18
THE SUPREME COURT
No 317/2003
Murray C.J.
Geoghegan J.
Fennelly J.
BETWEENJohn McCarthy Plaintiff/Applicantand
Enda Keane,
Eireann International Finance Brokers Limited,
Warrantell Limited and Des Peelo Defendants/Respondents
JUDGMENT delivered on the 16th day of December, 2004 by FENNELLY J.
The fourth-named respondent (hereinafter “the arbitrator”) made an award determining the price of the Appellant’s shareholding in the second-named respondent (hereinafter “the company”). The Appellant alleges misconduct by the arbitrator and seeks to have the award set aside and to have the arbitrator removed pursuant to sections 37 and 38 of the Arbitration Act, 1954. (hereinafter “the 1954 Act”). Alternatively, he seeks to have the reward remitted to the arbitrator pursuant to section 36 of the Act. His claim was dismissed by Lavan J in the High Court and he now appeals to this court.
The Facts
The Appellant acquired a 39% shareholding in the company in about 1998. The first-named respondent (hereinafter “the Respondent”) was already a shareholder. At that time and up to the commencement of the section 205 proceedings to be described below, the Respondent held 59% of the shares; the remaining 2% were held by a person who is not a party to the proceedings. The Appellant also held shares in a number of associated companies.
In the year 2000, the Appellant instituted proceedings in the High Court in which he alleged that the Respondent was conducting the affairs of the company in a manner oppressive of him and in disregard of his interests. He also alleged that the company had been operated as a quasi-partnership. The proceedings were brought by way of Petition pursuant to section 205 of the Companies Act, 1963.
When those proceedings came on for hearing before McCracken J in the High Court, the parties reached a settlement, which is comprised in three documents.
Firstly, the Court made an order reciting that the settlement had been reduced to writing in the form of a consent executed by the parties. The order went on to provide that the consent be received and filed and that the proceedings be stayed except as might be necessary for enforcing the agreement. It then stated that:
“…pursuant to Section 205 of the Companies Act 1963 Warrantell Limited shall purchase the shareholding of the Petitioner [the Appellant ] in [the company] in the manner set forth in the said consent.” The consent began by stating that, since the institution of the proceedings, the Respondent had transferred his shareholding in the company to Warrantell Limited (hereinafter “Warrantell”). It was agreed that Warrantell would be joined as a party to the proceedings. This device appears to have been adopted by reason of concern that there might be a breach of section 31 of the Companies Act 1990, but the Court has not been asked to enter into that aspect of the matter.
The key provision of the consent was that Warrantell was “subject to an order of …[the] Court made pursuant to Section 205 of the Companies Act 1963 [to] purchase the shareholding of [the Appellant] in [the company]...” “and the associated companies….”
The parties agreed to the appointment of the arbitrator, by name, though originally he was to be “the Accountant.” The consent provided:
“The Accountant shall value [the Appellant’s] shareholding in the said companies on the basis of a willing seller and a willing purchaser and as so doing shall act as an expert and not as an arbitrator. Account shall be taken of … the sums due and owing by [the Appellant] and [the Respondent] by way of director’s loans to the companies. The valuation date shall be 21st July 2000.”
The parties later agreed that the fourth-named respondent would act as an arbitrator with the powers conferred by the 1954 Act. I have treated the consent as if that word were substituted for Accountant.
The consent provided that the parties should “exchange and submit to [the arbitrator] written submissions in relation to all issues arising on the said valuation….” While the consent also fixed times for this and other matters, it allowed that the arbitrator “at his sole discretion……. [should] be at liberty to extend the time limits….” No issue is taken with the performance by the arbitrator of this function. The consent also provided for the convening of a meeting or meetings “for the purpose of hearing oral submissions…” The parties were to furnish to the arbitrator by return any information sought by him. It provided also that “without fourteen days of the date of the meeting convened for the purpose of hearing oral submissions [the arbitrator]… [should]… publish his determination as to the value of [the Appellant’s] shareholding in the said companies.” It then provided: “The said determination shall be final and binding on the parties.”
Following detailed consequential provisions for giving effect to the determination by means of the purchase by Warrantell of the Appellant’s shareholding and the payment of the purchase price, the consent went on to state:
“This agreement is confidential to the parties and their advisors and its terms shall not be disclosed by the parties, their servants or agents save as may be required by law or Court order. In particular, there shall be no disclosure of its terms to [the arbitrator].”
