Fakafanua v Discovery Corporation Ltd [2024] TOSC 78; CV 52 of 2023 (23 September 2024)

IN THE SUPREME COURT OF TONGA
CIVIL JURISDICTION
NUKU'ALOFA REGISTRY
CV 52 of 2023

BETWEEN:
ZAR NICHOLAS PAKU FAKAFANUA
- Plaintiff

AND:
DISCOVERY CORPORATION LTD
- Defendant

RULING
APPLICABILITY OF THE ARBITRATION CLAUSE

BEFORE: HON. LORD CHIEF JUSTICE MALCOLM BISHOP KC

Date: 23 September 2024
To: Mr C. Edwards for the Plaintiff
Mrs F. Vaihu for the Defendant

1. HISTORY OF PROCEEDINGS

1. On the 5 September 2024, I gave a Direction that the issue of the applicability or otherwise of an arbitration clause should be determined before the matter proceeds any further.
2. In response to that Direction helpful submissions have been filed by each party together with relevant authorities for which I am grateful. I make it plain that my Direction relates solely to that narrow but important question namely whether arbitration clause governs the future conduct of these proceedings.
3. In short, the subject matter is a tenancy agreement for the demise of business premises namely a petrol station for a term of 10 years. It is submitted that since this is a lease and was not registered under the Land Act 2020 it ceases to have any effect.
4. Whether that is correct as respects to the contractual relationship between the parties is a matter for decision at the final hearing.
5. The current concern is where should that hearing be, should it be before an arbitrator or a court pursuant to an arbitration clause of the agreement.
6. The clause itself is in the following terms at paragraph 9:

“In the event of any dispute arising between the landlords and the tenants to the meaning and the effect of agreement or otherwise arising out of the arrangements between them shall be referred exclusively to arbitration in the Kingdom of Tonga ( and not to any court of laws )and the parties hereto bind and oblige themselves to refer to any such disputes to the amicable and final settlement of an arbitrator mutually agreed by them (failing which agreement an arbitrator to be nominated and appointed by the president of Tonga Chamber of Commerce and industry Inc) and to accept the decision of the said arbitrator as final and binding between them and not subject to appeal of review in any court of law.”

7. Both parties accept that on its face the arbitration clause covers the current dispute which arose because the original landlord sadly died and, it is submitted, so did the agreement.
   
   2. DISCUSSION
8. The issue before me is whether the conduct of the parties has ousted the applicability of that clause. It is submitted by the plaintiff that the defendant has submitted to the jurisdiction of the court in such circumstances as to oust the arbitration clause.
9. The defendants by counsel, with commendable frankness, accept that they entered into the defence of these proceedings without considering the arbitration clause. It is necessary therefore to consider the history of the pleadings.
10. The statement of claim dated the 23 October 2023 avers that at the death of the original landlord to the agreement Mr. Kisione, the Defendant failed to make payments under the agreement or notify the Administrator of the deceased’s estate of its rights or interests in the property in question.
11. As a result of the defendant’s nonpayment of rent, the plaintiff seeks an order declaring that the tenancy agreement dated the 20 of November 2019 has expired claiming at paragraph 6 of the statement of claim that

“on the death of Mr Kisione (the original landlord) the agreement ceased as it did not bind Mr Kisione’s successors in title or others. It was limited solely to his person”

12. That in essence is the issue to be determined at the final hearing and I say no more about it at this stage.
13. The defence was filed on the 1st of December 2023 in which paragraph 6 of the statement of claim is addressed in the following terms

“ she admits the allegation contained in paragraph 6 of the statement of claim . Further she states the deceased and the defendant understanding was that the agreement will run for the whole of the term even if he died before the expiry of the term”

14. I hold that what the defendant is saying is that she agrees that the death of Mr Kisione caused the tenancy to cease, but that states that “there was an understanding that the agreement will continue nevertheless and will run for the whole of the term even if he died before the expiry of the term.” A Paragraph of the defence could have been better and more clearly drafted, but the issue is clear.
15. The plaintiff states that the agreement was personal to the parties and that it did not it did not survive the decease of the plaintiff; whereas the defendant states although that might matter have been the strict position in relation to the tenancy agreement there was an agreement between the parties (which is referred to as an understanding) that the agreement will run for the whole of the term even if he died before the expiry of the 10 years.”
16. In a reply dated 11 December 2023 the plaintiff the states at paragraph 6:

“the plaintiff notes that the defendant admission of the allegation contained in paragraph 6 of the statement of claim. The assertion of understanding is not supported by the signed written agreement which the defendant has already admitted”.

