Mousavi-Khalkali v Abrishamchi & Anor [2019] EWHC 2364 (Ch) (18 September 2019)

Neutral Citation Number: [2019] EWHC 2364 (Ch)
Case No: E30MA931

IN THE HIGH COURT OF JUSTICE
BUSINESS & PROPERTY COURTS IN MANCHESTER
BUSINESS LIST (ChD)

Manchester Civil Justice Centre
1 Bridge Street West
Manchester M60 9DJ
18th September 2019

B e f o r e :

HIS HONOUR JUDGE EYRE QC
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Between:

SEYED MOHAMMED ZAKI MOUSAVI-KHALKALI
Claimant
– and –
 
MAHMOUDREZA ABRISHAMCHI
2) PARS IRATEL JOINT STOCK COMPANY
Defendants

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Giles Maynard-Connor (instructed by Addleshaw Goddard LLP) for the Claimant
Thomas Grant QC and Ciaran Keller (instructed by Grosvenor Law) for the Defendants

Hearing dates: 16th and 17th July 2019
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HTML VERSION OF JUDGMENT
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Crown Copyright ©

HH Judge Eyre QC:

Introduction.

    1. The Claimant has dual British and Iranian citizenship having become a British citizen in 1991. He owns property in England and it is his case that he is now resident in this country. There is a dispute about how much of his time he actually spends here and the Claimant accepts that his wife lives in Iran in a property he owns in Tehran and that when he is in Iran he lives with her there. The Claimant is the managing director of Fanavaran Amvaj Co (“Fanavaran”) an Iranian company which has provided professional services to the mobile phone industry in that country.
    2. The First Defendant is an Iranian national living in Iran. He accepts that he spends time in England but says that this is limited and confined to visiting his sons here. The Second Defendant is an Iranian telecommunications company of which the First Defendant is the managing director and majority shareholder (holding 70% of the shares with the balance being held by his wife and eldest son).
    3. The Claimant and the First Defendant are related in that the Claimant’s brother is married to the First Defendant’s sister.
    4. The proceedings are in respect of sums totalling £3,478,321 together with interest which the Claimant says are due to him from the First Defendant alternatively from the Second Defendant.
    5. In 2006 the Second Defendant entered a series of joint venture agreements with Nokia to develop the mobile phone network in Iran for the Mobile Telecommunications Company of Iran (“MCCI”). The arrangements between the Second Defendant and Nokia fell through and the Second Defendant then continued with the project for developing the network (“the MCCI Project”) without the involvement of Nokia. The claims relate to the funding and performance of that project and to work done in respect of a subsequent Swiss arbitration in which Nokia claimed against the Second Defendant with the latter then making a counterclaim against Nokia and which ultimately resulted in an award in the Second Defendant’s favour.
    6. The key issue before me was whether the court should exercise jurisdiction and permit service out of the jurisdiction in respect of those claims against the Defendants.

The Procedural History.

    1. On 28th February 2019 the matter came before HH Judge Halliwell at a without notice hearing. Judge Halliwell gave the Claimant permission to serve the claim form and the Particulars of Claim on the Defendants out of the jurisdiction. He also granted a freezing order in respect of the First Defendant. The freezing order was continued by HH Judge Pearce on 8th March 2019 at a hearing which was on notice but which the Defendants did not attend and at which they were not represented. On 25th April 2019 the Defendants applied for a declaration that the court has no jurisdiction in respect of the claims against the Defendants and/or that it will not exercise any jurisdiction and for the consequent setting aside of the permission to serve outside the jurisdiction. The First Defendant also applied for the discharge of the freezing orders and the consequent release of the sum of £2.34m paid into court as security in relation to those orders.
    2. I need not rehearse the rather unedifying history of the hearings before HH Judge Stephen Davies in relation to extensions of time and relief from sanction. It suffices to say that the applications before me were those of the Defendants as to jurisdiction and the freezing orders together with two amendment applications made by the Claimant. The first of those related to the wording of the sundry orders with a view to correcting errors in the drafting of those and in particular to make it clear that the hearing before Judge Halliwell was without notice. That was uncontentious and I order amendment in the form proposed by the Claimant save for the proposed amendment of the preamble to Judge Pearce’s order which is unnecessary the preamble being correct in its current form. The second application related to amendment of the Particulars of Claim and I will set out below my determination in relation to that.

The Claims.

    1. The Claimant’s case is founded on three claims. It will be necessary to examine the competing contentions further below but at this stage it suffices to identify the basic nature of the Claimant’s case.
    2. The first element is the “Loan Agreement”. The Claimant says that in 2006 the Second Defendant needed funds to continue the MCCI Project. Neither he nor Fanavaran was prepared to lend to the Second Defendant. However, Fanavaran was prepared to lend to the Claimant and he, in turn, was willing to lend to the First Defendant. Accordingly, the Claimant lent $2.4m to the First Defendant on terms that the latter would pay the Claimant a loan fee of 8% per annum of the loan amount by way of profit share.
    3. The Claimant says that the relevant agreement was made orally in a conversation he had with his brother on 17th June 2006 with the latter acting on behalf of the First Defendant and with the First Defendant shortly thereafter confirming the arrangement orally and in writing. The agreement was made in Iran and the Claimant accepts that it was governed by Iranian law although he says that the later agreements allegedly made in England were governed by English law. Although payments have been made the Claimant says that the balance of the loan fee is outstanding in the sum of $128,462 and that amount is claimed against the First Defendant alone.
    4. The next claim relates to sums said to be due under the “Project Fees Contract“. The Claimant was engaged to provide services to the Second Defendant in respect of the MCCI Project. He says that his agreement was with the First Defendant and that the services provided to the Second Defendant were by way of performance of his consultancy agreement with the First Defendant. On the Claimant’s case there were two parts to this arrangement. He was to be paid a Project Management Fee of $20,000 per month and an additional Project Bonus of $1,000 for each mast which was made operational and handed over to MCCI. The Claimant says that he performed his work as consultant under the agreement from August 2006 to July 2009 and that 1,669 masts were made operational and handed over. Some of the monthly fees were paid but the Claimant says that the First Defendant failed to pay twelve of the monthly instalments and that none of the Project Bonus was paid.
    5. The Claimant says that following the First Defendant’s failure to pay the sums due an oral agreement was made in England. This was made in February 2011 at a meeting in London between the Claimant and the First Defendant. At that meeting the Claimant agreed to the First Defendant deferring the outstanding payment until the outcome of the arbitration between the Second Defendant and Nokia in return for the First Defendant’s agreement that he should be paid the outstanding sums together with interest at 7% per annum on the conclusion of the arbitration. The arbitration concluded in May 2016 but the First Defendant failed to pay and the Claimant says that sums totalling $3,009,310 are due. The Claimant’s case is asserted primarily against the First Defendant but it is put in the alternative against the Second Defendant if the First Defendant is found to have been acting on behalf of the Second Defendant in engaging the Claimant.
    6. The arrangements between the Second Defendant and Nokia had broken down and in November 2010 arbitration proceedings had been commenced between them. The Claimant assisted in preparing the Second Defendant’s case in the arbitration. He says that he and the First Defendant orally agreed at their meeting in London in February 2011 that in return for his assistance in the arbitration he would get not less than 8% and not more than 12% of any sums recovered from Nokia (“the Arbitration Contract”). The arbitration resulted in a payment from Nokia but the First Defendant failed to pay the Claimant. The Claimant says that this failure triggered further negotiations and that the “Compromise Contract” was made between him and the First Defendant when both were in England. The Claimant says that there had been meetings between him and the First Defendant in London on 8th and 12th August 2016 which had not resulted in an agreement but that the agreement was made in a telephone conversation on 14th August 2016 when he was in Manchester and the First Defendant was in London. The Claimant says that the agreement was that he would accept payment forthwith of $1.5m in place of the sums due to him in relation to the arbitration. That sum has not been paid and the Claimant says it together with interest remains due from the First Defendant. Again the claim is presented primarily against the First Defendant but with an alternative claim against the Second Defendant if the agreement is found to have been made on its behalf.

The Approach to Service out of the Jurisdiction.

    1. Although there were differences of emphasis there was no substantial disagreement between the parties on the approach I am to take to the questions of whether the court should decline jurisdiction and whether Judge Halliwell’s order granting permission for service outside the jurisdiction should be set aside.
    2. The matter is to be determined in accordance with CPR 6.37 and Practice Direction 6B.
    3. Although the matter is now before the court on the Defendant’s application for a declaration as to jurisdiction and to set aside Judge Halliwell’s order the burden is on the Claimant to establish that the court has jurisdiction and that it should exercise that jurisdiction. Those questions are to be approached afresh and Judge Halliwell’s order made without notice does not alter the burden on the Claimant.
    4. The Claimant has to show a claim which has a real prospect of success. The test to be applied is that which would be applicable in determining a summary judgment application by the Defendant. The reason for this is that it would not be appropriate to allow service out of the jurisdiction of a claim which does not have such a real prospect and in respect of which a defendant could forthwith obtain summary judgment. The test as to whether the claim has a real prospect of success is that set out by Potter LJ in ED&F Man Liquid Products Ltd v Patel & another [2003] EWCA Civ 472 at [8] and [10]. The Claimant must show that he has a real as opposed to a fanciful or notional prospect of success. The court must not conduct a mini-trial and must be alert to the scope for allegations of actions which appear strange or unusual to be established at trial and for explanations which invite scepticism when expressed on paper to be accepted when confirmed after cross-examination. However, the court must not be unrealistic in considering whether a real prospect of success has been shown and it is not bound to accept a party’s assertions without analysis or at face value. Such assertions are to be assessed in the light of their inherent credibility; commercial reality (where appropriate); their consistency or inconsistency both internally and in relation to relevant documents; and the presence or absence of documentary support for the assertions. There will be cases where in the light of such an assessment the court is able to conclude that assertions have no real substance.
    5. The Claimant must also show a good arguable case that the claim in question is within one of the gateways in paragraph 3.1 of the Practice Direction. The approach to be taken is that set out at Brownlie v Four Seasons Holdings Inc [2017] UKSC 80, [2018] 1 WLR 192 at [5] – [7] as confirmed at Goldman Sachs International v Novo Banco SA [2018] UKSC 34, [2018] 1 WLR 3683 [9]. The burden is on the Claimant. If the court can come to a conclusion that a particular gateway applies it should do so. If it is not able to do so on the material available then the requirement is met if the Claimant shows a good arguable case in the sense of having the better of the argument on such material as is available.
    6. Then the court must be satisfied that England and Wales is the proper place in which to bring the claim. That question is to be addressed in the way set out by Lord Goff in Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460 at 480F and 481D. Thus the court must be satisfied that England and Wales is “clearly” “the forum in which the case can be suitably tried for the interests of all the parties and the ends of justice”. The court has to consider whether England or some other country is the “natural” forum for trial (see Cherney v Deripaska [2009] EWCA Civ 849 at [20] per Waller LJ). That is an evaluative exercise and, as explained by Lord Goff at 480B, it requires the court to take account of “the nature of the dispute, the legal and practical issues involved, such questions as local knowledge, availability of witnesses and their evidence and expense.” In that exercise the fact that the relevant contract is governed by English law may be “of very great importance” in some cases but in others “it may be of little importance as seen in the context of the whole case” (per Lord Goff at 481H).
    7. Even if another country is the natural forum and would otherwise be appropriate it will not be the appropriate forum if the court is “satisfied, by cogent evidence, that there is a real risk that substantial justice will not be obtainable” in that otherwise appropriate foreign jurisdiction (per Lord Briggs JSC in Lungowe & others v Vedanta Resources Plc & another [2019] UKSC 20, [2019] 2 WLR 1051 at [88]). In such circumstances the courts of England and Wales will allow service out and will exercise jurisdiction. A finding of such a real risk is not to be made lightly and there must be both cogent evidence and a real risk. As Lord Briggs explained (at [96]) evidence can be cogent even if it is challenged and disputed but mere assertion is not sufficient.
    8. Whether such a real risk has been established will depend on the evidence in the particular case and will potentially be specific to a particular litigant, a particular case, or a particular time. Thus one person litigating about a particular subject in a country at a certain time may be at risk of not obtaining substantial justice when there might be no such risk in relation to a different person litigating in the same country but about a different matter or at a different time. That is so even though the proposition that a particular litigant in a country with an otherwise properly functioning legal system will be at risk of failing to obtain substantial justice is one which it will inevitably be much more difficult to establish than would be the case in relation to a country where it can be shown that the legal system has broken down generally. It is because the issue of whether there is a real risk that substantial justice will not be obtained is fact sensitive in those respects that I derived little assistance from the authorities to which Mr. Grant QC referred. That is so in respect of those addressed that issue in relation to other individuals in respect of litigation in Iran and even more so those authorities addressing litigation in other countries. I also have to remember that the power to permit service outside the jurisdiction is a discretionary one. It follows that the decisions of other judges are examples of how they exercised their discretion in the circumstances of particular cases. Accordingly, as Lewison LJ explained in Jong v HSBC Private Bank (Monaco) SA [2015] EWCA Civ 1057 at [18], the relevance of those decisions is limited and they are to be seen in the light of the analysis set out by Millett LJ in Jaggard v Sawyer [1995] 1 WLR 269 at 288. The authorities to which Mr. Grant referred do, however, assist to the extent of demonstrating that a finding that there is such a real risk is one which is not to be made lightly and that indications that a particular legal system has flaws or operates differently from that of England and Wales are unlikely without more to be sufficient to establish the necessary degree of risk that substantial justice will not be available.
    9. A party seeking permission for service out of the jurisdiction must make full disclosure of all material matters (I consider at [50] – [53] below what are and are not material matters for this purpose). A failure to make such disclosure can cause the court to set aside the permission which was given at a without notice hearing. However, even if doing so the court may then renew permission. The assessment of whether to do so will be fact sensitive and will depend on proportionality and the interests of justice having regard to the nature of the failure and to whether a lesser sanction such as a costs order is sufficient (see for example the approach of Carr J in Tugushev v Orlov & others (No 2) [2019] EWHC 2013 (Comm) at [46] – [47]).
    10. The relevant assessments are to be made in respect of each claim and each defendant separately.

Amendment of the Particulars of Claim.

    1. The Claimant seeks to amend the Particulars of Claim to assert that his brother made the Loan Agreement on behalf of the First Defendant; to allege a subsequent conversation and letter in which the First Defendant is said to have confirmed the Loan Agreement; to assert the First Defendant’s denial of the existence of the Compromise Agreement and of his personal liability under any such agreement; and to plead as an alternative to the primary contention that the First Defendant is liable under the Compromise Agreement the contention that the First Defendant made the agreement on behalf of the Second Defendant and that the latter is liable to the Claimant on it.
    2. At one point Mr. Grant submitted that the questions of jurisdiction and service out should be determined by reference to the unamended Particulars of Claim. However, he also prayed in aid the proposed amendments as indications of the weakness of the Claimant’s case and as showing inconsistencies in the Claimant’s contentions and invited me to take account of them in support of his argument that the Claimant had not shown claims which had a real prospect of success.
    3. I have to determine questions of permission to amend by reference to the Overriding Objective having regard to the need to deal with the case justly and to the importance of determining the true issues between the parties. I am satisfied that there will be no prejudice caused to the Defendants if I determine the jurisdiction issues by reference to the amended pleading and that the interests of justice require those issues to be determined on the footing of the Claimant’s case as he now wishes to present it. Accordingly, I give permission for the amendment of the Particulars of Claim and will approach the matter on the footing of the case as set out therein.

Is there a real Risk that substantial Justice will not be obtainable in Iran?

    1. The Claimant contends that he will not get a fair trial in Iran. There are two principal bases for this contention. The first derives from the potential consequences of the Claimant’s status as a dual national of Iran and the United Kingdom. The second is based on assertions as to the nature of the Iranian legal system combined with allegations about the conduct and connexions of the First Defendant and his family.
    2. The Claimant refers to travel guidance given by the Foreign and Commonwealth Office. The guidance was updated on 17th May 2019 and advised British-Iranian dual nationals against all travel to Iran (though at a later point in the guidance this is said to be advice against “all but essential” travel to Iran). The advice explained that there was a risk that British nationals and even more so British-Iranian dual nationals could be detained arbitrarily in Iran. It explains that the Iranian authorities do not recognise dual nationality and so the FCO’s ability to provide consular support to detained dual nationals would be extremely limited. The guidance goes on to express “serious concerns” about the Iranian judicial processes and their compliance with international standards. However, in context this is clearly a reference to the judicial processes relating to those who have been arbitrarily detained and to the availability of consular access to such persons and so is of very limited assistance in assessing how the Iranian courts would address a commercial dispute such as that between the Claimant and the Defendants.
    3. In his witness statement the Claimant says that in the light of the FCO advice he had not travelled to Iran since the advice was published. However, I note that the advice was published on 17th May 2019 and the statement was made on 21st June 2019 and so this was a comparatively short period.
    4. In his statement the First Defendant says that the advice issued by the FCO on 17th May 2019 was a reiteration of earlier advice which had warned of the potential risk of arbitrary detention without the prospect of consular access faced by British-Iranian dual nationals. He says that there was a warning to this effect from 16th February 2017 which was reiterated in stronger terms in September and October 2018 with the September 2018 guidance already containing advice against all but essential travel. The Defendants say that this is significant because the Claimant has spent time in Iran since the earlier warnings were given and indeed since he intimated a claim against them but has been able to pass to and from Iran and to conduct business there without difficulty. The Defendants identify occasions when the Claimant was in Iran in October 2017, June 2018, and March 2019. The Claimant does not dispute such visits and stated that he has recently been “spending as much time as I can” in Iran to be with his elderly and unwell father.
    5. In the affidavit of 29th February 2019 put before Judge Halliwell in support of the without notice application for service out of the jurisdiction and for a freezing order the Claimant gave an address in Manchester as his “home address”. In a section entitled “my personal background” the Claimant set out his academic and career history. The only reference in that passage to any continuing connexion with Iran was the statement that the Claimant had created and become the managing director of Fanavaran though the rest of the affidavit does make it clear that the Claimant had spent time in Iran working on the MCCI Project.
    6. In his statement of 25th April 2019 the First Defendant said that the picture painted by the Claimant was misleading. He asserted that the Claimant is married to a lady who lives in Iran with whom he lives at a property owned by them in Tehran. The First Defendant identified a number of other properties in Iran which he asserted were owned by the Claimant and a number of business ventures in which he was involved in that country. The First Defendant also pointed out the Claimant has other investments in Iran and that the First Defendant had entrusted the Claimant with sums to invest on the former’s behalf on the Tehran stock exchange.
    7. The Claimant does not take issue with much of this account. He accepts that since 2007 he has been married to Elaheh Ansari, an Iranian citizen; that she lives at a property in Tehran which he has owned since 2009; and that he lives there with her when in Iran. The Claimant says that he has been trying to bring his wife to the United Kingdom for a number of years but that this has not been possible. He accepts that he spends time in Iran “on occasions for prolonged periods.” The Claimant says that the properties to which the First Defendant refers are owned jointly by himself, his father, and his brother. The Claimant does not accept the detail of the First Defendant’s contention about his business ventures in Iran but does accept that he has involvement which is essentially passive in some of them. He accepts that he had made investments on the Tehran stock exchange on the First Defendant’s behalf noting that he had referred to this in his affidavit and that this had been in April 2016.
    8. The Claimant concludes his response in this exchange of evidence by saying that he is and continues to be resident in England; that he has very strong connexions with England; and that he considers Manchester his home. However, he does not give any explanation for his failure to explain the scale of his Iranian connexions in his affidavit. In particular no explanation is given of why, when saying that his home was in England, the Claimant failed to mention his twelve-year marriage to a lady living in Iran and the time spent with her at a residential property he owns in Tehran. In my judgement that failure is significant. It indicates a degree of unreliability in the Claimant’s evidence and that he was content to put before the court an account of himself and his affairs which was not complete. This means that I must exercise caution in attaching weight to assertions made by him to the extent that they lack other support or confirmation.
    9. In respect of this limb of the Claimant’s argument I conclude that the Claimant’s status as a dual British-Iranian national does not give rise to a real risk that he would not obtain substantial justice in Iran. This is a commercial dispute between private individuals (I will consider below the contentions as to the Defendants’ connexions and influence). The Claimant has significant interests in Iran and a wife and a home there. On his own account of matters he has spent prolonged periods in Iran and has recently spent as much time as he can there. He does not suggest that any question of detention arising out of or connected with his dual national status has arisen to date. Those visits have not been since publication of the latest FCO guidance but have been since warnings in similar terms were given and since the claim against the Defendants was intimated. In addition I have taken account of the material in the evidence of Dr. Hosseinabadi to which I will refer below. If the Claimant were to fall foul of the Iranian authorities and were to be detained then he would be unlikely to be able to obtain British consular assistance but that is not a sufficient ground for concluding that there is a real risk that substantial justice will not be done in this dispute by reason of the Claimant’s dual national status.
    10. I turn to the second limb of the Claimant’s contention that there is a real risk that substantial justice will not be available. The Claimant says that there are a substantial number of, often unannounced, court holidays in Iran; that delaying tactics are often a feature of Iranian litigation; and that corruption is “rife”. In relation to the last point the Claimant refers to the 2018 Corruption Perceptions Index of Transparency International; a Freedom House report of 2019; and a joint report of the Danish Immigration Service and the Danish Refugee Council. He also quotes a number of members of the Iranian judiciary and government. However, those quotations refer to robust action being taken against judges who are found to have been corrupt and that approach is also apparent from the Danish report.
    11. The Defendants have produced an expert report from Dr Amir Hosseinabadi. He speaks from a background of experience as a judge and legal practitioner in Iran. Dr. Hosseinabadi has produced a detailed report in which he explains the operation of the Iranian legal system and the measures which are in place to protect judicial independence and to address judicial corruption. He identifies instances of successful litigation in Iran by dual nationals (including a British-Iranian dual national) and by foreign companies including litigation against governmental entities and explains the arrangements under which commercial disputes are determined. The expert opinion of Mohammed Tavakoli, an Iranian attorney at law, was put in evidence by the Claimant. This primarily addressed the lawfulness under Iranian law of the Loan Agreement but also addressed the procedure for putting evidence of English law before an Iranian court. Mr. Tavakoli said that he anticipated that there would be difficulties in obtaining such evidence though that view derives from Mr. Tavakoli’s concern as to the difficulty of finding a suitably qualified expert. However, his opinion does describe the appeals process in the Iranian judicial system giving an account entirely consistent with a functioning and effective legal system. It is also of note that Mr. Tavakoli indicates that he is a member of a law firm engaged, inter alia, in advising multinational companies on their commercial activities demonstrating the availability of such advice in Iran. Moreover, the fact that Mr. Tavakoli has provided a report in support of the Claimant’s contentions itself undermines the Claimant’s argument that he will be unable to find Iranian lawyers willing to act in litigation against the First Defendant.
    12. It is apparent that the Iranian legal system operates differently from that of England and Wales in a number of respects. That is not surprising and of itself does not come close to establishing a real risk that substantial justice will not be available to the Claimant. The existence of court holidays and attempts at delaying tactics by litigants are the commonplace of almost any legal system and the evidence before me does not establish that those have any material impact on the ability of the Iranian courts to provide justice to litigants. It is apparent that there are corrupt judges in Iran but also apparent that such conduct is not condoned; that measures are taken to address it; and that there is a functioning appellate system. It follows that subject to matters arising out of the position of the Defendants it cannot be said that there is a real risk that substantial justice will not be available in Iran.
    13. The Claimant says that the First Defendant’s conduct and his family’s influence and connexions mean that it will not be possible for him to have a fair trial. I deal first with the allegations as to the First Defendant’s conduct. The Claimant says that he had witnessed discussions between the First Defendant and his legal team as to how they might influence the judge sitting on litigation between the Second Defendant and MCCI. He also says the First Defendant managed to make an arrangement with government officials which enabled him to sell rather than return shares he had obtained on the privatization of an Iranian bank but where he had failed to meet the instalment payments due on the shares. The Claimant said that he did not know whether the incidents involved the First Defendant in paying bribes but that he believed that they “demonstrate[d] that the practice is not uncommon”. The conclusion asserted by the Claimant simply does not follow from the premise even on the Claimant’s evidence. It cannot be said that dealings by the First Defendant which are not known to have involved the paying of bribes show that bribery of officials or judges is common let alone that the First Defendant has engaged in such conduct. The First Defendant denies any impropriety and any suggestion that he was involved in bribery. He says that the discussions in respect of the litigation were about how to present the Second Defendant’s case in the most attractive way and is supported in the denial of any impropriety by Dr. Ahmadi a lawyer who was present at the meetings in question. The First Defendant points out that in any event the Second Defendant lost at first instance in that matter. The discussions in question are said by the Claimant to have been between the First Defendant and his legal team. It follows that if plans were being made for any improper actions the lawyers would appear to have been party to them. Any allegation along those lines would need to be made clearly and directly. The Claimant does not do so and I reject any contention that any impropriety in that regard has been shown. Similarly the material put forward by the Claimant does not establish any impropriety in the First Defendant’s actions in relation to the shareholding and, as the First Defendant points out, there is no suggestion that this had anything to do with the Iranian judicial system.
    14. The Claimant says that in response to his obtaining of the freezing order the First Defendant threatened through his sister to have the Claimant detained in Iran. He also says that following an unsuccessful mediation in October 2018 the First Defendant flew into a rage uttering threats against the Claimant and his family and attempting physically to attack the Claimant. The First Defendant denies this and his denial is supported by statements from his sister and from Dr. Ahmadi who was present at the mediation as mediator. It follows that there is a dispute as to what was said and done on those occasions. That dispute cannot be resolved without cross-examination but the Claimant’s contentions even if factually correct do not show a real risk that he will be unable to obtain substantial justice. In that regard it is of note that despite the First Defendant’s alleged anger and threats and the family influence alleged by the Claimant (to which I will turn next) the Claimant has been able to travel to and return from Iran unhindered. It is common ground that the Claimant was in Iran in March 2019 and then returned to the United Kingdom doing so, therefore, after both the failed mediation and the obtaining of the freezing order.
    15. The Claimant says that the wealth, connexions, and influence of the First Defendant’s family mean that it will not be possible for the Claimant to have a fair trial. He says that this is particularly so as part of his case in relation to the Loan Agreement is likely to involve asserting that the First Defendant or his father or the Second Defendant colluded with a bank official to fabricate documents creating a purported loan involving Fanavaran when none in fact existed. The Claimant contends that the First Defendant’s father is reputed to be the sixth richest man in Iran (alternatively one of the eight richest men there) and that he “has close ties to the judiciary”. In elaborating the latter point the Claimant says that the First Defendant’s father had close ties to Ayatollah Shahroudi and to Ayatollah Yazdi. The former headed the Iranian judiciary from 1999 to 2009 and was chairman of the Expediency Discernment Council (moderating disputes between the Iranian Parliament and the Guardian Council) from 2017 to 2018 but died in December 2018. The latter was head of the judiciary from 1989 to 1999 and head of the Assembly of Experts from 2015 to 2016. The Claimant does not himself explain or amplify the form the alleged ties took. However, Alexander Hogarth of his solicitors has provided a statement in which he says that he was informed that the First Defendant’s father was a “close personal friend” of the former ayatollah and a “close friend” of the latter. Neither the Claimant nor Mr. Hogarth identifies any instance where it is said that those ties impacted on litigation involving the First Defendant’s family.
    16. Mr. Hogarth says he contacted “a well-known and well-regarded global risk consultancy firm” with a view to obtaining a report on the risk that the Claimant would not obtain a fair trial in litigation against the First Defendant in Iran. The firm declined to provide such a report saying that to do so would expose those involved in unacceptable levels of risk including “questioning and detention by security forces”. The deciding factor in this was said to be the position and connexions of the First Defendant’s family. The instances given of this were the wealth of the First Defendant’s father and his friendship with the said two ayatollahs. Mr. Hogarth was told that the First Defendant’s father “had access to the very top levels of the Iranian judiciary” and that individuals “did not get to be in such senior positions in the judiciary without being very close to the Supreme Leader of Iran.” It went on to say that the “starting point” in respect of litigation by the Claimant against the First Defendant “had to be that the Claimant would not receive a fair trial”.
    17. The Defendants have countered Mr. Hogarth’s evidence with a statement from Mark Hastings of their solicitors. Mr. Hastings contacted four risk management/intelligence agencies. Three of them said that they would have no difficulty in providing a report on the prospects of a fair trial in Iran notwithstanding the alleged connexions of the First Defendant’s family. The fourth say that it would not be able to do so but that was because of its ownership being situated in the United States and the limitations on United States businesses having dealings with Iran.
    18. The First Defendant says that his father did know the late Ayatollah Shahroudi but that he does not believe that he knows Ayatollah Yazdi and that he himself certainly does not. The First Defendant accepts that his father is a wealthy man but describes him as being an apolitical businessman. The First Defendant denies that he or his family have influence over the Iranian judiciary referring in that regard to the Second Defendant’s defeat in litigation arising out of the MCCI Project as indicating the absence of such influence and as indicating that lawyers are prepared to act for those in dispute with the First Defendant’s family and its businesses. The First Defendant also points out that in 2010 he was subject to a travel ban arising out of litigation. That appears to have been a consequence of the procedure under Iranian law as explained by Dr. Hosseinabadi whereby a creditor can obtain a travel ban on a debtor.
    19. The First Defendant adds that the Claimant’s father, Ayatollah Mousavi-Khalkali, is himself a high ranking clergyman in a country where, he says, governmental power rests ultimately with high ranking figures in the religious establishment.
    20. The allegations about the standing of the First Defendant’s family are in the most general of terms. I accept that Mr. Hogarth was given the response which he records but it is again in general terms and must be seen in the light of the contrary indications given to Mr. Hastings. References to matters such as the wealth of the First Defendant’s father and his friendship with a senior judge who is now dead and to an alleged friendship with one who no longer has any official position can carry little weight. As already indicated there is no evidence that any attempt was made to use those connexions to influence the outcome of litigation let alone that any such attempt succeeded. The Claimant suggests that the First Defendant’s ability to do a deal in relation to the shares in the privatized bank was the result of the standing of his family but there is nothing of substance to establish that.
    21. I accept that the evidence shows that the First Defendant’s family is wealthy and well-connected. For that reason there will doubtless be many in Iran who would wish to have good relations with members of that family but the evidence does not take matters beyond that. I remind myself that in order to conclude that a party should not be required to litigate in an otherwise appropriate forum cogent evidence is needed showing a real risk that substantial justice will not be available to the litigant. The material in relation to the First Defendant’s family does not even come close to satisfying that requirement. In that regard to the extent that the Claimant is saying that the making of an allegation against officials of Bank Sepah will prevent him obtaining justice I find his argument misconceived. If it is his case that he is exposing wrongdoing by a bank official then one would expect a bank to welcome such exposure rather than to react adversely against the person bringing it to light.
    22. Accordingly, I will approach the questions of whether service out should be permitted and whether the court should exercise jurisdiction on the basis that the Claimant has failed to establish a real risk that he would not obtain substantial justice if these matters were to be litigated in Iran. It follows that if Iran is otherwise the natural or appropriate forum the Claimant’s contentions as to that alleged risk will not warrant service out nor the exercise of jurisdiction by this court.

