Tavendale & Partners Limited v Dineen [2022] NZHC 1530 (30 June 2022)

Last Updated: 21 July 2022

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2021-409-000586 [2022] NZHC 1530

BETWEEN	TAVENDALE & PARTNERS LIMITED Plaintiff
AND	MARK JOHN DINEEN Defendant

Hearing:	16 May 2022
Appearances:	A S Butler and J A Tocher for Plaintiff P F Whiteside QC and J R Pullar for Defendant
Judgment:	30 June 2022

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 30 June 2022 at 3.30 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

TAVENDALE & PARTNERS LTD v DINEEN [2022] NZHC 1530 [30 June 2022]

Table of Contents

Para No

Background
The constitution and the 2009 shareholders agreement	[2]
The merger	[13]
The Heads of Agreement	[17]
Following the merger	[25]
The Arbitration Act	[27]
The Court’s approach	[32]
The parties’ positions	[42]
My analysis	[51]
2009 shareholders agreement	[52]
Clause 7.3 of the HOA	[53]
The 2014 draft shareholders agreement and the HOA	[61]
The scope of cl 12	[84]
A further matter raised	[93]
Result	[94]

• [1] The plaintiff (Tavendale) sues the defendant (Mr Dineen) for breach of fiduciary duties and for retaining electronic data in breach of his personal undertaking. In reliance upon art 8(1) of sch 1 of the Arbitration Act 1996, Mr Dineen applies for a stay of the proceeding and a referral of the disputes to arbitration.¹ Tavendale opposes Mr Dineen’s application.

Background

The constitution and the 2009 shareholders agreement

• [2] Tavendale is an incorporated law firm.

• [3] Mr Dineen is a solicitor. He was a shareholder and a director of Tavendale from 6 November 2009 to 30 July 2021.² He now practises law with another law firm.

• [4] Tavendale alleges Mr Dineen breached fiduciary duties owed to it by entering into loan transactions with its clients and failing to account for interest earned. Tavendale also alleges that, upon exiting the firm, Mr Dineen retained Tavendale’s electronic data in breach of his personal undertaking.

• [5] Tavendale’s constitution is dated 6 November 2009. It provides for Group A and Group B shares to which different rights attach. The constitution contemplates a shareholders agreement. The term “Shareholders Agreement” is defined, and there are several references to it throughout the constitution.³

• [6] Tavendale and the then Group A and Group B shareholders signed a shareholders agreement on 6 November 2009. The Group A shareholders were the directors of Tavendale working as lawyers at Tavendale. The Group B shareholders were predominantly spouses. The parties’ associated family trusts were also parties.

• [7] Several clauses in the shareholders agreement were referred to in submissions.⁴ It will suffice to presently refer to cls 6.4, 12, 13 and 14.

¹ An application to strike out the proceeding was not pursued by Mr Dineen.

² Counsel referred to Group A shareholders of Tavendale as “Partners”.

³ See cls 5.1, 6.1, 18.1, 20.5, 22.1 and 24.1.

⁴ See Background B, cls 1.1, 2.1, 6.2, 6.4, 8.4, 12, 13.1, 14, 22, 27 and schedule 2.

• [8] Clause 6.4 required the parties, inter alia, in exercising rights, powers and discretions under the shareholders agreement to act in good faith and in the best interests of Tavendale.

• [9] Clause 12 provided that, except in relation to urgent interlocutory relief, where any “question, dispute or difference” arose between the parties “concerning or in any way arising out of this Agreement or the performance of either party to this Agreement” no party was entitled to commence any court or arbitration proceedings unless they complied with the procedures set out in cl 12. Those procedures involved the raising of a dispute by written notice, negotiation, referral to mediation and then arbitration.

• [10] Clause 12.6 provided:

If the dispute remains unresolved after the mediation, then the Dispute must be submitted to the arbitration of a single arbitrator agreed on between the parties, or in default of agreement to be nominated by the President of the New Zealand Law Society. The arbitration will be conducted in accordance with the Arbitration Act 1996 and the provisions of the Second Schedule of the Act will apply. The parties reserve the right to appeal to the High Court on any question of law arising out of an award.

• [11] Clause 13.1 provided the shareholders agreement remained in force until all bar one of the Group A shareholders agreed in writing to terminate it.

• [12] Clause 14 dealt with the conduct of Group A shareholders. Both positive and negative obligations were imposed. Relevantly, cl 14.1 provided:

Positive Obligations Each Group A Shareholder must:

1. devote his or her whole time and attention to or for the Business except to the extent otherwise agreed in writing by the Board;

2. comply with his or her obligations under the [Lawyers and Conveyancers Act 2006] and all Regulations and Rules thereunder;

100. not act in a way contrary to the interests of the Company.

The merger

• [13] By 2014, the Group A shareholders of Tavendale were Mark Tavendale, Andrew Leete and Mr Dineen.

• [14] On 1 October 2014, there was a merger of Tavendale and the Ashburton law firm, Cooney Silva Evatt Ltd (CSE). The merger was given effect by the acquisition of CSE by Tavendale.

• [15] Timothy Silva and Thomas Evatt were principals of CSE.

