AIRWORK HOLDINGS LTD V AUCKLAND REGIONAL RESCUE HELICOPTER TRUST HC AK CIV-2005-404-6808

AIRWORK HOLDINGS LTD V AUCKLAND REGIONAL RESCUE HELICOPTER TRUST HC AK CIV- 2005-404-6808 16 May 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2005-404-6808BETWEEN AIRWORK HOLDINGS LIMITED Plaintiff AND AUCKLAND REGIONAL RESCUE HELICOPTER TRUST Defendant Hearing: 4 May 2006 Appearances: F Thorpe for Plaintiff KA Muir and D Badawi for Defendant Judgment: 16 May 2006JUDGMENT OF ASHER JThis judgment was delivered by me on at am/pm pursuant to Rule 540(4) of the High Court Rules Registrar/Deputy Registrar .. DateSolicitors: Heaney & Co. PO Box 105 391 Auckland (DJ Heaney) Morgan Coakle, PO Box 114 Shortland Street Auckland F Thorpe, Barrister, PO Box 3995 Shortland Street AucklandTable of ContentsParagraph NumberIntroduction [1]Background [2]The point of law raised [8]The test [10]Have the parties agreed to a right of appeal without leave? [12]Is the question raised a point of law? [21]Exercise of discretion [37]The strength of the challenge by nature of point of law [40]The importance of the dispute to the parties [44]The amount of money involved [45]The amount of delay involved in going through the Courts[46]Conclusion on discretion [47]Result [48]Introduction[1] Airwork Holdings Limited ("Airwork Holdings") applies for leave to appeal an arbitration award. The application is opposed by the other party to the award, Auckland Regional Rescue Helicopter Trust ("the Trust").Background[2] On 1 January 2002 Airwork Holdings and the Trust entered into an agreement ("the agreement") whereby Airwork Holdings made available to the Trust a helicopter BK117-HHV ("the helicopter") on the terms set out in that agreement. Clause 3.1 of the agreement provided that the Trust would pay Airwork Holdings a fixed monthly charge of $91,667.00 plus GST together with an hourly charge of $950.00 per hour plus GST for every hour the helicopter or a replacement aircraft was flown. [3] Clause 3.4 of the agreement read as follows:3.4 The rates of payment in the Schedule shall be reviewed one year from the signing date of the agreement and in each subsequent year during the term of this Agreement and fixed at a rate that is fair and reasonable having regard to the costs incurred by the Operator in carrying out the services and the rate available for the service on the open market and any other circumstances that the Operator and the Trust shall consider relevant. Any dispute relating thereto shall be settled by arbitration and, if the rate is not fixed within one month of the date of review, the parties shall be deemed to have submitted the matter to arbitration under the Arbitration Act 1908 [4] The parties were unable to agree upon a reviewed rental for the year commencing 1 January 2004. In accordance with the agreement they submitted the issue to arbitration. They signed a specific Arbitration Agreement dated 17 May 2004 ("the Arbitration Agreement"). In essence, the Arbitral Tribunal was asked what was a fair and reasonable charge for the monthly operating costs of the helicopter, and a fair and reasonable rate of charge for every hour that the helicopter or replacement aircraft was flown.[5] Clause 3 of the Arbitration Agreement reads as follows:3. QUESTIONS IN DISPUTE 3.1 The questions in dispute to be decided by the Arbitral Tribunal are: 3.1.1 Pursuant to clause 3.4 of the agreement, for the year commencing 1 January 2004, what is a fair and reasonable rate for the charge for monthly operating costs of the helicopter having regard to the costs incurred by the operator in carrying out the services and the rate available for the services on the open market and any other circumstances that the operator and the Trust shall consider relevant. 3.1.2 Pursuant to clause 3.4 of the agreement, for the year commencing 1 January 2004, what is a fair and reasonable rate of charge for every hour the aircraft or replacement aircraft is flown having regard to the costs incurred by the operator in carrying out the services and the rate available for the services on the open market and any other circumstances that the operator and the Trust shall consider relevant. 3.1.3 The parties agree that costs should be awarded in the discretion of the Arbitral Tribunal.[6] The Arbitral Tribunal was stated to be Mr Anthony M Frankham of Auckland, Chartered Accountant ("the Arbitrator"). It is accepted by the parties that Mr Frankham is a very experienced accountant and arbitrator, expert in valuation exercises of the type required by the arbitration reference. The arbitration took place over two and a half days, and the award was delivered on 8 June 2005. The rates fixed by the Arbitrator were lower than the rates provided for in the agreement. The fixed monthly charge was set at $87,250.00 plus GST, and the hourly charge at $865.00 plus GST for every hour the aircraft or replacement aircraft was flown. [7] Following the delivery of the award letters were sent to Mr Frankham seeking "correction or clarification" of his award. He responded in two letters, the first dated 29 June 2005 and the second dated 30 August 2005. The parties accept that these letters should be regarded as part of the award. Mr Frankham declined to amend his award in the manner sought by Airwork Holdings.The point of law raised[8] The application for leave sets out the question arising from the award as follows:When applying an identified weighted average cost of capital ("WACC") formula to ascertain the fair and reasonable return on capital to which the plaintiff was entitled from the defendant did the Arbitrator err by failing to gross up the return so as to obtain a pre-tax other than an after-tax result?