for the use of the word “ultimately”. There is no evidence from Mrs Levison and the assertion is contradicted by MG who states in his witness statement that the settlor was Mr Levison: “Laser Trust was established by Leib Levison…[who] is a friend who was prepared to provide me with limited funds to assist me during my financial difficulties” (para 42 of his statement dated 31 May 2019). In his proposals to creditors he states that the trust was “established by Mr Levison”. In fact, the settlor is named as a company known as Mutual Trust Management [Gibraltar] Limited and no details are provided about this Gibraltar Trust. With a trust fund that has no accounts or financial statements his failure to provide a source for his evidence is in, and of itself, extraordinary. This is not just pedantic. The circumstances leading to this petition, the revoked IVA and proposals for the Arrangement militate towards transparency and the obligation of MG who relies on this evidence is to provide a “complete” picture.
    10. In her second witness statement dated 10 June 2019 Ms Blom-Cooper makes the following observations that, in my judgment, have force:

“Mr Steinberg now says in his witness statement that the KSA was entered into, “primarily for commercial reasons” and that Laser Trust potentially stands to make a very healthy profit in return for its $6m investment. This is wholly inconsistent with what was said in paragraph 2 of Mr Steinberg’s letter to Teacher Stern dated 16 April 2019 which put forward a primary charitable purpose for the assignment”

“The Trust appreciated that the money they provided might not be recoverable but was intended by Laser Trust to reflect the efforts that Mr Gertner and the Family Trusts had made over the years to support worthy causes internationally.”

“It is tolerably clear that this change of case has been introduced in a last-minute attempt to answer CFL’s legal arguments in relation to the applicability of the Court of Appeal decision in Kapoor to the facts of this case. This is clear not only from the timing of this change of case, but also from the fact that the alleged commercial upside now relied upon makes no sense at all:

(i) The alleged commercial upside is said to be the ability of the Laser Trust to recover the Kaupthing debt from Crosslet Vale and Mr Mendi Gertner (Mr Gertner’s brother). Mr Steinberg asserts that Crosslet Vale will (indirectly) receive a large portion of the proceeds of the Arbitration and that Mendi Gertner is a, “wealthy man in his own right” and that the Laser Trust intends to pursue both Crosslet Vale and Mr Mendi Gertner for repayment of the assigned Kaupthing debt;(ii) It seems extraordinary that Laser Trust is willing to help one brother escape insolvency (for reasons that include his and the Family Trust’s contributions to charity) to then pursue the other brother (and indeed a company allegedly owned by the Family Trusts) for what are extremely large sums of money;

(iii) It is impossible for CFL to verify the (new) claim that Crosslet Vale does indeed stand to receive some or all of the proceeds of the Arbitration (if successful). In any event Crosslet Vale was a party to the KSA. In my view, it would have made no commercial sense for Crosslet Vale (which is allegedly owned by one of the Family Trusts) to agree that Kaupthing should have an upside from the Arbitration, which Mr Gertner said on oath in the First Challenge would be “a substantial amount”, the offers to settle having been “into the hundreds of millions” and that the Laser Trust could also enforce the Kaupthing debt to obtain another very substantial share of the proceeds of the Arbitration;

(iv) Mr Mendi Gertner’s asset position as at 10 December 2015, according to an affirmation which appeared at appendix 4 of the KSA was negative in the sum of £590,644,750….”

    1. Mr Atherton QC and Ms Leahy argued that the evidence from Laser Trust does not make commercial sense as Crosslet Vale would receive little by agreeing to share the fruits of the Arbitration:

“In oral submissions, Laser Trust attempted to meet CFL’s point by saying that Kaupthing and Crosslet Vale will both receive a share of the Arbitration proceedings. This does not answer CFL’s point. Crosslet Vale and the three parties to the profit-sharing agreements are all Gertner family companies. It would have made no sense for these companies to agree to pay the same debt twice over.What also makes no sense is the suggestion that Kaupthing gave up its claim against Crosslet Vale (which already had an indirect entitlement to a large share of the Arbitration proceeds) for a right to a share of the profits of the three other Gertner companies (which also have an entitlement to a share of the Arbitration proceeds). Further, had Kaupthing given up its claim against Crosslet Vale for an (in substance) equivalent claim against three other Gertner companies, then this is a point that would have been made very forcibly during the course of the section 262 challenge in support of R3’s position that Kaupthing had not received a collateral advantage, and had not been induced to enter into the KSA by a promise of a payment outside the IVA.”

    1. To counter these powerful submissions Ms Toube QC and Mr Phillips QC point to the evidence from Mr Steinberg that if the assignment bears no return the Laser Trust will be content. This is because the Gertner family had given support to Jewish charities over the years. I have set out the evidence above and shall turn to its reliability now.
    2. Ms Toube QC argues that the Court may not go behind the evidence of Mr Steinberg and should accept the evidence of Mr Hassan without more. The Court may not find the evidence unreliable or make a finding of dishonesty without having heard cross-examination: The Burden Group Limited [2017] BPIR 554. That the Court should not find a person dishonest without cross-examination is undeniable. That a Court may not find assertions made in a witness statement unreliable is not. Ms Toube further relies on Long v Farrer & Co [2004] BPIR 1218 where Rimer J said there are only limited exceptions when a Court should go behind statements of fact without cross-examination but where written evidence is manifestly incredible the Court may find it unreliable. In Portsmouth v Alldays Franchising Limited [2005] BPIR 1394 [12] Patten J (as he was) observed: “So far as the evidence is concerned, the mere fact that a party in proceedings not involving oral evidence or cross-examination asserts that certain things did or did not occur, is not sufficient in itself to raise a triable issue. That evidence inevitably has to be considered against the background of all the other admissible evidence and material in order to judge whether it is an allegation of any substance.” This has been followed in numerous occasions, for example See Smith Stylist Ltd v Harte Solutions Limited [2017] EWHC 2971; Dowling v Promontoria (Arrow) Ltd [2017] BPIR 1477. None of these cases were cited in The Burnden Group Limited where the Court was asked to decide a conflict of evidence (different to the exercise undertaken by Patten J (as he was). The Court’s practice of looking at all the evidence to weigh its credibility in the absence of cross-examination is long established. In National Westminster Bank Plc v Daniel [1994] 1 All ER 156, Glidewell LJ, giving the judgment of Court, referred to Standard Chartered Bank v Yaacoub [1990] CA Transcript 699 in which “Lloyd LJ, giving the decision of the Court with which Nicholls LJ agreed, said: ‘it is sometimes said that in an application under Ord 14 the court is bound to accept the assertion of a defendant on affidavit unless it is self-contradictory or inconsistent with other parts of the defendant’s own evidence, and that the court cannot reject an assertion on the simple ground that it is inherently incredible.’ Lloyd LJ then referred to Webster J’s decision in Paclantic Financing Co Inc v Moscow Norodny Bank Ltd, saying that it was not approved by the Court of Appeal. He then referred to the judgment of Bingham LJ in Bhogal v Punjab National Bank and continued: ‘In the present case I ask myself whether it is credible that an oral agreement was made in mid-January of 1985 as alleged by Mr Naidoo in his third affidavit. I have come to the conclusion that it is not.’ This led Glidewell LJ to agree with the decision in Standard Chartered Bank v Yaacoub where “Lloyd LJ posed the test: is what the defendant says credible? If it is not, then there is no fair or reasonable probability of him setting up a defence.” This, Glidewell LJ said, is a wider test that posed by Webster J who thought that affidavit evidence could only be rejected if it “contained in it …. evidence, [that] is inherently unreliable because it is self-contradictory, or if it is inadmissible, or if it is irrelevant…..[The Court can] reject a defendant’s evidence when there is affirmative evidence which is either admitted by the defendant or unchallengeable by him, and which is unequivocally inconsistent with his own evidence”. None of these cases were cited to the Judge in The Burnden Group Limited. Accordingly, I reject the submission made by Ms Toube QC that the Court must accept the assertions made in the witness statement of Mr Steinberg without more.
    3. In this matter I am not seeking to determine a conflict of evidence but whether the evidence is reliable. Weighing the evidence of the Laser Trust against the background of all the other admissible evidence and material in order to judge whether it is of any substance I find that the Laser Trust has provided little visibility, little or no analysis, and the evidence amounts to unsubstantiated assertion, carries internal inconsistencies, external inconsistencies or contradictions, has unresolved questions, relies upon evidence such as a magazine that carries little or no evidential weight, and relies on a letter from a previous trustee which itself carries little weight. The criticisms levelled by Ms Blom-Cooper and Mr Atherton in oral submissions are justified. The lack of explanation, the internal inconsistencies and failures I have outlined lead me to conclude that the evidence is unreliable. It cannot be described as evidence of substance or sufficient to “raise a triable issue”.
    4. The unreliable evidence does not undermine the debt assigned to the Laser Trust. It does affect the evidence to support (i) the explanation given for purchasing the debt from Kaupthing; (ii) the assertion that the Laser Trust has a commercial interest in the proposed Arrangement; and (iii) “that Mr Gertner’s proposed IVA represents a better deal for ……Mr Gertner’s other unsecured creditors than bankruptcy” as stated by Mr Steinberg. As the evidence is unreliable it does not support the assertion that the Laser Trust is free from the influence of MG or a Gertner Family Trust (or independent as Mr Atherton put it).
    5. I observe in his witness statement MG explains that he has a current salary of £75,000 which is paid to charity or to his wife for “family expenses”. The proposal for the Arrangement is dependent upon a payment of £450,000 being made from the Rosenberg Family Trust and “no other assets will be made available and no guarantees are offered in support of this arrangement”. There are two observations to make. First, as said by Ms Blom-Cooper in her witness statement there is no independent evidence that the contribution is third party money. Having regard to the background to this matter, the First Judgment and Appeal Judgment, it may be said that the Rosenberg Family Trust would have been keen to provide such evidence. Secondly as MG’s salary is given away to charity or sometimes used for expenses it is surprising, regardless of the size of the debts, that it, or a proportion of it, is not available to creditors over several years. In these circumstances there is no evidence to support the statement of MG that “the only way that my creditors will receive any monies is in an IVA”. I turn to the role of the nominees.

The role of the nominees

    1. Mr Khalastchi and Mr Bass of Menzies LLP are joint nominees for the Arrangement. Mr Khalastchi has provided a witness statement in which he explains the proposals and gives an account of the investigations he has carried out. He says that he was instructed following the decision of the Supreme Court to refuse permission to appeal on 11 February 2019 and set about reading the First Judgment and the Appeal Judgment. He informs the Court that he understands and knows his duties as joint nominee and is aware of SIP 3.1. He is satisfied that although his principal source of information was MG, “he has taken all reasonable steps to verify the information he has received and has seen two boxes of documents provided by Teacher Stern LLP but did not review them on the basis that the funds available to the Nominees were insufficient to undertake any detailed analysis or consideration of those papers”.
    2. Mr Shaw acting for the nominees explains that the nominees are neutral as to the outcome of this hearing but urges the court to find that they have carried out their duties and taken reasonable steps to confirm that MG’s financial position was not materially different from that represented by him.
    3. Mr Shaw refers me to the well-known case of Greystoke v Hamilton-Smith [1997] BPIR 24 (at 28-29) where Lindsey J set out some guidance for nominees:

“But within the scheme of the Act as discernible from the powers and duties given to the nominee it is, in my judgment, to be expected, as a minimum, of the nominee, at least in those cases where the fullness or candour of the debtor’s information has properly come into question, that the nominee shall have taken such steps as are in all the circumstances reasonable to satisfy himself and shall have satisfied himself on three counts. Leaving aside compliance with the formal requirements of the Act and rules they are, first that the debtor’s true position as to assets and liabilities does not appear to him in any material respect to differ substantially from that which it is to be represented to the creditors to be. Secondly, that it does appear to him that the debtor’s proposal as put to the creditors’ meeting has a real prospect of being implemented in the way it is to be represented it will be. A measure of modification to proposals is possible under s 258 so this question is to be approached broadly. Thirdly, that the information that he has provides a basis such that (within the broad limits inescapably applicable to what have to be the speedy and robust functions of admitting or rejecting claims to vote and agreeing values for voting purposes) no already-manifest yet unavoidable prospective unfairness in relation to those functions is present.Reverting, then, to only the three counts I have mentioned, what steps are reasonable in the circumstances for a nominee to satisfy himself will, inevitably, depend on a host of variables such as the strength of the grounds for such questions or doubts as shall have arisen, their materiality to the propriety or feasibility of the debtor’s proposals, the quality of the debtor’s answers to the nominee in intended resolution of those doubts, the ease or difficulty with which independent inquiry by the nominee may resolve any continuing doubts, the expense entailed in such further inquiry and the availability of funds to meet that expense. Plainly, the less inquiry the nominee undertakes, the more important, in terms of reliance upon it, becomes the fullness and candour of the information provided by the debtor. If, for whatever reason, the nominee’s inquiries in questionable cases have been so restricted or unsatisfactory that the nominee would be unable to assure creditors that he had satisfied himself that those three minima were met, then he should not unequivocally report, under s 256(1)(a), that in his opinion a meeting of creditors should be summoned. Where such doubts have reasonably arisen it cannot be right for the nominee unquestioningly to accept whatever it put in front of him on the supposed basis that it is not for him but for the creditors to accept or reject the proposal; it is fundamental to the intended operation of IVAs that what the creditors vote upon is not the debtor’s raw material but a proposal that, at least to the qualified extent I have described, has survived scrutiny and which, to at least that extent, has commended itself to an independent professional insolvency practitioner as proper to be put to, and capable of being not unfairly voted upon by the creditors. Although it may be said, in the broadest terms, that the plan of the 1986 Act in relation to IVAs is ‘Leave it to the creditors’, it is not, in other words, anything that is so to be left; the formalities apart, the ‘it’ to be left to them by the nominee has (at least in the cases of doubt which I have described and with which I am, for the moment, concerned) to have met the three minima I have mentioned.”

    1. Mr Khalastchi states that his investigations show that MG’s financial position is not manifestly different from that contained in the proposal; that from the information he has, he does not conclude that the IVA is manifestly unfair; and if Laser Trust are entitled to vote, the IVA will be approved and implemented. In reaching these conclusions he has had regard to the Appeal Judgment which informs him that the Laser Trust debt is an enforceable debt; information provided by MG; land registration documents for the property disclosed by MG; the Laser Trust deed, confirmation from the Laser Trust that it is not connected to MG and, that he had received the sum promised by the Rosenberg Family Trust for distribution to creditors if the proposals are passed at a meeting.
    2. I agree with Mr Shaw that the nominees were entitled, without more, to rely on the information they obtained for the purposes they obtained it. It is rarely necessary to conduct a full investigation prior to a meeting and common sense and authority dictate that limited investigations are ordinarily justified. The nominees have gone further than the nominee had for the IVA. In that case Mr Rubin was recorded as accepting that his investigations were “thinner than they should be”. That was insufficient. This is an extraordinary case and required more than the usual amount of investigation. I find that the investigations undertaken by the nominees were reasonable in the circumstances. I have regard to the fact that three days of Court time has been taken to decide if the information provided by MG is cogent, whether the debt owed to CFL is enforceable, the weight to give to the evidence of the Laser Trust, as opposing creditor, the application of good faith to the facts of this case, the exercise of discretion to adjourn the hearing of the bankruptcy petition for the purpose of permitting a meeting of creditors, and the limited resources available for investigation.
    3. That a nominee has carried out reasonable investigations within the ambit of her duties as nominee, those investigations being limited by funding and time, and taking account of a nominee’s inevitable reliance on information provided by a debtor, does not mean that a Court should be bound by the opinion of the nominee. The fact of a nominee who acts and reports in accordance with SIP 3.1, as I find the nominees have here, does not mean that the results of those investigations are sufficient for all purposes. There are undoubtedly further investigations that can be made into the asset position of MG and how the side agreements (KSA and Bank Leumi settlement agreement) came about.
    4. Where there is independent evidence before the Court that contradict the views of a nominee or after a closer degree of scrutiny the Court finds that the evidence provided is insufficient, the Court may reach a different conclusion to that of the nominee.

Adjournment- the arguments summarised

    1. Mr Atherton and Ms Leahy argue that the Court should not permit a meeting of creditors as: (i) a breach of the good faith principle taints any future proposal and MG should not be permitted to have a “second bite of the cherry”; (ii) the Court of Appeal refused to give a direction to hold a second meeting and this Court should follow suit- “collateral attack”; (iii) the Laser Trust debt is not admissible for voting purposes and (iv) taking into account the above factors the Court should, in its discretion, refuse permission to adjourn.
    2. Laser Trust’s case is more easily stated: (i) Laser Trust did not vote for the IVA; (ii) Laser Trust should not be treated as if it were Kaupthing; (iii) the second proposal to creditors should be treated as new and Laser Trust should have an opportunity to vote if it thinks it is its best interests; (iv) the estimated outcome of £00.4 makes commercial sense to Laser Trust and (v) Laser Trust is receiving no collateral benefit outside the second proposal. MG’s position can also be summarised as: (i) there is no authority for the proposition that the revocation of the IVA means that he cannot put forward a second proposal; (ii) it is accepted that MG did not disclose the KSA to creditors and they were blind, as a result, that Kaupthing had commercial benefits not available to the other creditors. That failure does not taint the assignee of the debt.

Second bite of the cherry

    1. The contention is that as a result of the revocation of the IVA on the ground that there had been a breach of the good faith principle, MG should not be permitted to put proposals to creditors a second time: no “second bite of the cherry”. It is grounded on an abuse of process argument. It is of note that Laser Trust and MG reject the argument that MG is precluded from having a second bite of the cherry because Laser Trust should be treated as independent of Kaupthing. The focus of the abuse of process, however, is on MG’s entitlement to put proposals to creditors. The principle put forward by Mr Atherton QC and Ms Leahy is summarised in their skeleton argument:

“Where a debtor invokes the voluntary arrangement machinery, but then abuses that process by breaching the good faith principle, he acts in a manner which is inimical to the process which he has purported to invoke and must therefore be taken to have forfeited his right to a second IVA, at least in relation to the debts that the subject of the first IVA which his creditors have successfully impeached.”

    1. To make good the submission an analogy is drawn with litigation where a litigant does something or fails to do something with the consequence that there can be no fair trial: Arrow Nominees Inc v Blackledge [2001] BCC 591. An analogy is also drawn with cases where there had been a strike out for inordinate and inexcusable delay. Mr Atherton took me to Securum Finance Ltd v Ashton [2001] Ch 291, 301-302 and in particular 309 C-H:

“For my part, I think that the time has come for this court to hold that the “change of culture” which has taken place in the last three years—and, in particular, the advent of the Civil Procedure Rules—has led to a position in which it is no longer open to a litigant whose action has been struck out on the grounds of inordinate and inexcusable delay to rely on the principle that a second action commenced within the limitation period will not be struck out save in exceptional cases. The position, now, is that the court must address the application to strike out the second action with the overriding objective of the Civil Procedure Rules in mind—and must consider whether the claimant’s wish to have “a second bite at the cherry” outweighs the need to allot its own limited resources to other cases. The courts should now follow the guidance given by this court in the Arbuthnot Latham case [1998] 1 WLR 1426, 1436-1437:

“The question whether a fresh action can be commenced will then be a matter for the discretion of the court when considering any application to strike out that action, and any excuse given for the misconduct of the previous action: see Janov v Morris [1981] 1 WLR 1389 . The position is the same as it is under the first limb of Birkett v James. In exercising its discretion as to whether to strike out the second action, that court should start with the assumption that if a party has had one action struck out for abuse of process some special reason has to be identified to justify a second action being allowed to proceed.”

35. It follows from the preceding paragraphs of this judgment that I am satisfied that the judge adopted the wrong approach to the question whether the claim in the present action (or any part of it) should be struck out on the grounds of abuse. Although he recognised (correctly) the important public interest in the use of court time, he failed to give any weight to that interest in reaching the conclusion which he did. In those circumstances it is for this court to exercise its own discretion”.

    1. The rationale for the rule under consideration is provided by Chadwick LJ at paragraph 52:

“If that claim stood alone it could be said with force that to seek to pursue it in a second action when it could and should have been pursued, properly and in compliance with the rules of court, in the first action is an abuse of process. It is an abuse because it is a misuse of the court’s limited resources. Resources which could be used for the resolution of disputes between other parties will (if the second action proceeds) have to be used to allow the bank “a second bite at the cherry”. That is an unnecessary and wasteful use of those resources. The bank ought to have made proper use of the opportunity provided by the first action to resolve its dispute in relation to the claim for payment.” (my emphasis).

    1. I accept that to put proposals to creditors for a second time, where the proposals are substantially the same as the first proposals can be viewed as a “second bite of the cherry”. I reject the analogy with abuse of process. The reason for my rejection is the rationale for the abuse rule is not to prevent a debtor from seeking to come to terms with his creditors but to prevent an abuse of the Court process. The Court provides a public service for dispute resolutions, has limited resources, and parties have to wait in order to avail themselves of the Court procedure. The Court resource should be jealously guarded and not wasted. In my judgment the Securum Finance Ltd type of abuse does not assist even if: (i) the outcome of the meeting may lead to a challenge to a creditor approved arrangement; (ii) such a challenge is resolved through litigation and (iii) there is a prospect of an appeal from the first instance decision.
    2. What is addressed now is if the Court should adjourn to permit an out-of-court process run its course. To extend the abuse of (Court) process doctrine to out-of-court processes would be to stretch the rationale for the doctrine beyond reasonable limits. I accept the submission of Ms Toube QC that the statutory framework does not permit a debtor to make more than one application every twelve months for an interim order but is silent as to advancing more than one proposal. This is not to say that the “second bite of the cherry” argument will not have some relevance to the exercise of discretion, as is recognised by Mr Atherton and Ms Leahy in their written submissions.

Collateral Attack

    1. Section 262 of the Insolvency Act 1986 provides:

“(1) Subject to this section, an application to the court may be made, by any of the persons specified below, on one or both of the following grounds, namely—

(a) that a voluntary arrangement approved by a decision of the debtor’s creditors pursuant to section 257 unfairly prejudices the interests of a creditor of the debtor;(b) that there has been some material irregularity in relation to a creditors’ decision procedure instigated under that section…….

(4) Where on an application under this section the court is satisfied as to either of the grounds mentioned in subsection (1), it may do one or both of the following, namely—

(a) revoke or suspend any approval given by a decision of the debtor’s creditors;(b) direct any person to seek a decision from the debtor’s creditors (using a creditors’ decision procedure) as to whether they approve—

(i) any revised proposal the debtor may make, or(ii) in a case falling within subsection (1)(b), the debtor’s original proposal.

(5) Where at any time after giving a direction under subsection (4)(b) in relation to a revised proposal the court is satisfied that the debtor does not intend to submit such a proposal, the court shall revoke the direction and revoke or suspend any approval previously given by the debtor’s creditors.

(6) Where the court gives a direction under subsection (4)(b), it may also give a direction continuing or, as the case may require, renewing, for such period as may be specified in the direction, the effect in relation to the debtor of any interim order.”

    1. In the First Judgment HHJ Keyser QC considered what order to make under subparagraph 4 of section 262:

“Mr Fraser QC submitted that, if the foregoing conclusions were reached, a further hearing ought to be held to consider how the statutory discretion should be exercised. However, in agreement with Mr Atherton QC I consider that such a course is neither necessary nor appropriate. Without Kaupthing’s support, the Proposal would not have been approved. A further creditors’ meeting would necessarily result in the rejection of the Proposal, unless Laser Trust were able to vote in favour of it on the basis of the KSA. However, for reasons appearing above, Laser Trust is not entitled to vote on that basis.”

    1. The Court of Appeal did not disagree, but it is unclear whether an appeal was advanced on the ground that the Court should have permitted a further creditors’ meeting. The issue now advanced is that as the Court did not order a further meeting it equally did not direct a fresh meeting. That being the case a further meeting would contravene the principle of barring a collateral attack upon a final decision. The White Book, volume 1 at 3.4.3.3 refers to Hunter v Chief Constable of the West Midlands Police [1982] AC 529 which is cited for the proposition that it is an abuse of process to initiate “proceedings in a court of justice for the purpose of mounting a collateral attack upon a final decision against the intending (claimant) which has been made by another court of competent jurisdiction in previous proceedings in which the intending (claimant) had full opportunity of contesting the decision in the court in which it was made.”
    2. The argument based on a collateral attack is, at first sight attractive, since the proposals for the Arrangement are in such similar form to the proposals for the IVA, and the KSA continue to benefit a creditor who can make the final decision at a creditors’ meeting. In my judgment, the argument must fail. First there is no discernible attack on the First Judgment as his order was to revoke the IVA not to accede to the request to convene a further meeting in relation to the proposal that led to the IVA. Secondly, the Arrangement is based on a different (albeit marginally different) proposal.
    3. In my judgment it is also clear from the First Judgment that Kaupthing was disabled from voting due to a breach of the good faith principle. At that time there had been no assignment to Laser Trust. The only party who could vote in respect of the Kaupthing debt was Kaupthing. That is why the Court observed that a further creditors’ meeting “would necessarily result in the rejection of the Proposal” but went on to say, “unless Laser Trust were able to vote in favour of it on the basis of the KSA”. The similarity of the proposals and the benefits available to the Laser Trust but not the other creditors are matters that should be considered when exercising discretion.

Discretion principle

    1. There is agreement that the court has a discretion to exercise at the hearing of a bankruptcy petition. The parties disagree as to how the discretion should be exercised, and what should or should not be taken into account. Mr Phillips QC and Ms Thornley argue that the Court should give priority to the wishes of the largest creditor who opposes bankruptcy. The opposing creditor is independent, there is no challenge that it has taken an assignment of the Kaupthing debt and paid good consideration for it. The wishes of the opposing creditor are not, it is argued, based on sentimentality but on commercial reality. There is a greater chance of a return, albeit a modest return, through the vehicle of a voluntary arrangement.
    2. The discretion is provided by section 266(3) of the Insolvency Act 1986 which provides:

“The Court has a general power, if it appears to it appropriate to do so on the grounds that there has been a contravention of the rules or for any other reason, to dismiss a bankruptcy petition or to stay proceedings on such a petition; and where it stays proceedings on a petition, it may do so on such terms and conditions as it thinks fit.”

    1. In Aabar Block Sarl v Maud [2018] 3 WLR 1497 Mr Justice Snowden was asked to determine, in the context of a bankruptcy petition and on complicated facts, whether to make a bankruptcy order in circumstances where two petitioning creditors were relying on a joint debt but they disagreed as the making of such an order. Snowden J held that if the debt was joint, both creditors had to agree before the Court would make an order. If by resisting an order for bankruptcy one party was acting in breach of duties, the Court would not stand-by but would make an order. In the course of his judgment the learned judge referred to Re Leigh Estates (UK) Limited [1994] BCC 292. At page 294, where Mr. Sykes QC said,

“Although a petitioning creditor may, as between himself and the company, be entitled to a winding-up order ex debito justitiae, his remedy is a ‘class right’, so that, where creditors oppose the making of an order, the court must come to a conclusion in its discretion after considering the arguments of the creditors in support of and opposing the petition: see Re Crigglestone Coal Company Ltd [1906] 2 Ch 327 , in particular the statements of principle of Buckley J at first instance, and s. 195 of the Insolvency Act 1986 …It is plain from the well-known authorities on the subject that, where there are some creditors supporting and others opposing a winding-up petition it is for the court to decide as a matter of judicial discretion, what weight to attribute to the voices on each side of the contest…”

    1. In summarising an earlier judgment on the same matter, in which Snowden J granted an appeal against a decision to make a bankruptcy order, he said [at para 45-46]

“Thirdly, I explained by reference to Sekhon v Edginton [2015] 1 WLR 4435 that the court’s own discretion to adjourn a bankruptcy petition in relation to an undisputed debt where the debtor asked for time to pay would only be exercised in the debtor’s favour if the debtor could produce credible evidence that there was a reasonable prospect that the petition debt would be paid in full within a reasonable time. However, I held that this type of discretionary decision for the court in the exercise of its case management powers was not a substitute for the consideration by the court of the separate question of the views of the members of the class in a case in which the petition was opposed by other creditors. Finally, I referred to a number of cases which appear to indicate that the court might, in exceptional circumstances, exercise its general discretion to decline to make a bankruptcy order or a winding-up order if it is satisfied that the order would serve no useful purpose because there would be no assets available in the insolvent estate for creditors. That was the main point of decision in Crigglestone Coal and also appears to have been the basis for the dismissal of the bankruptcy petition in Re Malcolm Robert Ross (a Bankrupt) (No 2) [2000] BPIR 636. I concluded, however, that a debtor faces a heavy burden in persuading the court not to make an order on that basis: see e.g. re Field (a debtor) [1978] Ch 371 at 375, and Shepherd v Legal Services Commission [2003] BCC 728″.

    1. In my judgment these observations may in part be applied to the exercise of discretion to make a bankruptcy order, alternatively to adjourn for the purpose of convening a meeting of creditors to vote on proposals for a voluntary arrangement. First among the principles is that the proceedings are a class action. And where there are creditors opposing a bankruptcy order it is for the court to decide as a matter of judicial discretion, what weight to attribute to their voices and those of the petitioning creditor. I have been taken to re P & J Macrae Limited [1961] 1 WLR 229 which is more apposite. It concerned a petition based on a judgment that was opposed by a majority in number and value of the creditors. But no evidence was filed as to the grounds of opposition. Upjohn LJ observed (page 238):

“Although the statute provides that it is the wishes of the creditors to which the court may have regard, it is quite clear that, as the statute gives a complete discretion, the weight to be given to those wishes in determining whether a winding-up order ought to be made varies according to ‘ the number and value of the creditors expressing wishes, and the nature and quality of their debts. I certainly do not accept for one moment the proposition that it is merely a matter of counting heads and that a majority of 51 per cent, opposing a petition will outweigh the views of the 49 per cent, who support the petition. In such a case where the wishes of the creditors are so evenly balanced (and there is no reason to distinguish between creditors as mentioned below) the weight to be given to the majority view is obviously negligible. No judge, in my judgment, could possibly be criticised if, in the absence of other relevant circumstances, he chooses to exercise his discretion by giving effect to the prima facie right of the petitioning creditor to a winding up order. At the other end of the scale there is the case where an overwhelming proportion of the creditors in number and value oppose the petitioner who is virtually alone. In that case clearly the weight to be given to those creditors, unless there is some reason for disregarding them, must be very great, and in the ordinary case in the absence of special circumstances will be decisive. All one can say as between those two limits is that the weight to be given to the wishes of the opposing creditors must necessarily depend on all the circumstances of the case, but other things being equal, will increase in the mind of the judge as the majority of opposing creditors increases…. In my view Buckley J. cannot have intended to mean that the voice of the majority of creditors was decisive on whether a winding-up order should be made. I think he meant that, when weighing all the circumstances in deciding whether to wind up the company, the voice of the creditors must either ultimately be for or against, and that is in the ordinary case determined by the majority; but the power of the voice must necessarily depend on all the circumstances. If he meant more his words were obiter and I would respectfully not agree with them. But it is not merely a matter of calculating percentages in value. Apart altogether from prospective or contingent creditors whose position may be difficult to assess, a judge may properly take the view that greater weight should be given to the wishes of a large number of small creditors against the wishes of one or two very large creditors, even though the latter are larger in amount in the aggregate. Then there may be differences in the quality of the creditors. The circumstances may be such that the court is rightly suspicious of the opposing creditors and of the motives which are actuating them. In such a case the court may desire to have evidence before it of their reasons for opposing. It must be a question of discretion in each case whether creditors should be asked to file evidence to support the views they have expressed or not. I do not think it is possible to lay down any prima facie rule one way or the other. The judge may prefer to convene a meeting to ascertain their wishes

    1. In my judgment these authorities provide useful guidance. The Court should take into account (i) the class remedy nature of insolvency (ii) if a meeting of creditors is held, whether it is likely that a majority by reference to the value of votes will pass the proposals (iii) the proposal in the context of the claims to identify if a commercial return would be provided to creditors and (iv) all the circumstances of the case. This is not intended to be an exhaustive list. In Re Bayoil SA [1999] 1 WLR 909, 911 Lord Justice Ward warned against laying “down almost as a statement or proposition of law that discretion has to be exercised in any particular direction”, and any guidance should not fetter discretion. I am mindful that although discretion must be exercised judicially, its very existence means that the rules should be flexible: Southard and Co Ltd [1979] 1 WLR 1198, 1204-5 per Buckley LJ. Although these cases concern winding up such an approach is consistent with the language of section 266(3) of the Insolvency Act 1986. The factors I set out above, and in particular factors (i), (ii) and (iii) are matters which are routinely taken into account as a matter of practice in the Companies Court, where a debtor company seeks to adjourn a winding up peitition for the purpose of putting proposals to creditors. Factor (iv) is founded on authority: re P&J Macrae (supra) and Re Langley Mill Steel and Iron Works Co (1871) LR 12 Eq 26 pp 29-30.
    2. I briefly record a late submission from Mr Phillips QC and Ms Thornley. They argue that the Court should adjourn for the outcome of a meeting because, if the meeting is passed, the petitioning creditor will be paid a dividend and its debts erased. As Mr Justice Snowden was at pains to state, the jurisprudence does not favour such an approach. An adjournment may be given where the debtor can produce credible evidence that there is a reasonable prospect that the petition debt would be paid in full within a reasonable time. That is not the case here. At best what can be said is there is a reasonable prospect that CFL will be paid £0.0028p in the pound. And CFL takes a different view; a voluntary arrangement based on the proposals will permit a cramming down of the petitioning creditor’s debt, leaving it without recourse and without a voice.

