N6255

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS No.50 of 2016

BETWEEN:

KUTUBU CATERING LIMITED
Plaintiff

AND:

EUREST (PNG) CATERING AND SERVICES LIMITED
Defendant

Waigani : David, J
2016: 6 & 13 April

PRACTICE AND PROCEDURE - National Court – application for stay of proceedings – management agreement – resolution of disputes – arbitration clause – settlement of disputes by expert determination before having recourse to arbitration – separability of arbitration agreement - discretionary power of court – relevant considerations for exercising discretion – Arbitration Act, Chapter 46, Section 4 – application refused. 

Facts:

The plaintiff had a catering contract which was managed by the defendant under a written management agreement. The management agreement was completed. Funds totalling K1, 283,732.93 allegedly went missing whilst under the defendant's management. The plaintiff claimed that the loss was due to gross negligence in the defendant's discharge of its powers, duties and responsibilities under the management agreement. The defendant filed a defence denying liability. The management agreement had a clause requiring disputes arising out of or relating to the management agreement to be settled by expert determination before having recourse to arbitration by a single arbitrator. The plaintiff commenced the proceedings claiming, amongst others, K1, 283, 732.93, special and general damages and an order for the defendant to pay into the National Court Trust Account the sum of K2.5 million as security for costs and judgment arising from the proceedings. The defendant sought to stay the proceedings so that the dispute could be resolved by arbitration.

Held:

The application to stay the proceedings was refused with costs to follow the event. 

Cases cited:

Newsat Ltd v Telikom PNG Ltd (2007) PGNC 156, N3448
Niugini Civil Petroleum Ltd v West New Britain Development Corporation Ltd (2005) PGNC 64, N2909
Simon Norum v Daniel Ikio [1997] PNGLR 200

Treatises cited:
Chitty on Contracts, General Principles, 27th Edition, Volume 1, Sweet & Maxwell 1994
Halsbury's Laws of England, Fourth Edition, Reissue, Volume 2(3)

Counsel:
Ignas Polos Mambei, for the plaintiff
Bill Frizell, for the defendant

JUDGMENT

13 April, 2016

1.	DAVID, J: It is alleged that the plaintiff had a catering contract with Oil Search (PNG) Ltd (the catering contract) to provide all catering services to all its campsites in the Southern Highlands Province. The defendant had been managing the catering contract for and on behalf of the plaintiff under three year term management contracts it had with the plaintiff since 2000. The contract was renewed for a further term of three years to commence on 1 January 2012 and terminate on 31 December 2014 when the plaintiff and the defendant entered into a Management Agreement on 7 December 2011 (the Management Agreement). The Management Agreement was not renewed because the management of the defendant, the proprietor beneficial owner of which was Compass Group International BV, decided to cease operations in Papua New Guinea to be effective as from 31 December 2015. The parties however agreed to extend the Management Agreement to 31 December 2015 on a monthly basis to enable the defendant to facilitate the hand-over/take over. During this extended period, the defendant reported to the Board of the plaintiff at its second quarter meeting that funds totalling K1,283,732,93 (petty cash of K937,264.96 obtained from canteen and irregularity in NASFUND deductions of K346,467.97) were missing since 2013. The defendant reported the matter to the police, but never followed it through. The defendant was grossly negligent in the discharge of its powers, duties and responsibilities under the Management Agreement resulting in the plaintiff suffering loss and damage. The plaintiff therefore claims, amongst others, K1, 283,732.93 being the missing funds, special and general damages and an order pursuant to Order 14 Rule 10(3) of the National Court Rules for the defendant to pay into the National Court Trust Account the sum of K2.5 million as security for costs and judgment arising from these proceedings. 

2.	By a notice of Motion filed on 21 March 2016, the defendant sought orders to; dismiss the proceedings commenced by the plaintiff on the grounds that, they disclosed no reasonable cause of action, or they were frivolous or vexatious, or they were an abuse of process of the Court pursuant to Order 12 Rule 40(1)(a) or (b) or (c) of the National Court Rules; alternatively, stay the proceedings on the basis that the Management Agreement required that any dispute arising out of or in relation to the Agreement be referred to a single arbitrator for arbitration pursuant to Order 12 Rule 40(1)(a) or (b) or (c) of the National Court Rules and/or Section 4 of the Arbitration Act, Chapter No 46. At the hearing, the defendant abandoned the relief seeking dismissal of the proceedings and opted to only seek the alternative relief to stay the proceedings. This is my ruling. 