[9] The relief sought was as follows:An order varying the award by grossing up the identified return ($391,320.00) by a factor equivalent to the corporate tax rate so as to ensure a proper application of the identified WACC formula and the proper determination of a fair and reasonable return on capital for the plaintiff.The test[10] Clause 5(1) and (2) of Schedule 2 ("the Second Schedule") of the Arbitration Act 1996 ("the Act") provides:5. Appeals on questions of law(1) Notwithstanding anything in articles 5 or 34 of Schedule 1, any party may appeal to the High Court on any question of law arising out of an award - (a) If the parties have so agreed before the making of that award; or (b) With the consent of every other party given after the making of that award; or (c) With the leave of the High Court. (2) The High Court shall not grant leave under subclause (1)(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially effect the rights of one or more of the parties. [11] A number of issues have arisen out of the clause 5(1) appeal requirements.Have the parties agreed to a right of appeal without leave?[12] The first submission of Airwork Holdings was that the agreement contains a term that the parties agreed to exclude the leave provision, and to confirm that there was to be a right of appeal without leave. In this regard Airwork Holdings relies upon clause 8.1 of the agreement. Clause 8.1 reads as follows:8.1 The award of the Arbitral Tribunal shall be final subject to the parties' agreed rights of appeal as set out in clause 5 of the Second Schedule to the Act.[13] It is submitted that this clause constitutes an agreement between the parties for the purposes of clause 5(1)(a) of the Second Schedule, and that on its plain words the parties are acknowledging that clause 5 of the Second Schedule applies to any award. [14] Clause 5 of the Second Schedule is not a clause which records that the parties have agreed that there is a right of appeal, or which in itself creates a right to appeal. Rather, it is a clause which sets out the various circumstances in which a party may have or may obtain a right to appeal to the High Court on a question of law. [15] One of the circumstances listed in clause 5(1) that will give the parties the right to appeal is their prior agreement that such an appeal right exists. Section 5(1) goes on to provide at sub-sections (b) and (c) that an appeal may be available if the parties have consented to an appeal after the making of the award, or have obtained the leave of the High Court. [16] Section 5 therefore creates a right to appeal, but it is a right that may only be invoked in the three listed circumstances, only one of which is agreement between the parties. In those circumstances, clause 8.1 of the agreement, in recording that clause 5 applies to the arbitration, does no more than record that the parties may appeal if they can bring themselves within one of the three conditions. Clause 8.1 is not an agreement in itself to an automatic right of appeal without leave. [17] Arbitration Agreements can state that clause 5 does not apply, and that there may be no right of appeal on any point including a point of law. On the other hand,an Arbitration Agreement may indeed record that there is a right of appeal to the High Court without leave. Clause 8.1 of this Agreement does neither of these things. It does no more than record the legal position set out in s 5. [18] Mr Thorpe for Airwork Holdings submitted that the fact that the clause does no more than record the "default" position leads to the consequence that it has no purpose. He submits that to give the clause meaning it should be construed as providing a right to appeal without leave. Otherwise it was pointless for the parties to include it in the Arbitration Agreement. [19] It is correct that clause 8.1 may be unnecessary given the express provisions of clause 5 of the Second Schedule, but this does not mean that it should be given an interpretation which is contrary to the natural meaning of its words. There are other clauses in the Arbitration Agreement which equally do not appear to have any particular contractual significance, but rather have the purpose of recording the existing position. For instance, clause 19(2) provides that the Arbitral Tribunal will make directions as to the providing of evidence at the arbitration hearing. Clause 20 provides that the arbitration hearing will take place at a place specified by the Arbitral Tribunal. In fact the Arbitrator would have had these powers in any event. I do not consider that the inclusion of clauses in the Arbitration Agreement which record rights that already exist means that the Court should strain to find a further meaning for those clauses beyond their plain meaning. [20] The position is, therefore, that Airwork Holdings must obtain leave if it is able to appeal. This will turn on whether the point raised is a point of law.Is the question raised a point of law?