[2003] HCA 6
TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361
Source
Original judgment source is linked above.
Catchwords
Ex parte Lam (2003) 214 CLR 1[2003] HCA 6
TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361
Judgment (13 paragraphs)
[1]
Background
Except as indicated, the following facts are either the subject of unchallenged findings by the primary judge or otherwise not disputed.
For a number of years, Errol Lieschke and his late wife, Glenys Lieschke, conducted a farming partnership on various properties near Henty. They had four children, Warren, Malcolm (the first applicant), Tracy and Melissa. [1] Michelle Lieschke (the second applicant) is Malcolm's wife. I mean no disrespect, but for the balance of the judgment I will refer to the parties by their first names for ease of reference.
According to the primary judge, in 1993 Errol and Glenys purchased a farm called Eagles Nest from Errol's mother. [2] The farm was purchased for $130,000 using debt finance. Title to Eagles Nest was later transferred to Errol and Warren in equal shares. In 1997, Errol and Glenys purchased a farm called Hazelglen from Errol's brother. Title to the property was registered in Warren's name. [3]
In March 2006, Errol and Glenys acquired a property for the partnership called Waverly for $1,130,675. [4] Her Honour noted that the purchase was funded by a loan of $1.66 million "in the name of Warren", which I understand means that Warren was the principal borrower. According to her Honour, "[t]he property was put in Warren's name" because of a concern on the part of the Errol and Glenys about the possible reintroduction of estate duties. [5]
In 2006, Glenys passed away. Glenys bequeathed a farming property known as Erlsridge to Malcolm and left her interest in the farming partnership to her husband. [6] Errol continued the farming business as a sole trader.
In July 2007, Errol entered into a partnership agreement with Malcolm and Michelle with Errol's interest comprising a "half share" and each of Malcolm and Michelle's interest comprised of a "quarter share". [7] Clause 17 obliged the parties to cause to be prepared and sign annual partnership accounts. [8] Clause 19 of the agreement entitled any partner to withdraw from the partnership by giving not less than three months' notice in writing. [9] Clause 20 of the partnership agreement provided that, within a month of the determination of the partnership, a general account would be taken of its property and liabilities, and thereafter the debts owing to the said partnership were to be collected and the assets sold with the monies of the partnership to be applied in a specified priority. [10] Clause 24 of the agreement required the partners to refer any disputes to arbitration. [11] The method of appointment of the arbitrator has already been described above at [*10].
According to the primary judge, Errol "rolled" the assets and liabilities of his farming business into the partnership. [12] A journal entry for the new partnership recorded the historical cost of those assets and liabilities which included the Waverly property (even though it was registered in Warren's name). [13]
In 2011, Errol, Malcolm, Michelle, Warren and his wife, Jade Lieschke, entered into a Deed of Family Arrangement (the "Family Agreement"). [14] The Deed recited Errol as the owner of a property known as Hilltop and one half of Eagles Nest, Warren as the owner of Waverly, Hazelglen and the other half of Eagles Nest and Malcolm as the owner of Erlsridge. It also recited that Warren was indebted to Suncorp Metway in the sum of $550,000 while Errol and Malcolm were indebted in the sum of $1.2 million with the parties having provided guarantees and mortgages to secure each other's debts. [15] The Family Agreement appears to have sought to achieve a separation of Warren's interests by providing that he would receive $340,000 and transfer his interest in Hazelglen and Eagles Nest to Errol and Malcolm or their nominee. [16] The parties were obliged to seek refinancing so their debts would not be secured over the property of the other. To affect the Family Agreement, the partnership paid Warren $340,000, most of which was funded by debt. [17] Warren's interest in Eagles Nest and Hazelglen was transferred to Malcolm with the consideration noted as "natural love and affection". [18]
On or about 18 October 2017, Errol gave notice under cl 19 of the partnership agreement of his intention to dissolve the partnership. [19] According to the primary judge, the parties reached agreement on the value of the farming equipment. [20] Errol continued to farm Hilltop and Eagles Nest whilst Malcolm and Michelle farmed Erlsridge and Hazelglen. [21]
The parties were unable to reach an agreement over the distribution of partnership property. Errol retained an accountant, Peter Haley, who produced three reports dated 27 March 2018, [22] 29 March 2018 [23] and 20 November 2018 ("Mr Haley's third report") respectively. [24] These reports sought to revalue each partner's entitlements by reference to the most recent partnership accounts which had been prepared by the partnership's accountant, Mr Lea.
The parties eventually reached an agreement on the value of stock, inventory, properties and machinery which were reflected in Mr Haley's third report. [25] Otherwise, Mr Haley identified two main accounting issues. First, Mr Haley revalued the assets that Errol contributed to the partnership in 2007 on the basis that the book value utilised was less than their true value. [26] Second, Mr Haley concluded that an entry deleting Waverly as an asset of the partnership made in the accounts for the financial year ending on 30 June 2012 was wrongly treated as a 100% deduction from Errol's capital account, whereas the value of the property should have been deducted from all the partners' capital accounts in accordance with their partnership share. [27] In addition, based on his instructions, Mr Haley concluded that Hazelglen and Warren's half interest in Eagles Nest were partnership assets, and Errol's half ownership of both the properties should be recognised. [28]
On or about 13 March 2019, Mr Lea provided a report which largely agreed with Mr Haley's reports. [29] He said that book values were used for the contributions made by Errol in 2007 "in order to access the Capital Gain Tax Balancing charge rollover relief". [30] He also stated that the debt used to finance the payment to Warren under the Family Agreement referable to Waverly was treated in the accounts as only Errol's debt but "should be treated as split between [the] partners". [31]
[2]
Referral to Arbitration
By June 2019, no agreement had been reached over the dissolution of the partnership and the matter was referred to arbitration. [32] The Law Society appointed Mr McGruther as arbitrator. The arbitration agreement provided, inter alia, that the arbitrator was "not bound by the rules of evidence but may inform himself in relation to any matter in such manner as the Arbitrator thinks fit" and that "the Arbitrator is able to make an Interim Award or determine part of the Dispute as the Arbitrator thinks fit". [33]
Consistent with s 23(1) of the Arbitration Act, Mr McGruther convened a preliminary conference on 1 August 2019. [34] He made directions for the filing of, inter alia, points of claims and responses. [35]
On or about 2 September 2019, Malcolm and Michelle received a report from an accountant they had retained, Geoff Gardner (of the firm Gardner Brown). [36] His report treated or assumed that Waverly, Eagles Nest, Hazelglen (and Erlsridge) were not partnership assets. [37] He adjusted the partnership accounts to give credit to Errol for the market value of his contributions in 2007, [38] debited Errol's account for certain loans to family members introduced into the accounts in 2007 and otherwise made a series of debits and credits to the partnership accounts to accord with his conclusion (or assumption) that the properties just noted were not partnership assets. [39] He also restored the full debit balance to Errol's partnership account in relation to the Waverly property on the basis that it should not have been treated as a contribution to the partnership in 2007 in the first place (because it was owned by Warren). [40]
On 15 November 2019, Errol served points of claim which, inter alia, recited that the partnership funded the purchase of Hazelglen and (half of) Eagles Nest, the interests for both properties were registered in Malcolm's name and the liability resulting from the finance used to fund the purchase was "recorded solely against Errol". [41] Malcolm and Michelle filed a response that reflected Mr Gardner's report. [42]
Between December 2019 and February 2020, the parties served evidence in support of their respective contentions which mainly consisted of the various accountants' reports. [43]
On 13 February 2020, there was a further preliminary conference before Mr McGruther. On 20 February 2020, Mr McGruther sent the parties a letter referrable to the preliminary conference. [44] Mr McGruther directed Errol's solicitor to provide by 3 March 2020 a "brief Statement of Confined Issues for Decision", [45] a "brief Statement as to what [is] contended [to be the] 'Final Amount'... owed" [46] and a "brief summation… of any factual or legal argument surrounding the contention as to the existence (or otherwise) of any 'Trust' or contended 'trusteeship'". [47] This was clearly a reference to a (further) document of the kind contemplated by s 23(1) of the Arbitration Act.
In compliance with these directions, on 4 March 2020, Errol's solicitor provided Mr McGruther and the solicitor for Malcolm and Michelle with amended points of claim ("APOC"). [48] The APOC pleaded various facts and contended that Malcolm held "his interest in… Hazelglen and Eagles Nest on behalf of the Partnership in the same proportion as his and Errol's' interest in the Partnership" [49] and that, in the alternative, Malcolm was estopped from denying that he so held those interests. [50] The APOC also pleaded that various adjustments should be made to the partners' capital accounts that reflected the various issues raised by Mr Haley in his reports. Consistent with this, the APOC contained four prayers for relief, the first three of which were described as a "determination or finding" in terms that reflected Errol's assertions as to his beneficial ownership of Hazelglen and Malcolm's 50% interest in Eagles Nest. [51]
The fourth prayer for relief was as follows: [52]
"A determination or finding by the Arbitrator that the partners' capital accounts ought be adjusted as per paragraph 4.1.2 of the Report of Peter Haley dated 20 November 2018 or in such other amount as the Arbitrator shall think fit."
