The appellants' challenges to these conclusions analysed
88 The appellants press a two-fold attack on these reasons. The reasons are said, firstly, to give effect to his Honour's erroneous approach to cl 7 of the Deed in so far as he held that it could be engaged otherwise than with reference to identified "steps" in the arbitration (whether past or future). Secondly, Mr Bushby was not reasonably justified in forming his conclusion on the basis of the matters accepted by Campbell J.
89 Mr Bushby gave evidence that he never saw any advantage to ARS in the arbitration (Black 59Q, 133D). Consistently with this, he viewed the respondents' decision to allow the arbitration to run as an "enormous indulgence" (Black 70E. See also his letters of 13 November 2002 (Blue 68) and 6 January 2003 (J18)). This view was made known by Mr Bushby to the appellants (through Mr Geary) and to the respondents before the Deed was entered into. In these circumstances, the appellants submit, it would be a surprising and uncommercial interpretation of cl 7 for it to be engaged if nothing else happened other than Mr Bushby forming the view (during the currency of the Deed) that it was not in the interests of his clients to continue the arbitration. In my opinion there is real force in this submission, when it is recognised that the Deed addressed and decided the question whether the arbitration would go forward at all. Campbell J effectively accepted it at J70.
90 But I cannot accept the corollary advanced by the appellants to the effect that cl 7 did not authorise termination merely because Mr Bushby formed a view (even a reasonable view) that each and every further step in the arbitration was no longer in his clients' interests. The language of cl 7 is broad enough to permit the formation of a view that any and every further step in the arbitration would not be in the interests of Mr Bushby's clients.
91 However, I do accept the appellants' submissions that the concerns in par 7 identified by Mr Bushby and accepted by the primary judge could not be characterised as based upon Mr Bushby "acting reasonably". Accepting that cl 7 of the Deed contemplated termination if each and every further step in the arbitration was not in the interests of the respondents, Mr Bushby's determination was not reasonably based upon the matters stated in or incorporated into in par 7 of the termination letter. My reasons follow.
92 Earlier in his reasons, Campbell J had held that cl 7 addressed "steps" after the Deed was entered into, with the corollary that it was not open to Mr Bushby to conclude that starting the arbitration at all had not been in the interests of his clients (J70). I agree. The appellants ultimately recognised that the arbitration served the interests of all parties. More to the point, cl 1 of the Deed (read with recitals R & S) expressly provided for the arbitration to take place, at least as the vehicle for determining the "defects issue".
93 In this context, par 7 of the termination letter must be viewed as a statement about the financial risks to ARS and Mr Nicholas of the arbitration continuing down the course indicated as at 28 May 2003. That course included the risk of an adverse costs order consequent upon a complex and hard-fought building dispute before an arbitrator. Detailed procedural directions had been given on 2 May 2003 and they are referred to in par 1 of the termination letter.
94 The legitimate kernel of concern to which par 7 was addressed was the capacity of FPM and Mr Yazbek to meet their indemnity under cl 4 of the Deed. This is a generous approach to par 7 that I am prepared to take in the respondents' favour, for the purpose of argument. But what was the expressed and reasonable basis for such concern on Mr Bushby's part? And what were the financial parameters to which it was addressed?
95 Paragraph 7's kernel of legitimate concern turns out to be encased in a shell of unjustified assertion that is not reasonably based, for several reasons.
96 In the first place, no category of future costs is mentioned in par 7 except for the costs recoverable by Mr Bushby's firm under cl 6 of the subject Deed for monitoring the conduct of the arbitration. Paragrapah 7 confined itself to concerns referable to the respondents' capacity to meet their obligation under cl 6 of the Deed. This is made plain by the second sentence. It was therefore not open to the respondents to seek to construe this "concern" as directed at the future costs of the arbitration generally.
97 Furthermore, no money was shown to be owing to Mr Bushby for fees at the time when the letter was written (see J88, set out above). The deposit of $5,000 made before the Deed was entered into had not actually been exhausted, on the evidence. It is of course obvious that considerable additional expense would be incurred in the future even if Mr Bushby's monitoring continued at a less acute level of oversight than had been adopted to date. But cl 6 of Deed ensured that Mr Bushby's right to payment would accrue in arrears, and subject to an itemised account being sent 14 days before payment could be demanded.
98 Secondly, the concerns expressed by Mr Bushby in par 7 referable to the recovery of his fees were based, in terms, upon "Fyntray's refusal to deposit money in our trust account as security against fees being incurred". This was a demand that Mr Bushby knew he was not contractually entitled to make (Black 135-6). Mr Geary had pointed this out again and again in correspondence. Mr Bushby's right to infer FPM's and Mr Yazbek's incapacity to pay his fees as they accrued in the future, stemming from the appellants' refusal to submit to such a demand, was therefore unjustified and unreasonable. The appellants had never repudiated their obligations under the Deed or threatened to do so. In fact, their solicitors had explicitly affirmed them in this context (see J35, 38).
99 Thirdly, if (contrary to my view) par 7 were to be read as extending to the future costs of the arbitration itself, reliance on this matter would have been vitiated by the very factors that struck at the validity of par 2. As indicated above, Campbell J had held that the respondents were disentitled to have regard to the future impact of an adverse costs order in the arbitration where he had taken no steps to form a view about the likely extra extent of those costs (J77). The same may be said about any assumed concern if it is to be read as forming part of the par 7 determination.
