McKensey v Hewitt

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1585/1995 McKENSEY v HEWITT JUDGMENT 1 His Honour: By notice of motion filed 6 November 2001, the plaintiffs sought an order that the defendant pay $5,000 to Stuart Cameron, on account of the costs of an arbitration between the plaintiffs and the defendant. 2 The parties once were partners in an accountancy firm. Their venture failed and litigation raged between them. This litigation was settled by what was called a Settlement Agreement of October 1997. In that agreement, the plaintiffs were called the "Continuing Partners" and the defendant and a Mr Nelson the "Retiring Partners." It was necessary to enforce that Settlement Agreement by way of specific performance proceedings. 3 The dispute that arose under clause 12 of the Settlement Agreement was referred to the arbitration of a Mr Stuart Cameron. 4 On 23 December 1999, Mr Cameron sent a fax to the plaintiffs' solicitors which, as far as is relevant, is as follows: "It is our office policy to receive $10,000 into our Trust account to proceed. Please forward a cheque." 5 On 14 August 2000, the plaintiffs' solicitors wrote to the defendant's solicitors: "Mr Cameron requires payment of $10,000 into his trust account in order to proceed with the arbitration. I suggest that we coordinate payment of our clients' respective half share of the above amount. Please therefore confirm within the next 7 days that you have obtained a cheque from your client in the amount of $5,000 made payable to Court & Co's trust account. I will do likewise." 6 On 22 August 2000, the defendant's solicitors replied that they objected to the apparent fact that the arbitrator had been in contact with one side alone in private communication. They indicated that until they were assured that Mr Cameron was independent and they had copies of all correspondence between the plaintiffs' solicitors and the arbitrator, they did not propose to respond to the earlier correspondence. 7 In March 2001, the plaintiffs' solicitors and the arbitrator told the defendant's solicitors that there was no other correspondence between them. The defendant's solicitors indicated that they would require a direction from the arbitrator to them before a payment would be considered. 8 On 16 March 2001, the defendant's solicitors indicated that their client would pay one-ninth of the amount being sought by the arbitrator. The basis for this was that the defendant held a 10% share in the original partnership, but as Mr Nelson who also held a 10% share was an undischarged bankrupt, the defendant accepted a liability to pay one-ninth. 9 On 20 March 2001, the arbitrator wrote to the plaintiffs' solicitors: "As you are aware, we are not prepared to commence the Arbitration unless there is $10,000 in our Trust Account, $5,000 from your side and $5,000 from the other side. Would you please liaise with Hansens, (the defendant's solicitors), or alternatively, come up with the funds so I may commence my Arbitration." 10 The plaintiffs provided a cheque for $5,000 to the arbitrator on 22 March 2001. The covering letter concluded, "please exercise your powers as Arbitrator to direct the Defendants to pay the remaining $5,000.00." 11 On 26 March 2001, the defendant's solicitors wrote to the arbitrator confirming that their client was prepared to pay $1111.11 or perhaps $2,500, but not $5,000. They continued: "We are dismayed that you continue to write directly to Mr Matthew Smith to the exclusion of this firm in circumstances where such concerns were raised with you in our correspondence of 13 September, 2000. Such conduct gives rise to an apprehension of bias." 12 On 4 June 2001, the plaintiffs' solicitors wrote to the arbitrator pointing out that the Settlement Agreement provided in clause 26 that "The cost of the arbitrator will be paid by the parties as determined by the arbitrator." The letter continued, "We therefore request you make a determination on the issue of the Defendants' liability to make payment of the $5,000.00 on account of your costs." Later in the letter, the submission was made that this was the only proper determination that could be made as the defendant was jointly and severally liable for the costs. 13 On 5 June 2001, the defendant's solicitors wrote to the arbitrator that the assertion that the defendant was jointly and severally liable was "manifestly incorrect." 14 After further correspondence to which it is not necessary to refer, the arbitrator wrote to the plaintiffs' solicitors on 8 June 2001 that he would not, as a matter of sheer commercial necessity commence the arbitration until he had received the additional $5,000. 