[2015] ACTSC 188

CONTRACTS - Building, Engineering and Related Contracts - defective building work - damages - whether cost of demolition and rebuild reasonable - liquidated damages - rate of liquidated damages for delay 'zero' - whether intended to exclude claim for unliquidated damages for delay - procedural fairness - natural justice - credibility of witnesses.

Commercial Arbitration Act 1986 (ACT) s 38

Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137

Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613

Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2006] NSWCA 361

Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20

Commonwealth v Rian Financial Services and Developments Pty Ltd (1991) 105 FLR 239

Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312

Diestal v Stevenson [1906] 2 KB 345

Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689

J-Corp Pty Ltd v Mladenis [2009] WASCA 157

Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] A.C. 724

Promenade Investments Pty Ltd v New South Wales (1991) 26 NSWLR 184

Radford v De Froberville [1978] 1 All ER 33

Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344

Stekovic v Polyseal Waterproofing Technologies Pty Ltd & Contexx Pty Ltd [2013] ACTSC 195

Temloc Ltd v Errill Properties Ltd (1987) 39 BLR 30

Turner Corp Pty Ltd (Receiver & Manager Appointed) v Austotel Pty Ltd (1994) 13 BCL 378

Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49; (2005) 218 ALR 1

Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37; (2011) 244 CLR 239

Trevor Thomas, '$Nil liquidated damages: An exhaustive remedy for delay under a construction contract?' (2008) 24 BCL 82

Michael Hollingdale, 'Designing and enforcing liquidated damages claims to maximise recovery' (2005) 21 BCL 412

Court/Tribunal: Institute of Arbitrators and Mediators Australia

Case Title: Arbitration of disputes between Adapt Constructions Pty Ltd and Brad Whittaker and Narelle Luff concerning Contract for Building a Home at 5 Sue Watt Place URIARRA ACT Interim Award; Arbitration of disputes between Adapt Constructions Pty Ltd and Brad Whittaker and Narelle Luff concerning Contract for Building a Home at 5 Sue Watt Place URIARRA ACT Final Award

1. This matter concerns the construction of a residential building at Urriarra in the Australian Capital Territory (the Property). The appellant was the builder of the Property and the respondents are the owners of the Property. I will briefly summarise the facts surrounding the dispute.

2. A standard form MBA building contract was signed by the parties on 10 December 2011 (the building contract) engaging the appellant to build a four bedroom home and garage at the Property for a lump sum price of $480,000.00. Building commenced in early 2012 and was substantially completed in late 2012.

3. Towards the end of the building process, a number of disputes arose between the parties, including an allegation by the appellant that the respondents had denied the appellant its entitlement to payment under the building contract, and allegations by the respondents that the building work was defective.

4. On 27 February 2013, the appellant applied to the Institute of Arbitrators and Mediators Australia (IAMA) to nominate an arbitrator. On 6 March 2013, Mr Bryan Ahern was nominated.

5. Initially, the value of the claim was approximated to be $28,000.00, as was stipulated on the 'Request for Nomination' document submitted to the IAMA by the appellant.

6. On 26 April 2013, the arbitrator provided the parties with spreadsheets setting out the specific items in dispute between the parties. The item referred to as Item C-08 was a claim under the heading "other Costs & Damages":

Poorly placed control joints and slab not constructed as per engineers (sic) specification

Compensation for loss of aesthetic and future remedy/rectification work and missing footing. Cost of rectification TBA pending advice from engineer

Control joints placed correctly. Owner has viewed these for more than 6 months without any complaint to date.

7. Subsequently, by way of a letter dated 18 June 2013, the respondents alleged that, based on findings set out in expert engineer reports, the construction of the concrete slab and footings were not in accordance with specified plans, the minimum requirements of the Building Code of Australia, or Australian Standard AS2870 (Residential slabs and footings - Construction). I note that the concrete slab referred to was intended to be a polished concrete floor within the residence. It was alleged that the various deviations from the plans had contributed to an increase in cracking in the concrete slab and that further cracks might be expected. Consequentially, the respondents amended their claim to one seeking damages to account for the demolition and reconstruction of the residence. The respondents increased the quantum value of their claim against the appellant to the sum of $539,469.97, comprising of:

(a) total payments made by the respondents to the appellant in the sum of $488,897.30; and

(b) damages in the sum of $50,762.67, including holding costs for the Property incurred by the respondents throughout the construction period, interest on the building loan, estimated costs of demolition, and costs associated with the preparation of expert reports and inspections.

8. On 11 April 2013, the parties attended a preliminary conference with the arbitrator. On 10 October 2013, a hearing was held at the Property and a view was undertaken.

9. Following the receipt of written submissions from both parties, the arbitrator determined that the issue referred to as "Footings and slabs not constructed to approved plans, BCA/AS2870" was a "threshold issue" and, if the respondents' claims in relation to that issue were sustained, the building would need to be demolished and reconstructed. In that event, the majority of the other issues in dispute would become irrelevant. A particularly contentious aspect of this threshold issue was cracking to the polished concrete floor. The arbitrator determined that it was prudent to decide the threshold issue as an 'Interim Award'. Further investigations of the physical condition of the floor slab were undertaken and both parties made submissions accompanied by supporting documents and expert evidence. Both parties were unrepresented for this process.

10. On 14 April 2014, the arbitrator determined an Interim Award. The arbitrator found that "the footings and slab were not constructed to the engineer's specification and did not comply with the Building Code of Australia 2011 and AS2870 1996 - 'Residential slabs and footings'". In particular, he noted in relation to the cracking to the concrete floor:

I determine that although the cracking in some instances may be less than 1 mm wide, in the circumstances of a polished floor, being a feature of the house, any cracking must be very minor and must be controlled to the most practical extent. The cracking that has occurred is unsatisfactory and has been caused by failure to construct the slab to be fit for its purpose as an exposed polished concrete floor... the Builder did not construct the footings and slab in accordance with the structural engineering design, nor in accordance with the BCA and AS AS2870.

The arbitrator also noted in his reasons that experts for both the appellant and respondents agreed that the usual standards for cracking in concrete slabs are represented by those in the Guide to Standards and Tolerances 2007, and that cracks the size of those in the concrete floor of the Property would not be classified as a defect under those standards. However, the arbitrator was of the opinion that the defect classification found in the Guide to Standards and Tolerances applied to "ordinary concrete works" but not when the concrete is a finished surface, such as a polished concrete floor.

11. The arbitrator found that "the only practical method of rectifying the numerous defects... is complete demolition and reconstruction". The arbitrator ordered that the appellant pay the respondents the sum of $544,930.70 inclusive of GST, if any, including $488,897.00 for the cost of reconstruction, $15,000.00 for the cost of demolition, and $41,033.70 in "[d]amages for late Completion to 8 November 2013".