[3]
The Interim Award
Mr McGruther held a further preliminary conference on 24 March 2020. [53] On 27 March 2020, he sent the parties a letter referable to that conference. [54] The letter recorded that "[i]t was agreed at the conference that the question of the existence, or nature, of any 'Trust or Trusts' needs to be pre-emptively determined prior to any 'Accounting Conference or the like" (emphasis added). [55] The balance of the letter included various directions to enable that to occur.
Consistent with those directions, Errol's solicitor subsequently filed written submissions. Those submissions contended that Mr McGruther should find that Malcolm's interest in Hazelglen and Eagles Nest was either a partnership asset held on resulting trust for Errol, [56] a partnership asset held on constructive trust for Errol [57] or that Malcolm was estopped from denying that it was a partnership asset. [58] It was contended that, if any of those contentions were established, the "account[s] ha[d] to be adjusted in accordance with paragraph 4.12. of the report of [Mr] Haley dated 20 November 2018". [59] The balance of the submissions addressed what it described as "Residual Accounting Issues", being the other matters raised by Mr Gardner and Mr Haley on the basis that Malcolm was the sole beneficial owner of Hazelglen and that half of the interest in Eagles Nest was registered in his name. [60]
Malcolm and Michelle's solicitor filed submissions rejecting Errol's contention as to his beneficial ownership of Hazelglen and half of Eagles Nest. [61] They otherwise submitted that the "accounting issues should await the findings of the arbitrator on the equitable issues that have been raised". [62]
On 17 June 2020, Mr McGruther wrote to the parties and recorded their agreement ("as mutually affirmed by the Parties") that he would make an "interim arbitral determination on the Trust/equitable issues" and that he would then "seek submissions from the Parties as to the Accounting/Partnership Accounts or residual accounting or adjustment matters which, if any, might inherently flow from the [interim] determination". [63]
On 10 December 2020, Mr McGruther published a document entitled "Arbitration Determination (Interim)" (the "Interim Award"). [64] He concluded that Malcolm was the legal and beneficial owner of Hazelglen and the half share in Eagles Nest. He rejected the first three prayers of relief claimed in the APOC which were referable to those properties (see [*44]). [65] The Interim Award included some observations on the "residual accounting issues" noted above. [66]
Mr McGruther held a teleconference with the parties on 20 January 2021. On 22 January 2021, he wrote to the parties recording that it was "mutually" agreed that their respective accountants would be provided with the Interim Award and instructed to "readjust their final dissolution Partnership Accounts/Reports". [67] In March 2021, the parties exchanged reports from Mr Brown (i.e. Mr Gardner's partner) and Mr Haley that conformed with those directions. [68] On 15 March 2021, Mr McGruther emailed the parties. [69] He advised that the teleconference that was listed for 19 March 2021 would be adjourned for four weeks to allow the accountants to confer in relation to their differences. [70]
[4]
Errol Retains a New Solicitor
On or about 31 March 2021, Errol's solicitor advised Mr McGruther that their instructions had been withdrawn. [71]
On 13 May 2021, Errol's new solicitors wrote to Mr McGruther. [72] They queried Mr McGruther's authority to make findings about the ownership of farming properties and contended that the Interim Award "overlooked" the necessity of determining the beneficial ownership of land to ensure that the owner of the land carries a "proportionate share of the… liability for the loans secured by mortgages used to finance the purchase of the lands". [73]
A teleconference was held the next day on 14 May 2021. [74] The primary judge found that Errol's new counsel advised that the partnership's accounts needed to be revisited and that Mr McGruther "appears to have regarded this with some scepticism". [75] Her Honour also noted that in his letter to the parties on 17 May 2021, Mr McGruther stated: [76]
"(Stated at its briefest) [counsel for Errol's] reference to 'new information on instructions' touching upon contended antecedent Partnership accounts histories (including antecedent to the subject Partnership here) suggested to attract 'revisiting', including in the stated emphasised context of a potential Account resolution. I merely note, but do not necessarily (procedurally or otherwise) accept this very late reference."
Mr McGruther's letter confirmed that the matter was adjourned to 26 July 2021. [77] The letter reiterated his understanding that the remaining issues to be resolved were the so-called "residual accounting issues" noted above. [78]
Just prior to the teleconference on 26 July 2021, Errol's new solicitor circulated draft directions that provided for the parties to provide written consents for access by the other to all books and records of the partnership. [79] The draft directions also sought the permission of the arbitrator under s 27A(2) of the Arbitration Act for an application to be made to the Court for the issue of subpoenas seeking, inter alia, the conveyancing files concerning the transfer of Hazelglen and the half interest in Eagles Nest to Malcolm. [80] This aspect of the directions could only have been relevant to an attempt to reagitate the findings made in the Interim Award.
Mr McGruther declined to make those directions at the teleconference on 26 July 2021 (or thereafter). [81] Instead, in a letter dated 30 July 2021, he directed that Gardner Brown and Mr Haley "confer, meet and/or liaise to discuss any material differences in their final dissolution Partnership Accounts/Reports, in particular as and since and arising from the Interim Determination". [82] He directed that each accountant prepare a report or reports and send them to each set of solicitors. [83]
The primary judge characterised the effect of the directions that were made at the teleconference on 26 July 2021 and immediately afterwards as follows: [84]
"That is, there would be no re-opening of the partnership accounts but, rather, adjustments made to the existing partnership accounts strictly along the lines anticipated by the existing experts in their existing reports and in light of the interim award. So far as the arbitrator's letter confirming his directions reveals, the reason for this decision was because this had been the process agreed by Errol's previous solicitors after the interim award had been handed down, and the parties had been in the process of implementing these directions before Errol appointed new lawyers."
In addition, Mr McGruther noted in an email sent to the parties on 26 August 2021 that these directions:
"… were made after full discussion was had at the Teleconference of 26 July, including your counsel's then referring to your party obtaining a new 'forensic accountant's report'. As a unilaterally announced measure, it was immediately objected to by the other party and, then and now [i.e. 26 August 2021], declined by me as Arbitrator." [85]
No finding reflecting this passage was made by the primary judge. Even if the possibility of serving a report was raised at the directions hearing and refused, this occurred in a context where the report was not yet available and any "new case" based on a revised view of the accounts was yet to be articulated.
[5]
Errol Retains a New Accountant
On 10 August 2021, Errol's new solicitor sent a letter of instruction to an accountant, Guy Hammond. [86] The letter requested that Mr Hammond review the financial position of the partnership "seeking to identify errors in the accounts that adversely impact" Errol. [87] The factual instructions given to Mr Hammond were lengthy. They recited the solicitor's belief that the Interim Award wrongly determined that Malcolm was the beneficial owner of Hazelglen and the half interest in Eagles Nest, [88] and advocated that the financial statements of the partnership were "taxation accounts and not valuation accounts and the two [were] separate entities entirely". [89] If this statement is meant to suggest that financial accounts prepared for taxation purposes should not contain true and fair values of a company's assets and liabilities, then it is unfortunate to say the least.
A further letter of instruction dated 23 August 2021 advised Mr Hammond that the Interim Award could not be appealed and thus "in order to rectify this award [i.e the Interim Award] the only recourse we have is to seek amendments to the partnership accounts to accommodate for the loss Errol has suffered from the loss of the property" (i.e. Hazelglen and a half interest in Eagles Nest) (emphasis added). [90] This letter was tendered before the primary judge. It was not provided to Mr McGruther.
On 23 August 2021, Mr Hammond provided Errol's new solicitor with a draft report. [91] He provided a final report on 25 August 2021 that, save for one matter, was not materially different. [92] These reports were tendered before the primary judge but were not provided to Mr McGruther or the solicitor for Malcolm and Michelle during the arbitration. In the reports, Mr Hammond concluded that both Mr Haley and Mr Gardner had adopted opening balances that had been taken from incorrectly prepared financial statements of the partnership. [93] He concluded that the financial statements had been prepared "on a cost basis, "contain[ed] several significant errors" and "apportioned total partners drawings in proportion to the profit share percentages instead of assigning the actual amounts drawn by each party". [94]
Mr Hammond suggested a new apportionment method as follows: [95]
"6 Given the existing errors in the partnership financial statements it is my opinion that the only way to correctly calculate a fair and equitable division of the assets and liabilities of the partnership is to agree on the total assets and debt values as at 28/2/2018 (including land assets owned by the Parties) then ensure the assets and debts of the partnership are apportioned to deliver the same total net assets to each of the two parties 1. Errol Wayne Lieschke and 2. Malcom & Melinda [sic] Lieschke.
7 This would involve revaluing all assets including the properties owned by each party and then apportioning the debt to ensure each party has the same net assets.
8 The entire business would first need to be valued as though it were being sold to a third party, including all assets and liabilities whether owned by the individual parties or the partnership.
9 The properties owned by the individual partners were provided as security for Suncorp Bank to provide loan funds for the Partnership. These loan funds appear in the financial statements but not the properties in the correct proportions.
10 It is an incorrect accounting treatment to exclude the properties but include the loans secured by those properties. This accounting treatment has severely distorted the equity accounts in the financial statements."