The Claimant’s alleged Failure to make proper Disclosure and its Effect.

    1. A party seeking relief without notice has an obligation to make full and frank disclosure of all material facts including significant arguments potentially available to the other side against the relief sought. This duty is particularly acute where the relief sought is in any way exceptional or one which the court is to exercise caution in granting such as permitting service out of the jurisdiction or the grant of a freezing order. A party who fails to make such disclosure is at risk of the order being set aside and not renewed even if the relief would otherwise have been appropriate though, as explained at [23] above, the precise consequences will depend on the circumstances of the particular case.
    2. The Defendants say that there was material non-disclosure by the Claimant at the without notice hearings which should cause the court to decline to order service out of the jurisdiction even if that would otherwise have been warranted.
    3. Many of the alleged instances of non-disclosure relate to what is said to have been a failure to put before Judges Halliwell and Pearce potential arguments and/or matters which should have been identified as counter-arguments to the Claimant’s case. To a considerable extent this is a question of degree. It was not incumbent on the Claimant to draw the court’s attention to every single point which could be made for the Defendants by assiduous lawyers strenuously contesting the case and taking every potentially arguable point. The proper approach was explained by Slade LJ in The Electric Furnace Co v Selas Corporation of America (No 2) [1987] RPC 23 at 29 and by Toulson J in MRG (Japan) Ltd v Engelhard Metals Japan Ltd [2004] 1 Lloyds Rep 731 at [23] – [33]. A party making an application for service out does not have to “anticipate all the arguments, or all the points, which might be raised against his case”. That party does have to set out such potential defence arguments which are of sufficient weight that their omission could mislead the court by giving a false or incomplete picture or which might reasonably cause the judge to take a different approach to the application. That does not require disclosure of all matters going to the merits of the action nor of every possible defence open to the other party. All concerned have to keep in mind that the question at the stage of the decision as to service out is whether a case with a real prospect on the merits has been shown falling within a relevant gateway and the material to be put before the judge whether by way of supporting the application or of disclosing potentially material counter-arguments is to be focused on that. In that regard it is relevant to note the scale of the material which can be generated the more the parties turn to the details of a case. Here both sides were agreed that the hearing before me was not to be regarded as a mini-trial but nonetheless I was presented with over 2,000 pages of documents; five volumes of authorities; and over 100 pages of skeleton arguments. I heard argument for two full days having undertaken a day’s pre-reading. The Claimant’s obligation to make full and frank disclosure did not require him to engage in that level of detail at a without notice hearing but it did require him to ensure that the matter was presented fairly with the judges at those hearings being made aware of the significant potential arguments for the Defendants.
    4. In the light of that assessment I will not address every matter which the Defendants say amounted to a breach of the Claimant’s duty of full and frank disclosure. However, it is apparent that the potential counter-arguments could have been spelt out more fully than was in fact done and there are two respects in which I find that there was a significant failure of disclosure.
    5. The first is, as I explained at [32] – [35] above, the Claimant’s failure when describing his personal circumstances to mention his wife and property in Iran. Those were clearly material matters which should have been drawn to the court’s attention.
    6. The second is the Claimant’s failure to refer the court to the “Telegram” exchange of 30th and 31st March 2017. In that exchange the First Defendant referred to a payment of £200,000 having been sent to the Claimant and the Claimant responded saying that he had received that payment but that it was “less than half of outstanding balance. According to above details the balance is approx GBP 450K of which 200K been taken care of today.” I will address the effects of that exchange in more detail below but at this stage it is sufficient to say that it was clearly of relevance and at least potentially inconsistent with the Claimant’s case in that it appeared to show him saying that only £250,000 or thereabouts remained due at a time when he now says the First Defendant owed him considerably greater sums. The Claimant says that he did not refer Judges Halliwell or Pearce to this exchange because he regarded it as being part of without prejudice negotiations. I do not find that explanation persuasive because in his witness statement of 21st June 2019 the Claimant’s account of how the exchange came about is that it was in the context where the Claimant had requested a part payment of £500,000 (having done so because he believed that payment of that was more likely to be forthcoming than if he had demanded full payment of all sums due) and that the exchange related to the outstanding element of the part payment rather than of the total indebtedness. There is no reason why the exchange together with that explanation could not have been put forward at the earlier hearings and in my judgement it should have been.
    7. It follows that there was a failure on the part of the Claimant to make the full and frank disclosure of material matters which was incumbent upon him. I will explain below the potential relevance of that to the freezing order. In terms of whether there should be service out of the jurisdiction this failure is not such as to disentitle the Claimant to an order for service out if that is otherwise justified. This is because I am satisfied that in such circumstances the imposition of a costs sanction would adequately address the justice of the matter. The failure of disclosure does, however, have a further consequence. As I explained at [35] it raises a significant question mark over the reliability of the Claimant’s evidence and so requires care to be taken before placing weight on unsupported assertions by the Claimant.

Factors supporting and detracting from the Claims generally.

    1. There are a number of matters on which the Defendants relied to say that the claims generally lack credibility or substance and others on which the Claimant relied as supporting the credibility of those claims. It is appropriate to consider those and to assess whether it can be said that in general terms the Claimant has shown a case with a real prospect of success or one which lacks substance before turning to the detail of each claim.
    2. The Defendants point to the lack of documentary confirmation of the sundry agreements and the failure by the Claimant to press for payment. They say that agreements such as those asserted by the Claimant would have been expected to be recorded in writing. They also say that it is not credible that if the Claimant had been owed the sums alleged he would not have been pressing repeatedly for payment. In that regard they point out that the arbitration between the Second Defendant and Nokia concluded in May 2016 and that on the Claimant’s case the sums due under the Project Fees Contract were then due. Moreover, the Compromise Contract was made in August 2016 and provided for payment forthwith. Despite that the Claimant did not, the Defendants say, press for payment. Indeed the Defendants say matters go further than that because the Claimant was making payments to the First Defendant in the period after, on his case, payment was due to him from the First Defendant. The Claimant made payments of substantial sums to the First Defendant in January, February, and March 2018. It is common ground that these payments related to investments on the Tehran stock exchange and in cash which the Claimant had made on behalf of the First Defendant using funds provided by the latter. The Claimant says that he was acting honourably and was returning to the First Defendant the proceeds of investments which he had made on the latter’s behalf with the latter’s money. The Defendants say that this is unrealistic and that if, as the Claimant says is the case, the First Defendant owed the Claimant very substantial amounts at this time one would have expected the Claimant at least to have sought to set the money repayable to the First Defendant against the sums due to him from the First Defendant or to have accompanied the repayments with pressure for the First Defendant to discharge his indebtedness to the Claimant.
    3. The Defendants say that not only did the Claimant not chase for payment when such chasing would have been expected if he was owed the sums alleged but that when a claim was made it was not for the sums now alleged to be due. Thus on 14th August 2018 the Claimant sent an email seeking payment of $1.669m for the Project Bonus and $1.025m for services rendered in respect of the arbitration but making no mention of the Loan Agreement; the Project Management Fee; the Arbitration Contract; nor the Compromise Contract. The Claimant says that this is a misinterpretation of the email at least in relation to the Compromise Contract because that was the source of the figure of $1.025m which resulted from crediting the March 2017 payment of £200,000 against that liability.
    4. The Defendants place considerable emphasis on the Telegram exchange of 30th and 31st March 2017 quoted at [55] above. They say that this is a clear assertion by the Claimant that the only amount outstanding was £250,000 made at a time when on the Claimant’s current case he was owed more than fifteen times that amount. The Claimant says that the exchange at the end of March 2017 is to be seen in the light of messages sent earlier that month. He says that it was only in February or March 2017 that he began to doubt that the First Defendant would meet his obligations and having failed in attempts to speak to the First Defendant on the phone he sent a number of Telegram messages. On 2nd March 2017 he sent a Telegram saying “further to our telephone conversation please arrange payment of GBP500k into my account.” The Claimant says that he was owed more than £500,000 at that stage but that he was asking for a part payment because he believed that the First Defendant would be more likely to respond positively to this than if he had pressed for full payment. The tactic was, the Claimant says, successful to the extent that it resulted in a payment of £200,000 leaving £250,000 of the proposed part payment outstanding. The Telegram message makes no reference to the sum of £500,000 being a part payment. A further curious feature is that the Claimant says that there had been no telephone conversation in February or March 2017 but that his reference to such a conversation was to a discussion in late 2016 when he had reminded the First Defendant of his liabilities and of the Claimant’s need for funds.
    5. These are indeed significant factors particularly when seen in the light of the instances of non-disclosure identified above. Subject to the explanations from the Claimant to which I will turn shortly they indicate an inconsistency between the Claimant’s past actions and the approach which would have been expected as a matter of common sense and commercial reality if his current case were correct.
    6. The Defendants dealt at some length with two matters which did not in my judgement have the same significance. The Claimant sought and I have granted permission for amendment of the Particulars of Claim. One of the amendments was to paragraph 17 where the pleading in relation to the Loan Agreement was that “on 17th June 2006 the Claimant and the First Defendant entered into an oral agreement at the offices of the Second Defendant”. That has been amended to read “on 17th June 2006 the Claimant and MM [the Claimant’s brother] acting as the authorised agent of the First Defendant entered into an oral agreement at the offices of the Second Defendant”. This was combined with a further averment, at 11A, of subsequent confirmation in a conversation between the Claimant and the First Defendant and in a letter from the Claimant to the First Defendant. The Defendants say that this is a very material change of stance and undermines the Claimant’s credibility. This contention fails to take account of the context of the original Particulars of Claim. The statement of truth in relation to those was signed on 27th February 2019. The Claimant’s affidavit in support of his applications was sworn on the same date. In that affidavit the Claimant says, at [37(b)] that the agreement was made with his brother on 17th June 2006 at the Second Defendant’s office. It follows that although the pleading has been amended the substance of the Claimant’s case as to how the Loan Agreement was made has not changed.
    7. The Defendants also placed considerable emphasis on the evidence which had been put forward on behalf of the Second Defendant in the Nokia arbitration. The Claimant was involved in preparing that evidence and in giving instructions to the forensic accountants, Sterling Partners Ltd, who prepared the report on which the Second Defendant relied in relation to quantum. That report referred in some detail to the Claimant saying that he had “joined” the Second Defendant; that he had been appointed by the Second Defendant; and seeking to recover the “costs of employing” him. The Second Defendant sought to recover those costs in the arbitration identifying the Project Bonus and the Project Management Fee as being recoverable as costs incurred by the Second Defendant. The Defendants point to this as undermining the Claimant’s credibility on the ground that he knew that he was employed by the Second Defendant and that the Second Defendant was liable to pay him but in these proceedings has asserted (they say falsely) that the payment obligation was on the First Defendant. In my judgement this argument simply does not bear the weight which the Defendants sought to place on it. The question of the ultimate liability to pay the Claimant in the event of a failure to recover from others is different from that of the Second Defendant’s entitlement to recover from Nokia. Certainly at the stage of determining whether there is a real prospect of success an arrangement under which the First Defendant and the Claimant agreed that the latter would provide services to the Second Defendant with the former being liable as between the Claimant and the First Defendant to make payment is not so necessarily incompatible with the stance adopted in the arbitration as to indicate inconsistency or lack of credibility on the part of the Claimant. Conversely, the report by Sterling Partners supports the Claimant’s stance in two respects. It shows that the parties proceeded on the basis that the Claimant was entitled to the Project Management Fee and the Project Bonus notwithstanding the absence of a written agreement to that effect. Moreover, the report records payments of the Project Management Fee having been made to the Claimant by the First Defendant.
    8. There are a number of general factors on which the Claimant relies as indicating the credibility of his case. As I have just noted there is no dispute that the Claimant had an arrangement entitling him to the Project Management Fee and the Project Bonus even though there was no written agreement. The Claimant points to this as demonstrating that the nature of his relationship with the First Defendant was that agreements involving substantial sums of money were made orally. It is also clear that the First Defendant did make payment to the Claimant in respect at least of the Project Management Fee from a bank account in his name even though the Defendants say that the Claimant’s agreement was with the Second Defendant and that it was the latter who was liable to pay the Claimant.
    9. It is not disputed that the Claimant played a considerable rôle in the MCCI Project and in the preparation of the Second Defendant’s case for the Nokia arbitration. The Claimant says that as a matter of commercial reality he would have required payment for this. He also says that when account is taken of the Second Defendant’s financial position it is consistent with common sense and commercial reality that he would have required comfort as to payment and would not have entered an agreement solely with the Second Defendant. In that respect he points out that in 2006 following the breakdown of relations with Nokia the Second Defendant needed funds to continue with the MCCI Project and had to borrow $2.4m. The Second Defendant was in financial straits and so it is not surprising, the Claimant says, that he was not prepared to lend to it directly.
    10. I have already said that the Defendants rely on the March 2017 Telegram exchange as being inconsistent with the Claimant’s case. The Claimant, however, says that it also poses difficulties for the First Defendant. Despite it being the First Defendant’s case that nothing was due to the Claimant and that to the extent that payment was due it was due from the Second Defendant he had responded to the earlier Telegram not by denying liability but by making a payment of £200,000.
    11. The Claimant relies on a manuscript note made at a meeting between him and the First Defendant in the Royal Garden Hotel, London on 3rd January 2018. The note contains elements written by both the Claimant and the First Defendant. The note consists of columns of figures and short notes in Farsi. The meaning of the figures and the correct translation and interpretation of the notes are disputed. The Claimant says that the meeting was to clarify how much was due. He says that it records in particular the entitlement to the Project Bonus of $1.669m and the Compromise Contract sum of $1.5m together with payments made against the Loan Agreement and that the First Defendant accepted the amounts and his liability to pay. The note records payments which the First Defendant asked to be noted as having been made by him but which the Claimant did not accept as having been made. The First Defendant accepts that the meeting took place and that the note was made at the meeting. He also accepts that the Claimant was saying that the First Defendant owed him very substantial sums. The First Defendant says that he was surprised at this but that a reconciliation of the payments made was then undertaken (and he says recorded in the note) showing that the payments made had exceeded the liabilities. It follows that there is considerable dispute as to the ultimate outcome of the meeting and as to the proper interpretation of the note. It is, however, significant that it is not disputed that in January 2018 in a meeting with the First Defendant the Claimant was saying that substantial sums remained outstanding; that notes were made of the sums alleged; and that the notes include figures referable to at least the Compromise Contract and the Project Bonus.
    12. Looking at those matters in the round there is considerable scope for scepticism in respect of the Claimant’s contentions. There are a number of aspects where he will need to explain apparent inconsistencies between his current case and the documents and his earlier actions and failures to act. However, his claims are set out with particularity and are not inherently incredible. There are, moreover, matters which are consistent with his stance and not readily compatible with the position of the Defendants. The Claimant’s case is not in general terms a strong one and much will depend on the persuasiveness of his explanations of the apparent inconsistencies. It is not, however, a case which can in general terms be said to have no real prospect of success in the sense of being fanciful. It is in the light of that general assessment that I turn to the particular claims.

The Loan Agreement.

    1. This claim is made against the First Defendant alone. He denies that there was any such agreement. The Claimant’s case is not only that the Loan Agreement was between him and the First Defendant and providing for a fee of 8% but also that one half of the amount advanced was to be deposited with the Claimant as security. The First Defendant says that those terms are so contrary to commercial reality as to demonstrate the unlikelihood of the alleged agreement. He asks what would have been the point of borrowing a sum of $2.4m and paying a fee based on the full sum when only half of the amount would be available and the balance would be held as security. Those terms are indeed surprising. The Claimant points to the Second Defendant’s desperate need for funds at the time of the agreement. That is understandable and potentially credible as an explanation of the level of fee and also of the Claimant’s insistence that the repayment obligation be that of the First Defendant and not of the Second Defendant. However, it is not persuasive as an explanation of the asserted 50% deposit provision as a term of an agreement with the First Defendant (particularly in light of the assertions which are now being made as to the First Defendant’s wealth).
    2. I have already explained why I do not accept the Defendants’ contention that the Claimant has changed his case as to how the agreement came to be made.
    3. The First Defendant says that the documents show that there were dealings in the form of a series of Commandite contracts before the alleged date of the Loan Agreement. He says that the documents show an earlier loan having been made by Fanavaran and more significantly a repayment. The Claimant challenges the authenticity of the documents produced by the First Defendant. He accepts that they appear to show a loan in Fanavaran’s name involving that company and Bank Sepah but says that neither he nor Fanavaran had any knowledge of this and that the company was not a party to that arrangement. The Claimant says that there appears to have been the fabrication of documents to create a purported loan involving Fanavaran and suggests that there was collusion involving a manager of Bank Sepah. That is an allegation which will need considerable substantiation if it is to be accepted by a court. However, the question of the proper interpretation of the documents cannot be resolved at this stage and would require further evidence as to the operation of Commandite contracts.
    4. It is common ground that the Loan Agreement was made in Iran and the Claimant accepts that it was governed (or at least that it is likely to have been governed) by Iranian law. There is a significant issue as to whether the Loan Agreement is illegal and unenforceable under Iranian law. The Defendants’ expert says that it is illegal and unenforceable. The Claimant’s expert says that the question will turn on how the court characterises the arrangement. If it is characterised as a loan with the fee being regarded as interest then it would be illegal. Mr. Tavakoli accepts that there is a risk of the court characterising the agreement in that way but believes that it is the less likely alternative and that the agreement is more likely to be characterised in such a way as to be lawful and enforceable. That argument cannot be resolved at this stage. It is sufficient to note that there is a live issue as to the Loan Agreement’s lawfulness under Iranian law and that this will turn on the characterisation of the agreement.
    5. There are considerable difficulties confronting this claim but as already stated a number simply cannot be resolved at this stage. The claim is not fanciful and has a sufficiently real prospect of success to meet the first requirement for service out.
    6. The only potentially applicable gateway is that at paragraph 3.1(4A) of the Practice Direction namely that a claim falling within certain other gateways is brought against the same defendant and the claim in question “arises out of the same or closely connected facts”. The claims in respect of the Project Fees Contract and the Compromise Contract fall within the paragraph 3.1 (6) gateway and are against the same defendant. However, the claim in relation to the Loan Agreement does not arise out of the same or closely connected facts. The parties to the claims are the same but that clearly is not sufficient connexion. The Loan Agreement was to provide funding to enable the Second Defendant to continue with the MCCI Project and the Project Fees Contract related to payment for work done on that project with the Compromise Contract deriving from work done in respect of the arbitration arising out of that project but other than that there is no connexion between the claims. That connexion is limited and remote and the facts giving rise to the other claims and those giving rise to the Loan Agreement are neither the same nor closely connected. The fact that the purpose of the Loan Agreement was the funding of the project out of which the other claims derived does not mean that the Loan Agreement arises out of the same or closely connected facts as the other claims indeed it shows that they arise out of different facts. This is particularly so when regard is had to the difference in timing. The Loan Agreement was made in June 2006. The Project Fees Contract was made in February 2011 (albeit that it came out of the Project Management Fee and Project Bonus arrangements which had been made in 2006). The Compromise Contract was made in August 2016 and was a replacement for the Arbitration Contract made in 2011. Accordingly, the Loan Agreement claim does not fall within the paragraph 3.1 (4A) gateway.
    7. However, even if I had concluded that this claim fell within the gateway I would not have been satisfied that the courts of England and Wales were the appropriate forum for this claim. The agreement was made in Iran and is governed by Iranian law. There is a live issue as to its lawfulness and enforceability under that law and the answer to that question will depend on the way in which the dealings are characterised. That is a matter which the Iranian courts are much better placed to address than those in England. That is all the more so when account is taken of the fact that there will need to be consideration of the effect of a series of Commandite contracts and banking documents in Farsi and drawn up in accordance with Iranian banking practice. The documents are not only in Farsi but they use Iranian numbering and dating conventions. They are the kind of documents which if they had been in English and drawn up in accordance with English banking practices an English judge dealing with commercial cases would be able to assess at a glance and with which such a judge would be very familiar. That exercise will be markedly more difficult in relation to the actual documents here even with translation and explanation. Conversely one would expect an Iranian judge dealing with commercial cases to be well familiar with documents of this kind and able to assess their effect quickly. It is also apparent that the evidence of a number of witnesses is likely to be relevant. The case will turn not just on the evidence of the Claimant and the First Defendant and the former’s brother but will require evidence from those involved in the earlier dealings (particularly if the Claimant is to maintain that the documents on which the First Defendant relies are fabrications involving collusion on the part of bank staff). The relevant witnesses are based in Iran and are likely to be Farsi speakers.
    8. In those circumstances Iran is clearly the natural forum for the resolution of the dispute in relation to the Loan Agreement. I have already explained that the Claimant has not established any real risk that he will not receive substantial justice there and it follows that Iran is also the appropriate forum for that resolution.
    9. It follows that in respect of the claim relating to the Loan Agreement the order permitting service out of the jurisdiction is to be discharged and the court will not seek to exercise jurisdiction in respect of the claim.

The Project Fees Contract.

