the Units specified in the notice AND HE SHALL SPECIFY IN THE NOTICE THE PRICE PER UNIT WHICH HE FIXES AS THE FAIR VALUE THEREOF. ... A TRANSFER NOTICE SHALL NOT BE REVOCABLE except with the sanction of the Trustees EXCEPT WHERE THE FAIR VALUE HAS BEEN FIXED BY ARBITRATION AS HEREINAFTER PROVIDED AT A PRICE LOWER THAN THE PRICE FIXED BY THE PROPOSING TRANSFEROR IN WHICH CASE THE PROPOSING TRANSFEROR MAY REVOKE THE TRANSFER NOTICE by notice in writing to the Trustees within seven days after he has received notice of the result of such arbitration from the Trustees. ... (iii) The service of a transfer notice shall be deemed to constitute the Trustees the agent of the proposing transferor for the sale of the Units therein specified to a purchaser to be nominated by the Trustees as hereinafter provided AT A PRICE EQUAL TO THE FAIR VALUE THEREOF AS SPECIFIED BY THE PROPOSING TRANSFEROR OR AS FIXED BY ARBITRATION IN THE MANNER HEREINAFTER PROVIDED AS THE CASE MAY BE. (iv) Units comprised in a transfer notice shall in the first instance be offered by the Trustees by notice in writing to all the Unit Holders (except the proposing transferor) as nearly as may be in proportion to their respective holdings of Units of the same class. ... (v) The offer to Unit Holders shall state that if the same is not accepted in whole or in part within twenty one days from its receipt it shall be deemed to be declined ... THE OFFER SHALL ALSO REQUEST THE UNIT HOLDERS TO STATE WHETHER THEY DESIRE THE FAIR PRICE OF THE UNITS TO BE FIXED BY ARBITRATION AS HEREINAFTER PROVIDED. ... (viii) Within thirty days after being served with a transfer notice the Trustees shall by notice in writing to the proposing transferor nominate one or more Unit Holders or other persons whom in the opinion of the Trustees it is desirable in the interests of the Trust to admit as Unit Holders (in this paragraph (b) hereinafter then called "the purchaser") and who wish to purchase forthwith for cash all or any of the Units comprised in the transfer notice as purchaser or purchasers of such Units WHEREUPON THE PROPOSING TRANSFEROR SHALL BE BOUND UPON PAYMENT OF THE FAIR VALUE SPECIFIED OR FIXED AS AFORESAID OF THE UNITS TO TRANSFER THE UNITS TO THE PURCHASERS AS SET OUT IN THE SAID

NOTICE IN WRITING. (ix) The Trustees shall by the same notice as is referred to in sub-paragraph (viii) of this paragraph (b) if so required by the purchaser or purchasers of any of the Units to be purchased require the fair value of the Units to be fixed by arbitration pursuant to the Arbitration Act in force in the Territory on the date of the notice in lieu of the fair value fixed in the transfer notice PROVIDED ALWAYS that in the event of the fair value so fixed by arbitration exceeding the fair value fixed in the transfer notice the Trustees shall forthwith give notice thereof to the purchasers and all or any of such purchasers may by notice in writing to the proposing transferor not later than fourteen days

after the determination elect not to continue with the purchase. (xi) If at the expiration of thirty days after the

transfer notice the Trustees shall not have found a Unit Holder or person selected as aforesaid willing to purchase forthwith for cash any Units mentioned in the transfer notice or if following arbitration any intending purchaser elects not to continue with the purchase of any such Units the proposing transferor shall be entitled at any time within one month after the expiration of the said period of thirty days - (i) to sell and transfer those Units to any person at a price not less than the price fixed by him in the transfer notice; or (ii) to require the Trust to be wound up in which case notwithstanding anything contained in this Deed he shall in that event be entitled to require the Trustees to convene an Extraordinary General Meeting of Unit Holders for the purpose of considering a resolution that the Trust be wound up and shall be entitled at such meeting to exercise ten thousand votes for every Unit held by him of whatever class." (emphasis added) 16. It is convenient to set out next the arbitrator's reasons for his costs award, and the various attacks thereon. The arbitrator's reasons and the applicants' attacks thereon A general principle: the successful party should recover its costs 17. The learned arbitrator considered that he had a discretion as to costs, to be exercised judicially; and that, in general, a party successful in the arbitration was entitled to recover its costs. 18. I note that it is of the greatest importance to bear in mind that an arbitrator's decision on costs is within his discretion, and not that of this court. The arbitrator's approach above was correct, as Mr Maurice QC of senior counsel for the applicants agreed; the general principle that 'costs follow the event' applies in an arbitration as in court proceedings. I did not understand either party to dispute this approach. An arbitrator's general discretion as to costs is unfettered, but it must be exercised judicially according to well settled principles, one of which is that a successful party is entitled to be awarded his costs, special reasons being necessary if he is to be deprived of them: see Ballantyne v Electricity Trust of South Australia (1994) 62 SASR 133; Leighton Contractors Ltd v Western Australian Government Railways Commission [1966] HCA 58; (1966) 115 CLR 575 at 578; Ritter v Godfrey [1920] 2 KB 47 at 42, per Lord Sterndale MR, approved in Donald Campbell & Co Ltd v Pollak [1927] AC 732 at 814, and applied to arbitrations in Berbette Pty Ltd v Hansa [1976] VicRp 35; [1976] VR 385 at 388; Scherer v Counting Instruments Ltd [1986] 1 WLR 615 at 621; L