Champion v Smith [2007] ACTSC 44

2. The application was brought in reliance upon provisions of s 38 of the Commercial Arbitration Act 1986 (ACT), the relevant portions of which are in the following terms:

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

. . .

(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

(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.

(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.

3. Section 40 relates to exclusion agreements and it was not suggested that it was of any relevance to the present case.

4. The defendant does not consent to the plaintiff bringing the contemplated appeal and it may therefore be brought only if leave is granted pursuant to subs 38(4). Hence, it is incumbent upon the plaintiff to demonstrate that the condition in subsection (5)(a) and either of the conditions in subs (5)(b) have been satisfied and to show that the discretion to grant leave pursuant to subs (4) should be exercised in its favour.

5. The plaintiff seeks leave to appeal against the arbitrator's findings on two issues; namely, whether the contract price should have been taken to have included the Goods and Services Tax ("GST"), and whether the plaintiff had been entitled to damages for breach of a contractual term relating to the provision of fencing.

6. The provisions for payment of fees to the defendant is contained in cl 8.1 of the contract, which provides that:

Subject to the proper performance of the Services, the (plaintiff) shall pay the (defendant) the balance of the fee payable for the Services as set out in Annexure C. The parties acknowledge that the fee is deemed to include all costs and expenses (including and without limitation all incidental disbursements and expenses) of providing the Services and complying with all of the terms of this Contract.

7. Annexure C bears the heading "The Fee" and this is followed by the words "Amount of Fee (Clause 8.1)". The annexure then sets out a series of amounts, described as "Provisional sums", with a total figure of $177,000 and further series of amounts, described as "Provisional Quantities (allowances in the lump sum contract)", with a total figure of $134,825. The Annexure concludes with the words "the Lump Sum Contracts" and specifies a further amount of $1,723,816.

8. The arbitrator noted that in the absence of any express exclusion of GST it is normally taken to be included. This proposition was not disputed. The GST is, of course, simply a tax levied upon the supplier of goods and/or services. Like sales tax, excise or the various State and Commonwealth taxes on petrol, it may be effectively recouped by the supplier increasing prices charged to customers. However, in the absence of a contractual term to that effect, a customer does not assume any obligation to pay more than the agreed price. Hence, a customer at a service station is not obliged to add to the amount shown on the bowser some further percentage in order to reimburse the supplier for the tax it is obliged to pay on the petrol.

9. The arbitrator suggested that there were, however, other issues. He said that, whilst the heading of Annexure C was immediately followed by the words "Amount of Fee (Clause 8.1)", there was in fact no item in that Annexure that was identified as a fee. If, by this comment, he was intending to suggest that the total of the amounts set out in Annexure C did not constitute the fee payable pursuant to cl 8.1 of the contract, then he was, in my opinion, clearly wrong. He went on to refer to a revised quotation made on 11 February 2004 which had referred to a revised price of $1,723,816 "excluding GST" and suggested that the fact that the exclusion was not carried through to Annexure C "would likely be treated as an oversight in the contract administration". He noted that this had been disputed by Mr Aghili, a director of the plaintiff company, but said that he did not accept his claim that the changed basis for the fee had been discussed and agreed. The arbitrator referred to the plaintiff's letter of acceptance of 12 February 2004, suggesting that it had been unusual though "not impossible" to list two items with the same label and that the reference to one clause in the contract seemed "odd". He also noted that Annexure A contained the words: "Total (excluding work in provisional sum items) (excluding GST) $1,723,816".

10. The arbitrator concluded with the following statements:

Given the circumstances and the audit trail that existed at the time of offer and acceptance of the contract, I believe it is clear as to the intended meaning of the parties.

I go further, and on the basis of the contra proferentem rule, the parties' arguments based on mistake or misrepresentation would result in a ruling against the party who had prepared such documentation, in this case, Techno Build.

Either way, I came to the same conclusion.

Accordingly, I rule that the proper interpretation of the contract sum included in Annexure C is that it excludes GST.

