JUSTMINK LTD V TUHOE - WAIKAREMOANA MAORI TRUST BOARD HC ROT CIV-2011-463-291

JUSTMINK LTD V TUHOE - WAIKAREMOANA MAORI TRUST BOARD HC ROT CIV-2011-463-291 26 July 2011IN THE HIGH COURT OF NEW ZEALANDROTORUA REGISTRYCIV-2011-463-291UNDER the Arbitration Act 1996IN THE MATTER OF applications seeking leave to appeal on aquestion of law arising from, and settingaside of, an arbitral awardBETWEEN JUSTMINK LIMITEDApplicantAND TUHOE - WAIKAREMOANA MAORITRUST BOARD AS RESPONSIBLETRUSTEE FOR TE MANAWA O TUHOETRUSTRespondentHearing: 20 July 2011Appearances: Mr P T Harman for applicantMr C Bidois for respondentJudgment: 26 July 2011 at 9:30 AMJUDGMENT OF LANG J[on application for orders setting asideand leave to appeal against arbitral award]This judgment was delivered by me on 26 July 2011 at 9.30 am, pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate[1] The parties to this proceeding entered into a variable order sharemilking agreement dated 23 March 2005. Under that agreement the applicant, JustminkLimited ("Justmink"), agreed to provide sharemilking services on a property ownedby the respondent, the Tuhoe-Waikaremoana Maori Trust Board ("the Board").[2] Matters appear to have proceeded smoothly for approximately five years. During that period the parties renewed the agreement in 2007 and 2009. In November 2010, however, the Board advised Justmink that it did not intend to renew the agreement the following year. As a result, the agreement was due to finally expire on 31 May 2010.[3] In early 2010 problems arose because the Board considered that Justmink was not performing the agreement to an adequate standard. It therefore purported to terminate the agreement by letter dated 5 February 2010, and subsequently requiredJustmink to leave the Board's property by letter dated 12 February 2010. The Boardthen withheld monies that it was required to pay Justmink upon termination of the agreement.[4] Justmink disputed the validity of the Board's action in terminating theagreement. It contended that it was performing its obligations under the agreement to an appropriate standard, and that there was no basis upon which the Board could validly terminate the agreement for inadequate performance. Justmink also contended that the Board had failed to observe the dispute resolution provisions of the agreement, and that the Board had no right to withhold payment of the monies that were due and owing to Justmink under the agreement. Finally, Justmink contended that, in terminating the agreement in February 2010, the Board had denied it the opportunity to enter into a new sharemilking agreement for the 2010/2011 season with another landowner.[5] In accordance with the terms of the agreement, these issues were the subject of an arbitration before Mr D I Stewart at which both parties were represented by counsel. The arbitrator heard evidence between 13 and 17 December 2010. By the end of the hearing the arbitrator had determined that the Board was not entitled to terminate the sharemilking agreement, and that it had not been entitled to withholdpayment of monies owing to Justmink under the agreement. This led to the parties resolving several of Justmink's claims. The arbitrator recorded their agreementregarding these issues in interim awards that he issued on 21 and 22 December 2010.[6] The arbitrator determined the balance of Justmink's claims in a final awardthat he issued on 14 February 2011. In that award he dismissed Justmink's claim fordamages relating to its alleged loss of opportunity to enter into a new sharemilking agreement. Justmink had claimed damages in the sum of $310,000 plus GST under this head.[7] Justmink now seeks orders setting aside, and granting leave to appeal thisaspect of the arbitrator's award to this Court. It contends that, in dismissing this partof its claim, the arbitrator erred in law in several respects.Jurisdiction[8] Article 34 of the First Schedule to the Arbitration Act 1996 ("the Act")permits the Court to set aside an arbitral award in limited circumstances. It relevantly provides:Application for setting aside as exclusive recourse against arbitral award(1) Recourse to a court against an arbitral award may be made only by an application for setting aside in accordance with paragraphs (2) and (3).(2) An arbitral award may be set aside by the High Court only if—(a) The party making the application furnishes proof that—(i) A party to the arbitration agreement was under some incapacity, or the said agreement is not valid under the law to which the parties have subjected it, or, failing any indication on that question, under the law of New Zealand; or(ii) The party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present that party's case; or(iii) The award deals with a dispute not contemplated by or not falling within the terms of the submission toarbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside, or(iv) The composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Schedule from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Schedule; or(b) The High Court finds that—(i) The subject-matter of the dispute is not capable of settlement by arbitration under the law of New Zealand; or(ii) The award is in conflict with the public policy of New Zealand.(3) An application for setting aside may not be made after 3 months have elapsed from the date on which the party making that application had received the award or, if a request had been made under article 33, from the date on which that request had been disposed of by the arbitral tribunal. This paragraph does not apply to an application for setting aside on the ground that the award was induced or affected by fraud or corruption.