Ironsands Investments Ltd v Cheung Kong Infrastructure Holdings Ltd v Toward Industries Ltd v New Zealand Steel Ltd

• Jurisdiction: New Zealand
• Judge: Ellis J
• Judgment Date: 08 June 2012
• Neutral Citation: [2012] NZHC 1277
• Docket Number: CIV-2011-404-1289 CIV-2011-404-6843
• Court: High Court
• Date: 08 June 2012

Under the Arbitration Act 1996

BETWEEN

Ironsands Investments Limited

First Applicant

And

Cheung Kong Infrastructure Holdings Limited

Second Applicant

and

Toward Industries Limited

First Respondent

And

New Zealand Steel Limited

Second Respondent

[2012] NZHC 1277

Court:

Ellis J,

CIV-2011-404-1289

CIV-2011-404-2012

CIV-2011-404-6843

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Application to strike out applications to have arbitral interim liability award and corresponding quantum award set aside — agreement between parties to purchase shares in mining company — purchaser under obligation to make reasonable endeavours to obtain consent of Overseas Investment Office (“OIO”) but advised OIO would close mining operation once business acquired — OIO refused consent — arbitration found purchaser had not used all reasonable endeavours and vendor had breached vendor warranties in regards to disclosure — purchaser applied to set aside liability award on ground that it was induced by “(equitable) fraud and corruption (of process)”, and quantum award on grounds that the resale costs assessment was made without evidence, and the ruling that purchaser's counterclaim could not be offset breached natural justice as not given opportunity to make submissions on issue and no reasons given for the finding — whether in strike out proceedings involving arbitral awards Court did not have to accept at face value allegations of fact which could be tested against the record — whether applications to set aside liability and quantum awards were clearly untenable.

Counsel:

F Cooke QC, M Colson and F Tregonning for Applicants

J Hodder SC, D Alderslade and J Graham for Respondents

FMR Cooke QC, PO Box 1530, Wellington 6140

RESERVED JUDGMENT OF Ellis J

This judgment was delivered by me on 8 June 2012 At 4 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

1 This judgment relates to further challenges brought by Cheung Kong Infrastructure Holdings Ltd and its subsidiary Ironsands Investments Ltd (together, “;CKI”) to two awards made by Alan Galbraith QC as a result of an international arbitration conducted by him during 2010 and 2011. Earlier challenges by CKI to Mr Galbraith's interim liability award and to ancillary rulings made by him were largely struck out by Courtney J on 8 July 2012.

2 The arbitration related to a 2008 agreement by CKI to buy the shares in New Zealand Steel Mining Ltd, then owned by Toward Industries Ltd and, ultimately, by New Zealand Steel Ltd (“;NZS”). The business operated by NZS involved an iron mining operation situated at Taharoa, south of Hamilton. The contract required CKI to use all reasonable endeavours to obtain the consent of the Overseas Investment Office (OIO) to the purchase. But as a result of the global financial crisis in late 2008, CKI decided it no longer wished to pursue the venture. On 8 December 2008 CKI advised the OIO that, once it had acquired the business, it would close the mining operation. OIO consent was consequently refused and settlement under the agreement necessarily did not occur.

3 NZS then asserted that CKI had breached the contract by failing to use all reasonable endeavours to obtain OIO consent. The parties agreed to arbitrate the resulting dispute. By way of counterclaim, CKI alleged that NZS had failed to advise CKI timeously of adverse developments that were material to the business and that this failure was in breach of the vendor warranties contained in the contract, which relevantly provided that:

• 4.1 To the best of the knowledge and belief of the Vendor all material comprised within the Due Diligence Information … is materially accurate and is not materially misleading in its context whether by omission or otherwise, having regard to the totality of those materials.…

• …

• ……

• …

• 6.1 The Due Diligence Information contains accurate and complete particulars of all material commercial agreements to which the Company is a party and which relate to the Business.

4 The parties agreed to a split trial. The liability hearing took place over some 22 days in February 2010. The quantum hearing took place over some nine days in late April and early May 2011.

5 After the liability hearing and before the release of Mr Galbraith's interim award, NZS cancelled the agreement and sought damages. CKI then challenged its ability to do so and this led to two further decisions from Mr Galbraith known as the “;election” ruling and the “;cancellation” ruling. Mr Galbraith found for NZS in both instances. Those decisions do not require further consideration in this judgment. 1

The impugned decisions

6 In his interim liability award dated 30 April 2010 Mr Galbraith found that:

• (a) CKI had not used all reasonable endeavours to obtain OIO consent.