• [16] The merger occurred quickly, and there were time pressures that prevented it being fully documented prior to 1 October 2014. On 13 September 2014, a draft shareholders agreement, based substantially upon the 2009 shareholders agreement, was circulated to the principals of Tavendale and CSE, but certain matters were not agreed and it was not signed. Despite that, the draft shareholders agreement is significant and at this juncture it should be noted its cls 6.4, 12, 13 and 14 were in the same terms as those clauses in the 2009 shareholders agreement.

The Heads of Agreement

• [17] In the absence of a new constitution and shareholders agreement (or a completed agreement for the sale and purchase of the assets of CSE) Tavendale, CSE, and Messrs Tavendale, Leete, Dineen, Silva and Evatt entered into a Heads of Agreement (HOA) dated 26 September 2014.

• [18] Under the heading “Background”, the HOA states that Messrs Tavendale, Leete, Dineen, Silva and Evatt would participate in the ownership of Tavendale from 1 October 2014, “in accordance with these Heads of Agreement”.

• [19] Under the heading “Overall Structure”, cl 1 provides, amongst other things:

(a) for the sale of the assets in CSE to Tavendale as a going concern on 1 October 2014;

(b) that Messrs Tavendale, Leete and Dineen would sell sufficient Group A and Group B shares in Tavendale to Messrs Silva and Evatt so that the overall proportionate shareholding of the Group A and Group B shares would be 22 percent each to Messrs Tavendale, Leete, Dineen and Silva, and 12 percent to Mr Evatt;

(c) that in due course shares would be issued or transferred to two further parties who were joining the firm under separate arrangements to be agreed; and

(d) the parties would enter into a shareholders agreement and adopt a new constitution for Tavendale.

• [20] By cl 2, the sale of the assets of CSE to Tavendale was to proceed on 1 October 2014. The details were set out in cl 3.

• [21] By cl 2.2, all key steps and “documents identified above” would be finalised at the earliest possible opportunity after 1 October 2014. The reference to “documents identified above” would include the new constitution and shareholders agreement.

• [22] Clause 6 was headed “Shareholders Agreement” and provides the shareholders agreement would be based on the draft that had been circulated prior to the merger, with the exception of certain identified provisions. I set out cl 6 in full:

6. Shareholders’ Agreement

• 6.1 The Shareholders’ Agreement between the parties will be based on the draft Shareholders’ Agreement circulated by Leete on 13^th September 2014 at 10.42am with the exception of the following:

1. Clause 5.2 and 5.4 – if schedule 3 cannot be agreed then proceedings of the Board will be governed by Schedule 3 of the Companies Act 1993.
2. On any Transfer Event, the retirement of any Group A Shareholder or the exit of any Group A Shareholder (and their related Group B Shareholder) then in addition to the transfer price and repayment of current accounts, the exiting shareholders will receive their proportionate share of the retained earnings of TP calculated by the Company Accountant in accordance with the following:
   1. The Company Accountant will prepare financial statements and calculate retained earnings for TP up to the end of the month

prior to the exit date on the same basis as the financial statements to be completed for the year ending 30^th September 2014.

3. A dividend will be declared and the retained earnings will be distributed by way of dividend to the shareholders (including the exiting shareholders).
4. There will be no goodwill component to the Transfer Price, or any other goodwill payment to the exiting shareholders.
5. Clause 6.1(d) below shall apply in terms of payment to the exiting shareholders.
100. Clause 9.5 – a shareholder may by notice exit TP at any time in which case TP will buy the exiting shareholders’ shares and the exiting shareholder will be paid in accordance with the methodology set out above.

4. Clause 9.15 and 9.16 – any distributable cash reserves then reasonably available shall be paid to the exiting shareholders at the earliest reasonable opportunity with the balance of all other payments within 3 years of the transfer of shares.
5. Clause 9.18 – clause 9.18 shall be expressly excluded.
6. Clause 15 – clause 15 shall be expressly excluded such that there is no restraint of trade or current account forfeiture on exit in any circumstances for any Group A Shareholders.
7. Holidays – shall be increased to 6 weeks per annum for Group A Shareholders.
8. Clause 13.1 Duration – termination of the Shareholders’ Agreement shall be by unanimous Group A shareholder agreement.
9. Clause 19 – TP and all Group A Shareholders shall maintain runoff cover for the exiting shareholders benefit on the same basis as the remaining cover for TP and the Group A Shareholders.

• [23] Clause 7.3 provides that disputes between the parties “with regard to any provision of these Heads or on the documents” that could not be resolved in good faith would be resolved by mediation and, failing that, by arbitration.

• [24] Clause 7.6 states the HOA is legally binding on the parties.

Following the merger

• [25] The merger proceeded on 1 October 2014. Following 1 October, there were negotiations concerning the terms of a new shareholders agreement. Further drafts were distributed on 7 March 2015 and 3 May 2016, but no further shareholders agreement was ever signed.
• [26] Since 2014, Messrs Silva Evatt and Dineen have left Tavendale and are no longer shareholders or directors. There have been appointments and departures of what were referred to as salaried partners.⁵ It was intended that a class of Group C shares would be created for them, but this has not occurred.

The Arbitration Act

• [27] This case concerns primarily art 8(1) of sch 1 of the Arbitration Act, which provides:

8 Arbitration agreement and substantive claim before court

(1) A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.

