TODD TARANAKI LIMITED AND ANOR V ENERGY INFRASTRUCTURE LIMITED AND ANOR HC WN CIV-2007-485-2684

TODD TARANAKI LIMITED AND ANOR V ENERGY INFRASTRUCTURE LIMITED AND ANOR HC WN CIV-2007-485-2684 19 December 2007IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2007-485-2684IN THE MATTER OF the Arbitration Act 1996 BETWEEN TODD TARANAKI LIMITED First Applicant AND TODD POHOKURA LIMITED Second Applicant AND ENERGY INFRASTRUCTURE LIMITED First Respondent AND SHELL EXPLORATION NZ LIMITED Second Respondent Hearing: 13 December 2007 Counsel: H McIntosh and A Olney for Applicants J Hodder and N Wood for Respondents Judgment: 19 December 2007 at 11 am at 11amJUDGMENT OF DOBSON J Background[1] This originating application is brought pursuant to the provisions of the Arbitration Act 1996. It seeks the removal of an Arbitrator (and an order that the arbitration not proceed pending determination of the application). The substantive hearing of the arbitration between the parties commenced before the Hon Barry Paterson, QC, on 3 December 2007, and is ongoing. Urgency has been accorded to determination of this application, and it is accepted that if it succeeds, the present hearing will have to be discontinued and the substantive matter heard de novo before a new Arbitrator whom the parties would have to appoint.[2] The applicants ("Todd") are also the claimants in the arbitration, which is intended to resolve disputes between Todd and the respondent parties ("Shell") about the terms for storage of Todd's condensate from the Pohokura oil field, at the Omata tank farm in Taranaki. The precise contractual arrangements between the parties are not relevant to the present application. [3] The arbitral process began in February 2007. There has been some tension as to how promptly the arbitration should be progressed, with Todd seeking an adjournment and pursuing various interlocutory arguments, and Shell complaining of delays. [4] The present application invokes art 12(2) of the First Schedule to the Arbitration Act 1996, ("the Act") in contending that there is justifiable doubt as to the Arbitrator's impartiality. The basis for this concern arose primarily out of comments alleged to have been made by the Arbitrator on the opening morning of the hearing. An application for immediate withdrawal was made to the Arbitrator two days later on 5 December 2007, supported by three affidavits from those claiming to have heard at least parts of the relevant exchange. That application was the subject of argument before the Arbitrator on 5 December, and he dismissed the application in an oral ruling that day. [5] The directly relevant provisions in the First Schedule to the Act are:12. Grounds for challenge— (2) An arbitrator may be challenged only if circumstances exist that give rise to justifiable doubts as to that arbitrator's impartiality or independence, or if that arbitrator does not possess qualifications agreed to by the parties. A party may challenge an arbitrator appointed by that party, or in whose appointment that party has participated, only for reasons of which that party becomes aware after the appointment has been made. 13. Challenge procedure— (2) Failing such agreement, a party who intends to challenge an arbitrator shall, within 15 days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstance referred to in article 12(2), send a written statement of the reasons for the challenge to the arbitral tribunal. Unless the challenged arbitrator withdraws from office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge. (3) If a challenge under any procedure agreed upon by the parties or under the procedure of paragraph (2) is not successful, the challenging party may request, within 30 days after having received notice of the decision rejecting the challenge, the High Court to decide on the challenge, which decision shall be subject to no appeal, while such a request is pending, the arbitral tribunal, including the challenged arbitrator, may continue the arbitral proceedings and make an award. [6] The parties agreed that there could be cross-examination on the affidavits filed in the present proceeding, and as well, evidence has been heard from witnesses appearing under subpoena. The primary evidence for Todd was from Ms Fiona Cleary, a junior solicitor employed by Todd's solicitors. In the course of setting up papers for those appearing for Todd, she asked the Arbitrator, who happened to be in the arbitration room, if he had a preference as to which side of the room the respective parties should be seated. The affidavit (in the same terms before the Arbitrator and before the Court) deposed:5. He replied that it did not really matter but that I: "should figure out where the side with the right argument should be seated, and put Russell McVeagh on the other side". 6. I was taken aback by that comment. I responded, attempting to use a light hearted tone in order to convey my concern without being confrontational, that I was from Russell McVeagh and so he should not say that to me. He then said: "Oh, you are from Russell McVeagh", but nothing else.[7] There were also affidavits from the two summer clerks who had accompanied Ms Cleary. One of them, Ms Read, did not hear all of what the Arbitrator said. The second, Ms McNaull, deposed to her recollection as follows:... Very shortly after we arrived at the hearing room, I heard Fiona ask the arbitrator which side of the room we should set up on. To my recollection, he replied to her, within my hearing, with words like:"It doesn't really matter but figure out which is the right side and put Russell McVeagh on the other." To which Fiona responded: "You can't say that, we're from Russell McVeagh."