15 The plaintiffs' solicitors wrote to the arbitrator, with a copy to the defendant's solicitors on 14 June, saying that he must have misunderstood the situation. They repeated their request for the arbitrator to determine the preliminary question that had arisen as to the responsibility to pay the security for costs he had sought. 16 On 15 June 2001, the arbitrator wrote to the plaintiffs' solicitor, the following letter: "Thank you for your letter of 14 June 2001. Coming from your letter, we seek to make a determination on the issue of the defendant's liability that they are to make a payment of $5,000 on the account of our costs. While this may not be the total costs in relation to our proposed work, the defendants should at least pay $5,000 on account. As suggested in your letter, would you approach the court for enforcement of our determination as Mr Hewitt has yet to make the requested payment. Indeed, upon receipt of the above $5,000 we can then progress the arbitration. If you have any questions to the above, please contact me." 17 The plaintiffs' solicitors forwarded a copy of this letter to the defendant's solicitors on 19 June 2001. 18 On 21 September 2001, the defendant's solicitors wrote to the arbitrator to the effect that in a case where it was relatively clear that the maximum liability of the defendant was $7,028.24, it was an incorrect use of his powers to require a fee of $10,000 and that, in any event, he had misconstrued the Settlement Agreement that costs were to be borne in proportion to the former partners' interest in the partnership. 19 The arbitrator did not reply to this letter. On 6 November 2001, the plaintiffs filed the present motion. 20 The motion came on before me as Duty Judge on 11 December 2001. I did not consider that the submissions made on that occasion covered the field that needed to be explored. As Duty Judge at the end of term, I did not have time to do the research myself. I thus stood the matter over until today with directions that the plaintiffs might put in further written submissions by 29 January 2002 and the defendant by 14 February 2002. 21 The plaintiffs' solicitors, rather than their counsel sent submissions by the due date. There was no response by the defendant. 22 The submissions, with respect, did not deal with all the aspects uncovered at the hearing in December. However, it is clear that I need to deal with them in order to see if this long running case, apparently now only involving $7,000, can be finalized. 23 The points that arise for decision are: (1) Did the arbitrator make any determination with respect to costs, and, if so, what determination? (2) Has the arbitrator power to order security for his own costs or order payment of his costs in advance? (3) Was the arbitrator's determination of the liability for costs fatally flawed? (4) Should the determination of 15 June 2001 be enforced? (5) Should the court itself make an order as to costs? (6) What orders should be made on the plaintiffs' motion? 24 The first point is an awkward one because of the rather bizarre way the arbitrator has acted. He keeps writing only to the plaintiffs' solicitors despite the defendant's solicitors' protest. He originally "requested" $10,000 to be lodged in his trust account. He never indicated that he was to be at liberty to transfer that sum or any part of it from his trust account to his office account and if there was to be such a transfer, when it would occur. He persistently ignored letters asking him to determine the matter of costs and, when, he finally made what the plaintiffs call a determination, he made it in the most obscure terms. 25 The so called determination seems to ignore the submissions made to the arbitrator on both sides. As noted above, his determination is phrased in a way that is scarcely comprehensible viz, "Coming from your letter, we seek to make a determination on the issue of the defendant's liability that they are to make a payment of $5,000 on the account of our costs". Apart from minor matters such as the "our" and "defendant's", and the phrase "Coming from your letter", this "determination" has not addressed the question in what proportion the parties should give security for costs. The "determination" has shifted the ground from security for costs to be held in a trust account to an outright payment in advance of costs. 26 If the "determination" were made by a judicial officer, it would be set aside as a complete failure to carry out the task set before him or her. However, a lesser standard is required of arbitrators. If the court possibly can construe the determination in accordance with commonsense, and divine the real intention of the arbitrator, then the determination should be accepted; see eg Larrinaga & Co v Societe Franco-Americaine des Phosphates de Medulla Paris (1922) 10 Ll L Rep 254, 262. 