The third relevant document, signed by the Appellant and the Respondent, is a side agreement as follows:
“I, John McCarthy hereby agree that when making submissions to [the arbitrator] regarding the valuation of my shareholding……no reliance will be placed by me on or my behalf upon the fact that the High Court may have made an order pursuant to Section 205 of the Companies Act 1963. I reserve the right however, in so far as it may be relevant, to point to the fact that the purchase of my shareholding in the said companies has been made in the context of Section 205 proceedings instituted by me.”
The solicitors for the Appellant and the Respondent on 25th and 26th October 2000 wrote to the arbitrator in virtually identical terms. The opening paragraph of the letters differs only in so far as necessary for the solicitors to identify their respective clients. Notably, neither letter mentions Warrantell, which, as stated above, now owned the Respondent’s former shareholding in the company. In fact each letter inaccurately ascribes this shareholding to the Respondent. These letters contain the terms of reference of the arbitrator, since, according to its terms, he was not to see the consent. The crucial paragraph read as follows:
“It has been agreed between the parties that Mr McCarthy shall dispose of his shares in the above companies. The purchase and sale of the shares is to be conducted on the basis of there being a willing purchaser and a willing seller ….”
It went on to deal with certain procedural matters based on the contents of the consent. These included a specification of the “valuation date” as 21st July 2000. This aspect of the matter presented some practical difficulties, which are indirectly related to one of the items in dispute. The consent had provided that the respondents were to have the accounts audited up to the valuation date by one of a number of named firms of auditors.
The arbitrator accepted the assignment and proceeded immediately to propose a timetable for the exchange of submissions and meetings. The original timetable turned out to be too ambitious. Procedural disputes developed between the parties, particularly about the Appellant’s solicitors’ demands for extensive documents and information from the Respondent and the company and the response that the Appellant had been the Finance Director of the company and was privy to most of the information in any event.
Whatever the rights and wrongs of these disputes, the arbitrator extended times and regulated procedures. Matters dragged on throughout 2001.
Only two of these procedural disputes are now relevant.
Firstly, the Respondent’s original written submissions to the arbitrator were accompanied by a report from Price Waterhouse Coopers (hereinafter “PWC”). A covering letter explained that neither PWC nor any other firm had been able to prepare a report on the Balance Sheet at the relevant date. These submissions were not sent to the solicitors for the Appellant. It had been envisaged that submissions would be exchanged.
The Appellant’s solicitors insisted that there be audited accounts up to 21st July 2000, as provided in the consent and expressly included in the terms of reference of the arbitrator and refused to accept the PWC report as satisfying the requirements of an audit.
Deloitte and Touche prepared a report and accounts. The Respondent’s solicitors sent a copy to the arbitrator and stated that they intended to update the submissions already made. They formally withdrew the earlier submissions and promised new submissions by a date, which they did not meet, but it was later extended.
On 4th December 2001, the arbitrator sent the parties a new note of procedures to be followed. He stated that all existing submissions were to be disregarded and that new submissions were to be made by 14th December and that he would exchange these forthwith. The Respondent’s submissions though late, were received by the arbitrator within a final extended period up to 18th January 2002.
The Appellant’s solicitors said that they expected that their own original submission prepared by BDO Simpson Xavier should be included. More importantly, they demanded - and this has become one of their grounds of complaint - that the original submissions of the opposing party would be included as there would be “…essential comparisons to make between it and their present submission…” This point has been repeatedly made in various forms. The arbitrator declined this request, responding that he was “not concerned with earlier submissions if they are not part of the final submission.” However, it should be noted that the Appellant was provided with a copy of the PWC report itself. They were deprived only of the Respondent’s original submissions, which had been withdrawn.
Secondly, the arbitrator ruled that the parties should make submissions, which would be exchanged. He made no provision for either party to submit a rejoinder, which also became a bone of contention in due course.
The oral hearing took place on 21st February 2002. Both parties were represented by Senior Counsel.
Apart from the two procedural matters already mentioned, the Appellant claims that the arbitrator misconducted himself by making certain rulings concerning the basis of the arbitration. His task was to value the Appellant’s 39% shareholding in the company. A minority shareholding may attract a significantly lower than proportionate valuation. Hence, the precise terms of reference of the arbitrator may be crucial to the basis of valuation.
