NAPIER CITY COUNCIL v H2O MANAGEMENT (NAPIER) LTD [2020] NZHC 1913

NAPIER CITY COUNCIL v H2O MANAGEMENT (NAPIER) LTD [2020] NZHC 1913 [31 July 2020]IN THE HIGH COURT OF NEW ZEALANDNAPIERI TE KŌTI MATUA O AOTEAROAAHURIRI ROHECIV-2020-441-3[2020] NZHC 1913BETWEEN NAPIER CITY COUNCILPlaintiffAND H2O MANAGEMENT (NAPIER) LTDDefendantHearing: 28 July 2020Counsel: J D Cameron for the plaintiffR A Rosser for the defendantJudgment: 31 July 2020JUDGMENT OF CULL JOverview[1] H2O Management (Napier) Ltd (H2O) manages Ocean Spa in Napier, whichis owned by Napier City Council (the Council). H2O's management is governed by amanagement agreement (the Agreement) for a period of five terms of four years. It isrenewable every four years, provided H2O has not been in breach of the Agreementand H2O gives 12 months' written notice to the Council that it intends to renew theagreement. A dispute arose between the parties, when the Council purported toterminate the Agreement on the grounds that H2O had not sought a renewal by thespecified date. The parties disagreed on the specified date under the Agreement.[2] The matter went to conciliation and then to arbitration, as required under thedispute resolution clause in the Agreement.[3] During the course of the conciliation, the Council alleged that H2O hadbreached the Agreement by assigning, or subleasing its management over parts ofOcean Spa without the Council's consent. Further, the Council alleged that H2O'scalculation of income was incorrect, leading to unpaid sums owing under the profit-sharing arrangement, in breach of the Agreement.[4] The arbitration was undertaken in two parts. In the first arbitral award (FirstAward), the Arbitrator held that H2O's interpretation of the specified due date forrenewal was correct and the Council was not entitled to terminate the Agreement. Inthe second arbitral award (Second Award), the Arbitrator found that H2O owed theCouncil $37,254.80 and gave H2O 28 days to pay it.[5] The Council contends that three questions of law arise from themisconstruction by the Arbitrator of the applicable clauses and seeks to appeal to thisCourt. H2O submits that there are no errors of law and that any alleged error does notjustify the exercise of the discretion and is not arguable.The issues[6] The challenge to both arbitral awards can be summarised in the following twoissues:(a) Did the Arbitrator err in law by misconstruing clauses 8.2 and 8.3 ofthe Agreement, in holding that those clauses relate to physical changesto the complex only and not to assignments of management?(b) Did the Arbitrator err in law by misconstruing clause 11.4 of theAgreement holding that H2O was not in breach of the Agreement at thedate of renewal in respect of the profit-sharing clauses?[7] I will deal with each of the issues briefly, in light of the Full Court of the Courtof Appeal's emphasis on the desirability of a "short judgment" for leave decisions inthis context.11 Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA) at [59].Construction of clauses 8.2 and 8.3[8] Under Part 8 of the Agreement entitled 'Obligations of the Company', clauses8.1 to 8.4 provide as follows:8.1 In consideration of the appointment of the Company as the Managerof the Complex, the Company shall fit-out the Complex, including:• provisioning of all chattels• interior construction of a fitness centre• supply of all fitness equipment• interior construction of a café• supply of all café equipment• supply of onsite hypochlor generation plant• supply of a reception front desk and administration systemThe fit out shall be completed to the value of $1m.8.2 The Company shall not change, alter or extend the Complex (after thecompletion of development), during the term of this agreement without thewritten consent of the Council.8.3 The Company shall not make changes to the Complex during or afterdevelopment without the written agreement of the Council. The Companydoes not have authority to make changes that will incur additional costs forthe Council.8.4 The Company shall report in writing to the Council on themanagement and operation of the Complex. Such reports and their frequencyshall be agreed between the Council and the Company.[9] The remaining clauses under Part 8 require the Company to employ qualifiedstaff to supervise the management and operation of the Complex, be responsible forthe security of the Complex, and for the maintenance, repair and replacement ofspecified items. The Company is also obliged to keep the Complex open for publicuse at specified times and the Company must consult with the Council when amendingopening hours or admission fees and charges.[10] The Council alleges that H2O was in breach of the Agreement at the date ofrenewal by subleasing, assigning or alienating the fitness centre and/or café at theComplex, without obtaining the Council's written consent as required underclause 12.1 of the Agreement.[11] The Arbitrator found that clauses 8.2 and 8.3 relate only to physical changes ofthe Complex and do not include arrangements relating to the assignment, sublease orsubcontract for the management of part or all of Ocean Spa. Further, the Arbitratorheld that in order to establish a breach of clause 12.1 of the Agreement, the Councilmust establish that H2O assigned its interests in the Complex. Part 12 and clauses 12.1and 12.2 contain standard terms for assignment of interest and termination of contractclauses.[12] The Arbitrator noted that the Council accepted H2O's claim that the operationof either facility was undertaken by a "trading arm" of H2O. The Arbitrator concludedthat the arrangement made by H2O since February 2015 in relation to the operation ofthe café and the fitness centre were not in breach of clause 12.1 of the Agreement,because H2O cannot assign its interests in either of the café or fitness centre to itself.This aspect of the Arbitrator's finding was not challenged.