17. That is an important matter, but it is not for me at this stage to decide, one way or the other. As I have already indicated I am solely concerned with the applicability or otherwise of the arbitration clause.
18. It was not until 9 February 2024 in a written submission to the court that the arbitration clause was first raised by the Defendant. This submission was made in response to an application by the plaintiffs to close the petrol station (the subject matter of the agreement) and to take possession thereof.
19. The question before me is whether by raising the arbitration clause at this stage of the proceedings the defendant can be permitted to rely on it as the governing the proper forum for final decision.
20. When an agreement contains an arbitration clause there are, in effect two agreements: first to perform the rights and obligations of the main agreement but also an agreement to refer any dispute arising therefrom to arbitration.
21. This is a consensual matter which the parties are free or to include or exclude in their agreement. Its applicability will depend on the intent of the parties when they agreed.
22. Where there is no explicit record of their intent the court must approach the matter from the standpoint of reasonable parties entering onto a commercial arrangement. If an impartial bystander with knowledge of all the material facts been asked the question, what if the plaintiff dies would the arbitration clause also die? In my judgment the parties would have answered something along the lines, “of course not, the arbitration is meant to settle all disputes between us referable to the tenancy agreement.”
23. It follows in my judgment that clear words not to rely on the agreement must be established before it is of no effect. No where in the pleading is it suggested that the agreement does not apply but simply that neither of the parties thought at that stage to rely on it. That was unfortunate but in my view is not fatal to the efficacy of the arbitration agreement itself.
24. I have been helpfully referred to Nafta Products Limited v Fili Shipping Co. Ltd [2007]UKHL 40. In a speech with which the other members of the judicial committee agreed, Lord Hoffman made refence, (at paragraph 9) to paragraph 7 of the [UK] Arbitration Act 1996 :

“unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, nonexistent or ineffective because the other agreement is invalid, or did not come into existence or has become ineffective, and it shall be for that purpose to be treated be treated as a distinct agreement ”

25. It is of course the case that the Arbitration Act 1996 has not been in enacted in Tonga, but it seems to me the underlying jurisprudence makes good sense. As the court held at paragraph 5:

“arbitration is consensual. It is it dependent upon the intention of the parties as expressed by their agreement. Only the agreement can tell you what kind of disputes they intended to submit to arbitration. But the meaning which parties intended to express by the words which they will be affected by the commercial background and the readers understanding of the purpose for which the agreement was made. Businessmen in particular are assumed to have entered into agreements to achieve some rational commercial purpose and an understanding of this purpose will influence the way in which one interprets their language.

26. The court further held at paragraph 17:

“Of course, there are there may be cases in which the ground upon which the main agreement is invalid is identical with the ground upon which the arbitration agreement is invalid for. For example, if the main agreement and the arbitration agreement are contained in the same document and one of the parties claims that he never agreed to anything in the document and that his signature was forged, then it will be an attack on the validity of the arbitration agreement. But the ground of attack is not that the main agreement was invalid. It is that the signature to the arbitration agreement was forged. Similarly, if a party agrees that someone who procured to sign as agent on his behalf had no authority whatever to do to conclude any agreement on his behalf, that is an attack on both the main agreement and the arbitration agreement”.

27. I accept of course that it was not until the pleadings had been launched that it first dawned on the defendants to invoke the arbitration clause. But failure to do so does not amount to an election to abandon it.
    
    100. FINAL RESULT
28. In my judgment clear words are necessary to abrogate an arbitration agreement, a fortiori where, as here, the subject matter of the agreement (to rent a petrol station for 10 years) remains intact and unaffected by the death of the plaintiff, apart from the temporary nonpayment of rent which is a subordinate issue.
29. No such election took place here and accordingly the arbitration clause remains in force.
30. Let me make it clear once again I am not deciding whether the main agreement has been frustrated by the death of the landlord, that is a matter to be decided, but the forum for decision I hold is arbitration not the court.
31. Accordingly, I stay these proceedings on the basis that the defendant will diligently pursue an arbitration claim and that both parties under the agreement will use their best efforts, “to refer any such disputes to the amicable and final settlement of an Arbitrator in default of which a nomination must be made by the president of the Tonga Chamber of Commerce and industry Inc.”
32. Costs are reserved.

NUKU’ALOFA		HON. MALCOLM BSHOP KC
23 September 2024		LORD CHIEF JUSTICE