IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-004018

BETWEEN	LJS MANAGEMENT LIMITED Plaintiff

AND	AMIRCO LIMITED (IN LIQUIDATION) Defendant

Hearing:	10 August 2010

Appearances: M R Bos for Plaintiff
R M Dillon for Defendant

Judgment:	12 August 2010

JUDGMENT OF KEANE J

This judgment was delivered by Justice Keane on 12 August 2010 at 4.15pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

Solicitors:

Davenports Harbour Lawyers, Auckland for Plaintiff
Gaze Burt, Auckland for Defendant

LJS MANAGEMENT V AMIRCO LIMITED HC AK CIV 2010-404-004018  12 August 2010

[1]       LJS Management  Limited, the franchisor of a Whangaparaoa cafe, seeks leave to appeal an arbitrator's award, dated 31 March 2010, fixing the value as at 8
January 2008 of the 'fixtures, fittings, plant, chattels and/or lease' of Amirco, that had been the franchisee. On 8 January LJS had exercised an option to purchase any such items belonging to Amirco. Amirco had, a matter of days before, abandoned the franchise.

[2]       Two issues, essentially, arise. The first is one of classification. Are the errors LJS contends for capable of being classified as errors of law; the only form of error susceptible of appeal. The second, assuming the errors contended for are legal in character, is whether they are sufficiently arguable and significant to warrant a grant of leave.

Context

[3]       LJS Management Limited operates and franchises a number of fast service cafes. One, as to which it holds the head lease, is at Foodcourt, Whangaparaoa. On
16 October 2007 Amirco Limited, now in liquidation, with the consent of LJS, purchased the business of the then franchisee and took an assignment of the sublease. LJS and Amirco entered into a franchise agreement. The franchise was to extend for five years.

[4]       On 23 December 2007 Amirco shut down the business, on seven days notice. There was a brief hiatus until IJS took up the business itself. Then, by notice on 8
January 2008, LJS exercised its option to purchase Amirco's fixtures, fittings, plant and chattels for a price to be determined by valuation, payable within one month afterwards.

[5]       Amirco obtained a valuation, as at 1 April 2008, made on an in situ going concern basis. That valuation excluding GST was $67,200. On 9 April 2008 LJS rejected this valuation. It contended that Amirco had abandoned the cafe, and the assets, and that it had been forced to re-enter. As at 8 January 2008, the date it had exercised the option, it said, the business was no longer a going concern. As at 9
April, the date of the letter, LJS said, it was trading at a loss. There was no willing

buyer in sight. Any in situ valuation, it said, would have to be nil; and, it contends, the franchise agreement called for a market value fixed by auction room sale. LJS relied on an auctioneer's valuation of $11,950.

[6]       The  franchise  agreement  provided  that  where,  as  had  happened,  LJS exercised its option to purchase on early termination, and LJS and Amirco were unable to agree on the independent valuer to be appointed, or 'as to the valuation assessed', the dispute was to go to arbitration. The arbitrator eventually appointed, Robert Hawkes, an Auckland property consultant, was not appointed immediately. He was first appointed arbitrator on 29 October 2009 by Amirco alone. He was jointly appointed under agreements dated 27 December 2009 and 4 February 2010.

[7]       At arbitration LJS continued to contend that there was nothing to arbitrate. Amirco,  it  said,  had  abandoned  the  business  before  it  exercised  the  option  to purchase.  Once  that  happened,  moreover,  the  ASB  Bank,  which  had  financed Amirco, asserted its right under a general security deed to Amirco's assets within the cafe. In August 2008, when LJS granted a fresh franchise, it had first to purchase the items charged. It paid out ASB the auction room figure, $11,950.

[8]       The arbitrator's award, dated 31 March 2010, which is expressed to be final as to the subject of the proposed appeal, the value of the assets as to which LJS exercised its option on 8 January 2008, favoured Amirco. The arbitrator held that what was called for was a valuation of the items in situ. To that, he held, LJS's auctioneer's valuation was irrelevant, because it assumed an auction room sale.