(6) For the avoidance of doubt, and without limiting the generality of paragraph (2)(b)(ii), it is hereby declared that an award is in conflict with the public policy of New Zealand if—(a) The making of the award was induced or affected by fraud or corruption; or(b) A breach of the rules of natural justice occurred—(i) During the arbitral proceedings; or(ii) In connection with the making of the award.[9] The right to appeal to this Court on a question of law is provided by Article 5 of the Second Schedule to the Act, which provides: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 affect the rights of one or more of the parties.[10] The Act defines "award" as follows:award means a decision of the arbitral tribunal on the substance of the dispute and includes any interim, interlocutory or partial award:[11] Justmink contends that the Court should set the award aside under Article 34(2)(b)(ii) and (6)(b) because the arbitrator breached the principles of natural justice in two respects. First, he failed to have regard to basic principles of contractlaw when he dismissed Justmink's claim for consequential losses. Second, he failedduring the hearing to alert Justmink to the possibility that he might dismiss the claim on the basis that he ultimately did.[12] The application for leave to appeal on a question of law also arises out of the alleged failure to have regard to fundamental principles of contract law whendismissing Justmink's claim. For that reason it is appropriate to deal with that issue first. Because it is central to the application to set aside the award, I propose to determine the issue on a substantive basis and not on an arguable basis as would usually be the case when determining an application for leave to appeal.Did the arbitrator err by failing to have regard to fundamental principles ofcontract law when he dismissed Justmink's claim?[13] In considering this issue it needs to be borne in mind that it was open to the parties to select an arbitrator with legal qualifications. They elected not to do that. Instead, they selected an arbitrator who had considerable practical experience in the rural sector. In particular, he had considerable experience in drafting sharemilkingagreements. This demonstrates that the primary objective of the parties was to secure the services of an arbitrator who understood sharemilking agreements, and who also appreciated the practical issues that the dispute raised. To the extent thatthe arbitrator's lack of legal qualifications led him to use language that might not be as precise as that expected of a judge or lawyer, that outcome is entirely understandable. The parties must share in the responsibility for that outcome.[14] The arbitrator succinctly summarised Justmink's claim for damages for lost opportunity as follows:12. It was [Justmink's] submission that the actions of [the Board] throughits agents and invitees amounted to a repudiation of the contract. That is an unequivocal, clear indication that [Justmink] could not perform the contract under any circumstances.13. As such, [Justmink], being the innocent party pursuant to Section 7 of the Contract Remedies Act 1979, in which he has the right to either affirm or cancel the contract had in this case, no option but to cancel the contract on the evidence presented and was therefore, in[Justmink's] submission, entitled to damages.14. [Justmink] submitted that the damages require [the Board] to restore [it] to the financial position [it] would have been in had the contract been performed.That the damages arise directly out of and flow naturally from [theBoard's] breach.That no claim of damage is too remote to limit the amount claimed.That the accepted test for proximity of damages is whether damageswere likely "as a result of the breach".15. It was [Justmink's] submission that the withholding of theproceedsdue before the termination prevented [Justmink] from securing a sharemilking contract for the 2010/2011 season.[Justmink] submitted that, as required in common law, [it] attempted to mitigate [its] losses by endeavouring to obtain a sharemilking position for the 2010/2011 season and finally by securing a position as a salaried manager for the 2010/2011 season.That [it] was unable to secure a more highly paid position as a variable order sharemilker on a larger property because [it] was forced to admit to prospective Owners that [it] was in dispute with [its] previous employer.17. It is therefore [Justmink's] submission that Claim (I) represents [its]loss of opportunity to enter into a new Sharemilking Agreement forthe 2010/2011 season because [the Board] had not paid [it] the monies owing to [it] on date of termination.[Justmink] submits that had [it] been paid those monies [it] would have been able to enter into a new variable order agreement or a 50/50 Sharemilking Agreement and would have received significantly more income under that Agreement for the 2010/2011 dairy season.18. [Justmink] has calculated the damages as a result of [the Board's]actions as $310,000 plus GST, being, in [its] view, the likely return [it] would have received from an 800 cow sharemilking position at a $7 payout less [its] costs and expenses in performing the contract.[15] The Board countered Justmink's claim with the following arguments:(a) The sharemilking agreement provided its own remedy for wrongful withholding of monies owed to the sharemilker. It required the Board to pay interest at the rate of eight per cent per annum in respect of any monies that the Board wrongly withheld. It had paid Justmink interest at that rate as part of the Interim Award.