27 It is to be noted that the defendant has never alleged that the so called determination is void for uncertainty, void for a blind following of the plaintiffs' solicitors' letter without independent thought, bad for deciding the wrong question or otherwise vitiated. Thus, assuming there is power, the determination should be accepted. 28 Point 2 must now be considered. The Settlement Agreement provided in the last sentence of clause 26 that "The cost of the arbitrator will be paid by the parties as determined by the arbitrator." Section 34(1) of the Commercial Arbitration Act 1984 provides that: "Unless a contrary intention is expressed in the arbitration agreement, the costs of the arbitration (including the fees and expenses of the arbitrator …) shall be in the discretion of the arbitrator …". 29 The law clearly is that an arbitrator has no power to order security for costs unless the arbitration agreement confers that power: Re Unione Stearinerie Lanza and Wiener [1917] 2 KB 558; Holman v Dynabuild Pty Ltd [1975] 2 NSWLR 334; Bremer Vulkan Schiffbau Und Maschinenfabrik v South India Shipping Corp Ltd [1981] AC 909, 946. See also Mustill & Boyd, Commercial Arbitration, 2nd ed (Butterworths, London, 1989) at p 335. 30 The English 1996 Act has now changed the position. However, no corresponding change has been made to the local law. 31 Accordingly, it was beyond power for the arbitrator to insist on a payment of $10,000 to be made into his trust account in order to provide security for his own costs. 32 This appears to be what the arbitrator was attempting to do in his determination of 15 June 2001. However, it may be that he was making a demand for a commitment fee or was making an order for costs in advance. 33 If he was seeking a commitment fee, again, the law is clear that he has no power to do so except by consent or unless there is an agreement to pay the fee in the arbitration agreement: K/S Norjarl A/S v Hyundai Heavy Industries Co Ltd [1992] QB 863, 876 and 885; Turner v Stevenage BC [1998] Ch 28, 36-7. 34 An arbitrator has, under s 34(1) of the Commercial Arbitration Act 1984, a power virtually the same as that exercised by a Judge of this court under section 76 of the Supreme Court Act 1970. 35 It is now clear that a Supreme Court Judge under s 76 can, in limited circumstances, make an order for costs in advance: see Berkett v Cave [2001] 1 NZLR 667, 670; Bonnyrigg Turkish Islamic Cultural Association v Abdullah [2002] NSWSC 100. This power would appear to be possessed by arbitrators as well. 36 However, none of the factors mentioned in those two cases or the authorities discussed in them were present in the present case. Nor were any of those factors mentioned to the arbitrator. Accordingly I cannot see how the determination can be upheld under this limited power. 37 It follows that the arbitrator had no power to make his determination. 38 Points 3 and 4 can thus be dealt with quickly, as the arbitrator had no power, his determination cannot stand nor can it be enforced. 39 I now turn to point 5. The following passage appears in the plaintiffs' solicitors written submissions of 25 January 2002: "If it is held that the Arbitrator lacked the power to make the direction on 15 June 2001 … the Plaintiffs submit that section 47 of the Act [the Commercial Arbitration Act] invests the Court with jurisdiction to order the Defendant to do so, and should exercise that power having regard to all the circumstances. To this extent, the Plaintiffs seek leave to amend their notice of motion to seek an order that the Defendant pay $5,000 on account of the Arbitrator's costs of the arbitration." 40 There is no doubt that this Court has power under s 47 to make interlocutory orders where arbitration proceedings are on foot and the Act does not specifically provide for such an interlocutory order: Commonwealth of Australia v Cockatoo Dockyard Pty Ltd (1995) 36 NSWLR 662, 671. The section enables the court to order security for costs in an arbitration; see eg Nasic v Dimovski [1988] VR 94; Victoria v Seal Rocks Victoria (Australia) Pty Ltd [2001] VSCA 94 at para [9]. 41 The first question is whether the plaintiffs should be permitted to amend their notice of motion. The defendant did not file any submission by 14 February as directed. I can thus assume that there is nothing that his counsel wished to put against the application. Moreover, in the light of the command in s 63 of the Supreme Court Act that all allied disputes between parties should be considered together, I should grant the amendment. 