CUFONE & ORS v CRUSE & ORS No. SCGRG-99-269 [2000] SASC 304

3 The question now at issue is whether an arbitrator (Mr Nosworthy) the second defendant had jurisdiction to enter upon an arbitration and as to the extent of his power to grant relief (in particular declaratory relief). Mr Nosworthy has taken no part in the proceedings except to intimate that he will abide the outcome.

4 The dispute concerns two groups who may conveniently be identified as the Cufone group (comprising the plaintiffs) and the Cruse group (comprising the first defendants). Fun Trading Pty Ltd is the Trustee of a unit trust which operates a tavern at Parafield Airport. Cufone Holdings and Cruse Nominees at all material times have owned equal numbers of units in the Trust. There is also equality in shareholding in Fun Trading as between the members of the Cufone family and the Cruse family. It is the contention of Cruse that this equality should be reflected in the representation of the Cufone and Cruse interests respectively on the Board of Directors of Fun Trading. At present Cufone representatives are in the majority.

5 When the tavern business was established in 1996 the enterprise required funds. These were provided partly in cash from the personal resources of some members of the two groups and partly by bank loan supported by mortgage over a property of Raeffaele, Suzanne and Julia Cufone and a guarantee by Raeffaele Cufone and Robert Cruse. Arrangements were made between the two groups to regulate their affairs in circumstances where the Cufone group was about to contribute a greater amount in cash immediately to the venture than the Cruse group and in circumstances where those who provided the collateral security to the Bank by mortgage or guarantee needed protection. A written agreement dated 6 March 1996 provided for the employment of four members of the Cufone family and two members of the Cruse family in the proposed enterprise and for the application of funds derived from the unit trust by Cruse Nominees in such a way so as eventually to equalise the balances of the two groups in the venture after discharge of the bank loan and any liability arising under the collateral securities.

6 Since 19 February 1996 the directors of Fun Trading have been Robert Cruse and Raffaele and Samuel Cufone. The directors have power under the articles of association to appoint another director or directors. A general meeting of the members of the company has power to remove and replace a director. The articles require that the number of directors be not less than two nor more than ten.

7 Eventually the bank loan was repaid, the mortgage discharged and the loan accounts of the two groups were equalised. The Cruse group then sought equality in the representation of each group as directors of Fun Trading Pty Ltd and equality in the representation of each group as signatories to the Company's bank account. This request (apparently made by letter on 10 August 1998) was refused; the Cruse group asserts that an issue as between the two groups is thus identified.

8 The agreement dated 6 March 1996 provided as follows:

"Cl 9 If at any time there is any dispute or difference between any two or more parties to this Agreement in connection with the matters dealt with in this Agreement or the operations of Fun Trading or the Business or the Wholesaling Business it must be submitted to arbitration in accordance with and subject to The Institute of Arbitrators Australia Rules for the Conduct of Commercial Arbitrations. The arbitrator's decision shall be final and binding on all the parties to the dispute."

9 All members of each group (including Cufone Holdings and Cruse Nominees) are parties to the agreement. The "business" referred to in cl 9 can be identified as the business of an hotel and liquor store outlet at Parafield Airport and "includes building hotel and liquor store premises and land owned by Federal Airports Corporation". The "Wholesaling Business" is a reference to a business to be operated as a wholesaling business "from premises close to the proposed site for the Business".

10 Mr Robert Cruse took steps to refer the matter to arbitration and Mr Nosworthy was appointed as arbitrator upon the nomination of the Institute of Arbitrators.

11 By letter dated 10 November 1998 to the Arbitrator Mr Cruse outlined the nature of the dispute. An extract from his letter reads as follows:

"The assets of the trust owned equally by Cufone and Cruse are controlled by the Directors of Fun Trading Pty Ltd. The number of Directors in Fun Trading is disproportionate to the Shareholdings ie there are two Cufone Directors and one Cruse Director. Cruse is therefore disadvantaged in that his interests are not proportionally represented. He is a repressed shareholder and that is not equitable, fair or reasonable.

A request by Cruse to Cufone dated 10 August 1998 to either support a motion to allow Cruse to appoint another Director to Fun Trading or alternatively to resign one of the Cufone Directors has been refused verbally.

