WAI-O-TAPU LIMITED PARTNERSHIP v THE TRUSTEES OF NGATI TAHU NGATI WHAOA RUNANGA TRUST [2018] NZHC 1003

WAI-O-TAPU LIMITED PARTNERSHIP v THE TRUSTEES OF NGATI TAHU NGATI WHAOA RUNANGATRUST [2018] NZHC 1003 [9 May 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-463-000085[2018] NZHC 1003UNDER The Arbitration Act 1996IN THE MATTER of an application to set aside an arbitralaward pursuant to Articles 34(2)(b)(ii) & (iii)and 34(6)(b) of Schedule 1 of the ArbitrationAct 1996BETWEEN WAI-O-TAPU LIMITED PARTNERSHIPApplicantAND THE TRUSTEES OF NGATI TAHU NGATIWHAOA RUNANGA TRUSTRespondentsHearing: 12 March 2018Appearances: S J Mills QC and P J Crombie for ApplicantD Salmon and R E Schultz for RespondentsJudgment: 9 May 2018JUDGMENT OF VENNING JThis judgment was delivered by me on 9 May 2018 at 3.30 pm, pursuant to Rule 11.5 of the HighCourt Rules.Registrar/Deputy RegistrarDateSolicitors: Cooney Lees Morgan, TaurangaLee Salmon Long, AucklandCounsel: S Mills QC, Auckland[1] Wai-O-Tapu Limited Partnership (the Lessee) seeks to set aside an award ofthe Hon Robert Fisher QC (the arbitrator) determining a rent review between theLessee and the trustees of Ngati Tahu Ngati Whaoa Runanga Trust (the Lessor) inrelation to a property known as Wai-O-Tapu Thermal Wonderland (Wai-O-Tapu).1The Lessee says the arbitrator breached natural justice and exceeded his jurisdiction.Brief background to Wai-O-Tapu[2] I take the background from a previous decision of the Court.2 Wai-O-Tapu iscurrently leased under a deed of renewal of lease dated 25 September 2000. The leaseincorporates all of the terms of an original lease from 1969 (except in relation to rentin the initial period). The final expiry date of the lease is 30 June 2033.[3] The Lessor was assigned the land and its reversion as part of a Treaty ofWaitangi settlement in 2010. On 31 October 2012 the Lessee purchased the tourismbusiness of Wai-O-Tapu, including the leasehold interest in the land.[4] The lease requires rent reviews every five years or whenever the Lessee subletsor assigns any part of the land. The previous rent review was completed in 2010. Itestablished the rent at $205,000 plus GST. No review was conducted when the Lesseeacquired the lease in 2012.[5] The subject property is a largely undeveloped 125 ha site consisting ofimprovements, natural geothermal features and bush. The Lessee operates a well-known geothermal tourism business on the property.1 Ngati Tahu – Ngati Whaoa Runanga Trust v Waiotapu Ltd Partnership (Partial Award) RobertFisher QC, 10 May 2017 (the Award).2 Wai-O-Tapu Ltd Partnership v The Trustees of Ngati Tahu Ngati Whaoa Runanga Trust [2017]NZHC 2597.The arbitration[6] The rent became due for review on 1 July 2015. The parties and their expertswere unable to agree an appropriate rental. Ultimately they submitted the issue toarbitration. The arbitrator was appointed sole arbitrator to determine the rent review.[7] The experts who gave evidence at the arbitration as to the Current Market Rentwere significantly apart. The Lessor called Mr Gary Cheyne, a registered valuer, whoproposed a rent of $1,139,400 per annum; and Mr Michael Lowe, a charteredaccountant, who proposed a rent of $972,000 per annum. The Lessee called MrGerrard Wilson, a registered valuer who proposed a rent of $287,200 per annum; andMr Eric Lucas, a chartered accountant who proposed a rent of $300,000 per annum.The arbitrator ultimately fixed the rent at $1,139,400 per annum.The Lessee's challenge of the award[8] The Lessee applied to set aside the arbitral award. First, it sought leave toappeal on questions of law. In a judgment dated 24 October 2017 this Court refusedthe application for leave.3[9] The Lessee now seeks to set the award aside based on arts 34(2)(a)(iii) and(b)(ii) and 34(6)(b) of Schedule 1 of the Arbitration Act 1996. The Lessee says thatthe arbitrator breached natural justice and exceeded his jurisdiction in fixing the rentat $1,139,400 per annum.The grounds for setting aside[10] The parties considered the original lease terms did not provide sufficientguidance as to the basis for the rental or the methodology that should apply to thereview so entered what has become known as a Process Agreement. The Lessee reliesupon the provisions of the Process Agreement to support its application to set asidethe award.3 Wai-O-Tapu Ltd Partnership v The Trustees of Ngati Tahu Ngati Whaoa Runanga Trust [2017]NZHC 2597.[11] The Lessee raises three arguments:(a) breach of natural justice in the way the arbitrator dealt with ajurisdictional objection it made based on the range it says was set bythe Process Agreement.(b) the arbitrator exceeded his jurisdiction by setting a Current Market Rentthat was outside the range allowed by the Process Agreement;(c) the arbitrator exceeded his jurisdiction by not basing the new CurrentMarket Rent on an "appropriate methodology" as was required underthe Process Agreement.The Process Agreement and its amendment[12] Clause 8 of the lease provided that on the occurrence of certain events:the annual rental hereinbefore reserved shall be reviewed by agreementbetween the Lessor and the Lessees: Both parties considered the clause did not provide sufficient guidance on the basis forthe rental or methodology that should apply to the 2015 rent review. They agreed ajoint brief to apply to the rent review (the Process Agreement). The ProcessAgreement was:to act as a basis for engagement between the parties and their respectiveappointed assessors in relation to this rent review.