Plaintiffs v Defendants

Supreme Court of Victoria|2009-11-18|Before: HARGRAVE J

COMMERCIAL ARBITRATION - Application for leave to appeal - Arguable error of law concerning breach of warranty - Failure of applicant to establish any damages arising from any breach of warranty - Application for leave to appeal refused - Commercial and Arbitration Act 1984 (Vic) ss 38(4), (5).

1 The plaintiffs seek leave to appeal under s 38(4)(b) of the Commercial Arbitration Act 1984 ('the Act') against the interim and final arbitral awards of an arbitrator appointed to determine disputes arising under a business acquisition agreement made on 25 June 2008 ('the agreement'). The first plaintiff, Perth Freightlines Pty Ltd, was the purchaser under the agreement ('the purchaser').

2 The first defendant was the vendor under the agreement, and was the claimant in the arbitration ('the vendor'). Claims were made for the balance of the purchase price due under the agreement. The purchaser raised a number of defences and counterclaims.

3 Relevantly, the purchaser contended that, prior to completion of the sale, the vendor failed to disclose an arrangement under which certain cartage subcontractors, engaged by it in connection with the relevant business, had agreed to accept immediate payment of 96 per cent of their invoice amounts, in lieu of full payment within 30 days in accordance with the agreed terms of trading. I will refer to these arrangements as 'the upfront payment scheme'.

4 The purchaser claimed that it was entitled to set-off damages suffered by it arising from this non-disclosure. Three grounds were relied upon. First, because the vendor engaged in misleading or deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) by failing to disclose the existence of the upfront payment scheme. Second, because the vendor misrepresented that the upfront payment scheme was no longer in force. Third, because the nondisclosure constituted a breach of warranties given in the business acquisition agreement.

5 The arbitrator found that the existence of the upfront payment scheme had been disclosed to the purchaser in a number of different ways. Accordingly, the Trade Practices Act and misrepresentation claims were dismissed. No appeal is sought to be made against those findings of fact.

6 The arbitrator also dismissed the defences and counterclaims based on alleged breaches of warranty. The purchaser seeks leave to appeal against those aspects of the awards.

7 The applicable law is not in doubt. Section 38(4) of the Act provides that an appeal against an arbitral award may only be made with consent or with the leave of this Court. Under sub-s (5) this Court must not grant leave unless it considers that two matters have been established:

(a) that, having regard to all of the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement; and

(b) that there is a manifest error of law on the face of the award.

There is another alternative in (b) which is not relevant to the facts of this case.

8 It is clear that leave to appeal will only be granted in respect of an error of law which appears on the face of the relevant award. The relevant principles have been discussed in a number of cases and there is no dispute about them. In Anaconda Operations v. Fluor Australia Pty Ltd,[1] Dodds-Streeton J, as she then was, summarised the relevant principles in the following way:

It is well established that the legitimate role of the Court in applications for leave to appeal under s.38(5) of the Act is very circumscribed. The legislation restricts the court's jurisdiction to review arbitral awards in recognition of the importance of speedy finality in that context. Nevertheless, the power to review is enlivened by an obvious departure from settled principles of law. The basic principles relevant to the determination of an application for leave to appeal pursuant to s.38(5) of the Act were conveniently summarised by Debelle J in Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust as follows -

(1) there is no appeal from an arbitrator on a question of fact;

(2) while s.38 provides that an appeal shall be from the award of an arbitrator on a question of law, leave must nevertheless be obtained unless both parties consent to the appeal;

(3) leave will only be granted in circumstances prescribed in s.38(5);

(4) the applicant for leave must satisfy both para(a) and para(b) of 38(5);

(5) the epithet `manifest' in the expression `manifest error of law' is used to indicate an error which is evident or obvious rather than one which is arguable;

(6) if the court determines that there is no manifest error of law, an application based on this ground fails;

(7) if the court is satisfied that a manifest error of law exists, a question arises whether the court should, in the exercise of its discretion, grant leave; and

(8) assuming that there is not a manifest error of law on the face of the award, it may be argued that there is strong evidence that the arbitrator made an error of law and the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law. This requirement indicates that the question should be one of wider and greater importance than, for example, the construction of a one-off clause in the context of the particular agreement between the parties.[2]

9 The purchaser contends that the arbitrator erred in law because his determination that there was no breach of warranty was 'infected and affected' by an irrelevant consideration: that the purchaser's knowledge of the upfront payment scheme meant that the warranties in question were not breached.