In the balance of the draft report, Mr Hammond addressed particular accounting issues raised in the Interim Award and the reports of Mr Haley and Mr Gardner. Mr Hammond then adjusted the accounts of the partnership to reflect two scenarios, the first being to reflect "Errol's shares of Hazelglen and Eagles Nest held on trust" and the second being the position reflected in the Title documents. [96] The final version of Mr Hammond's report included a third scenario which involved Malcolm being treated as the beneficial owner of Hazelglen but transferring the entirety of his (half) interest in Eagles Nest to Errol. [97] The first and third scenarios are inconsistent with the Interim Award. The third scenario does not reflect any contention previously made by Errol in that he asserted that Hazelglen and Malcom's interest in Eagles Nest were partnership assets.
Consistent with the approach set out in the above extract from his report, Mr Hammond allocated the mortgage debts to Suncorp Metway so that the net assets of Errol on the one hand and Malcolm and Michelle on the other were identical in all three scenarios. This approach appears to achieve the objective specified in the letter of instruction noted above (at [*62]).
The primary judge found that on 24 August 2021, Errol's new solicitor and counsel participated in a telephone conference with Mr Haley and Mr Hammond. [98] Her Honour found "Mr Haley said that if any of the issues raised by Mr Hammond were true and correct, then Mr Haley's interim report provided to the arbitrator was incorrect and the accounts of the partnership would need to be re-done from inception as all of the assumptions in the financial records and reports were incorrect and could not be relied upon". [99] There is no suggestion that either Mr McGruther or Malcolm and Michelle were advised of this.
[6]
Attempts to Introduce Mr Hammond's Report through Mr Haley
On 25 August 2021, Malcolm and Michelle's solicitor advised Mr McGruther that their accountant, Mr Brown, had made contact with Mr Haley in accordance with the existing directions but Mr Haley had advised that he was not in a position to discuss the differences "which he agreed were not substantial, because he had been awaiting another accountant's report." [100]
On the same day, Mr McGruther advised the parties by email that the directions of 30 July 2021 noted above (at [*57]) did not "encompass" any liaison between the accountants "at the behest of either party, from any third or other accountant". [101] His email stated:
"Accordingly, no 'other' accountant's report is to be submitted to or discussed with Mr Haley (or Gardner Brown). Any such (if submitted) is to be ignored by them for the purposes of the Directions as made.
Accountants' material and liaison are singularly confined to the mutual contributions of Gardner Brown and Vincents (Haley) [Mr Haley] in accordance with those Directions referred to."
Errol's new solicitor responded to Mr McGruther's email that same day as follows: [102]
"We have forwarded a copy of [your email] to Mr Haley and advised him to comply with your further directions. However, we do so under protest.
The Applicant does not intend to submit any report from a third party accountant. Rather, it was intended that Mr Haley would consult with Mr Guy Hammond, a specialist forensic accountant for the purposes of preparing himself to confer with Mr Gardner and drafting any further reports. In our view, there is nothing improper about an expert informing him or herself however the expert sees fit in order to form an opinion, including consulting with third parties with relevant expertise, provided that the basis for the expert's opinion and any material relied upon are disclosed. Accordingly, we ask you to reconsider your direction to Mr Haley so as to permit him to consult with Mr Hammond." (emphasis added)
On 26 August 2021, Mr McGruther emailed the parties. [103] He reiterated that the directions he made on 30 July 2021 required that "only" Mr Brown and Mr Haley liaise. As noted, Mr McGruther added that those directions were made after a discussion about the possibility of serving a report from a new forensic accountant. Mr McGruther confirmed that the "nominated Accountants as above are to move ahead with their designated mutual exercise as per [the existing] Directions" and to "do so without any intervention or interposition of any third or other party."
On 27 August 2021, the parties attended a preliminary conference before Mr McGruther. [104] His letter dated 30 August 2021 reporting on the conference recorded as follows: [105]
"The submission (by counsel for [Errol]) for Mr Haley (in the above exercise) to be approachable by, or for any contribution by, a third or other party (accountant or other) was objected to by [Malcolm and Michelle]. The submission was and is declined.
For abundant certainty … no third or other party or intermediary (accountant or other) is to interpose, liaise with, report to, or make contact with either of the directed Accountants, nor vice versa."
By letter dated 7 September 2021, Errol's new solicitor provided Mr Haley with a lengthy set of further instructions. [106] The primary judge observed that "[t]he letter of instruction [was] similar to that earlier sent to Mr Hammond and, presumably, incorporated the analysis and observations made by Mr Hammond." [107] Her Honour noted that "some of the attachments to the letter of instruction appear to have been the work of Mr Hammond". [108] Her Honour concluded that "although the arbitrator had expressly forbidden Mr Haley consulting with anyone other than Mr Brown, [Errol's new solicitor] was incorporating Mr Hammond's work in a letter of instruction to Mr Haley". [109] It seems that Mr McGruther did not become aware of this letter until its existence was disclosed in a statutory declaration affirmed by Errol's new solicitor that was provided to Mr McGruther on 2 November 2021 (see [78]).
A further preliminary conference took place on 17 September 2021. [110] Mr McGruther adjourned the matter to permit the completion of a further report from Mr Haley. In his letter dated 21 September 2021 to the parties, Mr McGruther reiterated that the parameters of the "conjoint exercise for the Accountants" were his earlier directions which related to the residual accounting issues left open after the making of the Interim Award (emphasis in original). [111]
On 13 October 2021, Mr Haley and Mr Brown signed a joint report based on the financial statements for the partnership that had been provided to them. [112] As noted by the primary judge, "the experts agreed that the differences between them were immaterial and it was reasonable to adopt the mid point". [113] The report included the following: [114]
"2.6 Haley notes that he was provided with a letter dated 7 September 2021 from Jarratt Webb & Barrett (acting on behalf of Errol Lieschke) which asked Haley to consider various items that they considered had not been properly accounted for in the preparation of the Partnership financial statements. Haley was also provided with an Accounting Opinion report prepared by Mr Guy Hammond which detailed Mr Hammond's opinion of incorrect accounting in the preparation of the Partnership financial statements.
2.7 By email dated 25 August 2021 the Arbitrator directed that '... no "other" accountant's report is to be submitted to or discussed with Mr Haley (or Gardner Brown). Any such (if submitted) is to be ignored by them for the purposes of the Directions made.'
2.8 Accordingly, as noted above the experts note that their reports to date have been prepared based on the financial statements of the Partnership that have been provided to them and no consideration has been given to the validity of the issues raised in either the report of Mr Guy Hammond or the Jarratt Webb & Barnett letter of 7 September 2021." (emphasis added)
Thus, despite Mr McGruther's directions, Mr Haley received a copy of Mr Hammond's report.
[7]
The Final Award
On 20 October 2021, Mr McGruther made directions for the parties to make brief submissions concerning "what Orders or Award… should be made in the final determination as an Award in the matter based singularly and only on the Joint Accountant's Report" (emphasis in original). [115] Errol's new solicitor and counsel were directed to provide statutory declarations explaining how Mr Haley came to be in possession of Mr Hammond's report. [116]
On 2 November 2021, Malcolm and Michelle's solicitor provided final submissions. They contended that the partnership accounts should be calculated in accordance with the joint accountant's report such that Errol was obliged to pay the partnership $1,034,686 whilst Malcolm was to pay $416,735. [117] It was also submitted that Errol should pay Malcolm and Michelle's costs of the arbitration. [118]
On 19 November 2021, Errol's solicitor provided his client's final submissions. [119] The principal submission was that the effect of Mr McGruther's directions was that Errol was rendered "unable to present its case" within the meaning of ss 34(2)(a)(ii) and 36(1)(a)(ii) of the Arbitration Act such that recognition of the award was liable to be refused or the award was liable to be set aside. [120] The written submissions did not identify what "case" Errol sought to pursue but was denied. Attached to the written submissions was a statutory declaration from Errol's new solicitor addressing Mr Haley's receipt of Mr Hammond's report. [121] The solicitor stated that the report was provided to Mr Haley on 25 August 2021 by a "junior receptionist" at the solicitor's office. [122] He said he was not aware Mr Hammond's had been provided until 19 October 2021 when he was so advised by counsel. [123] He also disclosed that he had sent the letter dated 7 September 2021 to Mr Haley and attached a copy. [124]
Mr McGruther issued his final award on 28 January 2022 ("the Final Award"). [125] He made the award and costs order sought by Malcolm and Michelle. [126] Mr McGruther also addressed Errol's submissions in detail and rejected them. It is not necessary to address those reasons in detail, bearing in mind that the question of whether Errol was unable to present his case (or whether the award conflicted with the public policy of this State) is ultimately not a matter for Mr McGruther but for the Court. It suffices to note that Mr McGruther recorded that the arbitration proceeded over many years in a manner that reflected how Errol had framed his case, namely by seeking a finding concerning the status of Hazelglen and the half interest in Eagles Nest that was registered in Malcolm's name and then addressing various residual accounting issues. [127]
Mr McGruther also observed: [128]
"The Applicant's apparent or implicit attempt now to have intrude into the Arbitration freshly contended or purported 'historic' or antecedent deficiencies or problems with original Accounts is, in effect, an attempt to go underneath or to circumvent this Arbitration itself, that is, to attempt to 'restart' it, or to 'rerun' it on some brand new basis. This was an Arbitration called by the Applicant himself and based on the Partnership Accounts as they stood, and as were consensually put to and advocated to the Arbitration throughout. If it is now to be presumed that the Applicant is urging, in some extremely late sense, that there may have been some historic or antecedent negligence, errors, omissions or flaws of some 'historic' or other sort in the Partnership Accounts, then if so, any remedy as to that definitively does not lie within this Arbitration."