The exercise of discretion

    1. I start with the proposals which will deal with factors (ii) and (iii). The proposals for the Arrangement incorporate the standard conditions produced by the Association of Business Recovery Professionals, but if there is a conflict between the proposals and the standard conditions the proposals prevail. The introduction provides background information and a statement that there has been an assignment of the Kaupthing debt to the Laser Trust. Exhibited to the proposals is a letter to Mr Khalastchi said to be from the “Trustees of the Laser Trust”. It is a curious document as: (i) there is only one trustee; (ii) it is not signed (at least the photo copy does not obviously bear a signature) but even if it is signed; (iii) it fails to identify the author and (iv) it bears a Lawrence Stephens Solicitors logo at the bottom of the page but carries a Jerusalem, Israel address at the top. The letter is short and states that the Laser Trust is not obliged to vote in favour of the proposals, and it has received no inducement to do so.
    2. The proposal is simple. The Rosenberg Family Trust will pay the sum of £450,000 to the joint nominees which will be available to creditors and no “other assets will be made available and no guarantees are offered in support of this Arrangement”. The proposals then deal with his assets stating that MG owns two watches, he is a beneficiary of a discretionary trust “known as the Gertner No 1 Settlement” and to “the best of my knowledge I am not a beneficiary, discretionary or otherwise, of any other trust whether family or otherwise.” Despite this statement it is accepted by the nominees that he is a beneficiary under Gertner No 12 trust. He claims to possess or own very few other assets. The property in which he lives is owned by his wife as is the furniture in the house.
    3. As an arrangement will provide a class remedy (factor (i)) the Court should consider the effect on the creditors as a whole. I have mentioned that the Rosenberg Family Trust money has now been paid. There is no reason to doubt that if the appropriate resolution is passed and there is no challenge or any challenge fails, that money paid by the trust will not be distributed in accordance with the proposal.
    4. Two creditors have agreed to defer their claims. The first (an associate as defined by the Insolvency Act) his father and the second the Laser Trust which has agreed to defer any distribution for the first £150,000. On the basis of the Laser Trust’s debt as at 29 March 2019, when it stood at £799,360,216, the return from the Arrangement will be, as Mr Shaw helpfully submitted, approximately £280,000 or £0.035p in the pound. A comparison with bankruptcy based on the disclosed assets is that creditors (save for the deferred creditors) will receive a dividend of £0.0043 (although following the submission of CFL’s proof of debt, this sum has been recalculated to £0.0028) if the Arrangement is passed and nothing in bankruptcy. It is on this basis that Laser Trust “considers that [the] proposal represents the best prospect of a return to creditors…. And intends to vote in favour of the IVA….”. As the Laser Trust holds “around 90% of the unconnected indebtedness” and intends to vote in favour of the Arrangement, the proposals will be passed at a meeting.
    5. The sums to be paid to the creditors through the proposal have been described as de minimis. CFL forcefully argue that the acceptance of the proposals by the passing of a resolution voted on by Laser Trust will force it to accept a de minimis payment when it has been out of its money for 8 years. It contends that is unreasonable having in mind, first there has been no objective investigation into the affairs of MG and secondly the unexplained ability of MG to settle with some creditors by directing that the proceeds of the arbitration be shared among a few. Ms Blom-Cooper explains in her second witness statement that in addition to the KSA there has been:

“a settlement agreement entered into with Bank Leumi whereby that bank was to receive the upside from the Arbitration if it agreed to withdraw its bankruptcy petition against Mr Gertner…..Following the Bank Leumi settlement, as far as I am aware, CFL was the only creditor pressing for payment. When CFL refused to accept Mr Gertner’s offer of settlement, Mr Gertner did a deal with Kaupthing (in the form of the KSA) and put forward the First Proposal, which, in my view, was for the sole purpose of cramming down CFL’s debt.”

    1. Ms Blom-Cooper observes that the contribution to the Arrangement was the same as the sums that were offered to CFL after the service of the statutory demand.
    2. I take account of the class views. The deferred creditors are in favour of an adjournment for the purpose of holding a creditors’ meeting. The majority of non-deferred creditors are against. The quality of the CFL vote has been called into question by MG. It is a form of defence by attack. I have found that the CFL debt is not impugned by reason of the arguments advanced that it is unenforceable by reason of a failure to comply with the rigours of the CCA, or that it fails because it the rates of interest constitute a penalty. Nothing is said about the other creditors save for the Laser Trust.
    3. The Laser Trust is in the same or nearly the same position as Kaupthing. It seeks to benefit from an ad hoc private arrangement as described by Patten LJ. That benefit will mean that it, as the largest and most influential unsecured creditor, will vote for an outcome for which it had little or no interest. This is evident from the KSA, and I infer, from the agreement that Laser Trust will rank as a deferred creditor in the Arrangement for the distribution of the first £150,000 reducing any dividend in the IVA below that of other unsecured creditors. To vote in favour of the Arrangement where it has been said that the assignment was made on commercial grounds is extraordinary. The Trust’s voting intentions are explicable on these grounds alone but, I infer, are explicable on the basis it may indirectly share in the fruits of the arbitration by enforcing against Crosslet Vale. The share of the arbitration fruits stands to benefit the Laser Trust substantially but not the other unsecured creditors able to vote at a creditors’ meeting. In my judgment the mischief identified in earlier proceedings remains, namely, upon “the approval of the Proposal, those creditors would, for example, lose any chance to investigate whether potential benefits of the Gertler Arbitration would be the beneficial property of Mr Gertner”.
    4. In my judgment the return offered in the proposals for the Arrangement is so small as to be properly regarded as de minimis. In the absence of a side agreement an objective creditor would not be able to, without any or any proper investigation that extends beyond what is ordinarily required by a nominee, conclude that the Arrangement will provide the best outcome for creditors (as stated by MG). There is little proportionate economic benefit to be gained by agreeing to the Arrangement. The effect of an adjournment for the purpose of allowing the proposals to be voted upon will be to create different classes of unsecured creditor. Laser Trust will benefit from assets not available to the general body of creditors. That is manifestly unfair and would have serious consequences on the less influential creditors restricted to share in a much smaller and distinct pool of assets. I agree with Mr Atherton and Ms Leahy, Laser Trust is outside of a homogenous group of creditors, and it may be inferred that it has illegitimate motives; that is an uncommercial motive for seeking to vote in favour of the Arrangement because it is looking to other sources outside of any arrangement to make good its investment. To permit an adjournment for the purpose of voting on the proposals for the Arrangement would be to permit the Laser Trust to cram-down CFL or act in a way that is detrimental or unfair to its interests and prejudicial. This analysis shall be a factor when exercising my discretion.
    5. The evidence of Mr Steinberg and Mr Hassan is not reliable, and I have said is of little or no substance. The evidence cannot be relied upon to give a true account of the reasons for paying $6m for the Kaupthing debt, the reason given for the desire to vote in favour of the Arrangement or that the Laser Trust is free from the influence of a Gertner Family Trust or of MG. In these matters there has been a failure to provide a “complete picture”; a good faith requirement. There has been a failure to provide any records, any account as to the source of the $6m or an analysis of the Trust’s accounting position that, on its own evidence, leads it to conclude that its deferred return from the proposed Arrangement is a good return. The reason for this absence of evidence is that the Laser Trust has no accounts or financial statements. I repeat my observations in paragraph 87 above. If there is a true commercial reason for the Laser Trust voting in favour of the Arrangement I infer there to be a desire to safeguard its investment, prevent an objective investigation and reduce the risk against Crosslet Vale’s ability to recover in the arbitration. If there is not a true commercial reason, I infer that MG has influence over the Laser Trust causing it to act in his best interests and in my judgment the observations made by Etherton LJ, as set out in paragraphs 67 and 68 above, are apposite.
    6. In taking all the circumstances into account it is relevant to weigh the proposed outcome of the Arrangement, the voting creditors, the evidence and the pertinent observations made by HHJ Keyser QC in the First Judgment and Patten LJ in the Appeal Judgment.
    7. The debts of MG are long in existence. MG failed to meet his obligations under the personal guarantee provided to CFL and failed to meet his agreed obligations in the Contract. The presentation of the petition was met with a proposal to creditors for an IVA. The IVA was revoked, an appeal dismissed and soon after the petition was restored a second proposal made on substantially the same basis.
    8. It is not unreasonable for the Court to ask, when exercising its discretion, if anything has altered save for the assignment? Has the assignment to a new entity prevented (i) the strict application of the good faith principle and (ii) the major creditor receiving a collateral advantage not available to other creditors? In my judgment questions (i) and (ii) should be answered negatively. In addition, I infer that the Laser Trust is not wholly independent (or free from the influence) of MG or a Gertner Family Trust.
    9. In these circumstances I do not undertake a simple accounting exercise and adjourn on the basis that the largest creditor entitled to vote seeks an adjournment. The nature and quality of Laser Trust leads me to discount its influence, and to give greater weight to the wishes of the independent petitioning creditor, CFL. I reach the conclusion, exercising and my discretion, after considering the arguments of the creditors in support of and opposing the petition that I should refuse the adjournment application and make an order on the petition.

Summary of conclusions

  1. In my judgment the CFL debt is not disputed on genuine and substantial grounds. Neither is the debt impugned. The provisions of the CCA do not apply to the Contract. On a true interpretation of the Contract the debt in the Contract was not deferred, and credit not extended. In my judgment the law does not provide that a structured settlement clause making provision for the payment of a debt over time extends credit or financial accommodation (paras 27-32).
  2. The “essential character” of the Contract cannot be characterised as one “for making loans” (paras 33-35). In any event the Contract compromised proceedings where MG defended a claim by CFL for the debt, now under consideration. One of the defences pleaded was that the CCA applied. Applying Binder v Alchaouzos, I find that the terms of the Contract terms were fair and reasonable, and I am satisfied that the Contract constituted a bona fide compromise and the Court should not, in the absence of vitiating factors, go behind it (paras 40-44).
  3. The purpose of most or a good deal of penalty clauses is to compensate the loss resulting from the breach, if the level of damage is exorbitant or disproportionate to a great extent with “the highest level of damages that could possibly arise from the breach” it is likely to be a penalty. There is little guidance on what may constitute a legitimate interest, save that there can be no legitimate interest in punishing the defaulting party. The high interest rates imposed as a condition for lending to Lanza with very high defaulting rates were in keeping with (i) the nature of the lending that was urgent and very short term and (ii) the nature of the lender which was known as a lender of last resort. There is no argument that there was any disproportion between the parties and MG must accept that he had the benefit of skilled legal advice when entering the Contract. There is no obvious oppression where parties freely enter into a contract at arms-length following litigation and where the challenging party had the benefit of legal advice. The claim that the CFL debt amounts to a penalty does not raise a genuine or substantial dispute: Cavendish Square Holdings v Makdessi [2016] AC 1172 (paras 46-49).
  4. The failure to run the penalty claim or not to pursue it by way of a defence when MG had a chance to do so in the Part 7 proceedings, the compromise the acceptance of the CFL debt in proposals to creditors, and the failure to argue the penalty when an opportunity arose at the statutory demand stage preclude MG from raising the issue now. The fact that the petition for bankruptcy was stayed is not relevant. The rights and obligations of MG are governed by the Contract. One of the rights that he gave up when entering into the Contract was to forfeit the right to defend the claim to interest on the ground it contravened the common law on penalties. To permit him to re-open that argument at the hearing of a bankruptcy petition in order to argue that the debt contained in the petition is not liquidated is to argue, in substance, that he may contravene the principle Johnson v Gore Wood & Co (No 1) [2002] 2 AC 1 in respect of the Part 7 proceedings and Turner v Royal Bank of Scotland [2000] BPIR 683 in relation to the bankruptcy petition. The CFL debt, KSA and the position of Laser Trust need to be looked at as a whole (paras 51-53).
  5. The Appeal Judgment found that there would be a breach of good faith where one creditor voted in favour of a proposal in which it had quite different commercial interests from those of other creditors. The fact that approval of a proposal would put investigation of a debtor’s interests to an end and out of the reach of other creditors is indicative of a conflict between that party and other creditors entitled to vote. The principle goes hand-in-hand with the need for transparency (paras 71-77).
  6. The evidence provided on behalf of the Laser Trust is not credible and unreliable. The evidence may not be relied upon for: (i) the explanation given in relation to the reasons for purchasing the debt from Kaupthing; (ii) the assertion that Laser Trust has a commercial interest in the proposed Arrangement; or (iii) that Mr Gertner’s proposed IVA represents a better deal for ……Mr Gertner’s other unsecured creditors than bankruptcy”. The evidence cannot be relied upon to support the assertion that the Laser Trust is free from the influence of MG (paras 79-93).
  7. I reject the submission that the doctrine of abuse of process operates to preclude a debtor from putting proposals to creditors following a successful court challenge to an earlier approved voluntary arrangement. The similarities of the proposals, and the collateral advantage to the majority creditor outside of an arrangement are factors to be taken into account when exercising discretion (paras 104-113).
  8. When exercising discretion to adjourn a hearing of a bankruptcy petition, the Court should take into account (i) the class remedy nature of insolvency (ii) if a meeting of creditors is held, whether it is likely that a majority by reference to the value of votes will pass the proposals (iii) the proposal in the context of the claims to identify if a commercial return would be provided to creditors and (iv) all the circumstances of the case (paras 115-119).
  9. In exercising discretion in accordance with the identified principles I refuse the application to adjourn to enable the Laser Trust to vote on the draft proposals for the Arrangement (paras 121-134).
  10. The Nominees had complied with their obligations to investigate. Those investigations are inevitably limited by funding and time and take account of a nominee’s inevitable reliance on information provided by a debtor. The Court is not bound by the opinion of the nominee. The results of a nominee’s investigations are not sufficient for all purposes (paras 98-100).
  11. I refuse the application to adjourn and make an order on the petition presented to the Court on 6 October 2015.

Sabbagh v Khoury & Ors [2019] EWCA Civ 1219 (12 July 2019)

Neutral Citation Number: [2019] EWCA Civ 1219
Case No: A4/2018/1462

IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
THE BUSINESS AND PROPERTY COURT OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
THE HON MR JUSTICE ROBIN KNOWLES

Royal Courts of Justice
Strand, London, WC2A 2LL
12 July 2019

B e f o r e :

LORD JUSTICE DAVID RICHARDS
LORD JUSTICE HADDON-CAVE
and
SIR TIMOTHY LLOYD

____________________

Between:

SANA HASSIB SABBAGH
Respondent/Claimant
– and –
 
(1) WAEL SAID KHOURY
(2) SAID TOUFIC KHOURY (deceased)
(3) SAMER SAID KHOURY
(4) TOUFIC SAID KHOURY
(5) SAMIR HASSIB SABBAGH
(6) SUHEIL HASSIB SABBAGH
(7) WAHBE ABDULLAH TAMARI
(8) CONSOLIDATED CONTRACTORS GROUP SAL (HOLDING COMPANY)
(a company incorporated in the Lebanon)
(9) CONSOLIDATED CONTRACTORS INTERNATIONAL COMPANY SAL (OFFSHORE)
(a company incorporated in the Lebanon)
(10) HASSIB HOLDING SAL
(a company incorporated in the Lebanon)

Appellants/Defendants

____________________

Philip Edey QC, Andrew Fulton and Andrew Feld (instructed by DLA Piper UK LLP) for the eighth defendant and Jessica Hughes (instructed by CMS Cameron McKenna Nabarro Olswang LLP) for the fifth, sixth, eighth and tenth defendants
John Wardell QC, Simon Colton QC and James Walmsley (instructed by Mishcon de Reya LLP) for the Respondent
The remaining Defendants (none of whom was an Appellant) did not appear and were not represented

Hearing dates: 20 and 21 March 2019 
____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Crown Copyright ©

Lord Justice David Richards:

Introduction

    1. This is an appeal against the grant of an injunction to restrain the appellants from pursuing an arbitration in Lebanon. The judge held that the claims made in the arbitration were not within the arbitration agreement relied upon by the appellants and duplicated claims made in proceedings properly brought by the respondent in England. The injunction was granted on the basis that continuation of the arbitration would thus be vexatious and oppressive. The issues raised on the appeal include whether the court has jurisdiction on these grounds to grant an injunction to restrain an arbitration with a foreign seat and, if so, whether the jurisdiction is limited to cases where England is the natural forum for the underlying dispute.

The proceedings and the parties

    1. The claimant in these proceedings, and the respondent to the appeal, Sana Hassib Sabbagh (Sana) is the sister of the fifth and sixth defendants Samir and Suheil Hassib Sabbagh (respectively Samir and Suheil). They are the daughter and two sons of the late Hassib Sabbagh (Hassib) who died on 12 January 2010. They are his heirs under Lebanese law, each entitled to one third of his estate.
    2. Hassib, with the late Said Toufic Khoury, founded in 1950 what has become the Consolidated Contractors Company group (the CCC group), the largest engineering and construction business in the Middle East. The evidence is that its value is at least US$5 billion. The ultimate holding company is the eighth defendant, Consolidated Contractors Group SAL (CCG), which is owned by Hassib’s family and by the Khoury family. CCG and its subsidiaries are incorporated in Lebanon.
    3. Relations have broken down between Sana and her brothers over disputes concerning the management of, and dealings with, their father’s assets both after he suffered a severe stroke in June 2002 and following his death in 2010.
    4. The present proceedings were commenced in the Commercial Court in July 2013. The first to fourth defendants are members of the Khoury family. The late Said Khoury is named as the second defendant and his three sons, Wael, Samer and Toufic are the first, third and fourth defendants. They are all directors of CCG and Wael is the non-executive chairman. Samir, Suheil and the seventh defendant, Wahbe Abdallah Tamari (Wahbe), are also directors of CCG. The ninth defendant is a company in the CCC group. The tenth defendant, Hassib Holdings SAL (HH), is a Lebanese company, owned and controlled by Samir and Suheil. They, together with Samer and Wahbe, are the directors of HH.
    5. The only connection with England is that Wael is resident here. Sana lives in New York, Wahbe lives in Switzerland and the other individual defendants are resident in Greece. CCG and CCIC accepted service of the claim form in Greece, where each has an office, and they are treated in these proceedings as domiciled in Greece for jurisdiction purposes. HH is domiciled in Lebanon.
    6. Wael is the anchor defendant for the purposes of establishing jurisdiction against the other individual defendants, CCG and CCIC under art. 2(1) of Regulation 44/2001 and against Wahbe under art. 6(1) of the Lugano Convention. Leave to serve HH out of the jurisdiction as a “necessary or proper party” was given under the CPR. The defendants other than Wael challenged the jurisdiction of the court. Those challenges were upheld in part by Carr J at first instance ([2014] EWHC 3233 (Comm)) but, on appeal, rejected in whole by this court (Gloster V-P, Patten LJ and Beatson LJ) in a judgment given on 28 July 2017 ([EWCA Civ 1120]) (the 2017 judgment).
    7. The claims made in these proceedings are summarised in the 2017 judgment:

“7. On 29 June 2002 Hassib suffered a severe stroke which incapacitated him for the rest of his life and, it is alleged, rendered him unable to make any business decisions or to manage his own affairs. In proceedings issued in the High Court on 9 July 2013 Sana alleged that the principal defendants conspired from a date shortly after Hassib’s stroke to misappropriate assets belonging to Hassib and that since his death in 2010 they have also conspired to deprive her of her entitlement to the shares in CCG which she claims belonged to Hassib at the date of his death. These two claims have been labelled the asset misappropriation claim and the share deprivation claim and, for convenience, we shall adopt the same terminology.

8. The asset misappropriation claim relates for the most part to dividends from Hassib’s shares in CCG which were used either to make investments in other companies and property or to meet expenses such as the running costs of an aircraft. It is not in dispute that before his stroke Hassib used and authorised CCIC to pay family expenses and charitable donations out of his income from dividends and other investments. But the allegation is that, following Hassib’s stroke, accumulated dividends and other income were used knowingly by the defendants (other than Wahbe and HH) to make improper or unauthorised investments in their own names and that, when sold, the proceeds of sale from these investments were not accounted for or applied for the benefit of Hassib. To the extent that they would otherwise have formed part of Hassib’s estate on death, Sana seeks damages for conspiracy based on the value of the misappropriated assets.

9. The share deprivation claim depends upon Hassib having retained ownership of shares in CCG at the date of his death. Sana relies on a confirmation by the Commercial Registry in Beirut (“the Commercial Registry”) dated 16 January 2010 that its register contained an entry which records that, as at 10 May 2009, Hassib continued to hold 399,915 shares in CCG. She alleges that following her father’s death, the defendants conspired to deprive her of her entitlement under Lebanese law to a third of this shareholding by unlawfully procuring the transfer of the shares to HH.

10. The defendants accept that HH is now the registered holder of 399,915 shares in CCG following general meetings of the members of CCG held in July 2010 which confirmed HH as the holder of the shares. But their case is that there was no unlawful conspiracy and that the shares now held by HH are derived from transfers of shares in CCG which Hassib made prior to his death (and prior to his stroke) in favour of Sana, Samir and Suheil. We will come to the detail of this later in the judgment but it is now common ground that by three share transfer agreements made in 1993 (“the 1993 Agreements”) Hassib agreed to transfer to his children 199,960 of his then holding of 199,970 shares in CCG subject to the retention by him of a usufruct in the shares for his life. Sana became entitled to receive 20,000 shares (for a stated consideration of US$1,333,333) and Samir and Suheil each became entitled to receive 89,980 shares at a price of US$6m. In September 1993 Hassib agreed to transfer 2 more of his remaining shares in CCG to each of his sons leaving him with only 6 shares.

11. Further agreements were entered into in 1995 between Hassib and his children and between Sana and her two brothers, the cumulative result of which (after taking into account increases in the share capital of CCG) was that Sana became entitled to 100,000 shares and Samir and Suheil to 199,960 and 199,961 shares respectively. Then in 1998 Sana transferred her entire holding of 100,000 shares back to Hassib who in turn transferred them to CCIC. His remaining 3 shares in CCG were transferred to Suheil. If this sequence of agreements was effective to pass ownership of the shares and any necessary corporate formalities were complied with, the net result of the agreements and transfers executed between 1993 and 1998 was that Hassib had ceased to own any shares in CCG but had retained his usufruct rights over 399,915 shares. By an agreement dated 16 July 2006 (but whose date is in issue) Samir and Suheil transferred 399,915 shares to HH subject to Hassib’s usufruct. CCIC retained the shares it had acquired in April 1998.

12. Sana’s original position was that the family agreements made between 1993 and 1998 were artificial or sham transactions with no legal effect. But she no longer disputes the existence, validity or effectiveness of the agreements as such. Her case now is that, as a matter of Lebanese law, the agreements fall to be treated as gifts rather than agreements to sell which would continue to bind Hassib (and his heirs) even after his death. As gifts they would lapse on death unless completed as transfers before then. She says that the agreements were ineffective to divest Hassib of ownership of the shares which were later transferred to HH because the formalities of board approval, registration and reissuing of the shares required under Lebanese law and the articles of association in relation to the earlier agreements were not complied with. It is not disputed that Sana received US$50m at the time she agreed in 1998 to give up her shareholding in CCG. But she disputes that the money (or at least all of it) was paid as consideration for her shares.”

    1. Like the court in the 2017 judgment, I shall refer to the claims made by Sana in these proceedings (the English proceedings) as the share deprivation claim and the asset misappropriation claim.
    2. In March 2014, after the issue of the present proceedings, Samir, Suheil, CCG and HH (the appellants) initiated arbitration proceedings in Lebanon with Sana named as the respondent (the Lebanese arbitration). It will be necessary to look in more detail at the claims made in the arbitration but, in brief, the appellants seek a determination as to the entitlements of Samir, Suheil, Sana and HH to shares in CCG (the shares claim) and a determination of the balance of any monies owed by CCG on Hassib’s shareholder’s account (the assets claim).
    3. The Lebanese arbitration was commenced pursuant to article 45 of the articles of association of CCG which makes provision for arbitration of certain claims. Sana disputes the jurisdiction of the arbitrators, on the grounds that the claims advanced in the arbitration do not fall within article 45 and that, not being a shareholder of CCG, she is not bound by the arbitration agreement constituted by article 45. She has declined to take part in the arbitration.
    4. In the alternative to their challenges to the jurisdiction of the English court, the defendants applied for a stay of the English proceedings either under section 9 of the Arbitration Act 1996 or under the court’s inherent jurisdiction or case management powers.
    5. In the 2017 judgment, this court held that neither the asset misappropriation claim nor the share deprivation claim fell within the terms of the arbitration agreement in article 45 (or in other agreements not relevant to this appeal), and accordingly refused a stay of the proceedings.
    6. Following the 2017 judgment, Sana applied to the Commercial Court for an injunction restraining the appellants from taking any steps to prosecute the Lebanese arbitration, and from seeking recognition or enforcement of any award made in it and, further, requiring them to take steps to stay the arbitration.
    7. The application was heard by Robin Knowles J who granted the injunction sought by Sana.

The judgment under appeal

    1. In a reserved judgment, Robin Knowles J said at [10] that he was satisfied that “the claims pursued in, or the issues truly in dispute in, the Lebanese Arbitration…are within the two claims” in the English proceedings. He relied in particular on a passage in a Memorial on Jurisdiction dated 8 October 2015 submitted by three of the appellants to the arbitrators that the claims in the arbitration “correspond in substance” to the claims in the English proceedings.
    2. The judge recorded at [17] that the appellants accepted “at the level of the Commercial Court and in my view rightly” that the court had power to grant an injunction in the terms sought by Sana. He referred to decisions in the Commercial Court which emphasised, in the case of injunctions to restrain an arbitration with a foreign seat that offered appropriate supervisory jurisdiction, “the need for exceptional circumstances for (at least where arbitration was agreed) and caution in the exercise of the power” to grant such an injunction. Specifically, the grant of an injunction may be appropriate if continued pursuit of an arbitration would be vexatious and oppressive.
    3. The judge noted at [22] that while he was being asked to grant an interim injunction, with liberty to apply in the event of a change of circumstances, there might be little, if any, difference in practice between an interim and a final injunction, and he approached the application with that in mind.
    4. At [23]-[29], the judge reviewed the effect of the 2017 judgment and said that it was plain that the basis of the court’s refusal of a stay was that “in respect of the two claims Sana is not bound by Article 45 because the claims are not based on the Articles and she is not suing on behalf of Hassib as a shareholder”. The judge continued:

“28. Mr Edey QC argued that the injunction sought would leave unresolved “the question of who are the rightful shareholders in CCG”. However that is not an issue between the Arbitration Claimants and Sana because Sana is not claiming a right to be a shareholder, and this was made clear to the Court of Appeal. The question identified by Mr Edey QC cannot therefore be a reason for the Lebanese Arbitration.

29. Thus the parties did not agree to arbitration in respect of the two claims. The reasoning of the Court of Appeal shows why a conclusion of the tribunal in the Lebanese Arbitration that it has jurisdiction is wrong. The Arbitration Claimants do not accept that, but they should. They have deployed their argument about Article 45 and it has been shown to fail.”

    1. At [46] the judge said that he had no hesitation in concluding that it was just and convenient to grant the injunction in the terms sought. Respecting the caution required in such cases, it was “a plain and compelling case for the exercise of my discretion”. There was no agreement to submit to arbitration the claims made in the Lebanese arbitration. The decision of the arbitrators to the contrary was in effect overtaken by the decision of the Court of Appeal in the stay appeal. Although that was not a decision of the supervisory court in Lebanon, it was a decision “by a court properly fulfilling its role in litigation properly before it, and in addressing a question put to it and argued before it by the parties who contended that there was an agreement to arbitrate”.

The grounds of appeal

    1. The appeal is brought with permission granted by Flaux LJ who, in giving his reasons, said that two grounds of appeal were fully arguable with a real prospect of success. Further, there was a compelling reason for hearing the appeal because the issues whether the English courts have jurisdiction to restrain a foreign arbitration and, if so, in what circumstances that jurisdiction should be exercised, are far from clear and there was a need for appellate guidance.
    2. The two grounds of appeal for which Flaux LJ gave permission are as follows:

“1. The Learned Judge erred in law in that the grant of an injunction restraining the Appellants’ pursuit of its claims in a Lebanese-seated arbitration was not an Order which the Court had power to make, having regard to the scheme of the Arbitration Act 1996 and the UK’s treaty obligations under the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (a fortiori where, as here, one of those claims was a claim which indisputably fell to be arbitrated); alternatively which it could ever in principle be a proper exercise of the Court’s discretion to make.

2. Further, or alternatively, the learned Judge erred in law in that after (apparently) accepting (as he was right, as a matter of clear authority, to accept) that it was a precondition to the injunctive relief sought that England be the “natural forum” for the litigation, he then misinterpreted and/or misapplied the concept of natural forum, wrongly regarding it as sufficient merely that the English Court had jurisdiction over the claim and the Appellants. Had the Learned Judge correctly applied the test, he would have had to conclude that England was not the “natural forum” for the litigation and as a result the Court either could or should not grant the anti-arbitration injunction.”

    1. Mr Edey QC, appearing for the appellants, structured his submissions on the following basis. First, the English court has no jurisdiction to grant an injunction to restrain an arbitration with a foreign seat (a foreign arbitration), at any rate on grounds, as in the present case, that it would be vexatious and oppressive because of proceedings in this jurisdiction. That was, Mr Edey said, the wider issue arising under the first ground of appeal. Second, the narrower submission was that there is no such jurisdiction in circumstances where, if the claim in the foreign arbitration were brought in English proceedings, those proceedings would be subject to a mandatory stay under section 9 of the Arbitration Act 1996. Mr Edey submitted that this was the case as regards one of the claims made in the arbitration, the shares claim, and that the judge was wrong to decide otherwise. Third, in the further alternative, by analogy with the grant of injunctions to restrain the pursuit of foreign court proceedings, the English court will not grant an injunction to restrain a foreign arbitration on grounds that the foreign arbitration was vexatious and oppressive unless England is the natural forum for the dispute. It is said that in this case England is not the natural forum. References in Mr Edey’s submissions to a lack of jurisdiction for the grant of such injunctions include bars or limitations to the exercise of the jurisdiction if in theory it exists. As Longmore LJ observed in a case to which I will later refer, Albon v Naza Motor Trading Sdn Bhd [2007] EWCA Civ 1124 at [7], this is “purely a matter of nomenclature”.