[21] The essence of Airwork Holdings' complaint about the award is that the Arbitrator used a weighted average cost of capital calculation ("WACC") to reach the appropriate percentage return on the original cost of the helicopter in the calculation of a return which is fair and reasonable, and in doing so he used a post- tax calculation. There was no complaint about the use of the WACC methodology. The complaint is that the calculation (which could have been done either pre-tax orpost-tax), should have been done pre-tax. It is submitted that the use of the pre-tax rather than the post-tax calculation had the consequence that the quantum of the return of capital component in the award was understated by one-third, in the sum of $192,680.00. [22] The first communication seeking clarification of the award, which was an email of 24 June 2005 from the solicitor for Airwork Holdings, queried whether there was a clerical or typographical error in the use of the phrase in paragraph 7.37 of the award "cost of capital". The second letter, sent to the Arbitrator on 1 July 2005, stated that the award contained an "error in computation and/or clerical or typographical error or an error of a similar nature" which Airwork Holdings sought to have corrected. It was said at paragraph 7:7. By definition and concept, WACC is a post corporate tax calculation. WACC expresses the financial returns required by the external providers of capital be it equity and/or debt. The cost of debt and equity expressed in a WACC formula are expressed on an after corporate tax basis. .. 10. In applying that in schedule 1, it appears that you have erred because the manner in which it has been applied generates a pre-tax result. In order to correct the error in computation to generate a WACC (ie after tax) return of 18%, it is necessary to factor the corporate tax rate in as an addition to the amount shown by you at $391,320.[23] The response of the Arbitrator to this on 30 August 2005 was to assert that it was not open to him to amend the award as sought, which dealt with the issues in a clear and unambiguous manner. It was stated:3. If I were to make an amendment in the manner sought by the defendant the award would deliver a result that on the evidence is not fair and reasonable.[24] In Champsey Bhara & Co v Jivraj Baloo Spinning and Weaving Co Ltd[1923] AC 480, 487, it was stated:An error in law on the face of the award means, in their Lordships' view, that you can find in the award or a document actually incorporated thereto some legal proposition which is the basis of the award and which you can say is erroneous.[25] It was put this way in Canada (Director of Investigation and Research) v Southam Inc (1997) 144 DLR (4th ) at [35]:Briefly stated, questions of law are questions about what the correct legal test is; questions of fact are questions about what actually took place between the parties; and questions of mixed law and fact are questions about whether the facts satisfy the legal tests.[26] The distinction between errors of law and errors of fact has a sound common sense purpose in the area of review of arbitral awards. The general rationale for arbitration is the adoption of a speedy, confidential and efficient process of resolution. Often this is done by choosing as the Arbitrator a person who has particular skill and knowledge in the area of fact that is the subject of the dispute. [27] It is clear that the application of legal principles, the interpretation of legal instruments, and the interpretation of statutes and regulatory documents, can all involve errors of law. In contrast, the valuing of assets and the calculation of their economic value is the classic subject matter of arbitrations and does not usually involve legal issues aside from the interpretation of the original Arbitration Agreement. In the determination of a fair ongoing market rate for the use of the asset as market conditions change, the owner of an asset and its user will often have differing views. The parties will have an ongoing relationship, and if a dispute as to value arises they will need a process of determination that is quick and reliable. [28] Valuation exercises can generally only be carried out by experts on the basis of an expressed test to be applied to calculate value. It is possible that errors of law may be made in the interpretation of that test. If, however, the formula is correctly understood by the Arbitrator carrying out the valuation process, the actual process of reasoning to reach a result will generally involve matters of expert knowledge and understanding, and findings of fact. Comparisons