10 In order to understand this contention, it is necessary to refer to the relevant terms of the business acquisition agreement. The relevant terms of the agreement are as follows:

(1) 'Accounts' are defined to include the vendor's accounts for the three years ending 30 June 2005, 2006 and 2007, together with the vendor's interim accounts for the six month period to 31 December 2007.

(4) The vendor agreed to provide the purchaser with full access to its books and records, and to assist in explaining those books and records if requested to do so.

(5) The vendor agreed that it would continue to manage and conduct its business in the ordinary and usual course until the Completion Date.

(6) The vendor gave certain warranties as at the Completion Date and agreed that those warranties would not be affected or limited in any way by information gathered by the purchaser, its advisers and representatives in the course of the due diligence process or otherwise. In this regard, the agreement also contained an entire agreement clause, which provided that the terms of the agreement superseded all prior conduct by the parties concerning the agreement.

11 The relevant warranties are set out in Schedule 7 to the business acquisition agreement. In argument, the focus was upon the warranties contained in Clauses 6.1 and 6.2, which relevantly provide:

6. Accounts

6.1 (Preparation) The Accounts (including the Interim Accounts):

(a) have been prepared in accordance with applicable laws and accounting standards;

...

(d) are not affected by any unusual or non-recurring item;

...

6.2 (Profits) The profits of the business shown in the Accounts ... and the trend of profits shown in those Accounts ... have not resulted to any material extent from:

(a) ...

(b) ...

(c) transactions entered into other than on normal commercial terms ...

12 It was first submitted that the accounts made no reference to the upfront payment scheme whatsoever. I accept that that is a correct statement. It was submitted that there was accordingly a breach of Clause 6.1(a) of Schedule 7 because the upfront payment scheme was operated through a related company with the profits going to that company and not to the vendor. It was submitted that this was a breach of the relevant accounting standards which were placed in evidence. I accept that it is arguable that this was a technical breach of Clause 6.1(a) of Schedule 7 in this respect. However, I note that this was not a matter which was pleaded or particularised before the arbitrator.

13 Second, it was contended that the upfront payment scheme affected the accounts, including the interim accounts, in an unusual manner. Until the form of the upfront payment scheme was altered, in or about September 2007, I do not accept that this was the case. Until this time, the upfront payment scheme was part of the usual trading arrangements of the vendor's business and had been for some time.

14 Third, it was contended that the failure to disclose in the accounts that the upfront payment scheme was materially altered in September 2007 constituted a breach of clauses 6.1(b) and 6.2(c) of Schedule 7. In September 2007, the related party ceased to operate the upfront payment scheme. Thereafter, the upfront payment scheme was operated 'in house' by the vendor, who then became entitled to any profits arising from it and, in the first instance, became obligated to fund its operation pending realisation of those profits. In this regard also, and notwithstanding the purchaser's knowledge of the upfront payment scheme as found by the arbitrator, I accept that it is arguable that there was a technical breach of the warranties identified.

15 Notwithstanding that there are arguable technical breaches of the warranties, leave to appeal should not be given unless a finding of breach could substantially affect the rights of the parties. In my view, that is not the case.

16 In his interim award, the arbitrator made it plain that, even if a breach of warranty was established, he would nevertheless have found in favour of the vendor. This is because the damages case put forward by the purchaser was not established on any view of the facts.

17 In that regard, the arbitrator said in paragraph 78 of the interim award, in my view correctly, that:

The loss that would naturally flow, and this is a contractual claim, from the fact that money had to be injected into the business for a period of months, would be the cost of obtaining the added finance over the relevant period.

Despite the arbitrator making reference to this as the most likely loss early in the arbitration, at no stage was any exercise carried out to demonstrate the cost of providing the extra income. On any view, it would not be a large sum of money. But a greater loss is claimed.

19 Reasons were then given by the arbitrator as to why the greater loss claimed was not proved. There is nothing evidently or obviously wrong about those reasons which, in any event, involve wholly or substantially questions of fact and not law. The purchaser elected to pursue a particular damages claim in the face of strong indications by the arbitrator that the natural loss flowing from any breach of warranty was of a more limited amount. The arbitrator found, as a matter of fact, that no basis of damage was proved, including as to the more limited amount. In these circumstances, notwithstanding my view that there were arguable (albeit technical) breaches of the warranties, leave to appeal should be refused, and the defendants should be given leave to enforce the final award.

Arbitration Act 1984

At a glance

Court

Decision date

Before

Source

Judgment (32 paragraphs)

Parties

Legislation Cited (2)