(b) Justmink failed to take reasonable steps to obtain a new sharemilking position for the 2010/2011 season. The Board had advised it in November 2009 that it would not be renewing the agreement in 2010. Justmink did not, however, begin actively seeking a new sharemilking contract well until after February 2010 when the Board terminated the agreement. By that stage it was too late for Justmink to have any reasonable prospect of obtaining a new sharemilking position for the 2010/2011 year.(c) Justmink's claim for $310,000 plus GST was unsustainable. It hadonly made a surplus of one-third of that sum in the 2009/2010 season.(d) The loss of opportunity was not a foreseeable consequence of the termination of the sharemilking agreement. The damages that Justmink claimed were therefore too remote.[16] Justmink's argument proceeds from the premise that, having determined thatthe Board had wrongfully terminated the contract, the arbitrator ought to haveensured that Justmink received proper recompense from the Board. It contends that this required the arbitrator to provide Justmink with full compensation for its inability to find a suitable sharemilking position in the 2010/2011 year. It submits that, in dismissing this aspect of Justmink's claim, the arbitrator failed to provide itwith recompense for losses caused by the wrongful termination of the agreement. He did so by ignoring well-established principles of contract law.[17] In argument before me counsel for Justmink contended that, with evolving principles such as the so-called "basket of remedies" for breach of contractualobligations, the arbitrator had a wide variety of remedies available to him.1 This submission ignores the fact, however, that Justmink did not ask the arbitrator to take such an approach. Rather, it sought damages in a quantified sum for the consequential losses it had suffered as a result of the Board wrongfully terminating the sharemilking agreement.[18] The classic test of remoteness for damages resulting from a breach of contract is that postulated by Alderson B in Hadley v Baxendale,2 and re-formulated by Asquith LJ in Victoria Laundry (Windsor) Ltd v Newman Industries Ltd.3Although the appropriateness of the test has been questioned,4 it is still generally applied today.[19] The learned authors of Burrows, Finn and Todd, Law of Contract in NewZealand summarise the essential features of the test within three propositions.5First, the innocent party may only recover damages to the extent that it was reasonably foreseeable at the time of the contract that such losses would be liable to result from subsequent breach. Second, what is reasonably foreseeable will depend upon the knowledge possessed by the party who later commits the breach. Third,1 See eg Tabley Estates Ltd v Hamilton City Council [1996] 1 NZLR 159 at 171.2 Hadley v Baxendale (1854) 9 Exch 341 at 355.3 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd (1949) 2 KB 528 at 537.4 See eg Stirling v Poulgrain [1980] 2 NZLR 402 at 419.5 Law of Contract in New Zealand, 3rd Ed, 2007 at 21.2.3knowledge may come in two forms, one actual and the other imputed. The first is knowledge that every reasonable person is assumed to possess regarding the type of loss that is likely to flow in the ordinary course of events from breach of the contract. The second is knowledge actually possessed by the party who breaches the contract regarding the existence of special circumstances that are likely to give rise to additional loss in the event of breach. Justmink was therefore required to establish that its losses fell within one or other of these categories.[20] It is clear from the arbitrator's decision that he was well aware that the Boardwas potentially liable for the losses naturally flowing from its decision to wrongfully terminate the sharemilking agreement in February 2010. The factual issue he needed to determine was whether or not Justmink had proved that the losses that it had allegedly suffered by being unable to enter into a new sharemilking agreement fell within that category.[21] The arbitrator ultimately determined that issue, and hence the claim, in favour of the Board. He reached that conclusion because he considered that Justmink had failed to adduce sufficient evidence to establish that the unlawful termination of the contract was the cause of Justmink's inability to obtain a suitable sharemilkingposition for the 2010/2011 season.[22] The essential factual components underlying the arbitrator's conclusion wereas follows:(a) Justmink did not call any prospective employer to confirm that the ongoing dispute between Justmink and the Board had dissuaded the prospective employer from engaging Justmink for the 2010/2011 season.(b) Justmink did not produce any evidence to confirm that the withholding of outstanding monies prevented it from financing a new variable order sharemilking position. 66 Such as budgets or evidence from its Bank Manager or Accountant.(c) Justmink only produced advertisements for available sharemilking positions from 3 April 2010 onwards. That was far too late to be seeking a sharemilking position for the 2010/2011 season.(d) Justmink knew from 18 November 2009 that the sharemilking agreement with the Board would not be renewed the following year. For that reason it ought to have commenced seeking a new sharemilking position at that time but failed to do so.(e) A change of sharemilker on any farm is a significant event, and active efforts to enter into a new sharemilking agreement normally occur in late spring or early summer.