Figueiredo Navegacas SA v Reedevei Richard Schroeder KG (The Erich Schroeder) [1975] 1 Lloyd's Rep 192 at 193-4; and Lewis v Haverford West R.D.C. [1953] 2 All ER 1599. Determining who is the 'successful party' 19. The arbitrator then noted that the real problem lay in applying the principle; that is, in determining "who is the successful party, if anyone" in this arbitration, where he had been required "to fix the fair value of the units referred to in the transfer notice". Mr Maurice agreed with this conceptualization. In addressing this general problem, the arbitrator considered the possible significance of 3 matters. It was in the course of doing so that he fell into error, in Mr Maurice's submission. Significance of Marrosan specifying $220,000 in its transfer notice, and its motive for doing so 20. The arbitrator recounted the background to the arbitration, noting that while Carpaolo and Epicure were obliged under clause 14(b)(ix) to purchase the 32 units at the "fair value" he had fixed - "... the vendor [Marrosan] still had the opportunity [under clause 14(b)(i)] to revoke the transfer notice if the fair price fixed by arbitration was lower than the price fixed by the vendor (viz $220,000 per unit). In the circumstances of this proceeding there is little doubt that this would be the situation. THE VENDOR HAS NOT PRODUCED ANY ATTEMPT TO JUSTIFY THE SUM OF $220,000 PER UNIT [it had specified in its transfer notice] and IT IS MY OPINION THAT HE SET THE AMOUNT AT A RIDICULOUS FIGURE IN ORDER TO ALLOW HIMSELF ROOM TO MOVE [that is, to revoke the transfer notice under clause 14(b)(i)] IF HE DID NOT LIKE THE PRICE FIXED BY THE ARBITRATOR. [I note that later (see p19) the arbitrator expressed "reservations about the bona fides of [Marrosan] in setting the fair value."] Does this [behaviour and motivation of Marrosan] make any difference [on the question of costs]? The Vendor says "NO" and the purchasers say "YES". The purchasers point out that the vendor has not at any stage reduced its price [of $220,000 per unit], that the purchasers did not do

anything to bring this arbitration on themselves but were rather confronted with a position where Marrosan wanted "out", they wanted the business to continue and the price [of $220,000 per unit] set by the vendor was ridiculous. In these circumstances the costs of the arbitration could not be avoided." (emphasis added) 21. Mr Maurice again argued the "YES" case before me, as the applicants' principal submission. He submitted that there was a manifest error of law on the face of the arbitrator's reasons, which constituted part of his award. He noted that the arbitrator had characterized the price of $220,000 per unit specified by Marrosan in its transfer notice as a "ridiculous figure"; see above. He submitted, importantly, that Marrosan was obliged by clause 14(b)(i) (p6) to specify in that notice the "fair value" of the units as the unit price; and that whether it had done so was the relevant 'event' when it came to applying the principle 'costs follow the event'. He submitted that Marrosan had failed to meet this obligation, with the result that the only choices open to Carpaolo and Epicure, on receiving the transfer notice, were either to allow the Trust to be wound up, or to make a binding offer to purchase the units for their "fair value" as fixed by arbitration. They chose the latter course. Mr Maurice submitted that the purpose of the Deed of Trust's provisions on "fair value" was to try to avoid an arbitration if that were possible; hence the obligation was that Marrosan fix 'not any price, but a fair price'. The 'commercial reality', as Mr Maurice put it, was that Marrosan by its transfer notice had made a bid to quit the quasi-partnership constituted by the Trust, but without finally committing itself to do so; it wanted a 'free look', and achieved this by fixing "a ridiculous figure" in its transfer notice, since it could then always revoke that notice under clause 14(b)(i) if the arbitrator fixed a lower figure as the "fair value" as, in reality, he certainly would (and did). Noting the arbitrator's concluded opinion (p11) as to Marrosan's motive for fixing the 'ridiculous figure', Mr Maurice submitted that by breaching its obligation under clause 14(b)(i) to specify a figure which was the "fair value" Marrosan had forced the arbitration on Carpaolo and Epicure, requiring them to establish therein that Marrosan's figure of $220,000 was not the "fair value". 22. I note that, mutatis mutandis, this submission bears comparison with a point made by the Court of Appeal (Eng.) in Scherer v Counting Instruments Ltd (supra) at 621: " ... The normal rule is that the costs follow the event. That THE PARTY WHO TURNS OUT TO HAVE UNJUSTIFIABLY ... GIVEN ANOTHER PARTY CAUSE TO HAVE RECOURSE TO THE COURT TO OBTAIN HIS RIGHTS IS REQUIRED TO RECOMPENSE THAT OTHER PARTY IN COSTS". (emphasis added) 23. Mr Maurice submitted that, although Carpaolo and Epicure succeeded before the arbitrator in establishing that Marrosan's $220,000 was not the "fair value" - and succeeded so completely that the arbitrator had characterized it as a "ridiculous figure" - and had also satisfied the arbitrator (p11) as to Marrosan's motive in specifying $220,000 in its transfer notice, they had nevertheless (wrongly) been required by the arbitrator in his costs award of 9 June 1994 in effect to bear 60% of their costs of the arbitration. The arbitrator had erred in making that costs order because he had ignored the fact, relevant to costs, that Marrosan was unambiguously obliged under clause 14(b)(i) to specify in its transfer notice as its price, the "fair value" of the units; and he had ignored Marrosan's failure to observe that obligation, when it fixed "a ridiculous figure" as the "fair value". Mr Maurice put the essence of the submission pithily: the arbitrator should have said to Marrosan "... you didn't fix a fair value, you didn't even try to fix a fair value, and therefore you should pay the costs of the arbitration." 