3.	The defendant relies on the:

(a)	Affidavit of Peter Heno sworn on 5 February 2016 and filed on 11 February 2016 (only to rely on the Management Agreement annexed there);
(b)	Affidavit of Joel Mesu sworn on 22 March 2016;
(c)	Affidavit of Bill Frizell sworn on 30 March 2016 and filed on 31 March 2016. 

4.	The plaintiff contests the application and it relies on the Affidavit of Ignas Polos Mambei sworn and filed on 11 February 2016 to do so.

5.	It is the defendant's submission that as the parties to the Management Agreement agreed to resolve their disputes by arbitration under Clause 15, these proceedings were not appropriate and are an abuse of process. Mr Frizzell of counsel for the defendant referred the Court to Niugini Civil Petroleum Ltd v West New Britain Development Corporation Ltd (2005) PGNC 64, N2909 and Newsat Ltd v Telikom PNG Ltd (2007) PGNC 156, N3448 to support his submission. In addition, Mr Frizzell submitted that steps were already taken for the appointment of a single arbitrator and he made reference to an exchange of emails between himself and Mr Jeffery Shepherd, an accredited mediator in Papua New Guinea who had agreed to be appointed as single arbitrator and that he had forwarded a letter to the plaintiff's lawyers requesting their client to give his concurrence on the appointment of Mr Jeffery Shepherd, but he had received no response up to the time of hearing. Copies of these correspondence by emails and letter are annexed to Mr Frizzell's affidavit as annexures "A" and B" respectively.

6.	It was the contention of the plaintiff through Mr Mambei of counsel that the since the Management Agreement had been completed or had lapsed, its terms, more particularly Clause 15, could not be invoked to settle the current dispute between the parties. In addition, counsel said the conduct of the defendant was not conducive to resolving the dispute by alternative dispute resolution or mediation which all along has been the plaintiff's preferred method for resolving the dispute apart from seeking the Court's intervention on the ground that the defendant continues to deny liability notwithstanding that funds went missing during the period of management by the defendant. Counsel referred me to Simon Norum v Daniel Ikio [1997] PNGLR 200 which I have considered, but I think it has no relevance. For these reasons, the defendant's application should be refused and allow the Court to determine the question of liability counsel submitted. 

7.	A copy of the Management Agreement is annexed to the affidavit of Peter Heno as annexure "B". Clause 15 contains provisions for the determination of disputes between the parties and I set out its terms in full below.

"15.	ARBITRATION AND CONSULTATION

15.1	Expert Determination

(a)	If a dispute arises out of or relates to this Agreement, or its breach, termination, validity or subject matter, the Parties to the Agreement and the dispute expressly agree to settle the dispute by expert determination administered by the PNGCDC before having recourse to arbitration.

(b)	A party claiming that a dispute has arisen, must give written notice to the other Parties to the dispute specifying the nature of the dispute.

(c)	On receipt of the notice referred to in Clause 15.1 (b), the Parties to the dispute must within seven (7) days of receipt of said notice seek to resolve the dispute.

(d)	If the disputes is not resolve with seven (7) days or within such further period as the Parties agree then the dispute is to be referred to PNGCDC.

(e)	The expert determination shall be conducted in accordance with the PNGCDC Expert Determination Guidelines which set out the procedures to be adopted, the process of selection of the expert and the costs involved and which terms are hereby deemed incorporated.

(f)	The Parties agree that the determination of the expert is final and binding.

(g)	The clause shall not merge upon completing.

15.2	Arbitration

(a)	Where a dispute cannot be settled under Clause 15.1 any one of the Parties to the dispute will submit the dispute to a single arbitrator appointed and acting under the Arbitration Act.

(b)	The arbitration shall be by one arbitrator appointed by agreement of the disputing Parties, but, if not, then by the President of the Papua New Guinea Law Society.

(c)	The award in the arbitration shall be final and binding on the disputing Parties."

8.	Clause 23.1 of the Management Agreement states that it the Management Agreement is governed by and is to be construed in accordance with the laws of Papua New Guinea, and the parties irrevocably submit to the non-exclusive jurisdiction of the courts of Papua New Guinea.