12. On 28 April 2014, the arbitrator directed the parties to identify any other issues that remained in dispute and were unaffected by the Interim Award. On 10 June 2014, a further conference was held between the arbitrator and the parties to discuss the completion of the arbitration. Both parties made further submissions.

13. On 1 September 2014, the arbitrator determined a Final Award. The arbitrator made findings that the appellant was not entitled to payment for the value of various works and, given that the owners had been successful in the arbitration, found that the appellant should pay costs. The arbitrator ordered that the appellant pay the respondents $30,704.35 in relation to "substantive issues", being expenses relating to allegedly defective construction works aside from the footings and slab issue determined in the Interim Award, $30,000.00 in relation to the respondents' arbitrator's fees, plus the respondents' costs on a party-party basis as agreed between the parties or as assessed by the court.

14. By an Application dated 26 September 2014, the appellant now seeks leave to appeal from the orders made by the arbitrator on both 14 April and 1 September 2014.

15. At paragraph 7 of the Draft Notice of Appeal filed concurrently with the Application for leave to appeal, the appellant sets out the proposed grounds of appeal as follows:

1. That the Arbitrator denied the Appellant procedural fairness when he determined the questions of liability and quantum at the same time in the Interim Award [dated 14 April 2014].

Procedural fairness required that the appellant should have been given a reasonable opportunity to make submissions with respect to the issue of quantum.

1. That the Arbitrator erred by assessing damages in the Interim Award that were:
   1. Greater than the amount claimed; and/or
   2. Greater than the loss of the First and Second Respondents'; and/or
   3. Inconsistent with the totality of the evidence before the Arbitrator that the footings and the concrete slab were structurally sound.

1. The sum awarded under the Interim Award is reflective of the cost of rectification of the footings and floor slab of the Property.
2. The assessment of damages unjustly enriches the First and Second Respondents' (sic) on the basis there is no requirement to demolish the Property.
3. It will remain open for the First and Second Respondents to tile over the cracked floor slab at minimal cost and either take possession of the whole of the property or sell it.

1. That the Arbitrator erred by making adverse findings with respect to the credibility of a number of witnesses notwithstanding commercial arbitration proceedings were deemed upon the papers only.

1. That the Arbitrator erred by awarding damages for late completion in the sum of $41,033.70 against the Appellant in the Interim Award in the absence of a liquidated damages clause in the building contract.
2. That the Arbitrator did not adequately or at all take proper account and consideration of numerous salvageable items in the Property when assessing damages.
3. That the Arbitrator erred in his assessment that the Property was not capable of receiving a certificate of occupancy.
4. That the Arbitrator erred by not proffering natural justice to the Appellant.

1. The appeal [be] allowed;
2. The decisions of the Arbitrator dated 14 April 2014 and 1 September 2014 be set aside;

1. The matters previously determined by the Arbitrator be determined by the Court[;]

1. In the alternative to the order sought in paragraph [(c)] above, that the commercial arbitration proceedings be remitted to the Arbitrator to be determined in accordance with law;
2. The First and Second Respondents' (sic) pay the Appellant's costs of the appeal.

17. The appellant provided written submissions dated 8 January 2015. Those submissions relate primarily to the Interim Award and provide that, if the Court sets aside the Interim Award, the Final Award should also be set aside as many of the findings in relation to the Final Award turn on the findings made in the Interim Award.

18. The Application for leave to appeal is brought under s 38 of the Commercial Arbitration Act 1986 (ACT), which provides:

(1) Without prejudice to the right of appeal conferred by subsection (2), the court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the award.

(2) Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.

(3) On the determination of an appeal under subsection (2) the Supreme Court may by order -

(b) remit the award, together with the Supreme Court's opinion on the question of law which was the subject of the appeal, to the arbitrator or umpire for reconsideration or, where a new arbitrator or umpire has been appointed, to that arbitrator or umpire for consideration;

and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make the award within 3 months after the date of that order.

(4) An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement -

(a) with the consent of all the other parties to the arbitration agreement; or

(b) subject to section 40, with the leave of the Supreme Court.

(5) The Supreme Court shall not grant leave under subsection (4) (b) unless it considers that -

(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of 1 or more parties to the arbitration agreement; and

(i) a manifest error of law on the face of the award; or

(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.

(6) The Supreme Court may make any leave which it grants under subsection (4) (b) subject to the applicant complying with any conditions it considers appropriate.

(7) Where the award of an arbitrator or umpire is amended on an appeal under subsection (2), the award as amended shall have effect (except for this section) as if it were the award of the arbitrator or umpire.

19. The appellant claims that the decision of the arbitrator substantially affects the rights of the appellant (s 38 (5) (a)) and contains errors of law such that the determination of them is likely to add substantially to the certainty of commercial law (s 38 (5) (b)). Specifically, the appellant submits that the determination of issues relating to the reasonableness of requiring demolition and reconstruction of a building in a case where cracks in a concrete slab that fall short of the definition of a 'defect' is likely to substantially add to the certainty of commercial law in relation to residential building disputes.

Reasonableness of damages (Grounds 7 (b), (d), (e), (f))

20. The appellant submits that the decision of the arbitrator to award damages to cover the cost of demolition and rebuilding "was so unreasonable as to manifest legal error".

21. The appellant distinguishes the case at hand to the High Court case of Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 and submits that, in this case, it was neither reasonable nor necessary for the arbitrator to order damages equivalent to the whole cost of demolition and reconstruction of the building, as the cracking in the concrete slab did not meet the definition of a 'defect' under the Guide to Standards and Tolerances. The appellant submits that there was "no evidence that the deficiencies identified in the slab or footings in any way compromised the structural integrity of the building or its fitness for use as a residential premises". The appellant draws a distinction between the "purpose" of the construction being for use as a residential premises, as opposed to the "desire" of the respondents that the living areas have polished concrete floors. On this basis, the appellant submits that there was no evidence to justify the arbitrator's finding that there was no rectification proposal short of demolition and rebuild that would be likely to produce a building which is reasonably fit for the respondents' purpose.

22. The appellant also submits that the arbitrator erroneously observed that the only rectification to the cracked concrete slab would be to demolish and rebuild when the arbitrator had also accepted the report of an expert engineer, Mr John Skurr, dated 28 August 2014, which provided that "[f]lexible floor coverings or demolition are the only possibility". However, I think it is necessary to consider that excerpt from the report in its context:

Rectification that retains the polished concrete surface is impracticable. Flexible floor coverings or demolition are the only possibility. To achieve the polished floor finish I have given some thought to alternatives to demolition such as installing the bored piers through the existing floor and topping the slab with another but these options are major. I would need more time to consider if other rectification options are possible.