[9]       In fixing the value of the assets LJS was to purchase the arbitrator relied on

Amirco's valuation, subject to two qualifications. To recognise that as at 8 January

2008, the business was no longer an ongoing concern, he adopted a value 72.13% of Amirco's value, $48,470. He discounted Amirco's valuation by $18,730. Then, to recognise the payment LJS had been obliged to make to ASB, he deducted $11,950. He valued the assets for the purpose of purchase at $36,520 plus GST.

[10]     On 4 March 2010 Amirco, by then in liquidation, made a statutory demand on LJS for $41,085, relying on the award. LJS Management applied to this Court on

17 May 2010 to have the statutory demand set aside, relying on a proof of debt in which it claimed $47,437.72 on account of losses it said it had suffered on the termination of the franchise. In opposing that application Amirco contends that LJS has made that demand, and brought this present application, to thwart being wound up. That application is set down for a one day hearing on 30 August 2010.

LJS challenge to award

[11]     LJS seeks leave to appeal the award, contending that the arbitrator made four errors of law, the first two of which, it contends, are pivotal. First, LJS contends, the arbitrator misinterpreted the contract as requiring that the assets, the subject of the option to purchase, be valued on a 'going concern' basis. Secondly, it contends, he wrongly  included  amongst  the  items  to  be  valued  fixtures  that  had  originally belonged to Amirco as sub lessee, but which had reverted to LJS as head lessee.

[12]     The third and fourth aspects of the arbitrator's decision that involve, as LJS contends, errors of law are consequential. LJS contends, thirdly, that the arbitrator wrongly determined that the purchase attracted 12.5% GST. If, as he held, the items were to be valued on a going concern basis, LJS contends, the arbitrator should have treated the purchase as zero rated. Fourthly, in fixing interest, LJS contends, the arbitrator took his rate from an unrelated term of the contract. He ought to have applied the Judicature Act rate.

[13]     Amirco contends, as to the first question, that the valuer valued the items, as the contract required, in situ. He did not value them on a 'going concern' basis. He used Amirco's valuation only as a point of departure. As to the second, Amirco contends, the fixtures the arbitrator included within the valuation remained its property even though they were by then in the possession of LJS. Amirco had purchased them from the original franchisee. The franchise agreement called for them  to  be  included  within  the  valuation.  The  lesser  aspects  of  the  arbitrator's decision as to GST and interest, Amirco contends, involved no error of law or none of any significance.

[14]     The  principal  question,  which  LJS  accepts  is  decisive,  is  whether  the arbitrator in the two respects LJS first identifies made decisions on questions of law as opposed to findings of fact. LJS agrees that if they involved, exclusively or principally decisions as to fact or inference, not questions of law, the two remaining lesser questions, even if questions of law, cannot justify a grant of leave.

Appeal by leave

[15]     An arbitrator’s award may only be appealed on questions of law: cl 5(1)(c),

2nd Schedule, Arbitration Act 1996.

[16]     Clause  5(10),  which  took  effect  on  18  October  2007,  before  the  joint reference to arbitration, says that an error of law includes 'an incorrect interpretation of  the  applicable  law  (whether  or  not  the  error  appears  on  the  record  of  the decision)'. It does not include any question whether an award, in whole or part, is
‘supported by any evidence or any sufficient or substantial evidence’. Nor does it extend to whether the arbitrator ‘drew the correct factual inferences from the relevant primary facts’.

[17]     In Auckland City Council v Wotherspoon [1990] 1 NZLR 76, 85 – 91, a criminal appeal, Fisher J described three ways in which facts can form part of a question of law. There can be: (i) a conventional legal question on unchallenged facts; (ii) a positive factual finding unsupported by any evidence; and (iii) a finding inconsistent with the only reasonable inference from unchallenged primary facts. The effect of cl 5(10), as I understand it, is that only the first species of question is open on an appeal against an arbitral award. The second and third questions, species of Wednesbury unreasonableness, have no place.

[18]     Even where the issue is one of law, cl 5(2) prohibits leave being granted unless the issue is truly significant:

The High Court shall not grant leave under subclause 1(c) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties.

[19]     In  Gold  and  Resource  Developments  (NZ)  Ltd  v  Doug  Hood  Limited,moreover, the Court of Appeal held that, as s 5 of the Arbitration Act 1996 that defines the purposes of the Act makes clear, the intent of the Act is 'to encourage the use of arbitration to resolve disputes between parties, and to limit the High Court's involvement in reviewing and setting aside arbitral decisions'.

