Command Energy Pty Ltd v Fletcher Construction Australia Ltd [2000] VSC 367

2. By a construction agreement dated 31 December 1992 made between Varnsdorf Pty Ltd and Fletcher Construction Australia Ltd ("Fletcher"), Fletcher agreed, inter alia, to design and construct cogeneration plants and other equipment ("the facility") to supply energy to a number of hospitals in the State of Victoria.[1]

5. By an operating agreement of the same date made between Fletcher, the plaintiff, Command Energy Pty Ltd ("Command"), and L'Union Financière pour Industrie et l'Energie, Command, as operator of the facility, agreed to provide certain operation and maintenance services for Varnsdorf.[2]

8. By a supply agreement of the same date made between Fletcher and the secondnamed defendant, TBI Pty Ltd, formerly called Detroit Engine and Turbine Company, ("DETCO"), DETCO agreed to design, construct, deliver and supervise the installation of and to commission the plant for the facility.[3]

11. In circumstances which are not relevant for my purposes, it is said that the facility and the plant suffer from deficiencies. This has led to a forest of disputations and claims:

1. Varnsdorf has commenced an arbitration against Fletcher: the Varnsdorf/Fletcher arbitration.

2. Varnsdorf has commenced an arbitration against Command: the Varnsdorf/Command arbitration.

3. Command has commenced an arbitration against Fletcher: the Command/Fletcher arbitration. Fletcher has filed a counterclaim in this arbitration.

4. Fletcher has commenced an arbitration against DETCO: the Fletcher/DETCO arbitration.

5. Command has commenced this proceeding against six defendants, including Fletcher as firstnamed defendant, DETCO as secondnamed defendant, and Varnsdorf as sixthnamed defendant.

19. Three of the arbitrations, the Varnsdorf/Fletcher arbitration, the Varnsdorf/Command arbitration and the Command/Fletcher arbitration are proceeding. The joint hearing has commenced and is expected to last well into next year. The Fletcher/DETCO arbitration has been settled.

22. In this proceeding Command has served only the secondnamed defendant, DETCO. It alleges against DETCO that it was negligent in designing, constructing, delivering and supervising the installation of and commissioning of the plant.[4] It says that, as a result, it suffered loss and damage inasmuch as the facility did not achieve handover by the due date and, further, the operating costs of the facility were higher than would otherwise have been the case.[5] It alleges also that DETCO made false representations in breach of various provisions of the Trade Practices Act 1974 and the Fair Trading Act 1986[6] or in breach of its duty of care to Command,[7] as a result of which it suffered loss and damage.[8] These allegations are denied and certain positive defences raised.

25. On 4 and 15 August I heard a number of interlocutory applications. The application by Command that DETCO provide further particulars was successful; DETCO's application that this proceeding be stayed pending the completion of the joint arbitration hearing was refused. Command's application to strike out a number of paragraphs of DETCO's counterclaim filed on 23 June 2000 was forestalled by the proposal of that party to file an amended counterclaim in the form of a draft then produced. Leave was granted to file this pleading, reserving to the parties the right to present written submissions for and against Command's application that paragraphs 9A and 9B of the amended counterclaim be struck out. This they have done. Neither party wishing to present oral argument, I now give my reasons for refusing to strike out those paragraphs.

28. In the amended counterclaim, DETCO seeks contribution and or indemnity pursuant to s. 23B of the Wrongs Act 1958. These provisions are as follows:

"23B (1) Subject to the following provisions of this section, a person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with the first-mentioned person or otherwise). ... (4) Subject to section 24(2B), a person who in good faith has made or agreed to make any payment in settlement or compromise of a claim made against that person in respect of any damage (including a payment into court which has been accepted) shall be entitled to recover contribution in accordance with this section without regard to whether or not the person who has made or agreed to make the payment is or ever was liable in respect of the damage provided that that person would have been liable assuming that the factual basis of the claim against that person could be established. (5) Subject to section 24(2B), a judgment given in an action brought by or on behalf of the person who suffered the damage in question against any person from whom contribution is sought under this section shall be conclusive in the proceedings for contribution as to any issue determined by that judgment in favour of the person from whom the contribution is sought. (6) References in this section to a person's liability in respect of any damage are references to any such liability which has been or could be established in an action brought against that person in Victoria by or on behalf of the person who suffered the damage and it is immaterial whether any issue arising in any such action was or would be determined (in accordance with the rules of private international law) by reference to the law of a place outside Victoria."