A request for Cufone to allow Cruse to appoint another signatory to the Bank account has not been answered."

12 A letter dated 4 December 1998 from Mr Cruse's solicitor to the arbitrator further identified the dispute as follows:

My client contends that two issues currently exist requiring arbitration in this matter:-

1. the breaking of dead-lock between unitholders in Roulettes Tavern Unit Trust for the appointment of a new trustee, the ownership and control of which properly represents my clients (sic) 50% interest in the Business; or

2. the breaking of a dead-lock between shareholders in Fun Trading Pty Ltd for the appointment of a director properly representing my clients (sic) 50% interest in the Business." (my emphasis)

In the alternative, my clients maintain that the arbitrator should settle in their favour the following dispute:

'The dead-lock between shareholders of Fun Trading Pty Ltd at a general meeting so that a majority can be obtained to either:

(a) Remove one of the directors appointed by Cufone;

(b) Appoint a director with Robert Cruse's consent.'"

13 Cruse also submitted to the arbitrator a document containing a prayer for relief which as now relevant reads as follows:

"1. A declaration that the agreed intention of Robert Cruse and Raffaele Cufone was at all material times to operate the businesses the subject of the Memorandum of Agreement dated 6 March 1996 as a partnership (by whatever corporate or natural persons and through whatever corporate or trust structures they may from time to time nominate), with control being at all times directly proportionate to the capital risk and share of profits to which they or their respective nominees would from time to time be entitled.

2. A declaration that in order to give effect to the said intention to operate the businesses as a partnership that the Cruse interests would be equally represented with the Cufone interest on the board of the company of Fun Trading Pty Ltd from the time that the Cruse capital contribution equalled that of the Cufones.

3. A declaration that in order for the company Fun Trading Pty Ltd to properly discharge and to be seen to be discharging its duties and obligations as Unit Trust trustee to protect the rights and entitlements of the Cruse interests to enjoy and participate in the assets and profits distributed pursuant to the Deed of Trust, the Cruse interest would be equally represented with the Cufone interests on the board of the said company."

14 The Cufone group has consistently maintained that the arbitrator lacked jurisdiction to act and lacked power to grant relief. The Cufones were represented before the arbitrator for the purposes of argument. When the preliminary issue was thus raised the arbitrator made a ruling. The arbitrator decided that he should "countenance these claims for the sake of entering upon the reference." The arbitrator formally ruled that he was thereupon "entering on the reference"; he added that pursuant to s 39(1)(a) of the Commercial Arbitration Act he consented to the Cufones submitting any question of law arising from this ruling to the Supreme Court for determination.

15 The Cufones as plaintiffs thereupon brought these proceedings before the Supreme Court by way of appeal pursuant to the leave of this Court in accordance with s 38(2) of the Commercial Arbitration Act. In reliance upon s 42 the plaintiffs sought orders that the arbitrator had no jurisdiction. The plaintiffs also sought declaratory relief.

16 The matter came before a judge of this Court who held that the arbitrator had not made an award (which is a precondition to the right contained in s 38(2) to appeal to the Supreme Court "on any question of law arising out of an award"). His Honour then revoked the leave to appeal previously granted by a Master. In my opinion the Judge's decision was correct.

17 Section 42 of the Act applies in circumstances where there has been misconduct on the part of the arbitrator or where an award has been improperly procured. The judge at first instance held that s 42 had no application and dismissed the claim based thereon. In my opinion there was nothing before the Court which would justify the use of s 42. There was certainly no misconduct on the part of the arbitrator and no award had been obtained.

18 The judge at first instance expressed his disapproval of the procedure adopted under s 39 whereby the arbitrator gave a blanket consent to any question being submitted to the Court; however, His Honour treated it as a procedural defect which could be cured. His Honour proceeded on the basis that there was a claim for declaratory relief before the Court and he dealt with the identified point of law as one arising in the course of the arbitration (see Commercial Arbitration Act s 39(1)(b). If necessary, His Honour was prepared to justify this course upon the basis that prima facie the arbitrator was in error in failing to identify the real nature of the dispute and in treating himself as having a power at large to grant a declaration.