• [28] In s 2 “arbitration agreement” is defined to mean:

... an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not

• [29] In the same section, “party” is defined as:

... a party to an arbitration agreement, or, in any case where an arbitration does not involve all of the parties to the arbitration agreement, means a party to the arbitration.

• [30] The following further provisions in sch 1 of the Arbitration Act should be noted:

5 Extent of court intervention

In matters governed by this schedule, no court shall intervene except where so provided in this schedule.

5. The rights and privileges enjoyed by the salaried partners was not explored in the evidence. I understand they received fixed remuneration but not other benefits of the Group A shareholders.

7 Form of arbitration agreement

(1) An arbitration agreement may be made orally or in writing. Subject to section 11, an arbitration agreement may be in the form of an arbitration clause in a contract or in the form of a separate agreement.

(2) A reference in a contract to a document containing an arbitration clause constitutes an arbitration agreement, provided that the reference is such as to make that clause part of the contract.

16 Competence of arbitral tribunal to rule on its jurisdiction

(1) The arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. For that purpose, an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure (necessarily) the invalidity of the arbitration clause.

• [31] Section 10 of the Arbitration Act is also relevant and provides:

10 Arbitrability of disputes

(1) Any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless the arbitration agreement is contrary to public policy or, under any other law, such a dispute is not capable of determination by arbitration.

(2) The fact that an enactment confers jurisdiction in respect of any matter on the High Court or the District Court but does not refer to the determination of that matter by arbitration does not, of itself, indicate that a dispute about that matter is not capable of determination by arbitration.

The Court’s approach

• [32] It is an objective of the Arbitration Act to encourage the use of arbitration to resolve domestic and international disputes.⁶ The Court is supportive of these objectives and will generally adopt a broader interpretation of language to give effect to the parties’ intentions to submit disputes to arbitration.

⁶ Arbitration Act 2006, s 5.

• [33] In Van Leeuwen Group Ltd v Attorney General, Cooke J put the matter this way:⁷

• [18] ... The Court recognises the importance of arbitral proceedings, and the autonomy of the parties who wish to choose arbitration for dispute resolution. The principle of non-interference in the face of an arbitration agreement accepts the parties’ right to conduct their private affairs as they choose. The role of the Courts is to support, not supplant, the extra-judicial process the parties have chosen to adopt.

• [19] ... Arbitration clauses are given a broad interpretation to give effect to a “one stop shop” concept to prevent issues been excluded from the scope of the arbitration is a matter of interpretation. In addition the Court can apply inherent jurisdiction to stay High Court proceedings when the proceedings are only related to disputes that are subject to arbitration, even in relation to parties who are not the subject of an arbitration clause. This is on the basis that it is more appropriate for the matters to be determined by arbitration, or for the arbitration to proceed first.

• [34] If a dispute is brought before the Court that is subject to an arbitration agreement, on the request of a party under art 8(1) of sch 1, the Court shall stay the proceeding and refer the parties to arbitration unless it finds the agreement is null and void, inoperative or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.

• [35] When faced with an application for stay under art 8(1), on grounds challenging the existence or validity of an arbitration agreement and/or its scope, consideration must be given to the standard of review the Court should adopt. The Court’s options are to:⁸

(a) immediately refer the matter to the arbitral tribunal;

(b) undertake a prima facie assessment, and if there appears to be a valid arbitration agreement that applies, refer the matter to the arbitral tribunal; or

(c) undertake a full analysis and finally determine questions relating to the validity and/or scope of an arbitration clause.

⁷ Van Leeuwen Group Ltd v Attorney General [2020] NZHC 215, [2020] 3 NZLR 502.

⁸ Tamihere v Mediaworks Radio Ltd [2014] NZHC 2082, [2014] NZAR 1113 at [20]; Ryan v Lobb

[2020] NZHC 3085 at [68].

• [36] Mr Whiteside QC argued that it has now become generally accepted that a prima facie review reflects the policy that the Court will endeavour to give effect to the intention of the parties to refer their disputes to arbitration while still recognising the Court’s ability to assume jurisdiction in clear cases.⁹ He submits that approach should be applied in this case.

• [37] Mr Butler argues the standard of review to apply turns on the facts of the case and the nature of the matters raised in the proceeding. He submits the courts in New Zealand and overseas consider a full review is appropriate to determine whether there is an arbitration agreement in place, as where that is an issue the rationale of giving effect to the parties’ intention to refer the disputes to arbitration does not apply. Mr Butler submits the prima facie review approach is more apt where the issue concerns whether a dispute falls within the penumbra of matters that the parties have agreed can be arbitrated. In such a case, he submits, the Court can properly conclude the arbitral tribunal should be given the “first shot” at determining the coverage of an arbitration clause.