23. The appellant further submits that the arbitrator erred in finding that there was "a strong likelihood that if rectification cost was awarded the sum so ordered would actually be spent on rectification". The appellant referred to the case of Ruxley Electronics v Forsyth [1996] 1 AC 344, where the House of Lords found it was unreasonable to award damages amounting to the cost of demolition and rebuilding of a pool where the pool had been constructed at a depth less than that contracted for, but was otherwise fit for use, as the owner would not have used the damages to rebuild the pool. The appellant also refers to the case of Radford v De Froberville [1978] 1 All ER 33 at 42:

If he contracts for the supply of that which he thinks serves his interest, be they commercial, aesthetic or merely eccentric, then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit.

The appellant contents that the Interim Award provides the respondents with an "uncovenanted profit". The appellant, however, concedes that there was no direct evidence before the arbitrator as to whether the respondents intended to live in the building as it was constructed or demolish and rebuild it, but submits that "the documentary evidence suggests the owners were prepared to "live with" tiled floors as opposed to polished concrete". The appellant's submissions do not point to any evidence to support this contention.

24. With respect to ground 7 (f), the appellant submits that there was no evidence to support the arbitrator's finding that it was "unlikely that a Certificate of Occupancy and Use would be issued with the footings and slabs in their current state". The appellant further submits that the only reason the appellant has not yet provided a Certificate of Occupancy is because the respondents have not applied for one.

25. In relation to ground 7 (d), the appellant submits that the fact that the building contract left the liquidated damages clause blank disentitles the respondents to compensation for late completion. I note that the relevant clause of the building contract, identified as A17, provides a section for the parties to the contract to fill in a "Rate for Liquidated Damages Per Week" with a note providing: "(if nothing stated, Zero)".

26. The appellant claims that they were not given a reasonable opportunity to address the arbitrator on the question of damages before the arbitrator made the final determination ordering that damages be paid to the value of demolition and reconstruction, submitting:

...the issues of denial of procedural fairness in particular when aligned with the Arbitrators (sic) approach to the question of 'reasonableness' demonstrate a manifest error of law on the face of the Award such as to justify the granting of leave under s.28(5)(b)(i).

(References omitted)

I assume that the above is a typographical error and should refer to s 38 (5) (b) (i).

27. It is submitted that "at no stage was the appellant advised [by the arbitrator] that a question of reasonableness in relation to the damages awarded might become relevant and that he should address such an issue". It was further submitted that the appellant should have been provided an opportunity to be heard on the question of quantum of damages after the arbitrator made specific factual findings, as opposed to, I assume, the arbitrator handing down findings of fact and orders as to damages concurrently in the Interim Award. The appellants argue that, had they been provided the opportunity, they could have made submissions regarding the "reasonable and necessary" test in Bellgrove v Eldridge as well as refer to the alternatives to demolition referred to in the evidence.

28. The appellant further submits that the arbitrator's failure to "take proper account of numerous salvageable items in what was otherwise a completed and new residential home" was a "further consequence of the failure to provide the Appellant with an opportunity to make submission in quantum following the making of factual findings".

29. The appellant submits that the credibility of experts for the appellant, in particular the credibility of Mr Don McInnes of Sellick Consultants, was "significantly castigated" by the arbitrator. The appellant refers to this Court's decision of Stekovic v Polyseal Waterproofing Technologies Pty Ltd & Contexx Pty Ltd [2013] ACTSC 195 at [17]:

Before I turn to examine the medical evidence, it is appropriate to say something about the way the parties conducted the arbitration before the Magistrate. As I noted, the parties simply tendered the various medical reports, and did not require any of the medical witnesses for cross-examination. I have great sympathy for counsel who wish to minimise the time taken for court hearings, and the greatest admiration for counsel with the ability to determine what does not need to be challenged, or elucidated, by cross-examination and the courage to implement their judgment. But cross-examination in the present case may have been expected to assist her Honour in understanding the differences of opinion between the medical experts, the basis of those opinions and the weight to be attributed to them. Expert witnesses will be expected to be capable of advancing rational reasons for their opinion, and for any disagreement they may have with an opinion of one of their colleagues. Exposure to those reasons through cross-examination could only have assisted the Magistrate in her task.

30. The appellant contends that the arbitrator should have required Mr McInnes to give evidence in person so that the arbitrator's concerns could be put to him.

31. The respondents provided written submissions dated 20 February 2015.

32. The respondents submit that leave to appeal should not be granted as there is no manifest error on the face of the award for the purposes of s 38 (5) (b) (i), nor would the questions posed on appeal add substantially to the certainty of commercial law for the purposes of s 38 (5) (b) (ii).

Reasonableness of damages (Grounds 7 (b), (d), (e), (f))

33. The respondents submit that the arbitrator expressly referred to the case of Bellgrove v Eldridge in his Interim Award and, in doing so, weighed up the relevant considerations in determining reasonable damages.

34. The respondents dispute the appellant's submission that there was no evidence of deficiencies in the concrete slab or footings such that the structural integrity of the building or its fitness for use was compromised, and listed a number of said 'deficiencies' in their submissions which were identified in the expert reports that were before the arbitrator. The respondents also draw attention to the arbitrator's finding of fact that the construction was not in accordance with the latest approved plans, nor with any alleged agreed change in plans. The respondents submit that, based on the expert evidence that was before him, it was open to the arbitrator to find that "the non-compliant slab cannot be said to be nonetheless 'serviceable'. The defect has affected the value of the work and the building as a whole". The respondents submit that the nature and extent of the defects, as accepted by the arbitrator based on the expert evidence that was put before him, and the appellant's non-compliance with the approved plans, show that there is no manifest error in the arbitrator's reasons.

35. The respondents argue that the appellant's suggestion that the value of the polished concrete floor is determined by the cost of its construction "misconstrues the situation". The respondents submit that, whilst this may identify the cost of the polished concrete floors, it does not identify its value. The respondents further submit that the cost of the polished concrete floors would only be relevant where the slab could be rectified to achieve the contracted result, which, according to the expert evidence accepted by the arbitrator, it could not.

36. The respondents refer to the case of Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2006] NSWCA 361, where Tobias JA states, in relation to reasonableness of damages, at [89]:

...whether the rectification work is a reasonable course to adopt is dependant upon a finding of fact that the proposed work was reasonable in order to achieve the contractual objective. The rectification work would be unreasonable if it was out of all proportion to the achievement of that objective or to the benefit to be obtained therefrom.

The respondents also refer to the case of Ruxley Electronics and Construction Ltd v Forsyth at 358:

...if I contracted for the erection of a folly in my garden which shortly thereafter suffered a total collapse it would be irrelevant to the determination of my loss to argue that the erection of such a folly which contributed nothing to the value of my house was a crazy thing to do.