19 Until the matter came before the Court the nature of the so called dispute had not been properly defined either in correspondence between the parties or before the arbitrator. There had never been a formal demand that the directors of Fun Trading exercise power under the company's articles to appoint an additional director; no meeting of the company had been convened to remove a director. However, dissatisfaction was evident on the part of the Cruse group about the inequality in power exercisable through the board of directors of Fun Trading. There are overtones of alleged oppression in Cruse's letter of 10 November 1998 and an appeal to notions of fairness. (cf re City Meat Co 112 LSJS 291 at 304 where Millhouse J discusses in principle the relevance of a shareholder's expectations based on "fairness" in the context of oppression).

20 The nature of the dispute was refined by the arguments of counsel for Cruse at first instance and before this Court. The dispute is based upon an alleged right or expectation of equality to be implied in the agreement of 6 March 1996 (where the agreement itself is silent) or collateral thereto. In the alternative there is (according to counsel) a claim that the agreement should be rectified. The claim for rectification has not been particularised. As will later appear I have some concerns about the ability of the arbitrator to deal with such a claim.

21 The judge at first instance reached the conclusion that sufficient had been identified to provide the basis for a dispute which might be arbitrated under the wide terms of the arbitration clause and possibly leading to an award by way of declaratory relief.

"In my opinion, based on the authorities to which I have referred, an arbitrator has an implied power to grant declaratory relief where the dispute is one which could have been submitted to this Court and where this Court could have given such relief.

It does not follow, however, that an arbitrator has power to grant declaratory relief in all cases. As it was argued before the arbitrator in this case, the Cruses did not appear to rely on any contractual right. As presented to the Arbitrator the dispute appeared to involve broader considerations based on principles of equity and fairness. I have already held that the Arbitrator had jurisdiction to enter upon such a reference in this case, given the all embracing nature of the arbitration agreement. However, if that is the nature of the dispute, a court of law could not grant declaratory relief in respect thereof. Indeed a court could not grant any relief unless the dispute were based on an alleged contractual right or some other legal right. In my opinion, the Arbitrator therefore erred in holding that he could grant declaratory relief of the type referred to in paragraphs 1, 2 and 3 of the Prayer for Relief submitted by the Cruses without first satisfying himself that the nature of the dispute was contractual or based on some other legal right in connection with matters dealt with in the Agreement."

23 His Honour thereupon formally determined a question of law arising in the course of the arbitration as follows:

"(a) The Arbitrator had jurisdiction to enter into the arbitration with regard to the dispute alleged to have arisen between the plaintiffs and the first defendants.

(b) The Arbitrator has power to grant declaratory relief to the extent that the dispute before him is based on the identification and enforcement of existing legal rights of one or more of the parties to the arbitration and to the extent that such relief could be granted by this Court."

24 Much of the difficulty in this case arises out of the fact that at the outset an issue was not properly identified before the arbitrator. Bleby J recognised this fact and moulded his own order to deal with the legal issue as it emerged before him. That was a convenient way of resolving a question of law upon which the parties were at difference and in respect of which the arbitrator was in need of assistance in the task upon which he had formally embarked.

25 The arbitrator is entitled to enquire whether he has jurisdiction (Brown v Oesterreichischer (1954) 1 QB 8) and has some powers to allow an amendment. Whether in the present case the arbitrator might follow that latter course or invite a party to take steps to formulate a new claim need not be considered. However, the intimation by counsel before this Court in the course of argument as to the identification of the issues will not suffice to crystallise the points for the purposes of the arbitration and to define the scope of the dispute (which upon one view still remains inchoate).

26 The members of the Cufone group as appellants contend that in the present case there is no dispute as to existing legal rights to be resolved by an arbitrator; they contend that all that has been raised is a complaint about inequality in circumstances where the respondents are seeking to redress an imbalance of power by reference to notions of fairness. The appellants assert that there is no "difference" which can be compromised lawfully by way of accord and satisfaction and that there is not a justiciable issue which is capable of being tried civilly. (see Halsbury's Laws of Australia Vol 1(2) at par 25-20).

27 The appellants' contention has two prongs - firstly that the terms of the arbitration agreement are not sufficiently wide to enable the arbitrator to adjudicate upon the supposed reference and secondly that the reference does not give rise to a justiciable dispute.