The arbitration claims

    1. It is convenient to start with an examination of the claims made in the Lebanese arbitration and whether they fall within the terms of the arbitration provisions, so that the points of principle raised by the appeal can be considered in the context of the actual claims.
    2. The claims made in the arbitration, as set out in the request for arbitration dated 12 March 2014, are twofold. First, they seek “a determination as to ownership and entitlement to any rights in the shares” of CCG of each of Sana, Suheil, Samir and HH. Essentially, they seek a determination that Sana has no entitlement to shares of CCG, because Hassib had no interest in CCG shares that survived his death and therefore Sana did not become entitled and is not entitled, as Hassib’s heir, to any shares of CCG. This is what I have called the shares claim. Second, they seek “a determination of the balance of any monies owed from Hassib Sabbagh’s shareholder’s account” in CCG to each of Sana, Suheil, Samir and HH. I have called this the assets claim.
    3. The matters in dispute, as set out in the request for arbitration, were in summary as follows. First, Sana’s “claim that, as one of her father’s heirs, she has inherited and is entitled to 1/3 of the 40% of [CCG’s] shares that she alleges were held by Hassib Sabbagh in full ownership on the date of his death”. Second, Sana’s “claim for the delivery up of the shares claimed by her which are currently held by [HH]”. Third, Sana’s “claim that she is entitled to all the rights attached to these alleged shares as a shareholder of [CCG] as per the Articles of Incorporation of [CCG], including rights to dividends attached to these shares which have been distributed prior to and after the death of her father”. Fourth, Sana’s “claim that she is entitled, as an heir to Hassib Sabbagh, to a one-third share of the balance of the amounts and investments held in Hassib Sabbagh’s shareholder account with [CCG] upon his death, in which dividends were credited”. Fifth, her claim to take an account of his shareholder’s account from 2002 until his death.
    4. It can readily be seen that there is, to use a neutral term, a correspondence between the shares claim (and the first and second matters in dispute) and the share deprivation claim, and between the assets claim (and the fourth and fifth matters in dispute) and the asset misappropriation claim. The third matter in dispute would appear to relate to the shares claim as regards distributions made since Hassib’s death and to the assets claim as regards distributions made before his death.
    5. It is not necessary to examine further the assets claim. The appellants accept that the effect of the 2017 judgment is that it is indistinguishable from the asset misappropriation claim and does not therefore fall within the arbitration provision in article 45. The appellants do not accept that this decision is correct as a matter of Lebanese law. However, they accept that the courts in England (including this court) are bound by the 2017 judgment on this point. Any consideration of this appeal must therefore proceed on the basis that the second claim is not subject to arbitration in Lebanon, while recognising that the Lebanese arbitral tribunal has taken a different view.
    6. The position as regards the shares claim is different. Sana does not now, in the English proceedings, claim to be entitled to any shares in CCG nor does she now seek any order for delivery to her of any shares in CCG. This has not always been her position either in the English proceedings or elsewhere. In September 2012, Sana advanced in correspondence a claim, based on detailed legal advice, that as one of her father’s heirs she was entitled to 133,305 shares in CCG, being one-third of her father’s shareholding at the date of his death, and that she was entitled “to recover all her rights in the late Hassib Sabbagh’s estate, especially in CCG Holdings SAL”.
    7. On the basis of Wael Khoury’s domicile in England, Sana commenced the English proceedings in July 2013. Particulars of claim were served on 15 January 2014. It was alleged in the particulars of claim that until his death Hassib owned 399,915 shares in CCG, that she became entitled on his death to one-third of those shares as an heir and that since then the appellants had conspired to deprive her of her entitlement to those shares, causing them to be improperly transferred to HH. She sought, first, “Delivery up of one-third of 40% of the shares in CC Holdings, or their true value, together with a like proportion of all dividends declared or distributed since Hassib’s death” and, secondly, damages.
    8. There can be no doubt that by these particulars of claim, Sana was asserting an entitlement, as against her brothers, HH and CCG, to one-third of the shares said to have been owned by Hassib at his death and to delivery up to her of those shares. In the course of argument, Mr Wardell QC on behalf of Sana said that this claim for delivery up was not by way of restitution of the shares claimed by Sana but only a form of compensation for loss. I am not sure that this makes any difference to the essential nature of the claim then being made by Sana to become a shareholder in CCG, but in any event I see no reason to disagree with the analysis of this claim in the 2017 judgment at [19] as being for “an order against HH for the restitution of the shares”, at [28] as being for “an order for the re-transfer of the CCG shares” and at [155] as being “what would amount in English terms to a proprietary claim to the shares”.
    9. The particulars of claim were provided to the appellants in unsigned form on 11 December 2013 and the appellants initiated the first steps under article 45 shortly afterwards, on 7 January 2014, by requesting mediation. The particulars were served on 15 January 2014, the offer of mediation was refused and the request for arbitration was made on 12 March 2014.
    10. As at the commencement of the arbitration, there can be no dispute that Sana was claiming that she was entitled to be recognised as a shareholder in CCG as one of her father’s heirs and claiming relief to give effect to her claim. That remained her position in the English proceedings until her solicitor stated in a witness statement dated 25 April 2014 that she no longer claimed delivery up of the shares. It is recorded in the 2017 judgment at [155] that “she has now limited her claim…to a personal claim for damages for the loss of the property to which she would otherwise be entitled. There is now no claim against HH, for example, for the delivery up of the CCG shares”. While that is now Sana’s position in the English proceedings, she has not, so far as we know, renounced all possibility of advancing elsewhere a claim to the shares.
    11. It was common ground on the stay application that, in principle (but subject to the precise terms of article 45, as to which see [38]ff below), Sana was obliged under article 45 and Lebanese law, the governing law of article 45, to submit to arbitration any claim by her as her father’s heir to be recognised as a shareholder of CCG: see the judgment of Carr J [2014] EWHC 3233 (Comm) at [238]. This was recognised in the 2017 judgment at [128]. It was also accepted by Mr Wardell in the course of argument before us. The absence of any such claim in the English proceedings by the time of the appeal in the stay application was central to this court’s decision to refuse a stay of the share deprivation claim. Indeed, Sana’s skeleton argument on the appeal stated that neither of the questions in the Lebanese arbitration, including the present ownership of shares in CCG, “are in issue in the present proceedings” and that “[t]he Lebanese Arbitration deals with entirely different issues”.
    12. Given that the issue raised in the Lebanese arbitration is whether Sana is entitled to shares in CCG and that it is common ground that in principle a claim to be a shareholder in CCG is subject to arbitration under article 45, it would seem to follow that this claim in the arbitration is within the arbitration agreement contained in article 45.
    13. This conclusion is disputed on behalf of Sana on a number of grounds.
    14. First, reliance is placed on the decision of this court that the claims made in the English proceedings are not subject to article 45. By itself, this cannot assist Sana for the reasons already given. In the English proceedings, Sana now makes no claim to be a shareholder in CCG nor does she make any claim as Hassib’s heir and, accordingly, there is no basis for saying that the English claims are subject to article 45. Since article 45 could bind Sana only “if the share deprivation claim was brought as Hassib’s heir or if Sana was claiming to be entitled to be recognised as a shareholder” (the 2017 judgment at [128]), it followed that Sana was not bound to arbitrate her claims in the English proceedings.
    15. Second, article 45 is expressly confined to the two kinds of dispute, identified in the article as “A” and “B”. They are themselves confined to disputes falling within articles 166 to 168 of the Lebanese Trade Act. In the 2017 judgment, this court expressed the view, albeit obiter, at [130] that “In any event we would accept that the share deprivation claim is, like the asset misappropriation claim, outside the scope of article 45 since the arbitration clause is confined to the two specified kinds of dispute”.
    16. It is submitted on behalf of Sana that the view expressed at [130] is correct and that it follows that the shares claim made in the Lebanese arbitration is not subject to arbitration under article 45.
    17. No further explanation was given by this court of the view expressed at [130], but it is critical to note that the court was addressing the share deprivation claim made in the English proceedings. The reason underlying the conclusion expressed at [130] is apparent from the expert evidence of Lebanese law adduced by Sana, which was in this and other respects accepted by the court. The expert said at para 207 of his report that from his consideration of the particulars of claim in the English proceedings “Ms Sabbagh’s claims are not based on any matters that could fall within Articles 166 to 168 CDC, but on the delictual responsibility of the Defendants. Such allegations of wrongful behaviour on the part of the Defendants are, in my view, outside the scope of the disputes covered by Article 45…”. In my judgment, this court was not at [130] saying anything about whether a claim to determine entitlements to CCG shares fell within article 45.
    18. Third, it is submitted on behalf of Sana that she disavowed any claim in the English proceedings to be a shareholder a long time ago, and it is not open to the appellants to force her into an arbitration by seeking a negative declaration in respect of a claim to be a shareholder that she no longer makes. This, however, ignores the fact that at the time of the request for arbitration this was the claim that Sana was making. While she has since abandoned in the English proceedings a claim to be recognised as a shareholder of CCG, she has not unequivocally for all purposes and in all jurisdictions given up the right to make such a claim. The arbitration proceedings were commenced in relation to a live claim and the subsequent abandonment of the claim in the English proceedings is not a ground for saying that the shares claim made in the arbitration thereby ceased to be within the scope of article 45. Whether it would provide a ground on which the arbitral tribunal could or should terminate the arbitration is a matter for the tribunal. It is not a basis on which the English court could or should restrain the further prosecution of the arbitration.
    19. Fourth, Sana submits that it is implicit in the 2017 judgment, albeit not expressly decided, that this court held that the Lebanese arbitral tribunal lacks jurisdiction and that Sana is not bound to arbitrate any dispute. It is submitted that the court’s decision to refuse a stay of the share deprivation claim implicitly involves a decision that none of the issues arising in that claim were subject to arbitration. As Sana’s case that Hassib was the absolute owner of shares at his death is the basis of her share deprivation claim and one of the principal issues in that claim, it follows that this court decided that this issue was not subject to arbitration under article 45.
    20. Mr Wardell referred us to a decision of Popplewell J in Sodzawiczny v Ruhan [2018] EWHC 1908 (Comm), [2018] Bus LR 2419, decided after the 2017 judgment. Popplewell J there considered the meaning of “a matter” in section 9 of the 1996 Act, specifically whether it was limited to claims or causes of action or extended to issues arising in the proceedings. There was a division of views in earlier High Court decisions and Popplewell J held that “matter” meant any issue arising in the proceedings which falls within the scope of the arbitration agreement. To that extent, he held, the court is obliged by section 9 to stay the proceedings and then decide, as a matter of case management, whether, as regards the other issues, the proceedings should continue or be stayed pending a determination in the arbitration. Applying this approach, Mr Wardell submitted that it followed that the Court of Appeal must have concluded that the issue of Hassib’s ownership of shares at the time of his death did not come within article 45.
    21. While Popplewell J’s judgment was not given until after the 2017 judgment, it appears from the 2017 judgment at [117]-[119] that a submission was advanced to this court that the share deprivation claim must, at least in large part, be stayed.
    22. It is, however, important to refer again to the way in which the court dealt with the application for a stay. At [129] the court said:

“Similarly, we are inclined to accept that Sana is not claiming an entitlement to be recognised as a shareholder, but rather is claiming that the defendants have deprived her of this entitlement. The relationship is tripartite: whilst Hassib would have been bound to arbitrate an assertion that he was entitled to be recognised as shareholder, as against the defendants, this cannot bind Sana to arbitrate her claim even if her claim depends in part on the question of Hassib’s ownership, since she does not claim on Hassib’s behalf.”

    1. As Sana was not claiming on Hassib’s behalf nor was she claiming to be a shareholder, none of the issues in the claim for damages for conspiracy comprising the share deprivation claim in the English proceedings could be the subject of arbitration under article 45. That is the very point being made by the court in the first sentence of [129], distinguishing between a claim to be recognised as a shareholder, which Sana is not making in the English proceedings, and a claim that she had been deprived of that entitlement, which she is making. I therefore reject the submission that this court in the 2017 judgment implicitly held that a claim by Sana that she is entitled to shares in CCG, or the converse claim by the appellants that she is not entitled to such shares, is not an issue that falls within article 45.
    2. For these reasons, I conclude that the shares claim made in the Lebanese arbitration is subject to the arbitration provisions of article 45 and that this court did not expressly or implicitly decide otherwise in the 2017 judgment.
    3. It follows that I disagree with Robin Knowles J when he said at [10] that “the claims pursued in, or the issues truly in dispute in, the Lebanese Arbitration…are within the two claims” brought in the English proceedings, at least as a basis for saying that the claim as regards entitlements to shares made in the Lebanese arbitration does not fall within article 45. As regards the judge’s analysis at [23]-[29] of the effect of the 2017 judgment, the “two claims” to which he there refers are the two claims brought in the English proceedings. While therefore the judge was right to say at [29] that the parties did not agree to arbitration in respect of the two claims, it does not assist in deciding whether the shares claim brought in the Lebanese arbitration is subject to arbitration under article 45.
    4. It follows that, in approaching the issues of principle argued on this appeal, I proceed on the basis that the shares claim is subject to article 45 but that the assets claim is not subject to it.

Jurisdiction to grant an injunction restraining a foreign arbitration

    1. Mr Edey made clear that he was confining his submission that the court has no jurisdiction to grant an injunction to restrain the pursuit of a foreign arbitration (an anti-arbitration injunction) to cases where it is said that it would be oppressive and vexatious to pursue the foreign arbitration. He accepted that claims for an injunction based on a breach of a contractual or other obligation, such as a choice of jurisdiction clause or a different arbitration agreement, raised different issues which did not arise in this case.
    2. Mr Edey submitted that the grant of an injunction to restrain a foreign arbitration that is said to be oppressive and vexatious is fundamentally inconsistent with the scheme of the Arbitration Act 1996 (the 1996 Act) and The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention). He relied also on a number of other points: the absence of the grant of any anti-arbitration injunctions before the enactment of the 1996 Act and the limited circumstances in which injunctions to restrain domestic arbitrations may be granted, the principles of comity and the absence of any binding decision since the enactment of the 1996 Act that the court does have jurisdiction to grant an anti-arbitration injunction.
    3. The New York Convention was made in 1958 and the United Kingdom acceded to it in 1975, giving effect to it in domestic law by the Arbitration Act 1975. The relevant provisions are now contained in the 1996 Act. Article II of the Convention requires contracting states to recognise arbitration agreements and Article II.3 requires the court of a contracting state, at the request of a party, to refer the parties to arbitration “when seized of an action in a matter in respect of which the parties have made” an arbitration agreement, unless it finds the agreement to be null and void, inoperative or incapable of being performed. Effect is given to this provision by section 9 of the 1996 Act, providing for a mandatory stay of proceedings “in respect of a matter which under the [arbitration] agreement is to be referred to arbitration”, subject to the same exceptions as provided in article II.3.
    4. The rest of the Convention is concerned with the recognition and enforcement of foreign arbitration awards, to which effect is also given by the 1996 Act. Limited grounds for refusing to recognise or enforce an award are contained in article V, including the invalidity of the arbitration agreement or that the dispute did not fall within the scope of the arbitration agreement. Although not the subject of express provision in the Convention, it follows from the fact of an arbitral seat that supervision of an arbitration is reserved to the courts of the seat.
    5. While the existence, validity and scope of an arbitration agreement will generally be matters for the arbitral tribunal, under the general principle of international arbitration law often called kompetenz-kompetenz (or jurisdiction-competence, as Lord Sumption has called it), or for the courts of the arbitral seat, there are circumstances in which a foreign court will or may examine these issues for itself. In Dallah Real Estate and Tourism Holding Co v Ministry of Religious Affairs of the Government of Pakistan [2010] UKSC 46, [2011] 1 AC 783, Lord Collins said:

“97. Where there is an application to stay proceedings under section 9 of the 1996 Act, both in international and domestic cases, the court will determine the issue of whether there ever was an agreement to arbitrate: see…Albon (trading as NA Carriage Co) v Naza Motor trading Sdn Bhd (No 4) [2008] 1 Lloyd’s Rep 1 (Malaysian arbitration). So also where an injunction was refused restraining an arbitrator from ruling on his own jurisdiction in a Geneva arbitration, the Court of Appeal recognised that the arbitrator could consider the question of his own jurisdiction, but that would only be a first step in determining that question, whether the subsequent steps took place in Switzerland or in England: see Weissfisch v Julius [2006] 1 Lloyd’s Rep 716, para 32.

98. Consequently, in an international commercial arbitration a party which objects to the jurisdiction of the tribunal has two options. It can challenge the tribunal’s jurisdiction in the courts of the arbitral seat: and it can resist enforcement in the court before which the award is brought for recognition and enforcement.”

    1. Mr Edey accepted that the New York Convention did not explicitly prohibit the grant of an anti-arbitration injunction, but he submitted that it limited the powers of the courts to three responses in the event of a finding that the tribunal did not have jurisdiction over the relevant claims, and thereby implicitly prohibited the grant of an anti-arbitration injunction. The three permissible responses are (i) to refuse a stay of court proceedings relating to the subject matter of the dispute (article II), (ii) if but only if it was the supervisory court, to suspend, set aside or annul any award (articles V.1(e) and VI), and (iii) if but only if it is the court before which recognition or enforcement of an award was sought, to refuse the application.
    2. He submitted that other provisions of the 1996 Act emphasised the limited role of the English court as regards foreign arbitrations.
    3. Section 1 provides:

“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.”

    1. Section 1 sets out principles to be applied in the construction of the provisions of Part 1 of the Act. Section 1(c) derives from article 5 of the UNCITRAL Model Law on International Commercial Arbitration (1985) but with the deliberate substitution of the less emphatic “should” for “shall”: see AES Ust-Kamenogorsk Hydropower Plant LLP v Ust-Kamenogorsk Hydropower Plant JSC [2013] UKSC 35, [2013] 1 WLR 1889 (AES) per Lord Mance at [33] who said that “Even in matters which might be regarded as falling within Part 1, it is clear that section 1(c) implies a need for caution, rather than an absolute prohibition, before any court intervention”.
    2. Section 2(1) provides that Part 1 applies where the seat of the arbitration is in the United Kingdom. Part 1 does, however, have a limited application to foreign-seated arbitrations. Sections 9 to 11 (stay of legal proceedings), section 66 (enforcement of awards), sections 43 (securing the attendance of witnesses) and section 44 (court powers exercisable in support of arbitral proceedings) apply to foreign-seated arbitrations, as well as to those with a UK seat: see section 2(2) and (3).
    3. Mr Edey drew attention to section 72 which confers on the court an express power to grant relief, including by way of injunction, where a person who is alleged to be a party to arbitral proceedings but who takes no part in the proceedings questions (a) whether there is a valid arbitration agreement, or (b) whether the tribunal is properly constituted, or (c) what matters have been submitted to arbitration in accordance with the arbitration agreement. This power applies only to UK-seated arbitrations and, Mr Edey submitted, it was significant that it was not among the sections applied to foreign arbitrations. Combined with the principles in section 1, especially section 1(c), and the express powers of the court to rule on such issues but only in the context of an application to recognise and enforce a foreign arbitration award, the absence of any power in the Act for the court to injunct a foreign arbitration demonstrated, or at least suggested, that the court had no such power.
    4. The absence of such power was, in Mr Edey’s submission, consistent not only with the overall approach to non-interference in foreign arbitrations but also to principles of comity. While not directly interfering with proceedings in a foreign court, an anti-arbitration injunction does interfere with the supervisory role of the courts of the arbitral seat.
    5. As regards cases, Mr Edey pointed to the lack of any case of an injunction against a foreign arbitration before the 1996 Act. The issue has arisen in a number of cases since the 1996 Act, but all have been at first instance except for two in the Court of Appeal. In one of those, the court upheld an injunction but jurisdiction to grant it was conceded. In the other case in this court, no injunction was granted and observations on the point were obiter and, in any event, the case was distinguishable. Anti-arbitration injunctions were granted in some first instance cases but always on the basis that the jurisdiction to do so had been established by the two decisions of this court, a basis that Mr Edey submitted was erroneous.
    6. Mr Edey developed his submissions with great skill but I am unable to accept them, principally because I do not accept that a prohibition on the power of the court to grant an anti-arbitration injunction which otherwise exists under section 37 of the Senior Courts Act 1981 can be spelt out of the 1996 Act, read with the New York Convention.
    7. No-one doubts that the general approach adopted in the New York Convention and in the 1996 Act is to give effect to arbitration agreements and to minimise the involvement of courts. As Mr Edey himself pointed out, the Convention does not itself prohibit anti-arbitration injunctions. We were not referred to any of the travaux préparatoires (and I make no complaint about that) and we do not know whether the possibility of including a prohibition was considered. I do not think that there can be drawn from the express provisions to which Mr Edey referred an implied prohibition on anti-arbitration injunctions.
    8. The power of the court to grant an injunction is conferred by section 37 of the Senior Courts Act 1981. Since the decision of the House of Lords in South Carolina Insurance Co v Assurantie Maatschappji “De Zeven Provincien” NV [1987] AC 24, it has been recognised that, while the power is not unlimited, it can be exercised not only in protection of a legal or equitable right but also to prohibit conduct that would be vexatious and oppressive, including in appropriate cases to restrain the pursuit of foreign court proceedings. In Société Nationale Industrielle Aerospatiale v Lee Kui Jak [1987] AC 871 (PC), it was established that an injunction may be granted to restrain proceedings in a foreign court in circumstances where, by reason of parallel proceedings in the English courts, the pursuit of the foreign proceedings would be oppressive and vexatious. A similar power as regards foreign arbitrations must exist, unless by statute (and the 1996 Act is the only candidate) section 37 has been implicitly modified to exclude an anti-arbitration injunction.
    9. In my judgment, it is not possible to extract such a modification from the 1996 Act. Reliance on the general principle in section 1(c) that “in matters governed by this Part [Part 1] the court should not intervene except as provided by this Part” suffers from two problems. First, the matters governed by Part 1 are arbitrations with a seat in the UK (except Scotland): section 2(1). Section 2(2) and (3) extend the application of a small number of specific provisions to foreign arbitrations but, save in those respects, foreign arbitrations are not matters governed by Part 1. Second, and in any event, the word “should”, not “shall”, was deliberately chosen for section 1(c) for the purpose and effect stated by Lord Mance in AES at [33] which I have earlier quoted.
    10. Section 72 of the 1996 Act does not, in my judgment, assist. It is the counterpoint to sections 30 to 32. Under those sections, a tribunal may rule on questions relating to its jurisdiction and a party dissatisfied with the ruling may, subject to the conditions set out in section 32(2), have the matter determined by the court. A party which is not participating in the arbitration may instead take the issue directly to the court under section 72. This is part of the overall scheme for arbitrations with a UK seat but it does not, in my judgment, shed any light on or affect the power of the court to grant an injunction restraining a party from pursuing a foreign arbitration.
    11. Mr Wardell QC for Sana relied on four cases, two in the House of Lords or Supreme Court and two in this court, which he submitted provided authority binding on us that the court had jurisdiction to grant anti-arbitration injunctions.
    12. I agree with Mr Edey that neither the decision of the House of Lords in Bremer Vulkan v South India Shipping Corp Ltd [1981] AC 909 nor the decision of the Supreme Court in AES provides any such authority. Both cases concerned arbitrations with their seats in England and neither addresses, directly or indirectly, the jurisdiction to grant injunctions to restrain a foreign arbitration. Moreover, Bremer Vulkan restated “the well-established law that the jurisdiction of the High Court to grant injunctions, whether interlocutory or final, was confined to injunctions granted for the enforcement or protection of some legal or equitable right”: see p.979 per Lord Diplock. The jurisdiction to grant an injunction to restrain vexatious and oppressive conduct, on which Mr Wardell relies, was not recognised until the South Carolina case. AES did not concern an injunction to restrain any arbitration, whether with a seat in the UK or elsewhere, but concerned an injunction to restrain foreign court proceedings by way of enforcement of an agreement to submit to arbitration in England. There are observations in Lord Mance’s judgment which are germane to issues in the present case, one of which I have already quoted, but it has nothing to say about the court’s jurisdiction to restrain foreign arbitrations and is certainly not a binding authority that the court possesses such jurisdiction.
    13. The two decisions of the Court of Appeal are concerned with injunctions to restrain foreign arbitrations. Weissfisch v Julius [2006] EWCA Civ 218, [2006] 1 Lloyd’s Rep 716 has frequently been cited at first instance as authority for the power of the court to grant anti-arbitration injunctions, but it was a case with highly unusual facts and it is important to identify the issue that arose in it.
    14. The case arose out of disputes between two brothers, Amir and Rami Weissfisch, who carried on a successful metal trading business. The immediate dispute related to a Bahamian discretionary trust. An English solicitor, Mr Anthony Julius, was appointed as sole arbitrator “with the broadest possible powers to make final and binding determinations or awards on all issues and disputes between the parties in full and final settlement.” The agreement was expressed to be governed by Swiss law and the seat of the arbitration was agreed to be Geneva. Mr Julius had previously acted for the companies through which the brothers’ business was conducted and also for each brother personally. He had also over several months sought to assist the brothers to reach an amicable settlement of their disputes.
    15. Amir issued proceedings in England, alleging, first, that the arbitration agreement had been procured by misrepresentations by Rami and Mr Julius and that the agreement was accordingly void or had been avoided by Rami, and, second, that in promoting and accepting appointment as arbitrator in a dispute between two existing clients Mr Julius was acting in breach of his fiduciary duties as a solicitor. The court noted at [13] that this latter conduct “is alleged to entitle Amir to an injunction restraining Mr Julius from continuing to act as arbitrator”.
    16. The defendants, who apart from Mr Julius were out of the jurisdiction, applied for declarations that the English court had no jurisdiction to try the claims made in the action or should not exercise any jurisdiction it might have and for a stay under section 9 of the 1996 Act. Essentially, the grounds were that the claims should be pursued in Switzerland as they concerned the validity of an agreement for arbitration, the putative law and seat of which were Swiss.
    17. Before these applications were heard in England, Mr Julius notified the parties that he intended to hold a hearing in Geneva to determine his jurisdiction and invited submissions. Amir applied in England for an injunction to restrain Mr Julius from taking any further steps in the arbitration until determination of the stay application. This was therefore a very unusual application. Anti-arbitration injunctions are almost invariably sought against the other parties, not the arbitrator. The application was made against Mr Julius personally because of the particular ground for the application.
    18. David Steel J refused Amir’s application for an injunction. He said that “on the face of it, the obvious forum for any challenge to the contract and to the appointment or performance of the arbitrator at this stage is Switzerland”. It was a well-established principle of English law that the courts of the seat should have supervisory jurisdiction and, as Lord Phillips LCJ giving the judgment of the court (Lord Phillips, Sir Anthony Clarke MR and Moses LJ) said, paraphrasing the judge, “if, despite the limitations of the 1996 Act, section 37 of the Supreme Court Act gave him jurisdiction to grant the injunction sought, it was a jurisdiction that should be exercised with great caution”. Even taking account of the nature of the case that Mr Julius should not be acting as arbitrator, the structure of the 1996 Act and the spirit of the New York Convention militated against the grant of the injunction sought by Amir.
    19. It appears from Lord Phillips’ judgment at [28] and [29] that on the appeal the case for an injunction was presented by reference to the position of Mr Julius. By the time of the hearing of the appeal, the stay application had been fixed for hearing by Colman J two months later. The court declined to grant the injunction on the grounds, as stated at [33(vi)], that no special circumstances had been shown which would justify an interim injunction pending that hearing. It would be for Colman J to decide whether the issues raised by Amir’s action should be determined in England or Switzerland.
    20. It is important to note that the basis of the application was an allegation that, in acting as arbitrator, Mr Julius would be in breach of existing fiduciary duties that were not governed by the arbitration agreement. In that sense, it was analogous to an injunction to restrain a party from pursuing a foreign arbitration in breach of a contractual obligation that was not subject to the arbitration agreement.
    21. Lord Phillips said at [33]:

“We have formed the view that there are cogent reasons why we should not at this stage restrain Mr Julius by injunction from holding a hearing to consider his own jurisdiction. These essentially mirror the conclusions of Steel J. They are:

(i) Amir and Rami, each of whom was receiving independent legal advice, expressly agreed that their disputes should be resolved by Mr Julius under arbitration which would be governed by Swiss law and have its seat in Switzerland.

(ii) The natural consequence of this agreement was that any issues as to the validity of the unusual provisions of the arbitration clauses would fall to be resolved in Switzerland according to Swiss law.

(iii) This consequence accords with principles of the law of international arbitration agreed under the New York Convention recognised by this country by the 1966 Act.

(iv) For the English court to restrain an arbitrator under an agreement providing for arbitration with its seat in a foreign jurisdiction to which the parties unquestionably agreed would infringe those principles.

(v) Exceptional circumstances may, nonetheless, justify the English court in taking such action. Whether such circumstances exist will be a matter to be resolved by Colman J and nothing in those reasons is intended to influence his decision in that regard.

(vi) No special circumstances have been shown which justify taking such action on an interim basis, pending the hearing before Colman J.” (emphasis added)

    1. This represents a statement of principle by a court with great experience in the law and practice of arbitration. It states the principles of the law on international arbitration, agreed under the New York Convention, that where the parties have agreed to a foreign arbitration (in that case, with its seat in Switzerland and governed by Swiss law), “any issues as to the validity of the unusual provisions of the arbitration clauses would fall to be resolved in Switzerland according to Swiss law”. An injunction to restrain an arbitrator would infringe those principles, but “exceptional circumstances” may nevertheless justify the English court in granting such an injunction.
    2. Mr Wardell submitted that, as the English court will in exceptional circumstances grant an injunction against the arbitrator, there can be no objection in principle to the grant, in suitably constrained circumstances, of an injunction against the parties to a foreign arbitration. In my judgment, Weissfisch v Julius does not provide authority for this proposition. The court was careful to confine its reasoning to the peculiar circumstances which concerned the personal position of the arbitrator and the duties under English law that he owed as a solicitor to present or former clients.
    3. The other decision of the Court of Appeal on which Mr Wardell relied is Albon v Naza Motor Trading Sdn Bhd [2007] EWCA Civ 1124, [2008] 1 Lloyd’s Rep 1. The parties had entered into a motor vehicle distribution agreement governed by English law. Mr Albon commenced proceedings in England for the recovery of sums overpaid by him under the agreement. Naza Motors applied for a stay on the grounds that the parties had entered into a joint venture agreement governed by Malaysian law and providing for arbitration in Malaysia. Mr Albon alleged that his signature on the latter agreement was a forgery.
    4. Lightman J held that, as Naza had applied for a stay, it was for the English court to decide the issue of forgery. Naza agreed that it would not invite the arbitral tribunal in Malaysia to decide that issue, so the position was that the issue of forgery would be determined finally in England. Naza nevertheless wished the arbitration to proceed in Malaysia, in effect without prejudice to the forgery issue. On Mr Albon’s application, Lightman J granted an injunction restraining Naza from pursuing the arbitration pending resolution of the forgery issue, against which Naza appealed.
    5. Although considerations of the autonomy of arbitrators and non-interference in foreign arbitrations were to the fore of Naza’s arguments in the appeal, it was accepted on behalf of Naza that the court had jurisdiction to grant the injunction. Longmore LJ, with whom Waller LJ and Sir Peter Gibson agreed, closely examined the arguments against the grant of the injunction, accepting that the court should be highly cautious in deciding whether to grant such an injunction, but did not question the jurisdiction of the court to restrain a foreign arbitration. Mr Edey is thus correct to say that Albon is not authority that such jurisdiction exists, but it is notable that a court with significant experience in arbitration should have accepted it without demur.
    6. As previously mentioned, anti-arbitration injunctions have been granted by Commercial Court judges at first instance in a number of cases over the last few years. Although the possibility of an anti-arbitration injunction was recognised by Mustill J in Black Clawson International Ltd v Papierwerke Waldhof-Aschaffenburg AG [1981] 2 Lloyd’s Rep 446 at 458, none appears to have been granted until 2008, except in the cases mentioned above.
    7. The first case in which an anti-arbitration injunction was granted on, at least partly, grounds of vexatious and oppressive conduct, was Claxton Engineering Services Ltd v TXM Olaj-Es Gazkutato KFT [2011] EWHC 345 (Comm), [2011] 1 Lloyd’s Rep 510. Hamblen J granted an injunction to restrain the defendant from proceeding with an arbitration in Hungary where the English court had earlier held that the dispute was governed by an exclusive English jurisdiction clause and was not governed by an arbitration agreement. At [28] the judge held that, despite the debate and controversy in the international arbitration community as to the grant of anti-arbitration injunctions, it was clear that the English court had jurisdiction (under section 37 of the Senior Courts Act 1981: see [26]) to grant such injunctions. He cited a number of cases, of which three related to foreign arbitrations: Weissfisch v Julius, Albon v Naza Motor Trading and Cetelem SA v Roust Holdings Ltd [2005] EWCA Civ 618, [2005] 2 Lloyd’s Rep 494 at [74]. It is these authorities that have also been relied on in subsequent Commercial Court decisions for the existence of the power to grant anti-arbitration injunctions. It is common ground between the parties in the present case, and I agree, that the Cetelem case does not provide support for the existence of this jurisdiction and is not relevant to it.
    8. Hamblen J went on to emphasise that nonetheless an anti-arbitration injunction will be granted only in exceptional circumstances and at [32] that “The need for caution in the grant of such injunctions is all the greater in relation to arbitrations outside the jurisdiction because such matters are generally best left to the relevant supervisory courts of the country of the seat of the arbitration”. It was of central importance to the exercise of the discretion to grant an anti-arbitration injunction that the English court had already held that there was no arbitration agreement. Hamblen J said at [41]:

“In many of the cases which concern whether an anti-arbitration injunction should be granted there is an issue as to whether there is any or any valid arbitration agreement. One can well understand why it would generally be appropriate for that issue to be left in the first instance to be determined by the arbitration tribunal. Here, however, not only has it already been decided by this court that there is no such agreement, but this court has also held there is a governing English exclusive jurisdiction clause.”

    1. The judge was satisfied that these were “sufficiently exceptional circumstances” to justify the grant of an anti-arbitration injunction. The basis of doing so was both that the foreign arbitration would infringe the claimant’s contractual right for determination by the English court in accordance with the exclusive jurisdiction clause and also that continuation of the arbitration would be vexatious and oppressive.
    2. Of the other first instance decisions in the Commercial Court, three have been cases where the anti-arbitration injunction was sought in aid of the claimant’s contractual right under an exclusive English jurisdiction clause or an agreement providing for arbitration in England: Sheffield United Football Club Ltd v West Ham United Football Club PLC [2008] EWHC 2855 (Comm), [2009] 1 Lloyd’s Rep 167, Injazat Technology Capital Ltd v Najafi [2012] EWHC 4171 (Comm), and Whitworths Ltd v Synergy Food Ingredients and Processing BV [2014] EWHC 4239 (Comm). The unusual facts in Excalibur Ventures LLC v Texas Keystone Inc [2011] EWHC 1624 (Comm), [2011] 2 Lloyd’s Rep 289 were that the same claimant commenced court proceedings in England and arbitration proceedings in New York in relation to the same dispute. The court refused the claimant’s application for a stay of its own proceedings in England and, on the defendant’s application, granted an injunction against the continuation of the arbitration in New York. I will refer later to two other Commercial Court decisions, where again the power to grant an anti-arbitration injunction was accepted.
    3. These first instance authorities do not of course bind this court, but I regard it as significant that in those cases seven Commercial Court judges, with great experience in international arbitrations, have found nothing surprising or questionable about the existence of this power, while acknowledging that it was to be exercised sparingly.
    4. For the reasons given earlier, I do not consider that the Arbitration Act 1996 has deprived the court of its jurisdiction under section 37 of the Senior Courts Act to grant an injunction to restrain a foreign arbitration, or, which comes to the same thing in practice, has constrained that jurisdiction in such a way that it can never be proper to exercise it. None of the English appellate authorities supports Mr Edey’s submission on this issue, although I accept that Mr Wardell can derive only limited support from them (and, I should add, can derive little or no support from those cases where the court has restrained an English-seated arbitration, because in such cases the English court is the supervisory court). I find it difficult to accept that the English court may restrain a foreign arbitration in aid of the claimant’s legal rights, such as those arising under an exclusive jurisdiction clause, but in no circumstances may it grant an anti-arbitration injunction to prevent vexatious or oppressive conduct. At the same time, it is clear from the principles of international arbitration embodied in the New York Convention and from the English authorities that the court must show great caution and restraint before granting such an injunction.
    5. I reject therefore the wide submission made by Mr Edey under the first ground of appeal.

Will the court grant an anti-arbitration injunction where the dispute falls within the arbitration agreement?