Mr McGruther's reference to Errol's "apparent or implicit" attempt to introduce various alleged deficiencies or problems with the partnership accounts accurately characterised what occurred after Errol retained new solicitors. At no point did Errol's legal representatives expressly seek to depart, or seek leave to depart, from the case that had been originally put on his behalf in his APOC and written submissions as supported by the reports of Mr Haley. In the absence of any such express attempt to run a new case or seek leave to run a new case, Mr McGruther does not appear to have been clearly advised of what Errol in fact sought to contend about the partnership accounts, much less whether it involved an attempt to reagitate what was decided by the Interim Award. Mr McGruther's reference to the "historic or antecedent deficiencies" appears to have been his attempt to characterise what he anticipated Errol's new solicitor was attempting to introduce into the proceedings via Mr Hammond briefing Mr Haley.
[8]
The Primary Judgment
As noted, Errol commenced proceedings seeking the setting aside of the Final Award on the basis that he was "otherwise unable to present [his] case" (s 34(2)(a)(ii)) or the Final Award was in conflict with the public policy of the State (s 34(2)(b)(ii)). The primary judge recorded Errol's principal contention as being that he was "denied, for inadequate reasons, the opportunity to adduce expert accounting evidence by Mr Haley to make good his contention that the partnership accounts were fundamentally flawed". [129] Errol submitted to her Honour that all issues with respect to the partnership accounts remained "at large" following delivery of the Interim Award and pending delivery of the Final Award. [130] It was contended that Mr McGruther had denied Errol procedural fairness by precluding the independent experts from consulting with what was said to be an "appropriate further source", namely, Mr Hammond. [131]
The primary judge observed that the parties and Mr McGruther had agreed that it was desirable that it first be determined whether particular properties were partnership assets and that "it would be unremarkable", following the publication of the Interim Award, for the parties to "to consider the implications of the arbitrator's findings and conclusions for the remaining issues and to re-calibrate their case, including by adducing additional evidence, to improve their chance of achieving some measure of success in the final award" (emphasis added). [132] At this point, I note that observation implicitly accepts that the anticipated recalibration takes place within the confines of resolving the "remaining issues" as defined by the parties. Her Honour considered that, until the publication of the Interim Award, Errol had "largely proceeded" on the basis that the partnership accounts had been correctly prepared by Mr Lea and operated on an assumption "not unreasonably made" that the parties would continue to use the accounting experts who had been retained up until the time of the Interim Award. [133]
Her Honour then found: [134]
"However, with the assistance of new legal representation, Errol now wished to examine and likely challenge the partnership accounts more broadly, such that more substantive adjustments may be sought than had been proposed by Mr Haley. No direction was sought by Errol's counsel, at the first or second preliminary conference which he attended in May or July 2021, to amend the Points of Claim which, it will be recalled, sought an adjustment of the partnership accounts on the basis of Mr Haley's third report. Presumably, at that stage, further investigations as to the partnership accounts were sought to be undertaken but no amendment to the pleadings or further expert report was then in view...
Fairly obviously, this new case was not welcomed by the arbitrator…. But that was now the case which Errol wished to advance and the question is whether, in the circumstances of this arbitration, he was given a reasonable opportunity to present it." (emphasis in bold in original; emphasis in italics added)
Two related matters should be noted about these findings at this point. First, her Honour noted that no amendment to the APOC was sought by July 2021 and inferred that was so because insufficient material was available. However, there can be no doubt that by late August 2021 such material was available, being Mr Hammond's report. Despite that, there was still no application made to amend the APOC.
Second, these findings move from noting that it was "likely" that Errol wished to "challenge the partnership accounts more broadly" to finding that he now had a "new case" which "he wished to advance". Presumably, this "new case" was that set out in Mr Hammond's report. Mr Hammond's report was never served on Malcolm and Michelle, and this "new case" was otherwise never clearly articulated. Mr McGruther appears to have anticipated that Errol was seeking to put forward something that either was, or might be, inconsistent with the Interim Award or otherwise involve a departure from Mr Haley's reports. He was right in that regard, but was not appraised of anything of substance until he received a copy of the letter to Mr Haley dated 7 September 2021 that was annexed to the solicitor's statutory declaration.
The balance of the primary judge's reasons then dealt with this so-called "new case" that Errol apparently wished to bring and Mr McGruther's supposed refusal to allow that case to be brought forward. Her Honour noted Malcolm and Michelle's submission that Errol could have sought to amend the APOC and bring fresh evidence but did not. [135] However, her Honour did not accept their submission that Mr McGruther did nothing to deny Errol the reasonable opportunity to bring forward late evidence. [136]
Her Honour found that Mr McGruther "was determined to complete the arbitral process as it had been defined by directions made before [Errol's] change of legal representations, come what may" (emphasis added). [137] Her Honour noted a similarity between this case and PBO v Donpro [2021] EWHC 1951 ("PBO") in which it was found that a party to the arbitration was not given a reasonable opportunity to put its case by reason of the manner in which the arbitrator addressed and rejected an application to amend a pleading (at [107] and [117]). [138] Her Honour then found: [139]
"Here, of course, the arbitrator was not dealing with an application to amend the Points of Claim: the arbitrator's directions made in May and July 2021 effectively precluded Errol from embarking on even the investigations which may lead to an application to amend. But similar deficiencies in the arbitral tribunal's approach are evident. As set out in the final award, the arbitrator focussed almost solely on the need to hold the parties to their bargain, made at earlier stages of the arbitration and progressively confirmed and refined by subsequent directions. The arbitrator did not consider the practical injustice that may be occasioned if the plaintiff instructed a new expert or was precluded from relying on such evidence, how that injustice could be remedied, or whether the views of a new expert came too late such that Malcolm and Michelle could not meet it. Nor does the arbitrator appear to have taken into account that 'disputes are best determined on their true merits'.
…
Errol was not being permitted an opportunity to advance a case which he now understood, with the benefit of new lawyers, may improve his chance of some degree of success in the arbitration. The arbitrator did not turn his mind to the different factors which should have been taken into account in deciding that no deviation in the arbitral process would be permitted. In the circumstances of this arbitration as a whole, I do not consider that Errol was given a reasonable opportunity to present his case and the award ought to be set aside under section 34(2)(a)(ii) and 34(2)(b)(ii)." (emphasis added)
Having made these findings, the primary judge then considered whether the Final Award should be set aside, either in whole or in part (Arbitration Act; s 34A(7)(d)), or otherwise suspended with Mr McGruther given the "opportunity to fix the underlying problem". [140] Her Honour declined to suspend the Final Award on the basis that "no reasonable person in [Errol's] position would expect the arbitrator would treat him fairly". [141] No separate challenge is made to the relief granted by her Honour save that, if the grounds of appeal are accepted, it could not be concluded that Mr McGruther treated Errol in a manner that was procedurally unfair.
[9]
The Appeal
Ground 1 of the draft amended notice of appeal contends that the primary judge erred in finding that the Final Award should be set aside on the basis that Mr McGruther's "refusal to allow the parties' experts to confer with [Mr Hammond] prevented [Errol] from being able to present his case, or that the award was in conflict with public policy because [Errol] was unable to utilise [Mr Hammond's opinion]". Ground 2 of the draft amended notice of appeal particularises this complaint in terms that are not necessary to recount. Ground 3 of the draft amended notice of appeal asserts that her Honour also erred in setting aside the Final Award on the basis that the opinions of Mr Hammond ought to have been introduced prior to the Interim Award and thereafter it was within the discretion of Mr McGruther (which was properly exercised) to allow them to be raised. [142]
[10]
Submissions
The parties addressed these grounds compendiously. I will do likewise. Malcolm and Michelle's written submissions contended that the critical issue was whether Mr McGruther's directions that the parties' accounting experts not confer with Mr Hammond prevented Errol from being able to present his case or otherwise denied him procedural fairness. [143] The submissions noted that, despite the directions, Errol was able to obtain Mr Hammond's report but did not make any application to amend his APOC or apply for Mr McGruther to receive new evidence, but instead sought to have a "new report infiltrate the conclave process". [144] To that end, it was contended that Mr McGruther "was never asked to deal straight forwardly with an application for amendment and change" [145] but instead Errol sought to place Mr Gardner in a position of being confronted with an entirely new accounting methodology to what had been agreed. [146] It was submitted that the overall effect of Mr McGruther's directions was to simply regulate the conclave between Mr Haley and Mr Gardner. [147]
Errol's written submissions contended that Mr McGruther "descended into the arena and restrained [Mr Haley] from referring to such sources as he saw fit and then restrained both existing experts from discussing expert evidence with an appropriate source" (Mr Hammond). [148] The submissions contended that Errol's "new case was not one requiring… amendment and was not contrary to the… interim award". [149] In particular, the following was contended: [150]
"The new dimension of the case that the respondent sought to have the existing experts consider, as sourced in the expert opinion of and materials referred to by the further expert, was primarily whether the partnership accounts should reflect that the specific properties should bear the debts and expenses associated with them, rather than the partnership accounts, since they were found not to be partnership assets even if they secured partnership liabilities."