[23] This led the arbitrator to the following conclusion:64. I find that [Justmink] has failed to produce any evidence that I may rely on to convince me that [its] inability to obtain a satisfactorysharemilking position the following season was caused by [the Board's]actions so warranting further payments.[The Board] has paid [Justmink] a sum as provided for in the Agreement byway of damages as a result and consequence of [the Board's] actions.In disallowing [Justmink's] claim I take particular note of the fact that [it]failed to table evidence in support of [its] claim that [it] was financially compromised to the extent that it affected [its] opportunity to secure a sharemilking position, which at the very least would have been necessary to justify such a claim.[Justmink] has also failed to table any evidence by way of a budget or any form of realistic assessment of income and expenses to satisfy me of the accuracy of the amount claimed of $310,000 plus GST as [its] likely/possible income for the 2010/2011 dairy season.[24] These conclusions were fatal to Justmink's claim. They meant that it hadfailed to prove that the Board had caused any loss of opportunity to enter into a new sharemilking agreement for the 2010/2011 season. Rather, that loss of opportunity arose because Justmink had failed to take appropriate action to secure a new position once it learned in November 2010 that the Board did not intend to renew the contract. As a result, any losses flowing from the failure to obtain a new positionflowed naturally from Justmink's failure to take timely steps after November 2010.They did not arise as a consequence of the termination of the agreement in February 2010.[25] The approach that the arbitrator took to this issue was not, as Justmink claims, contrary to established principles of law of contract. Rather, it was entirely orthodox, and in keeping with fundamental principles of contract law. As a result, the principal argument upon which Justmink relies in relation to both applications fails.[26] Justmink is obviously unhappy that the arbitrator considered that its evidence was not sufficient to establish the claim for consequential losses. It cannot, however, challenge that aspect of the award on appeal. Article 5(10) of the Second Schedule to the Act expressly excludes any question as to whether the award was supported by evidence or sufficient evidence as a question of law.Was the arbitrator required to alert Justmink to the possibility that he might decide the case in the way that he ultimately did?[27] This argument rests on the premise that the arbitrator ought to have alerted Justmink to the possibility that he might determine the claim in the way that he ultimately did. Had he done that, Justmink argues that it may have been able toaddress the arbitrator's concerns regarding the sufficiency of its evidence.[28] There is nothing in this ground. Justmink knew from the outset that the Board contended that its actions in terminating the sharemilking agreement were notthe cause of Justmink's failure to obtain a new contract for the 2010/2011 season.That was the subject of evidence and submissions at the hearing in December. Justmink must have been aware that, if it failed in relation to that issue, its claim for consequential losses could not succeed. The arbitrator was under no obligation to alert Justmink to the importance of the issue.Conclusion[29] For these reasons neither application can succeed.[30] In case I am wrong on this point, I turn briefly to consider whether the Court should exercise its discretion to grant Justmink leave to appeal in any event.Should the Court exercise its discretion in favour of granting leave?[31] Several factors suggest that the Court should not exercise its discretion in favour of Justmink. First, the Sharemilking Agreements Act 1937 imposes arbitration as the forum within which disputes arising out of sharemilking agreements are to be resolved. The Court must recognise this fact. It is also important that there be finality to this type of litigation.[32] In Gold and Resource Developments (NZ Ltd) v Doug Hood Ltd the Court of Appeal observed that in passing the Arbitration Act 1996 Parliament intended tolimit the High Court's involvement in reviewing and setting aside arbitral decisions. 7The Court also said:The test which should be applied in New Zealand[51] There are of course arguments which can be made in favour of a wider scope for judicial review of arbitral awards for error of law. Arbitrators do not always have legal knowledge, and may apply the law incorrectly. The parties will expect a fair and reasonable result, and may consider that they should have a right of recourse if such a result is not forthcoming because the law has been incorrectly stated or applied. And there is a public interest in ensuring that appropriate standards are met in arbitrations.[52] But our Parliament, like those in the United Kingdom and Australia, has chosen to favour finality, certainty and party autonomy over these considerations. It intended to encourage arbitration as a dispute resolutionmechanism. By enacting a statute with the express purpose of redefining and clarifying the limits of judicial review of arbitral awards, Parliament has made clear its intention that parties should be made to accept the arbitral decision where they have chosen to submit their dispute to resolution in such manner. It plainly intended a strict limitation on the involvement of the Courts where this choice has been made. This makes inappropriate a broad approach to the discretion, such as that proposed by counsel for the appellant in this case...