28 These arguments both pick up the point of law which has become central to the appeal as to whether upon the construction of the agreement for reference the arbitrator has power to make a declaration. Based upon the correspondence I can appreciate the appellants' concern that the respondents may be embarking upon an exercise where the arbitrator is to be asked to dispense "palm tree justice" - that is to say an award of some new legal entitlement based upon notions of fair play to the exclusion of legal principle. However, counsel for the respondent has informed the Court that the arbitrator is not being asked to exercise power except in accordance with legal principle in order to determine an existing dispute. A claim to enforce existing legal rights is justiciable. I reserve for future consideration the wider question as to whether the role of an arbitrator could extend to the creation of new legal rights.

29 Clause 9 of the agreement of 6 March 1996 limits the ambit of a possible reference to differences "in connection with" nominated topics. Therefore unless the dispute is wholly lacking a nexus with these topics then the matter of difference will be embraced by the wide terms of the contract (Woolf v Collis Removal (1948) 1 KB 11 at 18). So long as a relationship exists which is not fanciful, inconsequential or of no real account, effect should be given to the purpose which lies behind the arbitration clause (cf IBM Australia v National Distribution Services (1991) 22 NSWLR 466 at 472 per Kirby J).

30 The only point of contention is the extent of the arbitrator's power (if any) to grant declaratory relief. Upon the view put forward by the respondents it is premature to deal with that question but the point arises upon the appellants' argument which requires a narrower construction to cl 9 than provided in the order of Bleby J. The appellant contends that upon its proper construction the agreement to refer does not enable the arbitrator to give declaratory relief.

31 In Government Insurance Office v Atkinson Leighton Joint Venture [1981] HCA 9; (1981) 146 CLR 206 the High Court of Australia considered the principles as to the extent of an arbitrator's powers. A term may be implied into a contract that the arbitrator should decide according to the existing law of the land and should exercise every right and discretionary remedy given to a Court of law (see per Stephen J at 234-235 and Mason J at 246-247).

32 More recently the House of Lords in President of India v La Pintada Compania Navigacion SA [1985] AC 104 at 119 has held that:

"Where parties refer a dispute between them to arbitration in England, they impliedly agree that the arbitration is to be conducted in accordance in all respects with the law of England, unless, which seldom occurs, the agreement of reference provides otherwise."

33 It appears from the speech of Lord Brandon that when asked to imply a term in an agreement as to arbitrator's powers, the Court will apply the general principles which were identified by the High Court of Australia in Codelfa v State Rail Authority (1982) 149 CLR 337 - see especially at 353 per Mason J.

34 In IBM Australia v National Distribution Services (1991) 22 NSWLR 466 the New South Wales Court of Appeal held that an arbitrator upon a proper construction of an arbitration agreement had jurisdiction to award relief in the form of orders under the Trade Practices Act. In that case the agreement (for the supply of computing equipment and services) provided (at 469):

"This Agreement will be construed in accordance with and governed by the laws of New South Wales. Any controversy or claim arising out of or related to this Agreement or the breach thereof will be settled by arbitration. The arbitration will be held in Sydney, New South Wales and will be conducted in accordance with the provisions of the Commercial Arbitration Act, 1984 (as amended). The decision of the arbitrator(s) will be final and binding."

35 Putting aside the exceptional case of declaring a contract to be void ab initio Handley JA said at 487-488:

"The relevant implied term in the submission which this Court is bound to recognise is that referred to in the judgment of Mason J in Government Insurance Office of New South Wales v Atkinson-Leighton Joint Venture [1981] HCA 9; (1981) 146 CLR 206 at 246-247, namely a term that the arbitrator is to have the authority to give the claimant such relief as would be available in a court of law having jurisdiction with respect to the subject matter. Since the Supreme Court as a court of general jurisdiction under State law now has jurisdiction with respect to claims under Pt V of the Trade Practices Act (Cth) it must follow that the arbitrator has the same powers. It also follows, in my opinion, that a submission in the present form, without more, would not confer on the arbitrator any authority to exercise the powers of specialists tribunals established under State law such as the Industrial Commission, the Commercial Tribunal, or the Landlord and Tenant Tribunal. Such tribunals are not courts of law and do not have general jurisdiction over all controversies and claims arising out of or related to an agreement or the breach thereof."