• [38] Ryan v Lobb was relied upon by Mr Butler. It is a case where the Court considered a full review approach should be taken.¹⁰ It concerned a dispute between divorced parties as to the meaning of a resettlement provision of a trust deed. Any dispute or failure to agree relating to that provision was to be referred to arbitration. The defendant applied to have the proceeding dismissed on the basis the dispute resolution procedure had not been followed. Associate Judge Smith dismissed the application. He considered a full review was appropriate because it was a “clear case” for the Court to assume jurisdiction. Underlying his approach was a view the parties’ ability to access the arbitration provision was as discretionary beneficiaries, but the arbitration provision did not bind all of the discretionary beneficiaries who would or might be affected by the relief sought in the proceeding.¹¹ He considered this was fatal to the application, and the arbitration provision was either “null and void” or

⁹ Citing Ursem v Chung [2014] NZHC 436, [2014] NZAR 1123. See also Donaldson v Donaldson

[2015] NZHC 3093, [2016] NZAR 199 at [18]- [20].

¹⁰ Ryan v Lobb, [2020], above n 8, at [90].

¹¹ At [107]-[109]. This decision pre-dates the introduction of s 10A of the Arbitration Act.

“incapable of being performed”. The facts of Ryan v Lobb were unusual, as was recognised by the Court of Appeal in refusing leave to appeal.¹²

• [39] I accept the prima facie review approach has not been universally applied, and it is right that in each case the Court consider what standard of review is appropriate having regard to the circumstances of the case before it. However, in most cases where it is arguable on a prima facie review that there is a valid arbitration agreement, litigation should be stayed on the basis that an arbitral tribunal can decide on its jurisdiction.¹³ That approach is consistent with the weight of recent authorities and the relevant policy considerations, reflected in arts 8(1) and 16 of sch 1. These include recognition of party autonomy and the primacy of the arbitral tribunal to determine its jurisdiction.¹⁴

• [40] I do not see any support in principle for the distinction Mr Butler makes between cases concerned with the existence of an arbitration agreement rather than the coverage of such an agreement. Ultimately both are concerned with the jurisdiction of the arbitral tribunal to determine the dispute.

• [41] Here, I can see no reason to depart from the prima facie review approach. There is nothing in the facts of this case or the issues arising which makes it a “clear case” for the Court to assume jurisdiction of the dispute between the parties.

The parties’ positions

• [42] Mr Dineen’s primary position is that the claims made by Tavendale are the subject of an arbitration agreement contained in cl 12 of the draft shareholder agreement (distributed on 13 September 2014) and incorporated as a term of the HOA.

• [43] Mr Dineen’s alternative position is that the arbitration agreement is to be found in cl 12 of the shareholder agreement of 6 November 2009 which, he argues, is still

¹² Lobb v Ryan [2021] NZCA 224 at [17].

¹³ David Williams and Amokura Kawharu Williams & Kawharu on Arbitration (2^nd ed, LexisNexis, Wellington, 2017) at 3.12.

¹⁴ See discussion in Amokura Kawharu “Arbitral Jurisdiction” [2008] 23(2) NZALR 238, Ursem v Chung, above n 9; Tamihere v Mediaworks Radio Ltd above n 8; Donaldson v Donaldson above n 9; Queenstown Mini Golf Ltd v Brecon Street Partnership Ltd [2014] NZHC 1101.

operative because the shareholders and Tavendale never terminated it as the shareholder agreement required (cl 13), and they could not, by subsequent conduct, impliedly agree to abandon it.

• [44] Mr Dineen also now relies upon a further submission, that arose from my exchanges with Mr Whiteside, that the arbitration agreement is to be found in cl 7.3 of the HOA.

• [45] Tavendale opposes the application on the basis that:

(a) there is no arbitration agreement between the parties; and

(b) if there was ever an arbitration agreement, it is no longer operative and/or does not apply to the claims made in this proceeding.

• [46] As far as the 2009 shareholders agreement is concerned, Tavendale argues it was abandoned by the parties who ceased to conduct themselves in accordance with it when, in 2014, they entered into a new set of arrangements which are inconsistent with it having continued legal effect.

• [47] Tavendale argues the HOA was not a binding shareholders agreement and did not incorporate cl 12 of the draft shareholders agreement. It relies upon certain terms of the HOA and the subsequent conduct of the shareholders of Tavendale which, it submits, has been continuously inconsistent with Mr Dineen’s “recently claimed belief” there was a binding shareholders agreement entered into at that time.

• [48] Tavendale also argues that its claims do not fall within cl 12 as they do not concern Mr Dineen’s obligations as a shareholder but are instead concerned with breach of fiduciary obligations of loyalty and not to profit as a director. Further, Tavendale says, the claim for breach of undertaking is a standalone claim that cannot sensibly be said to have arisen out of the alleged shareholders agreement.

• [49] In addition, Tavendale argues that if there is a binding arbitration agreement, arbitration has not been triggered as Mr Dineen has not complied with the applicable dispute resolution procedures.
• [50] In relation to the submission the arbitration agreement is contained in cl 7.3 of the HOA, Tavendale argues cl 7.3 has not been relied upon by Mr Dineen previously nor has it been pleaded, and Mr Dineen has lost any right to seek to invoke that provision. Tavendale submits the Court should refuse to order a stay in reliance upon cl 7.3 because to do so would lead to inefficiencies and effectively a double arbitration scenario. It also contends that, had cl 7.3 been raised earlier, evidence could have been given to show the HOA was also regarded as a “dead letter” and had been abandoned by the parties.