32. The amended counterclaim alleges in paragraph 5 that DETCO is a person liable to Fletcher in respect of the loss and damage claimed in the Fletcher/DETCO arbitration. In paragraph 7 it alleges that in the Command/Fletcher arbitration, Fletcher has counterclaimed against Command claiming loss and damage as a result of Command's failure to operate and maintain the plant in accordance with the operating agreement or that it did so negligently, and that Command is liable to Fletcher for that loss and damage. In paragraph 7A it says that these allegations by Fletcher are true and, by paragraph 9, that in the premises, Command is a person liable to Fletcher in respect of this loss and damage.

35. The two paragraphs in question before me then follow:

"9A. Alternatively, the Command/Fletcher arbitration has commenced and is being heard and determined by Mr Brian Gallagher in Melbourne, Victoria. 9B. In the event that the arbitrator makes an award in the Fletcher/Command arbitration finding that Command is liable to Fletcher in respect of some or all of the loss and damage claimed by Fletcher then Command will be a person liable to Fletcher, within the meaning of sub-section 23B(1) of the Wrongs Act 1958, in respect of that loss and damage."

39. Counsel for Command submits that these paragraphs are bad and should be struck out on the basis that they are embarrassing, irrelevant and vexatious. It is said, first, that the liability of Command to Fletcher has not been established; second, that the award of an arbitrator is not "a judgment given in an action" within the meaning of s. 23B(5); and, third, that by the same provision, the judgment is conclusive in contribution proceedings, but only to the extent that it determines an issue in favour of Command.

42. In their submission, counsel for DETCO say that these arguments, or at least the second and third, misconceive their client's claim. DETCO relies only on its statutory right of contribution under s. 23B(1). It does not rely on s.23B(5). It says that its entitlement to contribution depends upon its establishing the following matters, all of which presently exist and which are asserted in the pleading:

1. DETCO is a person liable to Fletcher in respect of certain damage suffered by it.[9]

2. Command is a person liable to Fletcher in respect of certain damage suffered by it.[10]

3. The damage of Fletcher in each case is the same damage.[11]

48. In Arthur Young v Brunswick NL,[12] the Court of Appeal concluded that a claim for contribution may be commenced notwithstanding that the liability upon which it depends has not been ascertained by judgment or in some other manner. For pleading purposes it is sufficient that this liability be alleged. In the present pleading, as I have observed, DETCO sufficiently alleges each of the liabilities, including its own.

51. What, then, is to be made of paragraphs 9A and 9B? On behalf of DETCO it is said that the liability of Command to Fletcher may arise in one of two ways. First, it may arise from the breaches of contractual and tortious duty which caused Fletcher's damage, as is alleged in Fletcher's amended points of defence and counterclaim, dated 24 November 1999 and filed in the Command/Fletcher arbitration. Second, when the arbitrator publishes his award, the liability of Command will spring from the legal effect of that award. It is said that, in that event, Fletcher's cause of action in contract or tort will cease to exist; it will be superseded by a cause of action on the arbitrator's award. I was referred to the judgment of the Privy Council in FJ Bloemen Pty Ltd v Gold Coast City Council.[13] This was a case on appeal from the Full Court of the Supreme Court of Queensland which concerned an order for payment of $16,180 interest included in an award made by an arbitrator. It was said that this award was bad in law. The dispute concerned the entitlement of the parties under a contract for the execution of sewerage works. The arbitrator found for Bloemen and awarded a sum plus costs. A component of the sum awarded was the sum for interest which was calculated at the rate prescribed by cl. 35(c) of the contract. Under this clause, interest was payable at that rate only in respect of money payable by virtue of the contract. The point taken before the Privy Council was that the interest component of the award was calculated on the sum otherwise ordered by the arbitrator. Since it was agreed that the obligation to pay this sum arose, not under the contract, but under the award, interest on it could not be interest payable by virtue of the contract. The argument, therefore, depended upon the proposition that, upon an arbitration for a sum said to be due for breach of contract, the award of that sum creates a fresh cause of action which supersedes the contractual right. The Privy Council rejected this submission. In the course of their reasons, they said as follows:

"It is true - as the cases above referred to show - that when an arbitrator fixes a sum to be paid by one party to the submission by way of damages for breach of contract the award creates a fresh cause of action superseding that arising out of the breach. But it does not appear to their Lordships to follow from that that the cause of action which comes into existence when the award is made cannot be said to arise under the contract which contains the submission. The award of an arbitrator differs materially from a judgment. The plaintiff's right to sue and the court's right to give judgment for him if he proves his case are not derived from the agreement of the parties and the judgment when given is an entirely fresh departure. The award of an arbitrator on the other hand cannot be viewed in isolation from the submission under which it was made."[14]

55. There is in the cases a surprising uncertainty as to whether a right in personam which is determined by a domestic arbitral award merges in the award by the operation of a principle, such as res judicata. In favour of this proposition are the Privy Council decision to which I have referred and Onerati v Phillips Constructions Pty Ltd.[15] The proposition was assumed to be correct in H.E. Daniels Ltd v Carmel Exporters and Importers Ltd[16] and in The Rena K.[17] The authors of Mustill and Boyd, The Law and Practice of Commercial Arbitration in England,[18] however, consider to be unclear the juridical basis for the undoubted rule that an award operates as a bar to a fresh claim on the same dispute.