[13] The Process Agreement provided for a Rental Assessment DeterminationProcess; a basis of reviewed rental; and referred to the methodologies to beconsidered. It also provided the current rent was to apply in the interim and for costs.As relevant it provided:The parties agree that in order to reach agreement on the rental for the ensuingterm the process set out below will be followed by the parties and their thirdparty advisors as well as in relation to any determination made by a thirdindependent assessor:RentalAssessmentDeterminationProcessThe parties have agreed to:1. Appoint appropriate and suitably qualified third partyadvisors, acting as experts, to assist with the rentalassessment, negotiation and determination process. TheTrustees have appointed KPMG and WLP has appointedPWC. The two experts shall each be provided with theinformation, documentation and explanation theyconsider reasonably necessary in order to reach theirassessment. The experts will be permitted to retain theservices of a registered property valuer experienced inthe valuation of assets of this nature as they considernecessary to reach their assessment;2. The third party experts' reports shall be made availableto both parties, and the parties shall negotiate directly ingood faith in an attempt to reach agreement within areasonable time on the rental that should apply.3. Should the parties not be able to reach agreement oncethe two assessments are shared, then the experts shallconsider each other's assessments and expert reportsand attempt to reconcile any areas of disagreement andendeavour to provide an amended assessment for theparties' further consideration and negotiation; and4. If the parties still cannot reach agreement within areasonable time, the matter is to be referred to a jointlyappointed and independent third expert with each partyhaving the opportunity to make written and oralrepresentations. The third expert shall make adetermination providing written notice andsubstantiating the determination to the parties. Thedetermination must be within the range supported byeach of the parties' experts' assessments from step 3above. The determination shall be binding on theparties with no further right of review or appeal.In determining the rental that should apply:• Per the original lease the rent determined is not to beless than the rent for the period immediately precedingthis rent review;Basis ofreviewedrental:Current Market Rent, as defined by International ValuationStandards (namely the estimated amount for which aproperty, or space within a property, should lease on thedate of valuation between a willing lessor and a willinglessee on appropriate terms in an arm's length transaction,after proper marketing wherein the parties had each actedknowledgeably, prudently, and without compulsion), andhaving regard to the relevant terms and conditions of thelease and any subsequent variations.Methodologiesto beconsideredThe experts shall apply an appropriate methodology toarrive at their opinion on Current Market Rent as definedabove.The experts will consider, inter-alia, a Direct Comparisonmethodology as a basis for the rental to apply to the site(Direct Comparison methodology involves the comparisonof rents for other comparable land based concessions, leasesor licenses, in this case being those pertaining to othertourism related or similar activities).It is acknowledged by the parties that supporting analysisof the businesses trading accounts is to be carried out withreference to factors such as industry metrics for similartourism businesses, the necessary capital employed inoperating a going concern lessee business, improvementsowned by the lessee and the terminating nature of theconcession and any other relevant factors.In addition to the above, the following factors (withoutlimitation) are also considered relevant to determining therental as it relates to the trading outlook for the lessee'sgoing concern:• Forecast tourism activity (domestic and international);and• Forecast economic conditions.Interim rent: Until the reviewed rent is determined, the parties agree thatthe current contract rent of $205,000 plus GST per annumis to apply as interim rental, with the reviewed rent to bebackdated to the review date and any underpaymentreimbursed to the Lessor.Costs: In the event the rent is determined by the third expert, thewritten notice determining the rent shall provide as to howthe costs of the determination should be borne, otherwiseeach party, acting reasonably and in good faith, is to meettheir own costs of this assessment and determinationprocess.[14] The first step in clause 1 of the Rental Assessment Determination Process wascompleted in accordance with the Process Agreement. The Lessee appointed MrLucas of PwC. He suggested a rental of $300,000. The Lessor appointed Mr Loweof KPMG. He settled on a figure of $972,000.[15] Given the gap between the two figures the parties accepted that the negotiationand meeting of the experts provided for in clauses 2 and 3 was unlikely to result inagreement.[16] There then followed discussions between the parties' solicitors directed atabandoning the rental assessment part of the Process Agreement and instead havingthe rent fixed at arbitration. Mr Crombie, the Lessee's solicitor emailed Mr Salmon,the Lessor's solicitor on 16 June 2016 to confirm the agreement to vary the ProcessAgreement as follows:The variations to the Process Agreement are;• Clauses 2 & 3 of the Rental Assessment Determination Process arewaived • Clause 4 of the Rental Assessment Determination Process will nolonger apply. It is to be replaced by a new clause 4 which reads asfollows:"4. Submit what is now a dispute on the rent that is to apply from 1July 2015 to arbitration in accordance with the Arbitration Act 1996before a sole arbitrator whose award shall be final and binding onthem. The terms of reference for the arbitrator shall include arequirement for his/her determination of the rent that is to apply to beat a level not less than the rent that applied immediately prior to 1 July2015."[17] A draft letter for the proposed arbitrator, Mr Fisher, was attached.[18] Mr Salmon did not immediately respond. Mr Crombie then spoke directly toMr Salmon and prompted him for a reply to his letter of 16 June.[19] Mr Salmon replied by an email of 24 June 2016 that he was happy for MrCrombie to send the letter to the proposed arbitrator and continued:As discussed, my client raised a query about the proposed change to point 4of the Process Agreement which I will need to clear up before confirmingthose changes, but this does not need to hold you up in sending a letter to MrFisher.