My analysis

• [51] Mr Butler submitted the real question in this case is what, if any, legal effect the HOA had on either the 2009 shareholders agreement or 2014 draft shareholders agreement. He says these are issues of contractual interpretation.¹⁵ Mr Whiteside agreed with that submission, and so do I.

2009 shareholders agreement

• [52] Mr Dineen’s reliance upon cl 12 of the 2009 shareholders agreement appears to have been a fall-back position. For reasons that follow, it is arguable the HOA was a binding shareholders agreement intended to govern the relationship between the old and new shareholders of Tavendale from 1 October 2014. It must necessarily follow the 2009 shareholders agreement was superseded by the new arrangements and abandoned.¹⁶ I find that Mr Dineen cannot rely upon cl 12 of the 2009 shareholders agreement.

Clause 7.3 of the HOA

• [53] There is no dispute the HOA was legally binding on the parties and that is what cl 7.6 expressly provides. The issue upon which the parties primarily engaged is Mr Dineen’s contention the HOA was a binding shareholders agreement which

15. As to whether an arbitration clause is incorporated by reference see Conagra International Fertiliser Co v Lief Investments Pty Ltd (1997) 141 FLR 124.
16. See the principles in Paal Wilson & Co A/S Partenreederei Hannah Blumenthal [1983] 1 AC 854 (HC) at 913.

incorporated cl 12 of the 2014 draft shareholders agreement. The issue concerns the legal meaning and effect of cl 6 of the HOA. Upon considering the parties’ submissions it appeared that in relation to that issue, cl 7.3 of the HOA was overlooked.

• [54] Clause 7.3 provides that disputes between the parties “with regard to any provision of these Heads or on the documents” will be resolved by mediation and, failing that, by arbitration in the following terms:

Should any dispute arise between the parties with regard to any provision of these Heads or on the documents that cannot be resolved in good faith then such dispute shall be referred to mediation by a single mediator and if the parties cannot agree on who shall act as a mediator then one shall be appointed by the President of the New Zealand District Law Society. If the dispute cannot be resolved by mediation it shall be submitted to arbitration by a single arbitrator appointed by the President of the New Zealand District Law Society under the terms and conditions of the Arbitration Act 1996.

• [55] I consider it axiomatic that the dispute that exists as to the legal meaning and effect of cl 6 of the HOA is one “with regard to any provision of these Heads” for the purposes of cl 7.3. For that reason, this proceeding should be stayed and the issue referred to arbitration. If the arbitral tribunal decides that the HOA incorporated cl 12 of the 2014 draft shareholders agreement, it would need to also consider whether cl 12 applies to Tavendale’s claims. If so, it may go ahead and determine those claims. It would only be if the arbitral tribunal decides cl 12 was not incorporated into the HOA or does not apply to Tavendale’s claims, that the claims would come back before this Court.

• [56] Mr Butler raised objections to this approach. First, he argues Mr Dineen’s application for stay was not made on the basis there was a dispute as to the meaning of the HOA, and it was incumbent upon Mr Dineen to identify with clarity the basis upon which he sought a stay. He submits Mr Dineen has sought a stay in respect to the claims made in Tavendale’s statement of claim but not in respect of the prior issue whether there is an arbitration agreement under the HOA. He submits that art 8 requires a party to signal as early as possible the basis of an objection to the Court’s jurisdiction. As that has not been done in this case, it is submitted Mr Dineen has lost the right to invoke cl 7.3.
• [57] The answer to this objection is that reliance upon cl 7.3 does not give rise to any new issue. As Mr Butler argued, the “real question” concerns the legal effect of the Heads of Agreement on the 2014 draft shareholders agreement.¹⁷ That must be considered in the context of the HOA as a whole. While cl 7.3 took on significance only at the hearing, the basic premise of Mr Dineen’s application has never changed and remains that the HOA was a binding shareholders agreement in respect of which the parties agreed to arbitrate disputes.

• [58] Second, Mr Butler says that to accept the argument that the meaning of the HOA should be arbitrated would lead to a double arbitration scenario. This is because the arbitrator would need to first decide the meaning of the HOA and then, depending on the outcome, might determine, or not, Tavendale’s claims. He submits this is undesirable and the Court should not sanction such an inefficient process.

• [59] The risk of duplication of proceedings is often a real possibility a Court is faced with when determining a stay application under art 8(1) applying the prima facie review standard. Here, that possibility exists regardless of which ground for stay finds favour with the Court. I do not see how any additional inefficiency arises by Mr Dineen’s reliance upon cl 7.3. I would expect the parties would co-operate and ask the arbitral tribunal to deal with any challenges to jurisdiction as preliminary issues on the basis that if jurisdiction exists, the merits of Tavendale’s claims could be determined in the same proceeding and an award made.¹⁸

• [60] Third, Mr Butler argues had Tavendale had notice cl 7.3 would be relied upon it could have given evidence that the HOA was itself a “dead letter” and abandoned. I do not accept this argument for two reasons. First, Tavendale has already put before the Court affidavits from six present or former partners to support its contention that, since 2014, there has not been a binding shareholders agreement in place. I do not see what further evidence could be given. Second, the submission overlooks the principle of separability in art 16(1) of sch 1. An arbitration agreement will have an independent existence from a principal contract of which it is a part, so that any issue as to whether

¹⁷ Paragraph 20 of Mr Butler’s written submissions.