[8] Todd also relies on a second instance of the Arbitrator's conduct, described in an affidavit from Mr Selvadurai, a Director of the Todd companies involved, in the following terms:At around 2 pm during the lunch adjournment on 4 December 2007 (while I was under cross-examination by Mr Hodder, counsel for the respondents) I was sitting in the back of the room reading my newspaper waiting for Todd's counsel to return to the room in which the arbitration hearing was taking place. While I was waiting I heard the Arbitrator (who was standing close to his table at the time) say to Mr Hodder, "where are they?" then he said, "maybe they have capitulated". He then followed his initial statement with "neither party has capitulated".[9] One of the solicitors representing Shell, Ms Hadfield, has deposed that she was in the arbitration room at about 2.05 on the afternoon in question, when the comments complained of by Mr Selvadurai were made. She had had dialogue with counsel for Todd over the luncheon adjournment and was accordingly aware that they might be late back. She deposes:6. The arbitrator then said to Mr Hodder "where are your opponents? perhaps they have capitulated?" I am fairly certain that those were the exact words used. Before Mr Hodder replied, the arbitrator said "it's impossible that they have capitulated. In fact, I think it is impossible that either side in this case would capitulate." 7. Mr Hodder then replied. I do not recall his precise words, though I do recall him noting that he had received a message from his friend (i.e. Mr McIntosh), that there were certain matters to be discussed between them, and that there was no discourtesy in Todd's counsel's tardiness. At this point, neither Mr Hodder nor anyone else had explained to the arbitrator what the matters to be discussed by counsel were.[10] A discrete factor relied upon as adding to the grounds for justifiable doubt as to the Arbitrator's impartiality was the manner in which he had declined an application by Todd for an adjournment of the arbitration hearing. [11] In his ruling on the application that he should withdraw, the Arbitrator did not analyse the potential impact of the second statement causing concern. He admitted to being "somewhat perplexed" by the affidavit evidence in relation to thefirst exchange, stating that he did not have a clear recollection of the words that had been used. He was, however, firm that he could not have made any statement indicating pre-judgment of Todd's case, because he was not in a position to do that. He saw the issues in the arbitration as dependent on the evidence to be called, and from experience, would not form any view until the evidence has been heard. He stipulated in his ruling that he did not have any impression "as to where the matter will finish up". [12] Essentially because of the inherent unlikelihood of someone of his experience forming any view prior to the hearing, and implicitly because a fair-minded observer would appreciate that fact, he concluded that such an observer would not conclude that there was a real possibility, or a real danger, that Todd would not get a fair hearing. [13] As to the discrete concern over refusing an adjournment, the Arbitrator noted that such refusal was on terms reserving the right for Todd to raise the issue again if circumstances changed. [14] Mr Tweedie, Managing Director of Todd Energy Limited, describes the subject matter of the arbitration as being "of considerable commercial and financial significance". He has deposed that the manner in which the Arbitrator dealt with the application for withdrawal has added to his concerns. He also says that he and Todd are very concerned about the neutrality and impartiality of the Arbitrator as a result of the two statements complained of.The law[15] The Court of Appeal treats its decision in Muir v Commissioner of Inland Revenue [2007] 3 NZLR 495 as bringing New Zealand law on apparent bias into line with other common law countries. The approach is:[62] In our view, the correct inquiry is a two-stage one. First, it is necessary to establish the actual circumstances which have a direct bearing on a suggestion that the Judge was or may be seen to be biased. This factual inquiry should be rigorous, in the sense that complainants cannot lightly throw the "bias" ball in the air. The second inquiry is to then ask whetherthose circumstances as established might lead a fair-minded lay observer to reasonably apprehend that the Judge might not bring an impartial mind to the resolution of the instant case. This standard emphasises to the challenged Judge that a belief in her own purity will not do; she must consider how others would view her conduct.