11. Mr Hausfeld, who appeared for the plaintiff, submitted that, in these circumstances, there was a manifest error of law on the face of the award. Clause 8.1 of the contract provided for payment of the amounts listed in Annexure C. The relevant provisions were clear and unambiguous. Whilst there was no express reference to the inclusion of GST in those amounts, the arbitrator had rightly observed that "by ATO advice and common practice" the clause should be construed to include GST. Furthermore, Mr Hausfeld submitted that, in fact, the terms of cl 8.1 were quite incompatible with the suggestion that a further unspecified charge should be added to the fee so specified. The arbitrator should simply have applied the terms of the contract without advertence to the course of pre-contractual negotiations or other extrinsic material. It was true that Annexure A contained a reference to the sum of $1,723,816 "excluding GST" but this reference was on one of a number of pages that were expressly stated not to be part of the contract. Hence, this reference, like the antecedent correspondence, was merely extrinsic material that might properly have been taken into account had there been some real ambiguity in the contract itself. Since that situation had not arisen, the approach adopted by the arbitrator had been contrary to the parol evidence rule: see, for example Hoyts Pty Ltd v Spencer [1919] HCA 64; (1919) 27 CLR 133 at 143; Equuscorp Pty Ltd v Glengallon Investments Pty Ltd & Ors [2004] HCA 55; (2004) 218 CLR 471 at 483. The contra proferentem rule is merely one guide to construction that might be invoked in cases of real ambiguity but that this had not arisen. The suggestion that it had been invoked in relation to "the parties' arguments based on mistake or misrepresentation" merely revealed a misconception as to the issues the arbitrator had been required to address.

12. In answer to these contentions Ms Olsson SC, who appeared for the defendant, submitted that the arbitrator had approached the matter correctly. He had begun by attempting to construe clause 8.1 and Annexure C. He had correctly noted that, in the absence of any indication to the contrary, it would have been appropriate to construe those provisions as requiring payments of the stipulated sum inclusive of GST. Ms Olsson maintained, however, that he had been entitled to take into account the words "excluding GST" that qualified the total sum referred to in Annexure A. This gave rise to an ambiguity in the contract and the arbitrator had been entitled to consider extrinsic evidence in order to resolve it.

13. The obvious difficulty with this argument is that it ignores the fact that the words relied upon do not form part of the contract and hence do not create the suggested ambiguity in its terms, though they may have provided significant evidence in a suit for rectification had one been instituted.

14. Ms Olsson also submitted that I should take into account the fact that the party complaining of the arbitrator's reliance upon the evidence of pre-contractual negotiations had been the party who had introduced such evidence at the hearing. That fact may lend a tinge of irony to the application but, at least in the absence of waiver or estoppel, I am unable to see how the mere adducing of such evidence could deprive a party of the right to insist upon adherence to the parol evidence rule.

15. The arbitrator seems to have examined the evidence carefully and he clearly identified real issues as to the intention and understanding of the parties. Those issues may have raised questions about the implications of mutual or unilateral mistake or even about whether the contract should be rectified. However, the terms of clause 8.1 and the Appendix C are, in my view, clear and unambiguous. It was not open to the arbitrator to effectively re-write the relevant portions of the contract by purporting to adopt a "proper interpretation" of them based upon his opinion that they did not reflect antecedent negotiations or an annexed document that was not part of the contract. The extrinsic material may have provided an arguable case for rectification of the contract so as to make the amounts payable pursuant to clause 8.1 exclusive of GST. However, no such claim was ever articulated or referred to the arbitrator for determination. He was merely asked to determine the question, "what is the contract price including GST?" That question clearly required him to consider the price payable pursuant to the contract in its current form. It did not authorise him to rectify it.

16. Ms Olsson stressed that it was incumbent upon the plaintiff to demonstrate that any errors of law were manifest and not merely arguable. She cited the observations of Kirby P in Natoli v Walker (1994) 217 ALR 201 at 215 that:

This will seem a harsh decision to those who can show error in an arbitrator's award . . . But that is the choice which parliament has deliberately taken. Judges must be faithful to that choice. They must obey it, even where their inclinations suggest that a detailed and painstaking review of the facts and the law might ultimately persuade them that the arbitrator has erred.

17. In the present case, however, it is clear from the face of the record that the arbitrator departed from the parol evidence rule. It is also clear that he failed to provide any reasons for doing so or, indeed, even acknowledge its existence.

18. In the circumstances, I am satisfied that the arbitrator's finding that the contract sum outlined in Annexure C excludes GST, as founded on a manifest error of law on the fact of the award.

19. The arbitrator appears to have adopted a somewhat similar approach in relation to the counter claim by the plaintiff relating to the fencing that it contends, should have become its property at the completion of the works. In dealing with this issue, the arbitrator first turned to discussions that had allegedly occurred during the tender/negotiation period before citing the relevant provision in the contract that was in the following terms:

Fencing: Erect pre cast panels with concrete base 2.1 meter high (1050m approx) all around entire site.

On completion of civil work relocate the fencing to new site boundaries for building construction with four gates which will become TBD's property.

20. The arbitrator suggested that the description of the fencing was strange and that, read literally, the wording required precast panels (or their bases) 2.1 meters high. It had been conceded that this had not been intended. During the hearing Mr Aghili had said that he had expected pre cast concrete stabiliser bases with pipe posts and chain wire mesh. The arbitrator referred to what he described as "the Hughes Trueman fax dated 30 January 2004" and noted that it had referred only to an entry gate rather than the gates specified in the contract.