    1. The narrower submission of Mr Edey under the first ground of appeal is that, even if the court has power to grant an anti-arbitration injunction, it will not do so in respect of a claim which, if brought in English proceedings, would require the court to grant a stay under section 9 of the Arbitration Act 1996. I have earlier accepted that the shares claim in the Lebanese arbitration was not held by this court in the 2017 judgment to be outside the arbitration agreement in article 45 and, moreover, that it does fall within that agreement. Mr Edey submits that in these circumstances the court would be bound under section 9 to stay English proceedings in which the same claim was made and therefore the court either has no power, or should not exercise it, to grant an anti-arbitration injunction in respect of the shares claim.
    2. The logic of this submission is, in my judgment, irresistible. An anti-arbitration injunction would be wholly contrary to the fundamental principle underpinning the New York Convention and the 1996 Act of respecting and giving effect to arbitration agreements.
    3. The situation here is not unlike that in AmTrust Europe Ltd v Trust Risk Group SpA [2015] EWHC 1927 (Comm). There were two agreements between the parties, one governed by English law and providing for arbitration in England and the other governed by Italian law and providing for arbitration in Italy. The claimant commenced an arbitration in England and the English court had earlier held that the claimant had shown a good arguable case that its claim was covered by the English arbitration clause and was not covered by the Italian arbitration clause. However, Andrew Smith J refused to grant an injunction to restrain the arbitration in Italy. The court had not earlier examined whether the Italian arbitration clause covered the claims purportedly made under the Italian agreement to the arbitral tribunal in Italy. The fact that the Italian tribunal might in due course decide that the claims did not fall within the Italian agreement was not a ground for the grant of the injunction.
    4. Reliance was placed before Andrew Smith J on the speech of Lord Bingham in Donohue v Armco Inc [2001] UKHL 64, [2002] 1 Lloyd’s Rep 425, at [24] where he stated that if contracting parties agree to give a particular court exclusive jurisdiction as regards disputes, the English court will generally enforce such agreement, whether by a stay of English proceedings or an injunction to restrain foreign proceedings. Andrew Smith J held that Lord Bingham’s observation applied “when an anti-arbitration order is sought and there is no room for argument that a jurisdiction clause covers the relevant claims…either because it is common ground between the parties or because of a previous determination”.
    5. The logical connection between a stay and an anti-arbitration injunction lay at the heart of the reasoning of Popplewell J in Golden Ocean Group Ltd v Humpuss Intermoda Transportasi Tbk Ltd (The Barito) [2013] EWHC 1240 (Comm), [2013] 2 Lloyd’s Rep 242. A dispute arose as to whether the charterer of a vessel was A or its wholly-owned subsidiary B, both A and B contending that the charterer was B. The charterparty was governed by English law and contained an English arbitration clause. An addendum to the charterparty was signed, by the owners and B, reciting that B was and had always been the charterer and substituting a Singapore arbitration clause for the English arbitration clause. The owners contended that the addendum was void for mistake and, pursuant to a settlement agreement with A, commenced an arbitration in England, without prejudice to A’s right to contest the jurisdiction of the tribunal. The arbitrator published an award holding that A was the charterer. B was not a party to the arbitration and it initiated an arbitration in Singapore. The owners commenced proceedings in the Commercial Court, seeking enforcement of the award, declarations that B was not the charterer and that there was no arbitration agreement between the owners and B and an injunction under section 37 to restrain B from pursuing the Singapore arbitration.
    6. In determining whether the owners had shown a serious issue to be tried that the owners were entitled to the declarations sought by them, Popplewell J addressed the threshold issue as to whether these were matters to be decided in the English proceedings or the Singapore arbitration. He answered that question by examining the course that would be followed if B sought a stay of the proceedings under section 9. He determined that, in the circumstances of the case, the English court would decide the issue of the addendum’s validity and, that if it were held to be invalid, there would be a real prospect of a final anti-arbitration injunction. In the circumstances, the judge granted an interim injunction restraining the Singapore arbitration.
    7. That is the converse of the present case but if, in the hypothetical stay application, the English proceedings had been stayed under section 9, the consequence would be that no anti-arbitration injunction would be granted.
    8. I would hold that the narrow submission of Mr Edey under the first ground of appeal is well-founded and that an injunction should not have been granted to restrain pursuit of the shares claim in the Lebanese arbitration. The judge in the present case proceeded on the erroneous basis that this court had decided, or that it was in any event the case, that the shares claim was not within article 45 and that Sana was not bound by article 45 as regards such claim.
    9. The narrow submission cannot assist the appellants as regards the assets claim in the Lebanese arbitration. As earlier recorded, they accept that the effect of the 2017 judgment is that, in the English courts, this claim must be regarded as outside article 45.

Is it a pre-condition for the grant of an anti-arbitration injunction that England is the natural forum?

    1. It is on the second ground of appeal that Mr Edey relies to submit that the judge was wrong to grant the anti-arbitration injunction as regards the assets claim as well as the shares claim. If accepted, it would follow that an injunction should not be granted even if the English court has held, for example (as in this case) on a stay application, that the claim advanced in the foreign arbitration falls outside the arbitration agreement and that the continuation of the arbitration was properly held to be oppressive and vexatious.
    2. Mr Edey submits that, just as with injunctions to restrain foreign court proceedings, the English court will not restrain a foreign arbitration, in cases not involving exclusive jurisdiction agreements, unless England is the “natural forum” for the underlying dispute, i.e. that as between England and the place of the arbitration, England is the more appropriate forum.
    3. Although Mr Wardell sought to argue the contrary, there is no room for doubt that this is the general rule applicable to injunctions to restrain a party from commencing or continuing foreign court proceedings (anti-suit injunctions) and that it is a general rule with few, if any exceptions: see the leading authority, Airbus Industrie GIE v Patel [1999] 1 AC 119, and subsequent re-statements of the principle by this court in Glencore International AG v Exter Shipping Ltd [2002] EWCA Civ 528, [2002] 2 All ER (Comm) 1 and Star Reefers Pool Inc v JFC Group Ltd [2012] EWCA Civ 14, [2012] 1 Lloyd’s Rep 376.
    4. Mr Edey submitted that, as this principle is applicable to anti-suit injunctions, it follows that it is or should be equally applicable to anti-arbitration injunctions. It was significant, he submitted, that in Albon v Naza Motor Trading Longmore LJ cited at [7] the relevant passage from the judgment of Rix LJ in Glencore and noted at [8] that the judge at first instance had held that England was the most appropriate forum for the dispute. He referred also to the observation of Gloster J in Excalibur Ventures v Texas Keystone at [69] that England was the natural forum for the litigation in that case, followed by references to Glencore and Albon, although Mr Edey did not seek to place great weight on this observation.
    5. The treatment of this point in Albon v Naza Motor Trading does not, in my view, provide a solid basis for Mr Edey’s submission. The quotation from the judgment of Rix LJ in Glencore is included as a “recent enunciation” of the principle from which the submissions of counsel in that case were derived, that “a party will not be restrained from instituting or continuing foreign proceedings [i.e. court proceedings] unless the applicant can show that to do so would be oppressive and vexatious or (as it is sometimes said) unconscionable”. The applicability of that part of Rix LJ’s statement relating to natural forum to anti-arbitration injunctions was not the subject of submissions to the court or discussion by the court.
    6. It is necessary, in my judgment, to approach this submission as a matter of principle. First, there must be identified the rationale of the rule that England must be the natural forum before an anti-suit injunction will be granted on grounds of oppressive and vexatious conduct. Second, it must be determined whether that rationale has any application in the context of an anti-arbitration injunction.
    7. The rationale as regards anti-suit injunctions appears clearly from the authorities. An anti-suit injunction involves an indirect interference with the sovereign jurisdiction of the courts of foreign states. It is indirect, because the injunction is made against a defendant amenable to the jurisdiction of the English court, not against the foreign court itself, but its effect is recognised as nonetheless interfering with the foreign court’s jurisdiction. Since this is prima facie contrary to principles of comity, it must be kept within strict bounds that can properly be said to justify such interference, and the test of natural forum is one of the key means whereby this is achieved (although it is not by itself sufficient: see Société Nationale Industrielle Aerospatiale v Lee Kui Jak at 895). In Airbus Industrie v Patel, Lord Goff said at p.134: “In alternative forum cases, in which the choice is between the English forum and some other forum overseas, an anti-suit injunction will normally only be applied for in an English court where England is the natural forum for the resolution of the dispute; and, if so, there will be no infringement of comity”. At p. 138, Lord Goff said under the heading Comity:

“I approach the matter as follows. As a general rule, before an anti-suit injunction can properly be granted by an English court to restrain a person from pursuing proceedings in a foreign jurisdiction in cases of the kind under consideration in the present case, comity requires that the English forum should have a sufficient interest in, or connection with, the matter in question to justify the indirect interference with the foreign court which an anti-suit injunction entails.

In an alternative forum case, this will involve consideration of the question whether the English court is the natural forum for the resolution of the dispute.”

    1. I should mention that Mr Wardell relied on the first paragraph in this passage from Lord Goff’s speech for the submission that the true requirement was not that England should be the natural forum but only that the English court should have a sufficient interest in or connection with the dispute. That this involves a misreading of the authorities is clear from the second paragraph and the subsequent decisions of this court to which I have referred.
    2. This rationale does not apply to a foreign arbitration. An anti-arbitration injunction does not involve an interference with the jurisdiction of a foreign court, except in the very indirect way of relieving it of its role as the supervisory court for the arbitration – but that is a role that is entirely dependent on the continuation of the arbitration. There can be no question, in the case of an anti-suit injunction, of the court saying that the foreign court lacks jurisdiction (save in the case of exclusive jurisdiction agreements), whereas the lack of the arbitral tribunal’s jurisdiction, because there is no arbitration agreement or because the agreement does not cover the matter in issue, is the basis of an anti-arbitration injunction.
    3. An anti-arbitration injunction involves an interference with a different principle, namely the fundamental principle of international arbitration that courts should uphold, and therefore not interfere with, arbitration agreements. Where it is clear that the dispute is within the terms of a valid arbitration agreement, then the courts should not interfere. When the converse is true, “either because it is common ground between the parties or because of a previous determination” (per Andrew Smith J in Amtrust Europe v Trust risk Group at [25]), the court may grant an anti-arbitration injunction but only if the circumstances of the case require it. Save perhaps in the case of exclusive jurisdiction agreements, the grant of an anti-arbitration remains an exceptional step.
    4. Where the validity or scope of an arbitration agreement is in issue, it may be a difficult question whether the English court should seek to determine the issue. As earlier mentioned, komptenz-kompetenz is an important principle of international arbitration law. It is implicit in an arbitration agreement that the parties agree that the tribunal may rule on its own substantive jurisdiction, including issues as to the validity of the arbitration agreement and the matters within the scope of the agreement (see section 30 of the Arbitration Act 1996 as regards arbitrations with their seat in England). In Weissfisch v Julius, this court said that it was “the natural consequence” of an agreement for arbitration governed by Swiss law with its seat in Switzerland that “any issues as to the validity of the unusual provisions of the arbitration clauses would fall to be resolved in Switzerland according to Swiss law”.
    5. It is therefore an exceptional course for the English court to decide these issues in relation to an agreement for a foreign-seated arbitration. Nonetheless, there are cases where the English court may be required to do so. An application for a stay of English proceedings under section 9 is an obvious example, although even then these issues may best be left to the arbitral tribunal. In Golden Ocean v Humpuss Intermoda, Popplewell J explored the circumstances in which, on a stay application, the court should decide the issue for itself or leave it to the tribunal.
    6. What the English court will normally have to decide is whether the issues in the English proceedings fall within the scope of the arbitration agreement. The court did so in the present case, and the authoritative answer given in the 2017 judgment is that neither of the claims in the present proceedings falls within article 45. That did not decide whether the claims advanced by the appellants in the Lebanese arbitration fell within article 45, but they accept that by reason of the 2017 judgment the asset claim in the arbitration does not fall within article 45, so far as the English courts are concerned. This therefore comes within Andrew Smith J’s category of a “previous determination” that a claim is outside the scope of an arbitration agreement. In those circumstances, there is no objection in principle to the grant of an injunction to restrain the appellants from pursuing that claim in the Lebanese arbitration, and for the reasons already given there is no requirement to show that England is the natural forum for the dispute. The appellants do not challenge the judge’s decision that the discretionary factors support the grant of the injunction as regards that claim.
    7. It follows that I would dismiss the appeal as it relates to the injunction restraining the appellants from pursuing the assets claim in the Lebanese arbitration.

Conclusion

    1. For the reasons given above, I reject the submissions, first, that the English court has no jurisdiction to grant an anti-arbitration injunction on grounds that the arbitration is or would be vexatious and oppressive and, second, that any such jurisdiction is exercisable only if England is the natural forum for the dispute. However, I conclude that the shares claim in the Lebanese arbitration is within the arbitration agreement in article 45 of CCG’s articles of association and that the judge was therefore wrong to grant an injunction restraining the pursuit of that claim in the arbitration. I would therefore allow the appeal and discharge the injunction as regards the shares claim in the arbitration, but I would dismiss the appeal and uphold the injunction as regards the assets claim in the arbitration.

Lord Justice Haddon-Cave:

    1. I agree.

Sir Timothy Lloyd:

  1. I also agree.

Clarke v Colorman (Ireland) Ltd. & ors [2019] IEHC 507 (11 July 2019)

[2019] IEHC 507

THE HIGH COURT COMMERCIAL

[2019 No. 181 COS]

IN THE MATTER OF COLORMAN (IRELAND) LIMITED AND IN THE MATTER OF THE COMPANIES ACT 2014

AND IN THE MATTER OF SECTION 212 OF THE COMPANIES ACT 2014

BETWEEN

GARY CLARKE
APPLICANT

AND COLORMAN (IRELAND) LIMITED, CLARE NIXON, DAVID CLANCY AND ANDREW DUNNE

RESPONDENTS

JUDGMENT of Mr. Justice Denis McDonald delivered on 11 July, 2019

Introduction 
1. This is an application by the respondents for an order, under the inherent jurisdiction of the court, to strike out or stay these proceedings on the basis (so it is claimed) that the applicant is obliged to refer the dispute between the parties to binding expert determination pursuant to Clause 7.09 of a shareholders’ agreement dated 6th December, 2000. The application is brought pursuant to a motion dated 21st May, 2019, in relation to the proceedings instituted by the applicant on 16th May, 2019.

2. Each of the applicant and the respondents are directors of Colorman (Ireland) Limited (“the Company”) which is based in Broombridge Industrial Estate near the Royal Canal in Dublin. The Company was established in 1959 and is well known for its high quality printing and packaging services.

3. The company was established by the late Mr. Bob Burke. Following his death in 2000, the then management team bought out the business and together entered into a shareholders’ agreement dated 6th December, 2000, (” the shareholders’ agreement “). The agreement in question is in relatively short form. Clause 1.04 provides that it is to be governed by and construed in accordance with the laws of Ireland. Clause 1.05 identifies that the purpose of the agreement is ( inter alia ) to deal with the management of the Company’s affairs and the regulation of the future conduct and the relationship of each of the parties. The provisions dealing with subscription for shares are contained in Clause 2.01 of the agreement. Business management is addressed in Clause 4.01 which also provides that no material alteration is to be made to the nature of the business unless unanimously agreed between the parties.

4. Clause 4.05 deals with transfers of shares and also provides for pre-emption rights in the event that any shareholder wishes to dispose of shares. There is a significant dispute between the parties as to the interpretation of Clause 4.05. Of central importance to the present application is Clause 7.09 which envisages that disputes in relation to the agreement or the conduct of the Company’s affairs will be referred by the parties to an independent expert for determination. The text of Clause 7.09 is set out further below.

5. I do not propose to set out the nature of the dispute in any detail. It would be inappropriate and potentially unhelpful to do so. A broad outline of the dispute is sufficient in order to understand the context in which this application falls for consideration. The applicant holds a significant number of shares in the Company. The balance of the shares are held as between the respondents. In the course of 2018, it was decided by the parties to explore the possibility of a management buyout. At some point during that year, an offer was received by a US company but, ultimately, in February 2019, the proposed purchaser withdrew. There is a dispute between the parties as to what happened next. It is unnecessary, for present purposes, to go into detail in relation to the nature of that dispute. It is sufficient to record that, subsequently, a further prospective purchaser emerged, namely Ryhall Limited (” Ryhall “) which is incorporated in Malta. However, the applicant contends that negotiations were conducted by the respondents with Ryhall over the course of several months without reference or notice to him and he alleges that this was done without any attempt being made to offer the respondents’ shares to him in the manner required by Clause 4.05 of the shareholders’ agreement. He also argues that, in addition, this alleged behaviour on the part of the respondents constitutes oppression or conduct in disregard of his interests within the meaning of s. 212 of the Companies Act 2014 (” the 2014 Act “).

6. The applicant also complains that the respondents have entered into heads of terms with Ryhall which includes an exclusivity clause which purports to be legally binding on the parties thereto and which obliges the respondents not to engage with any third party whatsoever with respect to a possible sale of their shares in the Company, other than Ryhall. Again, the applicant contends that this alleged conduct on the part of the respondents constitutes a breach of the shareholders’ agreement and is oppressive to him and in disregard of his interests within the meaning of s. 212 of the 2014 Act.

7. The applicant also alleges that a valuation of shares was carried out by the Company’s auditors without his knowledge or consent and that there had been a failure to circulate a draft record outlining the auditor’s provisional view on valuation prior to finalising the valuation. The applicant also complains that the valuation provided by the auditors does not comply with the requirements of the shareholders’ agreement insofar as it states that the value could lie anywhere within a range of figures (with a margin between them of €2.5 million).

8. A further complaint made by the applicant as against the respondents is that they have wrongfully (so he contends) sought to suggest that the time periods under the pre-emption provisions of the shareholders’ agreement had commenced to run notwithstanding his complaint that the valuation had not been carried out in accordance with the requirements of the shareholders’ agreement. The applicant makes the case that this is further conduct in disregard of his interests and/or constitutes oppression within the meaning of s. 212 of the 2014 Act. He also alleges that there is a deliberate attempt to frustrate a due diligence exercise which he seeks to carry out and he alleges that this is designed to ” frustrate ” the exercise of his right of first refusal under the shareholders’ agreement and is done for the benefit of Ryhall and to his detriment.

9. All of the allegations made by the applicant are strenuously rejected by the respondents who have said on affidavit that the complaints made are without foundation and untrue. On the basis of the affidavits filed by the respondents, there is a significant factual dispute between the parties and, in circumstances where I heard no argument on the merits, it would be impossible at this stage to form any view as to the validity of the respective positions of the parties in relation to the substantive matters in dispute. 

The Initiation of the Proceedings by the Applicant 
10. A formal letter of complaint was written on behalf of the applicant on 22nd April, 2019, by Crowley Millar, solicitors. In their written response of 24th April, 2019, the respondents rejected the allegations against them and indicated that if the applicant intended to acquire their shareholding in accordance with Clause 4.05 of the shareholders’ agreement, the price certified by the auditor would have to be paid by bank draft in accordance with the time limit set out in the agreement. This provoked a short response from Crowley Millar on 24th April, 2019, in which they warned that, in the absence of appropriate undertakings from the respondents, the applicant would take steps to protect his position. On the following day, the respondents replied expressing disappointment at the approach taken by Crowley Millar and indicated that, if further steps were to be taken by the applicant, they required to be put on notice prior to any such applications. Later on the same day, Crowley Millar indicated that the applicant would be prepared to engage in without prejudice discussions and it appears from the affidavit evidence before the court that some discussions of that nature subsequently took place. Regrettably, the parties did not reach an amicable resolution of the dispute and on 16th May, 2019, the present proceedings were instituted. They first appeared in the chancery list before Reynolds J. on 21st May, 2019, when, for the first time, it was indicated by the respondents (through their counsel) that they intended to rely on Clause 7.09 of the shareholders’ agreement providing for expert determination of disputes between the parties. On the same day, the respondents filed the present application (which also sought an order pursuant to O. 63A admitting the proceedings into the Commercial List). Subsequently, by order of Haughton J. the proceedings were admitted into the Commercial List and Haughton J also directed that a preliminary issue should be tried on Friday 28th June, 2019 as to whether these proceedings should be stayed pending expert determination pursuant to Clause 7.09. 

The Jurisdiction of the Court to Stay Proceedings pending Expert Determination 
11. There was no dispute between the parties as to the jurisdiction of the court to stay proceedings for the purposes of expert determination. The jurisdiction was recognised by the Supreme Court in Via Net Works Ireland Limited [2002] 2 I.R. 41. Although that case was concerned with the enforceability of an arbitration clause rather than an expert determination clause, Keane C.J., at p. 58, approved the following passage from the speech of Lord Mustill in Channel Tunnel Group v. Balfour Beatty Limited [1993] AC 334 at p. 353:-

“I believe that it is in accordance, not only with the presumption exemplified in the English cases cited above that those who make agreements for the resolution of disputes must show good reasons for departing from them, but also with the interests of the orderly regulation of international commerce, that having promised to take their complaints to the experts and if necessary to the arbitrators, that is where the appellants should go.”12. On the same page of the report, Keane C.J. explained that, while the contract in the Channel Tunnel case was one which was ” more characteristic of the high level world of international commerce than the agreement now under consideration “, he had no doubt that the general principle was equally applicable to the shareholders’ agreement considered by the Supreme Court in that case. There is an obvious parallel between that case and the present not only because it concerned a shareholders’ agreement but also because, in that case, an allegation of oppression was made pursuant to what was then s. 205 of the Companies Act 1963. An argument had been made in that case that it would be contrary to public policy to refer a dispute under s. 205 of the 1963 Act to arbitration since this would deprive the petitioners of their statutory right to have the allegations determined by the High Court. Keane C.J. rejected that argument as misconceived. As noted above, that case was concerned with an arbitration agreement rather than an expert determination clause. However, there is no reason to suppose that the same principle does not apply in the context of an expert determination clause. Thus, there is no reason in principle why an expert determination clause (if sufficiently widely drafted) should not apply to a claim under s.212 of the 2014 Act.13. There is, however, an important distinction between an arbitration agreement and an expert determination clause insofar as the jurisdiction of the court to stay proceedings is concerned. In the case of arbitrations, the power of the court is circumscribed by statutory provisions. In the case of an expert determination clause, the jurisdiction of the court is discretionary. Kelly J. (as he then was) made that clear in Campus and Stadium Ireland Limited v. Dublin Waterworld Limited [2006] 2 IR 181 at page 187.

14. The manner in which the discretion of the court is to be exercised is now well established. As Hogan J. explained in the Court of Appeal inDunnes Stores v. McCann [2018] IECA 238 at para. 37, the starting point in any consideration of the issue is that the courts will generally hold the parties to the terms of their contractual bargain. This is consistent with what was said by Lord Mustill in the Channel Tunnel case at p. 353. In that case, Lord Mustill stressed that the presumption is that the expert determination clause should be enforced and it is up to the parties opposing expert determination to show “good reasons” for departing from the agreement which they have themselves signed up to.

15. It is, therefore, very properly, accepted by counsel for the applicant in this case that his client bears the burden of persuading the court that, in the exercise of its discretion, it should depart from the presumption that the expert determination clause should be enforced. In the course of the hearing on 28th May, 2019 I was not referred to any Irish authorities which address or identify the range of factors that might be sufficient to persuade a court to exercise its discretion against enforcing the stay. In due course, it will be necessary to consider a number of decisions from other common law countries on this issue. Before doing so, it is important to have regard to the terms of the expert determination clause contained in the shareholders’ agreement here. 

The Expert Determination Clause in Issue 
16. Clause 7.09 is in the following terms:-

“Any dispute relating to this Agreement or the conduct of the Company’s affairs shall be referred for decision by the parties to an independent Expert to be approved by agreement and in default of agreement between the parties within seven days of a dispute arising the matter shall be referred to the President for the time being of the Incorporated Law Society of Ireland for the appointment of an Expert. The decision of the Expert will be final and binding on the parties and shall not be questioned by any of them in any way. The provisions of the Arbitrations Act 1954 – 980 (sic) shall not apply.”17. A number of aspects of this clause should be noted:-(a) In the first place, it is in relatively straightforward terms. It is quite broad and lacking in detail. In particular, there is no provision dealing with the procedure to be adopted by the expert. Nor is there any provision in relation to the qualifications of the expert although it would seem likely that what the parties had in mind was that a lawyer would be appointed as expert. This would appear to follow from the fact that the parties envisaged that, in the event of a failure to agree on a nominee, it would be up to the President of the Law Society to make the nomination.(b) While the breadth of the clause was criticised by counsel for the applicant, the clause very clearly provides that any dispute relating to either the shareholders’ agreement itself or the conduct of the company’s affairs is to be referred for decision to an independent expert. Although it is not commonplace to do so, I can see nothing in principle or in any of the case law (to which I have been referred) which would prevent the parties agreeing to refer a broad a range of disputes to an appropriate expert. As the case law discussed below shows, a different conclusion might possibly be required if the clause appeared to envisage that a particular dispute might be referred for determination by a person without the necessary expertise to resolve that dispute. That would raise an issue as to whether the parties could plausibly have intended such an outcome. However, on its face, the clause here is sufficiently wide to cover the dispute sought to be ventilated by the applicant in these proceedings. Insofar as the applicant alleges a failure to comply with the terms of the shareholders’ agreement that is covered by the words ” any dispute relating to this Agreement “. Insofar as it is alleged that the affairs of the Company are being conducted in a manner oppressive to the applicant or in disregard of his interests, that would equally appear to be covered by the words ” any dispute relating to … the conduct of the Company’s affairs …”.

(c) As discussed in more detail below, the expert determination clause does not provide any guidance to an expert as to how he or she should proceed. There are no rules of procedure laid down in Clause 7.09. Given the breadth of the clause, it is potentially unhelpful that the clause does not set out the procedures to be followed by the expert or by the parties themselves in the expert determination process.

(d) The clause also very clearly provides that the decision of the expert will be final and binding on the parties and cannot be questioned by any of them in any way. It is equally clear that the expert is not to act as an arbitrator. Such a provision is common in an expert determination clause. It is understandable why parties might wish to proceed in this way since it means that the decision of the expert will, in all likelihood, bring complete finality to the dispute without any significant prospect of challenge. Furthermore, in contrast to a court process, there would be no ability to appeal (with all of the attendant delays that may ensue as a consequence).

(d) Somewhat unusually, the clause does not impose any time limit on the expert in rendering a decision. This has some relevance to the arguments made by the parties (discussed further below) and to the concern of the respondents to ensure that should be the earliest possible final resolution of the dispute between the parties lest Ryhall were to lose interest in acquiring the shares as a consequence of delay.

The Case made by the Respondents in support of a Stay 
18. The case made by the respondents is simple and straightforward. They say that the applicant, as one of the parties to the shareholders’ agreement, is bound by its terms. He cannot, on the one hand, contend that there has been a breach of the pre-emption provisions of the agreement and, on the other, allege that Clause 7.09 is not binding on him. They stress the importance of the Ryhall offer, particularly in circumstances where, at least, two of the respondents would like to retire and realise the value of their shares in the Company in order to support them in their retirement. They say that it is vitally important that the dispute be resolved as quickly as possible and that, even with the benefits of the Commercial List, there is no prospect that the proceedings initiated by the applicant will be resolved within a timeframe that would be likely to keep Ryhall on board. In the affidavit grounding the present application, the respondents also stress the importance of commercial confidentiality and they suggest that expert determination will provide an entirely private and confidential forum for the resolution of the dispute with the applicant. It is also clear from the affidavits sworn on their behalf in the substantive proceedings that they have concerns about the financial ability of the applicant to acquire their shares in the event that the Ryhall acquisition falls through. They suggest that an expert determination will achieve a significantly quicker resolution of the dispute than court proceedings. They rely, inter alia , on the observation made by Hogan J. in the Dunnes Stores case at para. 44 where he said:-“…the entire object of adjudication by expert is to achieve a speedy and final resolution of the dispute, even if the ultimate conclusions and the reasoning contained in the expert’s adjudication is not always perfect or completely justified on the evidence. But there are compelling policy reasons which warrant the courts respecting the choice of the parties to submit to adjudication by expert in commercial disputes of this nature. Accordingly, such respect means that the courts must – and will – accept a ruling from the duly nominated expert who is appointed with exclusive authority to determine a particular dispute…”19. The respondents say that it is a matter for the applicant to show that there are sufficient reasons in the present case to justify the court exercising its discretion against a stay of the proceedings and that, on examination, none of the arguments put forward by the applicant (addressed in more detail below) are sufficient to justify the refusal of a stay. 
The Position of the Applicant 
20. As noted above, the applicant, very properly, accepts that he bears the burden of demonstrating that the discretion of the court should be exercised against the grant of a stay. In the course of the written and oral submissions of counsel, a number of individual points were raised which, it was argued, when viewed collectively and in their entirety, justify a refusal of the stay. It is therefore necessary to consider each of the individual factors on which the applicant relies and to determine whether the issues raised by the applicant are sufficiently weighty (whether individually or collectively) to persuade me to exercise my discretion against the grant of a stay. At the same time, I must always bear in mind that, as all of the case law makes clear, the presumption is that the parties should be held to their bargain and that if they have agreed expert determination as the mechanism for resolving disputes, that is the mechanism which they are obliged to follow in the absence of good reason to the contrary. 

The Breadth of the Clause 
21. One of the factors relied on by the applicant is the sheer breadth of the clause. For the reasons already explained in para. 17(b) above, I do not believe that the breadth of the clause is necessarily problematic. Nonetheless, this contention may become relevant in the context of some of the other arguments addressed further below in the context of the nature of the dispute which arises in the s. 212 proceedings. As explained below, counsel for the applicant places significant emphasis on the fact that, quite apart from any question of interpretation of the shareholders’ agreement, there are substantial factual disputes between the parties in relation to a range of matters which will have to be determined by the expert if he or she is to reach a decision in relation to the factual disputes in issue including the disputes relating to the conduct of the affairs of the Company. Counsel submitted that the breadth of the dispute here is in marked contrast to the nature of disputes that one frequently encounters in the context of expert determination clauses relating to, for example, the value of shares or the value of some other asset. 

The Silence of the Expert Determination Clause in relation to the procedures to be adopted 
22. In relation to the procedures to be adopted by the expert, counsel for the applicant placed emphasis on the lack of any provision within the expert determination clause relating to the powers of the proposed expert to determine the dispute, the form of procedure to be adopted by the expert (including the question whether the expert can conduct a hearing on sworn evidence and whether the expert is bound by the rules of natural and constitutional justice), the procedure for the remuneration of the proposed expert, and the consequences of non-cooperation with the expert.

23. While I acknowledge that it would be preferable for an expert determination clause to spell out the powers of an expert and the procedures to be followed, I do not believe that the failure to do so in Clause 7.09 is fatal to the expert determination process. It is not unusual for an expert determination clause to be silent on, at least, some aspects of procedure. In many cases, no significant difficulty arises because, at the commencement of the process, the expert will usually organise a meeting with the parties, and agree the procedures to be adopted. The nature of the procedures to be adopted will frequently be dictated by the subject matter and ambit of the dispute in question. For example, if what is involved is essentially a valuation exercise, very little, by way of procedures, may require to be put in place. It is often the position in such cases that the expert determination clause in question will envisage that the exercise to be carried out by the expert will largely involve the deployment of the particular expertise of the expert concerned rather than the rendering of a decision after a full oral hearing. Again, a determination as to value is a typical example of such a process.

24. The lack of detail however, has the potential to be somewhat problematic if there is a dispute as to the procedures to be adopted or if one of the parties were to fail to cooperate with the process. Even where those difficulties arise, it is essential to bear in mind that, as explained further below, it will ultimately be for the expert to decide how all of these issues should be addressed. That said, the resolution of any disputes as to process or procedure has the potential to create delay. It may become necessary for the expert to convene several meetings in order to iron out any disputes as to the procedure to be adopted. In cases which involve a net issue and which do not require oral evidence, it may transpire that any such difficulties can be readily resolved. On the other hand, in cases where there is a significant dispute between the parties (including a dispute on factual issues) the resolution of any dispute between the parties as to the procedures to be adopted may take some time to resolve. It is in that context that the blank canvas contained in Clause 7.09 may give rise to some level of difficulty and delay. For example, Clause 7.09 makes no provision whatever in relation to the disclosure of documents – even though disclosure of documents may be important in the resolution of any factual disputes and in particular in the cross-examination of witnesses as to fact.

25. Even more serious difficulties may arise if a party were to refuse to cooperate altogether in the process. I do not believe, however, that it is appropriate to assume that difficulties of this kind will necessarily arise in this case. It is clearly in the interests of both parties that any dispute should be resolved as speedily as possible. Moreover, if a determination is made that the proceedings should be stayed and the dispute resolved by an expert, I believe the court is entitled to expect that the parties will abide by that ruling (unless and until set aside on appeal).

26. Furthermore, if a party refuses to cooperate, the expert may be left with no alternative but to proceed with the determination in the absence of that party. Once the expert has given the recalcitrant party an opportunity to be heard, it is difficult to see how the rules of natural or constitutional justice could be said to be infringed if a party, thereafter, refuses to engage with the process.