are done and calculations are made. Expertise is applied. If errors are made in that process of assessment, they are generally not errors of law. [29] As was said of the exercise of rental valuation in Granadilla Limited v Berben (1999) 4 NZ ConvC 192,963 (CA) at [26]:The parties chose to submit their dispute to the decision of arbitrators or their umpire. That decision is impeachable only for misconduct, which is not suggested, or error of law. The assessment of a value or a rental level is a question of fact. Provided the valuer applies a correct test or standard, then, as we have said earlier, the award can be called into question only when no reasonable valuer could have reached it upon the evidence or, which is really perhaps saying the same thing, no reasonable valuer would have failed to have taken account of and be influenced by particular evidence.It was held in that case that the view taken by the umpire on the evidence was a view open to him. [30] In Pupuke Service Station Limited v Caltex Oil (NZ) Limited (PC63/94, 16 November 1995), Lord Mustill stated of arbitral valuations in a passage not reported:A more unpromising subject for the judicial review of an award it would be hard to imagine, for a valuation is not a mechanical exercise, to be performed according to rote, but a broad weighing of necessarily imprecise data directed to the individual transaction in hand. Having entrusted this task to an arbitrator the parties should abide by the result, unless the arbitrator has employed a method clearly outwith the contemplation of the contract.This passage was cited in Westmed Finance Ltd v Wilson Parking NZ (1992) Limited(High Court Auckland, CIV2003-404-5913, 8 April 2004, Keane J).[31] In this case the error alleged is that the Arbitrator made a mistake in carrying out a calculation. The Arbitrator allegedly used a post-tax approach rather than a pre-tax approach. It is submitted that the percentage should not have been 18%, but should have been higher. [32] I do not consider this to be an error of law. It can be readily seen that there is no question of legal principle, or legal expertise or judgment involved in the calculation. The issue of whether the application of the WACC formula should be pre-tax or post-tax is a matter of assessment for an accountant carrying out the calculation. If an error was made, it was the error of the accountant applying his accounting expertise and skills. As Lord Mustill stated in the Privy Council decision in Pupuke Service Station Limited v Caltex Oil (NZ) Limited at [2], "subject to the most limited exceptions, the findings of fact by an Arbitrator are impregnable,however flawed they may appear": see Gold and Resource Developments (NZ) Ltd v Doug Hood [2000] 3 NZLR 318 (CA) at appendix one, [2]. [33] The calculation of the fair and reasonable rate was squarely within the Arbitrator's expertise. It is not suggested that he did not understand the WACC test, or that he was endeavouring to decide the rates on something other than a fair and reasonable basis. It is not suggested that he carried out the exercise in bad faith. Indeed, it is not suggested that he made an error in deciding to use the WACC formula as part of his process of calculation. The error alleged is a mistake by him in applying and carrying out the WACC calculation. [34] It was, of course, on the plaintiff's case, more than just an arithmetical error. Their allegation is that one of the steps taken in applying the WACC formula was wrong. However, such errors are not the type of errors that this Court reviews under clause 5 of the Second Schedule. The determination of such an issue by this Court would be difficult to resolve without the presentation of evidence by other expert accountants as to whether a pre or post-tax calculation was appropriate. It would not be satisfactory or fair for this Court to determine the issue from the face of the award. The High Court does not have expertise in the application of the WACC formula. If an appeal were permitted, this Court would end up doing part of the exercise that the parties had sought to avoid by referring the matter to an expert Arbitrator. [35] The issue properly dealt with under a clause 5 appeal is not whether this Court would come to the same view or a different view than that of the Arbitrator. The parties, by committing themselves to arbitration on the issue of the rates, had committed themselves to leaving the issue of expert accounting calculations to the Arbitrator. Having done this, they cannot now come to this Court seeking to persuade it that the Arbitrator got part of the calculation wrong. [36] For these reasons I find that the matter in respect of which leave is sought is not a question of law. The parties having entrusted the task of valuation to the Arbitrator must abide by the result.Exercise of discretion[37] I now turn to the question of whether, had I found an error of law, I would have exercised the Court's discretion and granted leave under clause 5. My judgment in this topic will be short, consistent with the comments on the correct approach