Thursday, March 28, 2024

Hard to appeal arbitration

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Dairy farmers and sharemilkers often resort to arbitration when legal disputes arise because it’s often faster and cheaper than court processes and is also confidential.
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But what happens when there is still disagreement following arbitration? Dissatisfied parties can usually appeal to the High Court only on pure grounds of law, with appeal rights restricted because of arbitration being a consensual dispute resolution process.

In the case of Rua vs Mamaku Highlands one party sought to appeal to the High Court following an arbitration. The Te Arawhata Trust owned a 432ha dairy farm near Mamaku, north of Rotorua, which supplied milk to Fonterra. In May 2007, the trustees agreed to lease the property, with a dairy herd, to Mamaku Highlands. Shares in this company were at that time owned by Mr Bradley but the trustees dealt with Mr and Mrs McLachlan, who were to acquire the shares from Mr Bradley on June 1, 2007.
The trustees and Mamaku Highlands entered into a five-year deed of lease and a deed of trust relating to the Fonterra shares on May 16, with Mrs McLachlan signing both documents on behalf of Mamaku Highlands.

The lease was terminated by the trustees and all disputes arising out of the termination were referred to arbitration. A reference to arbitration was executed on November 18, 2010. Rotorua solicitor Douglas Clemens was appointed arbitrator to determine the questions in issue as defined by the pleadings. A lengthy hearing took place, dealing only with questions of liability. The arbitrator resolved those questions in a partial award, finding the trustees had wrongly terminated the lease before the expiry of the agreed term.

The trustees applied to the High Court for leave to appeal on one aspect, of the award of liability relating to the Fonterra shares and the obligation of Mamaku Highlands under the deed of trust to account to the trustees if they received money as a result of an involuntary redemption.

Under the signed deeds the trustees agreed to provide 77,291 Fonterra shares to Mamaku Highlands. After the agreement was struck, Fonterra redeemed 11,254 shares and paid $73,826 to Mamaku Highlands on July 13.

On redemption, Mamaku Highlands held 66,077 shares on trust for the trustees, as opposed to the 77,291 originally contemplated. According to the deed of lease, any payment for redemption of the shares was to be made by Mamaku Highlands to the trustees immediately on receipt. Fonterra paid $73,826 into Mamaku Highlands’ bank account, which at that time remained under Mr Bradley’s control, even though the new season had begun.

Mr Bradley gave evidence that he had an earlier separate agreement with the trustees that money deposited into that account could be used to pay farm bills and to reimburse start-up costs funded by another business.

The issue for the arbitrator was whether, on termination of the lease, the trustees were entitled to recover $73,826 from Mamaku Highlands.

The arbitrator said 77,291 shares should have been transferred to Mamaku Highlands under the deed of trust, when only 66,037 were transferred. A penalty was applied by Fonterra and that penalty should be paid by the trustees to Mamaku Highlands.

The arbitrator said any payment of funds by Fonterra received by Mr Bradley was not the responsibility of Mamaku Highlands and any claim should be directed against Mr Bradley and not Mamaku Highlands and/ or Mr McLachlan.

The trustees applied for leave to appeal to the High Court on the issues of:

  • Whether, in determining whether share transfer obligations had been complied with, the proper construction of the deed of trust required any subsequent redemption of shares by Fonterra should be taken into account, and
  • Whether Mamaku Highlands had received the sum of $73,826 as trustee for the Te Arawhata trustees.

The lawyer for the trustees argued that a pure question of law arose in relation to interpretation of the trust deed, claiming that, regardless of who had owned shares in Mamaku Highlands at particular times, under the deed of trust it had to account to the trustees for the money it received for shares in Fonterra paid for by the trustees. There would be no precedent value in any decision given by the High Court and the amount at stake was $70,000 but, he said, the error involved was glaring.

Justice Heath said the argument was essentially that vendors and purchasers of shares needed to make arrangements between themselves for control of bank accounts and other assets, rather than leaving a third party to second-guess such questions. On the face of it this was a compelling argument, but Mamaku Highlands’ lawyer argued the questions posed by the trustees were not pure questions of law and did not substantially affect the rights of the trustees. The arbitration appeared to involve more than $1 million and $70,000 was a modest sum in that context.

Justice Heath said questions of fact were immune from appeal and leave to appeal should be refused because questions of law and fact were inextricably bound together. Although Mamaku Highlands was effectively controlled by Mr Bradley at the time of the deeds, the trustees were still prepared to deal directly with the McLachlans and there seemed to be some agreement for use of funds.

Second, because the partial award dealt only with liability, Justice Heath said it was difficult to know what significance a grant or refusal of leave of appeal would have. The court could not grant leave unless it considered that determination by the court of an issue of law could substantially affect the rights of one or more of the parties.

The trustees and Mamaku Highlands entrusted their dispute to the arbitrator’s determination and the fact that Clemens was legally qualified and had experience in the field made it more difficult to obtain leave to appeal on a question of law.

The application for leave to appeal was declined.

This and other judgments can be downloaded free from Judicial Decisions Online – www.justice.govt.nz/jdo
Rua vs Mamaku Highlands [2012] NZHC 1848  

Catriona MacLennan is a south Auckland barrister and journalist.

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