The respondents argue that the true contractual objective of the building contract was to build "a residential dwelling that complies with the plans and specification of the contract" with the polished concrete floors being "[o]ne important aspect". The respondents submit that the plans were designed to provide not only amenity but also structural integrity for the dwelling, and that "[b]oth have been irrevocably compromised without demolition and rebuilding".

37. With regard to the question of whether or not the respondents would use the damages awarded to demolish and rebuild the home, the respondents submit:

...there is no evidence that the owners will not remedy and accordingly any argument that it is unreasonable to compensate for the full cost of rectification because they do not intend to do so is not available.

38. In relation to ground 7 (b) (i), the respondents dispute the assertion that the arbitrator erred in assessing damages in the Interim Award that were "greater than the amount claimed". The respondents submit that a Scott schedule was used as a basis for the claim, which identified the respondents' claim as including the sum of demolition and rebuilding. It is submitted that the appellant was aware of the schedule and the amount of the claim in advance of the hearing.

39. With respect to ground 7 (f), the respondents submit that, given the numerous defects in the construction, it is reasonable for them to not have applied for a final Certificate of Occupancy, and no adverse finding should be made against them in this regard.

40. In relation to ground 7 (e), the respondents submit that the appellant put no evidence before the arbitrator with respect to salvageable items in the Property and, as such, cannot now say that the arbitrator erred in not allowing a sum for salvage.

41. With respect to ground 7 (d) relating the compensation for late completion, the respondents submit that "the only effect of no entry in this section [A17 of the building contract] is that the parties have agreed to not limit themselves to a fixed sum under the contract". They further submit that there was no express exclusion of their rights to seek damages at common law for delay in completion and argue that, unless clear words are used, a party will not be regarded as having abandoned its right to seek a remedy: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 at 717; Turner Corp Pty Ltd (Receiver & Manager Appointed) v Austotel Pty Ltd (1994) 13 BCL 378 at 395; Wallace-Smith v Thiess Infraco (Swanston) Pty Ltd [2005] FCAFC 49; (2005) 218 ALR 1 at [62].

42. The respondents reject the assertion that the arbitrator denied the appellant procedural fairness, submitting that the arbitrator took steps to ensure that the (at the time) unrepresented parties understood the requirement to give each party a fair opportunity to present its own case and respond to the other side. The respondents point to a letter from the arbitrator to the parties dated 24 May 2013, which specifically states:

The principles of natural justice require that the parties must be given adequate notice and opportunity to be heard and each party must be given a fair hearing and a fair opportunity to present its case.

For the majority of the items the Parties will be aware of the nature of the allegation being made by the other Party. In that respect little further preparation will be required.

However, in order to reduce the possibility of further submissions after the Hearing it is desirable that before the Hearing, the Parties request from the other Party further information in relation to any items where they are unsure of what is being alleged.

43. The respondents submit that they received their expert report from Mr John Skurr on 18 June 2013 and, on the same day, provided that report to the arbitrator and the appellant, indicating that they intended to increase the quantum of their claim to include the cost of demolition and rebuild.

44. The respondents further refer to directions given by the arbitrator on 7 August 2013, where he stated that:

The parties are at liberty to provide whatever evidence they consider necessary to support their claims. In relation to costs of works, expert evidence in the form of a professional valuation would assist a Party's claim. The Parties should address the value of the other Party's claims even where the liability is denied.

45. The respondents also refer to directions the arbitrator gave on 9 September 2013, where he again advised the parties that "it is important that the value of the other party's claims should be addressed even where the liability is denied". Following this report, on 18 September 2013, the appellant nevertheless confirmed that it would not be submitting any further reports.

46. The respondents submit that the arbitrator's finding that the Sellick report was biased was properly open to the arbitrator, noting that the "assumptions upon which [Sellick] founded his conclusions were not supported by other evidence", that "Sellick had drawn the plans which were not complied with so their independence was compromised" and that "Sellick had also failed to include a structural element in their plans".

47. The respondents further submit that, even if it was not open to the arbitrator to conclude that Sellick was biased, "there were sufficiently factually based and explained reasons for not accepting the evidence of Sellick in any event".

48. Before leave may be granted, I must be satisfied:

(a) that the determination of a question of law could substantially affect the rights of the appellant and/or respondents; and

(i) a manifest error of law on the face of the award; or

(ii) strong evidence that the arbitrator made an error of law and that the determination of the question may add, or be likely to add, substantially to the certainty of commercial law.

49. In Commonwealth v Rian Financial Services and Developments Pty Ltd (1991) 105 FLR 239, Miles CJ considered the meaning of the phrase "manifest error on the face of the award", and adopted the approach set out by Rogers CJ at 195 in Promenade Investments Pty Ltd v New South Wales (1991) 26 NSWLR 184, which itself was based upon the English decision in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724:

After referring to the speech of Lord Diplock in The Nema (supra), his Honour

continued:

"The immediate relevance of His Lordship's speech lies in the concept of perceiving an error in the award on a mere reading of the award even without the benefit of adversarial argument. Although the benefit of such argument cannot be discarded, under the first limb, it is necessary that the error be so obvious or so perceptible to the judge as to be manifest..."

50. More recently, the issue was considered by the High Court in Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37; (2011) 244 CLR 239, where the majority (French CJ, Gummow, Crennan and Bell JJ) said at [42]:

Paragraph (b)(i) of s 38(5) may be awkwardly expressed, but the words "a manifest error of law on the face of the award" comprise a phrase which is to be read and understood as expressing the one idea. An error of law either exists or does not exist; there is no twilight zone between the two possibilities. But what is required here is that the existence of error be manifest on the face of the award, including the reasons given by the arbitrator, in the sense of apparent to that understanding by the reader of the award. If that error is manifest and its determination could substantially affect the rights of at least one of the parties, as specified in par (a) of s 38(5), then the Supreme Court may go on to decide to grant or refuse leave in the exercise of the power conferred by s 38(4)(b).

51. At [43] the majority went on the consider s 38 (5) (b) (ii):

If there be no such manifest error on the face of the award but there is presented to the Supreme Court on the leave application "strong evidence" that an error of law was made, and its determination may add, or be likely to add, substantially to the certainty of commercial law (par (b)(ii) of s 38(5)) and also may substantially affect the rights of at least one of the parties (par (a) of s 38(5)), then leave may be granted.

52. For the reasons given below, I am not satisfied that the appellant has demonstrated any manifest error on the face of the award, nor that there is strong evidence that an error of law has been made.

Whether it was reasonable to order damages in the sum of demolition and reconstruction

53. The complaint made by the appellant is that the arbitrator should not have found on the evidence before him that it was either necessary or reasonable to award damages in the value of the cost of demolition and reconstruction of the building. The appellant acknowledges that the arbitrator applied the correct test in law, as set out in the decision of the High Court in Bellgrove v Eldridge, a decision quoted by the arbitrator in his Interim Award.