Errol's written submissions also noted that in the Interim Award, Mr McGruther expressed his "procedural expectations" with "firmness" even though there were no directions prior to the Interim Award splitting the arbitration, "mandat[ing] any particular approach to accounting or characterising the accounting issues as 'residual', in the sense of minor or consequential, after resolution of the trust issues in the Interim Award". [151] The balance of the submissions sought to uphold the primary judge's reasoning.
[11]
Resolution
The relevant provisions of the Arbitration Act are set out above (at [*12]−[*22]). As noted, s 18 requries that each party be given a reasonable opportunity to present their "case". It is that "case" which the initiating party must be unable to present before s 34(2)(b)(ii) is engaged (see also ss 27F(4) and 36(1)(a)(ii)). How then is the party's "case" to be identified? As explained, the statutory provisions concerning the conduct of arbitral proceedings afford a considerable degree of procedural flexibility to the arbitrator and the parties. Nevertheless, on any view but subject to contrary agreement or direction, the statement of claim an initiating party is obliged under s 23(1) to provide is highly significant to any identification of the "case" they wish to bring. Prima facie, that document and its response define a party's case and the issues in dispute in the arbitration.
As noted, s 23(3) of the Arbitration Act appears to provide a relatively generous scope for the parties to amend and thus change the "case" they wish to bring. However, the relative width of that provision tells against the suggestion that somehow a party's case is wider or fundamentally different to what was stated in the documents filed under s 23(1). Put another way, consistent with PBO, it can be accepted that a reasonable opportunity to put a "case" includes a reasonable opportunity to seek to invoke s 23(3) to amend or supplement a party's claim or defence. However, beyond that, it is difficult to accept that a party can be denied a reasonable opportunity to put a case that is said to be available to them when they neither advert to that case in the documents filed in accordance with s 23(1) nor seek to invoke s 23(3) to amend those documents.
Errol was the moving party in the arbitration, that is, the "party making the application" for the purposes of s 34(2)(a)(ii) of the Arbitration Act. In his APOC and written submissions, Errol stated the facts supporting his claim, the points at issue and identified with relative precision what "relief" he wanted, namely, findings in his favour about the beneficial ownership of Hazelglen and half of Eagles Nest and an adjustment of the partnership accounts in accordance with par 4.1.2 of Mr Haley's third report. Malcolm and Michelle joined issue on those claims and, via Mr Gardner, raised various accounting adjustments in their own right. To the extent that there was any doubt about what each party's "case" was and what issues were in dispute, then it was resolved by their respective written submissions. Together, this material identifed the issues in the arbitration and the "case" Errol maintained. His case was predicated on the correctness of the accounts prepared by Mr Lea subject to certain variations to reflect his assertions about ownership of Hazelglen and half of Eagles Nest and the specific matters raised in Mr Haley's third report. Malcolm and Michelle's response also accepted as its starting point the correctness of the accounts prepared by Mr Lea.
Thus, with respect to the primary judge, it was not a matter of Errol having "largely proceeded" on the basis that the partnership accounts were correctly prepared by Mr Lea and having operated on a mere "assumption" that the parties would continue to use the accounting experts who had been retained up until the time of the Interim Award (cf [*83] above). Instead, the correctness of the partnership accounts and matters identified in Mr Haley's third report were the premise of, and basis for, Errol's case.
Similary, contrary to Errol's submission to the primary judge, after the making of the Interim Award "all issues" with respect to the partnership accounts were not "at large". Instead, they were very much confined and reflected Errol's formulation of his case. As noted, in this Court, Senior Counsel for Errol pointed out that there were no directions prior to the Interim Award splitting the arbitration, "mandat[ing] any particular approach to accounting or characterising the accounting issues as 'residual'". However, there was no need for directions to that effect because it was agreed at the preliminary conference on 24 March 2020 that the "question of the existence, or nature, of any 'Trust or Trusts' need[ed] to be pre-emptively determined prior to any 'Accounting Conference or the like" [152] (see above at [*46]). As explained, the capacity of the parties to an arbitration to agree on the procedure to be adopted is a particular feature of the Arbitration Act (ss 19 and 23). Moreover, it was Errol's written submissions that characterised the balance of the accounting issues that remained to be determined after the Interim Award as "residual accounting issues" (see [*47]).
The so‑called "new case" that Errol wished to pursue emerged after the Interim Award and appears to be what is reflected in Mr Hammond's report. I have described that report above (at [*63]−[*66]). Errol's submission in this Court that no amendment to his APOC was required to pursue the approach identified by Mr Hammond is without foundation. It is unclear whether Mr Hammond's report seeks to revisit the findings made about the beneficial ownership of Hazelglen and Eagles Nest in the Interim Award. The letter of instruction sent to Mr Hammond (and later to Mr Haley) disputed those findings and sought the production of a report that overcame the alleged "loss" of those properties by Errol. Leaving that aside, Mr Hammond's report sought a determination of the existing partnership dispute on a completely different accounting basis to Mr Haley's third report (and Mr Gardner and Mr Lea's reports). Even if the submission extracted above (at [*92]) was a complete summary of Mr Hammond's approach, which it is not, that aspect of his report is not the subject of any factual assertion or claim for relief in Errol's APOC. Moreover, Mr Hammond's proposal to revalue all the assets on the basis of a sale to a third party and then ensure each party received the same net assets is fundamentally inconsistent with Errol's APOC which, as noted, adopts the correctness of the accounts prepared by Mr Lea as its starting premise. The scope of the change in approach from Mr Haley's report to Mr Hammond's report is reflected in the primary judge's finding about Mr Haley's response to being briefed on the report (see above at [*67]).
How, if at all, was this "new case" pursued by Errol? As noted, at no stage did Errol seek to invoke s 23(3) to raise the matters in Mr Hammond's report. Instead, he sought to introduce Mr Hammond's report into the conclave that was to take place between Mr Haley and Mr Brown. Such conclaves are a means of resolving (or least refining) the remaining issues in dispute in the arbitration. There is no doubt that by this time the arbitration was largely driven by the accountants for both parties. However, even in an arbitration, conclaves between experts are not free-standing inquiries. Mr Haley and Mr Gardner were expected to confer about the issues arising in the arbitration. At all times, those issues were defined by the statements filed under s 23(1). Mr Hammond's report advocated for an approach that was completely inconsistent with those statements. However wide the scope for flexibility in procedure afforded by the Arbitration Act might be, it does not contemplate the pursuit and introduction of a "case" that is inconsistent with the statements filed under s 23(1) through an expert conclave, especially when it is proposed to be done, as was the case here, without any proper notice to the other party.
The essence of Errol's case for setting aside the Final Award was that Mr McGruther's directions and conduct effectively precluded him from making a proper application to further amend his points of claim to run a so‑called "new case". I have already accepted that the reasonable opportunity afforded by s 18 to a party to present their case extends to a reasonable opportunity to invoke s 23(3). However, I do not accept that any aspect of Mr McGruther's conduct meant that Errol did not have such an opportunity.
As noted, the primary judge concluded that Mr McGruther's directions made in May and July 2021 "effectively precluded Errol from embarking on… the investigations which may [have led] to an application to amend". [153] The directions that were made (and not made) on 14 May 2021 and 26 July 2021 (or shortly thereafter in Mr McGruther's reporting letters) are described above (at [*54] and [*57]). Leaving aside what Mr McGruther said about those directions in his emails in August 2021, the only aspect of Mr McGruther's conduct on those days which "precluded" Errol from making "investigations" was his refusal to make directions to issue subpoenas to obtain conveyancing files in relation to the ownership issues that had already decided by the Interim Award and to make orders granting access to every book and record of the partnership. The suggestion that Mr McGruther should have permitted subpoenas to be issued for the purpose of reagitating the Interim Award is baseless. Further, his power to make directions for each party to produce documents is to be exercised for the purpose of resolving the issues in dispute. At that point in time, there was no issue in the existing statements filed under s 23(1) which warranted the production of those documents. Otherwise, it was not suggested to Mr McGruther that such documents were necessary for the purposes of making an amendment application. On the material available to Mr McGruther at that point, the application was a true "fishing expedition".
There remains to be considered the effect of Mr McGruther's email sent on 25 August 2021 restricting Mr Haley and Mr Brown to only confer with each other and directing that "no third or other party or intermediary (accountant or other) is to interpose, liaise with, report to, or make contact with either of the directed Accountants, nor vice versa". These directions were too widely expressed. The Court was not referred to any provision of the Arbitration Act which would authorise an arbitrator precluding an accountant retained by a party from conferring with a third party or their client, much less preclude any third party from conferring with the accountant.
However, the issue is not whether those directions were authorised, but rather whether they had the effect of rendering Errol unable to present a case. It may be that, in a particular case, if such a direction was made then, notwithstanding its potential invalidity, it might have the practical effect of precluding a party from gathering such material as it needs to invoke s 23(3) and thereby denying them a reasonable opportunity to present their case (and rendering them unable to present their case).
