2004 No. 45 SP
JUDGMENT of Ms. Justice Laffoy delivered the 30th day of July, 2004
In these proceedings brought by way of special summons the applicant claims an order granting leave to enforce what is described as "the valuation decision" of Gerry O'Brien of 17th December, 2002 in accordance with the provisions of s. 41 of the Arbitration Act, 1954 (the Act of 1954).
The respondent is sued in his capacity as a personnel representative of David Collis Lee (the Deceased), who died on 1st October, 2002, and probate of whose will was granted to the respondent, the sole executor named therein, on 31st July, 2003.
In a separation agreement dated 25th July, 1990, made between the applicant of the one part and the Deceased of the other part provision was made in relation to the ownership of the share capital in Collis-Lee (Ireland) Limited (the Company). It was provided that on the happening of a certain event, which apparently happened, the applicant should execute such minutes and resolutions as might be required to give effect to the following changes in the memorandum and articles of association of the Company:
i. the deceased should be appointed Managing Director and Chairman of the company for life with a casting vote; and
ii. in the event of the death of either the deceased or the applicant, he or she should be deemed to have offered his or her shares in the company for sale at market value, calculated in accordance with the revised Articles of Association of the Company immediately prior to death to the other shareholder.
It was provided that the market value of the applicant's 50% shareholding should be deemed to be 50% of the market value of the entire Company as a going concern.
Amended articles of association of the Company were adopted by special resolution on 21st September, 1990 pursuant to the separation agreement. It would appear that the amended articles were not filed in the Companies Office. However, it is common case that the amended articles regulate the issues between the applicant, the respondent and the Company. Clause 2.1 of the amended articles provides that no shares shall be transferred to a person, not being an existing shareholder or the lawful spouse or child of an existing shareholder so long as any existing shareholder is willing to purchase such shares at either the price specified by the proposing transferor or at fair value, as defined. Clause 2.2 provides that in order to ascertain whether any existing shareholder is willing to purchase shares offered for sale, the intending transferor shall serve notice on the board at the Company's registered office. Clause 2.3 provides that the transfer notice shall specify, inter alia, the price which the transferor seeks for the shares. A time limit of 30 days from the date of service of the transfer notice on the Board is prescribed within which an existing shareholder must indicate in writing to the Board willingness to purchase the shares at the price stated in the transfer, notice or at a price to be decided by the auditor as thereafter provided. Clause 2.6 deals with determination of fair value and, in its entirety, provides as follows:
"2.6 If the proposed sale price of the shares appearing in the Transfer notice is not accepted by an existing shareholder and the said shareholder indicates his dissatisfaction with the sale price in writing to the Board within the 30 day limit specified in the transfer notice, the auditor shall be requested by the board to establish a fair value for the share or shares and they shall do so within thirty (30) days of the shareholder indicating his dissatisfaction with the said price.
2.6.1. In preparing his valuation pursuant to this Clause 2, the auditor shall value any shares comprised in a transfer notice as an aliquot part of the whole company and not as a minority holding therein.
2.6.2. In exercise of his functions under this clause the auditor shall act in the capacity of an arbitrator and not as an expert within the meaning of the Arbitration Act, 1954 (as amended)."
Clause 2.7 provides that immediately upon receipt of the auditor's valuation of the shares comprised in the transfer notice, a revised copy incorporating therein the value set by the auditor (i.e. fair value) shall be circulated to the existing shareholders who will have 30 days from the date of service to deliver to the secretary of the Company an irrevocable application for all or any of the shares specified in the transfer notice.
Following the death of the Deceased, but before the grant of probate was extracted, the applicant, through her solicitors, notified the respondent that she intended to exercise her right to acquire the Deceased's 50% shareholding in the Company. Having obtained a grant of probate, the respondent wrote to the applicant, through her solicitors, a letter intended to be a transfer notice in respect of the Deceased's 50% shareholding in the Company and stipulating a price in excess of €1.28 million. The applicant, through her solicitors, by letter dated 13th October, 2003 responded within the 30 day period indicating that she was unwilling to purchase the shares at the price set out in the transfer notice and requested that the respondent invoke clause 2.6 of the Articles for the appointment of the Company auditor in order to establish a fair value for the shares.