24. It can be seen that the contention that Marrosan was under an obligation in clause 14(b)(i) to fix the "fair value" as its transfer price, is central to the applicants' principal submission. Mr Maurice stressed its importance, and that the absence of a costs sanction for breach of that obligation would tend to produce disputes, rather than peaceful resolutions. 25. The arbitrator proceeded to express immediately his conclusion on the significance to the question of costs of his conclusion as to Marrosan's motivation, and the purchasers' "YES" submissions he had recorded at p11: "ALL OF THE ABOVE IS CORRECT BUT DOES IT AFFECT MY DISCRETION AS TO COSTS IN THAT IT CAN BE SAID TO BE OF ASSISTANCE IN DETERMINING WHO WAS THE SUCCESSFUL PARTY? After much consideration and sympathy for the purchasers as to the position in which they found themselves I HAVE REACHED THE CONCLUSION THAT IT DOES NOT. (emphasis added) 26. He did not spell out the reasons for his "conclusion that it does not". This passage represented the conclusion of his consideration of the point, though he adverted to it again in his final paragraph (p22), when considering whether the award of costs should be on a party and party or indemnity basis. He simply rejected the "YES" submissions (p11) as irrelevant to the determination of the question of costs; the essence of Mr Maurice's submissions at pp11-13 is that that was erroneous, and involved the application of a wrong principle, in that the obligation imposed on Marrosan by clause 14(b)(i) was such that its failure to observe it, is relevant to costs, and determinative of them. By his conclusion above, the arbitrator tacitly rejected that view. Significance of lack of offers by the party 27. The arbitrator then turned to consider a separate matter he considered relevant to costs. This was the fact that neither party had sought to use any statutory or non-statutory mechanism by way of making an 'offer', to protect its position as regards costs. He said: "In my view the vendor's contention that it was open to the purchasers to make an offer [of compromise] pursuant to Order 91.10 of the Supreme Court Rules is correct and IF SUCH AN OFFER HAD BEEN MADE THERE IS NO DOUBT THAT IT COULD HAVE [BEEN] REFERRED TO AND USED ON THE QUESTION OF COSTS (Section 34(6) Commercial Arbitration Act). In addition to the above it was open to both parties to seek protection on the question of costs by way of a written offer of settlement which could be without prejudice and used solely on the question of costs - Calderbank v Calderbank 1975 3 All ER 333. In the circumstances of this case having regard to the financial position of the parties it would have been appropriate for me to treat such a letter as equivalent to a payment into Court and it could clearly only have been considered after the interim award [of 4 May 1994] had been handed down, and pursuant to the request under Section 34(4) of the Commercial Arbitration Act. [for directions as to payment of costs]." (emphasis added) 28. Order 91 of the Supreme Court Rules sets out the Commercial Arbitration Rules, which apply to an arbitration as well as to a proceeding in Court under the Act. Rule 91.10 provides: "A party to an arbitration may serve on any other party an offer of compromise of a claim the subject of the arbitration on the terms specified in the offer." 29. Section 34(6) of the Act provides for the legal effect of such an offer, viz: (6) "Where in accordance with rules of court an offer of compromise has been made in relation to a claim to which an arbitration agreement applies, THE ARBITRATOR ...

SHALL, IN EXERCISING A DISCRETION AS TO COSTS, TAKE INTO ACCOUNT BOTH THE FACT THAT THE OFFER WAS MADE AND THE TERMS OF THE OFFER." (emphasis added) 30. I observe that this is the ordinary way in which a party to arbitration may seek to protect its position on costs; see Keywest Construction Group Pty Ltd v Footscray Holdings Pty Ltd (unreported, Supreme Court (WA) (Anderson J), 23 February 1993) at p11. 31. Pursuing the costs significance of such "offers", the arbitrator next quoted at length from Tramountana Armadora JA v Atlantic Shipping Co SA [1978] 2 All ER 870 at 877-8, where Donaldson J set out how an arbitrator should deal with the question of costs where there is a 'sealed offer', noting the general rule and the overriding discretion. He also referred to Demolition & Construction Co Ltd v Kent River Board [1963] 2 Lloyd's Rep 7 at 15 where McNair J reflects on the measure of success required when deciding on the award of costs. He continued: "In this case I have no evidence of any offers by either the vendor or the purchasers. It does seem strange in the circumstances that no offers were relied upon but as was put to me in submissions I cannot surmise as to the position but must rely solely on the evidence before me." 32. As to this approach to the significance of "offers" (or the lack of them) to costs, Mr Maurice correctly noted that the Deed of Trust did not contemplate a 'sealed offer' procedure; he submitted that no rule of law required its adoption. He submitted that, as to the 'costs follow the event' principle, the arbitrator here had wrongly identified the 'event' as being whether the applicants had made an offer equal to or greater than the amount which he ultimately found to be the "fair value".