The arbitrator stated his understanding, at the outset that the “valuation [was] to be determined on the basis of a willing seller and willing purchaser.” He said that he had “no role or function as to the circumstances that arose in the valuation being pursued.” This was to be described, not necessarily accurately, as an “open market valuation.” Mr Michael Cush, Senior Counsel, who represented the Appellant at the arbitration, expressed fundamental disagreement with this approach. He proposed to call evidence to show that the company had been run as a “quasi partnership.” Mr Shipsey, Senior Counsel for the Respondent, opposed the calling of such evidence. He said that the terms of reference were clear and limited to valuing a 39% stake in a series of companies on the basis of a willing purchaser. He also said that the valuation was to be on the basis of a willing vendor and a willing purchaser, not a specific vendor and purchaser. Mr Cush, in response, accepted that the arbitrator was not being asked to find oppression, but argued that whether or not here was a quasi partnership was relevant in determining whether there should be a discount for a minority shareholding.
Having heard these arguments, the arbitrator repeated his opening rulings and added that he was “not prepared to get involved in any way in the background or circumstances that led up to [the litigation] in any shape or form.” He ruled that he was not concerned with the identity of either vendor or purchaser.
The other complaint concerning the arbitration was more procedural. The Respondent’s solicitors sent to the arbitrator, but not to the Appellant’s solicitors a document purporting to be a rejoinder to the Appellant’s submission. As already stated, such a pleading was not provided for in the procedures adopted by the arbitrator. At the opening of the hearing the arbitrator referred to a letter dated 8th February which he had received from the Respondent’s solicitors, stating that he would refer to it later. He suggested two different ways of dealing with this letter. One was by a short adjournment after the opening statements. The other was to simply read it into the record as part of the oral submissions, as it was a response to the submission that had been made by the other side. He said that he had copies, but he did not make them available at that stage. Nor, however, was he asked to provide copies after he had asked for comments on the procedure. In fact, he adopted the second procedure.
Having concluded the oral hearing, the arbitrator adjourned to prepare his award. On 21st March 2002, the solicitors for the Appellant wrote by fax to the arbitrator. In a lengthy letter, they argued that the arbitrator had misinterpreted his terms of reference on the issue of the correct basis of valuation. They said that this was a matter on “which a full argument should be had before any decision [was] reached. The letter suggested at several points that the arbitrator might find himself in contempt of the court order, “albeit unintentionally.” They suggested that the arbitrator reconvene the arbitration “for the purpose of hearing argument as to the appropriate method of valuation.” The letter ended by asking the arbitrator to “withhold reaching a final determination …… to give [their] client not less than fourteen days notice if you intend to deliver your decision so that they [sic] may take such proceedings as are necessary….”
By a return fax letter of the same day, the arbitrator objected that it was “wholly inappropriate and indeed totally wrong that any party should make contact of any nature with the arbitrator on the matters in issue.” He said that his award had been completed on 18th March, but that the fax had arrived before its issue. After brief reference to his terms of reference, he stated that he would defer issuing his award until mid-day on Friday 12th April, a period in excess of the fourteen days which had been requested. The letter concluded:
“If you wish to make an application to the High Court in the matter, you should do so before 12 April ’02. In the alternative, you can withdraw your faxed letter of 21 March.”
The solicitors for the Appellant, in a fax letter of 25th March, stated: “Having taken my client’s instructions he has indicated that we are prepared to take up the award on his behalf.” The letter indicated that the Appellant was reserving his rights, but stated that there was no need to defer the issue of the award. By letter of 28th March 2002, the arbitrator communicated his award to the parties.
Misconduct
The Appellant has made the following complaints of alleged misconduct against the arbitrator, arising from these events. The two procedural complaints are set out above. The substantive complaint relates to the approach to valuation adopted by the arbitrator and has concentrated on different aspects of the rulings. The following represents the way in which these complaints were presented at the hearing of the appeal.