    1. The Claimant says that the Project Fees Contract was made orally between him and the First Defendant at a meeting in London in February 2011. The First Defendant denies that there was any such conversation and so no such agreement.
    2. The outcome of this claim will depend substantially on the competing evidence of the Claimant and the First Defendant in respect of oral dealings said to have taken place between the two of them. The conclusions in respect of the Project Management Fee and the Project Bonus will have some but only limited impact on that question. It appears to be accepted that the Claimant was entitled to the Project Management Fee and the Project Bonus although the exact amount outstanding under the former is not necessarily accepted. The real dispute in relation to them is whether payment was due only from the Second Defendant or whether the First Defendant was liable to the Claimant for these sums. The answer to that question will have some impact on the conclusion reached as to whether there was an agreement in February 2011 but will be by no means conclusive. Even if those agreements provided for the Claimant to be paid by the Second Defendant and even if this is the source of the contentions in the arbitration that the Second Defendant’s losses included the sums payable to the Claimant this would not preclude an agreement in 2011 under which the First Defendant accepted personal responsibility. Even less so would it preclude the alternative of an agreement with the Second Defendant under which payment was deferred on terms that additional sums were to be paid.
    3. The Defendants say that the claims are statute barred. That argument would appear to be correct in relation to claims based on the original entitlement to the Project Management Fee and the Project Bonus. However, it cannot operate as a defence to the claim under the Project Fees Contract. The Claimant’s case is that this was a new contract under which payment was to become due on the conclusion of the arbitration. The arbitration did not conclude until May 2016 and on the Claimant’s case payment did not become due until then. It follows that if the Claimant succeeds in establishing that the parties entered the Project Fees Contract limitation will not operate as a defence to his claim.
    4. The considerations set out at [57] – [68] above are relevant to whether a serious issue has been shown in respect of this claim and I will not repeat that analysis. It is my assessment that in relation to the Project Fees Contract there are significant difficulties in the Claimant’s path but his claims against both Defendants are claims which are not fanciful and which have real prospects of success.
    5. If the Project Fees Contract was made it was made in England. As such the claim would be within the gateway at paragraph 3.1 (6)(a) of the Practice Direction. I am satisfied that the Claimant has shown a good arguable case that the claim falls within that gateway. Indeed, this was not disputed by the Defendants. The Claimant says that the claim is also within the gateways at 3.1 (6)(c) and (7) as being governed by English law and because payment was to have been made in England. The Defendants do not accept that if there was any agreement it was governed by English law and say rather that it would have been subject to Iranian law. For reasons which will become apparent I need not determine that dispute.
    6. The next question, therefore, is whether the courts of England and Wales are the appropriate forum for this claim. Substantially the same considerations in that regard apply to this claim and to the claim in respect of the Compromise Agreement and I will address them both together.
    7. The Claimant accepts that the First Defendant resides primarily in Iran but says that he is regularly in the United Kingdom. The First Defendant says that the Claimant has overstated the extent of his activities here but it is clear that the First Defendant does spend at least some time in this country. The Second Defendant is an Iranian company and it is not suggested that it has any connexions with the United Kingdom.
    8. The Claimant and the First Defendant are both Farsi speakers but they are both fluent in English. The First Defendant has made lengthy and detailed witness statements in English and he spent some years attending university in the United States.
    9. Although resident in England the Claimant has a home and a wife in Iran; he has various interests there; has worked there and spends periods of time there.
    10. The Project Fees Contract and the Compromise Contract were made (if such agreements were made at all) in England. However, in my judgement that was really a matter of chance and was because the Claimant and the First Defendant happened to be here when the agreements were made. They could equally well have been made in Iran or by telephone when the Claimant and the First Defendant were in completely different countries. Thus the Claimant gives evidence about discussions in March 2017. At that time the Claimant was in Iran but the First Defendant was in England and so they spoke on the telephone with the Claimant phoning from Tehran and speaking to the First Defendant who was in London.
    11. The central issue in respect of both the Project Fees Contract and the Compromise Contract claims will be the dispute as to the dealings between the Claimant and the First Defendant personally. Were there meetings and discussions as alleged by the Claimant and if so what, if anything, was agreed? Those are questions of fact turning very largely on the assessment of the evidence of the Claimant and the First Defendant and of the conclusions reached as to the credibility of their accounts in the light of the surrounding circumstances and the documents. Those are matters which an Iranian court will be just as well placed to determine as an English one. Indeed in a number of respects an Iranian court will be better placed than an English one. The conversations between the Claimant and the First Defendant were in Farsi. That is a factor of very limited weight given the fluency of the Claimant and the First Defendant in English. However, rather more significant is the fact that very many of the relevant contemporaneous documents and of the subsequent relevant correspondence were in Farsi; in note form; and some (though by no means of all) of them used Iranian numbering and dating conventions. I have already explained the relevance of this in relation to the documents relevant to the Loan Agreement but it also applies here. Many of the Telegrams were in Farsi and in note or abbreviated form as was the note of 3rd January 2018. This is a very significant document which the Claimant says confirms his account and which the First Defendant says confirms that even on the Claimant’s figures there is no outstanding balance. It consists mainly of figures in the Western format but there are a number of short annotations in Farsi the meaning and significance of which are a matter of live dispute between the parties. An English court clearly could determine the questions of the making and terms of the Project Fees Contract and the Compromise Contract. It would expect to do so on the basis of agreed translations of those sundry documents though there is already an indication that the parties are at odds as to the correct translation of a number of the documents. The difficulties of translation and of interpreting the effect of what was said are compounded when the court is dealing with text messages, manuscript notes, and similar documents. Those are written in abbreviated form with context being of great importance in determining what an abbreviation meant or was intended to mean and with ample scope for argument about the true effect of a particular abbreviated note. It is already clear that there will be such dispute here. In such cases the outcome can depend on a judge having to make a determination between different nuances of meaning. That can involve a difficult exercise of judicial assessment even when the judge is a speaker of the language used. A judge working from a translation of notes (and in this case an English judge is unlikely to be familiar even with the script in which the notes are written) is in a markedly worse position to decide on a party’s contention as to what was meant by a particular abbreviation than a judge who is a speaker of the language in question and who can make an assessment for him or herself of the credibility of a particular account of what was meant by a note. The exercise could be conducted by an English judge but it is one which an Iranian judge would be able to conduct undoubtedly more quickly and probably with less risk of an incorrect conclusion. In my judgement this is a very significant factor in considering whether the courts of England and Wales are clearly the more appropriate forum.
    12. The evidence of witnesses other than the Claimant and the First Defendant will be of very limited relevance to the crucial questions in respect of the Project Fees Contract and the Compromise Contract. It is, however, possible that the evidence of other witnesses about the arrangements for the Project Management Fee and the Project Bonus will be of some relevance by way of background in relation to the dispute about the Project Fees Contract. Those witnesses would appear to be based in Iran and to be Farsi speakers. This is a factor albeit one of very modest weight in favour of the view that Iran rather than England is the appropriate forum.
    13. The Claimant says that both these agreements are subject to English law. I have already indicated that the Defendants disagree but for these purposes I will proceed on the footing that it is at least arguable that they are governed by English law. Does that mean that the courts of England and Wales are the appropriate forum? As noted at [20] whether the law applicable to an agreement will be a factor of great or of little importance in determining the appropriate forum will depend on the context of the case as a whole. In my judgement it is of little importance in this case that the agreements were governed by English law. The core dispute in respect of both the Project Fees Contract and the Compromise Contract is not the enforceability or interpretation of what was agreed but whether there were in fact agreements of the kind alleged by the Claimant. That will depend not on matters of English or Iranian law but on whether the evidence of the Claimant or of the First Defendant is preferred on the issues of which meetings and discussions there were and what was said at them. The decision in that regard will turn on the assessment of the witnesses and an Iranian court will be as well-placed to conduct that assessment as an English one.
    14. In the light of those factors I am not persuaded that the courts of England and Wales are the natural forum for resolution of this dispute. I have already explained my rejection of the Claimant’s argument that there is a real risk that he will not receive substantial justice in Iran. In those circumstances I will discharge the order permitting service out of the jurisdiction in respect of the Project Fees Claim (together with the claims to the extent that they are separately maintained in relation to the Project Management Fee and the Project Bonus) and will decline to exercise jurisdiction in respect of that claim.

The Compromise Agreement.

    1. The Claimant says that this agreement was made in a telephone conversation on 14th August 2016 and was an agreement whereby the First Defendant agreed to pay him $1.5m forthwith in settlement of his entitlement under the Arbitration Contract. The First Defendant denies that there was any such agreement
    2. Again the factors set out at [57] – [68] above are relevant to whether a serious issue has been shown. The Telegram of March 2017 is a particularly potent factor in the Defendants’ favour given that it appears to show the Claimant saying that only £250,000 remains outstanding of a total indebtedness of £450,00 at a time when on the Claimant’s current case the Defendants were in default of an agreement under which $1.5m should have been paid in August 2016. Conversely the note of 3rd January 2018 is relied upon by the Claimant as making reference to the figure of $1.5m and attaching the date of August 2016 to it. At the lowest that does support the contention that payment of such an amount had been agreed at that date.
    3. It follows that this is again a claim where success for the Claimant is very far indeed from being guaranteed but where the claim cannot be said to be fanciful and where there is a real prospect of success.
    4. As with the Project Fees Contract if an agreement was made it was made in England and so the claim falls within the gateway at paragraph 3.1 (6)(a) of the Practice Direction.
    5. I have set out at [83] – [90] above the factors which caused me to conclude that the courts of England and Wales are not clearly the appropriate forum for the determination of the dispute in relation to either the Project Fees Contract or the Compromise Contract. In the light of that and my rejection of the contention that there is a real risk that the Claimant will not obtain substantial justice in Iran I set aside the permission for service out of the jurisdiction in relation to the Compromise Contract (and the Arbitration Contract to the extent that it is maintained as a separate claim) and decline to exercise jurisdiction in respect of the same.

The Freezing Order.

    1. In the light of my conclusions as to service out and jurisdiction the freezing order falls away. I will briefly explain why even if I had concluded that this was a case where service out of the jurisdiction was appropriate I would not have maintained the freezing order in place.
    2. Such an order is to be made if an applicant shows that he has a good arguable case; that there is a real risk of the dissipation of assets such as to cause any judgment to be unsatisfied; and that it is just and convenient for the order to be made in the exercise of the court’s discretion.
    3. I have explained that the Claimant has shown that he has claims which have real prospects of success in the sense of being more than fanciful. However, there are very significant weaknesses in the Claimant’s contentions and it is relevant to note that success will depend on him being able to establish that his account of the dealings was correct notwithstanding the sundry factors identified above.
    4. Much of the material on which the Claimant relies to assert that there is a risk of the dissipation of assets by the First Defendant simply does not do so. Much of it amounts to no more than showing that the First Defendant is a wealthy businessman with assets in Iran and in other countries and I need not address that material in detail. At the hearing it was submitted that in the three month period from 5th December 2018 to 1st March 2019 (so beginning after the Claimant had in August 2018 intimated that he would commence court proceedings) the First Defendant had made payments in excess of £7m out of his account with the London branch of the Qatar National Bank while only receiving credits of just over £200,000 into that account. That was said to be indicative of action by way of dissipation of the First Defendant’s assets. In those terms and in the light of that timing it appeared to be a submission with a degree of force. It was discovered after the hearing that this submission was erroneous in that the payments and receipts related to the fifteen month period from December 2017 to March 2019. The error was acknowledged on behalf of the Claimant and the Defendants accepted, as I do, that it was an innocent mistake caused by a typing error whereby the Claimant’s witness statement had referred to the period as starting in 2018 rather than in 2017. In the light of that I reviewed the underlying bank statements. Although these do show expenditure out of the account very substantially exceeding receipts into it and although they do so show some large payments out the majority of the payments are in comparatively small sums spread throughout the period. In the light of the First Defendant’s admitted wealth that pattern of expenditure over that period is not indicative of the dissipation of assets as a response to the Claimant’s claim. The Claimant also relied as evidence of dissipation on payments made by the First Defendant to his sons in sums equating to $6.4m, $525,000, and $4.73m in March 2017, March 2018, and April 2018 respectively. The First Defendant’s position is that those payments were made during Eid and were gifts to his children in sums which were considerable but which are not surprising in light of his and his family’s wealth. Those payments must be seen in that context. They do give some support to the contention that the First Defendant was disposing of his assets in favour of his sons. However, they pre-date by some time the first intimation that court proceedings were being contemplated and cannot be seen as indicating the improper dissipation of assets in the face of the Claimant’s claim. Moreover, the contention that there is a risk of dissipation is materially weakened by the delay on the part of the Claimant. The First Defendant was informed of the Claimant’s intention to commence proceedings in August 2018 but the application for a freezing order was not made until the end of February 2019. If the Claimant truly believed that there was a risk of dissipation of the First Defendant’s assets he would have been expected to have applied either before informing the First Defendant that he intended to commence proceedings or at the latest soon thereafter.
    5. On balance I would have been satisfied that the Claimant had shown a good arguable case. I would not have been satisfied that the Claimant had shown a real risk of dissipation for these purposes. However, even if I had been satisfied of that this is not, in my judgement, a case where it would have been just and convenient to continue the freezing order and it is one where I would have declined to exercise my discretion in favour of making such an order. It is in that regard that the weakness of the Claimant’s case; the delay in seeking the freezing order; and the Claimant’s failures of disclosure would come most strongly into play. It would not have been appropriate to continue the freezing order in favour of a party who had failed to put matters frankly and fully before the court; who had delayed in seeking the relief; and whose case would depend on the acceptance at trial of explanations which do not at this stage appear convincing.

Conclusion.

  1. It follows that the order of Judge Halliwell permitting service out of the jurisdiction is to be set aside as is the freezing order. Subject to submissions as to the terms of the appropriate relief, the Defendants are entitled to orders in those terms together with a declaration that the court will not exercise such jurisdiction as it has and provision for the release of the sum lodged by the First Defendant at court.

Clarington Developments Ltd v HCC International Insurance [2019] IEHC 630 (06 September 2019)