set out in Gold & Resource Developments (New Zealand) Ltd v Doug Hood Ltd at [59]. [38] The exercise of the s 5 discretion was exhaustively considered by the Court of Appeal in Gold & Resource Developments (New Zealand) Ltd. Blanchard J traced the restrictive approach taken by the Courts to the granting leave. It was observed that even prior to the current Act, a "bias towards finality had already emerged": para [43]. It was stated that in enacting the Arbitration Act 1996 Parliament had made clear its intention that parties should be made to accept the arbitral decision that they had sought, and that there was a strict limitation on the involvement of the Courts where this choice had been made: para [52]. [39] It is not sufficient that the matter at issue is a question of law. The Court set out eight guidelines relating to the exercise of the Court's discretion in clause 5 at [54]. These guidelines have been relied on by the Trust in opposition to the application. I will consider the points briefly, using the discretionary guidelines set out in Gold & Resource Developments (New Zealand) Ltd relevant to this case.The strength of the challenge by nature of point of law[40] It is far from clear to me that the challenge raised is strong. The Arbitrator did not rely only on the WACC formula in reaching the criticised percentage of 18%. As he has recorded in the award, he had a range of expert evidence put to him. Airwork Holdings' experts said that it had sought to achieve a pre-tax rate of return of 20 – 25%. The Trust's accounting expert expected a return rate in the range of 15 – 20%. The Arbitrator said at paragraph 7.37 of his award, in an extract which both parties accept is pivotal in his decision:7.37 On the evidence, cross checked by calculations using my own knowledge and expertise, I determine that 18% on the cost of thehelicopter is a fair and reasonable assessment of the cost of capital to form part of the lessee's lease charge [41] Clearly his calculation did not involve solely the application of the WACC formula. The 18% was within the range of expert evidence. It constituted the Arbitrator's judgment as to the appropriate percentage. It is not appropriate in this decision that I comment on the detailed conflicting submissions of counsel on the way in which calculation was ultimately carried out. I do, however, note that the approach now put forward by Airwork Holdings would involve it achieving a percentage higher than the highest recommended percentage (25%) put forward by its expert at the arbitration. [42] I am not satisfied that the challenge to the award is strong. Further, I consider that challenge to be a one-off point. The award is only actually binding for the current year. It does not necessarily bind the parties for the two years remaining, although obviously it will have some precedent value for those two years. [43] I note the observation of Blanchard J: [54](1) of Gold & Resource Developments (New Zealand) Ltd, that where the point was "one-off", leave should rarely be given unless there are very strong indications of error. The test of a "very strongly arguable case" is not met.The importance of the dispute to the parties[44] The effect of this ruling is a question of money, and there is no significant point of principle involved.The amount of money involved[45] The amount of money involved in this arbitration is $192,680 over the twelve months in question. It constitutes an 8.1 percent annual difference in the lease payments. The relatively modest amount is a factor against the exercise of the discretion.The amount of delay involved in going through the Courts[46] There will be considerable delay if this matter is to go through the Courts, as it will be necessary to have a fixture that will allow for detailed argument on questions of correct accounting practice. I consider that the hearing would involve at least a day and might well go for longer. This delay, when balanced against the amount involved, is a factor against exercising the discretion.Conclusion on discretion[47] Even if the issue raised in the application was an error of law I would not exercise my discretion in favour of granting leave. I regard the alleged error as essentially "one-off". I do not consider the point raised to be very strongly arguable, and I note that the importance is limited to money, and that the amount of money involved is in itself not great. I consider that the delay occasioned by the submission of the dispute to the Court system would be considerable, and there must be a question as to whether the cost of correcting the alleged error would be disproportionate to the amount in dispute.Result[48] The application seeking leave to appeal is dismissed. The defendant is entitled to costs to be fixed on a 2B basis, together with disbursements to be fixed by the Registrar. The plaintiff was represented by only one counsel, and while it was appropriate for the defendant's senior counsel to be accompanied by junior counsel, I consider in all the circumstances that the costs should only be awarded for one counsel.. Asher J