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State v Barclay Bros (PNG) Ltd [2004] PGNC 262; N2507 (2 April 2004)

N2507

PAPUA NEW GUINEA

[IN THE NATIONAL COURT OF JUSTICE AT WAIGANI]

OS 298 of 2000
OS 520 of 2003

BETWEEN:

THE INDEPENDENT STATE
OF PAPUA NEW GUINEA
Plaintiff

AND:

BARCLAY BROS (PNG) LTD
Defendant

Waigani : KAPI, CJ
2003 : 11, 12 November
2004 : 2 April

INJUNCTION – Application to restrain an arbitration before the International Chamber of Commerce International Court of Arbitration.

Meaning and effect of observation by the Court on matters not before it.

Counsel:
R. J. Webb QC with W. Kasou for the Plaintiff
J. Griffin QC with M. Varitimos for the Defendant

2nd April 2004

KAPI CJ: The State (Plaintiff) in an Originating Summons (OS 520 of 2003) filed on 18th September 2003 claims:

1. A declaration that the Defendant (as claimant) is not and has not at any time been entitled to continue, prosecute or pursue any arbitration proceedings against the Plaintiff (as respondent) for the claim contained in its amended statement of claimant’s case pursuant to or under clause 67 of the FIDIC conditions of contract which are exhibit KKI to the affidavit of Kerenga Kua sworn on 15 September 2003 and filed in these proceedings or the claim identified in the letter from Clayton Utz to the arbitral Tribunal dated 5 September 2003.
   
2. An order that the defendant by itself, its servants or agents or otherwise howsoever, be restrained from taking any further step in or for the purposes of an arbitration commenced by the Defendant (as claimant) against the Plaintiff (as respondent) on or about 20 April 2000 in the International Chamber of Commerce International Court of Arbitration at Paris (the "arbitration").
   
3. An order that the Defendant withdraw from and discontinue the arbitration as against the Plaintiff.
   
4. Such further or other orders as to this honourable Court shall seem fit.
   
5. Cost.
   

These orders are similar to the orders sought by the Plaintiff in an earlier originating summons (OS 298 of 2000) in paragraphs 4-6:

4. "A declaration that the defendant (as claimant) is not and has not at any time been entitled to commence, prosecute or pursue any arbitration proceedings against the plaintiff (as respondent) pursuant to or under clause 67 of the FIDIC Conditions of Contract forming part of the Construction Contract.
   
5. Except as otherwise ordered by the Court, an order that the defendant by itself its servants or agents or otherwise howsoever, be restrained from taking any further step in or for the purposes of an arbitration commenced by the defendant (as claimant) against the plaintiff (as respondent) on or about 20 April 2000 in the International Chamber of Commerce International Court of Arbitration at Paris ("the Arbitration").
   
6. An order that the defendant withdraw from and discontinue the Arbitration as against the plaintiff."
   

Both counsel sought to have these two matters heard together.

It is necessary to set out the background to these two matters.

OS 298 of 2000

This Summons was filed on 1st June 2000. It came before me for determination on 26th March 2001. I delivered judgment on 6th June 2001 (see Independent State of Papua New Guinea v Barclay Brothers (PNG) Ltd (Unreported Judgment of the National Court dated 6th June 2001, N2090).

For the present purposes, it is important to clarify the issues that were determined. Of the orders sought in the Originating Summons, I made two declarations:

"1. That SHGHL acted as the agent of the State in entering into the construction contract with BB on 9th April 1999 (with respect to Phase I and II and Stages 2A and 2B of the of the proposed Southern Highlands Gulf Road Link) and therefore the State is bound by its terms.

2. That the contract breached the tender requirement under s 40 (1) of PFM Act and is therefore void."
   

I did not discuss nor did I make any orders in respect of orders in paragraph 4 to 6 of the Summons.

Both parties appealed against the decision. The Defendant appealed against the second declaration (SCA 60 of 2001). The Plaintiff appealed against the first declaration (SCA 62 of 2001). Both appeals were dismissed by the Supreme Court (see Independent State of Papua New Guinea v Barclay Brothers (PNG) Ltd (SCA 62 and 63 of 2001) (Unreported Judgment of the Supreme Court dated 31st December 2002).

So far as OS 298 of 2000 is concerned, the issues raised in paragraphs 1 to 3 have been determined conclusively by the Supreme Court on appeal. In the result my decision was confirmed.