[20] The letter to the proposed arbitrator stated the parties had agreed to refer theirdispute to arbitration in accordance with the Arbitration Act. Mr Fisher confirmed hisavailability in a letter of 28 June. He suggested the parties complete a fresh submissionto arbitration.[21] On 5 August Mr Crombie wrote to Mr Salmon seeking confirmation in writingthat the variations suggested in paragraph 2 of his email message of 16 June had beenagreed. He also raised a concern about the approach the Lessor's expert Mr Lowe ofKPMG had adopted in carrying out its assessment of the market rental. Mr Crombierecorded the Lessee's view was that the Direct Comparison Methodology was agreedby the parties to be the primary approach the experts were required to consider. TheLessee believed the approach adopted by KPMG was contrary to the agreed approach.[22] Mr Crombie noted that unless the matter could be resolved the Lessee intendedto raise it (the requirement for the Direct Comparison Methodology approach to beapplied) with the arbitrator as a preliminary issue to be determined prior to thesubstantive hearing. Mr Crombie and Mr Mills QC then prepared the Lessee'smemorandum for the first telephone conference with the arbitrator noting, inter alia,the Process Agreement was varied in June 2016 and that it was agreed steps 2 and 3in the Rental Assessment Determination Process section of the Process Agreementwould be waived and that the substantive issue for determination was to fix the CurrentMarket Rent for the subject property as at 1 July 2015 having regard to the ProcessAgreement and the deed of lease. The memorandum then made reference to apreliminary issue Mr Crombie had raised with Mr Salmon and focused on themethodology to be considered.[23] In his memorandum prepared for the conference of 22 August (which may nothave been received by the Lessee or arbitrator prior to the conference) Mr Salmonnoted that the Lessor disagreed with the propositions raised by the Lessee that:• KPMG had not undertaken a Direct Comparison Methodologyanalysis; or• the Lessor's ability to reach appropriate conclusions on the probativevalue of relevant evidence was fettered by the Process Agreement; or• any such fetter survived the reference to arbitration.[24] In a minute issued following the conference the arbitrator suggested thedefinition of the dispute be:"The rent review as at 1 July 2015 arising from the lease of 22 October 1969of the Waiotapu Geothermal Wonderland, Rotorua."[25] The arbitrator then went on to discuss what had been described as thepreliminary issue. He suggested a pragmatic approach to the issue would be for bothparties to include a Direct Comparison Methodology analysis in the evidence whichthey put forward in the arbitration. He said he could see room for argument over therole of the methodology's requirement given that steps 2 and 3 in the agreed processhad been dropped. He could also see room for argument over whether:to "consider a [Direct Comparison Methodology]" necessarily involvesusing that methodology to then arrive at a conclusion.He suggested that both ensure that their valuation experts used, among other things, aDirect Comparison Methodology and a conclusion which resulted from that approach.[26] Mr Crombie subsequently circulated a proposed arbitration agreement to MrSalmon which defined the issue as:What is the Current Market Rent as at 1 July 2015 pursuant to clause 8(b)of a deed of lease and in accordance with [the process agreement] in August2015 and subsequently varied in June 2016?[27] In a letter of 18 October 2016 Mr Salmon confirmed the Lessor's experts hadbeen asked to further consider the Direct Comparison Methodology to the extent theyfelt in their opinion they properly could. The letter also noted that the draft arbitrationagreement was acceptable except that they considered the qualifying words of thedefinition of the dispute as otiose.[28] Mr Crombie replied by letter of 19 October noting that the Lessee did notaccept the reference in the schedule to the Process Agreement was otiose. He argued:"Current Market Rent" must be fixed in accordance with both the lease andthe process agreement. The lease makes no reference to "market rent". Theparties' agreement to the rent being based on the "market" arises from theprocess agreement. It also provides the arbitrator with the parties agreeddefinition of "Current Market Rent" and requires a determination to be withincertain range. It also prescribes certain factors that are relevant to thedetermination of market rent.[29] As will be seen from the exchanges between counsel from June 2016 theparties' focus was on the Current Market Rent and the methodology to be applied toset it. Mr Crombie noted that he considered the arbitrator had acknowledged that hemust derive the Current Market Rent inter alia pursuant to the Process Agreement.[30] Mr Salmon replied by letter of 2 November noting that the Lessor's positionwas that the inclusion of:additional definition beyond market rent referring to the direct comparisonapproach might create the false impression that one subset of potentiallyrelevant evidence may be thought to impliedly exclude others. The partieshave not agreed such a substantive result. They have [simply] agreed toconsider the available evidence to make a direct comparison. This makes thepoint one of procedure, rather than one that goes to the essence of the disputedissue.[31] In the interests of finalising the agreement both parties' position was set out inthe definition of the dispute in the arbitration agreement finally executed on 20December 2016:NATURE OF DISPUTEThe lessee contends that the issue for determination is:What is the Current Market Rent as at 1 July 2015 of the property known asWaiotapu pursuant to clause 8(b) of a deed of lease dated 1 July 1967 and theAgreement made by the parties (called "Joint Brief: Waiotapu GeothermalWonderland 1 July 2015 Rent Review") in August 2015 and subsequentlyvaried in June 2016?The lessor contends that the issue for determination is:What is the Current Market Rent as at 1 July 2015 of the property known asWaiotapu pursuant to clause 8(b) of a deed of lease dated 1 July 1967 on thebasis that the parties agree that the references in clause 8 of the said lease to"annual rental" and "rental" means "Current Market Rent".