54. In that case, Eldridge contracted with a builder, Bellgrove, to build a home in accordance with certain plans and specifications on land owned by Eldridge. The concrete used in the foundation of the house, and the cement used for bricklaying, did not comply with the contract specification, resulting in a building that was structurally unsound. At first instance, Eldridge was awarded damages based on the cost of demolition and reconstruction of the house. On appeal to the High Court, this decision was upheld. It is true, as the present appellant observed, that the building in Bellgrove v Eldridge was structurally unsound, but there are a number of principles referred to by the High Court that do not depend on the finding of structural unsoundness. Before the High Court, Bellgrove argued that the proper measure of damages was the difference in value between the building as constructed and if it had been constructed in accordance with the contract. In rejecting that proposition, the High Court (Dixon CJ, Well and Taylor JJ) said at 617 - 618:

In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract. One or two illustrations are sufficient to show that the prima facie rule for assessing damages for a breach of warranty upon the sale of goods has no application to the present case. Departures from the plans and specifications forming part of a contract for the erection of a building may result in the completion of a building which, whilst differing in some particulars from that contracted for, is no less valuable. For instance, particular rooms in such a building may be finished in one colour instead of quite a different colour as specified. Is the owner in these circumstances without a remedy? In our opinion he is not; he is entitled to the reasonable cost of rectifying the departure or defect so far as that is possible. Subject to a qualification to which we shall refer presently the rule is, we think, correctly stated in Hudson on Building Contracts, 7th ed. (1946), p. 343. "The measure of the damages recoverable by the building owner for the breach of a building contract is, it is submitted, the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach". Ample support for this proposition is to be found in Thornton v. Place; Chapel v. Hickes and H. Dakin & Co. Ltd. v. Lee. (See also Pearson-Burleigh Ltd. v. Pioneer Grain Co. and cf. Forrest v. Scottish Country Investment Co. Ltd. and Hardwick v. Lincoln). But the work necessary to remedy defects in a building and so produce conformity with the plans and specifications may, and frequently will, require the removal or demolition of some part of the structure. And it is obvious that the necessary remedial work may call for the removal or demolition of a more or less substantial part of the building. Indeed - and such was held to be the position in the present case - there may well be cases where the only practicable method of producing conformity with plans and specifications is by demolishing the whole of the building and erecting another in its place. In none of these cases is anything more done than that work which is required to achieve conformity and the cost of the work, whether it be necessary to replace only a small part, or a substantial part, or, indeed, the whole of the building is, subject to the qualification which we have already mentioned and to which we shall refer, together with any appropriate consequential damages, the extent of the building owner's loss.

(emphasis as per original)

(citations omitted)

55. It cannot be suggested, and it was not suggested, that the deficits in the home constructed by the appellant in the present case did not result in the construction of a house of lesser value than the house the appellant was contracted to build. The deficits in the house constructed by the appellant are no mere cosmetic deviation from the contract specification, but are such that cracking to the slab has occurred and is likely to worsen.

56. The High Court went on to add a qualification to the proposition that damages may be awarded calculated on the cost of work necessary to produce compliance with the plans, namely, that the performance of the work must also be reasonable. The example given of where work necessary to achieve compliance with plans would be unreasonable was where better quality materials were used than those specified in the contract. That is not the case here.

57. Of particular significance to the present proceedings is the statement at 619 of the joint judgment:

As to what remedied work is both "necessary" and "reasonable" in any particular case is a question of fact.

58. The arbitrator has, on the face of the award, identified the correct legal test to apply in assessing the damages to be awarded to the respondents. To this extent there is no error of law manifest on the face of the award, nor is there strong evidence that he made an error of law. The next step of determining what remedied work was necessary and reasonable involved a finding of fact by the arbitrator.

Whether the appellant was afforded procedural fairness in the arbitration process

59. I note that, in the 'Introduction' to the Interim Award, the arbitrator sets out in detail his dealings with the parties, the relevant excerpts of which I will set out here:

On 11 April 2013 the parties attended a preliminary conference with the Nominee Arbitrator at the MBA ACT. After agreeing with the parties on various conditions the Nominee Arbitrator entered upon the reference to Arbitration as the Arbitrator. Neither party had legal representation.

The Arbitrator directed the parties to formulate their claims and responses in a spreadsheet. The parties identified the various issues in contention, which were labelled with an alphanumeric code. The parties provided to each other and the Arbitrator various documents in support of their positions.

On 10 October 2013 a hearing was held at the [Property] where the parties presented their positions on the various issues in contention. A view of each issue was also undertaken at the [Property]...

The Arbitrator directed the Owners to provide their written submissions on each issue by 22 October 2013. The Arbitrator directed the Builder to provide its written submission by 29 October 2013.

Each party was afforded the opportunity to respond to the other party's submissions.

...

On 18 December 2013 the parties and the Arbitrator attended the [Property]...

...

The Arbitrator directed the parties to undertake any further investigations they considered necessary and then to make their final written submissions and responses to the other party's submissions.

...

On 6 February 2014 the Owners provided their "Summary of the Site Inspection" and an updated report by Contour Technologies.

On 21 February 2014 the Builder provided its final submission in the form of a report by Sellick Consultants dated 20 February 2014.

On 13 March 2014 the Owners provided their final submissions including a report by John Skurr Consulting Engineers dated 13 March 2014.

(emphasis as per original)

60. In my opinion, it is clear that the arbitrator provided ample opportunity to both parties to make submissions and to respond to the other party's submissions. I also note that the spreadsheet which the Arbitrator initially directed the parties to formulate included columns in which both the appellant and respondent were invited to specify a monetary sum for costs and damages, as well as a column for the builder to provide a comment. As I have already noted (at [6] above), the respondents stipulated as at 26 April 2013 that the cost of rectification claimed for the "Poorly placed control joints and slab not constructed as per engineers (sic) specification" was "TBA pending advice from engineer". On 8 October 2013, the arbitrator sent the appellant an updated spreadsheet provided by the respondents that incorporated an amended claim for the cost of demolition and reconstruction of the building along with damages, specifying a claim in the amount of $534,918.00. This was prior to the appellant providing their final submission in February 2014.

61. This is in addition to the arbitrator's specific directions on 7 August 2013 and 9 September 2013, which I have already referred to, advising the parties that "expert evidence in the form of a professional valuation would assist a Party's claim" and "[t]he Parties should address the value of the other Party's claims even where the liability is denied."

62. With this in mind, the appellant's argument that "[A]t no stage was the Appellant advised that a question of reasonableness in relation to the damages awarded might become relevant and that he should address the issue" cannot stand. It should have been obvious to the appellant, even though the appellant was at the time unrepresented, during the arbitration process and well prior to the arbitrator determining the Interim Award that the quantum of damages sought by the respondents was in issue. The nature of the respondents' claim concerning the concrete slab, and the quantum of damages claimed were clear to the appellant from at least 18 June 2013, well prior to the appellant providing its final submissions. There was no application by the appellant to adduce further evidence to the respondents' claim as amended.