42 The next question is whether I should make such an order for security for costs. 43 There seems little dispute between the parties that the arbitrator's point of view that he would not do any work for these parties without security was a reasonable one. The real difficulty is that the arbitrator should have made this stipulation before his appointment, not afterwards. The sticking points are whether $10,000 is too high an amount of security when one considers the relatively small ambit of the dispute and the small amount of money involved and the proportion in which the parties should contribute to the security. 44 As to the first matter, the defendant's solicitors in correspondence merely express a concern that the costs of the arbitration may well exceed the sum claimed. So they might: arbitration is usually a very expensive process indeed. However, that is no reason why the arbitrator should not be paid for work legitimately performed during the arbitration. 45 On the material before me, there seems no reason to choose as security any sum other than the $10,000 requested by the arbitrator. 46 The costs of dissolution of a partnership normally come out of the partnership assets and so are borne in proportion to the partners' shares in those assets. The defendant says that this principle flows through to the Settlement Agreement as can be seen by clauses 10 and 16 thereof. Thus, he argues, he should only be required to deposit $1,111.11. 47 The plaintiffs say that such a basis would be unfair as the accounting exercise to be performed by the arbitrator involves determining the amount of the defendant's liability to reimburse the plaintiffs. Although they do not directly say so, the plaintiffs' principal assertion is that there are two parties to the dispute being arbitrated, namely the plaintiffs and the defendant and that each side of the dispute should make an equal contribution to the arbitrator's fees. 48 Both arguments have their attractions. However, when one thinks about it a little more deeply, both arguments are irrelevant. 49 We are here dealing not with the relations of the parties inter se, but with the rights of the arbitrator against the parties. The arbitrator wishes to secure himself from the possibility of the parties reneging on payment of his fees. 50 Unless there is some special provision in the arbitration agreement, the parties are jointly liable to the arbitrator for his fees: Crampton & Holt v Ridley & Co (1887) 20 QBD 48, 54. Most modern lawyers adopt the amended rule stated by Mustill & Boyd op cit p 235, footnote 13 that their liability is joint and several. I so hold. 51 At the conclusion of the hearing, it would be open to the arbitrator to direct that his costs be wholly borne by one party or another. However, that stage has not been reached and the court in considering security for costs needs to act on the default rule noted above. 52 Thus each of the parties, that is, the three plaintiffs and the defendant have a co-ordinate liability to pay the arbitrator his $10,000 with an equitable right of contribution inter se. 53 At least as a general rule, if not an invariable rule (see Bailkower v Acohs Pty Ltd (1998) 83 FCR 1, but cf Hampic Pty Ltd v Adams (1999) 22 ATPR 41-737 at p 40,553 (CA) per Mason P), equity applies the rule "equality is equity'" to cases of contribution. 54 The expression "equality is equity" does not mean mathematical equality, but proportional equality: Steel v Dixon (1881) 17 Ch D 825, 830; In re Steel [1979] Ch 218, 226; Bailkower v Acohs Pty Ltd (1998) 83 FCR 1, 13. 55 Thus, in Burke v LFOT Pty Ltd (2000) 178 ALR 161, where X and Y on the one hand were liable for a loss of $750,000 and Z on the other hand was also liable, Z was ordered to contribute $375,000 to X and Y. 56 What then is the proportional equality? Is it (a) 75% for the plaintiffs and 25% to the defendant as there are three plaintiffs and one defendant? or (b) 50% each on the basis that there is one set of plaintiffs and one set of defendants; or (c) 88.8% to the plaintiffs as they are entitled to that percentage of the assets and 11.1% to the defendant? 57 In my view, on analogy with Burke's case, scenario (b) is the correct method of approaching the matter. 58 Point 6. I must now draw all this together and make a decision on the motion. 59 In view of what I have said, I should order that the defendant pay to the arbitrator the sum of $5,000 as his half of the security for costs required, on the basis that that sum, together with the same sum already paid by the plaintiffs be retained in the arbitrator's firm's trust account (or, if the parties so consent, placed at interest in the name of the arbitrator) pending further order of the arbitrator. 