[13] The Council seeks to argue that the Arbitrator erred in law by incorrectlyimplying the term "change" and "changes" in clauses 8.2 and 8.3 as applying only tophysical changes, rather than to any arrangement by way of assignment, sublease, orsubcontract for all or part of the Ocean Spa complex.[14] An appeal from an arbitral award is governed by Schedule 2, clause 5 of theArbitration Act 1996 (the Act) and r 26.15 of the High Court Rules 2016. TheHigh Court shall not grant leave unless a question of law arises and the determinationof the question could substantially affect the rights of one or more of the parties.2 Ifthe threshold test is met, then the Court has a general discretion to grant leave toappeal.3 The exercise of the discretion is guided by the eight considerations outlinedby the Full Court of the Court of Appeal.42 Arbitration Act 1996, clause 5(2).3 Schedule 2, clause 5(3).4 Gold & Resource Developments (NZ) Ltd v Doug Hood Ltd above n 1, at [11].[15] The meaning of a "question of law" is defined in the Act:5For the purposes of this clause, question of law—(a) includes an error of law that involves an incorrect interpretation of theapplicable law (whether or not the error appears on the record of thedecision); but(b) does not include any question as to whether—(i) the award or any part of the award was supported by anyevidence or any sufficient or substantial evidence; and(ii) the arbitral tribunal drew the correct factual inferences fromthe relevant primary facts.[16] The starting point here is that the Arbitrator interpreted the words "change"and "changes" as they appeared in clauses 8.2 and 8.3 of the Agreement. On its face,this involves a legal interpretation of the contract but it does not follow that theArbitrator's interpretation, if indeed it is in error, can be properly characterised asraising a question of law. This Court, has in several instances, found that the allegedidentified error does not engage a question of law when it is, in reality, a challenge tofactual inference or sufficiency of evidence.6[17] I accept H2O's submission that the Arbitrator did not imply a term into theAgreement but interpreted the words "change, alter or extend" in the context of theAgreement. The Arbitrator, in interpreting clauses 8.2 and 8.3 as relating only tophysical changes of to the Complex, referred to the use of the wording in clause 8.2of "change, alter or extend" and contrasted it with the wording in clause 12.1, whichrefers to an assignment of an "interest in the Complex". Comparing both clauses, theArbitrator found the wording in clause 8.2 meant physical changes and the wording inclause 12.1 related to contractual arrangements between the parties.[18] In analysing clause 8.3, the Arbitrator observed that H2O did not haveauthority to make changes to the Complex that will incur additional costs for theCouncil, without the consent of the Council. The Arbitrator construed the wording of5 Arbitration Act 1996, schedule 2, clause 106 Milk New Zealand (Shanghai) Co Ltd v Miraka Ltd [2019] NZHC 2713; Kiwi Property HoldingsLtd v Fletcher Construction Company Ltd [2018] NZHC 1745; and KKDS Ltd v S & G ThreeKings Ltd [2019] NZHC 3456.the clause as a reference to physical changes to the Complex, that could lead toadditional operating or maintenance costs for the Council. She found it did not includeany changes in assigning interests in parts of the Complex.[19] It is plain from the reasoning in both her Arbitral Awards and in the SecondAward in particular, that the Arbitrator followed the orthodox approach to contractualinterpretation, referring to a number of well-established authorities, which were reliedon by both parties.7 As H2O submits, the approach taken by the Arbitrator was toconsider the words of the contract; the factual matrix and background knowledgeavailable to the parties at the time of the contract; and the conduct of the parties afterthey entered into the contract. On my assessment, the Arbitrator has construed thewords in accordance with the framework of the Agreement, namely the obligationsimposed by Part 8 on the operational management of the Complex.[20] Although a contractual interpretation is usually a legal exercise, I consider thatthe Arbitrator's interpretation does not raise questions of law for further determination;there is no apparent error of law; and the Arbitrator's interpretation appears consistentwith the nature of the obligations of the respective parties under the Agreement.[21] I conclude that the Council's challenge does not raise a question of law but isinstead, a challenge to an unfavourable interpretation for the Council.Clause 11.4 of the Agreement[22] Clause 11.4 provides:11.4 In addition to the payment referred to in 10.2 above, the Companyshall pay a share of any profit from the Complex to the Council as follows:(a) For all profits less than $1.2million in any financial year, thesplit shall be 60/40 in favour of the company of the grossincome after deduction of $150,000.00 (being the return oninvestment and management fees) and the reasonableoperation and administrative costs of the Company relating tothe complex. (The sum of $150,000.00 shall be adjusted inaccordance with the CPI as per clause 10.2.)7 Vector Gas v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 144; and WholesaleDistributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37, [2008] 1 NZLR 277.(b) For all profits of $1.2million and greater in any financial yearthe said profit shall simply be split between the parties 60/40in favour of the Company.