27. In the present case, what is key is that the parties have previously, in the expert determination clause, agreed that the expert is to decide any disputes relating to the shareholders’ agreement or the conduct of the affairs of the Company. As part of the process of determining such disputes, the expert is empowered to decide all issues which require to be decided in order to determine that dispute. This was made very clear by Hogan J. in his judgment in the Dunnes Stores case at para. 44, where he said:-

” It also means a judicial acceptance that the expert should, in principle, at least , have full authority to determine all issues which require to be decided in order to determine the dispute, including questions of law and the interpretation of contractual terms. ” (Emphasis added)28. Similar observations have been made by the Court of Appeal in England & Wales in Barclays Bank plc v. Nylon Capital LLP [2012] 1 All ER (Comm) 912 at p. 925 where Thomas L.J. (as he then was) dealt with the matter as follows:-“36. It was next submitted … that a court has to take into account the speed and informality of expert determination as important considerations to which the parties agreed by selecting that form of procedure. As the expert determination would be carried out quickly without recourse to the formalities of court or arbitration, a court should not deprive the parties of that upon which they had agreed, even if the process was not, on an objective basis, suitable for the dispute which had arisen.37. As I have said, there is no procedural code for expert determination, in contradistinction to arbitration. The activities of an expert are subject to little control by the court, save as to jurisdiction or departure from the mandate given. Unless the parties specify the procedure, the expert determines how he will proceed; it is rare for what might be perceived as procedural unfairness in an arbitration to give rise to a ground for challenge to the procedure adopted by an expert…” (Emphasis added)

29. While I would not subscribe to the suggestion that an expert would be entitled to act with procedural unfairness, there is no doubt that, in the absence of provision for procedure, it is ultimately for the expert to determine the procedures to be adopted. As noted above, an expert, at the outset of the process, will usually speak to the parties about the procedure to be adopted and will take into account the suggestions made by the parties. However, ultimately, it is a matter for the expert to put in place whatever procedures are appropriate to enable the expert to determine the matters in dispute. The observations made by Hogan J. in the Dunnes Stores case (quoted in para. 28 above) reinforce this conclusion. That is not to say, however, that difficulties will not arise. As discussed in para. 24 above, in circumstances where the expert determination clause makes no provision for procedures to be adopted, there is significant scope for delay as a consequence of disputes between the parties as to the procedure to be adopted. Furthermore, as previously noted, there is the added difficulty that there is no provision made in Clause 7.09 in relation to the disclosure of documents by the parties to the dispute. While an expert might seek to rely on the authority of the Court of Appeal decision in Dunnes Stores to direct the disclosure of documents, there are obvious difficulties in the event that such disclosure is not made or is not made comprehensively. What is the sanction that an expert can impose in such circumstances? In the absence of detail in the expert determination clause, no guidance is given as to the sanctions that might be imposed. In addition, the expert does not have available the panoply of remedies which are available in court proceedings. I do not wish to suggest that this will give rise to insuperable difficulties. I simply draw attention to these potential difficulties in circumstances where the respondents suggest that expert determination will necessarily be more straightforward and expeditious than court proceedings. If the only issue here were the interpretation of the shareholders’ agreement, that would certainly be the case. However, as matters currently stand, the issues here are more extensive and include issues of fact on which there are significant conflicts between the parties on the evidence. It therefore seems to me that some weight should be given to this factor in considering how the discretion of the court should be exercised in this case. 
The expert determination clause is silent as to the identity or qualifications of the proposed expert 
30. In my view, this is not a concern. Clause 7.09 envisages, in the first instance, that the parties will agree on the appointment of the expert. The parties will therefore be in a position to nominate appropriate experts to deal with whatever form of dispute arises between them. If they cannot agree between themselves, there is an appropriate provision made for the nomination of an expert by an office holder, namely the President of the Law Society, who is peculiarly well placed to make such a nomination. The President of the Law Society is frequently identified as the person to make a nomination of that kind. Clauses to that effect are found in a variety of different situations in both arbitration and expert determination clauses. The President of the Law Society is well used to making nominations and it is inconceivable that the President of the Law Society would not make an appropriate nomination of a lawyer in the event that, as in this case, the dispute between the parties required legal input. In those circumstances, I can see no basis to take this factor into account in considering how the discretion of the court is to be exercised in this case. To my mind, it is inconceivable that the President of the Law Society will not nominate a lawyer of appropriate experience to determine a dispute of the kind which arises here. 

The ” failure ” to invoke the expert determination clause within seven days 
31. It was argued on behalf of the applicant that, having regard to the text of Clause 7.09, there was an obligation on the part of the respondents, if they wished to rely on the expert determination clause, to refer the dispute to an expert or to the President of the Law Society within seven days from the date of the dispute. It was argued that the respondents had manifestly failed to comply with that obligation. However, counsel on behalf of the respondents argued that the seven-day period ran not from the date of the occurrence of a dispute but from the date when the parties failed to agree on the appointment of an independent expert. Counsel for the respondents submitted that this was the most business like interpretation of Clause 7.09 and that to interpret it in any way would lead to an absurd result. It would impose on the parties an unrealistic obligation to keep referring any disputes which arose between them to expert determination within seven days of the dispute arising, irrespective of the number of disputes that might arise between them in the course of the conduct of the affairs of the company. Counsel also argued that, in any event, time could not be said to be of the essence and that, accordingly, any failure to refer the dispute to expert determination within seven days of the letter from Crowley Millar of 22nd April, 2019 was not fatal.

32. For completeness, it should be noted that, in this case, no argument was made that the agreement should be construed contra proferentem . Although the agreement appears to have been drafted by O’Hanrahan & Co. Solicitors (who are associated with one of the respondents) the parties agreed (as Recital D of the agreement makes clear) that, at the time the agreement was drafted, O’Hanrahan & Co were not acting for any particular shareholder. It would not therefore have been possible for the applicant to argue that one of the respondents should be regarded as theproferens .

33. In my view, counsel for the respondents was correct in suggesting that the reference in Clause 7.092 ” within seven days of a dispute arising …” refers not to seven days from the date of the original dispute between the parties but to seven days from a dispute arising as to who should be appointed as expert to resolve that dispute. As Lightman J. said in Don King Productions v. Warren [1998] 2 All Er 608 at p. 624 (in a passage cited by the authors of McDermott ” Contract Law “, 2nd ed., 2017, at para. 10.118);-

“The essential task of construction is to deduce, if this is possible, from the agreements, construed against their commercial background the commercial purpose which the business men …who are parties to them must as a matter of business common sense have intended to achieve by entering into them; and if such intent can fairly be deduced and if this is necessary to effectuate that intent, the court may require what may appear to be errors or inadequacies in the choice of language to yield to that intention and be understood as saying that (in light of that purpose) that language must reasonably be understood to have been intended to mean”.34. In my view, the construction of Clause 7.09 suggested by counsel for the respondents is the only construction which would make business sense to business people in the position of the parties to the shareholders’ agreement here. It would make no sense if the shareholders of the company were required to refer to an expert every dispute that might arise between them in the course of the conduct of the affairs of the company within a period of seven days. There are bound to be disagreements and disputes from time to time between shareholders especially where each of them is involved in some way in the management of a company. The vast majority of those disputes and disagreements would be resolved amicably in the course of discussions over time. If, in the meantime, the parties had to appoint an expert, it would lead to unnecessary expense and unduly elevate the seriousness of the dispute. Over time, it could also lead to a plethora of references of disputes to an expert. That would do little to promote a good working relationship between the shareholders. In these circumstances, it seems to me to be improbable that that is what the shareholders, here, intended.35. On the contrary, it is inherently more likely (and is consistent with business common sense) that the shareholders would have intended that the seven-day period should refer to any dispute between them as to who should be appointed an expert (if they ultimately are unable to resolve a particular dispute and come to the conclusion that the only way to resolve it is through expert determination). In such circumstances, it makes good sense that there should be a time limit on the reference to the President of the Law Society so that unnecessary time is not wasted in appointing an expert when it becomes really necessary to do so. If the parties are at a stage where they are unable to agree on the appointment of an expert, a dispute has clearly reached a level which requires outside input in order to resolve it. At that point, it is wise that there should be a time limit on the approach to the President of the Law Society so that an expert can be appointed in order to resolve the dispute as speedily as possible.

36. I therefore reject the applicant’s argument in relation to this issue. But it is important to bear in mind that this is not the only time point that is raised by the applicant. In addition, the applicant submits that the failure on the part of the respondents to invoke the expert determination clause until after these proceedings were instituted is a significant factor to be weighed in the balance. That is an issue which is addressed further below. 

The status of the applicant 
37. Counsel for the applicant also argued that the applicant’s status as a lay person is quite different to the parties to the expert determination clause considered by the House of Lords in the Channel Tunnel case. He drew attention, in this context, to the language of Lord Mustill at p. 353 in that case where he said:-

“This is not the case of a jurisdiction clause, purporting to exclude an ordinary citizen from his access to a court and featuring inconspicuously in a standard printed form of contract . The parties here were large commercial enterprises, negotiating at arm’s length in the light of a long experience of construction contracts, of the types of disputes which typically arise under them, and of the various means which can be adopted to resolve such disputes. It is plain that clause 67 was carefully drafted, and equally plain that all concerned must have recognised the potential weaknesses of the [procedure applicable under clause 67] and concluded that, despite them, there was a balance of practical advantage over the alternative of proceedings before the national courts…” (Emphasis added)38. Counsel argued that the applicant was in the position of an ordinary citizen. He was far removed from the large commercial enterprise mentioned by Lord Mustill. I do not, however, accept this argument. A similar consideration was dismissed by Keane C.J. in Via Net Works Ireland Ltd [2002] 2 I.R. 41 at p. 58 where, having cited the speech of Lord Mustill in the Channel Tunnel case, he continued as follows:-“While, as the passage makes clear, in that case the contract was one which was more characteristic of the high level world of international commerce than the agreement now under consideration, I have no doubt that the general principle is equally applicable to the agreement in this case”.39. It should be noted that, in the Via Net Works case, the applicants (like the applicant here) were shareholders in the relevant company. Similarly, the agreement in issue in that case was a shareholders’ agreement. The observations of Keane C.J. in that case are therefore equally apposite here.40. Moreover, as Hogan J. made clear in Dunnes Stores v. McCann at para. 37, the circumstances in which the courts are unwilling to enforce an expert determination clause as a consequence of the particular status of an applicant are limited to cases where the applicant is a consumer or where there was a manifest inequality of bargaining power between the parties to the relevant contract. He said:-

“The starting point … is that the courts will generally hold the parties to the terms of their contractual bargain. This is especially true in the context of the resolution of a commercial dispute between commercial equals, all of whom have been fully advised and are (presumably) aware of the implications of their actions. Different considerations might, …, come into play where the agreement had been reached where there was a manifest inequality of bargaining between the parties or where the agreement involved a consumer.”41. I cannot see any basis in the present case to suggest that the parties to the shareholders’ agreement, at the time of its conclusion, were not, in the words of Hogan J., ” commercial equals”. While counsel for the applicant attempted to argue that the respondents were in a stronger position than the applicant in negotiating the shareholders’ agreement (as evidenced by the fact that it was drafted by O’Hanrahan Solicitors), I do not believe that there is any sufficient basis to take that view. In particular, there is no evidence to support that proposition. While the applicant, in para. 16 of his affidavit, says that the agreement was drafted in its entirety by Mr. O’Hanrahan (who is the spouse of one of the respondents) there is no evidence to suggest that the applicant did not have an opportunity to take his own legal advice or that it was presented to him on a ” take it or leave it ” basis. On the contrary, Recital D to the agreement expressly records:-“The Subscribers each acknowledge that they have been separately legally advised and received accountancy advice or alternatively that they have waived the rights to obtain such legal advice or accountancy advice before the signing of this agreement. It is further acknowledged that the firm of O’Hanrahan & Co. Solicitors are not acting for any particular shareholder and the Subscribers acknowledge that O’Hanrahan & Co. Solicitors have no legal professional obligation to the Subscribers in regard to the contents hereof”.42. In my view, the applicant is bound by the Recital contained in the shareholders’ agreement. I therefore do not believe that it is open to the applicant to rely on the argument made by counsel as summarised in para. 38 above. Quite apart from that consideration, there is insufficient evidence in the affidavits before the court to support the argument made. 
The failure to invoke the clause until after the proceedings were instituted. 
43. In para. 10 above, I have already drawn attention to the relevant timeline. On the evidence before the court, the threat of legal proceedings was first made by the applicant in his solicitor’s letter of 22nd April, 2017. Although that letter does not explicitly threaten legal proceedings per se, the letter spoke of the applicant being advised ” to take such steps as are available to him to prevent the majority shareholders progressing with any proposed transaction involving Ryhall or any third party in contravention of the provisions of the Shareholders Agreement “. It is clear that the respondents understood this as a threat of legal proceedings. In their letter of 25th April, 2019 they expressly stated that they required to be put on ” prior notice of any applications concerning this matter” . This is reinforced by what is said by the third named respondent in para. 85 of his affidavit where, with reference to the correspondence, he expressly refers to the applicant ” threatening legal proceedings “.

44. As noted above, it was not until 21st May, 2019, after a full legal team (including both senior and junior counsel) had been retained by the respondents, that the first intimation was given that the respondents wished to rely on the expert determination clause. Counsel for the applicant strongly argued that it was telling that the clause was not raised until after counsel were retained. He suggested that the mechanism of expert determination cannot have been regarded as of fundamental importance to the respondents in circumstances where they did not ever seek to invoke it themselves. By the time the clause was invoked, the proceedings were already up and running with a very full affidavit having been sworn and served on behalf of the applicant.

45. It might be thought that it is not material that a period of only four weeks elapsed between the letter from Crowley Millar of 22nd April, 2019 and the date when the expert determination clause was first mooted by the respondents at the hearing before Reynolds J. on 21st May, 2019. However, a shorter period has been held to be material in somewhat analogous circumstances considered by the Supreme Court in Intermetal Group Ltd v. Worslade Trading Ltd [1998] 2 I.R. 1. That case was not concerned with an expert determination clause but with a dispute as to jurisdiction. Proceedings had been commenced in Ireland and an application for an interlocutory injunction was sought by the plaintiffs alleging that the defendant (an Irish registered company controlled by Russian interests) had wrongfully induced breaches of contract between the plaintiff (which was involved in the steel business) and certain steel suppliers. One week after the proceedings had been instituted, the defendants contended for the first time that the dispute should properly be determined in the courts of Russia rather than in Ireland. The defendants brought an application to stay the Irish proceedings on forum non conveniens grounds. There is some parallel between the test applied in such circumstances and the test applied in applications of the present kind. In a forum non conveniens challenge, once the defendant has established that the dispute should more appropriately be tried in the courts of some other forum, the onus then shifts to the plaintiff to show that it is not in the interests of justice that the stay should be granted. To some extent, that approach is mirrored in the present case insofar as the test to be applied is concerned. Here, the respondents must show that there is an expert determination clause in place which binds both parties. Once the respondents discharge that initial onus, it then falls to the applicant to demonstrate that there is good reason for the court to conclude that a stay should not be granted.

46. Ultimately, the Supreme Court, in Intermetal , determined that Russia was the most appropriate forum for the determination of the dispute but that, nonetheless, the interests of justice required that the proceedings should continue in Ireland. The forum non conveniens challenge was therefore dismissed. While the facts of that case are therefore very different to the present case, the rationale for the decision of the Supreme Court is of some relevance in the context of the issue raised in these proceedings that the respondents have delayed in invoking the expert determination clause. In particular, the following passage from the judgment of Murphy J. in the Supreme Court is of some relevance where he said at p. 38:-

“The beneficial owners of the Defendant must have realised that the activities of that company would be called into question by the Plaintiffs. Whilst the correspondence pre-dating the institution of these proceedings took place over a period of little more than one week, importance must be attached to the failure of the Defendant in the one letter written on their behalf to address the complaints made against them or to dispute expressly or by implication the appropriateness of Ireland as the forum in which to institute proceedings. Whilst it could not be suggested that the entry of the conditional appearance on 27th November or the delivery of the Defendant’s notice of motion on the 28th of November 1997, claiming the stay …involved anything approaching delay, the fact remains that the proceedings were instituted and the motion for an injunction apparently served before the appropriateness of the forum was challenged. Furthermore, it is clear that both parties recognised the urgency of the matter and must have overcome extreme difficulties to extract information, assemble documents and draft the numerous affidavits filed in connection with the two motions. Justice required that the action and in particular the interlocutory aspects thereof should be dealt with expeditiously. If the learned trial Judge had granted a stay and refused to hear the interlocutory application such a refusal would have constituted the denial of justice not merely to the Plaintiff but also the Defendant. They shared a concern to have this extremely important commercial problem resolved at the earliest date even though their expectations as to the ultimate outcome necessarily differed. The trial of this action in a different forum would not serve the ends of justice.In these circumstances I am of the view that the … trial Judge was correct in refusing the stay sought by the Defendant…”

47. Counsel for the respondents has argued that it would be wrong, in this case, to take the same approach particularly in circumstances where, just three days after the Crowley Millar letter of 22nd April, 2019 threatening proceedings was written, Crowley Millar wrote again on 25th April, 2019 proposing without prejudice discussions. It is clear from the affidavit evidence that such discussions subsequently took place between the parties. In those circumstances, it is suggested that it would be wholly wrong to take a similar approach in this case to that taken by the Supreme Court in Intermetal . It seems to me that there is some force in that submission. In addition, counsel drew attention to the fact that an offer to buy the respondents’ shares was made by the applicant and there was engagement on the part of the respondents in relation to that offer. Counsel submitted that it was unrealistic to think that it would occur to the parties, in those circumstances, to consider referring the matter to expert determination.48. On the other hand, counsel for the applicant argued that if expert determination was of such importance to the respondents, it was difficult to understand why they had not, in response to the Crowley Millar letter threatening proceedings, set out their position that, if the matter could not be resolved through negotiation, expert determination was the appropriate means of resolving any dispute rather than court proceedings. Instead, they stayed silent on that issue and simply demanded that (as noted above) they should be put on notice of any application to the court. However, counsel frankly acknowledged that this point, on its own, is unlikely to be enough to persuade the court to exercise its discretion against the grant of a stay. Nonetheless, he submitted that it was a factor to be considered and weighed in the exercise of the discretion.

49. For my part, I agree that the proposal for without prejudice discussions is a factor which differentiates this case from Intermetal . Nonetheless, the fact that the expert determination clause was not invoked until several weeks after the Crowley Millar letter of 22nd April, 2019 is an element to be borne in mind when I come to consider whether there are sufficient factors at play in this case to justify the refusal of the stay. I agree that it is not sufficient in itself to justify the refusal of a stay. It is simply a factor to be borne in mind. 

The inherent unsuitability of expert determination to resolve a dispute of this kind 
50. In the course of his submissions, counsel for the applicant drew a distinction between cases such as Campus & Stadium Ireland Development Ltd v. Dublin Waterworld Ltd and the present case. In the Dublin Waterworld case, the relevant clause dealt with a specific issue – namely a dispute between a landlord and a tenant concerning compliance by the tenant with its obligations under a lease concerning repair and maintenance. The clause provided that any such dispute should be referred to the determination of a single architect to act as expert. Based on what was said by Kelly J. at p. 186 of the report, it appears that the clause told the expert what he was to do upon appointment and required that any decision of the expert be rendered within three months of a submission of the dispute or such extended time as the parties might agree. Counsel suggested that this was a fairly typical expert determination clause which contemplated expert determination by an expert in respect of a specific issue which was plainly within the particular expertise of that expert. It also provided appropriate details as to how the expert should proceed and, very importantly, provided for a time limit for the expert to reach a determination. Counsel also referred to expert determination clauses which are frequently encountered such as those dealing with valuation of shares or valuation of a premises and where the clause provides for the appointment of a valuation expert. In such cases, the expert valuer will be in a position to very quickly reach a determination following what are likely to be quite brief written submissions from both sides (and in the case of the valuation of a premises, after an inspection of the premises). The expert will be able to bring his or her own experience and expertise in play in arriving at the determination. In such cases, the expert will usually not have to resolve issues of fact or to determine which party is telling the truth.

51. In contrast, in the present case, the expert will have to address a much more broad ranging dispute involving not only questions of interpretation of the shareholders’ agreement (something which could readily be done by an expert) but also a contest on the facts. In particular, on the basis of the case as currently constituted, the expert will have to make findings of fact based on disputed evidence. That process is inherently more likely to take time than the exercise contemplated by the much narrower terms of the expert determination clause in the Dublin Waterworld case.

52. Counsel argued that, in light of the nature of the dispute, the respondents had not established that the process would be more expeditious than the Commercial Court. If the President of the Law Society is to appoint an expert at this stage, it may be difficult to find someone who will be available immediately. The long vacation is looming. The expert will have to determine the procedures to be adopted. There will have to be meetings with the parties in order to agree a procedure. Issues may arise in relation to the exchange of documents. As noted above, there is no provision in the expert determination clause requiring the parties to provide any relevant documents to each other and the expert. All of this would have to be considered and debated at procedural meetings. Even more importantly, given the extent of the factual issues between the parties, it is impossible to envisage that an expert could determine the dispute without hearing oral evidence and without witnesses being subject to cross examination. The process would therefore be very similar to a court process. Counsel submitted that the process here will, accordingly, be quite unlike that envisaged by Hogan J. in Dunnes Stores v. McCann where he spoke of ” the entire object of adjudication by expert is to achieve a speedy and final resolution of the dispute …”. Counsel drew attention to the fact that in the Dunnes Stores case, the dispute related to whether a particular development had been completed in accordance with the development agreement. The expert determination clause envisaged that this would be determined by a particularly well qualified expert and it clearly envisaged a very truncated process given that, in contrast to clause 7.09 here, it required the expert to report within 20 working days of his appointment. Crucially, the clause there envisaged the appointment of an expert architect who would be in a position to readily form a view as to whether a particular building had been constructed in accordance with the development agreement in question.

53. Counsel for the applicant placed significant reliance upon a decision of Chesterman J. in the Supreme Court of Queensland in Zeke Services Pty Ltd v. Traffic Technologies Ltd [2005] 2 Qd R563. Counsel drew attention to the fact that, as in Ireland, it is plain from a consideration of the judgment of Chesterman J. that the Channel Tunnel case is the origin of the modern approach taken by Australian courts in relation to the enforcement of expert determination clauses. Furthermore, as para. 21 of the judgment makes clear, the test applied is the same. In that paragraph, Chesterman J. said:-

“The discretion whether or not to grant the stay is obviously wide. The starting point for a consideration of its exercise is that the parties should be held to their bargain to resolve their dispute in the agreed manner. This factor was emphasised by the House of Lords in Channel Tunnel, … However, a stay will not be granted if it would be unjust to deprive the plaintiff of the right to have his claim determined judicially or, to put it slightly differently, if the justice of the case is against staying the proceeding. The party opposing the stay must persuade the court that there is good ground for the exercise of the discretion to allow the action to proceed and so preclude the contractual mode of dispute resolution. The onus is a heavy one. The court should not lightly conclude that the agreed mechanism is inappropriate.54. In para. 22 of his judgment, Chesterman J. explained that the onus could be discharged where the dispute was not suitable for expert determination. He said:-“Ordinarily I would think that that onus can be discharged only by showing that, in the particular case, the dispute is not amenable to resolution by the mechanism the parties have chosen. This consideration includes the procedure, if any, for which the parties have contracted, and the qualification of the expert … to embark upon the determination of the dispute. The parties are presumed not to have intended that their dispute should be resolved by someone not qualified for the task, or in some inappropriate manner. This presumption, based on legal theory, removes any violence to the agreement which refusing the stay would otherwise have done.”While there is some force in the balance of what is said by Chesterman J in that extract, I am not sure that it is wise to suggest that the onus can only be discharged by showing that a particular dispute is not amenable to resolution by the mechanisms the parties have chosen. That seems to me to unduly circumscribe the discretion of the court on an application of this kind.55. The observations of Chesterman J must also be read in the context of the particular facts of that case. The expert determination clause there provided for the appointment of an accountant to resolve a dispute between parties. Most of the complaints made in that case related to the state of certain accounts which Chesterman J. held were well within the competence of an accountant. However, some of the complaints related to questions of fact and mixed questions of fact and law which Chesterman J. suggested were more readily answered by a lawyer than an accountant. It is clear from a consideration of the judgment as a whole that Chesterman J was very concerned that an accountant lacked the necessary skills to resolve issues of law or of disputed fact and his observations in the extract quoted in para. 54 above must be seen in that light.

56. Consistent with the argument made by counsel for the applicants, Chesterman J. observed at paras. 23-24 of his judgment as follows:-

“Einstein J … in Heart Research Institute noted that ‘Expert Determination provides an informal, speedy and effective way of resolving disputes, particularly disputes which are of a specific technical character or specialised kind.’ The most common examples are where a valuer is appointed to fix the rent … or a man experienced in a particular line of business is called on to fix the price of stock in trade, or say whether it is saleable.
24. It follows that if a dispute is not of a kind which can be determined in an informal way by reference to the specific technical knowledge or the learning of the expert, it may be appropriate to refuse a stay. Complicated disputes of fact or of law may be of such a character.”

57. Counsel expressed the concern that if the present dispute is to be determined in some summary way, it would inevitably involve a serious abrogation of procedural safeguards which would call into question the appropriateness of expert determination. In this context he emphasised what was said by Chesterman J. in Zeke Services at para. 27:-“The evident advantage of an expert determination of a contractual dispute is that it is expeditious and economical. The second attribute is a consequence of the first: expert determinations are, at least in theory, expeditious because they are informal and because the expert applies his own store of knowledge, his expertise, to his observations of facts, which are of a kind with which he is familiar. The less amenable the dispute is to this mode of resolution, the less appropriate this paradigm will be and the more likely it will be that the court will decline to stay an action brought on the contract so as to allow the expert determination to proceed.”58. Counsel for the applicant submitted that it was unreal to suggest that the dispute here could be determined without putting in place a procedure very similar to that which would be adopted in the High Court for resolution of the dispute. Counsel expressed the concern that if the respondents are correct in suggesting that the expert determination can provide a more expeditious mechanism for resolving the dispute, they must envisage that the expert will dispense with some of the necessary procedures and processes involved in any adversarial fact finding exercise. Counsel submitted that it would expose the applicant to injustice if the expert were to proceed in that way. On the other hand, if the expert is to essentially replicate the procedures that would be involved in a High Court case, this would inevitably mean that there would be no saving of time or expense and it called into question the appropriateness of expert determination in a full scale dispute of this kind.59. Counsel also relied on a decision of Judge Hegarty Q.C. in Cott UK Ltd v. FE Barber Ltd [1997] 3 All ER 540. In that case, the court refused a stay in circumstances where the relevant expert determination clause provided no guidance as to the procedures to be adopted and where, in common with the position in Zeke , the relevant expert (appointed by the Director General of the British Soft Drinks Association) had no appropriate expertise to resolve an issue in relation to the proper construction of a commercial agreement between the parties. At p. 550, the court said:-

“It may well be, that for certain types of disputes which might conceivably have arisen under this contract, the intervention and decision of a soft drinks industry expert would have been entirely sensible and appropriate. However, I do not consider on the evidence before me, that the parties, like the parties in the Channel Tunnel case, gave thought to the full range of possible disputes which might arise between the parties, and determined clearly, positively and explicitly that the appropriate person to resolve the entire range of disputes would be someone with this particular expertise. In this context, it is perhaps significant that they chose to describe him specifically as acting as an expert. Yet, in relation to this dispute … he would not appear to have any relevant expertise. …”.60. In response, counsel for the respondents argued that Cott is inconsistent with the subsequent decision of the Court of Appeal of England & Wales in Barclays Bank v Nylon Capital LLP . It also appears from the decision of Chesterman J. in Zeke that the Australian courts have doubted the relevance of some of the matters relied upon by the court in Cott . In addition, the fundamental difficulty that arose in Cott (arising from the lack of appropriate expertise of the nominee expert) does not arise in the context of Clause 7.09. As discussed above, although the clause says nothing about the particular expertise of the expert to be appointed, it is inconceivable that the President of the Law Society would not appoint a suitably experienced lawyer in this case. For that reason, it seems to me that Cott is not an apposite authority.61. With regard to Zeke , counsel for the respondents submitted that, in contrast to Zeke , it could not plausibly be suggested that the present case involved complicated questions of law or fact. He stressed that the principal issue related to the interpretation of the shareholders’ agreement which, he submitted, was very obviously a matter which could be readily addressed by any expert lawyer. He therefore suggested that this was quite different to the kind of case which Chesterman J. had in mind in para. 24 of his judgment in Zeke .

62. According to counsel for the respondents, there is a compelling policy reason to refer the present dispute to expert determination. Parties to expert determination clauses are bound by what they agree. In addition, he suggested that the speed of resolution weighed heavily in favour of expert determination. He suggested that, even if the expert has to adopt somewhat similar procedures to the High Court, an expert dedicated to determine this dispute and who is available over the coming long vacation must necessarily be in a better position to resolve the dispute more quickly than the court. He also submitted that if the court had any concern about the lack of any time limit imposed by Clause 7.09 on the decision of the expert, the court could tailor its order to make clear that the stay would be granted on condition that the person to be appointed as expert will determine the dispute within a period of time fixed by the court or such longer period as the parties may agree.

63. Counsel emphasised that while there is no evidence as to Ryhall’s intentions before the court, the longer that ultimate determination of the dispute is delayed, the greater will be the probability that Ryhall will withdraw.

64. With regard to Zeke , counsel for the respondents also argued that it predated Barclays Bank and that, accordingly, the court should treat it with caution. Counsel for the respondents also suggested that Barclays Bank is an example of a ” more extreme ” provision than Clause 7.09 and yet, he suggested, it was enforced by the court. In that case, the relevant clause provided that there should be an expert determination by an accountant in respect of any dispute arising between members of a limited liability partnership relating to either the amount of any profit or loss due to a member or in relation to any payment due to an outgoing member. In response, counsel for the applicant argued that the clause in Barclays Bank was of a radically different shape to Clause 7.09 in that it confined the nature of the dispute to be resolved by the expert to matters which were clearly within the competence of an accountant and were relatively net and discrete issues. It should also be noted at this point that, as discussed further below, the court in Barclays Bank did not ultimately grant a stay. 

Discussion and analysis 
65. Although each of the three Irish decisions discussed above show very clearly that the Irish courts will apply similar principles to those discussed by Lord Mustill in the Channel Tunnel case, none of those decisions address, in any level of detail, the factors which might potentially persuade a court to refuse to grant a stay of proceedings brought in contravention of an expert determination clause. In fact, there is nothing in the judgments in any of those cases which suggests that any argument was made that the presumption in favour of a stay was outweighed by more cogent countervailing considerations supporting the continuation of court proceedings. There is no indication in the judgment of Kelly J. in the Dublin Waterworld case that any argument of that kind was made by the plaintiff there. Based on the report of the judgment, the plaintiff appears to have argued that there was no sufficient dispute in existence that required determination by an expert. That argument was rejected by Kelly J. It is significant that the expert determination clause in that case was enforced even though this resulted in parallel proceedings before the expert in relation to the repairing covenant in the lease notwithstanding the ongoing court proceedings in relation to the balance of the lease.