¹⁸ Art 16(3) of Appendix 1 of the Arbitration Act 1996.

the HOA had been abandoned would remain capable of being referred and determined at arbitration under cl 7.3.¹⁹

The 2014 draft shareholders agreement and the HOA

• [61] In case I am wrong about the application of cl 7.3, I will consider Mr Dineen’s further submission. The case for Mr Dineen is that at the time of the merger there were some outstanding issues concerning the content of the new shareholders agreement. The parties recorded those matters that had been agreed in cl 6 of the HOA. He argues cl 6 incorporated cl 12 of the 2014 draft shareholder agreement in toto, which included the agreement to arbitrate.

• [62] Mr Butler submits cl 6 was not intended to create a binding shareholders agreement but set limits on what would remain up for negotiation in finalising the new shareholders agreement at a later date. He argues Tavendale’s interpretation is consistent with the use of the term “Heads of Agreement” which commonly refers to a document recording the basic framework of a transaction at a pre-contractual stage.

• [63] He relies, also, upon terms of the HOA that contemplated the completion of a shareholders agreement at a future time. These included that separate arrangements were to be agreed for the issue of shares to other persons in due course (cl 1(d)), that the parties would enter into a new shareholders agreement and constitution to be finalised after merger (cls 1.1(f) and 2.2), and that the new shareholders agreement was to be based on the draft shareholders agreement but with nine changes, some of which contemplated further negotiation (cl 6.1(a)). Mr Butler also referred me to cl 7.7 of the HOA which required the parties to give effect to the HOA and the “contemplated” documents and transactions.

• [64] Mr Butler argues there were several conceptual problems with Mr Dineen’s argument that cl 6 put in place a new binding shareholders agreement. First, he submits there was a lack of certainty as to who became and remained parties to the HOA given that it was contemplated shares in Tavendale would be issued to other persons who were not parties to the HOA. Second, he says that, had it been intended

¹⁹ See Carr v Gallaway Cook Allan [2014] 1 NZLR 792, [2014] NZSC 75 at [42]- [43].

the HOA would give legal force to the 2014 draft shareholders agreement, that could have been clearly recorded in writing. Third, he argues cl 6.1 would not have bound all shareholders that later joined the firm, and it would be incongruous for different arrangements to apply to different shareholders. Mr Butler also submitted that the subsequent conduct of the parties was a strong indicator none of the shareholders, including Mr Dineen, considered themselves bound by a shareholders agreement.

• [65] Despite all that Mr Butler has said, I consider, applying the prima facie review approach, it is arguable the parties have manifested a common intention to incorporate the draft shareholders agreement into the HOA and be bound by it, save to the extent set out in cl 6.1(a)-(i). There are several reasons for this.

• [66] Tavendale’s constitution contemplated the existence of a shareholders agreement that would govern a range of important matters. I agree with Mr Whiteside that it is difficult to accept the shareholders would proceed after 2014 on the basis that the constitution alone governed their relationship. It is far more likely, in circumstances where the parties were committed to the merger proceeding on 1 October 2014, that they would wish to record and lock-in those matters which were agreed.

• [67] There is evidence of Mr Silva supporting this view. He says he understood prior to the merger that Messrs Tavendale, Leete and Dineen were party to a shareholders agreement but:

However, we wanted changes to that agreement before we merged, and the variations that we all agreed upon were then recorded in a Heads of Agreement (HOA) ... The purpose of the HOA was to record fundamental agreements that were discussed and agreed around entry, structure, and exit. This was the agreed basis upon which we would go into a new relationship.

.. I strongly disagree with [Mr Leete’s] statement that the “sole binding rules of the firm are those set out in the firm’s constitution dated 6 November 2009”. It was never my understanding that the constitution would be the sole document governing the shareholders. In fact, during the discussions as to the merger, [Mr Leete] said in his email annexed at A:

I envisage that the Constitution would be reasonably “vanilla” (given its public nature) and that is why there is a bit of detail around the rights attaching to each share class within the shareholder’s agreement itself.

• [68] Mr Silva goes on to say:

It was my understanding that the HOA was binding on the equity partners/class A shareholders ... The intent was to capture the absolute fundamental provisions that we had that differed from the existing arrangements between the [Tavendale] equity partners when [Mr Evatt] and I entered. That included the methodology for entry, capitalisation and exit.

• [69] While Mr Butler has drawn my attention to clauses in the HOA that he says support Tavendale’s position, there are others that support Mr Dineen’s interpretation.

• [70] The HOA was concerned with the ongoing relations between the shareholders. It states that the five shareholders had agreed to participate in the ownership of Tavendale “from 1 October 2014 in accordance with these Heads of Agreement”.

• [71] There are clauses in the HOA other than cl 6 which suggest the draft shareholders agreement was regarded as having binding effect for certain purposes. Clause 1.1(c) incorporates the definition in the draft shareholders agreement of Group A shares and Group B shares. Clause 5.3(c) says that, notwithstanding the draft shareholders agreement “referred to below” (that is in cl 6), any review of directors’ salaries was to be by unanimous agreement between the shareholders. The reference to the shareholders agreement would be unnecessary if cl 6 was no more than a basis for future negotiation. Further, cls 7.6 and 7.7 state the HOA was legally binding and the parties agreed to give effect to it. If cl 6 was to be read down in the manner Tavendale contends, one would expect that to have been made clear.