He submitted that the arbitrator had erred in treating the applicants' failure to make a 'sealed offer' as determining the question of costs, as opposed to being a factor to be taken into account; and that, contrary to his finding (p16) there clearly had been offers made by both parties. Marrosan had offered to sell at a "ridiculous figure" of $220,000, and only at that price; that was Marrosan's only offer. Carpaolo and Epicure, on the other hand, had offered to purchase at the "fair value" fixed by the arbitrator, whatever it might be, and only at that figure. He submitted that the arbitrator had completely ignored the fact that these offers - the only "offers" made by the parties - had been made when, in deciding the question of costs, he attributed significance to the fact that there had been no 'sealed offer'. Mr Maurice submitted that, unlike litigation in the courts, the applicants had done nothing to bring the arbitration upon themselves - they had not invaded a legal right of Marrosan - and so whether an offer was made or not could not be decisive on costs. 33. As to the last point, I note that the applicants were parties to the Deed of Trust, which instituted this 'exit procedure'. I consider it is clear that when the arbitrator referred at p16 to the absence of "offers", he clearly meant those which could have been made in the course of the arbitration, offers designed to effect a compromise between the respective figures for which the parties in fact contended before him - Marrosan's $131,547 per unit and Carpaolo and Epicure's $21,481 or $23,271. Mr Maurice submitted that those figures were intended merely to show what the evidence to be called by the parties would respectively indicate as the "fair value" of the units; they did not constitute "offers", they said nothing about the prices at which the parties would have been prepared respectively to sell and buy. 34. In the circumstances, I do not accept that that is a valid distinction. It is clear that those figures represented the parties' cases on the arbitration, the "fair value" which they respectively contended the arbitrator should now fix. Since Carpaolo and Epicure were admittedly committed to buy at whatever figure the arbitrator fixed as the 'fair value', I consider that in substance their figure of $21,481 (or $23,271) constituted their offer to buy at that figure. In practical terms, Marrosan's figure of $131,547 constituted the price at which it was now prepared to sell its units; in saying that, I bear in mind that it was not legally obliged to sell at that price, in view of the terms of clause 14(b)(i). (In passing, I indicate that I accept this construction of clause 14(b)(i), despite the terms of clause 14(b)(viii), since it was common ground). I consider that it was relevant for the arbitrator to take into account in exercising his costs discretion that neither party had made any "offers" in the sense he meant at p16. 35. Mr Maurice did not submit that it was wrong of the arbitrator to take into account on costs the question of "offers", but he had erred in the course of doing so, as indicated at pp16-17, and in treating the applicants' perceived failure to offer as 'determinative' on costs. I do not consider that the arbitrator erred in the manner suggested at pp16-17; nor do I consider that he treated the matter of "offers" as determining the question of costs, - it was a factor in the determination of costs. I consider that he was correct in doing so. I do not consider that he decided that the only way the applicants could protect their position on costs, was by using the "sealed envelope" procedure. Lewis v Haverford West R.D.C. (supra) involved an arbitration as to quantum, as here; I note that Lord Goddard CJ observed at 1600: "If [the respondent] had made an offer to pay a sum approximating to the amount which the applicant recovered, that would have been an excellent reason for refusing costs to the applicant." 36. The arbitrator then proceeded to express his conclusion on the "successful party" approach to the award of costs, in relation to the "fair value" he had fixed, viz: "In those circumstances despite having reservations about the bona fides of the vendor in setting the fair value I CANNOT SEE ANY PROPER GROUNDS UPON WHICH I COULD FIND THAT EITHER PARTY HAS BEEN CLEARLY MORE SUCCESSFUL THAN THE OTHER if the matter of costs is to be determined on that basis alone. EACH OF THE POSITIONS TAKEN BY BOTH PARTIES IN DETERMINING THE FAIR VALUE WAS NOT CLOSE TO THE POSITION REACHED BY ME. The purchasers were in my view closer but as pointed out by Mr Riley [of counsel for the vendor] they did not make any real concessions which could be relied upon by the vendor which brought their position close to the sum ascertained by me as fair value." (emphasis added) 37. I think it is clear that in referring to "the positions taken by both parties in determining the fair value" the arbitrator had in mind Marrosan's figure of $131,547 and Carpaolo and Epicure's figure of $21,481 (or $23,271). He considered, rightly in my view, that neither figure was "close to" the "fair value" at which he arrived, of $72,923. Marrosan's was $58,624 more than that "fair value", while Carpaolo and Epicure's was $51,442 (or $49,652) less, and so 'closer'. I consider that the arbitrator's conclusion first emphasized on p19 was one clearly open to him to reach. Significance of success on individual issues 38. The arbitrator then turned to consider whether costs could be awarded on any basis other than that of success in fixing the "fair value", since on that aspect he had been unable to "find that either party has been clearly more successful than the other". He decided that "the only other appropriate method" to approach the costs question involved "a consideration of the various issues". That is, he decided that the costs question could be determined by ascertaining who had been successful on the various issues which had arisen in the arbitration. 