FPM Constructions Pty Ltd & Anor v Australian Recreation Systems Pty Limited & Anor [2003] NSWSC 768

New South Wales Supreme Court

CITATION : FPM Constructions Pty Ltd & Anor v Australian Recreation Systems Pty Limited & Anor [2003] NSWSC 768 HEARING DATE(S) : 28/7/03 - 29/7/03 & 15/8/03 JUDGMENT DATE : 21 August 2003 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Contractual power to terminate arbitration validly exercised

CATCHWORDS : CONTRACTS - construction of clause in contract permitting termination of arbitration - whether person purporting to exercise contractual power to terminate arbitration was acting reasonably - WORDS AND PHRASES - monitor (v) LEGISLATION CITED : Corporations Act 2001 (Cth) Black Uhlans Incorporated v New South Wales Crime Commission [2002] NSWSC 1060 CASES CITED : Jones v Dunkel (1959) 101 CLR 298 Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24 FPM Constructions Pty Ltd (formerly Fyntray Project Management Pty Ltd) - First Plaintiff PARTIES : Anwar Yazbek - Second Plaintiff Australian Recreation Systems Pty Limited - First Defendant John Arthur Nicholas - Second Defendant FILE NUMBER(S) : SC 3176/03 COUNSEL : G McVay - Plaintiffs AJ Grant - Defendants SOLICITORS : James A Moustacas & Co - Plaintiffs Phillip Bushby International - Defendants

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST

CAMPBELL J

21 AUGUST 2003

3176/03 FPM CONSTRUCTIONS PTY LTD (FORMERLY FYNTRAY PROJECT MANAGEMENT PTY LTD) & ANOR v AUSTRALIAN RECREATION SYSTEMS PTY LIMITED & ANOR JUDGMENT 1 HIS HONOUR: This is a dispute about whether a contractual power to terminate an arbitration has been validly exercised. It raises questions about the construction of the contractual power, and about whether the precondition for its exercise has been fulfilled. Circumstances Leading to the Arbitration 2 The first defendant, Australian Recreation Systems Pty Ltd, ("ARS") was incorporated in December 1998. It was, in commercial terms, an incorporated joint venture, intended to perform a contract with Camden City Council ("the Council") for the design, construction and management of a leisure centre at Mount Annan. There were three groups of joint venturers. The first was Mr Davies and his company Hofox Pty Ltd ("Hofox"), who were to be involved in the design aspect of the project. The second was Mr Yazbek (the second plaintiff in these proceedings), Mr Penglis and their company Fyntray Constructions Pty Ltd ("Fyntray Constructions"), who were intended to carry out the construction part of the project. The third joint venturer was Mr Nicholas, who was interested in carrying out the management of the leisure centre, once it had been built. On 23 December 1998 ARS entered an agreement with the Council for the design, construction and management of the Mount Annan Leisure Centre. 3 By July 2001 the construction of the leisure centre was complete, and ARS commenced to operate it, with Mr Nicholas being in practical terms, responsible for that operation. There had been three issued shares in ARS, one issued to each of the three joint venturers. As well, there had been three directors of ARS, with each of the groups of joint venturers appointing one director. In the period March-April 2001, Hofox transferred its share in ARS to Mr Nicholas, and Mr Davies resigned as a director. 4 In the first half of 2002 Mr Yazbek, acting on behalf of ARS, took steps to institute an arbitration between the Council and ARS, alleging that ARS was entitled to more money under the building contract than it had been paid. That arbitration was commenced on 26 June 2002, when the Institute of Arbitrators and Mediators nominated Mr Barry O'Mara as the arbitrator. 5 Fyntray Constructions had carried out the building of the centre under a sub-contract from ARS. On 30 July 2002 Mr Yazbek asked Mr Nicholas to consent, on behalf of ARS, to an assignment of the construction contract to a company called Fyntray Project Management Pty Ltd. Mr Nicholas signed and returned a document giving that consent. Fyntray Project Management Pty Ltd ("FPM") has since changed its name to FPM Constructions Pty Ltd. It is the first plaintiff in these proceedings. 6 There is some evidence that by August 2002 Fyntray Constructions ("FC") had gone into voluntary administration. Eventually, on 27 March 2003 Fyntray Construction was ordered by the Court to be wound up. It went into liquidation owing large sums of money to sub-contractors and suppliers connected with the Mount Annan Leisure Centre job. 7 Though Mr Nicholas was aware, in very general terms, in the first half of 2002 that Mr Yazbek was taking steps to take the Council to arbitration, and though he was told by Mr Freestone, a Council officer, in July 2002 that the arbitration had actually commenced, and that ARS might be at risk if it lost and was responsible for the legal costs of the Council, he knew little about the arbitration. In August 2002 he asked his solicitor, Mr Bushby, to make some enquiries in relation to the arbitration. Mr Bushby carries on practice under the firm name of Phillip Bushby International. 8 On 4 September 2002 Mr Yazbek signed a transfer of his one share in ARS to Mr Nicholas, and resigned as a director of ARS. On that same day, Mr Nicholas signed a letter saying: "I John Arthur Nicholas acknowledge that in the transfer of Anwar Yazbek share in ARS to John Nicholas that there are outstanding building matters that are to be resolved by arbitration. Proceeds resulting from the arbitration process in relation to the building contract will be transferred from ARS to Fyntray Project Management." 9 Mr O'Mara had given directions in the arbitration on 11 July 2002. By the end of August 2002 pleadings had been exchanged, and the solicitors acting for ARS in the arbitration, James A Moustacas & Co ("Moustacas & Co"), had requested consent to amend their Points of Claim, and for consequential amendments to be made to the timetable. On 2 September 2002 ARS provided the Council with a list of documents. Mr Bushby Investigates the Arbitration Proceedings 10 On 2 October 2002 Mr Bushby wrote to Moustacas & Co. He said that he acted for ARS and Mr Nicholas, that Mr Yazbek was no longer a shareholder in, or office bearer in, ARS, and that Mr Nicholas wanted to review the arbitration. On behalf of ARS, he instructed Moustacas & Co to take no further action of any sort in relation to the arbitration, until further written instructions were given. On 4 October 2002, at Mr Bushby's request Moustacas & Co sent him their entire file relating to the arbitration. 11 One of the first matters which Mr Bushby sought to clarify was who would be responsible for the payment of the fees of Moustacas & Co for acting on behalf of ARS in the arbitration. By 14 October 2002 he was told that Moustacas & Co would not be looking to ARS for their costs at any stage of the arbitration. Another matter of concern to Mr Bushby was the likely quantum of costs which might be payable to the Council if ARS were to lose the arbitration. For the purpose of estimating that amount, he asked Moustacas & Co to give: "… an estimate of the totality of fees which would be incurred since this matter commenced until its conclusion presuming a 2-3 day arbitration. This estimate is to include counsel's fees, expert witnessed, arbitrator's expenses, etc."