[32] There then followed a second teleconference with the arbitrator on 22December 2016. In a minute following that conference the arbitrator recorded that:It is agreed that the dispute for determination is "What was the current marketrent for the subject property as at 1 July 2015?"[33] Mr Crombie's evidence was that while the Lessee's counsel was content forthe dispute to be defined in that way the Lessee was not agreeing the ProcessAgreement was no longer binding or that the rental could be fixed without itsrequirements being applied.The issue arises at the arbitration[34] The Lessor adduced evidence both from Mr Lowe of KPMG (who maintainedthe rental should be $972,000 per annum) and from Mr Cheyne, a valuer, whose rentalassessment was $1,139,400 per annum. In contrast the Lessee's expert Mr Lucas ofPwC maintained the rental should be $300,000 and Mr Wilson, the Lessee's valuer,suggested $287,200.[35] Towards the conclusion of the arbitration and after counsel for both parties hadpresented closing submissions the arbitrator noted the written closing submissions forthe Lessor did not actually refer to the rental being contended for. At that stage MrSalmon responded, saying "My witnesses have under-estimated the rental". Hesuggested the Lessor could contend for a rental of $2.4 million per annum.[36] Understandably, Mr Mills took objection to that development. He raised anissue of jurisdiction. He submitted the range clause in the Process Agreement placeda fetter on the arbitrator's jurisdiction and submitted the Lessor was departing fromthe Process Agreement.[37] There then followed a discussion between counsel and the arbitrator. MrSalmon's position, which remains the Lessor's position, was that the parties haddeparted from the Process Agreement by the arbitration process. The arbitrator hadconfirmed the issue for determination in his second minute. There was no mention ofany range. The Lessee's position was that the arbitrator took the place of theindependent third expert referred to in step 4 of the first part of the Process Agreementbut otherwise, apart from steps 2 and 3, the Process Agreement was applicable. Thearbitrator accepted that the competing positions raised a jurisdictional issue whichought not be dealt with summarily. The arbitrator called for memoranda and evidenceon the issue.Further submissions as to the range[38] The parties then exchanged submissions by way of further memoranda. TheLessee also filed affidavit evidence from its chief executive officer and solicitor. TheLessee argued that the range clause in step 4 of the Process Agreement still appliedand the rental fixed had to be within the range set by the original experts appointedunder step 1 of the Process Agreement of between $300,000 and $972,000.[39] The Lessor took the position that by submitting the dispute to arbitration theparties had departed from the expert Process Agreement. The arbitrator's scope inrelation to rental was unfettered. Alternatively, the Lessor argued that even under theterms of the Process Agreement the arbitrator had jurisdiction to fix a rental which wassupportable on the full evidential record, (in other words, a rental substantiated by anyassessment by any of the expert witnesses).[40] The arbitrator ultimately concluded:[208] Given the conclusions I have just expressed, I do not need to delvefurther into the additional evidence and argument on this subject. The latestcontroversy was confined to the implications of agreements andcommunications made in 2016. All of that was overtaken by the basis onwhich the parties conducted the hearing in February of this year. Whatevermight have gone before, the overriding consideration now is the basis onwhich the hearing was conducted without objection from either side.[41] The reference to the earlier conclusions were to paras [194]–[203] of theinterim award, and particularly [201]–[203] in which the arbitrator rejected MrSalmon's argument that it was open for the arbitrator to fix a value of $2.4 million forthe rental:[201] The final and crucial obstacle to the Lessor's figure is one ofprocedural fairness. I put to one side step 4 in the Process Agreement, whichmay or may not have continued relevance as a matter of contract. But it isclear that during the entire arbitral sequence, including the hearing until thelast few minutes, the Lessee understood that the case it had to meet was aLessor claim to rent of no more than $1,139,400 (Mr Cheyne's valuation). Itwas only in his closing address that Mr Salmon contended for $2.4 million. If$2.4 million had been claimed from the outset the Lessee might haveconducted its case very differently or negotiated a compromise.[202] For similar reasons I cannot accept the Lessee's post-hearingcontention that the available range is confined to the difference between theassessments of the two accounting experts, Mr Lucas ($300,000) and MrLowe ($972,000). The contention is based on the Lessee's interpretation ofthe Process Agreement. The Process Agreement may or may not haveimpacted on the available range at the time it was agreed on but it has sincebeen overtaken by the way in which the hearing was willingly conducted byboth parties. Mr Cheyne's evidence was served well before the hearing.During the hearing the Lessor relied on that evidence, as well as that of MrLowe without procedural objection from the Lessee. It was only after thehearing was completed, when I sought submissions on the jurisdictional point,that the Lessee raised for the first time its objection to extending thejurisdictional range above the figure advocated by Mr Lowe.