39. Mr Maurice conceded that this approach was correct, if the applicants failed to establish their major ground of appeal at pp11-13. The arbitrator noted that there had been "a large number of contested issues", the main one being "the quantum [of the fair value of the units] and the method by which it was to be calculated". It will be recalled that as to the issue of the quantum of "fair value", he had already concluded (p19) that neither party "has been clearly more successful than the other"; he had not yet addressed the separate issue of the different methodologies advanced by the parties to fix the "fair value". He considered that on other issues "overall it would seem to be fairly lineball as to who was the successful party". That is to say, on issues other than the method of calculating quantum, neither party had been more successful than the other. It can be seen that this left for consideration as the sole outstanding issue, the significance to costs of the parties' differing methods of calculating "fair value". He considered that the vendor had been "wholly unsuccessful" in its suggested method, and accordingly "the purchasers should be entitled to their costs on this issue". He then concluded his award of costs: "Taking into account all of the matters which I have referred to previously in my reasons for judgment and what I [have] said above I CONSIDER THAT THE VENDOR SHOULD PAY A PROPORTION OF THE PURCHASERS' COSTS. Having heard both counsel on the matter and observed the various experts and assessed the value of their evidence as to facts,

principle and opinions and the concession made by Mr Maurice [of counsel for the purchasers] as to capital gains and income tax issues I HAVE REACHED THE CONCLUSION THAT BASED PRIMARILY ON THE QUESTIONS OF METHODOLOGY AND QUANTUM THAT THE VENDOR SHOULD PAY 30% OF THE PURCHASERS' COSTS OF THE ARBITRATION. The purchasers are also entitled to receive from the vendor 30% of the arbitrator's fees and other costs including court hire, transcript and other like charges paid by the purchasers including the costs of the further hearing as to costs. I do not consider that this is an appropriate case for the award of costs [on] an indemnity basis. ... I ACCEPT THAT THE PURCHASERS WERE IN ESSENCE FORCED INTO THE ARBITRATION but this is not sufficient reason to depart from the standard practice [of assessing costs on a party and party basis] particularly where THEY AGREED TO BECOME A PARTY TO THE TRUST DEED KNOWING THAT THIS COULD HAPPEN IF ONE "PARTNER" WISHED TO LEAVE AND PRICE [OF THE UNITS] COULD NOT BE AGREED UPON." (emphasis added) The application for leave to appeal General 40. Under s38(2) of the Act appeals to this court from an award of an arbitrator are restricted to "any question of law arising out of an award". 41. That is an important restriction on appeals; see Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251 at 259, per Kirby P. Section 38(4) provides that such an appeal may be brought by any of the parties to an arbitration agreement with the consent of the others or, subject to any agreement between them which excluded appeal, with the leave of the Court. In the absence of Marrosan's consent and any exclusion agreement, Carpaolo and Epicure sought leave to appeal. The threshold constraints on the grant of leave 42. The pre-1991 s38(5) imposed restrictions on the grant of leave to appeal. Since 1991 the discretion to grant leave to appeal is further restricted by a new s38(5) which provides: "(5) The Supreme Court shall not grant leave [to appeal] 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 one or more parties to the arbitration agreement; AND (b) there is - (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." (emphasis added) 43. It can be seen that subpars (a) and (b) operate as cumulative restrictions on the grant of leave; and that within subpar(b), restrictions (i) and (ii) are in the alternative. The applicants relied mainly on s38(5)(b)(i)

• that the arbitrator had made an error of law which was manifest on the face of the award.

44. In its present form, s38(5) reflects amendments introduced between 1990 and 1993 to the uniform scheme for commercial arbitration introduced throughout most of Australia by State and Territory legislation of the 1980's, and embodied in the Act. The purpose of the amendment effected by s38(5) was to further limit intervention by the Courts in the arbitration process. Prior to the amendments, principles to be observed in the discretionary grant of applications for leave to appeal under provisions akin to s38(4) in similar legislation in the United Kingdom, had been spelled out in BTP Tioxide Ltd v Pioneer Shipping Ltd & Armada Marina SA (The Nema) [1982] AC 724. Some of the Nema guidelines were subsequently applied in some Australian jurisdictions applying the uniform scheme, but not in all. The 1990's amendments were introduced to achieve greater uniformity between the States and Territories on whether the discretion to grant leave to appeal under s38(4) was at large, or limited. The amendments pointed to limitation; see Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 184 at 188-9. The policy behind them was "... to promote the finality of arbitral awards even at the price of denying a party its usual entitlement to the determination of the dispute by a court of law" - Natoli v Walker (unreported, Court of Appeal (NSW), 26 May 1994), per Kirby P at p2.
45. Section 38(5) constitutes thresholds which must be surmounted by an applicant before leave to appeal can be granted: a particular type of error of law must first be shown to exist. The effect of s38(5)(b)(i), for example, is that error of law in an award is no longer enough; it must be 'manifest'. If an error of law of the statutory type is found to exist, the threshold is surmounted but the gate to appeal remains closed: the question remains as to whether as a matter of discretion leave to appeal should be granted - see Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 203 at 225-26, per Sheller JA. The applicants' submissions and the threshold constraints
46. As indicated in the course of setting out the arbitrator's reasons, the general error of law relied on by the applicants is that he improperly exercised his discretion as to costs. The major submissions relied on are set out at pp11-13; Mr Maurice put the essence of that submission in the form of a question, viz: "Can an outgoing partner, in agreements of this kind, fix a 'ridiculous' [the arbitrator's word, p11] figure and expect not to have to pay the costs of the continuing partners in proving that his figure was ridiculous?"