63. There is no error manifest on the face of the award as alleged by the appellant, nor is there strong evidence of any such error.

Whether the arbitrator made reasonable findings on credibility

64. Each party chose not to cross-examine the expert witnesses of the other party. As I observed in Stekovic v Polyseal Waterproofing Technologies Pty Ltd (quoted above at [29]), cross-examination of expert witnesses may, in many cases, be expected to assist a tribunal of fact in understanding the differences between the opinion of the experts, and the basis of their opinions, and in determining what weight is to be given to their respective opinions. What I said in Stekovic, however, cannot be raised to the level of a principal that expert witnesses must be cross-examined. The decision of the parties not to cross-examine the respective expert witnesses deprived the arbitrator of that assistance. In the absence of that assistance, the arbitrator was nevertheless entitled to consider, on the material before him, whether the respective witnesses were truly independent, or whether they had demonstrated allegiance to a party or had a motive for partiality.

65. In any event, the arbitrator gave ample reasons based on the facts as he found them to be for rejecting the opinions of Mr Sellick. The appellant has not demonstrated any error of law manifest on the face of the award, or strong evidence that the arbitrator made an error of law.

Whether the arbitrator erred in awarding damages for delay

66. Where parties to a contract fix an amount payable on liquidated damages in the event of a breach of the agreement, that amount will bind the parties in the event of breach, provided it is not out of all proportion to the breach and void as a penalty. In such a case, it does not matter whether the actual losses are greater or smaller than the amount fixed, the parties are bound by the agreement: Diestal v Stevenson [1906] 2 KB 345; Cellulose Acetate Silk Co Ltd v Widnes Foundry (1925) Ltd [1933] AC 20. Particular questions, however, may arise where parties use a standard form contract which, on its face, suggests that there is no entitlement to liquidated damages.

67. In the present case, clause 8 of the building contract provides:

(a) The Builder will reach Practical Completion within the time in Item A10 of Appendix A, unless that time is extended under Clause 13.

(b) If the Builder defaults under Clause 8(a) the pre-estimated liquidated damages for that default is a sum calculated using the rate in Item 17 of Appendix A for the period from the Date for Practical Completion until Practical Completion is achieved under Clause 23.

(c) Those damages may be deducted from any money which becomes payable to the Builder by the Owner and any shortfall may be recovered by the Owner.

68. Item A10 of Appendix A to the contract provides a practical completion date of "July 2012". Item A17 of Appendix A is in the following form:

Rate of Liquidated Damages Per Week $__________________

(if nothing stated, Zero)

69. As no other figure is set out in Item A17, the rate for liquidated damages per week, for the purposes of clause 8 (b), is zero. The arbitrator found that there was no evidence of any extension under clause 13 of the contract for the date for practical completion, and then went on to say:

As the Builder did not cause the Works to reach Practical Completion, and there was no evidence of any acts of prevention, the Builder was in breach of Contract.

Clause 8(b) appears to be drafted to provide an agreed remedy if the Builder breaches Clause 8(a). However, for the Clause to be operable there must be a manner of calculating a sum via item A17 of Appendix A. There was no rate stated in Item 17 as no rate was inserted by the parties. The document states that "if nothing stated, Zero". Fundamentally "Zero" is not a rate and "Zero" is not a sum. "Zero" may have meant 'there is no damages' or may have meant 'there is no clause'. However this was not argued by the parties.

As there was no rate in item A17, there is no mechanism to calculate a sum as a pre estimated liquidated damage for late completion. If the parties intended that there be no damages for the breach of Contract in not completing the works to Practical Completion by the due date, then they would have had to express that intention clearly.

I find that leaving blank the Item A17 in the MBA Contract had the effect of rendering Clause 8(b) inoperable.

With Clause 8(b) being inoperable, that does not then imply that as a consequence Clause 8(a) was inoperable.

If Clause 8(a) was to be effectively struck out of the Contract then the result would have been that the Builder had no obligation to complete the works by any particular time but in a reasonable time. I do not consider that the MBA Contract has been drafted so as to achieve that effect where the parties simply fail to complete item A17.

I find that the Owners are entitled to damages for the Builder's breach of Contract in not causing the works to reach Practical Completion by July 2012.

70. In summary, the arbitrator concluded that the failure of the parties to insert a figure into Item A17 resulted in clause 8 being "inoperable", allowing him to assess damages for late completion based on ordinary principles for assessing damages for breach of contract. The arbitrator assessed damages in the sum of $41,033.70.

71. In determining that clause 8 was in operable, or to be seen as "effectively struck out" of the contract, it is alleged that the arbitrator has made an error of law which is manifest on the face of the award.

72. Similar situations have arisen in earlier cases. In Temloc Ltd v Errill Properties Ltd (1987) 39 BLR 30, Temloc, as contractors, entered into a contract with Errill to construct a shopping development. Clause 24.2.1 of the contract provided for liquidated damages to be paid or allowed to Errill if the project was not completed on time "at the rate stated in the Appendix". The appendix stated "liquidated and ascertained damages" to be awarded under clause 24.2 "at the rate of £nil". In subsequent proceedings between the parties, Temloc contended that the appendix meant that the liquidated damages were nil, whereas Errill contended that, by writing "£nil", the parties indicated that clause 24 was in effect to be excluded from the contract altogether. At first instance, the contention of Temloc was upheld. On appeal, the Court of Appeal (Watkins, Croom-Johnson and Nourse LJJ) held that, by completing the appendix with "£nil", the parties intended that liquidated damages of £nil should be an exhaustive agreement as to damages for failure to complete the works on time, and that Errill did not have the option of claiming damages of precisely the same character but in an unliquidated amount. Clause 24 of the contract was, relevantly, in the following form:

If the contractor fails to complete the works by the completion date then the architect shall issue a certificate to that effect.

Subject to the issue of a certificate under clause 24.1 the contractor shall, as the employer may require in writing not later than the date of the first certificate, pay or allow to the employer the whole or such part as may be specified in writing by the employer of a sum calculated at the rate stated in the appendix as liquidated and ascertained damages for the period between the completion date and the date of practical completion and the employer may deduct the same from any monies due or to become due to the contractor under this contract... or the employer may recover the same from the contractor as a debt...

73. There was evidence in Temloc of a course of dealing between Temloc and Errill concerning a number of construction projects involving the parties, with similar contracts all providing for £nil liquidated damages. That evidence established that the parties had agreed that, as no bonus would be provided to Temloc for early completion, no damages would be payable by Temloc for late completion. Croom-Johnson LJ, with whom Nourse LJ agreed, rejected the proposition that inserting £nil into the appendix meant that there was no effective clause for the recovery of liquidated damages, and that Temloc could sue for unliquidated damages.