However, the inquiry posited by s 34(2)(b)(ii) is one that involves a consideration of whether there has been a "real practical injustice" (TCL Air Conditioner at [55]). By 26 August 2021, Errol had received Mr Hammond's report and Mr Haley had provided his initial response to the issues raised. Despite Mr McGruther's directions, Mr Haley later received a copy of the report. For reasons already explained, Errol's reasonable opportunity to present his case did not enable him to introduce Mr Hammond's report via an accounting conclave directed to resolving the issues in dispute which were defined according to the statements filed under s 23(1) which were inconsistent with Mr Hammond's proposed methodology. Instead, the reasonable opportunity conferred on Errol by s 18 extended to a reasonable opportunity to invoke s 23(3). By 25 August 2023, Errol had the material which enabled him to make such an application, but he chose not to do so. In those circumstances, Errol was afforded a reasonable opportunity to present his case. It has not been demonstrated that Errol was either unable to present his case or that the Final Award was in conflict with the public policy of this State.
Finally I noted that Errol's submissions appeared to suggest that Mr McGruther's approach to the various steps taken on behalf of Errol after the Interim Award meant that, had an amendment application been made, it was invariable that it would have been refused. Three matters should be noted.
First, no such application was made and there was clearly a deliberate decision made on Errol's behalf not to make such an application (see [*69]). An assessment of whether Errol was unable to present his case depends upon an assessment of the events that happened and not those which did not happen. Errol's entitlement to a reasonable opportunity to present his case does not protect him from his own "strategic choices" (Mango Boulevard at [83]).
Secondly, if such an application had been made, then presumably attention would have turned upon s 23(3) which appears to allow a relatively wide scope for amendment.
Thirdly, I do not accept one can speculate how Mr McGruther might have dealt with an application seeking to invoke s 23(3) based on the directions he made in relation to the conclaves between Mr Haley and Mr Brown. In relation to those conclaves, Mr McGruther was entitled, and possibly obliged, to make directions to ensure they addressed the issues in dispute as identified by the statements under s 23(1). As noted, the primary judge found that Mr McGruther "was determined to complete the arbitral process as it had been defined by directions made before [Errol's] change of legal representations, come what may" (emphasis added). [154] To the extent that the phrase "come what may" might be seen as excluding an application that invoked s 23(3) then this finding is, with respect, speculative. Leaving that aside, given so much time had passed, Mr McGruther's determination to complete the arbitral process was understandable, and he was endeavouring to do so by reference to the issues and process that had been identified and agreed to by the parties well before any of the impugned directions were made.
It follows that I would uphold ground 1 of the draft amended notice of appeal. Mr McGruther's refusal to allow the parties' experts to confer with Mr Hammond did not prevent Errol from being able to present his case or render the Final Award in conflict with public policy. I do not accept that ground 3 of the draft notice of appeal properly reflects what occurred in that it appears to assume that Mr McGruther expressly addressed and rejected an application to rely on Mr Hammond's report. No such application was made.
[12]
Proposed Orders
It follows from the above that I consider the appeal should be allowed, the substantive orders of the primary judge be set aside and Errol's proceedings seeking to set aside the Final Award be dismissed.
On 16 February 2023, the primary judge published a judgment ordering Malcolm and Michelle pay Errol's costs of the proceedings in this Court at first instance (Lieschke v Lieschke (Costs) [2023] NSWSC 92). Her Honour also made orders in respect of the costs of the arbitration under s 33D(1) of the Arbitration Act. As I propose that Errol's proceedings seeking to set aside the Final Award be dismissed, those orders should be set aside. The Final Award will take effect according to its terms.
I propose the following orders:
(1) Grant the applicants leave to appeal.
(2) Direct the applicants file within 7 days a notice of appeal in the form of the draft amended notice of appeal.
(3) Allow the appeal and:
(a) Set aside the orders made by the primary judge on 16 December 2022 and 16 February 2023;
(b) In lieu thereof, order that the proceedings be dismissed.
(4) Order the first respondent to pay the applicants' costs of the proceedings at first instance and in this Court.
[13]
Endnotes
Lieschke at [29]−[30].
Lieschke at [31].
Lieschke at [31].
Lieschke at [32].
Lieschke at [32].
Lieschke at [33].
Lieschke at [34]−[35]; Blue 1/50 and 56.
Blue 1/53 at [17].
Blue 1/53 at [19].
Blue 1/53−54 at [20].
Blue 1/56 at [24].
Lieschke at [36].
Lieschke at [36].
Lieschke at [37]; Blue 1/323 at cll A−C.
Lieschke at [38]; Blue 1/323 at cll D−F.
Lieschke at [39]; Blue 1/325 at cl 3.
Lieschke at [40].
Lieschke at [40].
Lieschke at [43]; Blue 1/23N.
Lieschke at [44].
Lieschke at [44].
Blue 1/183.
Blue 1/233.
Blue 1/251.
Blue 1/253E.
Blue 1/186−188.
Blue 1/189−190.
Blue 1/190−191.
Lieschke at [49]; Blue 1/104.
Blue 1/104V.
Blue 1/105E.
Lieschke at [51].
Blue 1/63 at cll 6(f) and (h).
Lieschke at [52].
Lieschke at [52].
Blue 1/145.
Blue 1/149.
Blue 1/150 at 4.2.1.
Blue 1/149 at 3.3.5, .4.2.3 and 4.2.4.
Blue 1/151 at 4.2.5.
Lieschke at [57]; Blue 1/89.
Lieschke at [59].
Lieschke at [60]−[64].
Lieschke at [66]; Blue 1/347.
Blue 1/347S.
Blue 1/347T.
Blue 1/349.D.
Blue 1/350.
Blue 1/354 at [1.12].
Blue 1/355 at [1.16].
Blue 1/358.
Blue 1/358 at 3.4.
Lieschke at [72].
Blue 1/360.
Blue 1/360P.
Blue 1/403 at [20] and [30].
Blue 1/405 at [31] and 406 at [37].
Blue 1/406 at [38].
Blue 1/408 at [43].
Blue 1/409−410.
Blue 1/416.
Blue 1/421G.
Blue 2/432G and 436G.
Blue 2/433.
Blue 1/487 at [244].
Blue 2/471 and 2/485 at [237].
Blue 2/489J.
Blue 2/490; 2/503.
Blue 2/531−532.
Blue 2/531.
Blue 2/536.
Blue 2/538−539.
Blue 1/538−539.
Lieschke at [93].
Lieschke at [93].
Lieschke at [93].
Blue 2/541K.
Blue 1/540.
Lieschke at [96]; Blue 1/545R.
Blue 1/545H.
Lieschke at [97]; Blue 2/547N.
Blue 2/547P.
Blue 2/548.
Lieschke at [98].
Blue 3/1013.
Blue 2/556.
Blue 1/567.
Blue 1/566.
Blue 2/567M.
Blue 3/920N at [34].
Blue 3/988.
Blue 3/996.
Blue 3/990F.
Blue 3/990G.
Blue 3/990.
Blue 1/992.
Blue 3/1002.
Lieschke at [105].
Lieschke at [105].
Lieschke at [107].
Blue 3/1008.
Blue 3/1012.
Blue 3/1013.
Lieschke at [111].
Lieschke at [111]; Blue 3/1022−1023.
Blue 3/1045.
Lieschke at [113].
Lieschke at [113].
Lieschke at [113].
Lieschke at [114].
Blue 3/1118R.
Blue 3/1121.
Lieschke at [115]; Blue 3/1121.
Blue 3/1125.
Lieschke at [116]; Blue 3/ 1126.
Lieschke at [117]; Blue 3/1126−1127.
Lieschke at [118]; Blue 3/1129.
Lieschke at [118]; Blue 3/1129.
Lieschke at [119]; Blue 3/1131.
Blue 3/1133M.
Blue 3/1134.
Blue 3/1134 at [7].
Blue 3/1134 at [6].
Blue 3/1134 at [9].
Lieschke at [120]; Blue 3/1157.
Lieschke at [125]; Blue 3/1186−1187.
Blue 3/1159 at [2] and 1162 at [17]−[19].
Blue 3/1163 at [20].
Lieschke at [126].
Lieschke at [127].
Lieschke at [128].
Lieschke at [136].
Lieschke at [137]−[138].
Lieschke at [139].
Lieschke at [143].
Lieschke at [143].
Lieschke at [143].
Lieschke at [144].
Lieschke at [145] and [148].
Lieschke at [157].
Lieschke at [158].
White 14−15.
Applicants' written submissions at [32]; White 162.
Applicants' written submissions at [46]−[47]; White 166.
Applicants' written submissions at [51]; White 167.
Applicants' written submissions at [52]; White 167.
Applicants' written submissions at [54]; White 168.
First Respondent's written submissions at [3]; White 172.
First Respondent's written submissions at [5]; White 172.
First Respondent's written submissions at [6]; White 172.
Respondent's written submissions at [12]; White 173.
Blue 1/360P.
Lieschke at [145].
Lieschke at [143].