47. It is necessary first to see whether this general submission surmounts the thresholds in s38(5) to the grant of leave. The first threshold: s38(5)(a)

As to the threshold requirement in s38(5)(a), the question is whether "the determination of [this] question of law ... could substantially affect the rights" of one of the parties. In White Constructions (NT) Pty Ltd v Mutton [1988] NTSC 53; (1988) 91 FLR 419 at 433-4; [1988] NTSC 53; 57 NTR 8 at 22-3, Martin J (as he then was) followed Abignano v Electricity Commission of New South Wales (1986) 3 BCL 290 at 297 in holding that if the amount in issue is substantial, that is a relevant factor in determining whether the requirement in s38(5)(a) is met. I respectfully agree. The applicants have tendered affidavit evidence indicating that the amount in issue in this appeal is approximately $400,000; see par5 of Mr James' affidavit of 4 July 1994. There was no dispute that this was a substantial sum. I am satisfied that the amount in issue is substantial, the requirement of s38(5)(a) is satisfied, and the applicants cross the first threshold. The second threshold: s38(5)(b) 49. Section 38(5)(b) creates alternative second thresholds, for the applicants. 50. Section 38(5)(b)(i) requires that the Court be satisfied that there is an error of law which is "manifest ... on the face of the award". It is important to bear in mind that in this case the applicants seek to appeal an award of costs, a matter which by s34(1) is "in [the arbitrator's] discretion". In this connexion McHugh JA, (as he then was), in Warley Pty Ltd v Adco Constructions Pty Ltd (1992) 8 BCL 300 said at 312: "[Appeals from discretionary judgments] are not appeals on questions of law. They are appeals on questions of fact or perhaps more accurately on questions of opinion. Where a discretionary judgment is involved, the same body of evidence may reasonably lead to different persons to opposite conclusions. Consequently, APPELLATE COURTS HAVE IMPOSED UPON THEMSELVES THE RULE THAT THEY WILL NOT INTERFERE WITH THE DISCRETIONARY JUDGMENT UNLESS IT IS THE PRODUCT OF ERROR (FACT OR LAW) OR IS PLAINLY WRONG." (emphasis added) 51. In light of s38(5)(b)(i), consideration in this Court is restricted to whether the costs award is 'the product of error ... [of] law'. That is to say, the established principles which govern appeals against discretionary judgments, set out in authorities such as House v The King [1936] HCA 40; (1936) 55 CLR 499 at 505 and Australian Coal and Shale Employees' Federation v The Commonwealth ; at 627 are even more limited, in the case of an appeal under s38 against an arbitrator's discretionary judgment on costs. The usual rule holds that there is a strong presumption in favour of the correctness of his award of costs: it should be affirmed unless the applicants establish a manifest error of law on the face of the award. 52. The first question is what is "the award" for the purpose of s38(5)(b)(i)? In particular, does it include the arbitrator's reasons? Mr Maurice relied on Gold Coast City Council v Canterbury Pipelines (Aust) Pty Ltd ; at 63 per Barwick CJ, and Manufacturers' Mutual Insurance Ltd v Queensland Government Railways ; as authorities for the proposition that the reasons for an award are part of it, if the arbitrator so intends. 53. I note that s29(1)(c) of the Act requires an arbitrator to include in his award "a statement of the reasons" for making it. Clearly, that is what the arbitrator did here when in par3 of his formal award of costs he expressly annexed his reasons. I consider that it is clear that the arbitrator intended to incorporate his reasons into his award in this case. The relevant "reasons" are both the reasons for the award of 4 May 1994 and those delivered with the award of costs of 9 June 1994. Both sets of reasons form part of the one award. This is because an arbitration award is incomplete unless it deals with the question of costs - see In re an arbitration between Husbands and Husbands ; - and because s34(4) of the Act as regards costs, requires that the arbitrator shall "... AMEND THE AWARD BY ADDING TO IT such directions as the arbitrator ... thinks fit in relation to the payment of the costs of the arbitration". (emphasis added) 54. The second question is what constitutes "error of law on the face of the award". This is spelled out in Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd ; at 258 per Barwick CJ: "An error in law on the face of the award means ... that you can find in the award, or a document actually incorporated thereto ... SOME LEGAL PROPOSITION WHICH IS THE BASIS OF THE AWARD AND WHICH YOU CAN THEN SAY IS ERRONEOUS" (emphasis added) 55. See generally the summary of effect of the authorities in Gianfriddo v Garra Constructions Pty Ltd ; at 290- 1. 56. For the purposes of s38(5)(b), the expression "error of law" is construed strictly, in the interest of finality in arbitrations: see Azzopardi v Tasman UEB Industries Ltd at 155-6 on when a question of law is involved, as applied in applications for leave to appeal under s38(2) of the Act from arbitral awards by the majority in Warley Pty Ltd v Adco Constructions Pty Ltd (supra). It follows that an allegation that the costs award of the arbitrator involves perverse or unreasonable fact-finding, including fact-finding by demonstrably unsound reasoning, does not raise any question of law; unless the applicants are able to point to an error of law in the strict sense by the arbitrator in the exercise of his costs discretion, leave cannot be granted. For example, such an error of law would arise if there had been misdirection, in the sense of defining otherwise than in accordance with law questions of ultimate findings of fact to be answered, or if primary facts as found are necessarily within or outside a statutory description and a contrary decision has been made. Failure to take into account a matter relevant to the exercise of a discretion, or taking into account an extraneous matter, also constitute errors of law. In this case the fundamental error of law made by the arbitrator, on Mr Maurice's submission (pp11-13), was to ignore as irrelevant to costs the obligation on Marrosan in the Deed of Trust to fix a 'fair value', and its breach of that obligation. 57. The third question is when is an error of law on the face of the award "manifest"? This is a 'stringent requirement', and an 'important limitation' requiring a 'robust and narrow approach' to granting leave to appeal; see Natoli v Walker (supra), at pp21-6 per Kirby P. It is an objective criterion which entails the application of 'very considerable judicial restraint' to the grant of leave, as Kirby P put it at 24-5. The Court must be swiftly and easily persuaded of the existence of the error suggested, and must rapidly recognise it without embarking upon detailed scrutiny of the case. So the error relied on must be evident or obvious or perceptible, rather than merely arguable: see Natoli v Walker (supra) at 25, per Kirby P and Promenade Investments Pty Ltd v NSW at 225, per Sheller JA. It appears that an error of law is 'manifest' if it is one which has no rational basis, is obvious, and is capable of being readily perceived. 