The Company's auditor is Gerry O'Brien, of O'Brien Watters, Chartered Accountants. On 18th November, 2003 the respondent, in his capacity as personal representative of the Deceased, wrote to Mr. O'Brien enclosing certain documentation, including the articles of association and the separation agreement. In the letter, which was copied to the applicant's solicitors, Mr. O'Brien was apprised that the applicant had indicated her intention to acquire the Deceased's 50% shareholding, that a price had not been agreed, and that pursuant to the articles, the issue of price was to be referred to Mr. O'Brien as the Company's auditor. Mr. O'Brien's attention was drawn to clause 2 of the Articles and, in particular, the provision that he must act in the capacity of an arbitrator pursuant to the Act of 1954. He was told that, pursuant to clause 2.6, he was required to establish the fair value for the shares within a period of 30 days from the date of the referral letter. He was furnished with some information in relation to the assets and liabilities of the Company, apart from the principal asset which was an investment property, and was told that the respondent was seeking up-to-date details of these and the same would be furnished to him. He was also told that all correspondence should be copied to the applicant's solicitors.
Between 18th November, 2003 and 17th December, 2003 there was no correspondence or communication whatsoever between Mr. O'Brien, on the one hand, and the respondent or the applicant, on the other hand.
On 17th December, 2003 Mr. O'Brien wrote to the respondent in relation to the valuation of the 50% shareholding of the Deceased in the Company. He referred to the terms of the Articles and the applicant's expressed intention to purchase the Deceased's 50% shareholding at fair value as defined by the articles, that fair value was to be determined by the auditors acting in the capacity of arbitrator and not as expert, and that it was to be determined within a specific time frame of 30 days from 18th November, 2003. The letter then stated:
"We will thus base our opinion on the facts that are available to us."
Having set out what was described as the "recommended method of valuation" of a company as a going concern and, having outlined the basis on which he was applying that methodology to the Company, Mr. O'Brien concluded as follows:
". . . we get a valuation of . . . say €1,400,000 for the company, and then €700,000 for a 50% shareholding."
By letter of the same day, 17th December, 2003, Mr. O'Brien sent to the applicant's solicitors what he described as "copy of our valuation of shares" as instructed by the respondent on 18th November, 2003.
The following is an outline of what transpired between the respondent and the applicant, on the one hand, and Mr. O'Brien on the other hand following 17th December, 2003, both before and after the commencement of these proceedings, which were initiated by a special summons which issued on 4th February, 2004:
• On 23rd December, 2003 the respondent wrote to Mr. O'Brien stating that he had not discharged his obligations to act as arbitrator and had not addressed the issue of an oral hearing and had not taken any evidence. In the circumstances it was stated that, if the letter of 17th December, 2003 was intended to be an award pursuant to the referral, then it was fundamentally flawed.
• By letter dated 5th January, 2004 Mr. O'Brien responded referring to the request contained in the letter of 18th November, 2003 and the time frame. He said that he understood that the submissions which accompanied the letter of 18th November, 2003 were all the evidence available. His valuation was prepared in good faith "as a basis for negotiation between the parties". He had not contacted either party with a view to maintaining his independence in forming his opinion. He then invited "any further submissions" from either party to be submitted by 23rd January, 2004 for consideration and he asked the parties to agree on a time and venue suitable for all parties to meet.