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 13 October 2023
Solicitors:
Walsh & Blair Lawyers (Applicants)
Jarratt Webb & Barrett (First Respondent)
File Number(s): 2023/110538
Decision under appeal Court or tribunal: Supreme Court
Jurisdiction: Civil
Citation: [2022] NSWSC 1705
Date of Decision: 16 December 2022
Before: Rees J
File Number(s): 2022/119891
HEADNOTE
[This headnote is not to be read as part of the judgment]
The first respondent, Errol Lieschke (Errol), and his late wife, Glenys, conducted a farming partnership on properties near Henty for several years. After Glenys' death, in 2007 Errol entered into a partnership agreement with the applicants, being his son Malcolm Lieschke (Malcolm) and Malcolm's wife, Michelle Lieschke (Michelle).
On or about 18 October 2017, Errol gave notice of his intention to dissolve the partnership. In 2019, Errol referred a dispute about the partners' entitlements on dissolution to arbitration. The parties retained their own accountants. Errol filed points of claim in accordance with s 23(1) of the Commercial Arbitration Act 2010 (NSW) (the "Arbitration Act") which sought findings to the effect that various properties registered in Malcolm's name were partnership assets and sought variations to the partnership accounts in accordance with the report of his accountant. By agreement amongst the parties, the arbitrator determined the dispute about the ownership of the properties in advance of all other issues. On 10 December 2020, the arbitrator found that the disputed properties were not partnership assets but instead owned beneficially by Malcolm (the Interim Award). Thereafter, the arbitrator made directions for the accountants to confer to resolve the residual accounting issues.
After the Interim Award, Errol retained new solicitors. The new solicitors retained another accountant. In August 2021, the new accountant provided a report which concluded that the partnership accounts were fundamentally erroneous and had to be completely redone. Errol's existing accountant advised Malcolm and Michelle's accountant that he was reluctant to conclude their conclave because he was "awaiting another accountant's report" (i.e. the new accountant's report). Upon being apprised of this, the arbitrator directed that only the existing accountants confer. Errol's new solicitors protested. They stated that they did not intend to submit any report from the new accountant but instead proposed to introduce it into the conclave by having the new accountant brief the existing accountant. No application was made to amend the statement filed under s 23(1) of the Arbitration Act. The arbitrator then purported to direct that "no other third party or intermediary (accountant or other) [was] to interpose, liaise with, report to, or make contact with either of the [existing] Accountants". As events transpired, the new accountant's report was provided to his existing accountant but in the conclave the latter confined himself to resolving the existing accounting issues in dispute based on the partnership accounts.
On 28 January 2022, the arbitrator issued his final award which determined the dispute in a manner consistent with the report produced by the existing accountants in their conclave (the Final Award).
Section 18 of the Arbitration Act provides that "each party must be given a reasonable opportunity of presenting [their] case". Subsection 19(1) provides that "the parties are free to agree on the procedure to be followed by the arbitral tribunal". Subsection 23(1) provides that, subject to contrary agreement or directions, an initiating party "must state the facts supporting his or her claim, the points at issue and the relief or remedy sought" and the responding party "must state [their] defence in respect of these particulars". Subsection 23(3) provides that, unless otherwise agreed, "either party may amend or supplement the party's claim or defence during the course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow such amendment having regard to the delay in making it".
The primary judge upheld Errol's challenge to the Final Award. Her Honour held that Errol was unable to present his case (s 34(2)(a)(ii)) and the Final Award was in conflict with public policy (s 34(2)(b)(ii)) in that Errol was unreasonably denied the opportunity to advance a new "case" based on the conclusions of the new accountant. Malcolm and Michelle sought leave to appeal the primary judge's decision. The principal issue on appeal was whether her Honour erred in so finding.
The Court held (per Beech-Jones JA, Leeming and Payne JJA agreeing), granting leave to appeal, allowing the appeal and setting aside the primary judge's orders:
The Commercial Arbitration Act 2010 (NSW)
The Arbitration Act only applies to "domestic commercial applications"; that is, arbitrations to which the "Model Law" does not apply and where the parties to the arbitration agreement have a place of business in Australia at the time they concluded that agreement and have agreed in writing to resolve their disputes by arbitration (ss 1(1)−(3)). The "Model Law" is the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration (s 2). The Model Law is given effect by the International Arbitration Act 1974 (Cth).
The Arbitration Act has two interpretative provisions. The first provides that the Arbitration Act must be interpreted (and the functions of an arbitral tribunal must be exercised) to ensure so far as practicable that the "paramount object" of the Act is achieved (s 1C(3)). The "paramount object" is the facilitation of the "fair and final resolution of commercial disputes by impartial arbitral tribunals without unnecessary delay or expense" (s 1C(1)). The Arbitration Act declares that this is sought to be achieved by "enabling parties to agree about how their commercial disputes are to be resolved" (subject to that agreement not subverting the paramount object and "such safeguards as are necessary in the public interest" (s 1C(2)(a))) and "providing arbitration procedures that enable commercial disputes to be resolved in a cost effective manner, informally and quickly" (s 1C(2)(b)).
The second interpretative provision confirms that the Arbitration Act supplements the Model Law. Subsection 2A(1) provides that, "[s]ubject to section 1C" which concerns the paramount object, in interpreting the Arbitration Act, "regard is to be had to the need to promote so far as practicable uniformity" between the application of the Act to domestic commercial arbitrations and the application of the provisions of the Model Law to international commercial arbitrations "and the observance of good faith."
Part 2 of the Arbitration Act concerns arbitration agreements. Part 3 concerns the composition of the arbitral tribunal. The parties may agree on the number of arbitrators but, failing agreement, the Arbitration Act provides that there shall only be one (s 10). The parties are also free to agree on the procedure for the appointment of an arbitrator but, failing agreement, the Arbitration Act provides a mechanism for appointment (s 11). In this case, the relevant partnership agreement provided for the parties to appoint one arbitrator each but, failing agreement, there was to be only one arbitrator who was to be appointed by the President of the Law Society.
Part 4 of the Arbitration Act deals with the jurisdiction of the arbitral tribunal. This part contemplates the arbitral tribunal deciding an objection to its jurisdiction as a "preliminary question" (s 16(7) and 16(8)). Subsection 16(4) provides that a plea that the arbitral tribunal does not have jurisdiction must be raised not later than the submission of the "statement of defence". Part 4A contemplates the arbitral tribunal ordering so-called "interim measures" such as measures to preserve the status quo pending the issue of an award or preserving assets of the parties or evidence (s 17(2)).
The inquiry posited by s 34(2)(b)(ii) is one that involves a consideration of whether there has been a "real practical injustice". A party's entitlement to a reasonable opportunity to present their case does not protect them from their own "strategic choices": [22]-[24], [105], [107] per Beech-Jones JA (Leeming JA agreeing at [1]; Payne JA agreeing at [2]).
TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361; [2014] FCAFC 83; Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2018] QCA 39, applied. Amasya Enterprises Pty Ltd v Asta Developments (Aust) Pty Ltd [2016] VSC 326; Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam (2003) 214 CLR 1; [2003] HCA 6, considered.
Subject to contrary agreement or direction, the documents under s 23(1) are significant to any identification of the "case" the parties wish to bring. The relative width of s 23(3) tells against the suggestion that a party's case is wider or fundamentally different to the documents filed under s 23(1). A reasonable opportunity to put a case includes a reasonable opportunity to seek to invoke s 23(3) to amend or supplement a party's case. However, it is difficult to accept that a party can be denied a reasonable opportunity to put a case available to them when they neither advert to that case in the documents filed under s 23(1) nor seek to invoke s 23(3): [94]-[95] per Beech-Jones JA (Leeming JA agreeing at [1]; Payne JA agreeing at [2]).
Errol's statement under s 23(1) and the parties' written submissions identified each party's "case" and the issues in dispute. Errol's case took as its premise the correctness of the partnership accounts and was fundamentally inconsistent with the approach asserted in the new accountant's report. Errol had the material available to make an application to amend his statement under s 23(1) but chose not to. The reasonable opportunity conferred by s 18 to present his case did not enable him to introduce the new accountant's report via an accounting conclave directed to resolving the issues in dispute, which were defined according to the statements filed under s 23(1): [105] per Beech-Jones JA (Leeming JA agreeing at [1]; Payne JA agreeing at [2]).
Part 5 of the Arbitration Act deals with the conduct of arbitral proceedings and is directed to achieving the paramount object. In so far as that object refers to the "fair" resolution of disputes, s 18 provides that "[t]he parties must be treated with equality and each party must be given a reasonable opportunity of presenting the party's case." Similarly, in terms of both empowering the parties to agree on the procedures to be followed and affording flexibility in relation to that procedure, s 19 provides:
19 Determination of rules of procedure
(1) Subject to the provisions of this Act, the parties are free to agree on the procedure to be followed by the arbitral tribunal in conducting the proceedings.
(2) Failing such agreement, the arbitral tribunal may, subject to the provisions of this Act, conduct the arbitration in such manner as it considers appropriate.
(3) The power conferred on the arbitral tribunal includes the power to determine the admissibility, relevance, materiality and weight of any evidence.
(4) The power conferred on the tribunal also includes the power to make orders or give directions for the examination of a party or witness on oath or affirmation.