74. The decision in Temloc was distinguished by Giles J in Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137. Baese, the proprietor, claimed damages for breach of a building contract against Bracken, the builder. The contract provided a date for practical completion of the project, which expired before the project was completed. The contract envisaged the appointment of an architect who would act as the proprietor's agent. The contact authorised the architect to act as the assessor, valuer or certifier in respect of "liquidated damages". Clause 10.14 provided that, if the builder failed to bring the works to practical completion by the date for practical completion in the contract, the architect could give the builder notice in writing of default, and if such notice were given, the builder was to pay to the proprietor a sum certified and calculated by the architect at a rate specified in the appendix to the contract. The rate for liquidated damages in the appendix was "nil dollars". Giles J rejected the builder's argument that the parties had therefore agreed that, in the event of delay in achieving practical completion, the proprietor's only entitlement would be to nil damages. His Honour observed that clause 10.14 gave the proprietor an option to set in train the process in the clause, which distinguished it from the clause considered in Temloc. His Honour went on to say:

It is, I think, fairly well recognised that a liquidated damages clause providing for liquidated damages in the event of failure of a builder to complete on time is normally inserted for the protection of the proprietor, in order that the proprietor may be relieved from the difficulty and expense of proving actual damage occasioned by delay, and I refer in this regard to what was said by Salmon L.J. and Phillimore L.J. in Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd ((1970) 1 B.L.R. 114 at 121 and 127). It seems to me that the function of cl. 10.14 was to enable the proprietor, if he so desired, to cause the architect as his agent to invoke the machinery whereby liquidated damages could be assessed, or enable the architect to do so, in order to obviate the task which would otherwise arise of establishing an actual loss due to delay, but that if the proprietor or the architect did not do so, then the proprietor was entitled to rely upon his common law right to damages for breach of cl. 1.02.03.

One matter in particular can be seen as supporting this view of the contract. As Peak Construction (Liverpool) Ltd v. McKinney Foundations Ltd shows, a proprietor may lose his right to rely upon a liquidated damages clause providing for liquidated damages in the event of delay in completion if the proprietor caused or contributed to the delay. In that situation if would require clear words, in my view, before it was held that a liquidated damages clause was the entirety of the proprietor's rights, because the proprietor would be exposed to being left with no entitlement at all to damages for delay if by reason of his own contribution thereto he was unable to rely upon the liquidated damages clause. Clause 10.14, read in the context of the contract as a whole, does not to my mind so provide, and certainly does not so provide in clear words.

75. The decision of Giles J was not met with immediate acclaim. The editor of Building and Construction Law added a note to the reported decision:

With respect, a large number of those involved in construction contracts law are startled to be told that the proprietor...in effect has an option. Even worse, he can control that option according to his whims in whether or not he directs the architect to give notice of the overrun... On basic principles, it is difficult to believe that the true intention of the parties can be said to be that the proprietor should have such an option (starkly contrasted with the usual belief that there should be no delay damages where "nil" is inserted) just because of the difference between "shall" and "may"...

76. The decision has been discussed in a number of scholarly articles: Trevor Thomas, '$Nil liquidated damages: An exhaustive remedy for delay under a construction contract?' (2008) 24 BCL 82; Michael Hollingdale, 'Designing and enforcing liquidated damages claims to maximise recovery' (2005) 21 BCL 412. Thomas, after considering a number of authorities including Temloc and Baese, concluded:

If the parties complete the rate of liquidated damages as "$nil", the principal's ability to recover unliquidated damages is not entirely certain. Temloc suggests that the position, at least in England, is that the principal will not be entitled to recover unliquidated damages.

Baese suggests that the position in Australia will depend upon whether the terms of the contract evidence the parties' intention that liquidated damages would be an exhaustive remedy. In addressing this issue, Giles J observed (in Baese) that "clear words" would be necessary for a party to give up the right to claim unliquidated damages.

It is respectfully submitted that the decision in Baese can be questioned on the grounds that:

(a) liquidated damages and unliquidated damages may be viewed as manifestations of the same damage and, in the event that an enforceable rate of liquidated damages is set out in the contract (albeit a rate of "$nil"), the rate of liquidated damages should apply;

(b) the phrase "[t]he Architect may give notice" in cl 10.14.01 of JCC B 1985 may not, in the context of a certifying function, have been intended to be discretionary;

(c) it may have been appropriate to interpret the liquidated damages provision in light of the commercial context of the transaction rather than on a literal interpretation only of cl 10.14; and

(d) while "clear words" can certainly evidence an intent to give up the right to claim unliquidated damages, the appropriate inquiry, based on Darlington Futures, is to look at the contract as a whole to ascertain the parties' intentions.

77. In J-Corp Pty Ltd v Mladenis [2009] WASCA 157, the appellant, a builder, entered into a lump sum building contract with the respondent to construct a three level brick house on the respondent's land. The contract was in a standard form and provided that the appellant was to complete the works within a specified period, in default of which the appellant "shall be liable to pay the Proprietor liquidated damages at the rate of NIL DOLLARS ($00.00) per day" after the date specified for completion until completion occurred (clause 11.9). The primary judge concluded that the clause 11.9 did not exclude the respondent's right to claim damages of common law for losses suffered by reason of the delay in achieving completion. On appeal, Newnes JA, with whom Miller JA agreed, upheld the decision of the primary judge based on the interpretation of the relevant provision of the contract, and applying the common law principle that clear words are needed to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of contract arising by operation of law: Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689; Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312. At [51], Newnes JA also drew a distinction between contracts which provided for the liability of the builder in a positive amount, and those which provided for nil damages:

I do not consider there is any inconsistency between the terms of cl 11.9 and a right in the respondents to claim unliquidated damages for delay. The position may well be different where a contract provides for the liability of the builder for liquidated damages in a positive amount, it being unlikely that the parties would have intended that the proprietor should have the benefit of both liquidated and unliquidated damages for the same delay.

78. In a separate judgment, Buss JA came to the same conclusion, saying at [3]-[8]:

It is well established that an intention to exclude the common law right to damages for breach of contract must be expressed in clear and unambiguous terms. See, for example, Concut Pty Ltd v Worrell [2000] HCA 64; (2000) 75 ALJR 312 [23] (Gleeson CJ, Gaudron & Gummow JJ); Décor Ceilings Pty Ltd v Cox Constructions Pty Ltd (No 2) [2005] SASC 483; (2007) 23 BCL 347 [66] (Besanko J).

It is true that a claim by a proprietor against a builder for late completion under a building contract, whether for liquidated damages at an agreed rate or for unliquidated common law damages, involves a single cause of action for the same loss. See Temloc Ltd v Errill Properties Ltd (1987) 39 BLR 30, 33 (Nourse LJ). In other words, a claim for liquidated damages at an agreed rate and a claim for unliquidated common law damages in respect of the same loss are not separate heads of damage.