1. The arbitrator wrongly decided that he was deemed not to know the identity of the vendor and the purchaser without hearing adequate submissions entitling him to reach that conclusion;2. The arbitrator wrongly ruled out consideration of the terms of the Court order (exclusive of the Consent); 3. The arbitrator ruled out evidence on the issue of quasi partnership or the appropriateness of a minority discount;4. The arbitrator failed to provide the Appellant with the original submissions of the Appellant as based on the PWC report;5. The arbitrator wrongly permitted the Respondent to introduce the rejoinder document of 8th February 2002, in particular by ruling on the matter before the letter was read at the hearing.
In addition to alleging misconduct, the Appellant asks that the Court remit the award to the arbitrator pursuant to section 36 of the Arbitration Act, 1954.
All of these complaints were dismissed by Lavan J in a careful written judgment. The learned judge summarised the submissions of the parties and concluded that there was no basis for interference with the award. He held that the arbitrator had conducted himself correctly within the terms of his appointment.
Legal Principles
The Appellant relies on the provisions of the Arbitration Act 1954 in seeking to have the arbitrator removed and his award set aside.
Section 36(1) provides as follows:
“In all cases of reference to arbitration, the Court may from time to time remit the matters referred or any of them to the reconsideration of the arbitrator or umpire.”
Section 37 reads:
“Where, an arbitrator or umpire has misconducted himself or the proceedings, the Court may remove him.”
Section 38(1) provides:“Where—
(a) an arbitrator or umpire has misconducted himself or the proceedings, or
(b) an arbitration or award has been improperly procured, the Court may set the award aside.”
As counsel for the Appellant has submitted, the notion of misconduct does not connote moral turpitude. He says that his client had been procedurally disadvantaged by the rulings of the arbitrator and that this would suffice. Atkin J in Williams v Wallis and Cox [1914] 2 KB 478, at page 484 spoke of the meaning of the expression:
“That expression does not necessarily involve personal turpitude on the part of the arbitrator, and any such suggestion has been expressly disclaimed in this case. The term does not really amount to much more than such a mishandling of the arbitration as is likely to amount to some substantial miscarriage of justice, and one instance that may be given is where the arbitrator refuses to hear evidence upon a material issue.”
Not surprisingly, cases in which arbitral awards have been set aside for misconduct are few and far between. We can leave aside obvious or extreme cases of financial misbehaviour or personal misconduct, such as simple neglect by the arbitrator to perform his task. Real cases of misconduct may arise in the conduct of the arbitration, where the arbitrator acts unfairly either by clear acts of favouritism towards a party or adopts procedures which place one or other party (perhaps even both) at a clear disadvantage.
It seems to me that the standard or test of misconduct of such a nature would be something substantial, something that smacks of injustice or unfairness. One of the cited examples is of an arbitrator inspecting the farm he was to value in the presence of one party and in the absence of the other or of any representative of the other. (In the Matter of an Arbitration between Brien and Brien [1910] 2 I.R. 84). This was considered by Wright J to be “improper and inconsistent with the judicial character of an arbitrator.”
There is a sharp distinction between acts committed in the course of the arbitration and its result. Mere error is not misconduct. Parties submit disputes, including disputes as to the law, to arbitration. They expect the arbitrator to rule on all matters in dispute, but they do not have any guarantee that the arbitrator will reach the correct result. An arbitrator may err in his interpretation of the law or of the facts, without being guilty of misconduct. Though he was not dealing with an allegation of misconduct, McCarthy J set the tone for the correct judicial approach to arbitral awards in Keenan v Shield Insurance Company [1988] I.R. 89 at page 96:
“Arbitration is a significant feature of modern commercial life; there is an International Institute of Arbitration and the field of international arbitration is an ever expanding one. It ill becomes the courts to show any readiness to interfere in such a process; if policy considerations are appropriate as I believe they are in a matter of this kind, then every such consideration points to the desirability of making an arbitration award final in every sense of the term. Church and General Insurance Company v. Connolly and McLoughlin (Unreported, High Court, Costello J., 7th May, 1981) itself is an example of the type of fine-combing exercise which courts should not perform when it is sought to review an arbitration award.”