[16] The judgment also contains a summary on the current English approach in seven points, taken from the Court of Appeal decision in AWG Group v Morrison[2006] 1 All ER 967, which include the following:(i) A Judge is automatically disqualified from hearing a case on the ground of apparent bias if, on an assessment of all the relevant circumstances, the conclusion was that the principle of judicial impartiality would be breached (at para [6]). (ii) This disqualification is not a discretionary case management decision reached by weighing various relevant factors (such as inconvenience, costs, and delay) since there was either a real possibility of bias or there was not (at para [6]). (iv) "An appellate court is well able to assume the vantage point of a fairminded and informed observer with knowledge of the relevant circumstances. It must itself make an assessment of all the relevant circumstances and then decide whether there is a real possibility of bias" (at para [20]). (v) An example of a real danger of bias is where there was "animosity between the judge and any member of the public involved in the case" (Locabail (UK) Ltd at p 4801). The categories of such danger are not closed: "if, for any other reason, there were real ground for doubting the ability of the judge to ignore extraneous considerations, prejudices and predilections" then recusal would be necessary (Locabail at p 480 and AWG at para [8]). (vi) In most cases, "the answer, one way or the other will be obvious. But if in any case there is real ground for doubt, that doubt should be resolved in favour of recusal" (Locabail at p 480 and AWG at para [8]). [17] Although the parties agreed in general in terms that the test to be applied is that specified in Muir, they differed on three details.1 Locabail (UK) Ltd v Bayfield Properties Ltd [2000] QB 451; [2000] 1 All ER 65.(i) The attributes of the "fair minded observer"[18] The argument for Todd emphasised that such an observer is deemed to be a lay person, and so was arguably oblivious to the nuances of court or arbitration practice that might explain conduct which could otherwise contribute to a doubt as to impartiality. Reliance was placed on the High Court of Australia decision inJohnson v Johnson [2002] HCA 48, including the following extract from the judgment of Kirby J:[53] The attributes of the fictitious bystander to whom courts defer have therefore been variously stated. Such a person is not a lawyer. Yet neither is he or she a person wholly uninformed and uninstructed about the law in general or the issue to be decided. Being reasonable and fair-minded, the bystander, before making a decision important to the parties and the community, would ordinarily be taken to have sought to be informed on at least the most basic considerations relevant to arriving at a conclusion founded on a fair understanding of all the relevant circumstances.[19] Further, reliance was also placed on the unreported decision of Heath J inAuckland Co-operative Taxi Society Ltd v Perfacci Ltd HC AK CIV 2003-404-5495, 10 October 2003, and in particular:I agree with the learned author of Arbitration in New Zealand (2 nd Ed) that the test is an objective one. Some parties to arbitrations may be overly sensitive. Others may be unduly robust. The question is whether a fair minded and informed person in the position of the challenging party is likely to hold justifiable doubts as to the arbitrator's impartiality as a result of conduct of which complain is made.[20] On the basis of this authority Todd submitted the fair-minded observer was not a lawyer and was "in the position of Todd in the arbitration". [21] On the other hand it was submitted for Shell that the nototional observer should not be identified with the complainer, and it would be antithetical for such an observer to be vested with any interest in the substantive outcome. I do not treat Justice Heath's reference to an observer "in the position of the challenging party" as requiring any more than an awareness of all the circumstances of the dispute such as would be known to the challenging party. If more were intended, so that the observer has to identify with the challenging party's interest in the dispute, then thatwould risk the primary aim of detached objectivity. The observer should not be vested with the complainant's interest in the outcome.(ii) The nature of any "doubt" that has to be resolved in favour of recusal[22] Mr McIntosh submitted that any such doubt should avail the challenger on both stages of the inquiry, namely as to any conflict over what in fact occurred, as well as on the subsequent evaluation of whether such conduct was sufficient to require recusal. [23] The summary point cited in paragraph [16] (vi) above addressing the position when a doubt exists comes originally from the English Court of Appeal decision inLocabail Ltd v Bayfield Properties Ltd [2000] 1 All ER 65, paragraph 25. It is clear that the "doubt" in contemplation is only in respect of the adequacy of the ground made out, and not on the factual components of what the ground for concern was. The first stage of the inquiry, where there are conflicting recollections, requires a positive finding as to which is to be preferred. Leaving this critical factual inquiry unresolved by acknowledging a doubt as to what might have occurred does not meet the requirement for "robust inquiry". Muir describes the second inquiry as relating to "those circumstances as established".(iii) Whether the extent of disruptive consequences of any disqualification can influence the seriousness of disqualifying conduct that is required[24] It was submitted for Shell, albeit as a secondary consideration, that the extent of disqualifying conduct could vary depending on the severity of the consequences flowing from any disqualification of the Arbitrator. This suggests, for instance, that a lower level of disquiet at the apparent absence of impartiality might be sufficient to justify disqualification at the very outset of an arbitration, than would be necessary to justify disqualification if the majority of a lengthy arbitration had already been heard. [25] The submission relied on the reasoning of Lord Woolf in AT&T Corporation v Saudi Cable Co [2000] LLR 127, at 135:The word 'real' is linked to 'danger' so as to distinguish between a real and fanciful danger. The word 'reasonable' is linked to the word 'suspicion' for the same reason. In both cases it is appreciated that there is a need to avoid quashing or invalidating decisions where there is no reason to do so. As is apparent from the facts of this case, where millions of dollars have already been incurred in the costs of the arbitration and there have been three decisions, it would achieve injustice not justice if the arbitration awards were to be set aside if such a course were not justified. It is not to be forgotten that SCC is an entirely innocent party and it is entitled to have its interests considered when deciding whether to set aside the awards.