[20]     Clause cl 5(2), the Court said, is a pre-condition only and, even when it is met, the Court retains an 'important discretion' as to whether to grant leave.  That discretion, the Court said, must be exercised 'in a disciplined way'. Eight guidelines are to be taken into account, the first of which it said was the most important - the strength of the challenge and the nature of the point of law. As to that the Court said:

If it is a one-off point, in the sense that it is unlikely to occur again and cannot be seen as having any precedent value, either generally or to the parties on another occasion, then unless there are very strong indications of error leave should rarely be given. In other cases, the Court will be looking for a somewhat less stringent assessment. In those cases a strongly arguable case would normally be required for leave to be granted.

[21]     So, as the Court then went on to illustrate in each of the eight guidelines, the nature and significance of the issue of law is very relevant to the question of leave. Is the question novel, or of general interest, or is it neither? If it is neither is a lot of money involved? Or is the issue central to the result, and did the arbitrator clearly get it wrong? No less relevant is how it was that the arbitrator came to decide the issue. Is it the very issue that was entrusted to the arbitrator by reason of his or her competence? Or is it one that arose   incidentally, and happened to lie beyond the usual competence of the arbitrator? Did the parties agree that the arbitrator’s decision
should be final?

[22]     That assessment is to be made with economy. Where leave is granted the reasons why are not to be stated. Where leave is refused short reasons, for the benefit

of the parties, are all that is called for.

Termination of franchise agreement

[23]     The termination of the agreement and its consequences is governed by cl 42 of  the  agreement  and  para  (vi)  provides  that  where  the  agreement  ceases  for whatever reason Amirco's rights cease and it:

irrevocably appoints LJS to be its attorney for the purposes of taking any steps necessary to determine ... (the agreement) and protect the goodwill and reputation of LJS and at LJS's sole discretion to operate the business from the premises without LJS incurring any liability or duty to the franchisee ... except for ... fraud or dishonesty.

[24]     Clause 42(vi)(c) requires Amirco to 'surrender the lease or subleases held by LJS and if LJS requires the same to be surrendered and permit LJS to re-enter the premises and take full possession of the same'. So too cl 42(vi)(g) requires Amirco to
'return to LJS all plant, equipment, fittings and other property belonging to LJS but in possession or control of the franchisee in its servants or its agents'.

[25]     Ultimately,  this  present  application  turns  on  whether  in  his  award  the arbitrator arguably, and significantly, misinterpreted cl 16(d) of Schedule E, which confers on LJS the 'option to purchase after termination by default', and is expressed in this way:

In the event of early termination of this agreement for general breach of the provisions hereof or on the occurrence of any of the matters set out in Clause
42(v) ... , the Franchisee grants to LJS an option to purchase any or all of the
franchisee's fixtures, fittings, plant, chattels and/or the lease of the business if the same is held in the name of the Franchisee and has not been terminated for default or surrendered such option to be exercisable by LJS within 10 (ten) working days following termination of this agreement as aforesaid at a purchase price to be determined by an independent valuation with the purchase price to be paid in cash in one sum 1 (one) month after the determination of the purchase price ... .

[26]     This option to purchase is subject to three provisos each of which is material to the present application. The first confirms LJS's right 'to set off all claims, costs, fees, damages howsoever arising hereunder in reduction of such purchase price'. The

second requires arbitration in the event of dispute. It says, ' any matter in dispute between the parties relating to the appointment of an independent valuer or as to the valuation assessed or the quantum of set off claimed by LJS shall be referred to arbitration'.  The  third  proviso,  which  played  a  part  in  the  arbitrator's  choice of valuation  method,  prevented  Amirco  from  frustrating  LJS  in  the  exercise  of  its option. It says:

the franchisee shall not therefore during the term of this agreement nor during  10  (ten)  working  days  abovementioned  following  termination damage, incapacitate, alter, disconnect, shift or remove any item whatsoever and by way of example but not in limitation of the foregoing any partitions or  building  material,  plant,  fitting,  machine,  utensil,  implement,  paper product, food product,  cooking product,  item of  decoration,  sign,  menu, light, floor or ceiling covering without the written consent of LJS having first been sought and obtained in each and every instance.