58. I turn to the alternative threshold, under s38(5)(b)(ii) set out at p23. It requires "strong evidence" of 2 matters. As to the first, in Promenade Investments Pty Ltd v NSW Sheller JA said at 226: "The expression 'strong evidence that the arbitrator ... made an error of law' suggests first what might otherwise be called on the leave application a strong prima facie case [of error of law] and second, an error of law not manifest on the face of the award and demonstrable by evidence". 59. His Honour then referred to a possible inconsistency between the provision in s38(2) that appeal lies on "any question of law arising out of an award", and the contemplated use under s38(5)(b)(ii) of extrinsic evidence to demonstrate an error of law 'not manifest on the face of the award'. However, I note that an error of law may still arise "out of an award" although demonstrable only by reference to materials not forming part of the award, such as the transcript of proceedings before the arbitrator; see Commonwealth of Australia v Rian Financial Services and Developments Pty Ltd (1991) 105 FLR 239 at 244. (The decision was reversed on appeal, but not for any reason presently relevant). In that case Miles CJ at instance construed the expression "strong evidence that the arbitrator ... made an error of law" in s38(5)(b)(ii) in similar manner to Sheller JA in Promenade (supra). His Honour said at 243-244: " ... I have to consider first, whether there is "strong evidence that the arbitrator or umpire made an error of law". The use of the term "strong evidence" in this context is unusual. Whether a tribunal made an error of law is not normally regarded as a matter which depends on the weight of evidence. It is possible that the term "strong evidence" should be read in the sense of a strong prima facie case. However, I think that probably more than this was intended ... In any event, under s38(5)(b)(ii), the error does not have to be so obvious or perceptible that it is manifest in the sense necessary to fall under s38(5)(b)(i)". 60. What is "strong evidence" of an error of law remains imprecise; in the absence of any Australian authorities which usefully add precision to this expression, I consider it appropriate to have regard to the English authorities which deal with the test of a strong prima facie case of error, flowing from the decision in The Nema (supra). In doing so I note the similarity between the tests propounded in s38(5) and those in The Nema (supra). 61. In Ipswich Borough Council v Fisons Plc at 724-25 Lord Donaldson M.R., with whom Woolf and Beldam L.JJ agreed, said: "What, as I see it, underlies the philosophy expounded in The Nema and The Antaios [Antaios Compania Naviera SA v Salen Rederierna AB is that there is always a presumption in favour of finality and that, where there is nothing to rebut it, the application should be unceremoniously refused. Rebuttal must always be based upon at least a suspicion that the arbitrator has gone wrong. Being left upon at least a suspicion that the arbitrator may or may not have been right - being left in real doubt in that sense - is not sufficient. But the degree of suspicion which is requisite may vary according to the seriousness of the consequences of error to the parties and to a wider public. The House of Lords' guidelines with regard to one-off contracts, that an obvious case of error should be shown, I think assumed that the effect would also be one-off. This might well be true of the last rent review, particularly if the remainder of the lease were relatively short. It would not, however, be true of earlier rent reviews. There the long-term effect on subsequent reviews would be analogous to the effect of decisions on standard

terms, the only difference being that the same, rather than different, parties might be affected. Accordingly it may well be that in most rent review disputes the "standard terms" approach will be justified: a strong prima facie case of error should be shown. But "strong" is an imprecise term and I do not think that the House of Lords intended that the same degree of strength should be called for in every case. This is, after all, a matter which Parliament has left to the exercise of judicial discretion. Consistency of approach is important, but it must not negative a discretion based upon the facts of individual cases. So how strong is strong? No meter can be applied or indeed devised. It is a matter of relative values. If the chosen arbitrator is a lawyer and the problem is purely one of construction, the parties must be assumed to have had good reason for relying upon his expertise and the presumption in favour of finality or, to put it the other way round, the strength needed to rebut it will be greater. So too if the dispute really centres upon an issue calling for non-legal expertise, albeit with some underlying question of law, and the chosen arbitrator has that expertise. But if the chosen arbitrator is not a lawyer and the whole dispute centres upon a difficult question of law, less strength may be required. Similarly, the degree of strength will be affected by whether the clause in question is one of a class commonly encountered, so that others would benefit from an authoritative decision on its meaning or application, and I see no reason why some account should not be taken of the seriousness of the consequences to the parties of the arbitrator's error, if error there be. But the bottom line must always, I think, be that the judge concludes that there is a more or less strong, but still "strong", prima facie case that the arbitrator has erred in law. To adopt any other approach would be to fly in the face of the legislative preference for finality." 62. In this case I consider that the additional requirement in s38(5)(b)(ii) that there be "strong evidence that ... the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law" cannot be satisfied, for the following reasons. 63. I accept Mr Riley's submission that there is no evidence before me that the mechanism in the Deed of Trust for a unit holder to transfer units is a 'standard clause' used in similar deeds, or in similar trusts. Such evidence could have been placed before me: see for example Opat Decorating Service (Aust) Pty Ltd v Hansen & Yuncken (SA) Pty Ltd (1993) 171 LSJS 261 at 264. On this aspect I respectfully adopt the approach of Miles CJ in Commonwealth of Australia v Rian Financial Services and Developments Pty Ltd (supra) at 245: "... there is simply no evidence before me on this aspect. It is not a matter, I think, for judicial guesswork. What I think the subparagraph contemplates is that there be evidentiary material before the court on an application for leave to appeal which shows that there is some uncertainty in the commercial community on the question or questions of law in respect of which it is asserted that the arbitrator fell into error." 