[26] However, the reference to the extent of the arbitration already undertaken in that case does not suggest that it should influence the standard of disqualifying conduct required, but is rather mentioned to support the basic point that the prospect of partiality must be real, and that the Court ought not to entertain an order for disqualification lightly, because of the extent of adverse consequences that are likely to flow in any case. The nature of the conduct necessary to warrant a finding of justifiable doubt as to impartiality will be particular to each case, but the necessary level of disquiet cannot rise or fall depending on the extent of disruption that would be caused if a withdrawal of the Arbitrator was ordered.First stage: robust inquiry into what occurred[27] Turning then to the first stage of the inquiry, the Court has the advantage of a substantially more robust inquiry on the critical issue, than was possible before the Arbitrator. The notice of opposition for Shell cited Article 9(3) of the first schedule to the Act which provides:9. Arbitration agreement and interim measures by court— (3) Where a party applies to a court for an interim injunction or other interim order and an arbitral tribunal has already ruled on any matter relevant to the application, the court shall treat the ruling or any finding of fact made in the course of the ruling as conclusive for the purposes of the application.[28] Nothing was made of this during argument. I am inclined of the view that obligatory reliance on the Arbitrator's findings of fact is intended to prevent reargument of factual issues arising in the substantive course of an arbitration. Theclause should not confine the "robust" factual inquiry required in present circumstances, particularly here where the parties have presented further evidence for this Court to consider. [29] The requirement for an objective analysis attributed to an independent observer renders the extent of subjective concerns by Todd personnel irrelevant. The legal approach also means that the Arbitrator's own view as to whether his conduct exhibited a lack of impartiality cannot assist. [30] Shell subpoenaed Mr Paterson to give evidence. In explaining his position during the argument before him in the arbitration, and initially in his evidence in court, he put it in terms that he would not or could not have made any remarks suggesting a view against the arguments to be advanced by Russell McVeagh, in essence because of the inherent improbability of someone with all his experience doing so. He was pressed in cross-examination to acknowledge a difference between "would not" or "could not" on the one hand, and "did not" on the other. Ultimately, his evidence was that he did not make any such comment. [31] It was submitted for Todd that Mr Paterson's initial inability to recall the words used was significant, and that a direct denial coming only when pushed in cross-examination and after numerous earlier deflections of the issue by statements that he would have not made such a remark, counted against the credibility of that ultimate direct denial. As against that, Mr Hodder suggested for Shell that a degree of sensitivity when dealing with the issue by deflecting it rather than creating head on conflict would be understandable. Accordingly, he submitted that the veracity of the ultimate denial on oath should be respected. [32] A critical aspect of the different versions of the conversation is that Ms Cleary was sure that a reference to "right" related to the correctness of a party or parties' argument and not to the sides of the room. She was not moved from her recollection as deposed before the Arbitrator, throughout a focussed cross- examination.[33] On the other hand, Mr Paterson's recollection was that the reference to "right" arose in the context of sides of the room – ie left or right. He began his response to her question by noting that in court the claimant would be in front, and the respondent behind, but that in the arbitration the parties would be beside each other and that he was indifferent to which party was on the left, and which on the right. I consider it significant that his recollection on this is consistent with the stenographer, Ms Hoffman, who was also subpoenaed. She was clear that Mr Paterson's contribution to the exchange included a reference to left or right, in the context of sides of the room. [34] There is also an inconsistency between Ms Cleary and her colleague Ms McNaull, who deposed to her recollection but was not cross-examined. Ms McNaull recalled the conversation in terms that did link "right" to "side" rather than to "argument". Ms McNaull did corroborate Ms Cleary's evidence about the latter reacting adversely at the time to what the Arbitrator said ( "you can't say that"). However, that and the Arbitrator's acceptance that what he said had clearly made an impression on Ms Cleary go more to