58. To my mind, however, the answer to the present question is not to be found in any such analysis. I am not here concerned with an attempt by a party to an arbitration to re-open a matter determined by an award in that arbitration or to be determined in such an award. DETCO is not a party to the contract between Command and Fletcher and can derive no relevant rights under it. Neither is it a party to the arbitration between those parties; it is neither bound by any award made in it nor does it derive any benefit from such an award. This, at common law, is also the position of a person vis-à-vis a judgment obtained from a court in a proceeding to which that person is not a party. I, of course, put to one side the case where the party to the arbitration in some way represents that person or that where the person is a "person claiming through or under a party to the arbitration agreement".[19] In the context of litigation, at least, s. 23B(5) impliedly acknowledges this principle, for it provides a statutory exception so that a party, which has successfully fought an issue in court, is entitled to assert the finding on that issue in defending a claim for contribution brought against it.

61. Moreover, for my present purposes, this sub-section and ss. 23B(4) and 24(2B) are important because they contemplate that the underlying liability of Command to Fletcher, which is a cornerstone of DETCO's right to contribution, may continue to exist notwithstanding that, as between those parties, it may have been merged in a judgment between them or extinguished by a settlement agreement made between them. By parity of reasoning, this liability continues to exist notwithstanding that it is the subject of an award made in an arbitration between those parties, even it be assumed that, as between those parties, their pre-existing rights and obligations are in some way subsumed into the award.

64. I return to the application before me. It will succeed only where the paragraphs in question are bad in form, which they are not, or where they do not disclose a cause of action or are an embarrassing surplusage. Moreover, the applicant must make out its case to a high degree; it must show that the plea in question is such that it cannot succeed; that it is manifestly groundless.[20] The court is reluctant to deny to a party the right to advance a contention unless it is plainly futile.

67. I have considered carefully what has been placed before me and I have read with care the passage from the judgment of the Privy Council which I have set out above. I am far from confident that an award of the arbitrator in the Command/Fletcher arbitration will support DETCO's allegation of the relevant liability of Command to Fletcher which s. 23B requires. I would not, however, conclude that on this basis the plea is manifestly groundless. The difficulty facing DETCO is that the basis for the liability of Command to Fletcher alleged in paragraphs 9A and 9B has not yet arisen and may never arise. Insofar as DETCO relies on this fact now in support of its claim for contribution, it is not yet fact; the plea is premature. If the expected award were the only basis for this liability, the claim would be struck out.[21] If, in the future, a suitable award were to be published an application might be made to amend the pleading to allege it as a new fact or matter in accordance with R. 13.08. As to the prospect of success of such an application, I say nothing.

70. In the circumstances Command's application is successful. I will strike out paragraphs 9A and 9B of the amended counterclaim.

[1] Statement of claim paragraph 5, Defence paragraph 5.

[2] Statement of claim paragraph 9, Defence paragraph 9.

[3] Statement of claim paragraph 7, Defence paragraph 7.

[6] Statement of claim paragraphs 15, 24 and 30-38.

[7] Statement of claim paragraphs 26-28 and 40-1.

[8] Statement of claim paragraphs 25, 29, 39 and 42.

[9] Counterclaim paragraphs 4 and 5 and s. 23B sub-s. 4.

[12] [1998] VSCA 87; [1999] 1 VR 387.

[13] [1973] AC 115.

[14] [1973] AC 115 at 126.

[15] (1989) 16 NSWLR 730 at 738, per Giles J.

[16] [1953] 2 QB 242 at 255, per Pilcher J.

[17] [1979] QB 377 at 405, per Brandon J.

[19] See Commercial Arbitration Act 1984, s.28 and the definition of "party" in s 4(1). I also put to one side the other circumstances where a non-party to an arbitration may be bound by an award which are discussed in Mustill and Boyd, The Law and Practice of Commercial Arbitration in England 2nd Ed, 1989 pp. 414-5.

[20] General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125 at 129, per Barwick CJ.

[21] See Williams, Civil Procedure - Victoria, par I 13.08.1.