66. Similarly, in Dunnes Stores v. McCann , it does not appear that any argument was made by the plaintiff there that there were countervailing factors that outweighed the presumption in favour of a stay. On my reading of the judgment, the argument made by Dunnes Stores to resist the stay was simply that the dispute which it sought to litigate in the courts was outside the ambit of the expert determination clause. As para. 46 of the judgment of Hogan J. demonstrates, there was no merit in that argument which Hogan J. described as ” specious “. However, the Court of Appeal did not address the factors that might appropriately be taken into account by a court in considering whether there is a sufficient basis to refuse a stay. Nevertheless, the final paragraph of the judgment of the Court of Appeal enjoins the High Court to:-

“…stand ready at the earliest opportunity to strike out as abusive attempts of this nature to frustrate and undermine commercial agreements providing for adjudication by expert in the event that any future similar litigation of this kind should manifest itself….”.67. In essence, the argument in the Via Networks case also focussed on the ambit of the dispute resolution clause in that case (which provided for arbitration rather than expert determination) and in particular as to whether it could be said to extend to the statutory right to pursue an oppression claim under what was then s. 205 of the Companies Act, 1963. As noted previously, the fact that the Supreme Court, in that case, took the view that such a claim could properly be remitted to arbitration demonstrates very clearly that there is no reason in principle why the claim asserted by the applicant in these proceedings could not be dealt with by way of expert determination. While counsel for the applicant is undoubtedly correct in suggesting that expert determination clauses are frequently confined more narrowly to very specific issues, there is nothing to prevent parties from agreeing to submit to expert determination more widely.68. As noted above, counsel for the respondents placed significant reliance on the decision of the Court of Appeal of England & Wales in Barclays Bank v Nylon Capital . However, I am not convinced that this decision takes the matter much further. While the decision is useful, insofar as it deals with an expert determination clause which is silent on procedures, the court does not address, in any detail, the nature of the factors that might be sufficient to persuade a court to refuse a stay. The dispute in that case related to the jurisdiction of the expert. While the court reiterated the principle underlying the approach taken in the Channel Tunnel case, the court did not ultimately grant a stay. The court’s decision was not prompted by any factors which outweighed or displaced the presumption that a stay should ordinarily be granted. The reason for the court’s decision was simply that the relevant dispute between the parties was not within the ambit of the expert determination clause. In contrast to the provisions of Clause 7.09 here, the expert determination clause was narrowly focussed. It is noteworthy that, in the course of his judgment, Thomas L.J. highlighted that expert determination clauses are usually limited in nature. At para. 28, he said:-

“…expert determination clauses generally presuppose that the parties intended certain types of dispute to be resolved by expert determination and other types by the court…. The LLP agreement illustrates this: the parties agreed by cl 26.2 to submit to the exclusive jurisdiction of the English courts, but reserved specific disputes under cl 26.1 to the expert. They carved out of the exclusive jurisdiction of the English courts, to which they had submitted all disputes between the parties, a limited class of dispute. …. The simple question is whether the dispute which has arisen … is within the jurisdiction of the expert conferred by the expert determination clause or is not within it and is therefore within the jurisdiction of the English court. ….”69. In light of the approach taken by the Court of Appeal in the Barclays Bank case, I cannot agree with the submission by counsel for the respondents that the approach taken by Chesterman J. in Zeke is inconsistent with Barclays Bank . On the contrary, there is nothing in the Barclays Bank decision which addresses the issue which fell for consideration in Zeke – namely whether there were factors which outweighed the starting presumption that the parties were bound by the expert determination clause which they had expressly incorporated in the agreement between them.70. The decision of Chesterman J. is not an outlier. Insofar as I can see, it is consistent with a line of Australian authority which includes Badgin Nominees Pty Ltd v. Oneida Ltd [1998] VSC 118, Dance with Mr. Dance Ltd v Dirty Dancing Investments Pty Ltd [2009] NSW S332 and Mineral Resources Ltd v. Pilbara Minerals Ltd [2016] WASC 338. The decision is very useful in the way in which it analyses the factors that fell for consideration in that case. In particular, Chesterman J. drew attention to the inherent difficulties that are likely to arise where an expert determination clause purports to entrust a complex dispute to an ” expert ” who lacks the necessary skills, experience and expertise to resolve the issue. Chesterman J., at para. 28 of his judgment, identified that, in that case, most of the issues that fell for consideration were well within the competence of the accounting expert who was required to be appointed under the expert determination clause in issue in that case. It is clear from a consideration of Chesterman J. that if those were the only matters in issue, a stay would have been granted. As Chesterman J. said at para. 28:-

“All that is involved in the determination of these complaints is that the accountant uses his professional knowledge in a perusal of the company’s accounts and other records. The determination is likely to be quick and relatively cheap. There can be no sensible objection to the parties being held to their bargain that those disputes be resolved in that way”.71. The difficulty that arose in Zeke was that the matters in dispute between the parties also extended to more complex issues which involved the resolution of disputes as to fact and as to law. At para. 30 of his judgment, Chesterman J. said:-“The dispute, … raises a question of what the company’s officers believed about the recoverability of the debts and the reasonableness of any grounds for that belief. There are, therefore, questions of mixed fact and law to be resolved as to whether a representation was made and the content of any representation. Such questions are more readily answered by a lawyer than an accountant. Whoever makes the determination, the process must involve some argument, legal in nature. This is not the paradigm of applying one’s special knowledge to one’s own observations.”72. At para. 31 of his judgment, Chesterman J. highlighted that there were significant issues of fact to be resolved which he said was“not a matter with respect to which an expert accountant is particularly well equipped to answer. It is more the province of a trained fact finder, such as a judge or arbitrator.”73. Against the backdrop of the factual dispute, the silence of the expert determination clause in relation to procedures weighed heavily with Chesterman J. At para. 32 of his judgment he said:-“It is at this point that the absence from the agreement of procedural rules to be observed by the expert becomes of importance. Their absence is unremarkable in a case where the expert relies upon his own senses and learning, but where he is obliged to investigate disputed questions of fact and/or law, and come to a conclusion about them, the lack of a methodology for the inquiry is significant. An expert, unless obliged to do so by the contract or the terms of his appointment, does not have to comply with the requirements of procedural fairness or natural justice. The agreement does not contain such a requirement.”74. It is clear from a consideration of paras. 32-36 of his judgment, that it was this factor, combined with a concern that the parties would be bound by the outcome of the process (notwithstanding the obvious lack of relevant skill on the part of the designated expert to equip infra an adjudication of disputed fact) that ultimately led Chesterman J. to refuse a stay in that case.75. In contrast, in the present case, I do not believe that the same level of concern arises. This is for the simple reason that, in contrast to the Zeke case, the clause here clearly envisages that an expert will be appointed by the President of the Law Society. As noted earlier in this judgment, it is inconceivable that the President of the Law Society will not appoint a suitably qualified and experienced lawyer to deal with the dispute between the parties. Any such lawyer will be well familiar with the procedures to be adopted in relation to a fact finding exercise and the very basic requirement that both parties should be heard and both parties should be given an opportunity to test the evidence of the other.

76. Furthermore, in light of the approach taken by the Court of Appeal in Dunnes Stores v. McCann , the lack of any provision in Clause 7.09 as to the procedures to be adopted is not an insuperable obstacle. While it may take some time for any expert appointed in this case to consider the issues, hear the submissions of the parties in relation to the procedures to be put in place, and to formulate and decide on those procedures, the judgment of Hogan J. in Dunnes Stores makes clear that the expert will be entitled to decide on the procedures to be put in place. While there are disputes as to fact, any lawyer appointed as expert in this case, will undoubtedly conclude that, if it is necessary to decide the disputed issues of fact, appropriate procedures will need to be put in place to ensure that the parties have a proper opportunity to present their evidence and to contest the evidence of the opposing party. There may well be disputes between the parties as to the procedure to be adopted but ultimately the expert will have to rule on these disputes. Equally, there may be difficulties in relation to the disclosure of documents. However, while I believe that there is no perfect solution (in the absence of specific provisions in Clause 7.09 dealing with the disclosure of documents) I cannot accept that the expert will not be able to devise appropriate procedures that will provide sufficient incentive to the parties to make disclosure of any documents relevant to the issues of fact in dispute. For example, the expert could determine that, in the absence of full disclosure by a party of all relevant documents, this would go to the weight of the evidence adduced by that party. In my view, it would be perfectly reasonable for an expert to take that approach in circumstances where the expert was satisfied that appropriate disclosure had not been made. In the absence of appropriate disclosure, the opposing party may well have difficulty in fully testing, by cross-examination, the veracity of the evidence to be given. I stress, however, that this is no more than a potential approach which an expert might take. I have no doubt that an experienced lawyer would be well capable of devising other equally appropriate mechanisms.

77. In these circumstances, I believe that there is a significant distinction to be made between Clause 7.09 here and the clause in issue in Zeke which led Chesterman J. to refuse the application for a stay. In contrast to Zeke , the expert to be appointed here will, as a lawyer, be equipped and qualified to determine the issues in dispute including procedural issues. However, the complete lack of procedures in Clause 7.09 is nonetheless relevant for a different reason. As outlined above, the lack of any detail as to the procedures to be adopted carries with it a real risk that there will be significant time spent at the outset of the expert determination process in addressing the procedures to be adopted and resolving any disputes between the parties as to those procedures. This has the potential to delay the expert determination. The fact that the risk of delay exists significantly undermines the case made by the respondents, on the hearing of this application, that the expert determination process will be substantially more expeditious than proceedings in the Commercial Court. In order to ameliorate this concern, counsel on behalf of the respondents suggested, in the course of the hearing, that the court might impose, as a condition to the grant of a stay, a requirement that the expert appointed by the President of the Law Society should agree, on his or her appointment, to render a determination within a period fixed by the court or within any longer period that might be agreed between the parties. In my view, that is not an appropriate approach for the court to take. That would involve, in effect, a re-writing of Clause 7.09 by imposing a time limit which does not exist within the four corners of the clause. In my view, the court is not at liberty to re-write a clause of this kind. All of the case law emphasises that the parties are stuck with the terms of the clause which they agreed. They are bound by its terms. That works both ways. If the applicant is bound by the clause, so too are the respondents.

78. The most that can be said is that, where a clause of this kind is silent as to time for performance, it is usual to imply a term that performance will be completed within a reasonable time. In this context, Lewison in ” The Interpretation of Contracts “, 6th ed., 2015 at para. 6.16 cites the following observation of Lord Watson in Hick v. Raymond & Reid [1893] AC 22 at p. 32:-

“When the language of a contract does not expressly, or by necessary implication, fix any time for the performance of a contractual obligation, the law implies that it shall be performed within a reasonable time. The rule is of general application, and is not confined to contracts for the carriage of goods by sea. In the case of other contracts, the condition of reasonable time has been frequently interpreted; and has invariably been held to mean that the party upon whom it is incumbent duly fulfils his obligation, notwithstanding protracted delay, so long as such delay is attributable to causes beyond his control, and he has neither acted negligently nor unreasonably”.79. If an expert accepts appointment in this case, it seems to me that the expert will be under an obligation to render a decision within a reasonable time. However, as always, what is reasonable will depend on the circumstances. It is in this context that the silence of Clause 7.09 as to the procedures to be followed is most relevant. The lack of any guidance as to the procedures to be adopted is not the fault of any expert to be appointed. As noted above, there is a real risk that some significant time may have to be spent at the outset of the process in determining the procedures to be followed in this case.80. Furthermore, to the extent that there are issues of fact to be resolved, the process involved in finding those facts will also take significantly more time than the usual expert determination which largely involves the deployment by the expert of his or her own expertise to a very specific issue (within that expert’s peculiar competence to resolve). Again, this is a natural consequence that flows from the terms of the clause which the parties have agreed. By agreeing that all issues relating to the conduct of the company should be referred to expert determination, the parties have thereby committed themselves to that process even in so far as factual issues are concerned. They have not confined the clause to disputes that relate to a narrow area within the specific competence of a particular class of expert.

81. While it has been suggested in the affidavit sworn on behalf of the respondents that the issues of fact which arise cannot be said to give the applicant a cause of action under s. 212 of the 2014 Act, I cannot prejudge that issue at this stage. I heard no argument on this issue. There is a possibility that an expert may be able to determine that there is no cause of action under s. 212 such that the only issues that arise are those relating to the proper construction and operation of the shareholders’ agreement. If that is the view ultimately taken by the expert, it may well be possible to form a view relatively quickly as to the merits (or otherwise) of the applicant’s claim. Regrettably, I am not a position to predict whether such an outcome is likely. I must therefore proceed on the basis that the dispute as to fact may well have to be resolved by the expert in which case the process is, of necessity, likely to replicate many of the processes that would be followed in court proceedings including the delivery of pleadings or position papers, the provision of witness statements, the giving of oral evidence, and the cross-examination and re-examination of witnesses. It is therefore impossible to be assured that the expert determination process in this case will be significantly shorter than proceedings in the Commercial Court. This is particularly so in circumstances where the expert, pending any determination by him or her as to the procedures to be adopted, does not have available the well-established and readymade procedures of the Commercial Court in relation to the expedited delivery of pleadings, the delivery of interrogatories (where necessary), the ability to request discovery on a voluntary basis, and the ability to have preliminary issues disposed of in a very speedy and efficient way. All of the powers of the Commercial Court are enforceable in the same way as any other order of the court. This position is further reinforced in the Commercial Court by the undertaking required of a solicitor in such proceedings to use best endeavours to ensure that the court’s directions are complied with in full.

82. In light of these considerations, I have come to the conclusion that the expert determination process will not be significantly shorter than proceedings in the Commercial Court. It is in this context that the approach taken by the Supreme Court in Intermetal is of potential relevance. Will any useful purpose be served by remitting this dispute to expert determination when it is already up and running (so to speak) in the Commercial Court (just as the proceedings in Intermetal were in progress before the forum non conveniens issue was first raised)? Does it serve the interests of justice to stay the proceedings in these circumstances? I am very conscious, in this context, that detailed affidavits have already been delivered in the Commercial Court proceedings. It may or may not be necessary for points of claim and points of defence to be delivered. It may well be possible to proceed to fix the hearing of issues for trial on the basis of the issues as disclosed in the affidavit evidence. That raises the question as to the utility of repeating that process before an expert.

83. This is an issue which weighed with Clarke J. in the High Court of England & Wales in Thames Valley Power Ltd v Total Gas & Power Ltd [2005] EWHC 2208 (Comm). In that case, the court was able to come to the conclusion that there was no substance to the case which Total wished to have determined by an expert (as to the existence of force majeure). That aspect of the judgment is not of immediate relevance. However, in addition, in paras. 55-56 of his judgment, Clarke J. relied on the following considerations (which seem to me to have some resonance here), in support of his decision to refuse a stay:-

“55. …I bear in mind not only that the question at issue is one of construction, but that the parties have prepared for the hearing [of this application] and conducted it on the footing that unless there is a stay the court will finally determine the agreed issues. There is, or should be, nothing that has been held back whether by way of evidence or submission which would or might be available at a later trial. It follows that if there is a stay, the proceedings before the chosen expert will represent a complete duplication of effort and expense. I accept that prima facie disputes are to be determined in the manner that the parties have agreed, but that does not mean that the court is bound to refer an issue for expert determination when it has become apparent after what amounts to a trial that the construction argued for is erroneous and unsustainable.56. … I [also] take into account and give some weight to the importance to both sides, and to some extent to the wider public, of a speedy resolution of the issues. Although [Thames Valley Power Ltd] is the creature of large and powerful corporations, the financial consequences for it are potentially disastrous. The force majeure issue has been unresolved since early July. … The court itself ordered expedition so that the hearing has come on in vacation. It may be that the expert determination procedure could be speedily completed, but it is also possible that there may be significant delays in the agreement or appointment of an expert, his determination, and any proceedings that may follow thereafter. …”.

84. There is obviously not a complete parallel between the facts considered by Clarke J. in that case and the facts here. Nonetheless, there is something of a parallel. While it cannot be said, in this case, that all of the evidence and submissions as to the substantive issues are already before the court, there has already been a significant exchange of affidavits which has set out the respective positions of the parties in some considerable detail. All of this has occurred prior to the hearing of the present application. Furthermore, as noted above, the proceedings were launched and an application for an interlocutory injunction filed before any suggestion was made that the proceedings should be stayed pending expert determination. The applicant has therefore been put to some significant trouble and expense in mounting these proceedings before the question of a stay was ever mooted.85. In light of the considerations discussed in paras. 77 to 84 above, I do not believe that the proceedings before the expert will necessarily be completed more expeditiously than if these proceedings are permitted to continue in the Commercial Court. If anything, the process before an expert – starting from scratch and with a completely blank canvass as to the procedures to be adopted – is likely to take some time to get off the ground.

86. If speed and efficiency were the only relevant considerations, I would be inclined to refuse the application for a stay on the basis that (a) the proceedings are already up and running and can be effectively and efficiently managed in the Commercial List and (b) the lack of any provision for procedures in clause 7.09 means that it will take any expert a significant time to catch up. Having regard to the discussion in paras. 77-84 above, such considerations seem to me to have the capacity to outweigh the presumption in favour of a stay.

87. There is, however, a further consideration which requires to be taken into account. In para. 13 of the affidavit sworn on behalf of the respondents in support of the present application, the deponent says:-

“Finally, I say that it is in the interests of all the parties that these proceedings are referred to Expert Determination. I say and believe that this will allow the dispute to be resolved on a confidential basis which will protect vital commercial interests of the Company, including but not limited to, sensitive information relating to the Company’s affairs and commercial information which is the subject of non-disclosure agreements entered into between the Company, the Respondents and various third party bidders….”88. I can well understand the concern expressed in that paragraph. Shareholder disputes of this nature have the capacity to do significant damage to the commercial interests of the company to which they relate. If they proceed to a hearing, they almost inevitably involve disclosure in public of material relevant to shareholder value and also material relating to the conduct of the affairs of the company which would not ordinarily be known to outsiders including potential bidders (albeit that the latter, if they pursue a bid, will usually do so subject to a due diligence exercise). Experience shows that disputes of this kind often become very bitter and protracted and, if aired fully in public, there is a risk of damage to the reputation both of the company itself and its individual shareholders. The public airing of such a dispute also has the very obvious capacity to adversely affect the morale of the workforce on which the success of the company’s business ultimately depends.89. I am very conscious that, in the present case, a significant rationale underlying Clause 7.09 is likely to have been the desire to ensure that shareholder disputes should not be aired in public but should be resolved privately. That would explain why, somewhat unusually, Clause 7.09 envisages that all disputes relating to ( inter alia ) the conduct of the affairs of the company should be resolved through the expert determination process – a process which is entirely private. For the reasons already discussed above, I do not believe that the requirement for speed of resolution of disputes can be said to provide the only rationale for Clause 7.09. While there are likely to be relatively net disputes which are capable of being resolved by an expert in a very expeditious way, the present dispute illustrates that this will not be so in every case. In circumstances where Clause 7.09 extends to all disputes relating to the conduct of the affairs of the company, it seems to me that the requirement of privacy is likely to have been an equally important consideration underlying the inclusion of the clause in the shareholders’ agreement.

90. In contrast, if these proceedings go forward to a hearing in the High Court, it is difficult to envisage that they will be heard otherwise than in public. While s. 212 (9) of the 2014 Act confers a power on the court to hear proceedings under s. 212 otherwise than in public, it is now well established, as a consequence of the decisions of the Supreme Court in Re R. Ltd [1989] ILRM 757 and Irish Press Plc v. Ingersoll Irish Publications Ltd [1993] ILRM 747, that it is extremely difficult to satisfy the requirements of s. 212 (9). In essence, Article 34.1 of the Constitution requires that s. 212 (9) be given a very strict construction. As Courtney ” The Law of Companies “, 4th ed., 2016 at para. 11.068 makes clear, it is now well established that in order to have s. 212 proceedings held in c amera, an applicant must prove two matters to the court’s satisfaction:-

(a) That the hearing of the proceedings in public would involve the disclosure of information which would be seriously prejudicial to the legitimate interests of the company; and(b) That the hearing in public of the whole or part of the proceedings would fall short of doing justice.

91. As Courtney explains in para. 11.069 – 11.072, the first limb of this test is a difficult obstacle to overcome while the second limb is particularly difficult to overcome. As a consequence, applications under s.21 2(9) are rarely, if ever, encountered in practice. Consequently, if no stay is granted in the present case, the probability is that the entire hearing of the present proceedings will have to take place in public. In my view, that carries with it a real risk of damage to the interests of the company and of the individual shareholders. This seems to me to be a significant consideration which must be weighed in the balance with the countervailing consideration discussed in paras. 77-84 above. 

Conclusion 
92. In short, in the absence of the concern in relation to a public airing of this dispute addressed in paras. 87-91 above, the considerations identified in paras. 77-84 above would, in my view, be sufficient to displace the presumption in favour of a stay. The dispute is one which requires to be resolved as urgently as possible and there is accordingly a concern that remitting it to an expert at this stage has the capacity to cause delay- particularly in light of the time it may take for the procedural issues to be heard and determined.

93. However, given the risk that a public hearing may harm the company, the additional consideration in favour of a private hearing seems to me to provide an effective counterweight to the factors discussed in paras. 77-84. In these circumstances, it seems to me that the factors in favour and against a stay are evenly balanced. Where the factors are evenly balanced, it would seem to follow that, but for the further consideration discussed in para. 94 below, the presumption in favour of a stay cannot be said to be displaced or outweighed in the present case by any contrary considerations. As noted earlier, the grant of the stay is the default position unless there is a countervailing consideration that outweighs it. I cannot see how the presumption can be outweighed if there is an even balance of factors for and against the grant of a stay.

94. The one remaining consideration relates to the application by the applicant for an interlocutory injunction. In my view, even if the substantive claim for relief in the present proceedings were to be stayed, this could not affect the right of the applicant to pursue an application for interlocutory relief pending the determination of the dispute by the expert. This is for the very simple reason that Clause 7.09 does not purport to exclude applications to the court for injunctions or orders which an expert would ordinarily have no authority to grant. The decision of the Court of Appeal of England & Wales in Barclays Bank is relevant in this context. As noted above, in para. 28 of his judgment in that case, Thomas L.J. explained that the parties in those proceedings had, by their contract, chosen two alternative forms of dispute resolution – one which expressly referred certain disputes to resolution by way of expert determination and the other which conferred exclusive jurisdiction on the English courts. The clause in the present case is not as sophisticated. However, it is clear from Clause 7.09 that what it does is to give the expert exclusive jurisdiction to determine disputes relating to the shareholders’ agreement or to the conduct of the affairs of the company. It does not purport to exclude the jurisdiction of the court (which arises under the Constitution) in respect of the hearing of an application for an interlocutory injunction. In my view, if the clause was to have that effect, it would have to say so either expressly or by necessary implication.

95. I can see nothing in the terms of Clause 7.09 which would prevent any shareholder from seeking interlocutory relief (where appropriate). That means that the application for interlocutory relief could proceed even if a stay is granted insofar as the substantive relief is concerned. It follows that there could, in the course of the hearing of that application, be a significant disclosure of information relating to the affairs of the company. So far, the relevant affidavits have not been opened to the court. There has been no argument in court as to the merits of the respective parties’ positions (which will inevitably involve an assault by each side on the other side’s position). There has, as yet, been no public disclosure of the value of the company’s shares. While that information is contained in the affidavits before the court, those affidavits have yet to be deployed in any court hearing and the quantum of the valuation has not yet been mentioned publicly. If, however, the application for an interlocutory injunction proceeds, the affidavits will have to be opened and the respective positions of the parties would have to be debated at some length. There would be nothing to prevent a court reporter from reporting on the detail of what was aired in court on the hearing of any such application. If this were to happen, it has the capacity to substantially undermine the considerations summarised in paras. 87-91 above which, for the reasons already discussed, would otherwise persuade me that it is appropriate to stay the proceedings.

96. In these circumstances, if a stay has to be granted, it seems to me that it can only be granted if the respondents are prepared to give an undertaking to the court in the terms of the interlocutory relief sought by the applicant pending (a) the determination of the merits of the dispute between the parties by the expert to be appointed by the President of the Law Society, or (b) if earlier, a determination by the expert that any complaint relevant to the interlocutory relief now sought, is not maintainable in law by the applicant. That seems to me to be the only way in which the privacy consideration discussed above can be maintained.

97. In the absence of such an undertaking, I do not believe that it would be appropriate to give weight to the consideration outlined in para. 13 of the affidavit sworn on behalf of the respondents in support of the application for a stay. If such an undertaking is not forthcoming, it seems to me that it would be inappropriate to give any weight to the privacy consideration since the affairs of the company are likely to be aired to a significant extent on the hearing of the application for an interlocutory injunction. Thus, if an undertaking is not forthcoming, I would be of the view that the application for a stay should be refused.

98. I therefore propose to give the parties an opportunity to consider this judgment and in particular to give the respondents an opportunity to confirm whether such an undertaking will be forthcoming. If such an undertaking is forthcoming, I propose to grant a stay on the proceedings (including the application for an interlocutory injunction). On the other hand, if the undertaking is not forthcoming, it would seem to me to follow that the application for a stay should be refused. If any issues arise in relation to the form of the undertaking, I will hear the parties to the extent that it may be necessary to do so.

CENTREPLEX PTY LTD -v- NOAHS ROSEHILL WATERS PTY LTD [2019] WASC 252 (12 July 2019)

CENTREPLEX PTY LTD -v- NOAHS ROSEHILL WATERS PTY LTD [2019] WASC 252 (12 July 2019)

 

BETWEEN :

CENTREPLEX PTY LTD

Plaintiff

AND

NOAHS ROSEHILL WATERS PTY LTD

Defendant

 

Practice and procedure – Applications for interlocutory injunction restraining defendant from preventing the plaintiff from performing its obligations pursuant to the agreement – Whether plaintiff has a prima facie case for final relief – Whether balance of convenience favours relief sought by plaintiff – Turns on own facts

Contract – Construction of commercial contract – Whether agreement lawfully terminated by notice of termination – Whether plaintiff breached the agreement – whether the agreement was repudiated by plaintiff – Turns on own facts

 

LE MIERE J:

Summary

  1. The plaintiff company, Centreplex Pty Ltd, is a licensed real estate agency which carries on business as Rosehill Realty. The defendant, Noahs Rosehill Waters Pty Ltd (Rosehill), is a company formed for the specific purpose of acquiring, developing and selling land at West Parade, South Guildford (the Land).
  2. In 2016 Rosehill Realty and Rosehill entered into a marketing and sales agreement (the Agreement), pursuant to which Rosehill Realty agreed to provide sales and marketing services to Rosehill in respect of the Land.
  3. On 17 June 2019, Rosehill delivered to Rosehill Realty a notice of termination (Notice of Termination) terminating, or purporting to terminate, the Agreement.
  4. On 21 June 2019, Rosehill Realty commenced this action by writ of summons in which Rosehill Realty claims a declaration that the Agreement has not been lawfully terminated by Rosehill by the Notice of Termination, an injunction requiring Rosehill to continue to perform its obligations under the Agreement and damages.
  5. By chamber summons of 21 June 2019, Rosehill Realty seeks an interlocutory injunction restraining Rosehill from preventing Rosehill Realty from performing its obligations under and pursuant to the Agreement.
  6. Rosehill asserts that the Agreement has been lawfully terminated by the Notice of Termination and opposes the grant of the interlocutory injunction.
  7. For the reasons which follow Rosehill Realty’s application for an interlocutory injunction will be dismissed.

The Agreement

  1. The recitals to the Agreement set out the following. Rosehill has secured rights to acquire and develop the Land and proposes to develop the Land, over a number of stages, which will result in the subdivision of the Land into approximately 600 to 700 Subdivided Lots which will then be sold to individuals as house and land packages (Development). Rosehill has requested Rosehill Realty to assist in the marketing and sales of the Development.
  2. The Agreement provides that Rosehill irrevocably authorises and directs Rosehill Realty to undertake and manage the Sales, that is, Sales of Subdivided Lots (residential lots created as a result of the subdivision of the Land). Rosehill Realty acknowledges that Rosehill will be selling the Subdivided Lots as part of a house and land package involving both a Land Contract (a contract for the sale of a Subdivided Lot entered into by Rosehill with a buyer introduced by Rosehill Realty) and a Building Contract (a contract entered into by a purchaser of the Subdivided Lot with a builder to construct a dwelling on a Subdivided Lot the subject of a Land Contract). Rosehill Realty acknowledges that Rosehill reserves the right to accept or reject any offer that it may receive to purchase a Subdivided Lot in its absolute discretion.
  3. Clause 2.2(a) of the Agreement provides that Rosehill Realty agrees that Peter Francis Burke (Mr Burke) will be made available to oversee the management of all of the Sales. Clause 2.2(b) provides that Rosehill Realty will, at its sole cost (in relation to the proposed display village homes contained within the Development) employ and manage all sales personnel whose responsibilities will be to assist Rosehill Realty in carrying out the functions there described from (i) to (x).
  4. Clause 3 of the Agreement provides for the commission payable to Rosehill Realty. Rosehill agrees to pay to Rosehill Realty the Commission, that is an amount equal to 5.87% of the Sale Price (the total price for the Sale which includes the price of the Building Contract) in respect of each Sale, irrespective of whether Rosehill Realty is responsible for a Sale.
  5. Clause 4 of the Agreement provides for Rosehill Realty to undertake Marketing Activities. By cl 4.1 Rosehill irrevocably authorises and appoints Rosehill Realty to undertake the Marketing Activities for the Development. In consideration for the payment of the Marketing Fee, Rosehill Realty is to manage, coordinate and undertake such Marketing Activities as it deems fit. Marketing Activities may include but will not be limited to those activities listed in Schedule 1 of the Agreement, for a total price not exceeding the total price corresponding with each activity or, where a particular activity is not listed, for a price agreed in writing between Rosehill Realty and Rosehill. The Marketing Fee is an amount not exceeding $2.5 million unless otherwise agreed in writing by the parties.
  6. Clause 5 provides for the payment to Rosehill Realty of the Marketing Fee. Rosehill Realty is to render marketing tax invoices to Rosehill for its cost and the cost of undertaking the Marketing Activities provided that the total costs invoiced by Rosehill Realty to Rosehill do not exceed the Marketing Fee.
  7. Clause 6.1 deals with Noise Attenuation Certification. Rosehill Realty is responsible for the management and certification of the statutory requirement to provide noise attenuation into each house and land package in accordance with Australian Standard 2021-2015 Acoustics – Aircrafts noise intrusion – Building siting and construction (AS2021).
  8. Clause 7 deals with default by Rosehill Realty. Clause 7(a) provides that if Rosehill considers that Rosehill Realty is in breach of the Agreement, then Rosehill must give Rosehill Realty a written notice (initial default notice) detailing the alleged breach, what Rosehill considers Rosehill Realty must do to remedy the breach (if capable of remedy) and give Rosehill Realty a reasonable period of time (which shall be no less than three months) within which to remedy the breach. Clause 7(b) provides that if Rosehill issues to Rosehill Realty an initial default notice then, if after the expiry of the notice the breach is not remedied by Rosehill Realty then Rosehill may issue a further default notice (further default notice) setting out the reasons Rosehill considers Rosehill Realty has not remedied the breach, what Rosehill considers Rosehill Realty must do to remedy the breach and give Rosehill Realty a further three months to remedy the breach.
  9. Clause 8 deals with termination of the Agreement. The parties agree that the proper interpretation of the clause is as follows. Rosehill may by written notice to Rosehill Realty terminate the Agreement if Rosehill Realty fails to comply with both an initial default notice and a further default notice. The right of termination conferred on Rosehill by cl 8 is in addition to any rights which Rosehill may have at law, in equity or pursuant to any statute to terminate the Agreement. In particular, if Rosehill Realty breached a term of the Agreement entitling Rosehill to terminate the Agreement at common law or repudiated the Agreement then Rosehill is entitled to terminate the Agreement without complying with the notice provisions of cl 7 and cl 8.
  10. Clause 10 is a dispute resolution provision. It provides for a party to give to the other party a notice of dispute and then to attempt to resolve the dispute. If that is unsuccessful then the dispute is to be referred to mediation. If a dispute cannot be resolved following mediation the parties agree that the dispute shall be referred to arbitration under the Commercial Arbitration Act 2012 (WA).
  11. Clause 17 is a clause about variation. It provides that the Agreement may only be varied by a deed executed by the parties.
  12. By cl 21, each party acknowledges and agrees that monetary compensation alone may not be an adequate remedy to the other party for a breach of its obligations under the Agreement and that accordingly specific performance of those obligations may be an appropriate remedy.

Notice of Termination

  1. By the Notice of Termination, Rosehill stated that it gave to Rosehill Realty notice of termination of the Agreement by acceptance of Rosehill Realty’s repudiation of the Agreement and the exercise of Rosehill’s election to terminate the Agreement as a consequence of fundamental breaches of the Agreement by Rosehill Realty. The notice gave details of breaches of cl 4.2, cl 6.1, cl 2.2(a) and cl 2.2(b) of the Agreement. The notice also stated that Rosehill Realty has breached the implied term of the Agreement requiring Rosehill Realty to render faithful service to Rosehill and stated 13 matters said to constitute that breach or breaches.

Principles concerning interlocutory injunctions

  1. Where an applicant seeks an interlocutory injunction, the applicant must identify the legal or equitable rights which are said to be determined at the trial and in respect of which the final relief is sought. An interlocutory injunction in the auxiliary jurisdiction can only lie in order to protect an equitable or legal right, which the plaintiff might enforce by final judgment.
  2. Before the court will exercise its discretion to award an interlocutory injunction, an applicant must satisfy the court that:
    • (1) there is a prima facie case, in the sense that there is a serious question to be tried as to the plaintiff’s entitlement to relief, and a sufficient likelihood of success to justify the preservation of the status quo pending trial;
    • (2) the plaintiff is likely to suffer injury for which damages will not be an adequate remedy; and
    • (3) the balance of convenience favours the granting of an injunction.
  3. The question of the adequacy of damages is an aspect of the balance of convenience not a separate requirement. The question of whether the applicant will suffer irreparable injury for which damages will not be adequate compensation involves no more than a consideration of whether the injury cannot properly be compensated in damages, or by some other remedy. The question of whether the injury cannot properly be compensated in damages involves a consideration of whether it is just in all the circumstances that the plaintiff be confined to their remedy in damages.
  4. In assessing the balance of convenience in an interlocutory injunction application, the interests of third persons are relevant and have more or less weight according to other material circumstances. Whether those interests tend to favour the grant or refusal of an injunction in any case depend upon the circumstances of the case. Hardship visited upon third persons by the grant of an interlocutory injunction will rarely be decisive. In this case, the hardship to employees of Rosehill Realty, if the injunction sought is refused and their employment is terminated, is relevant but not decisive.
  5. The requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought, such as the fact that the grant or refusal of the interlocutory application would dispose of the action finally.
  6. The requisite strength of the prima facie case and the balance of convenience are not independent. The more the balance of convenience supports the respondent, and the more serious the consequences for a respondent, the stronger will be the prima facie case the applicant may need to establish to support an interlocutory injunction. Conversely, in a case where the balance of convenience strongly favours the applicant, then the strength of the prima facie case required to support the interlocutory injunction diminishes.
  7. Although the court will often examine the strength of a case for an interlocutory injunction, the court will not normally undertake a preliminary trial and will rarely attempt to resolve disputes of fact. The extent to which the court will consider the merits of disputes as to legal issues will depend on the circumstances of the case. There is no inflexible rule.
  8. There has been conflict in the authorities about whether these principles should apply equally to mandatory interlocutory injunctions. The better approach is that the same principles should apply. The better approach is, as Kiefel J has explained, that the classification of an injunction as mandatory should not automatically attract a requirement that the court should have further confidence in the correctness of the order. The focus should be on the effect of the proposed order. A prohibitory injunction is capable, in some cases, of having a more serious effect on the parties than a mandatory one. There can also be a fine line between an order which requires something to be done and an order which prohibits something from being done; sometimes the former can be recharacterised as the latter. Merely characterising an interlocutory order as mandatory should not invite a different approach.
  9. Nevertheless, the nature of the contract and the appropriateness of the remedy of an interlocutory injunction in the nature of specific performance are closely intertwined concepts. The difficulty of courts supervising contracts has been a major block to the specific enforcement of contracts. Justice Finn has used the classification ‘relational contract’ to describe ‘a contract that involves not merely an exchange, but also a relationship, between the contracting parties’. Courts are generally more reluctant to order injunctions in the nature of specific performance in a case of relational contracts than transactional contracts.