[27]     For completeness cl 16(e) says as to arbitration:

All references to arbitration in this agreement shall be submitted to the arbitration  of  a  single  arbitrator  if  one  can  be  agreed  upon  or  to  two arbitrators (one to be appointed by each party) and their umpire (appointed by them prior to arbitration) such arbitration to be carried out in accordance with the provisions of the Arbitration Act 1908 or any then statutory provisions relating to arbitration. This clause shall not prevent LJS suing the franchisee  for  arrears  of  Royalty  or  other  moneys  arising  under  these presents and payable by the Franchisee.

Arbitrator's award

[28]     The arbitrator in his award records that he invited Amirco and LJS to submit valuation evidence that answered that of the other. Neither did that. He had then, he said, to make his valuation on the divergent valuations presented. He had also to consider what weight, if any, should be given to the 15 July 2007 agreement for sale and purchase, under which Amirco purchased from the initial franchisee, and the 1
July 2008 agreement under which LJS sold the business to the present franchisee.

[29]     Amirco, the arbitrator said, relied on the price for 'tangible assets' in the 2007 agreement,  $95,000,  to  contend  that  LJS,  in  exercising  the  option,  should  pay
$86,246 including GST. That figure, the arbitrator said, appeared once only, in the provisional client and equipment schedule, and LJS, he said, disputed its relevance. LJS maintained that the value in the 2007 agreement had been struck when the shop

was first opened in 2006. It was not an accurate value as at July 2007, let alone January 2008. In July 2007, LJS said, there was an existing business. The assets were being used to generate income. In January 2008 that value fell away once Amirco abandoned the franchise.

[30]     Amirco relied also, the arbitrator said, on the tangible asset value in the July

2008 agreement, $55,000. Here too LJS contended that value could not have applied in January 2008 after Amirco had abandoned the business. The July 2008 value relied on the fact that since January LJS had been trading. It sold the business as a going concern. LJS relied also on a real estate agent's statement that the true value of the assets was $12,000; that the higher figure had been adopted to maximise the value of the assets for depreciation.

[31]     In his analysis the arbitrator did not ascribe a definite weight to either of these agreements. Rather, as he said, he placed 'most weight' on the two valuations obtained for the very purpose of fixing the value of the assets in January 2008 for the purpose of the exercise of the option.

[32]     The arbitrator began by identifying the two primary issues as to which LJS seeks leave to appeal. He contrasted Amirco's in situ 'going concern' valuation with LJS's valuation founded on an auction room sale. He recognised that Amirco looked for  a  price  that  included  the  value  of  leasehold  improvements  whereas  LJS contended that they lay beyond the scope of purchase. That, the Arbitrator said, alone amounted to a major difference:

The claimant's valuation reflects $27,000 plus GST for Plant and Equipment and $40,200 plus GST for Leasehold Improvements (Fitout), after rounding, as  against  the  $11,950  without  reference  to  GST,  of  the  respondent's valuation for the Plant and Equipment only.

[33]     The arbitrator then contrasted the plant and equipment and the leasehold improvements, itemising each, taking them from the July 2007 agreement for sale and purchase. Amongst latter he included, and contentiously for the purpose of this application, 'design, legal permit of fire and consultant fees'.  He then returned to the issue of method. Amirco, he said, contended for a 'going concern' valuation; LJS for a 'cessation of business' valuation. He adopted neither. He took a midpoint, an 'in

situ' valuation, consistent with but not identical to a 'going concern' valuation, and inconsistent with a 'cessation of business' valuation.

[34]     The arbitrator first said this:

All evidence has been carefully considered, leading to a conclusion that the correct valuation approach is of the various items 'in situ'. This conclusion is drawn primarily from the contract and the expectation of Clause 16(d) of Schedule Part E, the final proviso that 'the Franchisee shall not ... damage, incapacitate, alter, disconnect, shift or remove any item whatsoever and by way of example but not in limitation of the foregoing any partitions or building material, plant, fitting, machine, utensil, implement, paper product, food product, cooking product, item of decoration, sign, menu, light floor or fitting covering without the written consent of LJS having first been sought and obtained in each and every instance.'