• [72] Although nine exceptions to the draft shareholders agreement are identified in cl 6.1(a)-(i), very little has been left open for negotiation. Mr Butler submitted that “a number” of the clauses contemplated further negotiation. I do not agree. Only cl 6.1(a), dealing with procedures at Board meetings, is of this kind. In all other cases, the manner in which the draft shareholders agreement was to be varied is agreed. As examples, cl 6.1(e) and (f) provide cls 9.18 and 15 of the draft shareholders agreement “shall be expressly excluded”. The language is consistent with an intention to immediately bind the parties.

• [73] I do not accept there are conceptual problems with Mr Dineen’s argument as Mr Butler submits. I can see no uncertainty about who was or would become parties

to the HOA. The HOA recognises that separate arrangements would be made in respect of new partners and a new shareholders agreement would be entered into at some later date. Mr Butler submits that, had the parties intended to give the draft shareholders agreement legal force it would be expected they would clearly record that in writing. They did so in cl 7.6.

• [74] That takes me to Tavendale’s reliance upon subsequent conduct. In Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd, Blanchard J noted whether parties intended to enter into a contract and whether they have succeeded in doing so are questions to be determined objectively. ²⁰ It is permissible for the Court to look beyond the words of the parties’ “agreement” to the background circumstances, as well as their subsequent conduct towards one another.²¹

• [75] The first matter Tavendale relies upon is that, after 2014, several new partners were admitted without informing them that a binding shareholders agreement was in place or making an effort to have them sign a deed of covenant that they would abide by it. However, these salaried partners did not enjoy all the same rights and privileges as the Group A shareholders. This is apparent when one considers the terms of the offer made by the Group A shareholders to an incoming salaried partner, Amanda Strong, on 5 March 2019. It is not surprising, in those circumstances, that salaried partners were not asked to sign a deed of covenant to abide by the HOA which, in many respects, did not apply to their circumstances.

• [76] Further, despite the evidence from salaried partners that they were unaware of a binding shareholders agreement, there appears to be reference to it in an email from Andrew Leete to the then partners (including five salaried partners) in March 2015, in which he said:

The Shareholders Agreement is based on the previous Shareholders Agreement for [Tavendale] but amended in certain respects following negotiations with [Mr Silva and Mr Evatt] leading up to the merger. As the new partners are not familiar with the original Shareholder Agreement, I will not provide any commentary on the changes between the previous

20. Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2001] NZCA 289; [2002] 2 NZLR 433 at [54].

²¹ At [54] and [56].

Shareholders Agreement and this one but if anyone is interested I am happy to have a discussion with them about it.

• [77] Mr Leete can only be referring to the HOA. This view is supported by an email sent by Mr Silva dated 17 March 2015, responding to Mr Leete, in which he suggests several changes to the proposed shareholders agreement to bring it into line with the HOA (and referring to cl 6).

• [78] Mr Butler submits that Mr Silva’s email of 17 March 2015 is consistent with there being no binding shareholders agreement. He submits that if the HOA gave legal effect to the 2014 draft shareholders agreement, and the 2015 discussions were open negotiations to agree further variations, Mr Silva would have had no licence to demand the inclusion of terms based on the HOA. I do not accept the submission. Mr Silva was entitled to require the 2015 draft shareholders agreement to be amended consistent with cl 6.1 of the HOA because that is what had previously been agreed.

• [79] Tavendale relies upon the email of 5 March 2019, approved by Mr Dineen and sent by Mr Leete to Amanda Strong, in which, when discussing the structure of the firm, Mr Leete wrote:

The key document is a shareholders’ agreement and constitution. We do not currently have a final form of shareholders’ agreement - we just simply have never got round to it, but we will get onto it at some point in the next few months. What this means though is that there is no “document” to give you now as such and we’d confirm and document the terms of your arrangements etc by email correspondence (including this email).

• [80] Mr Leete’s reference to “a final form of shareholders’ agreement” is consistent with the efforts that had been ongoing since 2014 to produce a new shareholders agreement, but it does not, in my view, speak to the arrangements which then existed between the Group A shareholders. That Mr Leete refers to the “key document” being a shareholders agreement and constitution suggests that a shareholders agreement existed.

• [81] Tavendale relies on the evidence of Messrs Tavendale and Leete who say that there has not been a shareholders agreement in place since the merger and that the firm has operated on the basis of the constitution. As the shareholders agreements dealt with such important matters as the capitalisation of the company and the entry and exit

of partners, I find that evidence surprising. I do not consider such an understanding is reflected in Mr Leete’s email of 6 March 2019, nor is it the view of Mr Dineen and Mr Silva. Mr Dineen’s evidence is he understood at the time of merger that all Group A shareholders had agreed under the HOA to a new binding shareholders agreement. Similarly, Mr Silva says that it was his understanding that the HOA was binding on the Group A shareholders and that when he retired from Tavendale the starting point of the negotiation, from his perspective, was the HOA, and that his terms of exit, particularly his exit payments, reflect the key terms of the HOA.