Insofar as the Appellant relies independently on section 36 of the 1954 Act to ask the Court to remit the award, he cites the decision of Herbert J, in the High Court in McCarrick v Gaiety (Sligo) Limited [2001] 2 IR 266. In that case, where the arbitration was to be based on written submissions alone, the applicant failed, through an oversight, to furnish his submissions to the arbitrator and asked the court to remit the award pursuant to section 36. Herbert J said that he was dealing with a “procedural mishap.” This had had the effect that the submissions of only one party were before the arbitrator. Herbert J could not “see any imperative of policy, reason or justice which should cause this court to set any permanent inflexible and immutable limits to the exercise of the wide power conferred upon it by the Oireachtas in s. 36(1) of the Act for the obvious purpose of ensuring justice and fairness between parties within the arbitration framework.” (page 273). He cited another passage from the judgment of McCarthy J as follows:
"Section 36 would appear to be the procedure appropriate, for example, to a case of patent mistake in monetary calculation, in the giving or not giving of a particular credit, in an award that is on its face ambiguous or uncertain, in a case where the arbitrator, himself, seeks to rectify some error and perhaps, where fresh evidence has become available subject to the standard rules of an appellate court in such cases.”
In reaching his own decision on the interpretation of section 36, Herbert J followed the dictum of Donaldson M.R. interpreting the equivalent English provision in King v. Thomas McKenna Ltd. [1991] 2 Q.B. 480:
“In my judgment the remission jurisdiction extends beyond the four traditional grounds to any cases where, notwithstanding that the arbitrators have acted with complete propriety, due to mishap or misunderstanding, some aspect of the dispute which has been the subject of the reference has not been considered and adjudicated upon as fully or in a manner which the parties were entitled to expect and it would be inequitable to allow any award to take effect without some further consideration by the arbitrator. In so expressing myself I am not seeking to define or limit the jurisdiction or the way in which it should be exercised in particular cases, subject to the vital qualification that it is designed to remedy deviations from the route which the reference should have taken toward its destination (the award) and not to remedy a situation in which, despite having followed an unimpeachable route, the arbitrators have made errors of fact or law and as a result have reached a destination which was not that which the court would have reached. This essential qualification is usually underlined by saying that the jurisdiction to remit is to be invoked, if at all, in relation to procedural mishaps or misunderstandings. This is, however, too narrow a view since the traditional grounds do not necessarily involve procedural errors. The qualification is however of fundamental importance. Parties to arbitration, like to parties to litigation, are entitled to expect that the arbitration will be conducted without mishap or misunderstanding and that, subject to the wide discretion enjoyed by the arbitrator, the procedure adopted will be fair and appropriate. What they are not entitled to expect of an arbitrator any more than of a judge is that he will necessarily and in all circumstances arrive the 'right' answer as a matter of fact or law. That is why there are rights of appeal in litigation and no doubt would be in arbitration were it not for the fact that in English law it is left to the parties, if they so wish, to build a system of appeal into their arbitration agreements and few wish to do so, preferring 'finality' to 'legality', to adopt Lord Diplock's terminology."
The conclusion of Herbert J, arrived at after very careful consideration goes some way to open up the possibilities of employing section 36 to cover more than the traditional four grounds (error on the face of the award; a mistake which the arbitrator wishes to have corrected; new material evidence; misconduct). He considered that the Courts should exercise restraint in exercising the “unlimited discretion” conferred by the section.
It is true that section 36 does not in terms set any limits to the exercise of the discretion. That does not mean that the discretion is unlimited. The policy of the law is to uphold the certainty of arbitral awards, once they have been made. Furthermore, the courts will not interfere without very good reason in the arbitration process. I believe these propositions are consistent with the statement of McCarthy J, cited above, and with many others. I would certainly be prepared to agree that the power to remit is not necessarily limited to the four well-established circumstances. These have, on the other hand, been developed by the courts after careful consideration over many years. Normally, the arbitrator should be allowed, subject to the overriding obligation of fairness, to be master of procedure. It would be inimical to the autonomy and certainty of the arbitral process if the notion of “procedural mishap” were to become an additional ground of potential complaint. Donaldson M.R. emphasised, in particular, that it would have to be “inequitable to allow the award to take effect.” He also described as a “vital qualification” and one of “fundamental importance” that the power was “designed to remedy deviations from the route which the reference should have taken toward its destination…” Donaldson M.R. also recalled his own earlier decision in The Mountan [1985] 1 All ER 520 at 525 to the effect that the power “provides the ultimate safety net whereby injustice can be prevented, but it is subject to the consideration that it cannot be used merely to enable the arbitrator to correct errors of judgment, whether of fact or law or to have second thoughts, even if they would be better thoughts.”