It is significant to note that neither of the appeals raised any issue in relation to the lack of any discussion or orders in relation to paragraphs 4 to 6 of the Originating Summons. Consequently, no arguments were put before the Supreme Court. It is not surprising that the Supreme Court did not discuss the issue in its decision. I will return to the consequential orders later in my judgment.

However, the Supreme Court proceeded further and expressed an opinion on the principles of restitution. It is necessary to set out the relevant passages:

"But that does not mean that a party pleading illegality may do so without any consequence. While it is the law that no cause of action can be founded on an illegal contract, e.g. for specific performance or damages for breach of an illegal contract; such does not exclude the law of restitution. The principles of restitution lie outside of contract because the obligation to make restitution is not based contractual agreement to be bound or a promise to pay, but on justice and equity. They have historically been referred to as rights in quasi contract or claims for quantum meruit. They recognise that notwithstanding a contract may be illegal, where it is inequitable that a party retain monies paid or default on obligations for benefits or services supplied by another the Courts may order recovery. Not to enforce a void or unenforceable contract but because justice and equity demands it.

Restitution will however not be available to a party which has knowingly or cynically entered an illegal or statute barred contract and then seeks to recover by claiming reimbursement for such services rendered or moneys expended before the illegality was brought to light. Where a Court finds willing participation in an illegal contract there will be no recovery. Just as creation of an estoppel cannot be used to avoid statutory obligations, pleading a claim in restitution will not suffice to obtain redress in an illegal contract. While a party may not be able to establish total innocence of illegality it must show at least threat it is not responsible for or not an equal participant in illegality.

Integral to the Courts conclusion that restitution is appropriate, is a finding that the parties to the illegal contract are not in pari delictu that is that they have not been equally in breach of the law. Barclay Bros need to show that they are not equally at fault in breaching the PFM Act. On the evidence before the National Court and this Court they are clearly are not seeking to enforce the performance of the Contract. They have not instituted proceedings in PNG for that purpose. In the international arbitration they seek compensation for work done under the voided contract. The State by OS 298/99 has sought to prevent that.

The evidence accepted by the National Court in these proceedings is that Barclay Bros seeks to recover moneys certified under the agreement as due for work done prior to and up to the termination of the contract. It is accepted too that the contract was executed with the State’ s agent, an incorporated company rather than directly with the State itself. That is some evidence that Barclay Bros can maintain that all the needed to be done by its contracting party to enter a valid agreement appeared to have been done. Sections 19 and 20 of the Companies Act supports that position.

For the State’ s part it can be seen that it certainly had the obligation to follow the PFM Act provisions and did not. For whatever reason it did not do that, no evidence has been offered as to why, when becoming aware of its breach it failed to seek the exemptions under the Act as it was always empowered to do. Nor why, knowing that work was in progress it took no steps to meet its obligations for such work as it had instigated. It is surely an untenable position to assert that the contractor has to accept significant loss for the error of the State’ sown making and or a refusal a correct it. Plainly there is inequality of fault shown and it is here in restitution, that the inability to plead one’s own fault and/or illegality has fresh meaning. The forceful statement of this Court in Subendranathan’s case in the contexts of restitution be seen as an emphatic endorsement of the principle.

In the result it is the judgement of this Court that no withstanding the contract between the State through its agent SHGHL with Barclay Bros is illegal and unenforceable, there remains the right in Barclay Bros to pursue restitution for works and obligations undertaken up to the time of termination."

Consequently, the Plaintiff filed a Notice of Motion on 15th July 2003 seeking the following orders:

"1. For orders that:

(a) order until the final determination of this application that Barclay Bros (PNG) Ltd be restrained from taking any step in the purported arbitration commenced by its notice dated 20 April 2000, more particularly described in subparagraph (c) below.

(b) the last 5 paragraphs of the reasons for judgment of the Court delivered 31 December 2002 be excised;

(c) (i) Barclay Bros (PNG) Limited, by itself, its servants or agents or otherwise howsoever be restrained from taking any further step in or for the purposes of an arbitration commenced by it (as claimants) against the Independent State of Papua New Guinea (as respondent) "State") on or about 20 April 2000 in the International Chamber of Commerce International Court of Arbitration at Paris (‘the arbitration");

(ii) Barclay Bros (PNG) Limited withdraw from and discontinue the arbitration as against the State;

(d) other than as necessary to give effect to these orders, Appeal SCA No. 62 of 2001 be dismissed.

(e) orders for the costs of the appeals;

(f) Barclay Bros (PNG) Limited pay the costs of, and incidental to, this Notice of Motion with certification for overseas counsel;

(g) Such further or other order or relief as the Court considers appropriate."