THE HIGH COURT
[2019] IEHC 630
2014 No. 2536 P.
BETWEEN
CLARINGTON DEVELOPMENTS LIMITED
AND
HCC INTERNATIONAL INSURANCE COMPANY PLC
Judgment of Mr Justice Garrett Simons delivered on 6 September 2019.
Introduction
1.     This matter comes before the court by way of an application to dismiss the plaintiff’s
claim on the grounds that it discloses no reasonable cause of action. An order is sought,
in the alternative, staying the proceedings pursuant to the court’s inherent jurisdiction on
the grounds that the plaintiff’s case is bound to fail.
2.     The proceedings seek to enforce a bond which has been entered into between
(i) the plaintiff, (ii) the defendant and (iii) the contractor under a (separate) building
contract. The bond has been described variously as a “performance bond” or a
“contract guarantee bond”. In brief, the bond represents a form of guarantee
whereby the defendant, as surety, undertook to satisfy and discharge any damages
sustained by the plaintiff, as employer, in the event of default on the part of the
contractor in the performance of the building contract. This undertaking is subject
to a twelve-month time-limit reckonable by reference to the date of the issuing of a
certificate of practical completion.
3.     The plaintiff alleges that the construction works under the building contract were carried
out defectively by the contractor, and has issued these proceedings seeking to recover
damages from the defendant as surety under the bond.
4.     The plaintiff and defendant both agree that the damages must be quantified—to use a
neutral term—before liability to make payment under the bond arises. There is, however,
a fundamental disagreement between the parties as to the mechanism by which damages
are to be quantified. The plaintiff contends that damages can be assessed by the High
Court in plenary proceedings taken against the surety. Conversely, the defendant insists
that it is a condition precedent to the surety’s liability under the bond that damages must
first have been established and ascertained by way of conciliation or arbitration between
the employer and the contractor pursuant to the building contract. No such arbitration
has yet taken place. On this interpretation, it is not open to the plaintiff, as employer, to
have the damages quantified by the High Court, and the within proceedings are
accordingly bound to fail.
5.     The resolution of this disagreement between the parties turns on the correct
interpretation of the bond. In particular, it turns on the meaning to be attributed to the
phrase “the damages sustained […] as established and ascertained pursuant to and in
accordance with the provisions of” the building contract. It will be necessary to decide
whether this phrase requires that the damages can only be quantified—to use a neutral
term—by way of conciliation or arbitration under the building contract.
6.     Before embarking upon any consideration of the correct interpretation of the bond,
however, it will be necessary first to address the following jurisdictional issue. The
defendant, by issuing a motion to dismiss the proceedings, is asking the court to exercise
an exceptional jurisdiction. The court is being invited to dismiss the proceedings in limine
without a full hearing on oral evidence. This jurisdiction is to be sparingly exercised, and
should only be adopted when it is clear that the proceedings are bound to fail, rather than
where the plaintiff’s case is very weak or where it is sought to have an early
determination on some point of fact or law (per Clarke J. in Keohane v. Hynes
[2014] IESC 66, [6.6]).
7.     The application of these principles to the circumstances of the present case is discussed in
detail at page 7, paragraphs 22 et seq. below. The judgment will then turn to consider the
question of whether the proceedings are bound to fail.
Relevant facts
8.     There is no factual dispute between the parties as to the events leading up to the
institution of these proceedings. The parties have very helpfully prepared an agreed
factual chronology which was handed in to the court at the hearing.
9.     The plaintiff entered into a building contract with Sammon Contracting Ltd on 9
December 2011 (“the building contract”). For ease of exposition, I will refer to the plaintiff
as “the employer”, and to Sammon Contracting Ltd (and its successor in title, Sammon
Contracting Ireland Ltd) as “the contractor”, for the balance of this judgment. The
building contract related to the construction of a primary care centre and sports hall in
Newbridge, Co. Kildare (“the development”).
10.    The clause of the building contract of most immediate relevance to the dispute which has
since arisen in respect of the “performance bond” or “contract guarantee bond” (discussed
below) is clause 38. This clause sets out the dispute resolution mechanisms pursuant to
the building contract as follows.
“38.(a) If a dispute arises between the parties with regard to any of the provisions of
the Contract such dispute shall be referred to conciliation in accordance with the
Conciliation Procedures published by the Royal Institution of the Architects of
Ireland in agreement with the Society of Chartered Surveyors and the Construction
Industry Federation.
If a settlement of the dispute is not reached under the Conciliation Procedures either
party may refer the dispute to arbitration in accordance with Clause 38(b).
(b) Provided always that in case any dispute or difference shall arise between the
Employer or the Architect on his behalf and the Contractor, either during the
progress of the Works or after the determination of the employment of the
Contractor under the Contract or the abandonment or breach of the Contract, as to
the construction of the Contract or as to any matter or thing arising thereunder or
as to the withholding by the Architect of any certificate to which the Contractor may
claim to be entitled, then either party shall forthwith give to the other notice of
such dispute or difference and such dispute or difference shall be and is hereby
referred to the arbitration and final decision of such person as the parties hereunto
may agree to appoint as Arbitrator or, failing agreement, as may be nominated on
the request of either party by the President for the time being of the Royal Institute
of the Architects of Ireland after consultation with the President of the Construction
Industry Federation and the award of such Arbitrator shall be final and binding on
the parties. Such reference, except on Article 3 or Article 4 of the Articles of
Agreement or on the question of certificates, shall not be opened until after the
Practical Completion or alleged Practical Completion of the Works or determination
or alleged determination of the Contractors employment under this Contract, unless
with the written consent of the Employer or of the Architect on his behalf and the
Contractor. The Arbitrator shall have power to open up, review and revise any
opinion, decision, requisition or notice, and to determine all matters in dispute
which shall be submitted to him and of which notice shall have been given as
aforesaid in the same manner as if no such opinion, decision, requisition or notice
had been given. Every or any such reference shall be deemed to be a submission to
arbitration within the meaning of the Arbitration Act, 1954 (Number 26 of 1954), or
the Arbitration Act (Northern Ireland) 1957 (as the case may be) or any act
amending the same or either of them.”
11.    The employer and the contractor subsequently entered into a bond on 22
December 2011. The surety under the bond is HCC International Insurance Company plc,
i.e. the defendant to these proceedings. I propose to use the shorthand “the surety” to
refer to the defendant.
12.    The title page to the bond refers to it as a “performance bond”, whereas the text refers to
it as a “contract guarantee bond”. It does not appear that anything turns on this
distinction. The rights and obligations of the parties must be determined by reference to
the terms of the bond and any label used is not conclusive. I propose to refer to this bond
simply as “the bond”.
13.    The opening parts of the bond identify the parties, and recite the building contract. The
operative parts of the bond are then set out in numbered clauses. Insofar as relevant to
these proceedings, the key clauses are as follows.
“1. The Contractor and the Surety are hereby jointly and severally bound to the
Employer in the sum of €1,200,000.00 (one million two hundred thousand euro)
[hereinafter called ‘the Bond Amount’] provided that if the Contractor shall subject
to Clause 3 hereof duly perform and observe all the terms, conditions, stipulations
and provisions contained or referred to in the said Contract which are to be
performed or observed by the Contractor or if on default by the Contractor the
Surety shall satisfy and discharge the damages sustained by the Employer as
established and ascertained pursuant to and in accordance with the provisions of
the said Contract and taking into account all sums due or to become due to the
Contractor thereunder and all retention monies held thereby up to the amount of
this Bond then this agreement shall be of no effect but otherwise shall remain in full
force and effect. The Bond Amount shall automatically reduce by half upon the
issue of the Certificate of Practical Completion of the said Works.
[…]
3.     The Contractor and the Surety shall be released from their respective liabilities
under this bond twelve months after the date of Practical Completion of the said
Works as certified by the Architect/Engineer/Supervising Officer appointed under
the contract and then this Bond is automatically cancelled whether returned to the
Surety or not.
4.     If any suits at law or proceedings in equity are brought against the Surety to
recover any claim hereunder the same must be instituted not later than Expiry in
Clause 3 above.
5.     This Bond is executed by the Surety upon the following express conditions, which
shall be the conditions precedent to the right of the Employer to recover hereunder:
A. The Surety shall be notified in writing by registered or hand delivered letter
to its registered branch office of any serious breach of or default in any of the
terms and conditions contained in the said Contract and on the part of the
Contractor to be performed and observed as soon as possible but in any
event within three months after such breach or such default shall have come
to the knowledge of the Employer or his representative or representatives
having supervision of the said Contract and the Employer shall in so far as
may be lawful permit the Surety to perform the stipulations and provisions of
the said Contract which the Contractor shall have failed to perform and
observe.
B. In the event of the Surety being called upon to satisfy and discharge
damages sustained by the Employer, the Employer shall permit the Surety to
nominate a completion contractor to perform the stipulations and provisions
of the said Contract which the contractor shall have failed to perform and
observe provided the proposed completion contractor is acceptable to the
Employer; such acceptance shall not be withheld unreasonably.
C. No liability shall attach to the Surety under this Bond in respect of default by
the Contractor or breach of the conditions and terms of the said Contract
where such default or breach was directly or indirectly due to or arising out of
War, Invasion, Act of Foreign Enemy, Hostilities (whether War be declared or
not), Civil War, Rebellion, Revolution, Riot, Civil Commotion or Military or
Usurped Power.”
14.    Works pursuant to the building contract commenced on 4 January 2012. Thereafter, in
April 2012, Sammon Contracting Ltd assigned all obligations and interests in the building
contract to Sammon Contracting Ireland Ltd. For ease of exposition, the shorthand “the
contractor” is intended to refer to both of these companies.
15.    The works under the building contract were certified by the employer’s architect as
practically complete on 2 March 2013. The term “practical completion” is defined as
follows at clause 31 of the building contract.
“When in the opinion of the Architect the Works are Practically Complete he shall
forthwith issue a certificate to that effect and Practical Completion of the Works
shall be deemed for all the purposes of this Contract to have taken place on the day
named in such certificate.
‘Practical Completion’ means that the Works have been carried to such a stage that they
can be taken over and used by the Employer for their intended purpose and that
any items of work or supply then outstanding or any defects then patent are of a
trivial nature only and are such that their completion or rectification does not
interfere with or interrupted such use.”
16.    As appears from the final sentence of clause 1 of the bond (see paragraph 13 above), the
bond amount automatically reduced by half upon the issue of the certificate of practical
completion. The amount of the bond is now €600,000.
17.    The employer issued the within proceedings on 18 February 2014. In brief, these
proceedings seek to enforce the performance bond as against the surety. Crucially, the
proceedings seek to have the High Court quantify the damages payable. One of the reliefs
sought is for accounts and inquiries to “establish” the sums due to the employer by the
surety. The within proceedings were not served until 12 February 2015, i.e. almost
twelve months after the date of the institution of the proceedings.
18.    On the same date as the within proceedings were issued (18 February 2014), the
employer also issued proceedings against Sammon Contracting Ltd and Sammon
Contracting Ireland Ltd (“the contractor”). In brief, those proceedings seek an order
directing the contractor to refer the “proceedings” to arbitration. Damages for breach of
contract and negligence are sought in the alternative.
19.    As appears, both sets of proceedings were issued within twelve months of the date of the
certificate of practical completion. This may be relevant for the purposes of clause 3 and
clause 4 of the bond.
20.    SCLAD Construction Ltd (formerly Sammon Contracting Ltd) was placed into liquidation
by order of the High Court on 1 December 2017. Sammon Contracting Ireland Ltd was
placed into liquidation by order of the High Court on 5 June 2018.
21.    Finally, it should be recorded that for the purposes of determining the application to
dismiss the proceedings, it will be assumed that were these proceedings to go to trial, the
employer would be able to establish that the construction works had been carried out
defectively.
Jurisdiction to strike out or dismiss proceedings
22.    Before embarking upon any consideration of the correct interpretation of the bond, it is
necessary first to identify the limitations attendant on the court’s jurisdiction to strike out
or to dismiss proceedings. The jurisdiction is intended to protect against an abuse of
process. The principal question for the court in determining such an application is whether
the institution of the proceedings represents an abuse of process. It is not enough that
the court might be satisfied that the case is a very weak one and is likely to be
successfully defended. Rather, the court must be satisfied that the proceedings disclose
no cause of action and/or are bound to fail.
23.    As discussed presently, the case law suggests that a more exacting approach may be
appropriate in proceedings the outcome of which turns on the correct interpretation of
contractual documentation and where there is no dispute but that the documentation sets
out the entire of the agreement between the parties. Before turning to consider that case
law, it might be helpful to recall the general principles governing the jurisdiction to strike
out or to dismiss proceedings.
24.    For the reasons explained by the Supreme Court in Lopes v. Minister for Justice Equality
and Law Reform [2014] IESC 21; [2014] 2 IR 301, [16] to [18], it is important to
distinguish between the jurisdiction to strike out and/or to dismiss proceedings pursuant
to (i) Order 19 of the Rules of the Superior Courts, and
(ii) the court’s inherent jurisdiction. An application under the Rules of the Superior
Courts is designed to deal with circumstances where the case as pleaded does not
disclose any cause of action. For this exercise, the court must assume that the
facts—however unlikely that they might appear—are as asserted in the pleadings.
25.    By contrast, in an application pursuant to the court’s inherent jurisdiction, the court may
to a very limited extent consider the underlying merits of the case. If it can be established
that there is no credible basis for suggesting that the facts are as asserted, and that the
proceedings are bound to fail on the merits, then the proceedings can be dismissed as an
abuse of process. In order to defeat a suggestion that a claim is bound to fail on the facts,
all that a plaintiff needs to do is to put forward a credible basis for suggesting that it may,
at trial, be possible to establish the facts which are asserted and which are necessary for
success in the proceedings.
26.    Whereas it is correct to say that—in the context of an application made pursuant to the
court’s inherent jurisdiction—it is open to the court to consider the credibility of the
plaintiff’s case to a limited extent, the court is not entitled to determine disputed
questions of fact. The limitation on the assessment of credibility has been explained as
follows by the Supreme Court in Lopes v. Minister for Justice Equality and Law Reform
[2014] IESC 21; [2014] 2 IR 301.
“[19] It is also important to remember that a plaintiff does not necessarily have to prove
by evidence all of the facts asserted in resisting an application to dismiss as being
bound to fail. It must be recalled that a plaintiff, like any other party, has available
the range of procedures provided for in the RSC to assist in establishing the facts at
trial. Documents can be discovered both from opposing parties and, indeed, third
parties. Interrogatories can be delivered. Witnesses can be subpoenaed and can, if
appropriate, be required to bring their documents with them. Other devices may be
available in particular types of cases. In order to defeat a suggestion that a claim is
bound to fail on the facts, all that a plaintiff needs to do is to put forward a credible
basis for suggesting that it may, at trial, be possible to establish the facts which are
asserted and which are necessary for success in the proceedings. Any assessment
of the credibility of such an assertion has to be made in the context of the
undoubted fact, as pointed out by McCarthy J. in Sun Fat Chan v. Osseous Ltd.
[1992] I.R. 425, at p. 428, that experience has shown that cases which go to trial
often take unusual turns on the facts which might not have been anticipated in
advance.”
27.    The judgment in Lopes went on then to address the position of what might be described
as “document cases” as follows.
“[20] At the same time, it is clear that certain types of cases are more amenable to an
assessment of the facts at an early stage than others. Where the case is wholly, or
significantly, dependent on documents, then it may be much easier for a court to
reach an assessment as to whether the proceedings are bound to fail within the
confines of a motion to dismiss.* In that context, it is important to keep in mind
the distinction, which I sought to analyse in Salthill Properties Ltd. v. Royal Bank of
Scotland plc [2009] IEHC 207, (Unreported, High Court, Clarke J., 30th April,
2009), between cases which are dependent in themselves on documents and cases
where documents may form an important part of the evidence but where there is
likely to be significant and potentially influential other evidence as well.”
*Emphasis (italics) added.
28.    The relevant passages from the judgment in Salthill Properties Ltd v. Royal Bank of
Scotland plc [2009] IEHC 207, cited in Lopes, include the following.
“3.9 So far as the general question of whether proceedings are, on their merits, bound
to fail it seems to me that it is necessary to address the question which arose for
debate between the parties as to the approach which the court should take to the
evidence as presented on an application to dismiss such as that with which I am
involved. It has often been noted that an application to dismiss as being bound to
fail may be of particular relevance to cases involving the existence or construction
of documents. For example, in claims based on written agreements it may be
possible for a party to persuade the court that no reasonable construction of the
document concerned could give rise to a claim on the part of the plaintiff, even if all
of the facts alleged by the plaintiff were established.* Likewise, a defendant in a
specific performance action may be able to persuade the court that the only
document put forward as being a note or memorandum to satisfy the Statute of
Frauds, could not possibly meet the established criteria for such a document. More
difficult issues are likely to arise in an application to dismiss when there is at least
some potential for material factual dispute between the parties capable of
resolution only on oral evidence. At this end of the spectrum, it is difficult to
envisage circumstances where an application to dismiss as bound to fail could
succeed. In between are a range of cases which may be supported to a greater or
lesser extent by documentation.
3.10 However, it is important to emphasise the different role which documents may play
in proceedings. In cases, such as the examples which I have given earlier,
involving contracts and the like, the document itself may govern the legal relations
between the parties so that the court can consider the terms of the document on its
face and may be able to come to a clear view as to the legal consequences flowing
from the parties having governed their relations by the document concerned.* ”
*Emphasis (italics) added.
29.    The Supreme Court, per Clarke J., subsequently elaborated upon this theme in Keohane
v. Hynes [2014] IESC 66 as follows.
“6.8 In summary, it is important to emphasise the significant limitations on the extent to
which a court can engage with the facts in an application to dismiss on the grounds
of being bound to fail. In cases where the legal rights and obligations of the parties
are governed by documents, then the court can examine those documents to
consider whether the plaintiff’s claim is bound to fail and may, in that regard, have
to ask the question as to whether there is any evidence outside of that
documentary record which could realistically have a bearing on the rights and
obligations concerned. Second, where the only evidence which could be put forward
concerning essential factual allegations made on behalf of the plaintiff is
documentary evidence, then the court can examine that evidence to see if there is
any basis on which it could provide support for a plaintiff’s allegations. Third, and
finally, a court may examine an allegation to determine whether it is a mere
assertion and, if so, to consider whether any credible basis has been put forward
for suggesting that evidence might be available at trial to substantiate it. While
there may be other unusual circumstances in which it would be appropriate for the
court to engage with the facts, it does not seem to me that the proper
determination of an application to dismiss as being bound to fail can, ordinarily, go
beyond the limited form of factual analysis to which I have referred.
6.10 It is an abuse of process to bring a claim based on a breach of rights or failure to
observe obligations where those rights and obligations are defined by documents
and where there is no reasonable basis for suggesting that the relevant documents
could establish the rights and obligations asserted.* Likewise, it is an abuse of
process to maintain a claim based on facts which can only be established by a
documentary record and where that record could not sustain any necessary part of
the factual assertions which underlie the case. Finally, it is an abuse of process to
maintain a claim based on a factual assertion in circumstances where there is no
evidence available for that assertion and, importantly, where there is no reasonable
basis for believing that evidence could become available at the trial to substantiate
the relevant assertion. However, the bringing of a claim based on a factual
assertion for which there is or may be evidence (even if the defendant can point to
many reasons why it might be argued that a successful challenge could be mounted
to the credibility of the evidence concerned) is not an abuse of process. It is for
that reason that a court cannot properly engage with the credibility of evidence on
a motion to dismiss as being bound to fail and it is for that reason that the very
significant limitations which I have sought to identify exist in relation to the extent
to which a court can properly engage with the facts on such an application.”
*Emphasis (italics) added.
30.    An example of the practical application of these principles to a case involving a claim
pursuant to a bond—on the facts, a “HomeBond” guarantee issued in respect of a new
dwelling house—is provided by Wilkinson v. Ardbrook Homes Ltd [2016] IEHC 434. The
High Court (Baker J.) dismissed the proceedings pursuant to the court’s inherent
jurisdiction in circumstances where a claim in respect of any negligence in inspecting or
failing to inspect a dwelling the subject matter of the warranty had been expressly
excluded under the bond.
“46. For all of the reasons stated above, because this is a claim which is founded in a
contract of warranty contained in a written document, and because that contract
expressly excluded liability for the claim as pleaded, and because no special
relationship is claimed to have come into existence, either as a result of a
representation or the assumption of additional liabilities by the third defendant, I
propose in the exercise of my inherent jurisdiction to strike out the claim of the
plaintiffs against HomeBond, the third named defendant in the proceedings, on the
grounds that the claim is bound to fail.”
Findings of the court on jurisdictional issue
31.    It appears from the case law discussed above that the approach to be taken to an
application to strike out or to dismiss proceedings will differ slightly in circumstances
where the underlying proceedings turn on the interpretation of (agreed) contractual
documents. More specifically, the court may be able to resolve straightforward issues of
contractual interpretation on a summary application without the risk of injustice to the
parties. This is subject to a number of provisos as follows. First, there must be no factual
dispute as to the validity of the contractual documents. Secondly, it must be accepted
that the contractual documents represent the entire agreement between the parties. If,
for example, one of the parties alleges that the interpretation of the contract must be
informed by oral representations or that a collateral contract exists between the parties,
then these are issues which can normally only be properly resolved by a plenary hearing
on oral evidence. Thirdly, the contractual documentation must be capable of
interpretation on its own terms, i.e. without resort to extrinsic evidence. Finally, the legal
issues must be straightforward.
32.    In cases where these provisos are fulfilled, it may be legitimate for the court to consider
the terms of the contractual documentation. If the court concludes that no reasonable
interpretation of the contractual documentation could give rise to a claim on the part of a
plaintiff—even assuming that all of the facts alleged by the plaintiff would be established
at trial—then the proceedings can be dismissed as an abuse of process.
33.    Counsel on behalf of the employer in the present case does not demur from the
proposition that this case can, in principle, be approached for the purposes of the
application to strike out or to dismiss the proceedings as one involving primarily the
interpretation of a contract. (See paragraph 10 of the employer’s written legal
submissions). Counsel goes on, however, to stress that the issue of contractual
interpretation in the present case is not necessarily simple and straightforward. In
particular, it is submitted that the arguments advanced on behalf of the surety are, of
necessity, of “considerable intricacy” and fall well short of the standard of conviction
required to have an action dismissed on a summary basis.
34.    In this regard, counsel has placed emphasis on the very recent judgment of the Supreme
Court in Jeffrey v. Minister for Justice Equality and Defence [2019] IESC 27. The Supreme
Court held that proceedings should not be dismissed pursuant to the court’s inherent
jurisdiction in circumstances where the legal issues were complex.
“7.4 It is now well settled that, in the context of a summary judgment motion in which a
plaintiff seeks judgment in summary proceedings, a court can resolve
straightforward issues of law or the interpretation of documents, where there is no
real risk that attempting to resolve those issues within the limited confines of a
summary judgment motion might lead to an injustice. By analogy, I would not rule
out the possibility, without so deciding, that it may be possible to resolve a simple
and straightforward issue of law within the confines of a Barry v. Buckley
application. However, even if that should be possible, it could only be appropriate
where the issue was very straightforward and where there was no risk of injustice
by adopting that course of action. […] However, a Barry v. Buckley application
cannot be used to dismiss a case simply because it might be said that there is a
strong defence. Rather, such applications can only be used in cases where it is clear
that the claim is bound to fail. In my view, this case is not such a case. […]”
35.    The facts of the case were unusual. Mr Jeffrey had been prosecuted in the District Court
for a road traffic offence. The presenting guard had erroneously informed the District
Court judge that the accused had a series of previous convictions, and purported to
outline these offences to the judge. This was then reported in the local media. In fact, the
offences outlined were referable to an entirely different person who happened to have the
same surname as Mr Jeffrey. Mr Jeffrey subsequently instituted High Court proceedings
against the State seeking damages for negligence, breach of duty and negligent
statement. (An action for defamation could not have succeeded in circumstances where
absolute privilege attaches to court proceedings under the Defamation Act 2009).
36.    The State respondents sought to have the proceedings dismissed on the basis
(i) that a person cannot bring an action for damage to reputation other than through
an action for defamation; (ii) that the presenting guard did not owe a duty of care
to the accused; and (iii) that the conduct of court proceedings attracts immunity.
The Supreme Court refused to dismiss the proceedings in circumstances where the
legal issues were complex and it was not clear that Mr Jeffrey’s claim was bound to
fail.
37.    Having carefully considered the terms of the Supreme Court judgment in Jeffrey, I am
satisfied that the circumstances of the present case are distinguishable. The legal issues
raised in the within proceedings can properly be characterised as simple and
straightforward. The case largely turns on the interpretation of a single provision of a
contract. As explained at paragraphs 53 et seq., I am satisfied that the interpretation of
the bond in the present case is obvious. By contrast, the issues arising in Jeffrey
presented difficult questions of law and public policy. Such issues could not properly be
determined on an application to strike out proceedings in limine.
38.    In summary, therefore, I am satisfied that the present case gives rise to a straightforward
issue of contractual interpretation which admits of an obvious answer. This issue can
safely be resolved on an application to dismiss the proceedings without any risk of
injustice to the parties. There is no factual dispute which requires to be determined. The
parties are both agreed that the bond represents the entire agreement between the
parties. The outcome of the proceedings is not contingent on oral evidence, cross-
examination or the discovery of documents.
Submissions on interpretation of bond
39.    The employer and the surety both agree that the bond is a “conditional” bond as opposed
to an “on demand” bond. Both parties also agree that the damages must be quantified—
to use a neutral term—before liability to make payment under the bond arises. There is,
however, a fundamental disagreement between the parties as to the mechanism by which
damages are to be quantified. The resolution of this dispute turns primarily on the
interpretation of clause 1 of the performance bond.
40.    The rival interpretations of the parties can be summarised as follows. The surety contends
that the quantum of damages sustained must be established and ascertained pursuant to
the dispute resolution mechanisms provided for under the building contract. On this
interpretation, the damages can only be quantified in accordance with clause 38 of the
building contract. This clause has been set out in full at paragraph 10 above. As appears,
any dispute between the employer and the contractor is to be referred to conciliation,
and, if this is unsuccessful, to arbitration. It is submitted that the dispute resolution
mechanisms are exhaustive, and that it is not open to an employer to by-pass these
procedures, and, instead, to invite the High Court to quantify the damages in plenary
proceedings against the surety.
41.    Conversely, the employer contends that clause 1 of the performance bond simply requires
that the quantum of damages be established and ascertained in accordance with what
counsel characterises as the “substantive provisions” of the building contract. The High
Court can quantify the damages but in doing so must apply the “substantive provisions”
of the building contract. The liability of the surety is to be ascertained by reference to the
rights and obligations of the employer and the contractor under the “substantive
provisions” of their contract, i.e. the building contract. It is submitted that one practical
effect of this is that the surety can avail of any defence under the building contract upon
which the contractor could have relied. Similarly, it is said that the provisions of the
building contract in respect of any claim for set-off could also be relied upon.
42.    Counsel cites certain passages from O’Donovan and Philips, The Modern Contract of
Guarantee (3rd edition, English edition, 2016, Courtney and Philips) in support of an
argument that the liability of a surety can be determined in separate proceedings and that
a surety is not bound by an arbitration award made pursuant to a building contract. I will
return to consider this submission at paragraph 64 below.
43.    Counsel on behalf of the employer also argued that to interpret clause 1 as requiring
damages to be established pursuant to conciliation or arbitration under the building
contract would result in an unrealistic timeframe. The combined effect of clause 3 and
clause 4 of the bond appears to be that any proceedings against the surety must be
instituted within twelve months of the date of certification of practical completion. This
would mean that in order to avail of the bond (as interpreted by the surety), any defects
in the building works would have had to emerge in sufficient time to allow for a
conciliation or arbitration to be completed within twelve months of certification.
44.    Counsel placed some reliance on clause 5 of the bond. This clause has been set out in full
at paragraph 13 above. As appears, same sets out a number of conditions which are
stated to be conditions precedent to the right of the employer to recover under the bond.
Counsel observes that there is no express requirement under clause 5 that damages be
established and ascertained by way of conciliation or arbitration, and seeks to infer from
this that same is not a condition precedent to recovery under the bond. I will return to
this argument at paragraph 71 below.
45.    Despite extensive research by both Mr O’Doherty and Mr Cole, neither side was able to
identify any case law directly of assistance on the interpretation of the phrase
“established and ascertained pursuant to and in accordance with the provisions of” the
contract. The judgment closest in point is that in Paddington Churches Housing
Association v. Technical and General Guarantee Co Ltd (1999) 65 Con LR 132. The case
concerned a performance bond entered into between a main contractor, a sub-contractor
and a surety. The wording of the performance bond required the surety, in the event of a
valid determination of the building contract, to satisfy and discharge the net established
and ascertained damages sustained by the main contractor. The phrase “net established
and ascertained damages” has some limited resonance with the wording at issue in the
present case. Of course, the additional wording to the effect that the damages must be
established and ascertained “pursuant to and in accordance with the provisions of” the
building contract was absent.
46.    It appears from the reported judgment in Paddington Churches Housing Association that
the main contractor was under the mistaken impression that the bond would have allowed
for an interim payment to help the main contractor to finance the contract as it
progressed. The court observed that if this is what had been intended, then the main
contractor should have obtained a specific insolvency bond or an “on demand” bond.
47.    The High Court of England and Wales held that, on its correct interpretation, the
performance bond imposed no liability to make a payment on account. Rather, the liability
of the surety did not arise until the net liability had been ascertained. The High Court
indicated that the damages were to be calculated by reference to the code of the contract.
In particular, the employer’s statement envisaged under the contract was required before
the damages could be said to be ascertained.
“The defendants are liable as surety only, and it seems to me to be plain on the face of
the bond that the defendants are liable to pay the amount (if any) shown to be due
to the plaintiffs on a statement made by the employer in accordance with the terms
of the contract. That contract was imported into the bond by the recitals. Clause 27
of that contract is referred to specifically in the conditions. Both in case of default
and in case of determination on insolvency (or indeed in any case where it were
relevant, for corruption) the damages are calculated by reference to the code of the
contract, which are in any event unlikely to be different from the damages at
general common law. The accuracy of the employer’s statement might be
challenged in the courts, but the employer’s statement is required before the
damages can be said to be ascertained and there is no liability on the defendants
until those damages are ascertained.* The plaintiffs submit that the employer’s
statement is only a mechanism and not a condition precedent to payment, but no
other mechanism for ascertaining the net damages is put forward or relied on by
the plaintiffs.”
*Emphasis (italics) added.
48.    The judgment does not address the precise issue in dispute in the present case.
It is, however, suggestive of the fact that liability must be ascertained by reference to
the mechanism provided for under the building contract. To this extent, it lends some
support to the surety’s arguments.
49.    Both sides also referred to the judgment of the House of Lords in Trafalgar House
Construction (Regions) Ltd v. General Surety and Guarantee Co Ltd [1995] 3 All E.R. 737.
This judgment is of little assistance in that the principal issue in dispute there turned on
the distinction between an “on demand” bond and a performance bond. It seems that the
Court of Appeal had—mistakenly— held that a mere demand in good faith was sufficient
to obtain payment under the bond. The House of Lords held that proof of damage and not
mere assertion thereof was required before liability under such a bond arises. It was not
necessary for the purpose of that finding for the House of Lords to consider the separate
question as to the precise basis on which damages are to be proved (or established). The
parties in the present case are both agreed that the bond is a “conditional” as opposed to
an “on demand” bond.
50.    Finally, Mr Cole did turn up one case from England and Wales, Russell v. Stone [2019]
EWHC 831 (TCC) which concerned contractual language similar to that in issue in the
present case. The proceedings involved a claim for negligence against a firm of quantity
surveyors. One of the complaints made was that the quantity surveyors had been
negligent in failing to obtain a performance bond. The draft form of bond included the
following wording.
“[The Guarantor] … shall in the event of a proven breach of the Contract by the
Contractor (which definition shall include insolvency or other events listed in
Contract Clauses) … satisfy and discharge the damages costs and expenses
sustained by the Employer as established and ascertained pursuant to and in
accordance with the provisions of the Contract.”
51.    The High Court of England and Wales indicated (at paragraph 203) that the effect of the
bond, had it been procured, would have been that the beneficiary would have to prove a
default on the underlying contract and prove the loss and damage suffered as a result of
that default.
52.    Reference to this judgment does not greatly advance matters in that it leaves open the
very issue which is in dispute in these proceedings, namely the identification of the
mechanism by which damages must be established and ascertained.
Findings of the court on interpretation of the bond
53.    The compass of the dispute in the present case is very narrow. It turns on the
interpretation of clause 1 of the bond. More specifically, the dispute turns on whether the
use of the phrase “established and ascertained pursuant to and in accordance with the
provisions of the” building contract (i) requires that the quantification of damages be
carried out pursuant to the dispute resolution mechanisms provided under the building
contract, or (ii) merely requires that the rules for reckoning damages provided under the
building contract are to be applied but that the quantification can be carried out by the
High Court.
54.    The surety, by having elected to apply to dismiss the proceedings in limine, has
undertaken the heavy burden of persuading this court that its (the surety’s) interpretation
of the bond is so obviously the correct one that the employer cannot succeed at full
hearing. For the reasons which follow, I am satisfied that the correct interpretation of the
bond is obvious, and is capable of being fairly and properly determined on an application
to dismiss the proceedings.
55.    It may be useful to commence this analysis by recalling the precise terms of clause 1 of
the bond.
“1. The Contractor and the Surety are hereby jointly and severally bound to the
Employer in the sum of €1,200,000.00 (one million two hundred thousand euro)
[hereinafter called ‘the Bond Amount’] provided that if the Contractor shall subject
to Clause 3 hereof duly perform and observe all the terms, conditions, stipulations
and provisions contained or referred to in the said Contract which are to be
performed or observed by the Contractor or if on default by the Contractor the
Surety shall satisfy and discharge the damages sustained by the Employer as
established and ascertained pursuant to and in accordance with the provisions of
the said Contract and taking into account all sums due or to become due to the
Contractor thereunder and all retention monies held thereby up to the amount of
this Bond then this agreement shall be of no effect but otherwise shall remain in full
force and effect. The Bond Amount shall automatically reduce by half upon the
issue of the Certificate of Practical Completion of the said Works.”
56.    As appears, the contractor and the surety have undertaken a joint and several liability to
the employer in what is now an amount of €600,000. This liability remains in full force
and effect unless and until one of three contingencies is fulfilled. These can be
summarised as follows. First, the contractor duly performs its obligations under the
building contract. Secondly, the surety satisfies and discharges the damages sustained by
the employer as a result of the default of the contractor. Thirdly, the twelve-month
time-limit under clause 3 of the bond expires without proceedings having been issued in
accordance with clause 4.
57.    The bond follows the archaic grammatical structure often employed in drafting bonds, and
is phrased in the negative. The legal effect of the bond can be restated in positive terms
as imposing an obligation on the surety to satisfy and discharge the damages sustained
by the employer as a result of the default of the contractor. For the purposes of the
application to dismiss the proceedings, it must be assumed that—were the case to go to
full hearing—the employer would be able to establish that the building works are defective
and that it has sustained damage as a consequence.
58.    Clause 1 of the bond expressly states that the damages sustained must “be established
and ascertained pursuant to and in accordance with the provisions of” the building
contract. The language used is significant. The dictionary definition of “establish” includes,
relevantly, the meaning “show (something) to be true or certain by determining the facts”
(Oxford Dictionary of English, third edition). The word is ultimately derived from the Latin
verb stabilire, i.e. “to make firm”. The phrase “in accordance with” means “in a manner
conforming with”.
59.    All of this indicates that the quantification of damages is to be determined in a manner
conforming with the building contract. This imports the requirement to comply with the
dispute resolution mechanisms provided for under clause 38 of the building contract, i.e.
conciliation or arbitration. The employer’s interpretation, which would allow for damages
to be determined in parallel proceedings before the High Court, simply cannot be
reconciled with the contractual language. The surety’s liability to pay damages is to be
determined once and once only, i.e. pursuant to and in accordance with clause 38 of the
building contract. The bond does not allow for the possibility of different figures for
damages being produced by way of arbitration under the building contract and by way of
proceedings before the High Court, respectively.
60.    The rival interpretation advanced on behalf of the employer necessitates making a
distinction between (i) what counsel characterises as “substantive provisions” of the bond,
and (ii) the dispute resolution mechanisms under clause 38. With respect, there is nothing
in the contractual language which supports the employer’s argument that the bond makes
this distinction. Rather, the bond refers to “the provisions of” the building contract
simpliciter. This captures all of the provisions without distinction.
61.    Clause 1 requires, therefore, more than simply that the rules governing matters such as
set-off under the building contract be applied to the calculation of the damages sustained
by the employer. Had this been the sole intention, then it would have been sufficient to
rely on the words which follow under clause 1 to achieve this intention, i.e. “taking into
account all sums due or to become due to the contractor thereunder and all retention
monies held thereby”. The actual contractual language cannot be ignored: the words
“established” and “pursuant to and in accordance with” cannot be treated as mere
surplusage.
62.    In summary, the language used under clause 1 has the effect of ensuring that all of the
provisions of the building contract, including the dispute resolution mechanisms, must be
complied with. The contractual requirement that the quantum of the damages sustained
be “established” pursuant to and in accordance with the provisions of the building
contract can only properly be understood as having this effect. Both the procedural and
substantive provisions of the building contract must be complied with.
63.    Not only does the rival interpretation of clause 1 advanced on behalf of the employer
drain the phrase “established and ascertained pursuant to and in accordance with” of its
ordinary and natural meaning, it also necessitates imputing to the parties an intention
that there be two parallel mechanisms by which the quantum of the damages sustained
could be established and ascertained. On the employer’s interpretation, the quantification
of the damages sustained can legitimately be carried out by way of legal proceedings
before the High Court and/or by way of arbitration pursuant to clause 38 of the building
contract. Indeed, the logic of the employer having issued two sets of proceedings on 18
February 2014 is that both mechanisms can be invoked simultaneously. (See paragraphs
17 and 18 above). No sensible explanation has been offered as to what should happen in
the event that the two procedures produce different figures.
64.    Counsel for the employer had opened certain passages from O’Donovan and Philips, The
Modern Contract of Guarantee (3rd edition, English edition, 2016, Courtney and Philips) in
support of his argument that the liability of a surety can be determined in separate
proceedings and that a surety is not bound by an arbitration award made pursuant to the
principal contract. In particular, the following passage at §5.140 had been relied upon.
“If the guarantee in general secures the due performance of the obligations of the
principal debtor, the guarantor will not be bound by a judgment or arbitration
award obtained by the creditor against the principal. The award will not be evidence
against the guarantor and the extent of the guarantor’s liability must be strictly
proved. The reason for this is that the guarantor might otherwise be bound by an
admission of the principal debtor in the course of an arbitration without the
authority of the guarantor, or by the principal failing to contest properly the
arbitration proceedings. The rule applies even where the arbitration award arises
out of an arbitration clause contained in the principal contract. This was the case in
Bruns v Colocotronis, where the guarantee was also expressed in these general
terms: ‘the guarantor guarantees and undertakes to procure the due performance
and payment of all liabilities and obligations of the Owners arising under or out of
the agreements.’”
*Footnotes omitted.
65.    The main authority cited by the authors for these propositions is the judgment in Bruns v.
Colocotronis, The Vasso [1979] 2 Lloyd’s Rep. 412 (which, in turn, cites Re Kitchin, Ex
parte Young (1881) 17 Ch.D. 668).
66.    The rationale underlying these judgments is that for a surety to agree to be bound by an
arbitration award made pursuant to the principal contract would involve certain risks. In
particular, the surety would be bound by the outcome of arbitration proceedings in
respect of which it would not be a party. The judgments are clear, however, that it is
ultimately a matter of contractual interpretation as to whether a surety has undertaken
this risk.
67.    On the facts of The Vasso, the guarantor had guaranteed and undertaken to procure the
due performance and payment of all liabilities and obligations of the ship owners. Robert
Goff J. held that this form of wording did not extend to an obligation to honour an
arbitration award.
“The short answer is that, as a matter of construction, a guarantee containing general
words, as in the case of the guarantee of the defendant, although applicable
generally to obligations of the principal debtor arising under the relevant
agreement, does not apply to an obligation to honour an arbitration award.”
68.    By contrast in the present case, it is not being suggested that an arbitration award would
be binding on the surety as a secondary obligation assumed by the surety under the
bond. Rather, the surety’s argument is that an arbitration award would be binding
because the bond expressly states that the damages sustained are to be established and
ascertained pursuant to and in accordance with the building contract. The bond itself has
identified the mechanism by which damages are to be established and ascertained, and
has done so by incorporating by reference the dispute resolution mechanisms under the
building contract.
69.    There is an obvious tension between (i) ensuring that a bond provides an effective
remedy for the employer in the case of default by the contractor, and (ii)ensuring that a
surety is entitled to fully contest the making of any payment. Ultimately, it is a matter for
the parties to decide how to resolve this tension. The role of the courts is to interpret the
contractual documentation which records the agreement of the parties. It is not the
function of the court to substitute its view as to what the appropriate allocation of risk
should have been. See, by analogy, Dunnes Stores v. Holtglen Ltd [2012] IEHC 93 which
has been cited by the surety (“where parties have used unambiguous language,
irrespective of the question of commercial sense, the unambiguous language must be
applied”).
70.    For the reasons outlined earlier, I am satisfied that the bond in this case has the effect of
precluding a parallel action to quantify the sustained damages by way of plenary
proceedings before the High Court. There is no inconsistency between this finding and the
passages relied upon from The Modern Contract of Guarantee.
71.    The employer’s argument based on clause 5 of the bond can be disposed of shortly.
Clause 5 identifies a number of conditions precedent to the right of the employer to
recover under the bond. The wording does not indicate that the list is intended to be
exhaustive nor that these are the only conditions precedent. Crucially, none of the
subclauses under clause 5 are directed to a scenario, such as in the present case, where a
claim to recover damages in respect of defective works is made subsequent to a
certificate of practical completion having been issued. Clauses 5 (A) and 5 (B) are
directed to circumstances where a serious breach or default has been notified during the
course of the carrying out of the contract, and where the surety wishes to nominate a
completion contractor. Neither of the subclauses are directed to the quantification of
damages post- completion. Given that these subclauses are directed to a different
scenario, same cannot reasonably be interpreted as overriding the requirements of
clause 1. Clause 5 (C) is what might be described as a force majeure clause and is not
relevant.
72.    Counsel on behalf of the employer had also argued that to interpret clause 1 as requiring
damages to be established pursuant to conciliation or arbitration would result in an
unrealistic timeframe. In order to avail of the bond, any defects in the building works
would have had to emerge in sufficient time (i) to allow for a conciliation or arbitration to
be completed, and (ii) to allow for proceedings then to be instituted against the surety,
within twelve months of the certification of practical completion.
73.    With respect, there is nothing in the language of the bond to support an argument that
the bond was intended to remain in place for an extended period of time, still less that
the requirement that damages be established pursuant to the dispute resolution
mechanisms under the building contract would defeat any such intention. The issue of the
certificate of practical completion is treated as an event of significance under the bond. It
results in an immediate and automatic reduction in the bond amount by one half, i.e. to
€600,000. It also sets the clock ticking for the purposes of a twelve-month limitation
period. The introduction of a limitation period will, by definition, always run the risk of
“hard cases” occurring. For example, even on the employer’s interpretation, the benefit of
the bond might not be available in the case of defects which only became apparent twelve
months after the certification of practical completion. The risk of such “hard cases” does
not allow the court to depart from the clear and unambiguous language of the bond. If an
employer wishes to have the benefit of a longer indemnity period, then they are free to
negotiate that with a potential surety but it may have a greater financial cost.
74.    For the avoidance of any doubt, it should be noted that in reaching my conclusions on the
correct interpretation of the bond it has not been necessary to make any finding in
respect of the separate and distinct argument advanced on behalf of the surety to the
effect that the proceedings cannot succeed now that the bond has been cancelled in
accordance with the time-limit provided under clause 3. My findings are based solely on
the requirement under clause 1 that the damages be established and ascertained
pursuant to and in accordance with the dispute resolution mechanisms under the building
contract. This is sufficient to dispose of the case.
75.    The combined effect of clauses 3 and 4 would appear to be that any proceedings against
the surety must be instituted within twelve months of the date of the certification of
practical completion. It seems that if proceedings, which otherwise meet the requirements
of the bond, are instituted within that timeframe, then same can be pursued to conclusion
notwithstanding the cancellation of the bond. I reiterate, however, that it has not been
necessary for me to make a finding in relation to this issue in circumstances where I am
satisfied that whilst the within proceedings were issued within the twelve-month time-
limit, the proceedings cannot succeed in circumstances where the surety has no liability
under the bond in the absence of damages having been established and ascertained.
Conclusion
76.    The present case gives rise to a straightforward issue of contractual interpretation which
admits of an obvious answer. This issue can safely be resolved on an application to
dismiss the proceedings without any risk of injustice to the parties. The length of this
judgment is testament to the ingenuity and industry of counsel for the employer rather
than as a result of any actual complexity in the interpretation of the bond. It has been
necessary to address each of counsel’s arguments in this judgment. As appears,
however, the extensive case law referred to is largely irrelevant to the precise issue of
interpretation which falls to be resolved in these proceedings.
77.    For the reasons set out above, I am satisfied that, on its correct interpretation, clause 1
of the bond makes it a condition precedent to any claim against the surety that the
quantum of damages sustained have first been established and ascertained pursuant to
the dispute resolution mechanisms provided for under the building contract.
78.    Put shortly, the damages sustained by the contractor’s default must be established and
ascertained by way of conciliation or arbitration between the employer and the contractor.
The surety is not party to this process. This is unsurprising: the quantification of damages
will require consideration of the detail of the performance of the building contract. The
surety is a stranger to these matters, and the contractor is the obvious legitimus
contradictor. Once a net sum for the damages sustained has been established and
ascertained pursuant to and in accordance with the dispute resolution mechanisms under
the building contract, the bond can then be called upon and the surety would be obliged
to pay out up to the amount of the bond (€600,000).
79.    The employer has sought to by-pass these contractual arrangements, and to seek instead
to establish and ascertain the quantum of the damages sustained by way of High Court
proceedings taken against the surety. It is clear from the statement of claim that the
employer envisages that the High Court would embark upon a detailed consideration and
assessment of the defects alleged in the construction work carried out pursuant to the
building contract by the contractor. The reliefs sought include a prayer for accounts to be
taken and for inquiries to be entered upon so as to “establish” the sums due to the
employer by the surety.
80.    This has the practical consequence that the surety is now supposedly to be subject to
lengthy and costly High Court litigation in respect of the performance of the building
contract notwithstanding that it is obvious from the terms of the bond that any dispute in
this regard was to have been resolved by way of conciliation or arbitration between the
employer and the contractor.
81.    I am satisfied that the institution of the within proceedings represents an abuse of
process in circumstances where the claim against the surety cannot succeed for the
reasons explained under the previous heading. The claim has been brought in the teeth of
the terms of the bond. The claim is also wholly inconsistent with the separate proceedings
instituted against the contractors on the same date as these proceedings were instituted
(18 February 2014). Those latter proceedings seek to refer the quantification of the
damages sustained to arbitration.
82.    It is essential that the courts protect their process from abuse. The institution of
proceedings which are bound to fail represents such an abuse. It is unjust to put
defendants to the time and expense of a full hearing in circumstances where the claim
cannot succeed. To do otherwise creates a risk that defendants may be forced, for
commercial reasons, to make a windfall payment to a plaintiff in order to compromise
unmeritorious litigation. A defendant might be presented with a Hobson’s choice of
defending protracted litigation in circumstances where its legal costs might not be
recovered, or seeking instead to compromise the litigation for a lesser sum than that
which would be incurred in legal costs.
Proposed order
83.    I propose to make an order dismissing these proceedings pursuant to the court’s inherent
jurisdiction.
Appearances
Eoghan Cole, BL, instructed by Giles J. Kennedy & Co. Solicitors for the Plaintiff.
Graham O’Doherty of Maples and Calder Solicitors for the Defendant.