(c) The threshold figure of $1.2million shall be adjusted inaccordance with the CPI as per clause 10.2.[23] The Council seeks to argue that the Arbitrator misconstrued clause 11.4 of theAgreement, by importing a three-step process into the clause. The Council allegesthat the Arbitrator has found that when sums have not been paid under the profit-sharing clause, the parties are required to go through the dispute resolution processand be given an opportunity to make missed payments, before a breach of theAgreement can be said to have occurred.[24] In the Second Award, the Arbitrator found that H2O had not included allincome generated by the Complex in the profit-share calculations and had deductedexpenses that were not the reasonable costs of the Complex. The Arbitrator identifiedthat $37,254.80 was owing to the Council for the financial years ending March 2016,March 2017 and March 2018 and gave H2O 28 days to make that payment.[25] The Council seeks to appeal two aspects in respect of the Second Award. First,it alleges that the Arbitrator implied a term that the parties must go through a three-stage process before a breach can be found. This, the Council says, is contrary to theAgreement and therefore an error of law. Secondly, in finding that H2O had notcomplied with the profit-sharing clause, the Arbitrator erred in failing to find that H2Owas in breach of the Agreement at the date of renewal.[26] The real gravamen of the Council's challenge to the Second Award is that italleges H2O was in breach of the Agreement, as at the date of the renewal of itscontract, and the Council was therefore entitled to terminate the Agreement.[27] The Council's claim of breach of the profit-share clause was not initially raisedwhen it sent a letter terminating the Agreement for H2O's breach. The purportedtermination was on the basis that H2O had failed to renew in time. The profit-sharingissue arose subsequent to the alleged failure of H2O to renew in time and was asecondary issue, raised prior to or during the conciliation process. H2O's Counseladvised it led to the arbitration hearing being split into two.[28] At the hearing before me, Mr Cameron for the Council clarified that prior tothe renewal date, the Council had requested further financial information from H2O,as the information provided was unsatisfactory. The parties however, did not agree onthe profit-share amount owing. Ms Rosser for H2O submits that consequently, theparties were in "dispute" and that issue had to be resolved. I accept H2O's submissionthat, if there was an issue of a "missed payment" which was disputed, the Agreementrequires all disputes, whether a breach is ultimately established or not, to undergo aspecific dispute resolution process as required by clause 15.2.[29] It follows that I am unable to uphold the Council's submission that theArbitrator has implied terms or suggested additional obligations that must now be readinto the Agreement. The Arbitrator did not imply a term that required all future issuesof "missed payments" or breaches of the profit-sharing clause to undergo a three-stageprocess. The procedure adopted was limited to this dispute, arising in these particularcircumstances, which required determination, before H2O could be held to be inbreach. The fact that the determination was finalised after the date of renewal doesnot render the Arbitrator's finding an error of law. At the time H2O sought to renewits term, H2O was not in breach in the Agreement but was in dispute over the sumsowing. I note that it was open to the Council to raise these allegations of breach priorto the date of renewal, so that the matter could have been determined before renewal.[30] I consider that no question of law has been raised and there has been no errorof law. The parties could not agree on whether there were sums owing by H2O to theCouncil; there was a dispute as defined under the Agreement; and in accordance withthe Agreement, the dispute was referred to arbitration. The determination of thatdispute occurred after the date of renewal and on any view of the facts and the timing,H2O was not in breach of the Agreement at the date of renewal. I find that this is aheavily fact-oriented challenge and does not raise a question of law to be determined.Conclusion[31] On the basis of my findings above, none of the Council's alleged questions oflaw meet the threshold test under the Act. Even on a consideration of the discretionaryconsiderations, I note that the Arbitrator, Ms Nicole Smith is legally qualified. Thecontinuation of the contract is only for a further two years. There is no monetary valueattaching to any alleged mistake by the Arbitrator. I further observe that if leave weregranted, the substantive appeal is likely to be determined either within a year, or at theexpiration, of the final term of the Agreement. These factors count against a grant ofleave.[32] To conclude therefore, the proposed appeal, although involving aninterpretation of a contractual agreement does not engage questions of law, as thequestions raised are heavily fact-oriented and involve challenges to the Arbitrator'sinterpretation of words within the context of the Agreement. Her conclusions appearsound and appropriate. I consider the Council has a marginal prospect of appellatesuccess, given the facts involved in both the First and Second Awards, and there is nolikely useful precedent that can emerge from a grant of leave.Order[33] The Council's application for leave to appeal is dismissed.Costs[34] In the absence of Counsel agreeing to costs, the parties may file and servememoranda of no more than five pages:(a) H2O by 5pm 13 August 2020;(b) The Council by 5pm 20 August 2020.Cull JSolicitors:Lawson Robinson, Napier for the PlaintiffHolland Beckett Law, Tauranga for the Defendant