The main order sought in this Motion was to excise the paragraphs relating to Supreme Court decision on restitution (Paragraph (1) (b) of the motion). Paragraphs 1 (a) and (c) relate to a restraining order pending the determination of the order in paragraph (1) (b).

During the hearing, the Supreme Court converted the motion to excise the relevant paragraphs into an application to reopen the decision of the Supreme Court on the basis of the Slip Rule. The Court ruled in the following terms:

"We consider that the paragraphs of the judgment relied upon as the basis for this primary application to revisit the judgment under the slip rule and to excise those paragraphs or to clarify the judgment in relation to the principle of restitution does not merit application to revisit. We consider the judgment sufficiently speaks for itself and either of the parties or any party must argue its effect before the appropriate tribunal in a particular case. We therefore decline to entertain these applications."

That ruling disposed of the orders sought in respect of the passages on restitution in the judgment.

Following the ruling on the Slip Rule, counsel for the Defendant submitted:

"....it is our submission that that does not dispose of the second issue as well. Our learned friend says the court did not make consequential orders but what he really means is that the court did not proceed to injunct Barclays from proceeding with the arbitration. That is the consequential order that he is actually seeking in what he is describing as a consequential order."

In reply counsel for the State submitted:

"The point of departure from between my friend and us is that it was an issue at first instance before his Honour as to whether or not an injunction ought to be granted in respect of the further conduct of the arbitration at the suit of Barclay Brothers. His Honour did not grant the injunction at the end of the day we say because he regarded having – in light of the way the matter was conducted he regarded the declaration he made that the contract was void for illegality as including within its compass the arbitration clause within the contract. And it is no answer now in a preliminary way to say well that can all be sorted out in the arbitration because it is to say that to make a boot straps argument. The arbitration clause was void for illegality we say and what is clear having regard to the common position between the parties as to the authorities which determine the severability of arbitration clauses that arbitration clauses even though severable can be void depending on the nature of the illegality which has rendered the larger contract void."

The Court made the following ruling:

"We have decided that the application for the restraining order before this Court is inappropriate for these brief reasons that the restraining order is being sought pending the application to revisit the judgment with the view to either clarifying or exercising those paragraphs we have earlier referred to and decline the application to so visit. And also for the further reason that the orders sought in relation to the arbitration clause in the originating summons before the primary court were argued and it is not appropriate for this Court to descend into making order pertaining to them and the effect of the Supreme Court judgment. We think however, that the consequential effect of the primary judgment that the Supreme Court has upheld is a matter properly before the National Court and can be so requested of the National Court to be so visited. We decline to remit this application because we think the parties are at liberty to apply to the National Court for the consequential enforcement relief as maybe appropriate to be so applied before that court. That is as far as we consider it appropriate to indicate."

In essence, the Supreme Court in this ruling declined to entertain the consequential orders to restrain the Defendant on the basis that this matter was fully argued before me and the Court suggested that the parties should be at liberty to apply for these orders before me.

It appears that the parties seek to reopen OS 298 of 2000 on consequential orders in paragraphs 4 to 6 of the Originating Summons as suggested by the Supreme Court. These orders relate to the arbitration that was pending at the time I heard the Originating Summons. I realise that I did not in any way consider the consequential orders after deciding the issues in paragraphs 1 to 3 of the Originating Summons.

There may be some difficulty in considering the consequential orders at this time. These issues were argued fully in OS 298 of 2000. There was no suggestion that the consequential orders were not to be considered before me until after I have determined the legal issues raised in paragraphs 1 to 3 of the Originating Summons.

These orders ought to have been raised at the time I handed down my decision or alternatively, made the subject of appeal in the Supreme Court. If these issues had been raised before me after I handed down my decision, I would have considered them then. Alternatively, if the issues were raised on appeal, the Supreme Court would have determined them or remit the matter back before me to determine. This did not happen.

The consequence of this is that the same issues cannot be raised before me twice.

However, it appears that counsel for the Plaintiff has taken up the suggestion by the Supreme Court to apply before me to reopen the Originating Summons to consider the consequential orders in OS 298 of 2000. I note that counsel for Defendant has not taken up the preliminary point I have just discussed.

Consequently, I turn now to consider the orders sought in paragraph 4 to 6 of the Originating Summons. At the time I heard the Summons, the arbitration which was the subject of the Summons related to a dispute under paragraph 67 of the agreement.