Conclusion
I can dispose immediately of the argument based on section 36. It suffices for present purposes to say, without pronouncing definitively on the scope of the discretion identified by Herbert J, that, in my view, none of the matters advanced by the Appellant come within the scope of section 36 even as so interpreted. There is no suggestion, in the present case of the sort of procedural mishap which occurred in that case. The Appellant is aggrieved by the ruling of the arbitrator on the issue of basis of valuation. This was the subject of argument at the arbitral hearing; the Appellant’s solicitors returned to it in their letter of 21st March 2002; they have been argued in the High Court and in this Court.
The arbitrator offered the Appellant a postponement of the issue of his award specifically to enable him to apply to the High Court, presumably pursuant to section 36, in respect of this very issue. The Appellant declined this offer. He decided to accept the award. I agree with the submissions of Mr Hugh O’Neill, Senior Counsel, for the arbitrator that the Appellant should not, in these circumstances, be allowed to invoke the provisions of section 36. It would not be “inequitable” to allow the award to stand.
I will now consider each of the complaints against the yardstick of misconduct.
The first three grounds of alleged misconduct can be considered together. The basic complaint is that the arbitrator determined that his task was to value the shares on the basis of a willing purchaser and willing vendor; that there was no identified purchaser or vendor; and on the basis that he was not concerned with the background leading up to the submission of the matter to his arbitration.
In reaching these conclusions, the arbitrator had before him the terms of reference contained in the two identical letters of 25th and 26th October 2000. The key provision was: “It has been agreed between the parties that Mr McCarthy shall dispose of his shares in the above companies. The purchase and sale of the shares is to be conducted on the basis of there being a willing purchaser and a willing seller…” In my view, the arbitrator was perfectly entitled to conclude that this sentence dictated the basis of the valuation he was expected to carry out. Indeed, the words do not seem readily capable of any other meaning. The arbitrator was not, of course, privy to the terms of the Order made by the Court, the Consent or the side letter. To the extent that they contain provisions relevant to the arrangements reached between the parties, those are terms of agreement between them. To the extent, however, that the Appellant seeks to rely on the provisions of any of these documents so as to affect the terms of reference of the arbitrator, the Respondent is and was entitled to rely on them. Most materially, by express provision, the arbitrator was not to be permitted to see the terms of the Consent, which was referred to in the Court order. Finally, the terms of the side letter precluded the Appellant from relying on the fact that an order might have been made pursuant to section 205 of the Companies Act.
I am quite satisfied that the manner in which the arbitrator interpreted the terms of reference fell well within the scope of his authority. He heard argument from both parties. No accusation of unfairness can be made. To be fair to the Appellant, I do not think he accused the arbitrator of being unfair. In no sense can he have been guilty of misconduct in the manner in which he dealt with these matters.
Nor can I find any merit in the suggestion that the arbitrator misconducted himself in declining to ensure that the Appellant was provided with the original submissions of the Respondent. The Appellant was provided with a copy of the PWC report on which those submissions were based. Once, Deloitte and Touche were able to produce a proper auditor’s report as provided in the settlement, the Respondent no longer wished to rely on the PWC report. The arbitrator ruled that all original submissions were withdrawn. The only purpose of referring to earlier submissions, no longer relied on, would have been to try to demonstrate some unidentified inconsistencies. I cannot see any basis for an accusation of unfairness here.
Finally, there is the question of the letter of rejoinder. Certainly, the final procedural rulings of the arbitrator made no provision for any party to submit such a document. The arbitrator was clearly conscious of this at the hearing. Therefore, he suggested that the Respondent’s representatives would be allowed to read the letter as part of his submissions. He rightly recognised that each party had the right to respond to the opposing party’s submissions. He invited comment on his proposed procedure and there was no objection. The letter was read. It might have been better to have circulated the letter at the beginning, but the arbitrator said that he had copies and it was open to the Appellant’s counsel to ask for copies. Counsel obviously realised that this was not a matter of any great importance and the letter was read later. Nobody was denied the right to respond to it.
In my view, all of the complaints of misconduct fail. I am satisfied that the arbitrator conducted the arbitration properly and that he made rulings within the scope of his discretion. I would dismiss the appeal.
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