Legal principles concerning the right to terminate a contract

  1. The Agreement contains express rights of termination. However, it is common ground that the express rights of termination conferred by the Agreement operate in addition to any common law rights of termination for breach or repudiation. Rosehill does not rely upon its express right to terminate the Agreement conferred by the Agreement. Rosehill relies upon its right to terminate the Agreement for breach of the terms of the Agreement by Rosehill Realty and for repudiation by Rosehill Realty of its obligations under the Agreement.
  2. The right to terminate the performance of a contract arises relevantly under three circumstances. First, breach of a condition, secondly, the sufficiently serious breach of an intermediate term, and thirdly, repudiation of obligation. A condition is a contractual term any breach of which entitles the promisee to terminate the performance of the contract. An intermediate term is a term the breach of which entitles the promisee to terminate the performance of the contract only if the breach is sufficiently serious.
  3. Where a promisee elects to terminate a contract, what matters is whether the promisee is entitled to do so, not the basis stated by the promisee for doing so. Termination of a contract may be justified by reference to any ground that was valid at the time of termination, even though it was not relied on at the time.
  4. The effect of an election to terminate the performance of a contract for breach or repudiation of obligation is to discharge the parties from the duty to perform their respective contractual obligations. Thus, if Rosehill was entitled to terminate the Agreement, it has done so and both parties are discharged from their duties to perform their contractual obligations.

Prima facie case

  1. Rosehill Realty says that it did not breach the Agreement, Rosehill was not entitled to terminate the Agreement, Rosehill’s Notice of Termination is of no effect, the Agreement remains in force and Rosehill owes to Rosehill Realty a contractual duty to carry out Rosehill’s obligations under the Agreement, including the obligation not to prevent Rosehill Realty from carrying out its rights and obligations under the Agreement.
  2. Rosehill says it was entitled to terminate the Agreement by reason of Rosehill Realty’s repudiation of the Agreement and Rosehill Realty’s fundamental breaches of the Agreement. Whether or not Rosehill was entitled to terminate the Agreement depends on whether or not Rosehill Realty had committed a breach, or breaches, of the Agreement, which entitled Rosehill to terminate the Agreement, or Rosehill Realty had repudiated the Agreement. Rosehill is not confined to the grounds or breaches set out in its Notice of Termination.
  3. It is convenient to refer to the breaches of the Agreement by Rosehill Realty alleged in the Notice of Termination, as well as the alleged breaches and repudiation advanced by Rosehill on the hearing of this application.

Alleged breach of cl 4.2 of the Agreement

  1. Clause 4.2 of the Agreement provides that Rosehill Realty is to undertake Marketing Activities for a total price not exceeding the total price corresponding with each activity or, where a particular activity is not listed, for a price agreed in writing between Rosehill Realty and Rosehill.
  2. In the Notice of Termination, Rosehill claims that Rosehill Realty breached cl 4.2 of the Agreement by undertaking Marketing Activities for a total price exceeding the total price corresponding with each activity in Schedule 1 in the amount of $311,002 and by undertaking a particular activity not listed in Schedule 1 for a price that was not agreed in writing between Rosehill Realty and Rosehill in the amount of $110,000.
  3. Rosehill Realty says that the marketing plan was frequently amended and that all amendments, expenditure of funds on marketing and any substantial decisions in relation to marketing in general, were discussed and approved at meetings between Mr Burke representing Rosehill Realty and representatives of Rosehill. Mr Burke attaches to his affidavit sworn 21 June 2019, copies of minutes of meetings which he claims evidences agreements to vary the marketing plan. The minutes are not signed. Rosehill does not admit the agreements or discussions recorded in the minutes.
  4. Rosehill does not admit the amendments to the Agreement alleged by Rosehill Realty were agreed to by Rosehill, and further says that in any event the Agreement cannot be amended orally. Rosehill relies upon cl 17 (variation) of the Agreement, which provides that the Agreement may only be varied by deed executed by the parties. Rosehill relies upon Rock Advertising Ltd v MWB Business Exchange Centres Ltd as authority for the proposition that a contractual term prescribing that an agreement may not be amended save in writing is legally effective and the oral variations to the Agreement in relation to Marketing Activities alleged by Rosehill Realty are of no force and effect.
  5. Whether or not Rosehill Realty breached cl 4.2 of the Agreement depends on questions of fact and law which cannot be resolved on this interlocutory application.

Alleged breach of cl 6.1 of the Agreement

  1. Clause 6.1(d) of the Agreement provides that Rosehill Realty is responsible for the management and certification of the statutory requirement to provide noise attenuation into each house and land package in accordance with AS2021, including payment of all fees and costs associated with obtaining certification under AS2021. The Notice of Termination states that Rosehill Realty breached cl 6.1(d) of the Agreement by failing to pay fees and costs associated with obtaining noise attenuation certification under AS2021, in the amount of $66,671.
  2. Rosehill Realty denies that it breached cl 6.1 as alleged. Mr Burke says that in a discussion in Shanghai in about late 2016 with Ms Lee representing Rosehill, Ms Lee agreed that Rosehill would pay the fees and costs associated with noise attenuation certification.
  3. Rosehill relies upon the variation by deed only clause of the Agreement.
  4. Whether or not Rosehill Realty breached cl 6.1(d) of the Agreement as alleged depends on questions of fact and law which I cannot resolve on this interlocutory application.

Alleged breach of cl 2.2(a)

  1. Clause 2.2(a) of the Agreement provides that Rosehill Realty covenants and agrees that Mr Burke will be made available to oversee the management of all of the Sales. The Notice of Termination alleges that Rosehill Realty has breached cl 2.2(a) since on or before 9 January 2019 by reason of the fact that Mr Burke has ceased to be licensed in accordance with the requirements of the Real Estate and Business Agents Act 1978 (WA) to oversee the management of all of the Sales on behalf of Rosehill Realty.
  2. Mr Burke says that in about August 2018 in a meeting with Ms Lee, he advised Ms Lee that he would not be renewing his real estate agent’s licence when it came due for renewal in December 2018, and therefore could not act as licensee for Rosehill Realty and told Ms Lee he would arrange for someone else to act as licensee. Mr Burke’s license lapsed on 9 December 2018. Mr Burke says that since 9 December 2018, Mr Alan Stott, a licensed real estate agent, has been the licensee of Rosehill Realty and Mr Stott has been a director of Rosehill Realty since 14 December 2018. Rosehill Realty says that if it has breached cl 2.2(a), which it denies, it cannot be a fundamental breach of the Agreement entitling Rosehill to terminate.
  3. Rosehill did not elaborate upon its allegation beyond what is set out in the Notice of Termination. For the purposes of this application I find that Rosehill Realty has not committed a breach of the Agreement entitling Rosehill to terminate by reason of Mr Burke ceasing to be a registered real estate licensee from 9 December 2018.

Alleged breach of cl 2.2(b)

  1. Clause 2.2(b) of the Agreement provides that Rosehill Realty will, at its sole cost (in relation to the proposed display village homes contained within the Development) employ and manage all sales personnel whose responsibilities will be to assist Rosehill Realty in the matters there set out from (i) to (x). In the Notice of Termination Rosehill alleges that Rosehill Realty has breached cl 2.2(b) and gives particulars of the allegation in eight paragraphs.
  2. Rosehill Realty asserts that the particulars are not made out, the particularised conduct is not required by cl 2.2(b) and, in any event, could not constitute a fundamental or repudiatory breach.
  3. On the hearing of this application Rosehill did not orally elaborate upon its allegation that Rosehill Realty breached cl 2.2(b) of the Agreement. For the purposes of this application I find that Rosehill Realty did not breach cl 2.2(b) of the Agreement as alleged.

<class=”heading_2″>Alleged breach of implied term to render faithful service

  1. There is authority that in contracts of agency there is an implied condition that the agent shall render faithful service and that if such services are not rendered the principal may elect to terminate the contract, and the termination takes place on that implied condition.
  2. In its Notice of Termination Rosehill alleged that Rosehill Realty breached the implied term of the Agreement requiring Rosehill Realty to render faithful service to Rosehill and gives 13 particulars of that failure. The first is that Rosehill created multiple Letters of Commitment for a number of individual lots and in certain instances backdated Letters of Commitment, with the intent of withholding original Letters of Commitment from financiers as part of finance applications and/or promising purchasers that they would receive incentives from Rosehill that were not offered to them by Rosehill at the time Rosehill entered into a Land Contract with them.
  3. Michelle Kirk, a solicitor and director of Rosehill, gives evidence in support of Rosehill’s allegations in her affidavit affirmed on 25 June 2019. Ms Kirk says:

17.4.1 I refer to ‘PFB12’ annexed to Peter Burke’s affidavit of 21 June 2019 which is a letter from Bennett + Co to Centreplex dated 24 April 2018 seeking an explanation in relation to the conduct of one of Centreplex’s agents, Guilliaume Duguay.

17.4.2 Mr Duguay stated in an email (which is set out in Bennett + Co’s 24 April 2019 letter) that he had altered a Letter of Commitment dated 16 September 2018, signed by Ms Klarich which set out the value and description of certain items that were to be included in the sale to a particular purchaser so as to include additional items to a value of $22,500 which had not been included in the original letter. The second letter was also dated 16 September 2018, but as set out in Mr Duguay’s email, was in fact created on about 20 December 2018. This letter was in substance identical to the first letter including having been signed by Ms Klarich. However as set out above Ms Klarich’s employment had been terminated by then. As far as I am aware the Board of [Rosehill] had not authorised the additional items promised in the second letter.

17.4.3 Annexed and marked as ‘MK5’ which is a copy of an email chain which includes an email from Catherine Burke to Martine Jones (a Centreplex employee) dated 9 April 2018 in which Catherine Burke states as follows:

“Hi Martine, please see attached Letter of Commitment. We had to create two as the bank cannot see the 27.5k package if you could please lodge the 20k however keep the 27.5k for reference to what I will receive.”

17.4.4 Catherine Burke is the daughter of Peter Burke and a selling agent employed by Centreplex. The property the subject of this email is a property that she was purchasing herself. I do not know why the bank was not supposed to see the Letter of Commitment.

17.4.5 I have become aware of numerous other Letters of Commitment which have been altered in a similar way. I am concerned that the reason for the creation of altered Letters of Commitment was to overcome problems encountered by purchasers in securing finance approval from banks based on valuations of the properties in question.

  1. Rosehill Realty does not dispute that an obligation to render faithful service as an agent is implied in the Agreement and does not dispute that a breach of that implied term may entitle Rosehill to terminate the Agreement. Rosehill Realty says that it did not breach an obligation to render faithful service as an agent. Rosehill Realty relies upon an affidavit sworn by Mr Duguay on 26 June 2019 in which Mr Duguay swears:
    1. On 16 September 2018, I drafted a letter of commitment in relation to lot 138.
    2. The letter referred to a bonus pack comprising a sustainability package that was standard on every sale (being solar panels, bore connection, landscaping and fencing) and 2 incentives which were part of a special offer available at the time (home theatre package and air conditioning).
    3. On 16 September 2018, I presented a draft of the letter to Ms Sandra Klarich, the general manager of [Rosehill]. She approved of the offers of the bonus pack and the 2 incentives in the draft letter, and signed it on behalf of [Rosehill]. I know from previous dealings that Ms Klarich, as general manager of [Rosehill], was authorised to approve letters of commitment and sign them on behalf of [Rosehill]. To my knowledge, Ms Klarich had done this on many occasions on sales of lots in Rose Hill Waters estate. A copy of this letter is attached and marked “GDD1”. I sent a copy of the letter to [Rosehill Realty’s] contracts manager, who I believe sent a copy of the letter to the buyer because that is [Rosehill Realty’s] standard practice.
    4. On about 17 December 2018, I was advised by the buyer’s finance broker that the valuation had come in below the land and build contract price.
    5. On about 19 December 2018, I provided the finance broker with information concerning comparable properties, details of noise attenuation technologies included in the home and a copy of the letter of commitment (GDD1).
    6. On about 20 December 2018, I was advised by the finance broker that, while the information I had provided on comparable sales and noise attenuation had marginally increased the value, the valuer’s view was that the value of incentives stated in the letter of commitment (being the home theatre package and air conditioning, which totalled $22,500) should be deducted from the land value on the grounds that the home theatre was a nonfixed chattel and the air conditioning was part of the build. I understood this to mean that although [Rosehill] agreed to provide the home theatre, it was not taken into account by the valuer when valuing the property because it was a chattel.
    7. I discussed the matter with Ms Klarich and Mr Peter Burke on about 20 December 2019. We discussed whether the home theatre as stated in the letter of commitment confused the valuer who reduced the valuation because of it. To clarify the matter for the valuer, Ms Klarich, Mr Burke and I discussed whether it would be more simple to change the letter of commitment to remove the home theatre package and to remove the airconditioning because, as it turned out, it was already included in the build contract.
    8. I drafted an amended letter of commitment which had these items removed. I presented the letter to Ms Klarich, who approved it and signed it for [Rosehill]. A copy is attached and marked “GDD2”. I then sent the amended letter to the finance broker.
    9. On about 27 December 2018 I was contacted by a valuer who asked me whether each property sold by [Rosehill] received the air conditioning incentive. I said that the air conditioning incentive was part of a special offer and was not given to all purchasers.
    10. On about 3 January 2019, I was informed by the finance broker that there was a new valuation on lot 138 at the land and build contract price.
    11. While I was aware that Ms Klarich had been dismissed as general manager of [Rosehill] in early December, I knew that she remained a director of [Rosehill] and continued to hold a power of attorney.
    12. Both letters of commitment were provided by me to the finance broker. I do not know whether the finance broker provided both letters to the valuer who provided the final valuation.
  2. In response Rosehill says that Ms Klarich did not have authority to execute the second Letter of Commitment on behalf of Rosehill and that Rosehill Realty, through Mr Burke, knew that. Rosehill has produced what it says are minutes of a board meeting of Rosehill held on 6 December 2018 at which Ms Klarich and Mr Burke, amongst others, were present.[16] The minutes record the following resolutions or conclusions:
    1. That the Company terminate the employment of Ms Sandra Klarich as general manager on one months’ notice in accordance with the terms of her employment contract due to the unsatisfactory progress of the Company’s Rosehill Project over the period Ms Klarich has acted as general manager and the recent concerns raised by the Company’s financiers in relation to the information provided to them in relation to the progress of the Project.
    2. To revoke all authorities provided by the Company to Ms Klarich to execute documents and conduct business on behalf of the Company including all powers of attorney granted by the Company to Ms Klarich in connection with the Rosehill Project.
  3. Thus, Rosehill says that Rosehill Realty drafted the second Letter of Commitment, backdated it, caused it to be executed by Ms Klarich purportedly on behalf of Rosehill when Rosehill Realty knew that Ms Klarich had no authority to do so, and then presented the letter to the financier.
  4. Further, Rosehill says that Rosehill Realty has not refuted the evidence that Catherine Burke created multiple Letters of Commitment or that numerous other Letters of Commitment have been altered.
  5. Senior counsel for Rosehill Realty, Mr Donaldson SC, submits that whether or not Rosehill Realty breached the implied term and that Rosehill was entitled to terminate the Agreement depends on questions of fact.
  6. I find it unnecessary to consider the other breaches of the implied term of faithful service alleged by Rosehill, except for the alleged repudiation to which I will refer shortly. It is sufficient to say that whether or not Rosehill Realty breached a term of faithful service implied in the Agreement depends, at least in part, on questions of fact which cannot be resolved at this interlocutory stage.
  7. Rosehill relies upon another matter which it says entitled it to terminate the Agreement. Rosehill says Rosehill Realty has breached cl 2.2(a) by which Rosehill Realty covenanted that Mr Burke will be made available to oversee the management of all the Sales and cl 4.2(a) by which Rosehill Realty covenanted that Mr Burke will be made available to oversee the management of the Marketing Activities.
  8. The basis for these alleged breaches of the Agreement is that on 17 May 2019 Mr Burke became an undischarged bankrupt. That has consequences for his ability to manage a company. Section 206B(3) of theCorporations Act 2001 (Cth) provides that a person is disqualified from managing corporations if the person is an undischarged bankrupt. Section 206A(1) provides that a person who is disqualified from managing corporations under pt 2D.6 (which includes s 206B) commits an offence if:

(a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or

(b) they exercise the capacity to affect significantly the corporation’s financial standing; or

(c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation:

(i) knowing that the directors are accustomed to act in accordance with the person’s instructions or wishes; or

(ii) intending that the directors will act in accordance with those instructions or wishes.

  1. Section 206A(1B) provides that it is a defence to a contravention of subsection (1) if the person had permission to manage the corporation under either s 206GAB or s 206G and their conduct was within the terms of that permission. In this case Mr Burke does not have such permission.
  2. Rosehill says that since Mr Burke became bankrupt he has been disqualified from, and therefore unable to, manage the Sales and the Marketing Activities and consequently Rosehill Realty has been in breach of cl 2.2(a) and cl 4.2(a).
  3. Rosehill further says that Rosehill Realty has repudiated the Agreement by reason of Mr Burke’s bankruptcy. Repudiation comprises the manifestation of inability as well as of recalcitrance. Rosehill says that Rosehill Realty is unable to make Mr Burke available to oversee the management of the Sales and the Marketing Activities because if he were to do so he would commit an offence under s 206A(1) of theCorporations Act.
  4. Rosehill says not only is that conduct a repudiation of the Agreement but also that the balance of convenience is against granting the injunction, or the court should not exercise its discretion to grant an injunction because if Mr Burke oversees the management of all of the Sales and oversees the management of the Marketing Activities he would be committing an offence under s 206A(1) of the Corporations Act. Therefore, either Rosehill Realty cannot comply with its obligations under cl 2.2(a) and cl 4.2(a) of the Agreement, or if it did so it would be procuring Mr Burke to commit an offence.
  5. Rosehill Realty has not said, and does not say, that it will not comply with cl 2.2(a) and cl 4.2(a) of the Agreement. However, as I have said, repudiation comprises the manifestation of inability as well as of recalcitrance. Conduct that is self-disabling is repudiatory. Rosehill says that Rosehill Realty is unable to perform its obligations under cl 2.2(a) and cl 4.2(a) because Mr Burke would be committing an offence under s 206A(1) if he oversees the management of the Sales and Marketing Activities.
  6. Rosehill Realty says that Mr Burke may oversee the Sales and the Marketing Activities without committing an offence under s 206A(1) of the Corporations Act, because overseeing the Sales and the Marketing Activities does not fall within any of the prohibitions in pars (a), (b) or (c) of s 206A(1).
  7. Rosehill says that overseeing the Sales and the Marketing Activities falls at least within par (a) of s 206A(1) of the Corporations Act and therefore at the time Rosehill gave the Notice of Termination, Rosehill Realty was unable to perform cl 2.2(a) and cl 4.2(a) of the Agreement and had thereby repudiated the Agreement.
  8. Whether overseeing the Sales and the Marketing Activities as required by cl 2.2(a) cl 4.2(a) of the Agreement requires or involves Mr Burke making, or participating in making, decisions that affect the whole, or a substantial part, of the business of Rosehill Realty in contravention of s 206A(1) of the Corporations Act is a complex question of fact and law.
  9. The decision of the High Court in Shafron v Australian Securities and Investments Commission is of assistance in determining the scope of s 206A(1)(a) of the Corporations Act. In Shafron, the High Court affirmed the decision of the New South Wales Court of Appeal that the appellant, in his combined role of general counsel and company secretary of James Hardie Industries Ltd, breached his duty of care as an ‘officer’, as that term was defined in s 9 of the Corporations Act. One of the issues addressed by the High Court was: in what respect or respects did the statutory definition of ‘officer’ apply to the appellant? The term ‘officer’ of a corporation was defined by s 9 of the Corporations Act (and is defined by s 9 of the Corporations Act) as:

officer of a corporation means:

  • (a) a director or secretary of the corporation; or
  • (b) a person:
    • (i) who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
    • (ii) who has the capacity to affect significantly the corporation’s financial standing; or
    • (iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation); or

  1. Subparagraph (b)(i) of the definition of ‘officer’ is in substantially the same terms as s 206A(1)(a) of the Corporations Act.
  2. Mr Shafron submitted that he was not an officer as he merely provided information and advice to the board in assisting the board to make decisions. In rejecting that submission the High Court said:

Fourth, sub-par (i) of par (b) distinguishes between making decisions of a particular character and participating in making those decisions. Contrary to Mr Shafron’s submissions, participating in making decisions should not be understood as intended primarily, let alone exclusively, to deal with cases where there are joint decision makers. The case of joint decision making would be more accurately described as ‘making decisions (either alone or with others)’ that as one person ‘participating in making decisions’. Rather, as the Court of Appeal rightly held (28), the idea of ‘participation’ directs attention to the role that a person has in the ultimate act of making a decision, even if that final act is undertaken by some other person or persons. The notion of participation in making decisions presents a question of fact and degree in which the significance to be given to the role played by the person in question must be assessed.

  1. The High Court found that Mr Shafron had participated in making decisions of sufficient importance to engage the s 9(b)(i) definition in the Corporations Act:

That what he did can be described as proferring advice or providing information for the board’s consideration is not an end to the relevant inquiry. The conclusion that he participated in making the decision depends not only upon what he did but also upon identifying the relationship between his actions and the decision to adopt the proposal as ‘participation’ in making the decision. In this case, Mr Shafron was one of three executives who shaped and developed the proposal through its successive variants; he was one of the executives who presented successive proposals to the board; he was, as the Court of Appeal found (35), part of the ‘promotion of the separation proposal to the board’, a board that did not itself decide what elements would go to make up any of the several proposals it considered and was, as ASIC submitted, ‘reactive’ rather than ‘proactive’ in the formulation of the proposals. And he did all this as a senior executive employee of the company who, with Messrs Macdonald and Morley, decided what would be put to the board.

  1. Rosehill says, in effect, Mr Burke will make, or participate in making, decisions that affect a substantial part of the business of Rosehill Realty if he oversees the management of all of the Sales and the management of the Marketing Activities.
  2. ‘Management’ was considered by Ormiston J in Commissioner for Corporate Affairs (Vic) v Bracht. InBracht, the Commissioner for Corporate Affairs alleged that Mr Bracht was concerned in or took part in the management of Helti Pty Ltd contrary to s 227(1) of the Companies (Victoria) Code which provided that a person who is an insolvent under administration shall not be a director or promoter of, or be in any way (whether directly or indirectly) concerned in or take part in the management of, a corporation without the leave of the court. Ormiston J considered that ‘management’ in s 227(1) comprehends activities which involve policy and decision making related to the business affairs of the corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs. It is apparent that Ormiston J’s reasoning inBracht forms the basis of the prohibition in s 206A(1) of the Corporations Act. Ormiston J further held that to ‘be concerned in the management of a company in s 227(1) of the Companies (Victoria) Code requires an involvement of some kind in the corporation’s decision making process which is more than passing and involves some responsibility, but not necessarily of an ultimate kind whereby control is exercised. Absence of ultimate responsibility for decisions does not take an insolvent outside s 227’.
  3. Rosehill Realty says that Mr Burke has and continues to oversee the management of all of the Sales and the Marketing Activities without contravening s 206A(1) of the Corporations Act. Alan Stott is and has been since 14 December 2018 a director of Rosehill Realty. Rosehill Realty operates its real estate business under Mr Stott’s real estate licence. Mr Stott says:
    1. All staff working in the business, including the general manager Peter Burke report to me.
    2. I establish, monitor and maintain the Business’ policies and procedures.
    3. I supervise the staff and review all relevant matters as required to ensure that the business and its staff comply with the provisions of the Real Estate and Business Agents Act and the relevant Code of Conduct.
    4. I am responsible for [Rosehill Realty’s] trust account obligations.
    5. I am actively engaged in the day to day affairs of the business. This includes dealing with sales enquiries, allocating enquiries, reviewing, supervising and assisting with active sales matters, and engaging in regular meetings and correspondence with the representatives of the Business’ developer clients, including [Rosehill].
  4. Overseeing the management of all of the Sales and the Marketing Activities may require or involve Mr Burke making, or participating in making, decisions that affect a substantial part of the business of Rosehill Realty, notwithstanding that Mr Burke reports to Mr Stott and Mr Stott carries out the functions I have referred to.
  5. Whether or not overseeing the management of all of the Sales and the Marketing Activities involves making, or participating in making, decisions that affect a substantial part of the business of Rosehill Realty in contravention of s 206A(1) of the Corporations Act is a complex question of fact and law. In Bracht, Ormiston J observed that while it is easy to exclude from the concept of management those activities of a corporation which consist in the carrying out of day to day routine functions in accordance with predetermined policies, whether they be clerical or involve the ordering or supplying of goods or services on its behalf, it is harder to fix on those elements which are critical to management.
  6. On the face of it, an obligation ‘to oversee the management of all of the Sales’ and ‘to oversee the management of the Marketing Activities’ in relation to the Development at least arguably involves making, or participating in making, decisions that affect a substantial part of the business of Rosehill Realty in circumstances where assisting in the marketing and sales of the Development is the major part of Rosehill Realty’s business.
  7. There is a serious question to be tried whether or not Rosehill Realty has repudiated the Agreement as a result of Mr Burke’s bankruptcy. There is a serious question to be tried whether Mr Burke would commit an offence under s 206A(1) of the Corporations Act if, pursuant to an interlocutory injunction, he oversees management of all of the Sales and management of the Marketing Activities.

Rosehill Realty has established a prima facie case

  1. I find that Rosehill Realty has made out a prima facie case that it is entitled to final relief by establishing that it has not breached or repudiated the Agreement, so as to entitle Rosehill to terminate the Agreement. However, I am unable to make any finding as to the strength of Rosehill Realty’s case for final relief. The evidence is relatively sparse. Rosehill Realty did not respond to some of the evidence adduced by Rosehill but stated that that was because of the exigencies of time. I did not have the benefit of developed arguments in relation to the content of the obligation on Rosehill Realty to make Mr Burke available to oversee management of the Sales and the Marketing Activities and the scope of s 206A(1) of the Corporations Act.

Balance of convenience

  1. I find that the balance of convenience and justice favours the refusal of the relief sought by Rosehill Realty.
  2. Rosehill Realty advanced three major arguments as to why the interlocutory injunction should be granted. First, damages will not be an adequate remedy. Rosehill Realty points to cl 21, the inadequacy of damages clause in the Agreement. That is relevant in assessing the balance of convenience but it is not decisive.
  3. Damages may be an inadequate remedy where it may be extremely difficult for the court to quantify compensatory damages. Rosehill Realty says that it would be difficult to quantify compensatory damages. If the injunction is refused Rosehill will appoint another agent to manage the Sales and undertake the Marketing Activities. The Sales achieved by an alternative agent may not accurately reflect the Sales that would have been achieved by Rosehill Realty if it had continued to undertake management of the Sales and the Marketing Activities.
  4. The assessment of damages suffered by Rosehill Realty as a result of the unlawful termination of the Agreement, if it is so found, will involve predicting the Sales that would have been achieved by Rosehill Realty if the Agreement had not been terminated. Any predictive exercise has its difficulties but the difficulty of assessing damages in this case would not be insuperable.
  5. Secondly, Rosehill Realty submitted that if an injunction is not granted, five employees will be made redundant and dismissed. Senior counsel for Rosehill Realty, Mr Donaldson SC, summarised the matter this way:

People are going to lose their jobs if this injunction is not ordered – innocent people, as it were, not Mr Burke, but a number of other people who [Rosehill Realty] will have to terminate their employment if this injunction is [not] ordered.

  1. Rosehill says that the employees are not long standing employees. The employee employed for the longest period is Mr Duguay, who has been employed for a little under three years. Rosehill says that the hardship to Mr Duguay must be considered in the light of his conduct in relation to the Letters of Commitment. The remaining employees have been employed for periods ranging between about two and a half years and six months. Harm to nonparties is a relevant consideration. That employees will or may lose their jobs is a consideration which I have taken into account in considering whether the balance of convenience or justice favours the grant of an injunction.
  2. Thirdly, Rosehill Realty says that the injunction may only operate for a short time. The Agreement contains an arbitration agreement. Rosehill Realty says that the disputes arising from the initial default notice and the further default notice, together with a dispute about Rosehill’s failure to pay marketing fees and other matters, have been referred to arbitration. The arbitration is due to be heard in July 2019. Rosehill Realty says that the arbitration is likely to resolve the disputes between it and Rosehill. I accept that the arbitration may resolve many of the disputes between Rosehill Realty and Rosehill. However, it would not resolve all of the disputes. Whether or not the Agreement was lawfully terminated by Rosehill is not the subject of the arbitration. Rosehill says that it will press for that matter to be determined by this court. Even if the parties and the court approach the interlocutory processes with the objective of resolving the matter expeditiously, it is likely to be some time before the matter is resolved.
  3. The following matters cause me to refuse the interlocutory injunction sought.
  4. First, the injunction would oblige Rosehill to continue the Development through the agency of someone in who it has lost confidence and against whom it is currently engaged in litigation. The relationship between the parties is of a fiduciary character and depends upon mutual confidence. The courts will not normally enforce the continuation of such a contract by injunction.
  5. The performance of a contract of agency will not normally be enforced by an order for specific performance or other similar order. The authors of Bowstead & Reynolds on Agency explain that general approach:

A contract of agency is by its nature a personal contract; the relationship between the parties is of a fiduciary character and depends upon mutual confidence. It has long been established that the courts will not normally enforce the continuation of such a contract, whether directly by an order for specific performance or indirectly by injunction. A normal remedy for breach of contract by the principal is therefore an action for damages. But because these specific remedies are equitable they are discretionary and it is therefore not possible to state the principal has no exceptions. In this context the contract of agency has many similarities with the contract of employment: indeed some agents may be employees. … The continuation of confidence is clearly a factor of importance, especially in what may be called the field of pure agency where the agent represents the principal vis-à-vis third parties and can bring him into contractual relationship with them [citations omitted].

  1. Rosehill Realty submitted that there was no evidence that Rosehill had lost confidence in Rosehill Realty because no director or employee of Rosehill had gone on evidence to expressly say so. Rosehill Realty says that, despite the disputes giving rise to the arbitration, the parties have been able to productively work together in relation to Sales of the Land and have achieved approximately five sales per month since August 2018.
  2. Rosehill stated in its Notice of Termination that Rosehill Realty has breached the implied term of the Agreement requiring Rosehill Realty to render faithful service to Rosehill by the conduct set out in 13 paragraphs of the notice. That conduct, notwithstanding that it is denied by Rosehill Realty, is conduct which Rosehill asserts Rosehill Realty has engaged in and has breached Rosehill Realty’s obligation to render faithful service to Rosehill. Ms Kirk, on behalf of Rosehill, has affirmed in her affidavit that the allegations of breach set out in the Notice of Termination are accurate. Thus, notwithstanding that Rosehill Realty denies the allegations, Rosehill believes and maintains their accuracy. That is sufficient evidence that Rosehill considers that the relationship between the parties has broken down.
  3. By the Agreement, Rosehill appoints Rosehill Realty its agent for the purpose of undertaking the Sales. Rosehill Realty may make representations to prospective buyers of the Subdivided Lots for which Rosehill may be liable. That is a reason why the court should not grant an injunction requiring Rosehill to permit Rosehill Realty to continue as its agent in circumstances where Rosehill alleges that Rosehill Realty has engaged in creating multiple Letters of Commitment for individual lots, backdated Letters of Commitment and, in at least one case, caused a Letter of Commitment to be executed purportedly on behalf of Rosehill when Rosehill had given no authority to do so.
  4. Secondly, there is a serious question as to whether Rosehill Realty can perform its obligations under the Agreement without Mr Burke committing an offence under s 206A(1) of the Corporations Act. The court should not exercise its discretion to issue an injunction facilitating Rosehill Realty to perform its obligations under a contract where it is seriously arguable that to do so would involve an offence being committed under s 206A(1) of the Corporations Act.
  5. Thirdly, if the injunction is granted the court might have to give a series of rulings to enforce the order because of the imprecise obligation imposed on Rosehill by the injunction.
  6. The proposed injunction is prohibitory in form; it restrains Rosehill from preventing Rosehill Realty and its officers, employees and agents from performing its obligations under, and pursuant to, the Agreement. In substance it is mandatory in the sense that it requires Rosehill to carry out its duties under the Agreement, insofar as that is necessary to enable Rosehill Realty to carry out its obligations under the Agreement.
  7. For example, cl 4.2(b) of the Agreement provides that Rosehill Realty must engage its best efforts to manage, coordinate and undertake such Marketing Activities as it deems fit, which activities may include but will not be limited to those activities listed in Schedule 1 of the Agreement, for a total price not exceeding the total price corresponding with each activity or, where a particular activity is not listed, for a price agreed in writing between Rosehill Realty and Rosehill. Clause 4.2(d) provides that the Marketing Activities shall be reviewed for each stage of the Development and may be amended on such terms as agreed in writing by the Parties. The duty of Rosehill to review the Marketing Activities and to negotiate a price for Marketing Activities that are not listed in the Schedule is uncertain. It may lead to a series of rulings to enforce the order whenever Rosehill Realty alleges a breach.
  8. Furthermore, it is unclear what obligation the injunction would place on Rosehill in relation to activities by Rosehill Realty on the one hand, and the Severns on the other hand in relation to marketing and sales of the Lots. For example, the responsibilities of Rosehill Realty under cl 2.2(b) of the Agreement includes welcoming visitors to the home displays. Would Rosehill be obliged by the injunction to exclude the Severns from the display homes notwithstanding that, by its attorney, Rosehill has engaged the Severns as its agent to sell the lots?
  9. Clause 2.1(d) of the Agreement provides that Rosehill reserves the right to accept or reject any offer that it may receive to purchase a Subdivided Lot in its absolute discretion. However, is Rosehill obliged to consider any offer that it may receive from Rosehill Realty to purchase a Subdivided Lot where an offer has been presented by the Severns in relation to the same Subdivided Lot?
  10. The Agreement is a relational contract, it involves not merely an exchange but also a relationship between the contracting parties. Mr Burke has attached to his affidavit sworn 21 June 2019 minutes of meetings between representatives of Rosehill Realty and Rosehill. The first are minutes of a meeting held over three hours on 19 October 2017 which discuss a range of matters concerning the Development. The second are minutes of a meeting lasting an hour and 15 minutes on 21 August, a meeting lasting two and a half hours on 22 August and a meeting of unspecified duration on 24 August 2018. Those meetings again cover a range of matters covering the relationship between Rosehill and Rosehill Realty. The third set of minutes is for a meeting on 26 October 2018, which appears to have principally been concerned with marketing the Development. Those minutes are evidence of the ongoing relationship between Rosehill Realty and Rosehill arising from the Agreement.
  11. The fact that the court might have to give a series of rulings to enforce the injunction whenever there was an alleged breach and a consequent application by Rosehill Realty is undesirable because the only means available to the court to enforce its order is punishment for contempt, which is unsuitable as an instrument for adjudicating upon the disputes that may arise.
  12. Fourthly, Rosehill by its attorney, Alceon Group No 50 Pty Ltd (Alceon) has entered into agreements in relation to the future sale of lots in the Development with Lindsay and Ryan Severn. The agreements have been signed by Alceon, Rosehill’s financier, pursuant to a Power of Attorney that Alceon has under the Debt Facility Agreement between Alceon and Rosehill. The first agreement is between Rosehill and Lindsay Severn who is a licensed real estate agent which commences, or commenced, on 29 June 2019 and is a nonexclusive agreement. The agreement will terminate upon the second agreement coming into effect. The second agreement is between Rosehill and Ryan Severn. It will come into effect when Ryan Severn obtains his triennial certificate and becomes a licensed real estate agent. The second agreement is an exclusive agreement. If the injunction is granted then Rosehill will arguably be in the position of either breaching the injunction or will breach the agreements with the Severns. The grant of the injunction sought may coerce Rosehill to breach its agreement with the Severns and its agreement with its financier, so as to avoid the risk that it might otherwise suffer the dire consequences of breaching the injunction.
  13. Fifthly, Rosehill may not be able to obtain compensation under Rosehill Realty’s undertaking as to damages. On 21 June 2019 Mr Burke swore that Rosehill Realty’s only substantial assets are:
    • (a) the Agreement;
    • (b) [Rosehill Realty’s] claim against [Rosehill] in the Abitration;
    • (c) a sales and marketing and project management agreement between [Rosehill Realty] and a property developer in respect of a development in Gnangara (Suntower agreement); and
    • (d) amounts due to [Rosehill Realty] under the Suntower agreement amounting to approximately $1.2 million, which Mr Burke estimates will be received between August and December 2019.
  14. Neither the Agreement nor Rosehill Realty’s claim against Rosehill in the Arbitration are assets against which Rosehill is likely to be able to execute if it is ultimately successful in this proceeding. There is no material before the court to establish that the Suntower agreement, or amounts claimed by Rosehill Realty under the Suntower agreement, are realisable and will be assets against which Rosehill may execute or provide funds from which Rosehill Realty may pay any compensation due to Rosehill.
  15. Rosehill Realty has produced its 2018 financial statements and 2018 tax return. Rosehill Realty’s balance sheet as at 30 June 2018 showed cash assets of $1,662,349, comprised principally of a BW Build Fund account and BW Business account and receivables in the form of Trade debtors of $1,477,046. Noncurrent assets consist principally of loans owing by Greentop Nominee Pty Ltd of $439,567 and Maryalma Trust of $806,508. The total liabilities are shown to be $3,261,894.
  16. Mr Burke has produced a document which he describes as a copy of Rosehill Realty’s aged receivables list as at 26 June 2019. The receivables are stated to be $1,493,756 of which $1,137,477, or 76.1% of the aged receivables, are more than four months old. The largest receivable is the sum of $594,992 claimed to be owing by Rosehill. That is the subject of dispute with Rosehill. The other major receivables are said to be the sums of $461,102 from Suntower Pty Ltd and $309,236 from Suntower which relate to the Gnangara development. The remaining receivables total approximately $128,000. The evidence does not disclose the nature of those receivables and the likelihood that the amounts will be received by Rosehill Realty. There is no current list of Rosehill Realty’s assets other than its receivables and no current list of its liabilities.
  17. My analysis of the financial information is as follows. The material does not disclose any assets which are readily realisable. The evidence does not satisfy me that Rosehill Realty will be able to pay compensation to Rosehill for any loss or damage suffered by Rosehill if it is ultimately shown that Rosehill Realty should not have received the benefit of the proposed interlocutory injunction.