64. Mr Maurice submitted the question raised - what is the obligation of an outgoing partner, in a Deed of Trust where he is required to specify a 'fair value' - was of some importance in commercial law; but in the absence of any evidence, let alone "strong evidence", that the determination of the question "may add, or be likely to add, substantially to the certainty of commercial law", I consider that this requirement of s35(8)(b)(ii) cannot be met. 65. It follows that before the discretion to grant leave is considered, the applicants must cross the threshold constituted by s38(5)(b)(i). Conclusion 66. In exercising his discretion as to costs the arbitrator rightly accepted Mr Riley's submission, that in general 'costs follow the event'. That approach is not in issue. The arbitrator applied this principle, ultimately by considering who was successful on the issues. 67. The application of the 'event' principle to the present dispute where the sole issue is quantum, presents difficulties of the type which arise in arbitrations of rent reviews and quantum of damages, discussed in par25.4 of Bernstein and Wood's 'Handbook of Arbitration Practice' (U.K., 1993). In such cases the "event" is less readily identifiable. The arbitrator discussed (see p10) the difficulties in considering 'who is the successful party' on the determination of the ultimate issue of the amount of the "fair value". Having decided (p19) that he could not find "that either party has been clearly more successful than the other if the matter of costs is to be determined on that basis alone", he proceeded to apply the same 'successful party' test to 'the various issues' which had arisen, with the result set out at p21. It appears from Bernstein and Wood (op.cit.) at 195 that in rent review arbitrations a simpler approach is taken, turning on the amount of the award made, viz: "25.43 Practice where there is no Calderbank or open offer. The present practice in rent review arbitration appears to be broadly as follows:

(a) if the amount awarded is that contended for by one party (a rare result) the arbitrator awards that party the costs;

(b) if the amount of his award is very much nearer that contended for by one party he makes a fractional award of costs in favour of that party; (c) in all other cases he makes no order as to cost." 68. In any event, the approach taken by the arbitrator is not attacked, if the applicants fail in their principal submission. 69. The applicants' principal submission at pp11-13 was that the correct approach to the award of costs entailed having regard to what they contended was the obligation in clause 14(b)(i) on Marrosan to fix a "fair value" in its transfer notice, its failure to comply with this obligation, and its motivation therefor. Whether or not this submission is correct depends upon two factors: first, the nature of the obligation in clause 14(b)(i) to fix a "fair value"; second, the significance of the arbitration agreement in clause 14(b)(ix). 70. Clause 14(b)(i) requires a 'proposing transferor' to specify in his transfer notice "the price per Unit which he fixes as the fair value therof (sic)". I consider that this wording, in the context of the other provisions of clause 14, suggests that what a 'proposing transferor' is required to specify is a price which he considers to be the fair value; that is, it contemplates his subjective assessment, what is the 'fair value' in his mind, rather than 'fair value' in an objective sense. It is central to Mr Maurice's submission at pp11-13 that Marrosan was obliged by clause 14(b)(i) to fix a price which represented, objectively, "fair value"; I do not consider that that is what clause 14(b)(i) clearly required him to do. It is true that such a construction discounts the significance of the concept of 'fair value' in clause 14(b)(i), and allows a proposing transferor to do what the arbitrator found at p11 Marrosan did, and with the same motivation. However, I consider that that is the system to which these parties agreed when entering into the Deed of Trust. 71. The arbitrator stated in his reasons (p11): "The vendor has not produced any attempt to justify the sum of $220,000 per Unit, and it is my opinion that he set the amount at a ridiculous figure in order to allow himself room to move if he did not like the price fixed by the Arbitrator". 72. Although this finding suggests that the "fair value" fixed in the transfer notice was neither objectively nor subjectively 'fair', it falls short of finding as a fact that the value fixed by the proposing transferor amounted to a breach of his obligations under the Deed of Trust. 73. Further, regard must be had to the scope of the arbitration agreement as contained in clause 14(b)(ix), by which the purchasers may "require the fair value of the Units to be fixed by arbitration pursuant to the Arbitration Act in force in the Territory on the date of the notice in lieu of the fair value fixed in the transfer notice". Much has been written on the interpretation of the breadth of arbitration clauses, and the tendency of the courts to adopt a more liberal interpretation in recent times: see, for example, IBM Australia Ltd v National Distribution Services Ltd (1991) 100 ALR 361 at 366 et seq, per Kirby P. However, no matter how broad an interpretation is placed upon clause 14(b)(ix), it can in no way be said to encompass the determination of a dispute over an alleged breach of an obligation under the Deed of Trust. This lack of jurisdiction in the arbitrator to determine the question of a breach of obligation under clause 14(b)(i) suggests that any such breach is a consideration irrelevant to the exercise of the arbitrator's discretion as to the costs of an arbitration limited to fixing the fair value of the units. If this is correct, there was no error of law on the part of the arbitrator in exercising his discretion as he did. 74. I consider that on its proper construction clause 14(b)(i) did not require Marrosan to fix in its transfer notice as its price an amount which was the "fair value", in objective terms. That conclusion in effect determines the appeal. In the end, having regard to the scope of the arbitration clause 14(b)(ix), the lack of a finding that Marrosan was in breach of an obligation under clause 14(b)(i), the fact that the parties had mixed success on various issues before the arbitrator, and the fact that no negotiations took place and no Calderbank offer was made, I am neither swiftly nor easily persuaded that there is any obvious error of law in the award of costs. That is to say, I am unable to find that there is a manifest error of law on the face of the award, in the exercise by the arbitrator of his discretion on costs. 75. I note that the requirement of s38(5)(b)(i) that any error of law relied on be "manifest" can be productive of apparent injustice. As Kirby P put it in Natoli v Walker, (supra) at 25-6: "This will seem a harsh decision [by the legislature, in introducing the 'manifest' threshold] to those who can show error in an arbitrator's award. It will seem particularly harsh where an error of law can be shown. It may even seem intolerable where an arguable, but not "manifest", error of law is demonstrated. But that is the choice which Parliament has deliberately taken. Judges must be faithful to that choice. They must obey it, even where their inclination suggests that a detailed and painstaking review of the facts and the law might ultimately persuade them that the arbitrator has erred." 76. For the reasons I have endeavoured to state, leave to appeal is refused and the arbitrator's award is affirmed. The respondent should have its costs of the application. 77. Orders accordingly.