9.	It is possible that the law governing the substance of a dispute between the parties may be different to that governing an arbitration agreement and the procedures applied: Halsbury's Laws of England, Fourth Edition, Reissue, Volume 2(3) paragraph 5. In the present case however, no issue has been taken on this aspect. I am therefore satisfied that the law applicable for purposes of resolving disputes by arbitration under the Agreement will be the laws of Papua New Guinea, particularly the Arbitration Act. 

10.	Arbitration involves the submission of a dispute to someone other than a court by agreement of the parties for determination: Halsbury's Laws of England, Fourth Edition, Reissue, Volume 2(3). 

11.	The defendant principally relies on Section 4 of the Arbitration Act, but has also invoked the Court's power under Order 12 Rule 40(1) of the National Court Rules to stay proceedings.

12.	To my mind, the Arbitration Act is superior to the National Court Rules by virtue of Section 9 of the Constitution. The hierarchy of the laws of Papua New Guinea set out under Section 9 of the Constitution demonstrates that Acts of the Parliament are superior than, other laws made under or adopted by or under the Constitution or any other laws including subordinate legislative enactments. The National Court Rules were promulgate under Section 184 of the Constitution. The Arbitration Act is a specific legislation governing arbitration in Papua New Guinea, so takes precedence over the National Court Rules in that regard as well. I do not propose to address Order 12 Rule 40(1) the National Court Rules as a result. 

13.	Section 4 of the Arbitration Act states:

"(1) 	If a party to a submission, or a person claiming through or under him, commences legal proceedings in any court against another party to the submission, or a person claiming through or under him, in respect of a matter agreed to be referred, any party to the proceedings may, at any time after appearance and before delivering any pleadings or taking any other steps in the proceedings, apply to that court to stay the proceedings. 

(2) 	If the court to which application is made under Subsection (1) is satisfied that there is no sufficient reason why the matter should not be referred in accordance with the submission, and that the applicant was, at the time when the proceedings were commenced, and still remains, ready and willing to do all things necessary for the proper conduct of the arbitration, it may make an order staying the proceedings."

14.	Section 1 of the Arbitration Act defines the term "submission" as "a written agreement to submit present or future differences to arbitration, whether or not an arbitrator is named in the submission". It is not disputed that Clause 15 of the Agreement constitutes the arbitration agreement. It is therefore a "submission" for the purposes of the Arbitration Act.

15.	A party to an arbitration agreement against whom legal proceedings are brought may apply to the court in which such proceedings are commenced to stay the proceedings. A party does not have a right to stay the proceedings on the basis of the arbitration agreement because the Court has a wide discretionary power to, grant or refuse, to stay legal proceedings commenced by a party to an arbitration agreement: Niugini Civil Petroleum Ltd v West New Britain Development Corporation Ltd and Newsat Ltd v Telikom PNG Ltd.

16.	The concept of separability of an arbitration agreement applies. It means that an arbitration agreement is treated as a distinct agreement from the contract to which it relates although it often is embedded in the same document as is the case here: Chitty on Contracts, General Principles, 27th Edition, Volume 1, Sweet & Maxwell 1994, 15-008. 

17.	The plaintiff's contention that the arbitration agreement or Clause 15 does not apply in the present case because the Management Agreement has been completed or has lapsed is rejected as without merit. There are two reasons that form the basis for my rejection. Firstly, Clause 15.1(g) clearly states that "The clause shall not merge upon completing" and secondly, by application of the concept of separability of an arbitration agreement. The following excerpt from Chitty on Contracts, General Principles, 27th Edition, Volume 1, Sweet & Maxwell 1994, 15-008 is instructive in this regard: 

"But an arbitration clause is often embedded in the substantive contract to which it relates. The question then arises as to the extent to which the arbitration clause is to be treated as a separate agreement from the contract of which it forms part. In Heyman v Darwins Ltd, the House of Lords decided that an unqualified arbitration clause referring to disputes or differences arising "in respect of" or "with regard to" or "under" a contract covered a dispute as to whether a breach of contract by one party has operated to discharge the other. For repudiation by one party, even when accepted by the other, does not entirely abrogate the contract. Accordingly, an arbitration clause in a contract will survive a repudiatory or fundamental breach of the contract and may be relied on even by the party by whom the breach is committed. And if a contract, initially valid, is alleged for some other reason to have been brought to an end, an arbitration clause contained in it will nevertheless survive and the arbitrator has jurisdiction to determine the issue." 
	