However, this point of principle does not preclude the parties to a building contract from agreeing that the proprietor will be confined to the common law right to damages for any breach by the builder of its obligation to complete the works by a specified date. The intention of the parties in this respect turns on the proper construction of the particular contract.

The construction of a written contract is concerned with ascertaining what a reasonable person would have understood the parties to mean. Consideration should ordinarily be given not only to the language of the document, but also to the surrounding circumstances known to the parties, and the apparent purpose and object of the transaction. See Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd [2004] HCA 52; (2004) 219 CLR 165 [40] (Gleeson CJ, Gummow, Hayne, Callinan & Heydon JJ). Where the parties have entered into a building contract, the apparent purpose and object of the transaction may include the evident allocation between the parties of the risk of loss or damage arising from a particular occurrence or contingency. The statutory context (if any) in which the parties contracted may also be relevant to issues of construction.

As Giles J noted in Baese Pty Ltd v RA Bracken Building Pty Ltd (1990) 6 BCL 137, 140, a clause in a building contract providing for liquidated damages at an agreed rate in the event of the builder's failure to complete the works on time is normally included for the benefit of the proprietor. It relieves the proprietor from the difficulty and expense of proving that he or she has suffered actual damage as a result of the delay.

I agree with Newnes JA that on a proper construction of the contract between the appellant/builder and the respondents/proprietors, the parties did not express in clear and unambiguous terms an intention to exclude the common law right to damages for breach of the appellant's/builder's obligation to complete the works on time. Clause 11.9, in the context of the contract as a whole, manifests an intention that the standard form liquidated damages clause should, in substance, be excluded, but does not, in my view, manifest an intention that any and all remedies (whether under the contract or at common law) should be excluded.

(emphasis as per original)

79. The principles which I distil from these cases are:

(a) the requirement in each case is to ascertain the intention of the parties to the agreement concerning damages for delay;

(b) in ascertaining that intention, consideration may be given not only to the language of the agreement, but also to the surrounding circumstances known to the parties and the apparent purpose and object of the transaction. Temloc was a case where evidence was received of surrounding circumstances, being evidence of a course of dealings between the parties to the agreement which confirmed that the intention of the parties was that damages for late completion would not be available;

(c) the vesting of a discretion in the proprietor to exercise a contractual right to claim liquidated damages may indicate that the parties did not intend the contractual right to liquidated damages to be the exclusive remedy for delay; conversely, a mandatory clause, in the sense of compelling the builder to pay regardless of any demand for payment by the principal, may indicate that the clause is intended to provide an exclusive remedy; and

(d) in construing a contract which, on its face, provides for no liquidated damages for breach, an intention to exclude a right to common law damages must be expressed in clear and unambiguous terms.

80. The decision in Temloc may be distinguished on the basis of the evidence received in that case about the circumstances surrounding the agreement as known to both parties. The approach taken by the arbitrator, in the present matter, that leaving blank item A17 had the effect of rendering clause 8 (b) inoperable, is consistent with the approach taken to a similar clause by Buss JA in J-Corp Pty Ltd. The arbitrator examined the term of the contract and concluded that there were no clear words in the contract evidencing an intention that the parties intended that the respondents would have no remedy for breach of the contract by failure to complete the works within the prescribed time. This approach was consistent with the authorities to which I have referred. I am not satisfied that there is a manifest error of law on the face of the award concerning the award of damages for failing to complete the works by the specified date, nor am I satisfied that there is strong evidence that the arbitrator made such an error.

Whether the arbitrator erred concerning "salvageable items"

81. It was clear by at least 18 June 2013 that the respondents were claiming damages on the basis of demolition and rebuild because of the deficits in the concrete slab. The potential for this issue to subsume all other issues was highlighted by the decision of the arbitrator to consider the respondents' claim in relation to the slab as a threshold issue. The arbitrator also urged the parties to place before him evidence or submissions concerning damages, even where the claim was disputed. Notwithstanding these circumstances, the appellant did not put any evidence before the arbitrator, or make any submissions, that there were salvageable items of value which should be brought to account in reduction of damages. Without such evidence it was not open to the arbitrator to find that there were such items. There is no manifest error of law on the face of the award, nor is there strong evidence that the arbitrator made such an error.

82. The appellant challenges the finding of the arbitrator that the respondents are likely to use the damages awarded to demolish and rebuild the premises. It submits that it will be open to the respondents to tile over the slab at minimal cost and then remain in the premises, or sell them, while retaining the balance of the damages. A similar argument was rejected by the High Court in Bellgrove, at 620:

It was suggested during the course of argument that if the respondent retains her present judgment and it is satisfied, she may or may not demolish the existing house and re-erect another. If she does not, it is said, she will still have a house together with the cost of erecting another one. To our mind this circumstance is quite immaterial and is but one variation of a feature which so often presents itself in the assessment of damages in cases where they must be assessed once and for all.

83. The approach taken by the arbitrator is consistent with established principle. There is no manifest error of law on the face of the record, nor is there strong evidence of error.

Did the arbitrator err in assessing that the property was not capable of receiving a certificate of occupancy?

84. Whether the property was capable of receiving a certificate of occupancy has no bearing on the existence of the deficits identified by the arbitrator or what action is necessary or reasonable to rectify those deficits. For that reason the assessment of the arbitrator on this issue is irrelevant. The question of whether the premises are capable of receiving a certificate of occupancy is also, at best, a mixed question of law and fact. I am not satisfied that there is a manifest error of law on the face of the record, or any strong evidence of error.

Whether the arbitrator erred in awarding the respondents more than they claimed

85. This aspect of the proposed appeal was not particularised, nor was it addressed in the appellant's written submissions. There is no merit in the proposed ground. It was the duty of the arbitrator to assess the respondents' loss as a consequence of the appellant's breach of contract. The arbitration proceedings were not the subject of strict pleadings, but a Scott schedule was used by the arbitrator as the basis for the claim. The appellant was aware of the fact that the respondents increased their claim. In addition, the arbitrator awarded a modest amount for the cost of demolition, which had not been the subject of a specific figure in the Scott schedule. It was apparent, however, from at least 18 June 2013 that the respondents were claiming damages on the basis of demolition, so the appellant was aware that this was part of the respondents' claim, although no particular figure was claimed in the schedule.

86. The appellant has not demonstrated any manifest error on the face of the award, nor has it demonstrated that there is strong evidence that the arbitrator made an error of law. Leave to appeal the award of the arbitrator is refused.

I certify that the preceding eighty-six [86] numbered paragraphs are a true copy of the Reasons for Judgment of his Honour Justice Burns.