• (b) NZS breached its vendor warranties to CKI in relation to:

• (i) The completeness and accuracy of the information it had provided to CKI in the course of the due diligence exercise; and

• (ii) The timeliness of its communications to CKI regarding developments affecting the business.

7 As regards the finding of CKI's liability, Mr Hodder SC submitted, and I accept, that Mr Galbraith did not consider that the business decision made by CKI and advised to the OIO was by and of itself unreasonable. Rather, he held that in the context of the terms of the particular contract at issue the “;reasonable endeavours” obligation required CKI to take all reasonable steps to mitigate the negativity of that

decision in its communications with the OIO, and it had not done so. Thus at [265] and [266] of the liability award he said:

… in my view any applicant desirous of putting its best foot forward to obtain a consent which was otherwise forced to convey negative news would seek to mitigate that negativity in any reasonable way possible. Whether that would or would not ultimately be accepted by the OIO as mitigation, the attempt would be made by any determined applicant. While Mr Miles put the submission very eloquently, all reasonable endeavours, in my view, required something better than the 8 December letter.

The difficulty which faces CKI in respect to the closure decision is the difficulty I referred to earlier in the discussion of the legal test. An all reasonable endeavours obligation, does not, except in very particular circumstances, allow a party to prefer its own interests in acting in a way inimical to the contractual objective. It will be apparent from my discussion of the process and justifications for the CKI decision that it involved a choice made by CKI for what CKI perceived as its own commercial interest. Mr Logan and Mr Johnson justified the decision as being a decision which it was reasonable for CKI to make in its own interest. The choice may, had it not derailed the OIO consent process, have turned out to be a good or bad decision for CKI. That is irrelevant. What is important for present purposes is that it was a decision that was inevitably negative and likely fatal to the OIO application which CKI was in no way compelled to make. The Bell Gully letter of 28 November to the OIO had already signalled the possible cessation or significant reduction of production, redundancies and other cost cutting exercises “;soon after” acquisition of the business. Despite that and, as Mr Gordon acknowledged, somewhat surprisingly the OIO was still prepared to recommend consent.

…

8 And later, at [271] and [272] he said:

The reasons put forward by CKI to justify its 6 December decision were all reasons arising from changes in market conditions which, in CKI's judgment, affected the value to it of the business. The effect of CKI's 6 December decision was to significantly elevate the vendor's risk of OIO consent being refused to a near certainty. In a real sense CKI made a decision which it believed increased or preserved value for it but which almost inevitably was destructive of value for the vendor. In my view that choice was inconsistent with the agreed distribution of benefits, risks and obligations under the contract. Accordingly CKI could make that decision but it then had to pay for the difference to the contracted for distribution of risks and benefits under the Agreement.

In short the 6 December decision was objectively negative and likely fatal to the successful achievement of the OIO consent and could not be justified as falling within the reasonableness qualification of the all endeavours obligation. …

9 As I have said, following Mr Galbraith's determination that NZS was entitled to cancel the contract and to pursue damages, there was a separate remedies hearing. The damages sought by NZS related to:

• (a) The loss suffered as a consequence of the difference between the agreed purchase price (approximately $250 million) and the value of the business following the global financial crisis; 2

• (b) Losses NZS said it had incurred in attempting to resell the business after CKI's repudiation of the contract.

10 CKI sought to set off any damages payable to NZS against the damages it sought on its counterclaim in relation to the breaches of the vendor warranties referred to above.

11 Further discovery was provided by NZS to CKI in relation to the losses that it claimed to have suffered.

12 In his quantum award dated 29 July 2011 Mr Galbraith held that:

• (a) There had been no drop in the value of NZS's business at the relevant date and so damages were not payable by CKI to NZS in that respect;

• (b) NZS was entitled to damages for its expenses in relation to its attempt to mitigate the losses it had incurred as a result of CKI's repudiation. Those expenses comprised consultants' fees of AU$250,000 and legal fees of NZ$243,272.69 that were incurred in the course of NZS's attempts to resell the business;

• (c) CKI was not entitled to damages on its counterclaim, essentially because they were precluded by cl 12.14 of the...