It is clear from this provision that it has always been the intention of the parties that if the respondent so wished then all of these items would remain in situ and be paid for. This is in keeping with the general context of the Franchise Agreement, to maintain an operational LJS Franchise. The particular term 'going concern' is not mentioned but it might reasonably flow from an 'in situ' valuation and a business valuation scenario.

It  follows  that  if  the  valuation  is  to  be  undertaken  in  situ  then  the Respondent's valuation on the basis of the assets being removed from the premises to auction rooms is of only limited evidential assistance in arriving at the value.

The only expert value evidence on the 'in situ' basis is that presented by the Claimant. .... However I note in submissions particularly that from the Respondent and not refuted by the Claimant, that by the time the valuation was undertaken the franchise had been reopened and operating for some three months. This leaves unanswered whether the items appeared in a better condition under the care of the then Franchisee than applied when the previous Franchisee (the Claimant) closed the premises.

I accept the general submission that the valuation be as a going concern, albeit at a time when the premises were closed.

[35]     The arbitrator took Amirco's 'going concern' valuation as a starting point only. He also took into account that in August 2008 LJS had been put to the cost of purchasing Amirco's assets from ASB. As to the former, he began with a question:

This leaves the question as to whether a going concern at closing of the premises in December 2007 and up to or about the date the Respondent exercised its purchase option at 8 January 2008 is the same going concern as that at 1 April 2008 when the claimant's valuation was undertaken and the premises had been reactivated as an operational business.

I conclude that it is only reasonable to expect a valuation at a period of closure is going to include a risk margin to reflect the need to rebuild the business from a static state and the cost of capital tied up in that rebuilding phase, as against the in situ going concern in place as at 1 April 2008.

Consequently  while  the  Langley  $67,200  'going  concern'  and  in  situ valuation is a suitable starting point it must be discounted to reflect the business rebuilding risk and loss of earnings on the invested capital. In the absence of more precise evidence I conclude the answer lies somewhere between the Langley in situ valuation and the Bensemann auction room valuation, insofar as the 'Plant and Equipment' section of the Provisional Plant and Equipment Schedule is concerned. This is the respective valuations of $27,000 (claimant) and $11,950 (respondent). I am assuming the latter is on a plus GST basis, as is the former.

I conclude the appropriate valuation for the non-trading state at the effective date is a 50/50 compromise between these figures, or $19,475 plus GST. This is for only the Plant and Equipment and amounts to a 72.13% of the Claimant's valuation of that component.

[36]     The Arbitrator dealt as a residual item with the disputed leasehold assets that LJS contends had already reverted to it. He adopted the list in the Amirco valuation and applied the same discount. He simply said:

This leaves the Fitout items of the Claimant's valuation to be addressed to which I conclude the 72.13% factor should also be applied, leading to an award in favour of the Claimant in the sum of $36,520.

[37]	The arbitrator then set out how he reached this figure:

Langley valuation:                                   $67,200

Take 72.13%                                            $48,471

Rounded to                                               $48,470

Less sum paid to the ASB
by the Respondent to obtain
control of the chattels                              $11,950

Balance due	$36,520 plus GST

Conclusions

[38]	The four questions LJS seeks leave to appeal do not, I consider, warrant the grant it seeks.

[39]     The first error on the arbitrator's part that LJS contends for, his choice of valuation  method,  does  turn  on  a  question of  law.  He  made  his  choice  relying primarily on his interpretation of cl 16(d). That is a decision in point of law.  The method he chose was also significant to the award he made. But, I consider, if this is a one off dispute, which as between LJS and Amirco it surely is, LJS does not have a very strongly arguable case. And, even if it is not a one off dispute, because this term appears  in  contracts  that  LJS  has  with  other  franchisees,  LJS  does  not  have  a strongly arguable case either.

[40]     LJS rightly says that cl 16(d) grants it an option to purchase Amirco's assets on an early termination of the franchise and Amirco's business had ceased to be a going concern when the option was exercised. It rightly says that cl 16(d) does not call  for  a  going  concern  valuation  expressly.  It  was  open  to  the  arbitrator  to conclude, however, as he did, that what cl 16(d) does call for is a valuation in situ. The proviso he identifies required that the assets, the subject of the option, remain in place. That, he was entitled to conclude, was inconsistent with a 'going concern' valuation; a valuation that assumed that LJS was entitled, as indeed it was, to resume the business immediately and to protect the franchise.