36 It must follow from this statement of principle that a power to award a declaration may be implied. That power will be co-extensive with the power of the Supreme Court. The circumstances in which a court would grant a declaration were reviewed in Neeta (Epping) v Phillips [1974] HCA 18; (1974) 131 CLR 286.

37 Counsel for the present respondents argued before us that identification of a dispute which satisfies the terms of cl 9 of the agreement of 6 March 1996 is independent of the question as to the available relief. In my view this submission is too sweeping. A claim to set aside the agreement itself ab initio or a claim for rectification of the agreement may give rise to special cases where the dispute may be treated as being outside the ambit of the typical forms of agreement for reference - even when the agreement to refer is expressed in wide terms. The question will ultimately become a matter of construction of the relevant instruments. In the present case the agreement of the parties is to refer differences "in connection with matters dealt with in this agreement or the operations of Fun Trading or the Business or the Wholesaling Business". I have doubt whether a claim for rectification (as foreshadowed) is necessarily within the ambit of cl 9. I note the approach of Warrington J in Printing Machinery Co Ltd v Linotype & Machinery Limited (1912) 1 Ch 566 at 572-573:

"The plaintiff company further submits that, at all events, one of the questions is one that does not come within the arbitration clause, not because the defendant company was not a party to the deed of 1901, but because it does not come within the description of the questions referred to arbitration. That particular question is the claim for rectification; and there, I think, the plaintiff company is right. It seems to me that a claim for rectification is not a claim in relation to the deed which it is sought to rectify. It is a claim which may result in dealing in a particular way with the deed; but it is a claim which is founded upon and has relation to an agreement not expressed in the piece of paper or parchment on which the parties have sought to express the terms arrived at. It seems to me that it is not a question 'touching the construction of these presents,' nor touching the rights or liabilities of the parties 'under these presents.' Nor, in my judgment, is it a question 'in relation to these presents.' It seems to me that it is a question in relation to something outside 'these presents,' as the result of determining which something may have to be done to 'these presents.' But that is merely incidental to the determination of the question; it refers to something outside of these presents. In my judgment, therefore, the claim for rectification of the deed itself is not one which falls within the arbitration clause."

38 The point at issue requires that the exact terms of the proposed reference be examined alongside cl 9. Unfortunately we do not yet know how the claim for rectification is to be framed. Therefore in this case I would prefer not to express a view as to the ambit of the arbitration clause insofar as there is a claim for rectification. The arbitrator's power to deal with a dispute as to rectification of the agreement cannot be isolated from the question as to arbitrator's power to give particular relief. I consider that the appropriate course would be to reserve for further consideration the extent of the arbitrator's powers to consider a claim for rectification - if that is to be pursued.

39 In Bass v Permanent Trustee Co Ltd [1999] HCA 9; (1999) 73 ALJR 522 at par 48 six Judges of the High Court said:

"... one crucial difference between an advisory opinion and a declaratory judgment is the fact that an advisory opinion is not based on a concrete situation and does not amount to a binding decision raising a res judicata between parties. Thus, the authors of one recent text on declaratory judgments (Zamir & Woolf, The Declaratory Judgment, (2nd ed 1993)) emphasise that, where the dispute is divorced from the facts, it is considered hypothetical and not suitable for judicial resolution by way of declaration or otherwise. They say:

'If ... the dispute is not attached to specific facts, and the question is only whether the plaintiff is generally entitled to act in a certain way, the issue will still be considered theoretical. The main reason for this is that there may be no certainty that such a general declaration will settle the dispute finally. Subsequent to that declaration a person (the defendant himself or someone else) may be adversely affected by a particular act of the plaintiff. It may then be doubtful whether this act is covered by the declaration. In such a case the affected person will probably be entitled to raise the issue again on its special facts. Indeed, such a declaration will in effect be a mere advisory opinion.'"

40 In these circumstances I would uphold the order made at first instance but subject to the following variation:

"That notwithstanding the foregoing declaration there be reserved for further consideration as necessary any question as to power of the arbitrator to deal with a claim for rectification of the agreement dated 6 March 1996."

41 Subject to the abovementioned variation to the order dated 9 February 2000 I am of opinion that the appeal should be dismissed.

1 MARTIN J: I agree that the appeal should be dismissed for the reasons given by Williams J.