Orexim Trading Ltd v Mahavir Port And Terminal Private Ltd [2019] EWHC 2299 (Comm) (28 August 2019)

Neutral Citation Number: [2019] EWHC 2299 (Comm)
Case No: CL-2016-000527

IN THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
COMMERCIAL COURT

Royal Courts of Justice
Strand, London, WC2A 2LL
28/08/2019

B e f o r e :

CHRISTOPHER HANCOCK QC
(Sitting as a Judge of the High Court)

____________________

Between:

OREXIM TRADING LIMITED
Claimant
– and –
 
MAHAVIR PORT AND TERMINAL PRIVATE LIMITED (formerly known as FOURCEE PORT AND TERMINAL PRIVATE LIMITED)
Defendant

____________________

Mr Staurt Adair (instructed by Druces LLP) for the Claimant
The Defendant did not appear and was not represented

Hearing dates: 28 June 2019
____________________

HTML VERSION OF JUDGMENT APPROVED
____________________

Crown Copyright ©

Christopher Hancock QC: :

Introduction.

    1. This is the hearing of the application of the Claimant (“Orexim”) by notice dated 24th April 2019 (“the Application”) for an order that:

(1) The defence of the Defendant (“MPT”) be struck out; and

(2) There be judgment for Orexim for the full amount claimed ($7,391,600) plus interest;

or, alternatively, an “unless order”.

    1. MPT did not appear and was not represented before me.

The facts.

    1. I can deal with the relevant facts, as alleged by Orexim, in outline only. I note that the facts as set out below consist of allegations only at the present time.

(1) On 5th December 2013 Orexim entered into a written agreement with Atlantis Middle East FZE (“Atlantis”) for the sale and delivery by Orexim to Atlantis of 10,000 metric tonnes of crude Ukrainian sunflower seed oil (“the Goods”);

(2) Unbeknownst to Orexim, on or about 25th November 2013 Atlantis had entered into an agreement with Global International Imex Private Limited (“Global”) to sell the Goods to Global, and Global had, in turn, agreed to sell the Goods to Tose-E Tejarat Beynolmelal Zarrin Persia Omid PJS (“Zarrin Persia”);

(3) On the insistence of Atlantis, Orexim agreed to charter the MT Bon Vent (“the Vessel”) from MPT to transport the Goods. A charterparty for the charter of the Vessel was concluded between Orexim and MPT on or about 19th December 2013 (“the Charterparty”). The bills of lading named Bandar Abbas in Iran as the port of discharge;

(4) Contrary to the clear instructions of Orexim and in full knowledge of the fact that Orexim had not been paid the balance of the purchase price of the Goods, the Vessel unloaded the Goods into tanks at Bandar Imam Khomeini. MPT justifies this conduct by reference to an order it obtained from the Bombay High Court permitting it to discharge the Goods into tanks at Bandar Imam Khomeini and granting it a lien over the Goods;

(5) On 20th March 2014 MPT commenced arbitration proceedings against Orexim in India claiming demurrage and damages and obtained and order from the Bombay High Court appointing Mr Rahul Narichania as the sole arbitrator (“the Indian Arbitration proceedings”);

(6) On or about 30th April 2014 Orexim commenced criminal proceedings for fraud in Ukraine against MPT and its employees. Pursuant to these criminal proceedings the Vessel was arrested on 2nd May, 9th May and 2nd June 2014 in the port of Yuzhny in Ukraine. On each occasion the arrest was discharged by the Ukrainian courts;

(7) On 15th May 2014 Mr Budnyk attended a meeting with representatives of Atlantis, Zarrin Persia and MPT at the offices of Atlantis in Istanbul. Rajesh Lihala attended the meeting on behalf of MPT. Mr Budnyk’s evidence is that during the meeting it was acknowledged that Zarrin Persia had paid Global for the Goods and agreed that Orexim had to be paid the balance of the price of the Goods, which was US$7,694,700

(8) Prior to the meeting in Istanbul no one at Orexim had been aware of a link between MPT and Global. However, Mr Budnyk states in his affidavit that during the meeting he was informed by Rajesh Lihala that (a) Global was Rajesh Lihala’s company, (b) Atlantis owed around US$5 million to Rajesh Lihala in respect of unpaid freight on other deals and Rajesh Lihala wanted to keep the monies paid by Zarrin Persia to Global to discharge that debt.

(9) At the conclusion of the meeting Orexim, Atlantis and MPT executed the Settlement Agreement compromising all the claims and disputes between them and providing for payment of Orexim. The following were, inter alia, express terms of the Settlement Agreement:

Parties have agreed to settle their disputes in terms of this Settlement Agreement and to file the same before the sole arbitrator, the Bombay High Court and FOSFA and inviting orders of the sole arbitrator and Bombay High Court in terms of this Settlement Agreement”(clause 1);

“[MPT] shall cause Global International Imex Pvt. Ltd (“Global”) to deposit on behalf of Atlantis as part of monies payable by Global to Atlantis, an amount of USD7,391,600… with the Bombay High Court…” (clause 2.i.);

Orexim shall withdraw the total amount stated under paragraph 2.i. on release of the Vessel from arrest and withdrawal of the criminal proceedings…” (clause 2.vi.);

Each of the Parties warrants and undertakes to the other Party that it has full right, power and entitlement to enter into this Settlement Agreement and to perform its terms without reference to any other person …” (clause 3);

This Agreement shall be subject to English law and any dispute arising out of or in connection with this Agreement shall be referred to High Court of Justice of England and Wales” (clause 7).

(10) Global failed to deposit any monies with the High Court in Bombay, but on 25th June 2014 MPT caused Global to pay US$466,364.80 to Orexim;

(11) At the end of June 2014 Orexim learned that Zarrin Persia had obtained forged bills of lading and was using these documents to remove the Goods from the tanks at Bandar Imam Khomeini. Orexim commenced proceedings in Iran to prevent the removal of the Goods, but the Iranian court dismissed those proceedings on the basis, inter alia, that Zarrin Persia had paid Global for the Goods. Thus, the Goods have been delivered to Zarrin Persia notwithstanding that Orexim has not been paid the balance of the purchase price (US$7,694,700);

(12) It is Orexim’s case that it has been the victim of a fraud. Orexim contends that MPT and its director, Rajesh Lihala, have played a key role in perpetrating that fraud. In particular, Orexim contends that Rajesh Lihala:

a. Has an interest in Global and negotiated the Global Sale Contract with Atlantis and the separate contract between Global and Zarrin Persia; and

b. Was involved in the production of the forged bills of lading.

(13) Whilst it is common ground between the parties that Zarrin Persia obtained forged bills of lading, MPT and Rajesh Lihala deny any involvement in the production of those bills of lading or any fraud. Furthermore, Rajesh Lihala denies that he has any interest in Global and/or that he had any involvement in the negotiation of the Global Sale Contract.

Procedural history

    1. The procedural history of the proceedings can be summarised briefly as follows:

(1) On 30th August 2016 Orexim successfully applied ex parte to HHJ Waksman QC (as he then was) for a freezing injunction in respect of the Vessel and an order permitting service of the claim form on the Defendants out of the jurisdiction. The claim form included a claim under section 423 of the Insolvency Act 1986 (“IA 1986”) for an order setting aside the sale of the Vessel to the then Second Defendant, Singmalloyd Marine (s) Pte Limited, (“Singmalloyd”) and subsequently to the then Third Defendant, Zen Shipping and Ports India Private Limited (“Zen”). Zen is owned and controlled by Sahil Lihala, who is the son of Rajesh Lihala;

(2) On 17th February 2017 Mr Justice Blair made an order that the steps already taken to bring the proceedings to the attention of the Defendants constituted good and sufficient service and that Orexim be permitted to serve all other documents relating to these proceedings on MPT by email, “which will constitute good and sufficient service“;

(3) On 24th and 26th May 2017 respectively Zen and MPT issued applications challenging the jurisdiction of the court to hear the claim under section 423 IA 1986 and seeking orders setting aside the orders of HHJ Waksman QC granting Orexim permission to serve the proceedings out of the jurisdiction and granting the freezing injunction. The application was heard on 10th October 2017 and in a judgment dated 27th October 2017 HHJ Waksman QC held that the court did not have jurisdiction to hear the claim under section 423 IA 1986;

(4) On 22nd December 2017 MPT filed and served its Defence to Orexim’s claim for damages;

(5) On 24th January 2018 Orexim filed and served Amended Particulars of Claim and an Amended Claim Form. On 22nd February 2018 MPT filed and served its Amended Defence and on 15th March 2018 Orexim filed and served its Reply to the Amended Defence;

(6) On 7th June 2018 Orexim served on MPT a Notice to Admit Facts;

(7) The appeal from the order of HHJ Waksman QC was heard by the Court of Appeal on 3rd July 2018. In a judgment handed down on 13th July 2018 the Court of Appeal held that the Court does have power under the jurisdictional “gateway” created by paragraph 3.1(20)(a) of Practice Direction 6B to permit the service out of the jurisdiction of a claim under section 423 IA 1986 and that the Judge was entitled to conclude that the claim had reasonable prospects of success, but that, on the facts, there wasn’t a sufficient connection between the Defendants and England and Wales. The Court of Appeal therefore upheld the decision of HHJ Waksman QC, but for different reasons. As a consequence, Singmalloyd and Zen have ceased to be parties to the proceedings;

(8) On 24th August 2018 MPT was struck off the Register of Companies in India;

(9) On 9th November 2018 a Case and Cost Management Conference took place before Mr Andrew Burrows QC (sitting as a deputy Judge of the High Court). He made an order incorporating directions which were agreed by the parties prior to the hearing (“the Directions Order”). These directions required MPT to:

a. Give standard disclosure by list in respect of 4 specified issues by 4.00 pm on 1st March 2019 (paragraph 2);

b. Inspection of copies of the disclosed documents within 7 days of receipt of requests (paragraph 3);

c. Exchange witness statements of fact by 4.00 pm on 12th April 2019 (paragraph 4); and

d. Exchange expert evidence as to whether certain signatures purporting to be the signatures of Rajesh Lihala are forgeries (as he contends) by 4.00 pm on 10th May 2019 (paragraphs 6 and 8).

(10) The order also provided for a half-day PTR, which has been fixed for 5th July 2019, and a 6-day trial, which has been listed to commence on Monday 18th November 2019.

(11) On 22nd January 2019 Mr Justice Butcher made an order on the application of HFW that the firm had ceased to act for MPT I understand that this order was not served on Orexim’s solicitors, Druces, until 18th February 2019.

(12) On 18th February 2019 HFW served the order of Mr Justice Butcher on Druces by email and stated in that email that (a) they were not aware which firm was replacing them as solicitors on the record and (b) Rajesh Lihala had recently been in intensive care.

(13) In response to repeated requests from Druces for contact details for MPT and Rajesh Lihala, on 28th February 2019 HFW wrote to Druces by email stating:

The email address for Mr Lihala used for service on MPT before HFW came on the Court record is the same email address that we have continued to use and to which you have already sent an email.

The two emails which Druces had used to serve proceedings on MPT (which service was approved by Mr Justice Blair) were mahavirport@gmail.com and rajesh@fourcee.co.in (“the MPT Email Addresses”).

(14) On 26th February 2019 Druces sent emails to the two MPT Email Addresses, referring to the fact that HFW were no longer acting, and reminding MPT and Rajesh Lihala that paragraph 2 of the Directions Order required the parties to give disclosure by list by 4.00 pm on Friday 1st March 2019 and seeking confirmation that such disclosure would be provided by the deadline.

(15) On 26th February 2019 Rajesh Lihala responded from his rajesh@fourcee.co.in email address stating that MPT had been struck off the Register of Companies in India and that it had filed an appeal against that striking off and concluding:

Separately, the company does not have any solicitors in England. We request that all correspondence be addressed to the company at its address in Mumbai and not to my personal email id.

However, given the current state of affairs, the Company, until restored, will temporarily not be able to participate in the proceedings.

In the circumstances, we request that you consent to suspend the Directions Order of Mr Andrew Burrows QC of 9 November 2018 until the company is restored.”

(16) Orexim contends that by that email Rajesh Lihala made clear that MPT would temporarily not be complying with the Directions Order or otherwise engaging with the proceedings.

Overview of Orexim’s claims and the defence

    1. Orexim’s claims are for damages:

(1) For breach of clause 2.i of the Settlement Agreement; or

(2) Alternatively, for breach of the warranty at clause 3 of the Settlement Agreement, by which MPT warranted that it had:

full right, power and entitlement to enter into this Settlement Agreement and to perform its terms without any reference to any other person…”.

The basis of the claim for breach of warranty is that MPT warranted that it had the “right, power and entitlement” to cause Global to deposit US$7,391,600 with the Bombay High Court, whereas it now contends that it has no connection with Global.

    1. Orexim additionally claims a declaration that, by concluding the Settlement Agreement, the parties compromised the Indian Arbitration Proceedings and an injunction restraining MPT from prosecuting the Indian Arbitration Proceedings (or any similar proceedings).
    2. It is Orexim’s case that its claims are very strong. I do not need to express a view on this for the purposes of this application and I therefore do not.

Overview of MPT’s defences

    1. MPT’s primary defence to these claims is that it entered into the Settlement Agreement under duress (duress of goods and/or economic duress). The allegation is essentially that Orexim made false criminal allegations of fraud against MPT to the Ukrainian prosecuting authorities.
    2. MPT additionally defends the claims on the basis that:

(1) The parties impliedly agreed to abandon the Settlement Agreement;

(2) On its true construction, the Settlement Agreement did not impose any obligation on MPT to cause Global to deposit US$7,391,600 with the Bombay High Court;

(3) On the true construction of the Settlement Agreement and by reason of the failure of the parties to fulfil various alleged contingencies, there was no settlement of the disputes between the parties.

The current application: service.

    1. In breach of the requirements of CPR 6.23(2) and (3), MPT has failed to provide an address for service within the United Kingdom.
    2. The application, the supporting evidence and notice of the hearing date have been served on MPT and Rajesh Lihala in accordance with the substituted service order made by Mr Justice Blair on 17th February 2017 at the email addresses which HFW confirmed that they used to communicate with their client.
    3. There is little doubt that the application has come to the attention of MPT, but, in any event, Orexim has done everything it can to draw the application to the attention of MPT.
    4. I accept that the application has been validly served.

The application: substantive considerations.

    1. Orexim made the following submissions in support of its application in front of me.

(1) MPT has failed to comply with an order of the Court, namely the order of Andrew Burrows J.

(2) By reason of this failure, the Court has jurisdiction to strike out MPT’s defence under CPR Rule 3.4(2)(c) and 3.4(3).

(3) MPT has made clear in its email dated 26th February 2019 that it will not be participating in the proceedings. The explanation for this appears to be that it has been struck off the Register of Companies in India. However, MPT is an Indian company and it is clear that as a matter of Indian law, MPT continues to have capacity to defend these proceedings and to instruct lawyers for that purpose. It has continued to instruct counsel to represent it in parallel arbitration proceedings in India.

(4) The Claimants suggest that it is clear that MPT and Rajesh Lihala (who owns and controls the company) are implicated in a serious fraud that has been perpetrated against Orexim and that the merits of Orexim’s claims are very strong.

Principles applicable to a strike out application under CPR 3.4(2)(c)

    1. In Walsham Chalet Park Ltd v Tallington Lakes Ltd [2014] EWCA Civ 1607 the Court of Appeal held that the principles laid down in Mitchell v News Group Newspapers [2013] EWCA Civ 1537 and restated in Denton v TH White Ltd [2015] 1 All ER 880 have a direct bearing even though they relate to applications for relief from sanction. Richards LJ, however, pointed out at paragraph 44 of his judgment that in the case of a strike out application the proportionality of the sanction itself is in issue, whereas on an application for relief from sanction the court proceeds on the basis that the sanction is properly imposed.
    2. That paragraph of Richards LJ’s judgment states as follows:

“44.  The judge treated the principles in Mitchell as “relevant and important” even though the question in this case was whether to impose the sanction of a strike-out for non-compliance with a court order, not whether to grant relief under CPR rule 3.9 from an existing sanction. In my judgment, that was the correct approach. The factors referred to in rule 3.9 , including in particular the need to enforce compliance with court orders, are reflected in the overriding objective in rule 1.1 to which the court must seek to give effect in exercising its power in relation to an application under rule 3.4 to strike out for non-compliance with a court order. The Mitchell principles, as now restated in Denton, have a direct bearing on such an issue. It must be stressed, however, that the ultimate question for the court in deciding whether to impose the sanction of strike-out is materially different from that in deciding whether to grant relief from a sanction that has already been imposed. In a strike-out application under rule 3.4 the proportionality of the sanction itself is in issue, whereas an application under rule 3.9 for relief from sanction has to proceed on the basis that the sanction was properly imposed (see Mitchell , paragraphs 44-45). The importance of that distinction is particularly obvious where the sanction being sought is as fundamental as a strike-out. Mr Buckpitt drew our attention to the recent decision of the Supreme Court in HRH Prince Abdulaziz Bin Mishal Bin Abdulaziz Al Saud v Apex Global Management Ltd [2014] UKSC 64 , at paragraph 16, where Lord Neuberger quoted with evident approval the observation of the first instance judge that “the striking out of a statement of case is one of the most powerful weapons in the court’s case management armoury and should not be deployed unless its consequences can be justified”.

    1. In their joint judgment in Denton Dyson MR and Vos LJ explain the following three stage approach to consideration of an application:

(1) The first stage is to identify the seriousness of the breach;

(2) The second stage is to consider why the failure or default occurred;

(3) The third stage is to consider all the circumstances of the case in order to enable the court to deal with the application justly.

The application of these principles.

    1. As far as the first stage of the process is concerned, it was submitted that the breach could not be more serious. MPT has disinstructed its solicitors or caused them to apply to come off the record and has made clear that it will not be participating in the proceedings. It would be clear that the consequence of not providing disclosure or exchanging witness statements and expert reports is that the trial could not go ahead. The breach of the court order could not be more flagrant and is compounded by MPT’s refusal to respond to communications from Orexim’s solicitors. As to this submission:

(1) The effect of the failure to serve witness statements and expert reports is provided for by the CPR. In essence, the result of such a failure is that the party in default will not be permitted to adduce any factual or expert evidence: see CPR 32.10 (in relation to factual evidence) and 35.13 (in relation to expert evidence). The rules therefore provide their own sanction in relation to these matters. The failings do not mean that the trial cannot go ahead; it would simply be a much shorter trial, since the Defendants would not have any evidence in support of their position.