[41]     Such a valuation, as the arbitrator held, had to be inconsistent with a fire sale valuation of the assets detached from the premises. And though the arbitrator held that cl 16(d) called for a 'going concern' valuation, he is not to be taken literally. That is not the valuation he made. He recognised that Amirco's business had ceased at the date of the exercise of the option. Even though, as he also recognised, LJS was entitled to pick it up immediately, he nevertheless discounted Amirco's 'going concern' valuation by in excess of a quarter. In doing so he took account of LJS's auction room valuation. The balance he struck involved no obvious, let alone fundamental error.

[42]     The second question on which LJS seeks leave to appeal, the arbitrator's inclusion within his valuation of the leasehold improvements, does not involve, on the face of cl 16(d), any debatable question of law. It assumes that the franchisee, Amirco, will retain 'fixtures, fittings, plant, chattels'. It confers on LJS an option to

purchase  items  within  those  categories.  They  must  include  what  the  arbitrator, relying on the 2007 agreement for sale and purchase, describes as 'leasehold improvements'.

[43]     Only one question can arise and that is whether the arbitrator incorrectly included within his valuation the start up fees included in the 2007 agreement for sale and purchase as leasehold improvements. If he did that would be an error of fact. He did not make that error. Amirco's valuation, on which he relied, did not include that item as a leasehold improvement.

[44]     The argument LJS wishes to mount rather, as I understand it, is that though Amirco had purchased the leasehold improvements from the original franchisee, they reverted to LJS as sublessor once Amirco walked away. If that is the argument it cannot  easily be reconciled  with  the  very fact  that  to  acquire  the  assets  of  the franchisee LJS did have to exercise an option and pay a price. It is also inconsistent with the qualified right Amirco retained as at 8 January 2008, under s 266 of the Property Law Act 2006, to remove the leasehold improvements within a reasonable time.

[45]     If instead LJS claims that it purchased the leasehold improvements from ASB, after ASB assumed Amirco's property right under the general security deed, that does not assist LJS either. The date on which ASB exercised that right is not, so far as I am aware, in evidence. What is clear is that LJS purchased from ASB well after 8 January 2008, the date on which LJS exercised the option to purchase. As at that date the improvements must still have been Amirco's property. Nor can any injustice flow from the fact that LJS was put to the pass of purchasing Amirco's assets from ASB. The arbitrator offset the sum LJS then paid against the sum it had to pay Amirco to exercise the option to purchase, just as the second proviso to cl
16(d) called for.

[46]     As to the third and fourth questions, even if they raise arguable questions of law of some strength, that would not, as LJS concedes, warrant a grant of leave. Both are consequential. The issue whether the value of the assets for the purpose of purchase ought to be subject to 12.5% GST, or zero rated, does not appear to have

been argued before the arbitrator. But that ought now to be able to be resolved simply enough by counsel. It does not involve any vitiating error. The interest rate the arbitrator took is not one cl 16(d) imposes, as Amirco accepts. The arbitrator took it from cl 34 of the agreement, which prescribes the rate that Amirco was to pay LJS in a number of circumstances. All he did was to hold that it would be equitable to impose  the  same  rate  on  LJS.  That  too  involves  no  obvious  error.  Rather  the contrary.

[47]     Finally, there is this. This contract, under which the arbitrator was appointed, is one by which LJS governs its relations with all its franchisees. By this contract it retained the ability to purchase, on an early termination, a franchisee's assets at a value fixed, if need be, by an arbitrator, preferably a single arbitrator. The issue for the arbitrator was one principally, if not exclusively, of valuation. That could involve an issue of law, as it did here, but ultimately what was called for was an exercise of expert and informed judgment; and as has been said with the highest authority,
'Having entrusted this task to an arbitrator the parties should abide by the result, unless the arbitrator has employed a method clearly outwith the contemplation of the contract'.

[48]     For these reasons I decline the application for leave that LJS makes. Having successfully opposed the application, Amirco is entitled to an award of costs, as I should have thought, in scale 2B, and disbursements as fixed by the Registrar. In the event of any disagreement Amirco is to file a memorandum within ten working days of the date of this decision and LJS any response within the succeeding ten working
days.

P.J. Keane J