Conclusion

  1. Rosehill Realty’s application for interlocutory injunction will be dismissed.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.

MS

Associate to the Honourable Justice Le Miere

12 JULY 2019

 

Bridgehouse (Bradford No.2) v BAE Systems Plc [2019] EWHC 1768 (Comm) (11 July 2019)

Neutral Citation Number: [2019] EWHC 1768 (Comm)
Case No: CL-2018-000470

IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
OF ENGLAND AND WALES
COMMERCIAL COURT
QUEEN’S BENCH DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL
11/07/2019

B e f o r e :

MRS JUSTICE COCKERILL DBE
____________________

Between:

BRIDGEHOUSE (BRADFORD NO.2)
Claimant

– and –
 

 

BAE SYSTEMS PLC

 

Defendant

____________________

David Lord QC and Sebastian Kokelaar (instructed by Richard Slade & Co plc) for the Claimant
Fiona Parkin QC and Patrick Harty (instructed by Ashurst LLP) for the Defendant
Hearing dates: 13 and 14 May 2019 

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HTML VERSION OF JUDGMENT
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Crown Copyright ©

MRS JUSTICE COCKERILL DBE:

Introduction and factual background

    1. This is the hearing of BB2’s Appeal pursuant to section 69 of the Arbitration Act 1996 (“the 1996 Act”) against an award dated 14 June 2018 (“the Award”) issued by Mr John V. Redmond (“the Arbitrator”). The Appeal is, rather unusually, brought by agreement between BB2 and BAE.
    2. On 20 December 2012 BAE and BB2 entered into an agreement (“the Agreement”) pursuant to which BAE agreed to procure the sale by one of its subsidiaries to BB2 of two properties (Hawarden Airfield, Broughton, and Filton Main Site, Bristol) for the sum of £93 million. Under the terms of the Agreement the sale is due to complete on a date to be determined between 21 January 2020 and 1 July 2022.
    3. BB2 was incorporated specifically for the purpose of entering into the Agreement with BAE. It does not carry on any business and does not own any assets other than its rights under the Agreement. Its sole shareholder is Mr Andrew Ruhan and its sole director is Mr Gabriel Ruhan.
    4. The Agreement formed part of a wider transaction known as Project Bradford, which involved the disposal by BAE to companies within the Bridgehouse Capital group of a portfolio of properties that were surplus to BAE’s own requirements for a total sum exceeding £200 million.
    5. Clause 19 of the Agreement was an arbitration clause. It provides, in summary, that “any dispute…arising out of the provisions of this agreement” shall, if it cannot be resolved consensually, be referred to an independent person jointly appointed by the parties, who shall act as an arbitrator in accordance with the 1996 Act.
    6. Clause 20.1 of the Agreement is the key provision for this appeal. It provides:

“20. TERMINATION

20.1 If the Buyer:

(a) suffers an Event of Default (defined in Clause 20.2);… then BAE may, by notice in writing to the Buyer, determine this agreement.

20.2 Events of Default – meaning

For the purpose of clause 19 an Event of Default occurs if the Buyer suffers any of the following:…

(g) being struck off the Register of Companies or being dissolved or ceasing for any reason to retain its corporate existence.

20.3 Effect of termination notice

If notice is served pursuant to clause 20.1 then this agreement shall immediately determine and BAE shall be entitled to release the monies outstanding to the credit of the Accounts for its own benefit but any determination shall be without prejudice to any right of action or other remedy of the Parties in respect of any antecedent breach by the other of any of the provisions of this agreement.”

    1. Prior to 2014 BB2 failed to comply with its statutory obligations under s. 441 Companies Act 2006 to file accounts. As a result, on 16 December 2014, the Registrar of Companies published a notice under s. 1000(3) of the Companies Act 2006 (“the 2006 Act”) stating that BB2 would be struck off the register unless cause were shown to the contrary.
    2. Section 1000 of the 2006 Act confers a power on the registrar to strike off a company, which he has reasonable cause to believe is not carrying on business or in operation. The registrar appears to have formed such a belief in relation to BB2 because its accounts and/or annual return were not filed on time.
    3. The notice was sent to BB2’s registered office, but it did not come to the attention of Mr. Gabriel Ruhan. The reason for this was that BB2’s registered office was the office of lawyers who had previously worked for Mr. Andrew Ruhan, but who had ceased to do so in circumstances of considerable acrimony.
    4. Despite this situation, neither Mr. Andrew Ruhan nor his brother Mr. Gabriel Ruhan had ensured that BB2’s registered address had been updated at Companies House. Felicitously, lawyers who were working for Mr Andrew Ruhan on other matters noticed the strike off notice and drew it to the attention of BB2. BB2 then filed accounts and an annual return (signed by Mr Gabriel Ruhan and recording the same registered address) and the strike off action was discontinued. However, BB2 still did not change its registered office. Nor did it file accounts when next due – for the year ending 31 December 2015.
    5. On 15 March 2016 the Registrar of Companies therefore sent another notice to BB2 pursuant to section 1000(3) of the Companies Act 2006 stating that, unless cause was shown, the company would be struck off and dissolved at the expiration of two months from the date of the notice. Notice was (again) sent to the same registered address. For the same reason it apparently did not come to the attention of Messrs Ruhan. This time there was no fortuitous spotting of the problem by anyone acting for BB2.
    6. BB2 says that it was unable to show cause because the notice did not come to its attention in time – because again it was sent to a registered office which was not functioning as such. In any event, it did not show cause. Accordingly, it was dissolved and struck off the register on 31 May 2016.
    7. It is not in issue that the registrar had power to strike BB2 off the register or that this striking off was effective at the time.
    8. BAE became aware of the proposal to strike off on 25 May 2016. On 2 June 2016 it served a notice of termination pursuant to clause 20 of the Agreement (“the Notice”).
    9. An application for administrative restoration of BB2 to the register pursuant to section 1024 of the 2006 Act was then submitted to the Registrar of Companies on 24 June 2016.
    10. One of the requirements for restoration is that: “if any property or right previously vested in or held on trust for the company has vested as bona vacantia, the Crown representative has signified to the registrar in writing consent to the company’s restoration to the register.” An applicant is required to file a statement of compliance confirming “that the requirements for administrative restoration are met”. In its application for restoration, BB2 told the registrar that: “The Company holds no assets and therefore a bona vacantia waiver/consent letter is not required in this instance”.
    11. The application was successful and BB2 was restored to the register on 28 July 2016.
    12. This appeal concerns the effect of that restoration on BAE’s previously valid and effective termination in the light of section 1028 of the Act. S. 1028(1) provides that:

“The general effect of administrative restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.”

    1. BB2 challenged the validity of BAE’s termination of the Agreement. On 1 November 2016 BAE issued proceedings against BB2 in the Chancery Division for a declaration that the Agreement had been validly terminated by service of the Notice. Those proceedings were stayed by Chief Master Marsh on 2 February 2017 pursuant to an application by BB2 under section 9 of the 1996 Act, because of the existence of the arbitration agreement.
    2. BAE then commenced arbitration proceedings against BB2 on 3 March 2017. Mr John V. Redmond (“the Arbitrator”) was appointed as arbitrator by the President of the Law Society (in default of agreement between the parties).
    3. The issues which the Arbitrator had to decide are set out at paragraph 13 of the Award. There are four of them:

“Issue A1: Whether BAE had a right to exercise its right under Clause 20.1 prior to the release of the Properties from the BAES Leases Trust

Issue A2: Whether an Event of Default under clause 20.2(g) arose immediately upon BB2 being struck off the register on 31 May 2016 (as BAE contended) or (as BB2 contended) only after a reasonable period of time had expired without an application for restoration to the register having been made;

Issue A3: Whether the service of BAE’s notice was ineffective because BB2 did not exist, or was served in breach of a “good faith” obligation;

Issue A4: Whether any effective termination had to be re-assessed retrospectively as a result of BB2’s restoration to the Register by virtue of section 1028(1) of the 2006 Act such that the Notice is to be regarded as ineffective.”

It is issues A2 and A4, highlighted in bold above, which are in issue in this appeal.

    1. The Award was published on 14 June 2018. It runs to 188 paragraphs and 42 pages. On Issue A2, the Arbitrator held that an Event of Default had arisen immediately upon BB2 being struck off the register (paragraphs 52 to 60 of the Award).
    2. He further held that the Agreement had been validly terminated by the service of the Notice, and that the termination was not affected by BB2’s subsequent restoration to the register. The Arbitrator concluded that section 1028(1) did not automatically undo the termination of the Agreement (see paragraphs 153 to 185 of the Award). In light of this, it was not necessary for him to deal with BAE’s argument that the parties had contracted out of section 1028(1).
    3. On 11 July 2018 BB2 issued the present appeal against the Arbitrator’s award. The Appeal is brought by agreement with BAE.
    4. On 3 August 2018 BB2 issued a Part 8 claim in the Chancery Division (Insolvency and Companies List) seeking relief under section 1028(3) (“the Section 1028(3) Application”). Section 1028(3) confers a power on the court to “give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register”. The relief under section 1028(3) is sought in the event that the appeal against the Award fails.
    5. It was envisaged by BB2 that the Section 1028(3) Application would be determined, if necessary, at the same time as its appeal against the Award. Accordingly, on 3 August 2018 BB2 also issued an application for an order that the present appeal be transferred to the Insolvency and Companies List and heard together with the Section 1028(3) Application (“the Transfer Application”).
    6. On 4 September 2018 BAE issued an application pursuant to section 9 of the 1996 Act for an order staying the Section 1028(3) Application (“the Stay Application”).
    7. The Transfer Application was heard and dismissed by me on 26 October 2018. At the same time as dismissing the Transfer Application I also gave directions for the hearing of this Appeal.
    8. The Stay Application was heard by Mr Stuart Isaacs QC (sitting as a Deputy Judge of the High Court) on 14 March 2019. On 21 March 2019 he handed down a judgment granting the stay. On 10 April 2019 BB2 issued an Appellant’s Notice seeking permission to appeal against that decision from the Court of Appeal. So far as I am aware, that application has yet to be determined.

The questions of law

    1. The agreed questions of law that fall to be determined on this appeal are set out in Appendix 1 to the letter from BAE’s solicitors (Ashurst) to BB2’s solicitors (Richard Slade and Company) dated 10 July 2018, which records the terms upon which BAE agreed to the bringing of the appeal and which were later embodied in the Order of Teare J dated 7 December 2018. They are as follows:

Issue A4

(1) Was the Arbitrator correct to conclude that the answer to Issue A4, namely “Is any effective termination to be re-assessed retrospectively as a result of BB2’s restoration to the Register by virtue of section 1028(1) Companies Act 2006 such that the Notice is to be regarded as ineffective?”, is “No”. In particular:

a. Was the Arbitrator correct to conclude that section 1028(1) cannot undo the termination of a contract – where that termination was effected pursuant to an express contractual right to terminate in circumstances in which the company (that was a party to that contract) had been struck off the Register – after that company has been restored to the Register?

b. If the Arbitrator was wrong and the correct answer to Issue A4 is “Yes”, can the parties to a contract lawfully and effectively agree that – regardless of the deeming provisions of section 1028(1) – one party shall have the contractual right to terminate upon the other party being struck off the Register of Companies and, if it does terminate, that termination will not be affected by the deeming provisions of section 1028(1) if the other party is subsequently restored to the Register?

c. If the answer to the question at paragraph 1(b) above is “Yes”, did the parties to the Agreement in fact either expressly or impliedly agree that – regardless of the deeming provisions of section 1028(1) – BAE’s termination of the Agreement would be lawful and effective notwithstanding the restoration of BB2 to the Register?

Issue A2

(2) Was the Arbitrator correct to conclude that the answer to Issue A2, namely “Did a clause 20.2(g) Event of Default arise immediately upon 31 May 2016 (being the date on which BB2 was struck off the Register) as BAE asserts, or as BB2 contends, only after a reasonable period of time had expired without an application for restoration having been made”, is that an Event of Default arose immediately upon 31 May 2016? “

The approach to be adopted on the appeal

    1. The first point raised by BB2 was as to the approach to be adopted in this appeal. It referred me to the judgment of Eder J in MRI Trading AG v Erdenet Mining Corporation LLC [2012] EWHC 1988 (Comm), but submitted that in the present circumstances the approach adumbrated there is of limited application given that the Appeal has been brought by agreement between the parties and the arbitrator is not a market man but a lawyer.
    2. I broadly accept this submission. At least two of the issues are true questions of law, where no margin of appreciation applies. The others are questions of contractual construction. The arbitrator is indeed a lawyer, so no question of market knowledge or feel comes into play. And the parties have freely agreed to bring this appeal in circumstances where the main issue in the appeal was not the subject of much attention in the arbitration hearing. This is, therefore, an appeal where the Court can in effect view the issues as if de novo.
    3. The parties have approached the appeal from slightly different angles. BAE submits that Issue A2 logically precedes Issue A4 and dealt with it first. I entirely see the force of that approach. However, I will take the issues in the order preferred by BB2, which reflects the parties’ agreed issues for the appeal.

Question (1)(a): the effect of section 1028(1)

    1. This was the main issue on the appeal; but it was not the main issue before the arbitrator. As I understand matters, issue A2, along with other issues which are not live in this appeal represented the main issues argued in the arbitration. During the course of argument, however, the arbitrator raised this issue, some argument took place following that, during the course of which a number of the authorities were cited; and the arbitrator then made it a main ground of his decision. His decision was therefore reached without all of the material on statutory interpretation which I have had cited and with not all of the authorities available to him.

The statutory background

    1. Part 31 of the 2006 Act contains provisions relating to the dissolution and restoration of companies. Section 1000, as I have mentioned, confers a power on the Registrar of Companies to strike off an apparently defunct company. This power may be exercised where the Registrar has reasonable cause to believe that the company is not carrying on business or in operation, and has sent notices to the company to which it either has not responded within the requisite time or in response to which it has confirmed that it is not carrying on business or in operation.
    2. Under s. 1012 all property and rights vested in a company that has been struck off and dissolved are deemed to be bona vacantia and vest in the Crown (or the Duchy of Lancaster or Duke of Cornwall in some cases).
    3. Under previous Companies Acts (for example the Companies Acts 1900, 1908, 1929, 1948 and 1965) any application for the restoration of a company had to be made to court. The Court was provided with a discretion to restore a company to the register by one of two different routes. The two routes were intended to provide a “clear demarcation between the reversal of a formal winding up process and the rectification of the effects of a striking off procedure” where there had been no formal winding up of a company’s affairs.
    4. Thus, and taking the provisions of the Companies Act 1985 by way of example, the court had a discretion to order restoration as follows:

i) Pursuant to s. 651, which provided for the Court to declare a company’s “dissolution to have been void” and that thereafter “such proceedings may be taken as might have been taken of the company had not been dissolved”; and

ii) Pursuant to s. 653 which permitted a person who “feels aggrieved” by the striking off to apply to the court. It contained in s. 653(3) the same formulation as s. 1028(1) of the Companies Act 2006 (namely that upon the delivery of the restoration order to the registrar, the company “is deemed to have continued in existence as if its name had not been struck off….”).

    1. Over time however, that demarcation between the two routes had been eroded. Administrative restoration (whereby a company is restored to the register by the Companies Registrar) as provided for by ss. 1024 and 1025 Companies Act 2006 was an innovation of that Act, having been recommended for introduction as a result of consultations and reviews undertaken by the Company Law Review Steering Group (“CLR”) in 2000.
    2. As a result, the 2006 Act now has a twofold approach to restoration:

i) Section 1024 entitles a former director or member of a company struck off pursuant to sections 1000 or 1001 to apply to the Registrar to restore the company to the register. This procedure is called administrative restoration. It was first introduced by the 2006 Act.

ii) Section 1029 and following provide for restoration by the court on the application of a variety of other interested people.

    1. The focus in this case is on administrative restoration, albeit that the “backstory” of the legislative provision remains relevant.
    2. An application for administrative restoration may be made for a period of six years from the date of dissolution of the company. This is made clear by section 1024(4).
    3. Administrative restoration is only available if certain conditions are satisfied. These conditions are set out in section 1025. They are:

“(2) The first condition is that the company was carrying on business or in operation at the time of its striking off.

(3) The second condition is that, if any property or right previously vested in or held on trust for the company has vested as bona vacantia, the Crown representative has signified to the registrar in writing consent to the company’s restoration to the register. …

(5) The third condition is that the applicant has—

(a) delivered to the registrar such documents relating to the company as are necessary to bring up to date the records kept by the registrar, and

(b) paid any penalties under section 453 or corresponding earlier provisions (civil penalty for failure to deliver accounts) that were outstanding at the date of dissolution or striking off.”

    1. Section 1028(1) – the key provision in this appeal – deals with the effect of administrative restoration. As already noted it provides that:

“the general effect of administrative restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.”

    1. Section 1028(3) contains a power for the court to “give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register”. An application under section 1028(3) may be made any time within three years after the date of restoration of the company to the register (and thus up to nine years after the removal from the register).
    2. The provisions now contained in sections 1028(1) and (3), and sections 1032(1) and (3), have a long history, which goes back to the Companies Act 1880. Similarly-worded provisions have appeared in successive Companies Acts since then.
    3. As noted above, the previous method of restoration remains in place alongside administrative restoration. Section 1029 permits an application to be made to court to restore a company to the register, which has been dissolved after a winding up or following administration, or which has been struck off by the registrar. Such an application may be made by a wide range of persons, including a director, a person having a claim against the company or any person who but for the company’s dissolution would have been in a contractual relationship with it.
    4. The general effect of an order by the court restoring the company to the register is the same as the general effect of administrative restoration, i.e. the company is deemed to have continued in existence as if it had not been dissolved or struck off the register: section 1032(1). Further, section 1032(3) provides, echoing s. 1028(3): “The court may give such directions and make such provision as seems just for placing the company and all other persons in the same position (as nearly as may be) as if the company had not been dissolved or struck off the register.”.
    5. Upon restoration to the register (whether pursuant to the administrative procedure or a court order) any property which has vested in the Crown as bona vacantia automatically re-vests in the company: see Re C.W. Dixon Ltd [1947] Ch 251 and Smith v White Knight Laundry Ltd [2002] 1 WLR 616. Section 1034 contains special provisions that deal with the effect of restoration on dispositions effected by the Crown of property vested in it as bona vacantia whilst the company was dissolved.

The arguments

    1. BB2’s approach was to consider the various authorities in turn with little emphasis on the statutory purpose. It submitted that:

i) The authorities make abundantly clear that the deeming provision in clause 1028(1) operates retrospectively as well as prospectively.

ii) The language of section 1028(1) is unrestricted. The provision is intended to be general in its application – it expressly says so. Had it been the intention of Parliament to create exceptions to the general effect of administrative restoration, it would have said so in clear terms.

iii) The absence of any such exceptions in the wording of the section is entirely consistent with the policy behind it, which is to place the company and every other person in the same position (as nearly as may be) as if the company had never been struck off or dissolved.

iv) The Arbitrator fell into error in paragraph 181 of the Award where he concluded, in effect, that the actions taken by a party to a contract, in accordance with the contract, prior to the restoration, are immune from the retrospective effect of the deeming provision contained in section 1028(1).

v) Any actions taken by a contractual counter-party during the period between the striking off/dissolution and the restoration of the company, the validity or effectiveness of which depends on the striking off/dissolution having occurred, must be reassessed on the footing that those events are deemed not to have occurred. The logical consequence of this reassessment must be that such actions are ‘undone’.

vi) Contrary to what the Arbitrator appears to have thought, this is not a question of rendering legitimate actions illegitimate.

vii) To the extent the Arbitrator’s reasoning was driven by concern about the complications which might arise in certain situations if BB2 were right about the effect of section 1028(1), he was wrong to bring this into account because the reality of the situation is that this is a unique situation.

    1. Against this, it was BAE’s case that:

i) On its true construction, section 1028 does not require the retrospective reassessment of what is otherwise an effective termination of the Contract while the company was dissolved such that the termination is somehow rendered invalid.

ii) There is no credible reason why Parliament would have chosen to legislate to such an effect. There is no public policy which supports BB2’s construction and every reason why Parliament should not have legislated to prohibit such clauses.

iii) Such a result would be absurd and cause grave injustice.

iv) BB2 fails to show how it says that its construction of s. 1028(1) actually works or why it should work in such a manner.

v) BB2 elides “legislative purpose” with (what it asserts is the) “legislative effect” and has thereby failed to identify any “purpose” behind s.1028(1) which would justify the construction of the statutory provision it contends for;

vi) BB2 cannot explain why the termination is “ineffective” or how, as a matter of the law, a contract which it was accepted by BB2 had been terminated ceases to be so.

vii) BB2’s approach would mean that such a termination provision does not provide a party with a right but creates a trap: a party who was entitled to serve a notice in reliance on such a clause would be retrospectively deemed not to have been entitled so to act and therefore would have done so in (very possibly repudiatory) breach of contract.

Discussion

    1. The parties naturally placed different emphasis on three different aspects of the exercise: statutory intention, the dicta in the authorities and the effects of the position contended for. All three of course have to be synthesised so far as permissible and possible.

Statutory Intention

    1. Taking first the question of the statutory intention. This is of course important, because the goal of statutory interpretation is to give effect to the purpose of the statute. However, even so, the facts have to come into this consideration, as the authorities make clear. See for example Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 603 [32] per Lord Nicholls:

“The modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose. … In seeking the purpose of a statutory provision, the interpreter is not confined to a literal interpretation of the words, but must have regard to the context and scheme of the relevant Act as a whole: …. The essence of this approach is to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. Of course this does not mean that the courts have to put their reasoning into the straitjacket of first construing the statute in the abstract and then looking at the facts. It might be more convenient to analyse the facts and then ask whether they satisfy the requirements of the statute. But however one approaches the matter, the question is always whether the relevant provision of statute, on its true construction, applies to the facts as found”

    1. To similar effect is Luke v Inland Revenue Commissioners [1963] AC 557 at 577, deprecating a fully literal approach:

“To apply the words literally is to defeat the obvious intention of the legislation and to produce a wholly unreasonable result. To achieve the obvious intention and produce a reasonable result we must do some violence to the words. This is not a new problem, though our standard of drafting is such that it rarely emerges. The general principle is well settled. It is only where the words are absolutely incapable of a construction which will accord with the apparent intention of the provision and will avoid a wholly unreasonable result, that the words of the enactment must prevail.”

    1. Although the authorities indicate a synthesised approach, that has to be performed with some discrete analyses as the building blocks. I shall therefore consider first what can be deduced as to statutory purpose, before proceeding to consider the authorities and then what may be termed the “proof of the pudding” arguments.
    2. In part this initial exercise is hampered by the fact that, although administrative restoration is new, it partakes of rules which are much older. So the “statutory purpose” analysis cannot be conducted quite so cleanly as it could if the entire scheme and wording were new.
    3. However, what emerges from the CLR’s March 2000 report, Developing the Framework, is that administrative restoration was really seen as targeted at cases where there is no third party interest or where there is anticipated to be no significant third party effect. The paradigm was where a company did not realise that it had been struck off and might have dealt with a party which thought it was an existing entity:

“10.116 … in the case of restoration to the register, we believe that court intervention will continue to be necessary in many cases. Restoration can have far-reaching consequences and impact on the rights and interests of a range of third parties. Such parties may include members of the company, its creditors…. the registrar and, as regards the revesting of any bona vacantia, the Crown. There may be other parties affected by the resuscitation of the company, such as a landlord or third party guarantor for a company’s obligations. We consider that any case which involves striking a judgment as to the appropriate balance between these two interests is properly a matter for the courts.

10.117 However it has been put to us that there is a particular category of applications for restoration where no such complications arise. These cases arise where: there is no significant third party interest in the application other than the company’s own; the consent of the Treasury Solicitor … is available for the revesting of bona vacantia and where the sole object of the application is to rectify the registrar’s own initiative in striking off when in the light of events it has become clear that a company thought to be inoperative was operating after all. In these cases restoration can be viewed as a purely administrative procedure for which a court process is redundant and imposes unnecessary burdens of time and expense.

10.118 …. If the company is ignorant of the position then after it has been struck off it will continue to operate as though it were still on the register until it does become aware that it has been struck off. In these circumstances, restoration is often a fairly straightforward matter; it is unlikely to be contested and it does not give rise to any consequential effects on third parties.”

    1. The November 2000 paper, Completing the Structure, indicates (at paragraph 8.33) that focus was nonetheless on protecting the position of any affected third parties – again the focus being on the paradigm case:

“…section 653(3) provides that after restoration the company is “deemed to have continued in existence as if its name had not been struck off”. This latter approach may provide better protection for third parties who have dealt with the company unaware that it had been struck off.”

    1. The CLR’s Final Report of June 2001 concluded at paragraphs 11.17 and 11.19 yet again with the “dealing in ignorance” point in mind:

“11.17 …. We have since given further consideration to the effect restoration would have on those who continue to deal with the dissolved company in ignorance of its position. As a consequence we recommend that the resultant single statutory procedure for restoration should produce a similar result to that currently provided in section 653(3)

11.19 There was also wide support for a new procedure of “administrative restoration” … Application for this procedure would be restricted to the company itself (or rather to a person authorised to apply on behalf of a company) and where there is no third-party opposition. It is proposed that administrative restoration should have the same legal consequences as obtained under s.653(3).”

    1. In the light of these passages (and the other passages to which I was referred in argument) I am not entirely persuaded by BAE’s written submission, that the policy behind s.1028(1) Companies Act can be said to be the protection of third parties. The more nuanced view advanced in argument is that the purpose behind the introduction of administrative restoration was to provide an administrative route through restoration where it was highly unlikely that a third party would be impacted. However, it is true that the intention behind the adoption of the deeming provision appears, consistently with this, to have been that it better protected the interests of third parties – albeit with the paradigm being the position focussed upon.
    2. Nonetheless, I do accept the proposition advanced on behalf of BB2 that the deeming provision, which was effectively adopted from previous legislation, is really what is critical here, and that that deeming provision cannot sensibly be read as operating differently in this context than it does in other contexts.
    3. I have not been provided with material on the statutory genesis of this much earlier provision. It is therefore not possible to put alongside the materials on administrative restoration similar materials dealing with the original purpose of the deeming provision itself.
    4. It is therefore critical to look at what the authorities have to say about how that provision operates.


The authorities

    1. BB2 placed reliance on a number of authorities in which these provisions have been considered. I will deal with them in the order in which they were decided and am grateful to Mr Lord QC and Ms Parkin QC (and their respective juniors) for the helpful summaries of those cases provided in their skeleton arguments.
    2. In essence, it was Mr Lord’s case that what one sees in the authorities is a single strand, whereby the courts emphasise the breadth of the deeming provision, and which he says equates to a conclusion that the deeming provision is there as a matter of public policy, that it is mandatory and that it always applies.
    3. In contrast to this, Ms Parkin argued that the authorities have to be regarded as very much on their facts, and that they support no conclusion that the deeming provision is unlimited in its ambit. She contends that like circumstances to these have never arisen, and that there is nothing in the authorities which is inconsistent with the conclusion for which he contends.
    4. In broad outline I prefer this latter view, for the reasons explained below.
    5. The first case which was considered is Tyman’s Ltd v Craven [1952] 2 QB 100. This was concerned with section 353(6) of the Companies Act 1946, which conferred on the court a power to restore a company to the register following a striking off on the application of a member or a creditor. Such an application could be made at any time within 20 years. The section further provided that “upon an office copy of the order being delivered to the registrar for registration the company shall be deemed to have continued in existence as if its name had not been struck off; and the court may by the order give such directions and make such provisions as seem just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off”. In other words, it had essentially the same deeming provision with which I am concerned, albeit in a different context.
    6. After the company had been struck off the register and dissolved, an application was made in its name for a new lease of certain commercial premises. By the time the application was heard the company had been restored to the register by an order under section 353(6), but the landlord nevertheless contended that the application was a nullity because the company had not been in existence when it was made. The issue was therefore one of the corporate capacity of a dissolved company vis a vis a third party which had not appreciated its dissolved status.
    7. The Court of Appeal held by a majority (Evershed MR and Hodson LJ, Jenkins LJ dissenting) that the effect of the deeming provision contained in section 353(6) was to validate retrospectively all acts done in the name or on behalf of the company during the period between dissolution and restoration. The majority rejected the landlord’s argument, based on the final words of section 353(6), that such validation required an order of the court.
    8. Evershed MR said this (at p.111 – 113):

“More generally the final words of the sub-section seem to me designed, not by way of exposition, to qualify the generality of that which precedes them, but rather as a complement to the general words so as to enable the court (consistently with justice) to achieve to the fullest extent the “as-you-were position” which, according to the ordinary sense of those general words, is prima facie their consequence.…

Whatever, then, might have been the situation if the present application had come before the county court judge before the order of restoration… it seems to me that on October 31, 1951, it was no longer open to the respondent to allege the non-existence of the company on the preceding July 23; for, by the terms of the subsection, the company had then to be deemed to have continued in existence as if its name had never in fact been struck off the register.”

    1. In his concurring judgment Hodson LJ said this (at p. 126):

“For my part, I think the words of section 353 (6) are clearly designed to produce an “as you were” position, and think that the latter part of the subsection is complementary and intended to provide for cases where provision is necessary in order to clarify an obscure position or give back to the company an opportunity which it might otherwise have lost. An example of this would be a case where a company had lost an opportunity of obtaining a concession or renewing a lease during the interval between its dissolution and an order under the subsection. A provision in the order could deal with such a case. Tha