(2) The position in relation to disclosure is different, in my judgment. Here, the CPR do provide an automatic sanction, in CPR 31.21, which provides that a failure to disclose means that a party cannot rely on a document that is not disclosed. However, since the duty extends to documents which are adverse to a party, this sanction is clearly not a full or adequate remedy. In my judgment, the failure to comply with a disclosure obligation is a serious breach.

    1. As far as the second stage of the process is concerned, it is submitted that no proper explanation for the failure to comply with the Directions Order has been provided. The implicit suggestion in Rajesh Lihala’s email of 26th February 2019 is that it is due to the fact that MPT has been struck off the register of Companies in India.
    2. As to this suggestion, Orexim suggests that, as a matter of Indian law, the striking off of MPT does not result in an inability to take part in these proceedings; and, further, Orexim submits that this is evidenced by the fact that MPT has continued to participate in proceedings elsewhere in the world where it is advantageous to it to do so.

(1) First, Orexim submits that the unchallenged evidence of Indian law is that MPT is not disabled from defending these proceedings. As the fifteenth edition of Dicey Morris & Collins makes clear at paragraph 30-010 and 30-011, the corporate capacity and status of a foreign company must be determined in accordance with the law of its place of incorporation, which in the case of MPT is the law of the Republic of India:

Whether an entity exists as a matter of law must, in principle, depend upon the law of the country under which it was formed. That law will determine whether the entity has a separate legal existence. The law of that country will determine. The legal nature of the entity so created, e.g. whether the entity is a corporation or a partnership, and, if the latter, the legal incidents which attach to it.

It is well established that a corporation duly created in a foreign country is to be recognised as a corporation in England, and accordingly foreign corporations can both sue and be sued in their corporate capacity in the courts. Whether a corporation has been dissolved must be determined by the law of its place of incorporation for “the will of the sovereign authority which created it can also destroy it”.”

See also Lazard Bros v Midland Bank [1933] AC 289, 297.

(2) On that basis Orexim has obtained the expert evidence of Mr Vishal Sheth regarding the status and capacity of MPT following its striking off the register of Companies. That evidence, in paragraph 6, states that:

“…a company which is struck off from the register of companies in India pursuant to a notice issued under section 245(5) of the 2013 Act, remains responsible for discharge of its obligations and liabilities and it retains legal personality for that limited purpose.

(3) Mr Sheth’s expert opinion is primarily based on his interpretation of the wording of sections 250 and 248(6) of the (Indian) Companies Act 2013 (“the 2013 Act”). Section 250 of the 2013 Act provides:

Where a company stands dissolved under section 248, it shall on and from the date mentioned in the notice under subsection (5) of that section cease to operate as a company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date except for the purpose of… the payment or discharge of the liabilities or obligations of the company” (emphasis added)

(4) Section 248(6) of the 2013 Act provides:

The Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations within a reasonable time and, if necessary, obtain necessary undertakings from the managing director or other persons in charge of the management of the company:

Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.” (emphasis added)

(5) It follows that the fact that MPT has been struck off the Register of Companies in India does not deprive it of capacity or otherwise prevent it from defending these proceedings.

    1. Secondly, Orexim submits that Rajesh Lihala’s assertion in his email of 26th February 2019 that MPT will be unable to participate in proceedings as a result of it having been struck off is inconsistent with the way in which MPT has conducted itself.

(1) Although MPT was struck off the Register of Companies in India on 24th August 2018, it continued to instruct HFW and counsel to represent it in these proceedings and, in particular, to attend the Costs and Case Management Conference before Mr Andrew Burrows QC on 9th November 2018.

(2) Furthermore, notwithstanding the fact that MPT was struck off the Register of Companies in India on 24th August 2018, it has continued to be represented by lawyers (Shardul Amarchand Mangaldas & Co) in the Indian Arbitration Proceedings. By way of example:

a. On 28th January 2019 MPT’s Indian lawyers submitted detailed submissions to the arbitrator on behalf of MPT in response to Orexim’s application to terminate the Indian Arbitration; and

b. On 22nd May 2019 the same Indian Lawyers made further representations to the arbitrator by email.

(3) It would appear that MPT is perfectly capable of instructing lawyers to represent it when Rajesh Lihala considers that it is in his best interests to do so.

(4) Accordingly, there is no good reason for the failure to comply with the Court’s order.

    1. As far as the third stage is concerned, Orexim submits that all the circumstances of the case include the strong merits of Orexim’s claims, the prejudice caused to Orexim by the conduct of MPT and the strong evidence of dishonesty and fraud on the part of MPT. The evidence of fraud and dishonesty must inform the view taken of the conduct of MPT and any explanation provided. Finally, it is submitted that it would appear that MPT has taken a decision not to oppose this application.
    2. I will deal first with the damages claim. My conclusions in relation to this claim are as follows:

(1) There has clearly been a breach of the order of Andrew Burrows QC made in November 2018. The time limits in relation to disclosure, witness statements and expert reports have not been complied with.

(2) In my judgment, as I have noted, this breach is extremely serious, since it has put the trial date in jeopardy.

(3) No good reason has been put forward for this breach. In this regard:

a. I accept the evidence of Indian law put forward by Orexim, and hold that, on the basis of that evidence, there is nothing to prevent MPT from continuing to participate in these proceedings.

b. I also note, and place weight, on the fact that MPT has continued to participate in the Indian arbitration proceedings, despite the fact that it remains the case that it has not yet been restored to the register, as I understand the position as at the date of this judgment.

(4) The natural conclusion to be drawn is simply that MPT is declining to participate in these proceedings and refusing to comply with the orders of the Court.

(5) There is accordingly, in my judgment, no good reason for the breach.

(6) This leaves the question of the appropriate sanction. In my judgment, despite the pendency of trial, it would not be appropriate to strike MPT out at this stage. As is noted in the extract from Walsham Chalet Park Ltd v Tallington Lakes Ltd, the striking out of a statement of case is an extreme remedy. In my judgment it is not a proportionate response to the current situation.

(7) Instead, in my view, the appropriate order is an unless order. I therefore order that unless within 28 days of the date of this judgment and the order flowing from it, MPT has complied with its obligations in relation to disclosure, the service of any witness evidence that it intends to place reliance on, and any expert evidence, then Orexim shall be at liberty to enter judgment on its damages claim.

    1. However, in my judgment different considerations apply in relation to the claims for injunctive and declaratory relief.

(1) In general, a declaration will not be granted without full argument, of a type which has not occurred before me.

(2) It is also my view that it would be wrong to grant injunctive relief without a fuller consideration of the claim for such relief and a consideration of the interaction between the decisions reached to date by the Indian arbitrator and the English Court.

  1. In the circumstances, I propose to adjourn the application for injunctive and declaratory relief. This application can be relisted before me, if Orexim wishes to pursue it, and I will hear it with expedition if necessary.
  2. I would be grateful if Counsel would draw up an order giving effect to this judgment.

Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd [No 12] [2019] WASC 285 (9 August 2019)

SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

 

LE MIERE J:

Summary

  1. On 21 December 2018 I delivered my reasons for judgment on application by the defendants and defendants by counterclaim in each of these actions: Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd [No 10]. I subsequently ordered in effect that the counterclaim in each proceeding is stayed pursuant to s 8(1) of the Commercial Arbitration Act 2012 (WA) or the general power of the court to control its own processes. I dismissed applications by Hancock Prospecting Pty Ltd (HPPL), Hope Downs Iron Ore Pty Ltd (HDIO), the other HPPL parties and Mrs Georgina Rinehart and 150 Investments Pty Ltd (the GHR parties) to stay the whole of the proceedings.
  2. The HPPL parties and the GHR parties have applied for leave to appeal to the Court of Appeal. Bianca Rinehart (Ms Rinehart) and John Hancock (Mr Hancock) have sought to cross‑appeal. The Court of Appeal has ordered that the applications for leave to appeal be heard with the appeals. The parties have requested that the appeals (the Appeals) be heard in November 2019.
  3. The plaintiffs in the consolidated proceedings and the Rhodes proceedings submitted that the court should now give directions programming further steps in the proceedings. The HPPL parties and the GHR parties submitted that the court should take no further interlocutory steps until the Appeals have been resolved. On 24 July 2019, I delivered my reasons for determining that the court should give directions for further interlocutory steps to be taken: Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd [No 11].
  4. The parties do not agree what directions the court should now make for the progress of the action. In these reasons I set the directions the court will now give and my reasons for giving those directions.

Pleadings

  1. On 23 September 2016, I ordered that the defendants were not required to file a defence or amended defence until ordered by the court to do so. Having determined that the court should now give directions to progress the action it is appropriate that the defendants, other than the fifth and sixth defendants (Hope and Ginia), should now file a defence or amended defence by 1 September 2019.
  2. Hope and Ginia submit that they should not be required to file a defence before the resolution of the Appeals. First, they say that that is the effect or intention of my reasons in Wright Prospecting Pty Ltd v Hancock Prospecting Pty Ltd [No 11] where at [31] I said that the appropriate course was to make the limited directions proposed by the Rhodes parties. The only order in relation to pleadings, proposed by the Rhodes parties in their amended minute of proposed orders of 28 February 2019, was that any party that intends to file a reply to the defence filed by Ms Rinehart and Mr Hancock do so on or before 29 March 2019.
  3. At the hearing on 1 March 2019 WPPL proposed that I make directions in relation to pleadings, discovery, evidence and a tender bundle. The Rhodes parties proposed directions in relation only to pleadings and discovery. By referring to the limited directions proposed by the Rhodes parties I was referring to directions in relation to pleadings and discovery, but not necessarily the orders formulated in the Rhodes parties amended minute of proposed orders. I had not at that time determined what directions should be made in relation to pleadings and, in particular, whether or not Hope and Ginia should be required to file and serve a defence.
  4. Secondly, Hope and Ginia say that they should not be required to file a defence because to do so would destroy the right, which they say they have under the Hope Downs deed, to have any matter in dispute under the deed resolved by confidential arbitration.
  5. The orders sought by the HPPL parties on appeal are:
    1. The defendants to the proceedings be referred to arbitration in respect of the defence of [Ms Rinehart and Mr Hancock], pursuant to s 8(1) of the Commercial Arbitration Act 2012 (WA).
    2. The defence of [Ms Rinehart and Mr Hancock] be stayed pursuant to s 8(1) of the Commercial Arbitration Act 2012 (WA), or in the Court’s inherent jurisdiction.
    3. The Court stay the whole of the proceedings pursuant to its general power to control its own proceedings pending the arbitral reference pursuant to Order 1 of the court below made on 21 December 2018, any arbitral reference pursuant to Order 3 above, or the arbitral reference pursuant to Order 5(a) of the orders made by the Full Court of the Federal Court of Australia (Allsop CJ and Besanko and O’Callaghan JJ) on 15 December 2017 in Federal Court of Australia proceedings NSD 916/2016 and NSD 922/2016 (Full Court orders), or until further order of the Court.
    4. In the alternative to orders 3, 4 and 5 above, the Court restrain [Ms Rinehart and Mr Hancock], pursuant to the inherent power of the Court, s 25(9) of the Supreme Court Act 1935 (WA) or s 17J of the Commercial Arbitration Act 2012 (WA), from making any claim in the proceedings in respect of the ‘Hope Downs tenements’ (as that term is defined in the counterclaim of [Ms Rinehart and Mr Hancock] or asserting any right to or interest in the Hope Downs tenements pending the arbitral reference pursuant to Order 1 of the court below made on 21 December 2018, any arbitral reference pursuant to Order 3 above, or the arbitral reference pursuant to Order 5(a) of the Full Court orders, or until further order of the Court.
  6. If the appellants are successful in the Appeals and the proceedings are stayed, Hope and Ginia will not be required to file a defence in this court, at least until the resolution of the arbitral proceedings. Hope and Ginia say in effect that the Hope Downs deed gives them a right to have any dispute under the deed, which includes matters alleged by Ms Rinehart and Mr Hancock, resolved by confidential arbitration. Hope and Ginia say that if they are required to file a defence, that right will be destroyed and the harm done will be irremediable if the appellants are successful in the Appeals.
  7. The defence of Hope and Ginia will respond to the claims of WPPL in the consolidated proceedings and the Rhodes parties in the Rhodes proceedings. Those matters are not within the scope of the arbitral clauses in the relevant deeds. Furthermore, persons other than the parties to these court proceedings are not entitled to access pleadings, other than a statement of claim indorsed on the writ, without the permission of the court. Documents or information produced in these proceedings pursuant to orders will be protected from disclosure to other persons by the common law doctrine summarised by the High Court in Hearn v Street. No irremediable harm will be done to Hope and Ginia by requiring them to file and serve a defence.
  8. I will direct that Hope and Ginia file and serve a defence or alternatively notice that they will not participate in the proceedings and will abide by any order or judgment of the court. Counsel for Hope and Ginia request that if they are required to file a defence they be allowed 12 weeks to do so. The court must have regard to the overriding purpose of O 1 r 4A and O 1 r 4B of the Rules of the Supreme Court 1971 (WA) (RSC) to eliminate unnecessary delay and facilitate the efficient and expeditious resolution of matters consistent with their just determination. Hope and Ginia were joined as defendants on 23 September 2016. They have been respondents to the Federal Court proceedings since they were commenced in 2014. They have had ample opportunity to consider and prepare their defences. I will direct that they file and serve notice that they will abide any order or judgment of the court by 28 August 2019 or alternatively file and serve any defence by 20 September 2019.
  9. I will direct that any other party file and serve any amended defence by 20 September 2019.
  10. I will direct that the plaintiffs file and serve any reply to the defence filed by Ms Rinehart and Mr Hancock on or before 20 September 2019.

Discovery

  1. The plaintiffs in each proceeding proposed that each party to the plaintiffs’ proceeding provide to each other party a copy of:

(a) all discovery made by it in the proceedings, to the extent not already provided to that party and subject to compliance with any orders as to confidentiality; and

(b) all expert reports filed by it in the proceedings, to the extent not already provided to that party and subject to compliance with any orders as to confidentiality.

  1. The parties did not identify the relevant confidentiality orders and whether or not any further order or amendment will be necessary or convenient to facilitate the discovery orders that I will make. If that is necessary then the plaintiffs, or the appropriate party, should confer and if necessary apply for a further order or amendment.
  2. It is appropriate that the discovery proposed be given. The date for giving discovery should be after the pleadings have closed and the issues have been defined. I will direct that discovery be given in the form proposed by 18 October 2019.
  3. The plaintiffs in each proceeding further propose that Ms Rinehart and Mr Hancock give discovery in relation to all matters in question in the proceedings. Order 26 of the RSC defines the obligation of discovery by reference to documents that relate to matters in question in the cause or matter. It does not confine the obligation to matters in question between the parties seeking discovery and the party from whom it is sought.
  4. There is a difference between the parties as to whether and to what extent each party should give discovery in relation to matters in question in the action, but which are not in question between the parties seeking discovery and the party giving discovery. It has not been argued beyond an assertion by the Rhodes parties that such discovery should be given. If any party seeks discovery from a party in relation to matters in question in the action, but which are not in question between the parties seeking discovery and the party from whom discovery is sought, the parties seeking discovery should initiate conferral and, if the matter is not resolved by conferral, bring an application for the further discovery sought. I will direct that by 18 October 2019, Ms Rinehart and Mr Hancock provide discovery, that is, discovery in relation to matters in question between them and the plaintiffs. I will direct that by 18 October 2019, the parties to the plaintiffs’ proceedings in each proceeding (excluding the third party) provide any further discovery, that is, so far as the defendants are concerned, further discovery in relation to matters in question between the plaintiffs and the defendant giving discovery.

Stay of proceedings

  1. The HPPL parties and GHR parties seek an order that these procedural orders be stayed for 21 days to enable them to consider an appeal against the orders and file an appeal and an application for a stay of the orders pending appeal if they so decide.
  2. I will make a temporary stay order. In the exercise of my case management powers it is appropriate that I do so. It will enable the HPPL parties and GHR parties to consider their position and bring an appropriate application in an orderly fashion, without requiring the parties and the court to attend to such an application in an unnecessarily urgent manner.

Further directions

  1. I will direct that there be a further directions hearing on 22 October 2019. Of course, any party may apply to my associate to relist the matter for directions at an earlier time if events occur which make that appropriate.

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

9 AUGUST 2019

One Tree Community Service Inc v United Voice [2019] FCA 1309 (19 August 2019)

FEDERAL COURT OF AUSTRALIA

One Tree Community Service Inc v United Voice [2019] FCA 1309

File number:
WAD 389 of 2019
Judge:
MCKERRACHER J
Date of judgment:
19 August 2019
Catchwords:
INDUSTRIAL LAW – where dispute about payment of redundancy and recognition of service of transferred employees was referred to Fair Work Commission for arbitration – employer challenged Commission’s jurisdiction – Commission satisfied as to jurisdiction

INDUSTRIAL LAW – where the employer commenced proceedings in this Court challenging the Commission’s jurisdiction to arbitrate – whether the new employer ‘consented’ to arbitration – scope of agreement to arbitrate – parties to agreement to arbitrate

CONSTITUTIONAL LAW – whether the Commission would be impermissibly exercising judicial power in arbitrating the dispute – private arbitration – whether the Commission would be infringing Ch III of the Constitution

PRACTICE AND PROCEDURE – application for interlocutory relief – whether a prima facie case established – whether balance of convenience favoured relief

Date of hearing:
14 August 2019
Registry:
Western Australia
Division:
Fair Work Division
National Practice Area:
Employment & Industrial Relations
Category:
Catchwords
Number of paragraphs:
64

ORDERS

WAD 389 of 2019
BETWEEN:
ONE TREE COMMUNITY SERVICES INC. ABN 74 914 567 313
Applicant
AND:
UNITED VOICE
First Respondent

FAIR WORK COMMISSION
Second Respondent

JUDGE:
MCKERRACHER J
DATE OF ORDER:
19 AUGUST 2019

UPON THE APPLICANT, BY ITS COUNSEL, UNDERTAKING:

(a) to submit to such order (if any) as the Court may consider to be just for the payment of compensation (to be assessed by the Court or as it may direct) to any person (whether or not that person is a party) affected by the operation of the order or undertaking or any continuation (with or without variation) of the order or undertaking; and

(b) to pay the compensation referred to in (a) to the person affected by the operation of the order or undertaking.

THE COURT ORDERS THAT:

  1. Until the hearing and determination of the originating application or further order (the Court’s Decision), the Second Respondent be restrained from hearing or determining by way of arbitration the dispute the subject of Fair Work Commission proceeding number C2019/1489 (the Dispute).
  2. These orders be stayed for 48 hours and thereafter discharged if the Second Respondent determines to adjourn the hearing of the Dispute and stay any interlocutory orders, until the Court’s Decision.
  3. Costs reserved.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MCKERRACHER J:

THE APPLICATION

  1. The applicant, One Tree Community Services Inc., seeks urgent interlocutory relief restraining the second respondent, the Fair Work Commission, from proceeding with an arbitration. The interlocutory relief is in support of substantive relief for constitutional writs, an injunction and a declaration.
  2. One Tree raises the novel contention that the Commission will be invalidly exercising the judicial power of the Commonwealth by purporting to deal with the dispute by way of ‘arbitration’ under s 738(b) and s 739(4)of the Fair Work Act 2009 (Cth) (the FW Act), in circumstances where the respondent to the dispute, being One Tree:

(a) did not make (in the sense defined by s 182(1) of the FW Act) the relevant enterprise agreement containing the term purporting to vest the Commission with the power to arbitrate or resolve the dispute;

(b) did not make, agree or otherwise consent to the terms of the relevant enterprise agreement which purports to vest the Commission with power to arbitrate or resolve the dispute;

(c) is covered by and subject to the application of the relevant enterprise agreement only by operation of s 313(1)(a) of the FW Act; and

(d) did not otherwise:

(i) agree with the dispute applicant or otherwise consent to dealing with the dispute by the dispute applicant under any term of a relevant enterprise agreement by way of private arbitration in accordance with s 738(b) and s 739(4) of the FW Act; or

(ii) did not otherwise agree with the dispute applicant or otherwise consent to dealing with the dispute brought by the applicant by way of private arbitration under any other arbitral agreement.

THE BACKGROUND

  1. The underlying facts by way of summary are that on 23 July 2013, the Commission approved the Mission Australia Early Learning Services Enterprise Agreement, 2013-2016 (the EA). The EA was made by MissionAustralia Early Learning Services (as it was then known) and certain of its employees covered by the EA. One Tree was uninvolved with the making of the EA.
  2. Over five years later, and as part of an agreement with Mission, One Tree made offers of employment to various employees employed by Mission, whose employment was covered by the EA. They subsequently commenced employment with One Tree in around January 2019 (the Transferring Employees) under separate employment contracts discussed below.
  3. On 5 March 2019, the first respondent, United Voice, an industrial organisation, wrote to One Tree alleging that United Voice was in dispute with One Tree for the purpose of cl 77 of the EA, concerning the service histories of United Voice’s members who were Transferring Employees. United Voice allege that ‘it was not open for One Tree to decide not to recognise the transferring employees’ service for the purpose of redundancy’ (the Dispute). United Voice said it intended to notify the Commission of the Dispute as permitted by cl 77.5 of the EA.
  4. On 7 March 2019, United Voice filed in the Commission a Form 10, an Application for the Commission to deal with a dispute in accordance with a dispute settlement procedure, seeking to refer the Dispute with One Tree to the Commission in accordance with s 739 of the FW Act and cl 77 of the EA.
  5. Clause 77 of the EA, the Dispute Resolution Clause (the DRC), is in the following terms:

77. Procedures for preventing and settling disputes

77.1 If a dispute relates to:

(a) a matter arising under this Agreement other than relating to termination of employment; or

(b) the National Employment Standards;

this Section sets out procedures to settle the dispute.

77.2 An employee who is a party to the dispute may appoint a representative for the purposes of the procedures in this Section.

77.3 In the first instance, the parties to the dispute must try to resolve the dispute at the workplace level, by discussions between the employee or employees and the relevant supervisors and/or managers.

77.4 If discussions at the workplace level do not resolve the dispute, a party to the dispute may refer the matter to the Fair Work Commission.

77.5 The Fair Work Commission may deal with the dispute in two stages:

(a) the Fair Work Commission will first attempt to resolve the dispute as it considers appropriate, including by mediation, conciliation, expressing an opinion or making a recommendation; and

(b) if the Fair Work Commission is unable to resolve the dispute at the first stage, the Fair Work Commission may then:

(i) arbitrate the dispute; and

(ii) make a determination that is binding on the parties.

77.6 While the parties are trying to resolve the dispute using the procedures in this Section;

(a) an employee must continue to perform his or her work as he or she would normally unless he or she has a reasonable concern about an imminent risk to his or her health or safety; and

(b) an employee must comply with a direction given by the employer to perform other available work at the same workplace, or at another workplace, unless;

(i) the work is not safe;

(ii) applicable occupational health and safety legislation would not permit the work to be performed;

(iii) the work is not appropriate for the employee to perform; or

(iv) there are other reasonable grounds for the employee to refuse to comply with the direction.

77.7 The parties to the dispute agree to be bound by a decision made by the Fair Work Commission in accordance with this Section.

  1. One Tree did not in any conventional sense ‘agree’ to cl 77 of the EA, not having been a party to the EA. It did not reach any agreement with United Voice or anyone else as to the terms of cl 77 of the EA.
  2. Section 313 of the FW Act, in substance, however, purportedly applies the terms of the EA, including cl 77, to One Tree by operation of law as a ‘transferable instrument’ with respect to the Transferring Employees.
  3. One Tree contends that it did not agree with United Voice or anyone else for the Commission to arbitrate or resolve any disputes with United Voice or its members, including the Dispute.
  4. One Tree raised this objection and other matters in the Dispute proceedings, denying that the Commission had jurisdiction to arbitrate or otherwise resolve the Dispute in the absence of consent or agreement of One Tree. By decision delivered on 3 July 2019, the Commission held that it had jurisdiction to hear and determine the Dispute by way of arbitration. The Commission subsequently listed an arbitration hearing in relation to the Dispute for 3 September 2019.
  5. Although the Commission determined that it did have jurisdiction, it noted a submission by United Voice that any constitutional challenge was a question that should be determined by a court. One Tree proceeds with this application in this Court. The Commission has filed a submitting appearance.

CONSTITUTIONAL MATTER

  1. Notices of a constitutional matter have been issued under s 78B of the Judiciary Act 1903 (Cth). The constitutional matter is self-evident. The notices have adequately described it. Most Attorneys-General have responded. None wishes to be heard at this stage. As the matter is interlocutory and prompt relief is sought, it would, in any event, be appropriate to proceed: see s 78B(5) of the Judiciary Act.

EVIDENCE

  1. Nothing in argument suggested, at least at this stage, that the content of the evidence was controversial save that United Voice points out that only contractual templates have been produced rather than the actual contracts with employees.
  2. One Tree’s application was supported by an affidavit sworn by Ms Irina Cattalini, an Executive Director of One Tree, sworn on 7 August 2019, deposing to the essential matters, many of which in brief form have been referred to above.
  3. In response and in opposition to the interlocutory relief sought, United Voice relies upon an affidavit of Mr Stephen Bull, Industrial Coordinator and lawyer for United Voice, who also appeared on its behalf to argue against the interlocutory relief.
  4. The business which One Tree acquired from Mission was the operation of the assets in the Defence Childcare Program (DCCP) as a service provider on behalf of the Commonwealth’s Department of Defence. It involves the operation and management of various childcare service centres, outside school hours care facilities and case management services for defence personnel, families and local communities. One Tree is a registered charity. It has substantial assets and revenue.
  5. Between the award of the tender by the Commonwealth to One Tree in July 2018 and it commencing pursuant to that tender the operation of the DCCP business on 1 January 2019, One Tree made offers of employment to a number of Mission’s employees. Those offers all stated that One Tree would not recognise the prior service of those employees with Mission for the purposes of current or future redundancy entitlements at One Tree. One Tree says that position was consistent with its rights at common law as recognised by s 122(1) of the FW Act. Such offers were accepted by 171 employees of Mission on that basis and who commenced employment on or about 1 January 2019. These were the Transferring Employees referred to above.
  6. One Tree accepts that the Transferring Employees were and are covered by the EA. One Tree accepts that by operation of law and irrespective of the consent or agreement of One Tree to this outcome, the Transferring Employees remain so covered in their employment with One Tree. Pursuant to s 313(1)(a) of the FW Act, the agreement now covers and applies to One Tree and the Transferring Employees as a ‘transferable instrument’, with the elements of s 311 of the FW Act being satisfied.
  7. United Voice raised the Dispute contending that cl 61 and perhaps cl 63 of the EA requires or compels One Tree to recognise prior service of the employees for that purpose. One Tree contends that such recognition is not required. Clause 61 and cl 63 of the EA are in these terms:

61. Transfer of Employment

61.1 Where there is a transfer of employment in relation to an employee as specified in subsection 22(7) of the Fair Work Act, the employee is not entitled to any redundancy pay due to the termination of his or her employment by [Mission].