18.	Should I stay the proceedings?

19.	In Niugini Civil Petroleum Ltd v West New Britain Development Corporation Ltd and Newsat Ltd v Telikom PNG Ltd, Cannings, J proposed eight considerations to be taken into account when determining whether to grant or refuse a stay of proceedings for arbitration and these are:

1.	Is there a good reason for not going to arbitration?
2.	Was the defendant ready and willing to go to arbitration when the plaintiff instituted court proceedings?
3.	Is the defendant still ready and willing to go to arbitration?
4.	Has the defendant filed a defence or taken any other step in the court proceedings?
5.	Does the arbitration clause make it mandatory for disputes to be referred to arbitration?
6.	Was the application for stay of proceedings brought within a reasonable time after commencement of the court proceedings?
7.	Has the defendant waived its rights to arbitration?
8.	Has the plaintiff rushed to court?

20.	I adopt these considerations and apply them in the following manner.

Is there a good reason for not going to arbitration?

21.	Parties agreed to refer disputes arising out of or in relation to the Management Agreement to arbitration. However, Clause 15 is clear. If the parties have a dispute and before recourse to arbitration, the dispute must first be referred for expert determination administered by the PNG Commercial Dispute Centre Inc. (PNGCDC) or its replacement body as determined by the Papua New Guinea Law Society by virtue of Clause 15.1. Mr Frizzell submits that whilst the PNGCDC remains incorporated, it is dysfunctional and has been defunct for many years: see annexures "A" and "B" of his affidavit. In addition, Mr Frizzell submits that parties have tried unsuccessfully to resolve the dispute under Clause 15.1 of the Management Agreement in the absence of the PNGCDC therefore the defendant was now invoking Clause 15.2. Clause 1 of the Management Agreement defines the term "PNGCDC" and it means "the PNG Commercial Dispute Centre Inc or its replacement body as determined by the President of the PNG Law Society". There is no evidence before the Court that the PNG Law Society has been approached by any of the parties to appoint a replacement body for purposes of expert determination under Clause 15.1. The application to stay the proceedings is premature in that regard.

Was the defendant ready and willing to go to arbitration when the plaintiff instituted court proceedings?

22.	Yes, but it has filed a defence basically denying liability. The conduct of the defendant in filing a defence and filing the application to stay the proceedings is contrary to Section 4(1) of the Arbitration Act. 

Is the defendant still ready and willing to go to arbitration?

23.	The affidavits of Joel Mesu and Mr. Frizzell show that a letter seeking concurrence of Jeffery Shepherd as arbitrator has been sent to the plaintiff's lawyers. I adopt my earlier observation that the conduct of the defendant in filing a defence denying liability and filing the application to stay the proceedings is contrary to Section 4(1) of the Arbitration Act. 

Has the defendant filed a defence or taken any other step in the court proceedings?

24.	Yes. I adopt my earlier observations that the conduct of the defendant in filing a defence denying liability and filing the application to stay the proceedings is contrary to Section 4(1) of the Arbitration Act. The defendant's contention that because the plaintiff sought interim restraining orders and also now seeks summary judgment made it necessary to file a defence is rejected as a result. 

Does the arbitration clause make it mandatory for disputes to be referred to arbitration?
25.	Yes, but only when a dispute cannot be settled under Clause 15.1 of the Management Agreement.

Was the application for stay of proceedings brought within a reasonable time after commencement of the court proceedings?

26.	No. The application for a stay of the proceedings was not brought within a reasonable time. The proceedings were commenced on 10 February 2016, but significantly amended on 11 March 2016. The application for a stay of the proceedings was filed on 21 March 2016 which was more than a month after the commencement of the proceedings. 

Has the defendant waived its rights to arbitration?

27.	Yes. Adopting my earlier observations, I find that the defendant's conduct amounts to an implied waiver of its rights to arbitration.

Has the plaintiff rushed to court?

28.	No: see the affidavits of Ignas Polos Mambei and Bill Frizzell.

29.	For all these reasons, I will refuse the defendant's application to stay the proceedings with costs to follow the event.

____________________________________________________
Solwai Lawyers : Lawyers for the plaintiff
Warner Shand : Lawyers for the defendant