60 The plaintiffs have thus succeeded in obtaining the result they wished from the motion. However, they lost their primary arguments and only succeeded on the late amendment. The defendant has throughout adopted a fairly minor role in any debate. Neither side gave the court much assistance in making this decision: most of the research had to be done myself. 61 The plaintiffs seek indemnity costs. They point to the persistent failure of the defendant to participate wholeheartedly in the arbitration and also point to s 37 of the Commercial Arbitration Act 1984 which imposes a statutory duty on all parties to the arbitration not to delay the making of an award. 62 The case is not, to my mind, one for indemnity costs. The plaintiffs themselves delayed quite considerably in the early stages of the arbitration seemingly because their principal solicitor was on extended leave. The one-sided dealings with the arbitrator did not impress me and considerable ineptitude was shown generally in getting the dispute processed to the stage where the court could consider it. The defendant may have been tardy, but his legitimate protests and arguable case appear just to have been ignored. 63 In these circumstances, what order for costs should be made on the motion? Doing the best I can, I consider that the defendant should pay 40% of the plaintiffs' costs of the motion. Those costs may be assessed and paid forthwith. I have fixed 40% as approximately half way between one third and one half. 64 It is not current policy just to leave a court file open where the proceedings have not been finally determined. The court will expect the parties to inform the court once all matters have been finalised. This can be done by letter to the Registrar. If no such letter is received, the matter will be listed before the registrar for mention and report on 8 November 2002. It is wise also to give liberty to apply. 65 After the above was written and about to be printed and on 7 March 2002 at 10 am, a two page submission was received from counsel for the defendant. It is not the practice of the Court to consider submissions made after the date limited by the Court's order. 66 However, it is alleged by the defendant that he was not served with the submissions that the plaintiffs had made to me on 25 January until 22 February. I have not been able to investigate the truth of this allegation, but it is a gross breach of procedure if it occurred as no party is to communicate with a Judge unless the opponent is given a copy of the communications, usually in advance. 67 Thus, I have taken account of the additional submissions. I do not consider, however, that anything in them makes me change any of the above save that I should make an additional comment about [41]. 68 With respect, the additional submissions are devoid of any reference to any of the authority which I have discovered and with the exception mentioned in the next paragraph, really go no further than to repeat the defendant's basic submissions. 69 The exception is that there is no reference in the further submissions to any opposition to the plaintiffs having leave to amend the notice of motion by seeking, in the alternative, an order under s 47 of the Commercial Arbitration Act. The submission merely is that either the Court has no jurisdiction to make such an order, or alternatively, in its discretion, it should not make such an order. I have already dealt with this in what I have written. 70 Thus, I make the following orders:

Leave to the plaintiffs to amend the notice of motion filed 6 November 2001 by adding: "3. That the Court order the defendant to provide security for costs in respect of the arbitration now pending between the parties as ordered in these proceedings."

Such amended notice of motion is to be filed no later than 4 pm on the day following the publication of these reasons.

Make order 3 in amended notice of motion adding "in the sum of five thousand dollars".

Note that the amount referred to in order 2 and the additional $5,000 already provided by the plaintiffs is to be held by the arbitrator in his firm's trust account or such other account as the parties may agree pending further order of the arbitrator.

Order that the defendant pay the plaintiffs 40% of their costs of the said motion.

Order that the proceedings be listed for mention before the Registrar on 8 November 2002.

Liberty to apply to the Registrar on 5 days' notice. **********

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