[203] My conclusion is that as a matter of jurisdiction the range of annualrents now available to me lies between Mr Wilson's figure of $287,200 andMr Cheyne's of $1,139,400.[42] The arbitrator did not conclusively rule on whether step 4 in the RentalAssessment Determination Process still applied, instead finding that that aspect of theProcess Agreement had in any event been overtaken by the conduct of the hearing andno objection had been taken by the Lessee to Mr Cheyne's evidence.Did clause 4 of the Process Agreement survive the reference to arbitration?[43] Fundamental to the Lessee's first two grounds of challenge to the interim awardis the proposition that the arbitration (and arbitrator) should have proceeded on thebasis that the Process Agreement was to apply to the arbitration and particularly thatstep 4 of the Rental Assessment Determination Process, which provided thedetermination was to be within the range supported by the parties' experts'assessments, constrained the outcome available to the range provided by Mr Lucasand Mr Lowe, namely between $300,000 and $972,000.[44] The fundamental basis of an arbitrator's jurisdiction is contractual. Article28(4) of cl 1 of the Act provides that the arbitral tribunal is required to decide thedispute in accordance with the terms of any contract. If the parties contracted that step4 was to apply the arbitrator was obliged to make his award in accordance with thatprovision, subject to any issues of subsequent waiver. The Lessor argues step 4 didnot apply to the arbitration.[45] In my judgment the Lessor's argument is correct. The parties changed theRental Assessment Determination Process aspect of the Process Agreement so thatstep 4 did not apply to the arbitration. The parties moved from the appointment ofexperts and the staged process to follow from the exchange of the experts' reports inclauses 2 and 3, with, if necessary, the rental to be fixed by an independent third expertunder step 4 to a quite different process, namely an arbitration. By the submission toarbitration, the parties abandoned the Rental Assessment Determination Processaspect of the Process Agreement including step 4.[46] The Lessee refers to Mr Crombie's evidence of the discussion with Mr Salmonfollowing the letter of 16 June. Mr Crombie understood the range would need to beretained in the submission to arbitration. The Lessor accepts that Mr Salmon observedduring the conversation that the value range restriction had not been adopted in theproposed agreement to arbitrate.[47] But importantly, the Lessee proceeded on the basis the matter was agreed andaccepted that the clause had been removed by agreeing to the submission to arbitrationand by later referring to the June variation without any reference to the retention ofthe value range. The Lessor never sought to maintain the value range. Further, step 4could not remain with the reference to arbitration. As noted above, it was inconsistentwith it. Mr Salmon agreed that the draft letter for the arbitrator could be sent. Thatconfirmed the decision to go to arbitration which could only occur if the partiesabandoned step 4. Step 4 was abandoned in June and there was no fresh agreement toincorporate a value range in the submission to arbitration.[48] It is not possible to read the reference to the independent third expert in step 4as a reference to the arbitrator. The process involving the third independent expert andthe appointment of such independent third expert was only to be engaged in the eventthat the process set out in steps 1 to 3 had not led to an agreed rental. Steps 2 and 3were waived. Step 4 in the Rental Assessment Determination Process required theindependent third expert's determination to be within a range determined from step 3.Step 3 was never undertaken. The range provided for in clause 4 was not importedinto the arbitration process. Only the remaining aspects of the Process Agreementrelating to the basis of reviewed rental and the methodologies to be considered wereincorporated into the arbitration.[49] Further, by waiving steps 2 and 3, and replacing the independent expert processin step 4 with reference to arbitration, the parties changed the basis upon which thedetermination would be made. Step 4 in the Rental Assessment Determination Processhad provided the third independent expert's view would be final with no right ofappeal. By changing to an arbitration process the parties agreed to a quite differentprocess to resolve the rental issue.[50] The arbitration agreement is the best evidence of the terms of the agreementbetween the parties. Unfortunately that recorded different contentions between theparties as to the nature of dispute. The only issue on which the parties agreed was thatthe arbitrator was required to determine the Current Market Rent as at 1 July 2015 ofthe property known as Wai-O-Tapu.[51] The arbitrator clarified the conflict at the second pre-hearing conference. Herecorded in his minute no. 2 following the conference that the issue he was todetermine was "What was the Current Market Rent for the subject property as at 1July 2015". There was no reference to a fetter on the range of that Current MarketRent. The arbitrator was not constrained by step 4 of the Process Agreement. Thelessee did not challenge that statement of the issue by the arbitrator.[52] Even accepting the Lessee's explanation for not responding to the arbitrator'sminute, the Lessee made its position clear in its definition of the dispute in itssubmission to arbitration. In that definition of the dispute it relied on the ProcessAgreement "as varied in June 2016". The variation in June 2016 was the variationpromoted by the Lessee at that time. The variation was set out in Mr Crombie's letterof 16 June, namely clauses 2 and 3 of the Rental Assessment Determination Processwere waived, and clause 4 of the Rental Assessment Determination Process no longerapplied and was to be replaced by the reference to arbitration. Nowhere in that letteror in any other correspondence from the Lessee in June was there a reference toretaining the range provided for in clause 4.