61.2 An employee is not entitled to redundancy pay in relation to the termination of his or her employment if:

(a) the employee rejects an offer of employment by another employer (the second employer) that:

(i) is on terms and conditions substantially similar to, and, considered on an overall basis, no less favourable than, the employee’s terms and conditions of employment with [Mission] immediately before the termination; and

(ii) recognises the employee’s service with [Mission]; and

(b) had the employee accepted the offer, there would have been a transfer of employment in relation to the employee,

subject to any order by the Fair Work Commission to pay the employee redundancy pay where it is satisfied that the employee was treated unfairly.

63. Redundancy payments

63.1 Where an employee is not able to be redeployed and he or she is terminated on the grounds of redundancy, the employee is entitled to the following redundancy payments:

The Commission

  1. In a detailed and considered decision (United Voice v One Tree Community Services Inc [2019] FWC 4235), the Commission, having set out in detail the submissions of One Tree and United Voice, rejected One Tree’s objection and held that it was properly vested with jurisdiction to hear and determine the Dispute.
  2. Following this decision, directions were made by the Commission for filing of materials, including for One Tree to file its materials now in two business days’ time.

JURISDICTION AND INTERLOCUTORY INJUNCTION

  1. The Court has jurisdiction to hear and determine the originating application on one or more of the following bases:

(a) pursuant to s 39B(1) of the Judiciary Act, insofar as it seeks to a writ of prohibition against the Commission, which is constituted by officers of the Commonwealth;

(b) pursuant to s 39B(1A)(b) of the Judiciary Act, as a matter arising under the Constitution;

(c) pursuant to s 39B(1A)(c) of the Judiciary Act, as a matter arising under the FW Act; and

(d) pursuant to s 562 of the FW Act, which confers jurisdiction on this Court ‘in relation to any matter (whether civil or criminal) arising under this Act’.

  1. There was no dispute between the parties as to the appropriate test to apply in considering whether to grant the interlocutory injunction sought: see, for example, Australian Broadcasting Corporation v O’Neill [2006] HCA 46; (2006) 227 CLR 57 (at [65]-[72] and the authorities therein cited). At this interlocutory stage, the Court is concerned with whether the applicant has established a prima facie case and whether the interim order should be made on the balance of convenience, with regard to the prejudice which would flow and the interests of justice. The contention for United Voice is that neither limb of the test is made out such that no interlocutory relief should be ordered that impedes the progress of the arbitration of the Dispute by the Commission on 3 September 2019.

THE PARTIES’ ARGUMENTS

  1. United Voice’s argument is that the contentions advanced by One Tree are completely unfounded, novel only because they are unarguable and that the course proposed by United Voice accords entirely with many years of industrial process. United Voice also argues, in summary, that the relatively straightforward arbitration proceeding, listed for only half a day, should be permitted to proceed in its ordinary course, rather than be deferred for resolution of this jurisdictional dispute, which is much more likely to take up considerably greater resources and costs.
  2. Shortly put, the argument raised by One Tree is that in the absence of any arbitration agreement between One Tree and United Voice or any transferring employee, the Commission has no jurisdiction to arbitrate the Dispute, as any attempt to do so against the will of One Tree involves the impermissible exercise of the judicial power of the Commonwealth. That is, it is said, because such arbitration in the Commission can only be consensual.
  3. It is common ground that the Commission ordinarily exercises a power of ‘private arbitration’. One Tree contends that by the EA, which covers and applies to it by operation of statutory device, it has not accepted any private arbitration by the Commission. It argues that any attempt to arbitrate would amount to the determination of existing rights and obligations in the absence of One Tree’s consent and would amount to an impermissible exercise of judicial power by a body other than a Ch III CourtThis follows, it says, from ss 595(1), 595(3), 595(5), 738(b) and 739(4) of the FW Act, all of which operate only on the premise of the parties agreeing that the Commission may arbitrate. Those provisions are relevantly as follows:

595 [Commission’s] power to deal with disputes

(1) The [Commission] may deal with a dispute only if the [Commission] is expressly authorised to do so under or in accordance with another provision of this Act.

(2) The [Commission] may deal with a dispute (other than by arbitration) as it considers appropriate, including in the following ways:

(a) by mediation or conciliation;

(b) by making a recommendation or expressing an opinion.

(3) The [Commission] may deal with a dispute by arbitration (including by making any orders it considers appropriate) only if the [Commission] is expressly authorised to do so under or in accordance with another provision of this Act.

Example: Parties may consent to the [Commission] arbitrating a bargaining dispute (see subsection 240(4)).

(4) In dealing with a dispute, the [Commission] may exercise any powers it has under this Subdivision.

Example: The [Commission] could direct a person to attend a conference under section 592.

(5) To avoid doubt, the [Commission] must not exercise the power referred to in subsection (3) in relation to a matter before the [Commission] except as authorised by this section.

Subdivision B – Dealing with disputes

  1. Application of this Division

This Division applies if:

(b) an enterprise agreement includes a term that provides a procedure for dealing with disputes, including a term referred to in subsection 186(6); or

739 Disputes dealt with by the [Commission]

(1) This section applies if a term referred to in section 738 requires or allows the [Commission] to deal with a dispute.

(4) If, in accordance with the term, the parties have agreed that the [Commission] may arbitrate (however described) the dispute, the [Commission] may do so.

Note: The [Commission] may also deal with a dispute by mediation or conciliation, or by making a recommendation or expressing an opinion (see subsection 595(2)).

(5) Despite subsection (4), the [Commission] must not make a decision that is inconsistent with this Act, or a fair work instrument that applies to the parties.

(6) The [Commission] may deal with a dispute only on application by a party to the dispute.

(Emphasis added.)

  1. Section 313 of the FW Act, which is pivotal to resolution of this issue, provides:
    1. Transferring employees and new employer covered by transferable instrument

(1) If a transferable instrument covered the old employer and a transferring employee immediately before the termination of the transferring employee’s employment with the old employer, then:

(a) the transferable instrument covers the new employer and the transferring employee in relation to the transferring work after the time (the transfer time) the transferring employee becomes employed by the new employer; and

(b) while the transferable instrument covers the new employer and the transferring employee in relation to the transferring work, no other enterprise agreement or named employer award that covers the new employer at the transfer time covers the transferring employee in relation to that work.

(2) To avoid doubt, a transferable instrument that covers the new employer and a transferring employee under paragraph (1)(a) includes any individual flexibility arrangement that had effect as a term of the transferable instrument immediately before the termination of the transferring employee’s employment with the old employer.

(3) This section has effect subject to any FWC order under subsection 318(1).

  1. One Tree contends that the drafting and structure of the combination of the statutory provisions no doubt reflects constitutional limitations on the capacity of the Commonwealth legislature to confer judicial power on a body other than a Ch III court and no doubt seeks to conform with the judgment of the High Court of Australia in Construction, Forestry, Mining and Energy Union v Australian Industrial Relation Commission[2001] HCA 16; (2001) 203 CLR 645 (the Private Arbitration case). The High Court (Gleeson CJ, Gaudron, McHugh, Gummow, Kirby, Hayne and Callinan JJ) stated ([26], [29]-[31]):
    1. So far as concerns arbitrated provisions with respect to dispute resolution procedures, it should be noted that a dispute as to the powers the Commission should, but does not have, is not an industrial dispute and will not ground an award by which the Commission gives itself power to do that which it is not otherwise authorised to do. Moreover, an arbitrated dispute resolution provision will be invalid to the extent that it purports to confer judicial power on the Commission or any one else. For present purposes, it is sufficient to note that a power to make a binding determination as to legal rights and liabilities arising under an award or agreement is, of its nature, judicial power.

  1. What was said in Hegarty applies, but with some modification, to an agreement by parties to an industrial situation. As already indicated, it is incidental to the conciliation and arbitration power for the Parliament to permit parties to an industrial situation to agree on the terms on which they will settle the matters in issue between them conditional upon their agreement having the same legal effect as an award. So, too, it is incidental to that power for the Parliament to give legal effect to agreed procedures for maintaining a settlement of that kind and, also, for it to authorise the Commission to participate in those procedures.
  2. There is, however, a significant difference between agreed and arbitrated dispute settlement procedures. As already indicated, the Commission cannot, by arbitrated award, require the parties to submit to binding procedures for the determination of legal rights and liabilities under an award because Ch III of the Constitution commits power to make determinations of that kind exclusively to the courts. However, different considerations apply if the parties have agreed to submit disputes as to their legal rights and liabilities for resolution by a particular person or body and to accept the decision of that person as binding on them.
  3. Where parties agree to submit their differences for decision by a third party, the decision maker does not exercise judicial power, but a power of private arbitration. Of its nature, judicial power is a power that is exercised independently of the consent of the person against whom the proceedings are brought and results in a judgment or order that is binding of its own force. In the case of private arbitration, however, the arbitrator’s powers depend on the agreement of the parties, usually embodied in a contract, and the arbitrator’s award is not binding of its own force. Rather, its effect, if any, depends on the law which operates with respect to it.

(Emphasis added, citations omitted.)

  1. One Tree argues that there is a constitutional necessity for agreement (which is usually embodied in a contract) by the parties to a dispute to have the difference resolved by the Commission as expressly recognised by s 739(4) of the FW Act. The passages referred to in the Private Arbitration case make clear that the essential characteristic grounding the arbitrator’s power is the agreement between the parties to submit disputes to a third party for determination. French CJ and Gageler J repeat this requirement in TCL Air Conditioner (Zhongshan) Co Ltd v Judges of Federal Court of Australia [2013] HCA 5; (2013) 251 CLR 533 (at [29]) in these terms:

Therein is the essential distinction between the judicial power of the Commonwealth and arbitral authority, of the kind governed by the Model Law, based on the voluntary agreement of the parties. The distinction has been articulated in the following terms:

Where parties agree to submit their differences for decision by a third party, the decision maker does not exercise judicial power, but a power of private arbitration. Of its nature, judicial power is a power that is exercised independently of the consent of the person against whom the proceedings are brought and results in a judgment or order that is binding of its own force. In the case of private arbitration, however, the arbitrator’s powers depend on the agreement of the parties, usually embodied in a contract, and the arbitrator’s award is not binding of its own force. Rather, its effect, if any, depends on the law which operates with respect to it.

The context of that articulation puts its reference to “private arbitration” in appropriate perspective. The context was that of a challenge to the capacity of a statutory body consistently with Ch III of the Constitution to exercise a statutory function to settle a dispute where so empowered by an agreement entered into as a result of statutory processes. The reference to “private arbitration” was not to a private function, as distinct from a public function, but rather to a function the existence and scope of which is founded on agreement as distinct from coercion.

(Emphasis added, citations omitted.)

  1. Similarly in Rinehart v Hancock Prospecting Pty Ltd [2019] HCA 13; (2019) 93 ALJR 582 (at [85]), Edelman J observed that it was a ‘fundamental principle that arbitration is a matter of contract’.
  2. One Tree contends that general law conventional contractual principles of offer and acceptance apply in determining whether an arbitration agreement has been formed. That, it is said, is apparent from a number of cases, including the decision of Dowsett J in Balfour Beatty Power Construction Australia Pty Ltd v Kidston Goldmines Ltd [1989] 2 Qd R 105, followed by Emmett J in Hi-Fert Pty Ltd v United Shipping Adriatic Inc (1998) 89 FCR 166 (at 194-195).
  3. In this instance there is no suggestion or evidence, One Tree argues, of any express or implied offer or acceptance necessary to establish an arbitration agreement, either between One Tree and United Voice or One Tree and any of the Transferring Employees. The only offer and acceptance, if any, was between Mission and its employees at the point the EA was ‘made’ under s 182(1) of the FW Act. Clearly One Tree had no involvement in that process.
  4. It is not sufficient, One Tree argues, that the EA now ‘covers’ and applies to One Tree by operation of statute (s 313 of the FW Act), whether it likes it or not. That, One Tree says, cannot of itself establish a valid arbitration agreement. It is not even clear, for example, what the identity of the other party to that purported agreement would be. On this topic, One Tree also argues, even if United Voice could establish a valid arbitration agreement, the doctrine of ‘separability’ would apply requiring specific evidence of an intention to agree to cl 77.5: see Walter Rau Neusser Oel und Fett AG v Cross Pacific Trading Ltd [2005] FCA 1102 per Allsop J (as the Chief Justice then was) (at [89]).
  5. Significantly, according to One Tree, unlike all the other various terms and conditions of employment agreed to between One Tree and the Transferring Employees, the terms of the EA, their existence and applicability to the employment were recognised ‘as a matter of law’ only, but were expressly noted as not forming part of the contract of employment. By cl 51 of the Contracts of Employment, it was provided:

To the extent permitted by law, any legislation or Applicable Industrial Instrument applies to the Employment as a matter of law and does not form part of this Agreement.

(Emphasis added.)

  1. One Tree argues, therefore, that insofar as One Tree and the Transferring Employees were concerned, both parties expressly agreed to ‘not agree’ to the terms of the EA.
  2. Further, the relevant parts of the agreement between One Tree and the Transferring Employees provided:

One Tree will recognise the length and continuity of your period of service with [Mission] (including any period of service deemed by law or contract) for all purposes (except redundancy entitlements) and will assume and take on any:

  • accrued but untaken annual leave entitlements;
  • accrued but untaken long service leave entitlements;
  • accrued but untaken personal/carer’s leave entitlements;
  • accrued but untaken parental leave entitlements; and
  • associated service-related entitlements that have accrued to you prior to the Commencement Date.

One Tree will not recognise prior service for the purposes of current or future redundancy entitlements (including any redundancy entitlements which may arise under Subdivision B of Division 11 of Part 2-2 of the [FW Act] or any Applicable Industrial Instrument).

(Emphasis added.)

  1. One Tree argues that just as it did not ‘have’ to acquire Mission’s assets, employees were not ‘bound’ to take One Tree’s employment.

Whether there is a prima facie or arguable case

  1. In addition to United Voice’s argument noted above (at [25]), United Voice says that the Commission has already considered and determined the argument raised by One Tree. However, I note that in submissions to the Commission, United Voice did appropriately note that some arguments of constitutionality were matters that needed to be raised before a court. An avenue that One Tree has pursued.
  2. From a balance of convenience point of view, United Voice argues that One Tree had the opportunity to appeal to a full bench of the Commission and did not use its right to do so. As to that, One Tree argues that it would be at risk of submitting to the jurisdiction by lodging such an appeal. On its face, there is some merit in that contention: see Energy Australia Yallourn Pty Ltd v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union [2017] FCA 1245 (at [146]).
  3. United Voice also relies on TCL. In TCL, Hayne, Crennan, Kiefel and Bell JJ observed (at [106]):

No delegation of judicial power

  1. The submission by TCL that the judicial power of the Commonwealth was delegated under the IA Act to arbitral tribunals in contravention of the requirements of Ch III of the Constitution invoked the principle established in R v Kirby; Ex parte Boilermakers’ Society of Australia. That submission also reflected a failure to acknowledge the consensual foundation of private arbitration which governs the relationship between private arbitration and the courts.

(Citations omitted.)

  1. But reliance on this passage only invites the first question of whether or not arbitral power has been validly conferred by agreement or is otherwise constitutionally valid under statute, particularly s 313 of the FW Act.
  2. I accept that United Voice identifies an important facet of the dispute when it contends that the EA and its DRC came to cover One Tree because of ‘what it did’. The transfer of the EA to One Tree was an intentional act. One Tree executed an asset transfer agreement that brought about the transfer of the EA with a cohort of employees. On any ordinary meaning, United Voice argues One Tree gave its consent to being covered by the EA.
  3. United Voice argues that the transfer of the EA to One Tree was done according to the scheme of Pt 2-8 of the FW Act. While transfers of business take effect by operation of law, One Tree intentionally did the necessary things for the transfer to take place and did so with clear knowledge that the EA, in its entirety, would cover One Tree with regard to the employment of the Transferring Employees. United Voice points out that the transfer of the EA with its DRC was considered, hard fought and anticipated by One Tree. United Voice says the issue the subject of the Dispute in the Commission was a critical aspect of the negotiations and the asset transfer agreement. The EA was known and the DRC in the EA should have been an important part of One Tree’s due diligence for the transaction. It had clear choices. It could have walked away from the transfer of business arrangement or possibly applied under s 320 of the FW Act for variation of the transferable instrument. (One Tree doubts the latter provision would be applicable and I share One Tree’s doubt as to the applicability of s 320 as the necessary conditions for a variation would need to be satisfied.)
  4. United Voice also stresses (correctly) that any enterprise agreement must have a clause for settling disputes. It is mandatory content as prescribed by s 186(6) of the FW Act.
  5. United Voice also argues that a person, whether an employee or an employer, cannot, by less beneficial contractual terms exclude the operation of an enterprise agreement, the rights pursuant to which would be able to be vindicated by civil penalty proceedings under s 50 of the FW Act. While this contention may be correct, it would appear to stand and fall with the answer to the reasonably narrow question of whether or not One Tree has ‘agreed’ to arbitrate the Dispute and whether to otherwise to compel it to do so and be bound by the outcome would be unconstitutional.
  6. Importantly, I think, United Voice emphasises that enterprise agreements made under the FW Act apply to persons due to the agreement’s coverage. The use by One Tree of contractual terms of offer and acceptance United Voice argues, is misleading. An enterprise agreement applies to employees and employers if the agreement is expressed to cover (however described) the employees and employers: s 52(1) of the FW Act. It is not limited to those covered at the time the enterprise agreement is made and an enterprise agreement will cover an employee, employer or employee organisation as a result of, amongst other things, ‘a provision of [the FW Act] or of the Registered Organisation Act’ pursuant to s 53(3)(a) of the FW Act. It is commonplace, United Voice argues, and I think correctly, for enterprise agreements to cover employees not within an original cohort that made the agreement. New employees engaged after the approval of an enterprise agreement will be covered. Similarly, United Voice argues, employee organisations are not parties to enterprise agreements and do not make agreements but are covered by enterprise agreements and able to assert rights under those agreements on behalf of employees who they are entitled to represent by force of the FW Act. In other words, the fact that no agreement was reached between United Voice and One Tree does not mean United Voice is not entitled to pursue rights on behalf of employees affected by the EA pursuant to the provisions under the FW Act in the Commission.
  7. United Voice argues that Walter Rau and other authorities relied upon by One Tree, which are essentially commercial cases, are of limited assistance in light of the statutory character of enterprise agreements. This argument may well be correct, but I think it is part and parcel of the very question to be determined as to whether there was actual or deemed consent to arbitration or whether such consent is necessary.
  8. There was debate between the parties on the issue of the role of United Voice, which was not a direct party to the EA, but is a direct party to the proceedings in the Commission, having raised the Dispute. United Voice relies upon Energy Australia Yallourn Pty Ltd v Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union [2017] FCA 1245, where Bromberg J held that a union was able to initiate a dispute under the agreement in the absence of a disputed employee being named and that all affected would be bound by the outcome. That approach was confirmed on appeal in Energy Australia Yallourn Pty Ltd v Automotive, Food, Metal, Engineering, Printing and Kindred Industries Union (2018) 363 ALR 60, where Rares and Barker JJ described the enterprise agreement as a ‘statutory artefact’ made by persons specifically empowered by the FW Act to do so by having a ‘legislative character’. Their Honours said (at [60]):

An enterprise agreement is a statutory artefact made by persons specifically empowered by the [FW Act] to do so: Marmara at [90]. It has a legislative character, because it is a fair work instrument, as defined in s 12 of the [FW Act]. The Act enables an enterprise agreement to be made between an employer and both its employees (by majority vote) and employee organisations, such as the five unions.

CONSIDERATION

  1. Much of this case turns on whether the EA’s DRC is such that it encompasses authorising an arbitration between One Tree and United Voice in respect of the Dispute involving the Transferring Employees. Did One Tree consent? Can One Tree be deemed by statute, in effect, to have consented? Would a provision having the effect of deeming such consent be constitutional?
  2. Enterprise agreements represent bargains concluded by industrial parties – employers and employees and their nominated union representatives, or employers and employees – that are generally enterprise or business specific, though they may in certain circumstances cover multiple enterprises. Enterprise agreements are not, in and of themselves, ‘laws’, but are given the force of law by the federal industrial relations regime: cf City of Wanneroo v Australian Municipal, Administrative, Clerical and Services Union[2006] FCA 813; (2006) 153 IR 426 per French J (at [51] and the authorities therein cited). Enterprise agreements are given statutory force by a registration process prescribed by legislation.
  3. However, while contemplated by statute, enterprise agreements are related to contracts of employment as they presuppose the existence of a contract of employment and relationship of employment. Enterprise agreements may be categorised as analogous to contracts as they are arrangements entered into by private parties, albeit within a particular statutory framework. How, and if there is a distinction between a public and private instrument, may be an important question. (There is some discussion of this issue in a paper by Boncardo P, ‘Enterprise Agreements and Contracts: Convergent and Divergent Approaches to Interpretation’ (2011) 18 JCU Lw Rw 4.)
  4. The case for One Tree is that as United Voice is a party principal to the Dispute it would be necessary to find an arbitration agreement between One Tree and United Voice. One Tree argues there is no such agreement. Again, One Tree says absent such agreement, there can be no contract.
  5. One Tree says that United Voice is the party principal to look to in determining whether agreement was reached with One Tree because in Regional Express Holdings Ltd v Australian Federation of Air Pilots (2017) 262 CLR 456 (at [30]) it was made clear that a union does act as a party principal, as distinct from acting as an agent for its members which was the case until the decision of Burwood Cinema Ltd v Australian Theatrical and Amusement Employees’ Association [1925] HCA 7; (1925) 35 CLR 528. As such, One Tree argues, it would be necessary both to satisfy the requirements in s 793 of the FW Act as well as common-law requirements that there was an agreement to arbitrate between One Tree and United Voice. One Tree contends that no such agreement exists as it must by virtue of authority and no statutory construct can constitutionally deem the necessary agreement which agreement in turn is required by statute.
  6. One Tree contends that the Commission is not acting as private arbitrator as no agreement has ever been reached for it to be appointed in that capacity. Rather, it is in fact exercising, against the will of One Tree, the judicial power of the Commonwealth. One Tree argues that it is not within the constitutional competence of the Parliament to require, by coercion, a party to go to arbitration in the Commission in the context of disputes arising under an award or an agreement where no agreement has been reached to arbitrate in the Commission.
  7. One Tree argues, with some force, that while s 186(6) of the FW Act mandates a dispute resolution clause in enterprise agreements it, does not mandate arbitration per se for that very reason. It is not within parliamentary power to mandate arbitration in circumstances where no agreement has been reached to arbitrate.
  8. One Tree accepts that it is open to adopt an enterprise agreement after the event even though one was not a party to it, but of course, that is not, One Tree says, what it has done. It has not reached any agreement with United Voice and has not reached any agreement with the Transferring Employees, other than to the extent identified in evidence and, in relation to the Dispute before the Commission, in circumstances which exclude existing redundancy allowances. While an enterprise agreement is certainly a statutory artefact, the distinction which One Tree underlines is that it is one thing to be bound by a legal instrument by operation of statute. It is another thing to say that the proper construction of that instrument is that an agreement to arbitrate on certain terms and conditions has been reached, let alone with an entity that is not a party to the agreement.
  9. United Voice contends there is no jurisdiction for constitutional writs to go as it is clear from Endeavour Energy v Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia [2016] FCAFC 82; (2016) 244 FCR 178 (at [33]) that the Commission and its members act as private arbitrators. Ordinarily, One Tree would agree, however, One Tree says that it only does so when the Commission sits in a private arbitration capacity and that, in turn, can only occur when the parties agree to that course. That position is made clear also from Endeavour Energy (at [31]).
  10. The question here is whether there was any such agreement. There was certainly no specific agreement written or oral between One Tree and United Voice. The question is whether there is implied agreement or some other statutory obligation to displace agreement and if so whether such statutory obligation is constitutionally valid.
  11. On balance, although I have some misgivings, I consider that One Tree’s argument is sufficiently arguable that it ought not be shut out from determination in this Court, unless the balance of convenience suggests otherwise.
  12. Insofar as the balance of convenience is concerned, it clearly favours resolving this dispute in this Court as it is an issue which is capable of affecting numerous other circumstances and is obviously capable of being of wide import in industrial disputation. More specifically, in relation to the balance of convenience concerning these parties, I appreciate that the argument would expose United Voice to a more expensive dispute, but if it is correct on the view it takes about the Dispute which it has raised, it will be compensated to some extent by a costs order of the Court. It is equally true and of significance that if One Tree’s contention concerning the Commission’s jurisdiction is correct, but no interlocutory relief were to be ordered by this Court, it would be required to defend the Commission proceeding, which is generally a no cost jurisdiction, such that it would be unable to recover the costs in that jurisdiction. Further, and more importantly I think, if the Commission proceeding is determined adversely to One Tree, it will be faced with the choice of either complying with the determination (rendering these proceedings nugatory) or consciously refusing to comply, exposing it to penal consequences pursuant to s 50 of the FW Act. Apart from the question of costs, which United Voice may incur, there is no other readily identifiable prejudice to it or to those members it represents other than modest delay in conferral upon them of rights, if they are entitled to the rights they claim in the Dispute before the Commission.

CONCLUSION

  1. I consider the contention One Tree seeks to press is arguable and I have no doubt that the balance of convenience and the interests of justice favour resolving the point raised sooner rather than later by this Court so that the parties may, if necessary, proceed in the Commission if One Tree fails.
  2. The strength of the arguable case and the balance of convenience (together with the interests of justice) should always be measured collectively. Having regard to my clear views about the balance of convenience and interests of justice and my view that the case is arguable, I consider that the granting of relief would be appropriate.
  3. By conveying this view in written reasons in this proceeding to which the Commission is a party, I consider it appropriate not to make any order for 48 hours (or such further period as the Commission may reasonably deem necessary) to permit the Commission the opportunity of considering whether or not it would stay its present procedural orders and adjourn the arbitration of the Dispute pending resolution of this issue in this Court.
I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice McKerracher.