(5) For the purposes of the exercise of the power referred to in subsection (4), the arbitral tribunal may administer any necessary oath or take any necessary affirmation.
(6) An order made or direction given by an arbitral tribunal in the course of arbitral proceedings is, by leave of the Court, enforceable in the same manner as if it were an order of the Court and, where leave is so given, judgment may be entered in terms of the order or direction.
Subsection 19(1) emphasises the significance given by the Arbitration Act to the agreement of the parties concerning the procedure to be followed. One consequence of that approach is the necessity for caution in allowing a party to withdraw from any such agreement, especially where it may affect the "effective… and quick" resolution of the arbitration (s 1C(2)(b)). The balance of s 19 affords to the arbitral tribunal the power to adopt flexible means of determining the dispute. Subsection 19(6) is one of several provisions that provide for curial enforcement of orders and awards of the arbitral tribunal (see also ss 17H, 17J, 27, 27A and 35(1)). Such provisions are necessary, especially so far as any such order or award might concern third parties who are not party to the arbitration agreement.
Leaving aside the two matters noted in [11], the Arbitration Act does not expressly contemplate the arbitral tribunal deciding a particular issue by way of making a binding determination prior to the making of the final award (and even the determinations noted in [11] are not binding). Equally, the Arbitration Act does not preclude that course and it is at least arguable that it is authorised by s 19(1) where the parties agree, as has occurred here. Even though an interim award was made in the present case, the issues raised on appeal do not require this Court to determine its status.
Within Pt 5 of the Arbitration Act, s 23 is of particular significance to the resolution of this appeal. It provides:
23 Statements of claim and defence (cf Model Law Art 23)
(1) Subject to any contrary agreement of the parties or a direction of the arbitral tribunal, within the period of time agreed by the parties or determined by the arbitral tribunal, the claimant must state the facts supporting his or her claim, the points at issue and the relief or remedy sought, and the respondent must state the respondent's defence in respect of these particulars, unless the parties have otherwise agreed as to the required elements of such statements.
(2) The parties may submit with their statements all documents they consider to be relevant or may add a reference to the documents or other evidence they will submit.
(3) Unless otherwise agreed by the parties, either party may amend or supplement the party's claim or defence during the course of the arbitral proceedings, unless the arbitral tribunal considers it inappropriate to allow such amendment having regard to the delay in making it.
(4) Subsection (1) does not require a statement by a claimant or respondent to be in a particular form.
The documents referred to in s 23(1) represent the form of "pleading" contemplated by the Arbitration Act. Other provisions refer to those documents as a statement of claim and statement of defence. As noted, s 16 refers to the making of an objection to jurisdiction no later than the filing of a "statement of defence" (s 16(4)). This is a reference to the document required to be filed by a respondent under s 23(1). Similarly, s 25(1) empowers the arbitral tribunal, absent agreement to the contrary, to terminate the proceedings if a claimant fails to communicate their "statement of claim" in accordance with s 23(1).
Similar to s 19, s 23 emphasises the scope for the parties to agree on the procedure that will be adopted in an arbitration. Equally, it also confirms that, absent agreement to the contrary, the paramount object is furthered by requiring parties to plead their case and thereby define the issues in dispute. In this case, there was no "contrary agreement" (or direction) within the meaning of s 25(1) (and the parties did not "otherwise agree" for the purposes of s 25(3)).
Subsection 25(3) appears to be fairly restrictive in terms of the circumstances in which an amendment to a pleading may be refused (cf Aon Risk Services Australia Limited v Australian National University (2009) 239 CLR 175; [2009] HCA 27). In turn, this appears to reflect an assessment that the paramount object is best served by making liberal allowance for the circumstances in which parties may amend their pleadings so as to facilitate the determination of all the real issues in dispute and enable the other party to know the case they have to meet. That said, the apparent width of the circumstances in which a party may amend only reinforces the significance the documents filed under s 23(1) play in defining the issues in dispute.
Part 6 of the Arbitration Act deals with the making of an award and termination of the arbitral proceedings. Subsection 32(1) provides that the arbitral proceedings are terminated by the "final award" (or the making of an order under s 32(2)). Section 33B empowers the arbitral tribunal to award costs, including directing by whom and to whom they shall be paid.
Part 7 deals with appeals against awards and applications to set awards aside. Part 8 deals with recognition and enforcement of awards. Within Part 7, s 34A(1) confers a limited right of appeal "on a question of law arising out of an award". There is no counterpart to this provision in the Model Law. Within Pt 8, s 35 makes an arbitral award binding between the parties and provides for its enforcement by the Supreme Court on application.
Section 34 deals with applications to set aside an award. It relevantly provides:
34 Application for setting aside as exclusive recourse against arbitral award (cf Model Law Art 34)
(1) Recourse to the Court against an arbitral award may be made only by an application for setting aside in accordance with subsections (2) and (3) or by an appeal under section 34A. (note omitted)
(2) An arbitral award may be set aside by the Court only if:
(a) the party making the application furnishes proof that:
(i) … or
(ii) the party making the application was not given proper notice of the appointment of an arbitral tribunal or of the arbitral proceedings or was otherwise unable to present the party's case, or
(iii) ... or
(iv) … or
(b) the Court finds that:
(i) the subject-matter of the dispute is not capable of settlement by arbitration under the law of this State, or
(ii) the award is in conflict with the public policy of this State." (emphasis added)
Subsection 34(2)(a)(ii) enables the setting aside of an arbitral award if the "party making the application was … otherwise unable to present the party's case". Although this provision is only directed to the "party making the application", it has a counterpart in Pt 8 in that s 36(1)(a)(ii) provides that recognition or enforcement of an arbitral award may be refused if "the party against whom the award is invoked was … otherwise unable to present the party's case". Moreover, authorities dealing with the Model Law have treated a material failure by an arbitral tribunal to comply with the equivalent obligation to s 18 as not only triggering s 34(2)(a)(ii) in relation to a party who is unable to present their case, but also rendering the award in conflict with the "public policy" of the State for the purposes of s 34(2)(b)(ii) (TCL Air Conditioner (Zhongshan) Co Ltd v Castel Electronics Pty Ltd (2014) 232 FCR 361; [2014] FCAFC 83 at [73]−[74]; "TCL Air Conditioner"; Colin Joss & Co Pty Ltd v Cube Furniture Pty Ltd [2015] NSWSC 735 at [44]).
In reference to the equivalents of ss 34 and 36 as found in the Model Law, Allsop CJ, Middleton and Foster JJ observed in TCL Air Conditioner that "[a]n international commercial arbitration award will not be set aside or denied recognition or enforcement… unless there is demonstrated real unfairness or real practical injustice in how the international litigation or dispute resolution was conducted or resolved, by reference to established principles of natural justice or procedural fairness" (at [55]; emphasis added). Their Honours added that this "real unfairness or real practical injustice will generally be able to be expressed, and demonstrated, with tolerable clarity and expedition" (ibid) and "real prejudice, actual or potential, would be a consideration in the evaluation of any unfairness or practical injustice" (at [111]). This aspect of TCL Air Conditioner has been followed in this Court in the context of an international arbitration under the Model Law (Aircraft Support Industries Pty Ltd v William Hare UAE LLC [2015] NSWCA 229; (2015) 298 FLR 183 at [42] per Bathurst CJ with whom Beazley P and Sackville AJA agreed).
These observations from TCL Air Conditioner were made in the context of the Model Law which, as noted, has no equivalent to s 34A. Nevertheless, they should be taken as authoritative with respect to ss 34(2)(a)(ii), 36(1)(a)(ii) and so much of 34(2)(b) that encompasses procedural complaints. The necessity to demonstrate "real practical injustice" enunciated in TCL Air Conditioner has been followed in the context of domestic arbitrations by the Queensland Court of Appeal (Mango Boulevard Pty Ltd v Mio Art Pty Ltd [2018] QCA 39 at [81]−[82] and [104] per Morrison JA with whom Fraser JA and McMurdo JA agreed; "Mango Boulevard") and at first instance in the Supreme Court of Victoria (Amasya Enterprises Pty Ltd v Asta Developments (Aust) Pty Ltd [2016] VSC 326 at [20] per Croft J).
TCL Air Conditioner's requirement for "real practical injustice" echoes the observation of Gleeson CJ that "[w]hether one talks in terms of procedural fairness or natural justice, the concern of the law is to avoid practical injustice" (Re Minister for Immigration and Multicultural and Indigenous Affairs; Ex parte Lam (2003) 214 CLR 1; [2003] HCA 6 at [37]). The admonition in TCL Air Conditioner for the injustice to be tolerably clear (and not involve a contested evaluation of a fact-finding process: [55]) does not mean that a close consideration of the procedural history of an arbitral dispute should not be undertaken. Instead, what should be avoided is using a procedural complaint of the kind envisaged by s 34(2)(a)(ii) as a basis to undertake a merits review of the arbitral tribunal's substantive decision. In any arbitral proceeding, "[w]hat is required in terms of a reasonable opportunity to present [a] case is a question of fact and degree, and it is not intended to protect a party from its own failures or strategic choices" (Mango Boulevard at [83]).