[53] While Mr Mills pointed to the fact Mr Salmon did not directly confirm theLessor's acceptance to that proposal and noted that Mr Crombie had sought to clarifyit in his later letter of 5 August, there was no other amendment to the ProcessAgreement made or proposed in June 2016.[54] When read in context the focus of the Lessee's correspondence following theexchange in June was to ensure that the balance of the Process Agreement, whichreferred to the basis of reviewed rental as Current Market Rent and the methodologiesto be considered, and particularly the Direct Comparison Methodology was to apply.That is apparent from the correspondence and memoranda for the conferences beforethe arbitrator.[55] The Lessee makes the point that the parties referred to the Process Agreementduring the arbitration. But it is relevant that the Process Agreement comprised severaldifferent and distinct parts. The first part, the Rental Assessment DeterminationProcess was abandoned with the submission to arbitration. The later parts providedfor the methodology to be applied. The arbitrator engaged with those aspects of theProcess Agreement.[56] For the above reasons I conclude that the arbitrator was not constrained by therange that step 4 would have provided for if the Rental Assessment DeterminationProcess had been followed. In rejecting Mr Salmon's submission the rental should beat $2.4 million the arbitrator considered himself to be constrained by the broader rangeprovided by the evidence of both the expert witnesses for the Lessor and Lessee,namely between $287,200 and $1,139,400 but that was because of the way thearbitration had been conducted, not because of step 4 of the Process Agreement.[57] The finding that the arbitrator was not bound by the range set by step 4 of theRental Assessment Determination Process is sufficient to dispose of the first twogrounds of challenge, as the natural justice point relies on the Lessee's argument it wasnot able to respond to the way the arbitrator dealt with the post-hearing submissionsas to whether the range provided by step 4 applied. For the reasons given, step 4 didnot apply. Even if there were a breach of natural justice in the way the arbitrator dealtwith the issue it could not make a difference.4 The second ground, that the arbitratorexceeded his jurisdiction by going outside the range cannot be sustained either.[58] Nevertheless, in deference to counsel's submissions, and in fairness to thearbitrator, I briefly consider the submissions and objection raised on the natural justicepoint.Natural justice in the arbitration setting[59] There is no real challenge to the applicable principles. An award is in conflictwith public policy where there has been a breach of natural justice.5 Articles 34(2)and 32(6) of cl 1 of the Act make it clear natural justice is required during thearbitration process. In Trustees of Rotoaira Forest Trust v Attorney-General the Courtdiscussed the requirements of natural justice in the context of an arbitration.6 Thearbitrator is required to apply the principles of natural justice during the arbitrationprocess.[60] As outlined above from [35], the Lessee raised the issue of jurisdiction at theend of the arbitration, arguing that step 4 of the Process Agreement fettered thearbitrator's jurisdiction. The arbitrator decided this point based on the parties' conductduring arbitration, rather than by deciding whether step 4 of the Process Agreementapplied.[61] Mr Mills argued that there was nothing in the way the jurisdictional issue wasdealt with by the arbitrator at the end of the arbitral hearing that made it reasonablyforeseeable to the Lessee that instead of addressing the issue the arbitrator was askedto address he would avoid that issue and set the Lessee's objection aside on the basison which he did.[62] Mr Mills argued that if the Lessee had been given the opportunity the followingmatters would have been put to address the arbitrator's reasoning on the point:4 Downer Connect Ltd v Pot Hole People Ltd HC Christchurch CIV-2003-409-2878, 19 May 2004at [11].5 See David Williams and Amokura Kawharu Williams & Kawharu on Arbitration (2nd ed,LexisNexis, Wellington, 2017) at [17.6.1] for a discussion of the relevant authorities.6 Trustees of Rotoaira Forest Trust v Attorney-General [1999] 2 NZLR 452 (HC).(a) prior to the hearing the Lessee's position was the Process Agreementdefined the agreed basis upon which the arbitrator was appointed;(b) the Lessor did not rely on Mr Cheyne's evidence as a figure at whichthe new Current Market rental should be set;(c) the Lessee's understanding that the purpose of Mr Cheyne's evidencewas to give support to Mr Lowe's assessment of the Current MarketRent was confirmed in both written and oral opening submissions forthe Lessor;(d) the fact the Lessor relied on Mr Cheyne's evidence during the hearingwithout objection from the Lessee was because there was no reason toobject when the stated purpose of Mr Cheyne's evidence was to supportMr Lowe's figure;(e) the fact the Lessee's objection was raised for the first time at the end ofthe hearing was because this was the first time the Lessor made it clearthat it was seeking to depart from its previous reliance on Mr Lowe'sevidence as a rental that was sought and was contending that it wasentitled to move outside the range set by the Process Agreement.[63] Underlying the submission are the propositions that the Lessor effectivelyaccepted it was bound by step 4 of the Process Agreement which prevented the Lessorfrom relying on Mr Cheyne's evidence and that the Lessor accepted that aspect of theProcess Agreement limiting the range to the valuations of Mr Lowe and Mr Lucasapplied. Mr Cheyne's evidence was only to support Mr Lowe's evidence.[64] However, the background correspondence, submission to arbitration, pre-hearing conferences and the conduct of the arbitration do not support the Lessee'sargument.