Associate:

Dated: 19 August 2019

Diorite Securities v. Trevali, 2019 ONSC 4225

CITATION: Diorite Securities v. Trevali, 2019 ONSC 4225

COURT FILE NO.: CV-19-00613797-00CL

DATE: 20190829

ONTARIO

SUPERIOR COURT OF JUSTICE

APPLICATION UNDER the Arbitration Act 1991 S. O. 1991, c. 17, pursuant to section (h) of the Net Profits Interest Agreement dated August 9, 1990

 

BETWEEN: )

)

DIORITE SECURITIES LIMITED, as Trustee of THE FERN TRUST

Applicant

– and –

TREVALI MINING (NEW BRUNSWICK) LTD.

Respondent

)

) )

) )

) )

) )

)

)

Allan ColemanGeoffrey Grove and Eric Morgan, for the Applicant
Lara JacksonColin Pendrith and Kate Byers, for the Respondent
)
)
) HEARD: June 4, 2019

L. A. PATTILLO J.:

Introduction

[1]              This is an application by Diorite Securities Limited, as Trustee of the Fern Trust (the “Applicant”) for leave to appeal from an arbitrationdecision dated November 26, 2018 (the “Award”) pursuant to s. 45 of the Arbitration Act, 1991, S.O. 1991, c. 17 (the “Act”).

Background

[2]              The Respondent, Trevali Mining (New Brunswick) Ltd. (the “Respondent”), is the current operator of an underground base-metal mine located near Bathurst, New Brunswick (the “Caribou Mine”) under a mineral lease granted by the Province of New Brunswick.

[3]              The Applicant owns a 10% net profits interest in the Caribou Mine, granted to it by a former lessee and evidenced by an instrument dated August 9, 1990 (the “NPI Agreement”).

[4]              Subsequent to the NPI Agreement, the ownership of the Caribou Mine changed hands a few times. The Respondent became the owner in 2012 and in July 2016 achieved commercial production at the Caribou Mine.

[5]              On November 17, 2016, the Respondent provided the Applicant with a Statement of Net Profits for the third quarter of 2016 as required by the NPI Agreement. The Statement set out a “Loss Pool” which was the Respondent’s estimate of the amount by which prior owners of the Caribou Mine had, or ought to have, impaired their respective carrying values of the Caribou Mine since 1990. The application of the Loss Pool to the net profits reduced the net profits to nil.

[6]              The Applicant objected to the Respondent’s approach to the calculation of net profit under the NPI Agreement and served Notice to Arbitrate in accordance with the NPI Agreement. Subsequently, the parties and the arbitrator agreed that the arbitration would proceed in two phases. Phase 1 would address the interpretation of the NPI Agreement and Phase 2 would address all other issues, including issues relating to the calculation of the Applicant’s net profit interest.

[7]              The Award is the arbitrator’s decision in respect of the issues raised by the parties regarding the interpretation of the NPI Agreement (Phase 1). It dealt specifically with the basis upon which “net profits” are to be calculated. The parties agreed that the two issues for determination by thearbitrator were:

1)      Whether only the expenses of the current owner of the Caribou Mine (the Respondent) were to be included in calculating the net profits for any accounting period for which the NPI Agreement requires a net profit calculation to be done; and

2)      Whether an impairment of the value of the Mine as an asset is ever deductible as an expense in calculating net profits under the NPI Agreement.

[8]               In detailed reasons following a hearing, the arbitrator concluded:

1)      The expenses to be included in calculating the net profits of the Caribou Mine are not limited to the expenses of the current owner, nor to expenses or expenditures of any accounting period in which the NPI Agreement requires a net profit calculation to be done; and

2)      An impairment of the value of the Caribou Mine as an asset is not deductible as an expense in calculating net profits under the NPI Agreement.

The Issues

[9]              The Applicant seeks leave to appeal only in respect of the arbitrator’s decision on the first issue. It submits that the arbitrator erred in law in the manner in which he interpreted the NPI Agreement giving rise to the following extricable questions of law:

  1. a)   The Arbitrator misapprehended and/or mischaracterized the legal nature of the net profit interest held by the Applicant;
  2. b)   The arbitrator ignored, discounted and/or misapprehended the language in paragraph (a) of the NPI Agreement requiring that, in calculating net profits, expenses be determined in accordance with GAAP and good mining practice applied on a consistent basis; and
  3. c)     The arbitrator otherwise failed to consider and/or apply one or more relevant principles of contractual interpretation and/or ignored evidence relevant to the application of those principles.

Preliminary Issue

[10]        The Respondent submits that the Application should be dismissed on the basis that the NPI Agreement does not permit an appeal from the Award on a question of law or otherwise.

[11]        At the time that the NPI Agreement was entered into in August 1990, the version of the Act that was inforce at the time (the Arbitration Act, R.S.O. 1980, c. 25) permitted no right of appeal whatsoever, whether on a question of law or otherwise.

[12]        The introduction of the Act in 1991 specifically permitted an appeal from an arbitration award to this court on a question of law, with leave which can only be granted if the court is satisfied that the importance to the parties of the matters at stake in the arbitration justify an appeal and a determination of the question of law at issue will significantly affect the rights of the parties (s. 45(1)). At the same time, parties to an arbitrationagreement could agree, either expressly or by implication, to exclude the provisions of s. 45 (s.3).

[13]        The arbitration clause in the NPI Agreement provides as follows:

(h) any dispute regarding the calculation or payment of net profits shall be settled pursuant to the terms of the Arbitration Act (Ontario) and the parties hereto agree to be bound by any decision reached pursuant to such arbitration.

[14]         The Respondent submits that the above arbitration provision in the NPI Agreement by its wording, is intended to exclude a right to appeal and accordingly, the right to appeal on a question of law under s. 45 does not apply.  In support of its submission, the Respondent relies on L.I.U.N.A., Local 183 v. Carpenters & Allied Workers, Local 27 (1997), 1997 CanLII 1429 (ON CA), 101 O.A.C. 230, 34 O.R. (3d) 472 (C.A.).

[15]         L.I.U.N.A., concerned circumstances similar to this case where the arbitration agreement in issue, which was silent with respect to an appeal, was entered into under the predecessor to the Act.  At paragraph 20 of the decision, Finlayson J., on behalf of the court, stated that the question of whether the arbitration agreement excluded a right to appeal is to be determined by an analysis of the language of the agreement together with the circumstances surrounding its making (the context). In concluding that the agreement in question excluded the right to appeal, the court discussed the effect of the words “final and binding” and concluded that they indicated that there would be no right of appeal.

[16]         Subsequent decisions have followed L.I.U.N.A. and held that the use of the words “final and binding” in an arbitration clause operate to implicitly exclude the right to appeal under s. 45 of the Act. See: Weisz v. Four Seasons Holdings Inc., 2010 ONSC 4456 (CanLII), 103 O.R. (3d) 783 (S.C.J.); Nasjjec Investments Ltd. v. Nuyork Investments Ltd., 2015 ONSC 4978 (CanLII) (S.C.J.).

[17]         Having regard to the wording of the NPI Agreement as a whole and the above arbitration clause specifically, I am unable to conclude that the intention of the parties to the NPI Agreement was that there would be no right of appeal. The NPI Agreement is brief and primarily deals with the calculation of net profits. The arbitration clause itself states only that the parties agree to be bound by any decision. In the absence of additional wording to indicate the decision is intended to be final, the agreement to be bound means no more in my view than the parties agree to abide by the decision.

[18]         Nor is there anything in the evidence concerning the circumstances surrounding the making of the NPI Agreement to indicate that it was the intention of the parties to exclude an appeal from any arbitration decision.

[19]         The Respondent relies on Bank of Nova Scotia v. Span West Farms Ltd., 2003 SKQB 306 (CanLII), a decision of the Court of Queens Bench for Saskatchewan which it submits is “on all fours” with this case. That case concerned a lease and the arbitration clause provided that if the parties could not agree on the renewal rent, it “shall be settled by the award of three arbitrators … and the award … shall be binding.” As with this case, the lease in question was entered into under a former Arbitration Act which contained no right of appeal. Subsequently, Saskatchewan introduced a new Arbitration Act, similar in wording to the Act.

[20]         The court in Span West Farms held that the wording of the clause and particularly the use of the words “settled” and “binding” did not have the same meaning as “final and binding”, and therefore did not abrogate the right of appeal. However, the court went on to conclude that the absence of the right to appeal in the arbitration provision should be read as an implicit waiver of the right of appeal pursuant to the current statute, given the provision in question was negotiated at a time when the old statute, which did not confer a right of appeal, was in place.

[21]         I decline to follow the Span West Farms decision. Apart from not being bound by it, I consider that the reasoning of the learned judge in that case to find an “implicit waiver” is contrary to the approach to determining the question of whether the parties to the agreement intended to exclude the right to appeal as set out in L.I.U.N.A.

[22]         It remains to consider the Applicant’s submissions that the arbitrator made an extricable error of law entitling it to leave to appeal.

[23]         In Creston Moly Corp. v. Sattva Capital Corp, 2014 SCC 53 (CanLII), [2014] 2 S.C.R 633, at paras. 50 to 55 and more recently in Teal Cedar Products Ltd. v. British Columbia, 2017 SCC 32 (CanLII), [2017] 1 S.C.R. 688, at paras. 45 and 65, the Supreme Court of Canada confirmed that generally speaking, questions of contractual interpretation are questions of mixed fact and law. While the court recognized that some aspects of contractual interpretation may give rise to extricable pure questions of law, it also cautioned that circumstances in which a question of law can be extricated from the interpretation process will be rare and will occur only where the decision-maker has applied an incorrect legal standard, failed to consider a required element of a legal test or similarly erred in principle with respect to the application of the law.

  1.                                       Did the arbitrator misapprehend and/or mischaracterize the legal nature of the NPI Agreement?

[24]        The Applicant submits that the arbitrator erred in law in misapprehending and/or mischaracterizing the legal nature of its net profit interest which led directly to the arbitrator’s conclusion that expenses of entities other than the Respondent are to be included in the net profit calculation. In particular, the Applicant submits that the arbitrator misinterpreted and/or mischaracterized Blue Note Mining Inc. v. Fern Trust (Trustee of)2008 NBQB 310 (CanLII), 337 N.B.R. (2d) 116, affirmed 2009 NBCA 17 (CanLII) (the “Rideout Decision”).

[25]        The Rideout Decision dealt with the issue of whether the NPI Agreement was binding on Blue Note Mining Ltd., a subsequent purchaser of the Caribou Mine. In the first instance, Mr. Justice G.S. Rideout of the New Brunswick Court of Queens Bench, Trial Division, held, that the NPI Agreement created an interest in land and was therefore binding on Blue Note.  At paragraph 35 of the decision, Justice Rideout stated, in part:

I am satisfied that the interest over which the NPI is applicable is an interest in land. It is dealing with a net profit arising from the mine itself; consequently, the NPI is carved out of an interest in land.

[26]        The Rideout Decision was upheld by the New Brunswick Court of Appeal.

[27]        In a subsequent decision of the Court of Queens Bench of New Brunswick, Re: Blue Note Caribou Mines Inc., 2010 NBQB 91 (CanLII), affirmed 2010 CanLII 42941 (NB CA), 2010CanLII 42941 (N.B.CA.), Blue Note Caribou Mines trustee in bankruptcy sought an order from the court enabling it to sell Blue Note’s real property, including the mining leases and mineral rights free and clear from any interest thereby extinguishing any liens against or interest in the property, including the Applicant’s interest under the NPI Agreement.

[28]        The issue for determination was whether pursuant to paragraph (f) of NPI Agreement which provided, among other things, that the net profit interest shall terminate upon any bankruptcy of East West Caribou Mines Limited, the original grantor of the net profit interest, or whether it applied to Blue Note, a successor and assign of Caribou.

[29]        In a lengthy decision in which he referred to the Rideout Decision, Mr. Justice Leger held that based on the plain and ordinary meaning of the words of the NPI Agreement as a whole and paragraph (f) in particular, the termination clause did not apply to Blue Note. (the “Leger Decision”)

[30]        At paragraph 52 of the Award, the arbitrator sets out at some length his interpretation of the “natural and ordinary meaning of the words used” in NPI Agreement “in the business context in which that agreement was entered into and applying the Rideout and Leger Decisions. In respect of the opening paragraph of the NPI Agreement, which grants “… a freely assignable 10% net profits interest in the mine known as the Caribou Mine located near Bathurst, New Brunswick.”, the arbitrator stated:

            The interest granted is in a physical property with a physical location. It is an interest that the Rideout Decision found to be an interest in land. It is not an interest in a corporation, legal person or juridical entity.

[31]        The Applicant submits that in law, the net profit interest is not, as the arbitrator stated, “an interest granted in a physical property with a physical location” but rather an interest in the profits derived by the lessee under M-246 (whoever that may be) from the exercise of its lease in any accounting period in respect of which such profits are required to be calculated under the NPI Agreement.

[32]        The Applicant relies on Mesa Operating Ltd. v. Amoco Canada Resources Ltd., 1994 ABCA 94 (CanLII), [1994] A.J. No. 201 (Alberta C.A.) and the statement at para. 46 of the decision that “An overriding royalty is carved out of the working interest. Thus the fortunes of that royalty holder track those of the working interest holder.”

[33]        All royalty agreements are unique: St. Andrew Goldfields Ltd. v. Newmont Canada Limited[2009] O.J. No. 3266 (ONSC) at para. 53. I do not consider that the statement in Mesa Operating represents a general legal standard. In any event, Mesa Operating is distinguishable from this case as it was considering the calculation of a gross royalty with no deduction for development expenses and did not engage issues as to whether the royalty in question ran with the land.

[34]        I agree with the Respondent that it is irrelevant whether the other party to a royalty agreement is entitled to extract minerals and earn profits from the property in question by virtue of a leasehold or some other interest.

[35]        As noted, Justice Rideout held that the NPI Agreement which dealt with a net profit arising from the Caribou Mine itself, carved out an interest in land. The Caribou Mine is a physical property with a physical location. In my view, the arbitrator did not misunderstand or mischaracterize the Ridout Decision.

[36]        The Applicant submits the arbitrator’s decision that the NPI Agreement provides that the calculation of the net profit interest is to be done by reference to the Caribou Mine’s revenues and expenses as opposed to those of the current owner is “untenable”. I disagree. The arbitrator’s conclusion that the Applicant’s right to profits under the NPI Agreement is vested in the land, and not merely the current owner is consistent with both the Ridout Decision and the plain reading of the NPI Agreement.

[37]        The Applicant further submits that the arbitrator erred in law by alluding generally to “numerous authorities” on which he apparently relied in reaching his decision without specifying the authorities or how they influenced his decision.

[38]        Having concluded his interpretation of the NPI Agreement at para. 52 of the Award based on the plain and ordinary meaning of the relevant words, the business context of the Agreement and the Rideout and Leger Decisions, the arbitrator noted at para. 53 that it was not necessary to address the bulk of the submissions made to him. He did, however, make some brief comments in respect of them including his comment that he made no reference to the “numerous authorities cited by both sides to the ‘usual’ interpretation of profit sharing and royalty arrangements in the mining industry.” He stated that no purpose would be served in comparing the language used in those cases with the language used in the NPI Agreement.

[39]        It is clear from the decision that the “numerous authorities” had no bearing on the arbitrator’s decision. Further, as noted in Sattva, at para. 48, the arbitrator was not required to refer to all the arguments, provisions or jurisprudence in the Award. In reviewing the entire decision, I do not consider the arbitrator made an extricable error of law by not addressing specifically the “numerous authorities” cited by both sides.

  1.                                      The arbitrator ignored, discounted and/or misapprehended the language in paragraph 1(a) of the NPI Agreement.

[40]        The Applicant submits that interpreting the NPI Agreement, the arbitrator erred in law in failing to apply the principle of contract interpretation which requires the court to interpret the contract as a whole and avoid an interpretation that does not give effect to all of the terms or renders one or more of the terms ineffective.

[41]        Specifically, the Applicant submits that the arbitrator discounted and ignored the term in the NPI Agreement relating to generally accepted accounting principles (“GAAP”) and ignored the expert evidence adduced by both parties relating to GAAP.

[42]        The NPI Agreement states in paragraph (a) that it is to be determined “in accordance with generally accepted accounting principles … applied on a consistent basis.”

[43]        It is clear from the Award that the arbitrator did not fail to consider or misapply the specific principle of contract interpretation relied on by the Applicant nor did he ignore the expert evidence concerning GAAP. Rather, the arbitrator expressly took into account the principles of contractual interpretation (including the principle relied upon by the Applicant, Award, para. 46). Further, he specifically addressed the provision concerning GAAP in the NPI Agreement and concluded, based on his interpretation of the NPI Agreement that “the expert evidence relating to GAAP and IFRS rules as they apply to financial statements of companies is irrelevant.” (Award, para. 58.)

[44]        In paragraph 52 of the Award, where the arbitrator deals in chart form with his interpretation of the NPI Agreement based on the natural and ordinary meaning of the words, in respect of the words “in accordance with generally accepted accounting principles” in the NPI Agreement, thearbitrator explains his reasons why GAAP is not needed to interpret or apply the NPI Agreement as follows:

GAAP, as the words in the acronym imply, provides a common set of standards for approaching accounting issues and presentations. It is clear from the evidence of both Raza and Zastre [the experts], that GAAP does not override specific contractual arrangements. Even if that were not the case, the mention of GAAP in paragraph (a) of the NPI would not override the provisions of paragraph (b).

The arbitrator then goes on to set out the different ways in which both the Applicant and the Respondent sought to have GAAP contribute to the interpretation of the NPI Agreement “in ways which would alter the express language of the agreement.” He then concludes:

In my view, neither GAAP nor IFRS are needed in order to interpret or apply the NPI Agreement, exactly as it is written, in relation to the particular issues which need to be decided in Phase 1 of the arbitration.

[45]        Further, the arbitrator’s decision that he need not be guided by GAAP – which is an accounting standard engaged by the witnesses before him and not a legal standard – is a question of mixed fact and law and does not constitute an extricable error of law.

                          iii.            Whether the arbitrator otherwise failed to consider and/or apply one or more relevant principles of contractual interpretation and/or ignored evidence relevant to the application of those principles.

[46]        The Applicant submits that the arbitrator otherwise failed to consider and/or apply one or more relevant principles of contractual interpretation and/or ignored evidence relevant to the application of those principles.

[47]        The Applicant submits that in interpreting the NPI Agreement, the arbitrator “failed to give meaning to express language” in the NPI Agreement and interpreted it “in a fashion that creates commercial absurdities”. In support, the Applicant points to four brief excerpts from the Award which it submits are “inconsistent” with the arbitrator’s conclusion or “superfluous” to it.

[48]        In my view, the Applicant’s allegations do not implicate the legal standard or test applied by the arbitrator in interpreting the NPI Agreement and accordingly do not amount to an extricable error of law. The submissions engage the issue of how the arbitrator applied the principles of contractual interpretation (a question of mixed fact and law) and not whether the arbitrator applied the proper principles (a question of law).

[49]        In reaching his conclusion, the arbitrator set out and applied, correctly, in my view, the relevant principles of contract interpretation, specifically that the contract should be interpreted as a whole, in a manner that gives meaning to all of its terms and which avoids an interpretation that would render one of the terms ineffective.

[50]        For the above reasons, therefore, the Application is dismissed.

[51]        The Respondent is entitled to its costs of the Application. At the end of the hearing, counsel agreed that a fair and reasonable amount for costs was $20,000 in total. I agree. Accordingly, costs to the Respondent, fixed at $20,000 in total.

L.A. Pattillo J.

ATS Automation Tooling Systems Inc. v. Chubb Insurance Co., 2019 ONSC 5073

CITATION: ATS Automation Tooling Systems Inc. v. Chubb Insurance Co., 2019 ONSC 5073

                                                                                                COURT FILE NO.: CV-16-554961

DATE: 20190830

SUPERIOR COURT OF JUSTICE – ONTARIO

RE:                 ATS Automation Tooling Systems Inc. and IWK (Thailand) Ltd., Plaintiffs

AND:

Chubb Insurance Company of Canada, Defendant

BEFORE:      Nishikawa J.

HEARD:        May 30, 2019

ENDORSEMENT

Overview and Procedural Background

[1]               The Appellants appeal the decision of Master Short dated November 2, 2018 dismissing the Plaintiffs’ motion for a stay of their action against the Respondent in favour of arbitration in India:  ATS Automation Tooling Systems Inc. v. Chubb Insurance Company of Canada, 2018 ONSC 6139 (CanLII) (the “Decision”).

[2]               The factual and procedural history of this proceeding are described in detail in the Decision and need not be repeated here.  In brief, IWK (Thailand) Ltd. (“IWK”) sold and shipped certain machinery from Thailand to the purchaser, Dr. Reddy’s Laboratories Ltd. (“DRL”), in India.  The machinery was found to be irreparably damaged when it arrived at DRL’s inland warehouse.  There is a dispute as to whether the machinery was damaged during shipment by sea from Thailand to India or during transit inland, and who bears the risk for the loss.

[3]               DRL, who had paid for the machinery in full, took steps to commence an arbitration against IWK in India for its losses.

[4]               IWK’s parent company, ATS Automation Tooling Systems Inc. (“ATS”) made a claim on a commercial marine cargo insurance policy that it obtained for the shipment from Chubb Insurance Company of Canada (“Chubb”).  Chubb denied the claim on the basis that the damage occurred during inland transit, which was not covered by the policy.

[5]               The Appellants commenced this action against the Respondent in Ontario, alleging that Chubb breached the terms of the policy by denying coverage.  The Appellants then brought a motion to stay their action on the basis that an arbitration was pending in India.  The Appellants’ position is that both proceedings would address the issues of where the damage occurred and when the risk passed, giving rise to the possibility of inconsistent results.

[6]               The Respondent brought a motion for summary judgment dismissing the Appellants’ claim.  The parties could not agree on the scheduling of both motions.  At a chambers appointment, Akbarali J. directed that the stay motion be heard before the summary judgment motion.

[7]               The Appellants submit that the Master erred in refusing a stay because he incorrectly applied the test for a stay and made findings that were not supported by the evidence.

Analysis

[8]               The decision to grant or refuse a stay is an exercise in discretion and ought not to be interfered with unless the Master made an error of law, exercised his or her discretion on the wrong principles or misapprehended the evidence such that there is a palpable and overriding error:  Zeitoun v. Economical Insurance Group2008 CanLII 20996 (ON SCDC), [2008] 236 O.A.C. 76 (Div. Ct.)[2008] O.J. No. 1771, at paras. 40-41, aff’d 2009 ONCA 415 (CanLII).

[9]               In the Decision, the Master found that there was no existing arbitration hearing scheduled in India and that “there is no evidence that there ever will be arbitration in India; and, even if there ever was arbitration in India, Chubb would not be a party to it.”  (Decision, at para. 69).

[10]           The evidence on this issue was equivocal.  DRL initiated an arbitration in the wrong forum in India and had to withdraw it.  When this appeal was heard, DRL had not yet recommenced an arbitration in the proper forum but the limitation period, which would expire on July 21, 2019, had not yet passed.  Since the status of an arbitration in India would be relevant to this appeal, and for the sake of certainty, I requested that counsel advise me after that date whether an arbitration was commenced in the proper forum in India.  At a case conference on August 15, 2019, counsel confirmed that no arbitration had been commenced.

[11]           The limitation period has now passed and no arbitration was commenced in India. Accordingly, there can be no stay in favour of arbitration.

[12]           The Master did not err in exercising his discretion to refuse a stay.  The Master referred to and applied the correct principles from the relevant case law on whether to grant a stay where one of the parties to the action is not a party to the arbitration agreement.  Specifically, he considered: (i) whether the issues in the arbitration were substantially similar; (ii) whether continuing the action would work an injustice; and (iii) whether staying the action would not cause prejudice to the responding party.  (Decision, at paras. 50-71).

[13]           The Master went on to consider the “more appropriate method to addressing these disputes” (at para. 74) and referred at length to the principles applicable to summary judgment motions. This may have gone further than necessary or appropriate.  The issue before the Master was not the preferable procedure, as between arbitration in India and a summary judgment motion in Ontario, but whether, based on the applicable principles, a stay should be granted.  However, the Master’s comments do not impact the correctness of the Decision, as they were clearly obiter and were made after the Master’s determination not to grant a stay.

[14]           Where the parties to a dispute have entered into an arbitration agreement, “the jurisprudence — both from this Court and from the courts of Ontario — has consistently reaffirmed that courts must show due respect for arbitration agreements and arbitration more broadly, particularly in the commercial setting.”  Telus Communications Inc. v. Wellman2019 SCC 19 (CanLII), at para. 54.

Conclusion

[15]           Based on the foregoing, I dismiss the Appellants’ appeal.  The Respondent may proceed with its motion for summary judgment, if it remains necessary.

Costs

[16]           The Respondent submitted a costs outline for a total of $5,873.10 on a partial indemnity scale, including disbursements and HST.  The Appellants’ costs, at $14,086.03, were significantly higher.

[17]           Pursuant to the Courts of Justice Act, R.S.O. 1990, c. C.43, s. 131(1), the court has broad discretion when determining the issue of costs. The overall objective of fixing costs is to determine an amount that is fair and reasonable for the unsuccessful party to pay in the circumstances, rather than an amount reflective of the actual costs incurred by the successful litigant: Boucher v. Public Accountants Council for the Province of Ontario et al. (2004), 2004 CanLII 14579 (ON CA), 71 O.R. (3d) 291 (C.A.). Rule 57.01(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg 194 [Rules], sets out the factors to be considered by the court when determining costs.

[18]           I have considered these factors, and the principle of proportionality in R. 1.01(1.1) of the Rules, while keeping in mind that the court should seek to balance the indemnity principle with the fundamental objective of access to justice.  The Respondent was entirely successful in this matter. The Respondent’s view is that the motion was an exercise in excessive caution, because the Appellants are simply preserving a contingent claim.  Since DRL is not pursuing the arbitration against IWK, there may be no claim at issue.

[19]           Based on the foregoing, I fix the Respondent’s total costs at $5,873.10 on a partial indemnity basis, inclusive of disbursements and HST.