It is also important to set out the manner in which the parties approached the issues. So far as it is relevant to paragraphs 4 to 6, the parties clarified the issues in correspondence before the trial. In letter dated 12th October 2000, lawyers for Defendant wrote:

"As for paragraph 4 of the Summons, we presume, but please tell us if we are mistaken, that the only grounds upon which this declaration is sought are those identified in paragraph 1 to 3 of the Summons. Once again, if we are mistaken, please provide particulars of each and every other ground relied upon."

In reply lawyers for the Plaintiff replied:

"We also confirm that the declaration referred to in paragraph 4 of the originating summons is sought on the basis of the matters contained in paragraph 1, 2 and 3 of the originating summons."

This position was confirmed during the hearing before me on 27th March 2001. I concluded from this that the parties were mainly concerned with the issues in paragraph 1 to 3 of the Summons. That is to say, if the SGHL is an agent of the State and that there was a valid agreement, the arbitration would proceed under paragraph 67 of the agreement. If the agreement was invalid, no arguments were put before me that the arbitration would nevertheless proceed on some other basis such as damages on the principles of restitution. Having regard to the invalidity of the contract and the manner in which the parties ran the case, I would grant the declarations sought by the Plaintiff.

However, it is not necessary to make this order in the present circumstances. The arbitration has been amended. It is no longer based on clause 67 of the contract. It is based on the alleged decision of the Supreme Court on restitution. This brings me to consider OS 520 of 2003.

OS 520 of 2003

Whilst the orders sought in this summons appear to be similar to OS 298 of 2000, the subject matter for arbitration is different. The arbitration is now based on the alleged determination by the Supreme Court that the Defendant is entitled to damages on the principles of restitution.

The issue which arises for determination is the true meaning and effect of the passages on restitution in the decision of the Supreme Court. I have already set out the relevant passages.

The question of restitution was not an issue before me in the Originating Summons nor was it a matter raised and argued in the two appeals before the Supreme Court.

The effect of the passages on restitution was first raised by the Notice of Motion to excise these passages from the judgment of the Supreme Court. However, this motion was converted into an application to reopen the decision of the Supreme Court under the Slip Rule. I have already set out the ruling by the Supreme Court in this regard.

Counsel for the Defendant submits that the Supreme Court has determined the effect of these passages and therefore this Court cannot deal with the issue. He submits that to do so is to sit on appeal from the decision of the Supreme Court.

The Court considered that the passages on restitution speak for themselves without indicating the meaning or effect of these passages. The Court held:

"We consider the judgment sufficiently speaks for itself and either of the parties or any party must argue its effect before the appropriate tribunal in a particular case. We therefore decline to entertain these applications."

I find that the Supreme Court did not determine the issue. The Court left this issue to be determined by the appropriate tribunal which may be confronted by this issue. These passages have arisen for determination by this proceeding (OS 520 of 2003). Therefore, I am able to determine the meaning and the effect of the relevant passages.

I have already set out the passages earlier in my judgment. The language in which these passages have been expressed may be easily understood as determining the issues in relation to the issue of restitution as between the parties. However, these passages have to be read together with the whole of the judgment and the manner in which the case was conducted in the National Court.

The Supreme Court held that the principles of the Slip Rule were not appropriate. When the ruling is read as a whole, the Supreme Court did not regard the passages on restitution as deciding this issue as between the parties. If the Court found this to be the case, it would have been an appropriate case to apply the Slip Rule in that this was an issue not raised before me nor was it argued before the Supreme Court.

Having regard to the whole of the decision and the circumstances of the case, the Court was making an observation on restitution as a matter of principle. This is made clear in the last paragraph of the judgment of the Court:

"In the result it is the judgment of this Court that notwithstanding the contract between the State through its agent SHGHL with Barclay Brothers is illegal and unenforceable, there remains the right in Barclay Brothers to pursue restitution for works and obligations undertaken up to the time of termination." (emphasis added)

This is a right the Barclay Brothers may pursue in another action. Whether or not it may succeed in such cause of action is not a matter I need to consider.

Consequently, the basis of the arbitration as amended is misconceived and in my view ought to be restrained from proceeding.

The formal order of the Court is that the Defendant by itself, its servants or agents or otherwise howsoever, be restrained from taking any further step in or for the purposes of an arbitration (as amended) commenced by the Defendant in the International Chamber of Commerce International Court of Arbitration at Paris. I further order that the Defendant pays the Plaintiff’s costs of this proceeding.
____________________________________________________________________
Lawyers for the Plaintiff : POSMAN KUA LAWYERS
Lawyers for the Defendant : MALADINAS