[65] The subjective opinion of the Lessee's chief executive subsequent to thearbitration cannot alter the position. The relevant correspondence andcontemporaneous documents speak for themselves.[66] A fundamental and important thread running through the Lessee's argument isthat the Lessor did not rely on Mr Cheyne's evidence as anything other than supportfor Mr Lowe's figure. However, the Lessee's submission in relation to that is notborne out by the Lessor's submissions to the arbitrator or the record of the arbitration.Nowhere in the Lessor's opening submissions was it said Mr Cheyne's evidence wasadvanced only as support for Mr Lowe's evidence.[67] Importantly the Lessor's opening submissions referred to Mr Lowe's figure of$972,000 per annum as an appropriate proportion of the profit to be attributed to rentalbased on the EBITDA profit before rental of $4,912,000 but the submissions then wenton to note that, in reliance on Mr Cheyne's evidence, and adjusting for the site's higherEBITDA, a rental at 18 per cent on admissions revenue produced a rental of$1,139,400 on the site's admissions revenue uplifted for a ticket price increase duringthe term.[68] Mr Salmon did say:Now, as we will see when the witnesses come on, the extent to which the rentalcan rise before the actual returns, not turn over but returns match those of thecomparable properties, is substantial, indeed it's well above the rental we'repitching for.[69] Mr Mills argued that was a reference to the Lessor pitching for a rental of$972,000 but it is equally consistent with the Lessor's argument that an analysis of MrCheyne's evidence would have led to a sum greater than the figure Mr Cheyneultimately settled on.[70] More directly, when later discussing Mr Cheyne's evidence in opening MrSalmon said:But that makes the assessment in Mr Lowe's evidence a starting point, in mysubmission, and one that we can take some comfort in confirming MrCheyne's Direct Comparison Approach.[71] Rather than, as Mr Mills suggested, that passage meaning that the Lessor wassuggesting Mr Cheyne's evidence was only used to bolster Mr Lowe's evidence, as Iread it the Lessor was using Mr Lowe's evidence to provide "some comfort" toconfirm Mr Cheyne's approach. Mr Lowe's evidence was the starting point, not theend point.[72] Importantly there is also the passage in the transcript towards the conclusionof the hearing when the issue of jurisdiction was raised. In the course of thatdiscussion counsel for the Lessee said, in responding to the issue raised by Mr Salmonthat the evidence supported a rental of $2.4 million:Now, I would contend that the assessment that's been made is the 900 oddfrom Mr Lowe and the 1.1 odd from Mr Cheyne, and for our part the twofigures from Mr Wilson and Mr Lucas. And, so my reading of this is thatwhatever figure you come to, sir, must be within that range, and so thesuggestion now they'd go to around 2.5 million or something, I don't regardthat as available.[73] In that exchange counsel for the Lessee accepted the upper range was MrCheyne's figure.[74] I accept Mr Mills' submission before me that the submission to the arbitratorwas made on his feet in response to the suggestion $2.4 might have been on the tablewhich no doubt came as a surprise. However, it was made at the conclusion of thearbitration when all relevant issues would have been in the forefront of the parties'minds. It is contrary to the position now taken by the Lessee. Rather, it is consistentwith the arbitrator's view that that was the basis upon which the arbitration wasconducted.[75] As to the right to present argument, the Lessee was given the opportunity tofile submissions on the jurisdiction issue. It filed both an original memorandum onthe issue and a reply memorandum in response to the Lessor's reply memorandum. Italso filed evidence. The direct issue it had to respond to, namely that the arbitratorwas not bound by the range set by Mr Lowe and Mr Lucas was squarely addressed.Given the conduct of the arbitration (with Mr Cheyne's evidence being adducedwithout objection) it should have been reasonably foreseeable the arbitrator mightrefer to the conduct of the arbitration.[76] While the arbitrator dealt with the jurisdiction issue without directly resolvingthe interpretation point, for the reasons given above, nothing turns on that.[77] If necessary I would have found that there was no breach of natural justice inthe way the arbitrator dealt with the issue of jurisdiction.Did the arbitrator exceed his jurisdiction by not basing the new current marketvalue on "appropriate methodology"?[78] The Lessee's case on the third argument is that the Process Agreement requiredthe arbitrator to fix the current market rate on the basis of an "appropriatemethodology" and the methodology applied by Mr Cheyne (the figure accepted by thearbitrator) was not an appropriate methodology. It was not an approach whichaccorded with settled valuation practice.7[79] The remaining aspects of the Process Agreement that applied to the arbitrationprovided for the basis of reviewed rental and also the methodologies to be considered.They required the expert assessors to apply an "appropriate methodology" to arrive attheir opinion on Current Market Rent. While accepting that the experts were notrestricted as to the basis for their opinion the Lessee contends the Process Agreementrequired the methodology to be one that would seek to determine a Current MarketRent by reference to what a notional lessee would pay and a notional lessor wouldaccept in the defined market, namely comparable land based concessions, leases orlicences for tourism or related or similar activities. If the methodologies relied on didnot have this as its purpose it was not an appropriate methodology.