• [82] Finally, it is said Mr Dineen has only attempted to raise the argument that there is a binding agreement to arbitrate in order to avoid a High Court hearing on the allegations made against him. Mr Butler put the matter more colourfully when he submits that Mr Dineen “seeks to resurrect dead letters from the grave”. Several matters are relied upon, but none of them shed any real light on the parties’ intentions in 2014.

• [83] I am satisfied that there is at least a prima facie case there is a binding shareholders agreement between the parties that incorporates cl 12 of the 2014 draft shareholders agreement, entered into on 26 September 2014 when the HOA was signed.

The scope of cl 12

• [84] The next issue is whether Tavendale’s claims against Mr Dineen fall within the scope of cl 12.

• [85] Three of Tavendale’s causes of action plead breaches by Mr Dineen of fiduciary duty to act in the best interests of Tavendale and not divert business opportunities from Tavendale for his own benefit. The remaining cause of action alleges Mr Dineen retained Tavendale’s electronic data.

• [86] Clause 12 applies to any question, dispute or difference arising between the parties concerning or in any way arising out of “this Agreement or the performance of either party of this Agreement”. The allegations Tavendale makes in the statement of

claim would all be contemplated by obligations Mr Dineen owed Tavendale under cls 14 and 6.4 of the draft shareholders agreement.

• [87] Tavendale argues this is not the case as the draft shareholders agreement imposes rights and obligations qua shareholder and, in contrast, its claims against Mr Dineen are as a director and fundamentally of a different in kind. Further, it is said the fourth cause of action is based on a standalone undertaking given by Mr Dineen upon his exit from the firm that cannot sensibly be said to fall within the ambit of the alleged shareholders agreement. I do not accept these arguments.

• [88] The claim as it is presently pleaded is that Mr Dineen owed fiduciary duties to Tavendale as a shareholder and a director. Specifically, para [5] of the statement of claim pleads:

As a shareholder in, and director of, in the plaintiff, the defendant owed fiduciary duties to the plaintiff to:

(a) act in all times in the best interests of the plaintiff;

(b) at no time to divert business opportunities from the plaintiff for his own benefit or the benefit of entities associated with him, without the consent of the plaintiff;

(c) to avoid a conflict of interest between his own personal interests and those of the plaintiff, except to the extent that the plaintiff consented;

(d) to avoid benefiting himself from his position as director of the plaintiff, except to the extent that the plaintiff consented.

• [89] Mr Butler advises the pleading is an error but it is the pleading that has been made and it is consistent with the obligations of shareholders of Tavendale under cls 14.1 and 6.4 of the draft shareholders agreement.

• [90] I accept Mr Whiteside’s submission the draft shareholders agreement contemplates an indissoluble connection between the shareholders’ duties as shareholders, directors and practising solicitors of Tavendale.²² Adopting a broad interpretation, the Court must interpret cl 12 to include conduct in Mr Dineen’s

²² See cls 5.1, 14.1, 16, 18, 19, and 21.

capacity as director and solicitor because the shareholders agreement clearly contemplates imposing duties upon him in those capacities.

• [91] I also do not see that the claim for breach of an undertaking is of a different nature than the other causes of action. It is alleged Mr Dineen has retained Tavendale’s data, joined another law firm, and “contacted clients of the plaintiff to encourage them to take their business” to his new firm. Plainly the retention of Tavendale’s data and its use in this manner would breach Mr Dineen’s obligation not to act contrary to Tavendale’s interests.

• [92] I am satisfied there is a prima facie case that the disputes raised by Tavendale are covered by cl 12.

A further matter raised

• [93] Tavendale argues that Mr Dineen has not complied with the procedures in cl 12 and would therefore be precluded from commencing arbitration proceedings. Specifically, it is said Mr Dineen had not issued a dispute notice in accordance with cl 12.2 and that a mediation that took place between the parties in November 2021 did not occur in accordance with clause 12.5. I do not accept this argument. I consider it is Tavendale, not Mr Dineen, who has failed to comply with the requirements of cl 12 by commencing a legal proceeding in the High Court in respect of disputes which are subject to an arbitration agreement.

Result

• [94] The application is granted. As there is at least a prima facie case that the claims brought by Tavendale in this proceeding are subject to an arbitration agreement, and are capable of resolution through arbitration, the proceeding is stayed. The stay shall remain in force at least pending determination by the arbitral tribunal as to whether it has jurisdiction to determine the disputes.
• [95] Mr Dineen has been successful, and I consider that he is entitled to costs which are awarded on a 2B basis plus reasonable disbursements as fixed by the Registrar.

• [96] Finally, an issue was raised by counsel whether confidentiality orders should be made in respect to some matters that might be referred to in this judgment. I do not consider there is anything in this judgment which is of a personal, commercially sensitive, or damaging nature justifying the making of such orders.

O G Paulsen Associate Judge

Solicitors:

Woods Fletcher (R Fletcher), Wellington. Counsel: A S Butler, Wellington.

Taylor Shaw (J Pullar), Christchurch. Counsel: P F Whiteside QC, Christchurch.