100 The fourth matter also emerges from Campbell J's findings referable to par 2 of the letter of termination. His Honour held that it was unreasonable of Mr Bushby to have had regard to the future impact of a costs order adverse to ARS without having investigated the adequacy in the circumstances of the guarantee or bond provided by the Council (cf 5 of the Deed) or of the indemnity from Mr Yazbek and FPM provided in cl 4 of the Deed (see J77-78). These considerations also apply to par 7 on the generous assumption I have been making.
101 There is a fifth problem for the respondents. The first sentence and the opening words of the second sentence in par 7 make it plain that Mr Bushby based his adverse view about FPM's financial capacity (in part at least) upon FC's "proven history of failing to pay creditors… and [its] apparently deliberately organis[ing] its affairs so that any benefit which might flow to the Fyntray group from the proceeding will be kept out of the hands of those creditors". This was attributing guilt by association that pays little regard to the separate corporate existence of FC and FPM. Be that as it may (and I am prepared to assume in the respondents' favour that Mr Bushby could justifiably reason in this way), the fact remains that Mr Bushby's clients had been privy to the very re-organisation of affairs about which complaint was now being made. They knew all the facts when the Deed was entered into (J87). There was no evidence that they or Mr Bushby learnt anything adverse about the appellants' financial position since the Deed was executed. In these circumstances it strikes me as unreasonable to flag this re-organisation as part of the "background" triggering the concern expressed.
102 Clause 4 of the Deed provided:
Each of Yazbek and FPM indemnify ARS and Nicholas against any claim of any sort by anybody arising out of the construction of the Mount Annan Leisure Centre.
103 This was entered into well after FC had got into terminal financial difficulties. The parties to the Deed would then have been under no illusions as to FC's capacity to meet its indemnity under cl 3.4 of the Separation Deed. Consistent with the novation agreement whereby FPM was effectively substituted for FC as ARS's building sub-contractor, cl 4 of the Deed substituted FPM as the corporate indemnifier (along with Mr Yazbek personally) of both ARS and Mr Nicholas against "any claim of any sort by anybody arising out of the construction" of the Leisure Centre.
104 There was no evidence suggesting that FPM or Mr Yazbek were without adequate resources, let alone suggesting that something affecting their capacity to meet the negotiated indemnity embodied in the Deed had occurred between the date of the Deed (January 2003) and the date of the termination letter (28 May 2003). I do not share Campbell J's views (J78) that it was open to Mr Bushby to draw adverse inferences against Mr Yazbek and FPM as to their capacity or willingness to meet their indemnity from the events relating to the substitution of FPM for FC. But in any event, there were several additional problems with par 7, as I have endeavoured to show.
105 These considerations are also relevant to whether it would have been reasonable for Mr Bushby to have relied upon Mr Geary's failure or delay in writing to the architect retained as an expert in the arbitration requiring that architect to confirm that in no circumstances would he look to ARS for the payment of his fees (Blue 375-6, J82). Campbell J held that it was (J82, set out above). I respectfully disagree.
106 Mr Bushby never invoked this particular matter as one of his "concerns" in the letter of termination, so the issue is strictly academic.
107 Furthermore, there are additional difficulties for the respondents stemming from the reasoning in J82.
108 Mr Bushby properly conceded that there was nothing unreasonable in the retention of an architect as an expert witness for the arbitration proceedings (Black 117, 112. See J74). On 2 May 2003 the arbitrator had directed that ARS put on expert evidence by 13 June 2003. The letter of termination does not however indicate that the burden of this particular expenditure in relation to the expert witness was (a) taken into account or (b) costed by Mr Bushby when invoking cl 7. Nowhere in the letter did Mr Bushby suggest that he had concerns based on Mr Geary's delay in obtaining from the expert a promise not to look to ARS as a source for payment of his yet to be incurred expenses. Furthermore ((c)), there was no, or insufficient, consideration of the true risk to ARS in light of the contractual indemnities that it had procured (cl 4) and its contingent access to the bank securities (cl 5) (see generally J75-78). In any event ((d)), any concern in that regard would not have been justified in light of M & Co's written assurances in October 2002 that the firm would look only to FPM to cover all of its costs in the arbitration.
109 When a solicitor engages an expert witness in litigation the solicitor usually contracts as agent for a disclosed principal (see Bowstead & Reynolds on Agency 16th ed, 1996, p549). But M & Co had assured Mr Bushby on 13 October 2002 that their retainer was with FPM and not with ARS. This assurance was repeated in a letter of 14 October 2002 (Blue 63). It would therefore have been a gross, unexpected and fruitless breach of that assurance for M & Co to have exposed Mr Bushby's clients to the risk of being sued by the expert for his fees. Nothing indicates the likelihood of this occurring. This casts doubts upon the reasonableness of Mr Bushby's original insistence that Mr Geary procure from the expert a letter stating that the expert would not look to ARS for his fees. It would certainly colour the reasonableness of any inference of insolvency (had it been drawn by Mr Bushby) from Mr Geary's delay in obtaining this letter. Mr Geary had only agreed to get the letter in a spirit of cooperation, not obligation (see J44). There was in fact no evidence that Mr Bushby drew such an inference (cf J66).
110 Accordingly, I have concluded that (subject to the contention points raised by the respondents) none of Mr Bushby's expressed concerns were reasonably based.