• By letter dated 8th January, 2004 to Mr. O'Brien, the respondent stated that it was taken that the letter of 17th December, 2003 was not intended to constitute an award pursuant to the Arbitration Acts, 1954-1980, It was also stated that it was assumed that the purpose of the proposed meeting was so that Mr. O'Brien could issue directions having regard to the submissions of the parties with respect to how the matter might progress. It was pointed out to Mr. O'Brien that, as an arbitrator, he had a discretion to seek an extension of time from the parties and that the respondent would consent to an extension of time "sufficient to enable a meeting to be convened for the purpose of issuing directions and for the matter to be brought to an orderly conclusion thereafter."
• By letter dated 9th January, 2004 the applicant, through her solicitors, informed Mr. O'Brien that at that stage it was not open to him to seek to revisit the decision reached by him in respect of the valuation of the shareholding on 17th December, 2003. It was not appropriate that there should be further submissions or a meeting.
• By a further letter of 15th January, 2004 the applicant, through her solicitors, requested confirmation by Mr. O'Brien that he would proceed to implement the determinations set out in his letter of 17th December, 2003 and threatening proceedings to protect the applicant's interests in the event of such confirmation not being forthcoming within seven days.
• By letter dated 16th January, 2004 the respondent sent to Mr. O'Brien a letter of 15th January, 2004, which he had received from the applicant's solicitors and a copy of his response, dated 16th January, 2004, thereto. It was suggested that if it was the case that Mr. O'Brien had not sought legal advice with respect to his functions as arbitrator he might consider doing so.
• By letter dated 19th January, 2004 Mr. O'Brien asked the respondent to adhere to the date of 23rd January, 2004 for the submission of any further evidence, written or oral. He also requested that, if the respondent considered the valuation set out in his letter to be unfair, the reasons should be set out and he would deal with them. By letter of the same date to the applicant's solicitors enclosing a copy of that letter, Mr. O'Brien stated that he did not understand the addressee's anxiety about protecting the applicant's interest and the seven day deadline.
• By letter dated 20th January, 2004 the respondent informed Mr. O'Brien that he would like the opportunity of making oral submissions to him. He anticipated that he would have two witnesses. He requested that a time and date for that purpose be nominated.
• By letter dated 21st January, 2004 the applicant's solicitors informed Mr. O'Brien that they had been instructed to commence High Court proceedings seeking the enforcement of "the arbitration award of December". It was also stated that it was inappropriate and illegal "to commence a fresh arbitration" as was proposed. Confirmation was sought that the meeting of 23rd January, 2004 would not go ahead.
• By letter dated 22nd January, 2004, Mr. O'Brien informed the applicant's solicitors that he had noted the contents of the letter of 21st February, 2004.
• Following the listing of this matter for hearing in this court, by letter dated 21st July, 2004 the respondent requested Mr. O'Brien to write confirming "whether or not that letter [dated 17th December, 2003] purports to be an Award pursuant to our letter of 18th November, 2003".
The respondent set out his opinion that it did not constitute an award.
• By letter dated 26th July, 2004 to the respondent, Mr. O'Brien stated as follows:"I thought it was clear from previous correspondence that my letter dated 17/12/2003 was not intended as an award; it was an opinion on a valuation as requested by you."
The following is a summary of what transpired between the applicant, through her solicitors, and the respondent following receipt of Mr. O'Brien's letter of 17th December, 2003 and before the initiation of these proceedings:
• By letter dated 5th January, 2004 the applicant's solicitors informed the respondent that the applicant was accepting the value as assessed by Mr. O'Brien and wished to complete the transaction on or before 16th January, 2004.
• By letter dated 7th January, 2004 in response, the respondent informed the applicant's solicitors that he was awaiting a response to his letter of 23rd December, 2003 to Mr. O'Brien. He further stated that, if the letter dated 17th December, 2003 purported to be an award, it was fundamentally flawed and the respondent would have no option but to pursue the matter.