21. He also noted that the requirement for relocation mentioned in that fax had not been an "ownership requirement". After adverting to the contractual term providing for the relocated fence to "become TBD's property", the arbitrator said that: "If Aghili wants to enforce others strict compliance with what is written, one need only remind him of his own words used in Techno Build's letter of acceptance dated 11 February 2004, ie that the scope of Sayer's work was as briefed by Hughes Trueman 9 December 2003". With due respect to the arbitrator, this statement seemed to reflect a view that if one wished to avoid compliance with a term of a written agreement one "need only" advert to earlier correspondence in which the other party had taken a different approach. That is incorrect. The arbitrator asserted that there had clearly been no such ownership requirement as on 9 December 2003 and he went on to say that Mr Aghili had not explained why the requirement specified in the contract had differed from prior discussions between Sayers and Hughes Trueman and from the documentation at item F9 within the bill of quantities. He also suggested that Mr McMillan had not been aware of the requirements in the opening text to Annexure A when he executed the contract. He added that item F9 within the bill of quantities was not priced at a sufficient amount of money to allow for "precast panels with concrete base 2.1 metres high" to become the plaintiff's property upon completion of civil work or, on the evidence presented, for even precast stabiliser bases with chain wire mesh above. The arbitrator concluded:

If I were generous, I would rule a mistake with the insertion of words in Annexure A that were not intended.

If I were less generous, I would rule a deliberate insertion of words in Annexure A not documented, agreed or intended between the parties.

Either way, I believe that what was intended by the parties and what should have been documented in the 12 February 2004 contract were words giving effect to the provision of temporary fencing and upon which, in the absence of any qualifications in its tender, Sayers submitted its tender of 11 February 2004.

It is that tender and that scope to which Techno Build's acceptance of tender dated 12 February 2004 applies.

...

I rule that Techno Build has no claim to ownership of the fencing provided by Sayers as of the date of Practical Completion and accordingly its counter claim fails.

22. Ms Olsson maintained that this approach had been defensible because the relevant clause had specified a type of fencing that the parties had not intended. Given the concession made by Mr Aghili to this effect, I accept that the arbitrator did not fall into error in finding that there had been an unintended misdescription of the fencing and in treating the clause as requiring the construction of a chain wire fence with concrete stabiliser boxes.

23. There was, however, no legal justification for ignoring the plaintiff's contractual entitlement to acquire ownership of the fence.

24. Mr Hausfeld challenged the finding that Mr McMillan had not been aware of this requirement, pointing out that Mr McMillan had initialled the very page upon which the clause was contained. That may be so, but this finding was, of course, one of fact rather than law, and for present purposes may be disregarded.

25. More fundamentally, it is clear that the arbitrator did not seek to construe the relevant contractual clause but rather to deduce "what should have been documented" in the contract. It was incumbent upon the arbitrator to adjudicate upon the rights and obligations of the parties as they arose under the contract as it stood. It was, of course, open to him to seek to resolve any ambiguity in its terms and, had such an issue arisen, he would have been entitled to consider the course of pre-contractual negotiations and other extrinsic material for that purpose. In my view that situation did not arise. He did not find the relevant contractual provision ambiguous. He merely declined to apply it. He proceeded to treat the contract as if it had been rectified by the exclusion of the relevant provision on the ground that there was either a unilateral mistake by Mr McMillan or mutual mistake. These findings would not have supported a plea of non est factum had one been made or, so far as I could see from the available material, provided an adequate basis for rectification of the relevant clause had such an issue been identified and referred for arbitration.

26. In essence, the arbitrator was asked to resolve a number of differences that had arisen under a commercial contract between two companies that were bound by its terms. In respect of the two issues raised by the plaintiff, he ignored the parol evidence rule and purported to construe the contract in a manner that essentially involved re-writing its terms.

27. In each case, I am satisfied that the determination of the question of law concerned could substantially affect the rights of both parties to the arbitration agreement and that there is a manifest error of law on the face of the award. I am also satisfied that it would be appropriate to exercise my discretion to grant leave to appeal.

28. Ms Olson submitted that, if leave were to be granted, it should be subject to a condition that at least some of the amount awarded by the arbitrator be paid into court. In the circumstances, I do not think that this would be appropriate. On the other hand any appeal should be pursued with expedition and I see no reason why it should not be instituted within 7 days.

29. The defendant has applied in separate proceedings for an order that would enable that judgment be entered in accordance with the award and it is appropriate for that application to be stayed pending the appeal.

I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment herein of his Honour, Justice Crispin.

Solicitor for the plaintiff: J S O'Connor Harris & Co