the genuiness of what Ms Cleary thought had been said, rather than to the accuracy of what she heard. [35] I find that the critical reference in the Arbitrator's comments to "right" did relate to the side of the room, and not the character of argument advanced for any party. Without the latter connotation, the statement loses its sting as evidence of a lack of partiality. It is not necessary to determine the full text of what was said, and nor do I venture any suggestion as to how the comment could be misheard, but it follows from this finding that it must have been. [36] Mr McIntosh advised from the Bar that shortly after the arbitration commenced on 3 December the Arbitrator asked whether the clerks who had been setting up in the room earlier were from Russell McVeagh. That matter was not traversed in evidence, but he ventured that opposing counsel would not be able to dispute the exchange which involved Mr McIntosh acknowledging that they were from Russell McVeagh, and referring to "hordes of them". He argued for Todd that this question from the Arbitrator demonstrated a sensitivity that something which had occurred earlier when only the junior personnel were in the room, caused a levelof unease. I do not see enough in this suggestion to displace the preponderance of evidence on the critical reference to "right" relating to the side of the room rather than the quality of the argument. [37] As it transpired, in written points in reply which I invited on behalf of Shell when time did not permit an oral reply at the end of the hearing, Mr Hodder was unable to confirm Mr McIntosh's recollection of this question from the Arbitrator. Mr Hodder suggested that the question may have related to the personnel at the back of the arbitration room when the question was posed. His points in reply infer that the numbers of attendees from Todd's solicitors at the time justified the reference to "hordes". [38] As to the second instance involving a comment shortly after the lunch adjournment on 4 December, there is much less of a difference between the parties. It is clear that the Arbitrator made a quip when counsel for Todd were late in returning to the room, to the effect that perhaps they had capitulated. This was followed very quickly with an acknowledgment that that would be impossible, and that neither side would capitulate. There would be no realistic prospect of counsel taking offence, or inferring a lack of partiality. Rather it is the sort of meaningless banter used to alleviate any tension that might otherwise develop when one party keeps a hearing waiting. [39] However, my own or counsel's reaction is not the relevant one. Would a fair minded lay observer see it differently? I consider it appropriate to vest that persona with at least a basic appreciation of the dynamics of an ongoing hearing in a commercial arbitration. With that appreciation, it would not be reasonable to attribute any lack of partiality on account of such a comment. [40] Todd's challenge was advanced on the basis that this second instance added further weight to the justification for concerns over the first statement. Even had the first concern been made out, I doubt that the quip about capitulation could have added materially to the grounds for justifiable doubts on impartiality.[41] As to the third cause of concern, it does not bear scrutiny on its own. The Court of Appeal has recognised in Muir (paragraphs 99 to 101) that prior adverse rulings can seldom provide a foundation for concerns of bias. Here, the Arbitrator pointed out that the ruling was not absolute in the sense that he accepted the issue of an adjournment could be raised again, should circumstances change. Although it was submitted that the manner in which the adjournment application was dealt with added to the principle ground for concern, that was not readily apparent from the argument. In any event, when the primary cause for concern was not made out, there is nothing to which it could add weight. It certainly could not stand on its own. [42] Accordingly, I find that no justifiable doubt has been made out in terms of Article 12(2), and the application for orders that the Arbitrator withdraw is dismissed. [43] I note that if the Todd version of the primary exchange on the morning of 3 December had been upheld, so that the first stage of the two stage inquiry was resolved in Todd's favour, then I would most likely have found that the second stage was also made out, namely that such an observation did justify the requisite doubt. I mention this not because of the prospect of the issue being revisited (Article 13(3) of the first schedule to the Act specifies that the High Court decision shall be subject to no appeal) but because the concern was a legitimate one. The fact that a factual conflict has been resolved against Ms Cleary's genuine recollection of events is not to be taken as any personal criticism of her and nor was any suggested at any stage. To the contrary, her conduct was responsible and professional. [44] More generally, for Todd as well the issue is one that they were justified in ventilating. The matter is now resolved, and with "the air cleared", all involved in the arbitration should be able to go forward on the substantive issues without any backward glances towards this discrete issue affecting the remainder of the arbitration.[45] If costs are to pursued, I invite a memorandum from Shell by 15 February 2008, with any reply on behalf of Todds 14 days after service of that from Shell. Dobson JSolicitors: Russell McVeagh, Wellington Chapman Tripp, Wellington