• By letter dated 15th January, 2004 the applicant's solicitors, having outlined their position on the matter and stated that the arbitrator, having made his award, was functus officio and had no jurisdiction to change the award or to reopen in any shape or form the arbitration process, called on the respondent to take all necessary steps to implement the transfer of shares on the basis of the arbitrator's valuation. Legal proceedings were threatened in the absence of confirmation that this would be done within seven days.
• By letter dated 16th December, 2003 to the applicant's solicitors, the respondent took issue with the applicant's interpretation of events. It was stated that it was evident from Mr. O'Brien's letter of 5th January, 2004 that the arbitration process had not been concluded.
• These proceedings then intervened and the position adopted in the correspondence of mid-January, 2004 was maintained by both sides: the applicant contending that the letter of 17th December, 2003 constituted an award which was enforceable under the Arbitration Acts, 1954-1998; and the respondent contending that the arbitration had not concluded and that the letter was not an award.
• Following the listing of the proceedings in this court for hearing, by letter dated 21st July, 2004 the respondent reiterated that the letter of 17th December, 2003 did not constitute an award and, accordingly, that these proceedings are ill-founded. The respondent indicated that, if the applicant did not concede that the letter of 17th December was not an award, proceedings would be instituted for declaratory relief to that effect.
The legal submissions made by the respective counsel at the hearing of the special summons were consistent with the line which had been taken by the parties in correspondence and in the affidavits filed in the proceedings.
Counsel for the applicant submitted that the letter of 17th December, 2003 was an award and that by virtue of s. 27 of the Act of 1954 it was final and binding on the parties. In consequence, the arbitrator had become functus officio. Moreover, the applicant was entitled to have the award enforced in the same manner as a judgment by virtue of s. 41 of the Act of 1954. If the respondent was contending that the court should set the award aside under s. 38 of the Act of 1954, he is out of time because under order 56, rule 4 (f) of the Rules of the Superior Courts, 1986 the application to set aside should have been brought within six weeks after the award had been made and published to the parties. Moreover he submitted that this is not a case in which it would be appropriate to exercise the court's discretion to extend the time for initiating such proceedings.
That last submission is, in reality, academic, because the respondent does not seek to have the award set aside. The respondent's position is that there has been no award and, in particular, that the letter of 17th December, 2003, did not constitute an award. In discharging his duties an arbitrator must apply fair procedures and natural justice. It is clear on the face of the letter of 18th November, 2003, that Mr. O'Brien did not have all the information he required. He did not conduct a hearing. It was submitted that, if these proceedings were to have any further life, the matter should be adjourned to plenary hearing because there is a substantial dispute between the parties.
A number of authorities were cited by counsel, but I did not find them particularly relevant to what I consider to be the real issue in the matter.
In my view, the real issue in this case is whether Mr. O'Brien acted as an arbitrator should act, conducted a process which could lead to an award which is enforceable under the Act of 1954 and, in fact, made such an award. The articles of association are quite clear. In determining "fair value" the Company's auditor" is required to act as an arbitrator and not as an expert. The essential difference between an arbitrator and an independent expert determination is that the former exercises a judicial function of determining a dispute on the evidence and submissions of the parties but the latter has a duty of investigation and discovery of the facts and determines the issues on the basis of his own knowledge and experience (cf: Cato on "Arbitration Practice and Procedure Interlocutory and Hearing Problems", third edition 2002 at p. 882).
In my view, as the history of the process which I have outlined above illustrates, it is clear beyond doubt that Mr. O'Brien misunderstood his role. In furnishing his opinion on the value of the Deceased's shareholding contained in his letter of 17th December, 2003 he acted as an expert. He did not act as an arbitrator. He did not conduct the type of process that is required from an arbitrator and the opinion expressed in his letter expressed on 17th December, 2003 is not an enforceable arbitration award.
I can see no point in adjourning this matter to plenary hearing. The facts are not in dispute, although the proper inferences to be drawn and the conclusions to be based on the facts are in dispute. However, as I have stated, the position seems to me to be clear. As there is not an enforceable award the proceedings must be dismissed.