[33] These statements of principle plainly apply in the present case.7 Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 at [14].[34] It is also relevant that the issues that Justmink seeks to raise on appeal arise inthe context of a "one-off" dispute. Although the outcome is clearly of considerableimportance to Justmink, I do not accept its submission that the dispute has wider ramifications.[35] Finally, it is also relevant that Justmink filed its applications outside the time limit agreed to by the parties in the reference to arbitration. The reference to arbitration contained the following clauses:16. IN the event of either of the parties wishing to take any action to have the award set aside, then the party initiating such action shall lodge inthe solicitor's trust account a sum equal to the amount that has been awardedagainst it and no such action against the award shall proceed unless the notice of the intended action is served upon the other party within 28 days of the publication of the Award and, at the same time, the moneys as set outabove are deposited in the solicitor's trust account, time being of the essence. The lodgement of such funds by a party into their solicitor's trust accountshall constitute an irrevocable authority by that party to their solicitor to pay that sum of money to the other party in the event that the action taken against the award is unsuccessful.17. THE party taking such action against the Award pursuant to Clause 16, of this Agreement, is to commence proceedings in the High Court within 30 days of having given notice of the proposed action, TIME BEING OF THE ESSENCE.[36] I consider that the parties intended these clauses to apply to any form of challenge to this Court in respect of an arbitral award. Ordinarily any application to set aside an award, or to seek leave to appeal against an award, must be filed within three months.8 The parties to this particular agreement obviously sought to shorten the time within which any challenge could be filed.[37] The arbitrator issued his final award on 14 February 2011. In terms of clause 16, Justmink was required to give notice of its intention to take action to have the award set aside no later than 14 March 2011. Thereafter, it was required to commence proceedings in this Court within 30 days of giving such notice. At the latest, therefore, clause 17 required Justmink to file any application no later than 13 April 2011. It did not, however, file its applications until 13 May 2011. As a result,8 Article 34(3) of the First Schedule and Article 5(8) of the Second Scheduleit commenced the proceeding one month later than the reference to arbitration permitted.[38] In determining that the applications were filed outside the time prescribed by clauses 16 and 17, I reject the submission for Justmink that the word "days" in those clauses should be construed as meaning "clear working days". Counsel for Justminksought to buttress this submission by pointing out that reference to arbitration was governed by the provisions of the Sharemilking Agreements Act 1937 and the Sharemilking Agreements Order 2001. Both of those pieces of legislation refer to"clear working days" when imposing time limits for acts to be done. Counselsubmitted that this suggests that, where a sharemilking agreement imposes any time limit, that the limit must also be calculated in clear working days.[39] I consider it to be relevant that both pieces of legislation expressly provide that time limits are to be calculated having regard to "clear working days" rather than just "days". It was open to the drafters of the sharemilking agreement to adopt thesame wording in cls 16 and 17, but they elected not to do so. They must therefore betaken to have intended that the word "days" be given its natural and ordinary meaning.[40] It is also relevant that the clauses stipulate that time is to be of the essence. This confirms the importance that the parties attached to strict adherence to the time limits they imposed upon themselves. It means, in my view, that the Court should also recognise the importance of time limits in the present case. To ignore that issue would be to ignore the very basis upon which the parties agreed that they were referring their dispute to arbitration.[41] I therefore consider that, even if Justmink had been able to establish that the proposed appeal was worthy of consideration, it should nevertheless exercise itsdiscretion against granting leave because of Justmink's failure to comply with thetime limits imposed by the reference to arbitration.Result[42] The applications are dismissed.Costs[43] There is no reason why costs should not follow the event. The Board seeks indemnity costs but I do not consider that the applications were so lacking in merit that indemnity costs would be justified. My initial impression is that costs on a category 2B basis would be appropriate. If the Board wishes to advance an argument for costs on a different basis, I will receive memoranda on that issue.[44] The Board's memorandum (which is not to exceed five pages in length) is to be filed and served no later than 5 August 2011, with any memorandum in response (similarly restricted in length) to be filed and served by 19 August 2011. Any memorandum in reply is to be filed and served by 26 August 2011. I will then determine the issue on the papers.Lang JSolicitors:Blackman Spargo Rural Law Ltd, RotoruaEast Brewster Ltd, RotoruaCounsel:Mr P T Harman, Napier