[80] The Lessee's argument proceeds on the basis that the arbitrator fell into errorand exceeded his jurisdiction by relying on Mr Cheyne's valuation. Mr Mills arguedthat Mr Cheyne arrived at his Current Market Rent by simply applying Mr Lowe'sexcess earnings method. The Lessee submitted that Mr Lowe's corporate financeapproach which sought to identify excess profits of a business after allowing areasonable return on invested capital was not an appropriate methodology. The7 Wellington City v National Bank of New Zealand Properties Ltd [1970] NZLR 660 (CA); andGranadilla Ltd v Berben (1999) 4 NZ ConvC 192,963 (CA).arbitrator had himself concluded there were difficulties with the excess earningsmethod in not adopting Mr Lowe's figure.[81] Mr Mills submitted that while Mr Cheyne had insisted he had arrived at hisCurrent Market Rent assessment using a Direct Comparison Methodology approachthat was not, in substance, the approach he adopted. Mr Mills submitted that whereMr Cheyne got to using a conventional Direct Comparison Methodology method, wasapproximately $540,000 per annum, but he then relied on Mr Lowe's excess earningsmethodology to deliver a rental 240 per cent above the top end of that range. Hesubmitted the arbitrator did not address the submissions for the Lessee that the excessearnings method was not an appropriate methodology and that Mr Cheyne's CurrentMarket Rent was not based on a Direct Comparison Methodology.[82] However that was not Mr Cheyne's evidence. Mr Cheyne said he had notconsidered the excess profits approach as he was not an accountant and did not havethe skill set to do so. Rather, he acknowledged there was a relationship betweenprofitability and rental in general terms as Mr Lowe had set out. He did find that thetable prepared by Mr Lowe was helpful and informative because that helped himunderstand why there was a very broad variation of between 2.5 per cent and 15 percent for the rental factors. Later Mr Cheyne clarified that Mr Lowe's graph haddemonstrated to him that it was a flawed approach to consider all geothermal touristattractions as having the same level of profitability. Mr Cheyne was clear that he hadstill reached his final conclusion using a Direct Comparison Methodology. Heacknowledged he had taken profitability into account but only as one factor. Herejected the proposition he had elevated it above a consideration of other matters. Thepoint Mr Mills makes was a point he made in cross-examination of Mr Cheyne. It wasopen for the arbitrator to have reached the conclusion he did, having had the benefitof hearing and seeing Mr Cheyne's evidence in full.[83] As this Court found in the earlier leave application, while Mr Cheyne relied onthe figures provided by Mr Lowe, his rent calculation was not an application of theexcess earnings method and as noted in that decision:[44] It is important to record that in adopting Mr Cheyne's figure thearbitrator was not adopting the excess earnings approach. While the arbitratorreferred to the figure being reinforced in a general way by Mr Lowe's evidenceabout excess earnings, it was no more than a test of the result which headopted.[84] The reference to that was a reference to the arbitrator's finding that MrCheyne's figure was:reinforced in a general way by the excess earnings evidence [of Mr Lowe],however reduced the weight of that evidence might be by the factors discussed.[85] The wording of the Process Agreement on this issue is also important. Theonly requirement was to use an "appropriate method" and to "consider, inter-alia, aDirect Comparison Methodology." The parties acknowledged that supporting analysisof business trading accounts with reference to relevant factors such as industrymetrics, necessary capital employed, lessee improvements, the terminating nature ofthe concession, forecast tourism activity and economic conditions were to beundertaken. The brief was a general one.[86] The Lessor relies on the arbitrator's approach to this issue as follows:[63] There is a preliminary issue as to whether any part of the antecedentProcess Agreement survived the execution of the Arbitration Agreement. Butin my view the answer to that issue would not affect the outcome. Severalaspects of the Process Agreement show that it was not intended to place anyfetters on the methodology or methodologies finally adopted as the basis forthe valuation:(a) The stated object of the Process Agreement was to arrive atthe current market rent. It would be odd if the experts werebound to adopt a particular methodology even where, in theirview, it would result in something other than the currentmarket rent.(b) The natural and ordinary meaning of the word "consider"requires merely that the experts genuinely consider theusefulness of the direct comparison method in theirassessment of the rental. It does not mean that, having doneso, they must rest their valuation upon that method.(c) Use of the expression "inter-alia" indicates that the expertswere to be free to consider other methods.[64] My conclusion is that even if the relevant part of the ProcessAgreement is considered to still apply, it would require no more than theinclusion of the direct comparison method among the methodologies to beweighed and considered. If, having considered the effect of the directcomparison method, a valuer concludes that some other methodologyprovides a more effective route to the current market rent, he or she is free toabandon all reliance on the direct comparison method. Since all four valuersdid consider the effect of applying the Direct Comparison Method, this issuefalls away.[87] I agree with the arbitrator's reasoning on the point. In particular, as thearbitrator observed, the Direct Comparison Methodology was one method that was tobe considered. It was not necessarily to be the exclusive outcome or method. MrCheyne considered the Direct Comparison Methodology in arriving at his rentalfigure.[88] For the above reasons the applicant is not able to make out a case for settingaside the award on the basis the arbitrator exceeded his jurisdiction by failing to applyan appropriate methodology.Result[89] The application is dismissed.Costs[90] The respondent is entitled to costs. Costs on a 2B basis would be appropriate.In the event counsel are unable to agree they may exchange memoranda.__________________________Venning J