Command v Fletcher & related cases [1999] VSC 235

11. The Minister of Health required thermal and electrical energy for the conduct of six hospitals in Victoria. By a principal agreement, the Energy Services Agreement, Varnsdorf agreed to design and construct, own and operate cogeneration plants of those six hospitals, known collectively as the Victorian Hospitals Cogeneration Project, (VHCP), for the Minister of Health, to generate both steam and electricity for those hospitals and surplus electricity for export to the grid.

14. Four arbitrations arose from disputes concerning the VHCP. The arbitrations were and the principal agreements involved are: the Fletcher/Varnsdorf arbitration, (the construction agreement); the Varnsdorf/Command arbitration, (the operating agreement); the Command/Fletcher arbitration, (the collateral agreement); the Fletcher/DETCO arbitration, (the supply agreement). Mr Brian Gallagher was appointed the arbitrator in all four arbitrations.

17. By the construction agreement, Varnsdorf engaged Fletcher as turnkey project manager or TPM to design and construct the facility for Varnsdorf. By the operating agreement, Varnsdorf engaged Command to operate the facility on its behalf after construction by Fletcher. In order that Command was protected in relation to the suitability of the facility as constructed, Fletcher warranted to Command that it would comply with the construction agreement and to protect Fletcher, Command warranted that it would operate the facility in accordance with the operating agreement, such warranties being set out in the collateral agreement.

20. For the purposes of the construction agreement, Fletcher engaged DETCO to supply much of the cogeneration equipment installed at each hospital, including gas turbines, gearboxes, alternators and waste heat recovery boilers.

23. In December 1994 Fletcher initiated the Fletcher/Varnsdorf arbitration under the construction agreement against Varnsdorf. In late July and August 1998, Fletcher served on Varnsdorf witness statements containing allegations in relation to the conduct of Command. As a result, Varnsdorf issued a notice of dispute dated 28 August 1998 against Command initiating the Varnsdorf/Command arbitration.

26. On 21 December 1998 in proceeding No. 8125 of 1998, the court made orders pursuant to s. 26(1)(b) of the Commercial Arbitration Act 1986, (the Act), consolidating the Fletcher/Varnsdorf arbitration with the Varnsdorf/Command arbitration on terms. Those terms included that the hearing of the Command arbitration be stayed until after the determination of liability in the Fletcher arbitration; that the pleadings in the Command arbitration not be consolidated with the pleadings in the Fletcher arbitration; that Command be entitled to appear and be heard in the Fletcher arbitration by its legal representatives and to make submissions and cross-examine witnesses therein; that Command be entitled to inspect the discovered documents of the other parties; that each of the parties be bound as between each other in the consolidated arbitration by any finding of fact contained in the reasons of the arbitrator in the Fletcher arbitration and by the award or awards made by the arbitrator and liberty to apply was reserved.

29. On 1 February 1999, Beach J granted Command's application to extend the time within which it could serve on Fletcher its notice of dispute dated 9 December 1998 under the collateral agreement. Command then applied to consolidate the Command/Fletcher arbitration with the Fletcher/Varnsdorf and Varnsdorf/Command arbitrations. The arbitrator consolidated the Command/Fletcher arbitration with the Fletcher/Varnsdorf and Varnsdorf/Command arbitrations. The terms of that consolidation were along the same lines as the terms previously ordered by the court on 21 December 1998.

32. In the Command/Fletcher arbitration, the only pleading delivered is Command's statement of claim dated 26 March 1999. On 9 April 1999 the arbitrator directed Fletcher to serve its defence and counterclaim by 24 May 1999. On 28 May 1999 the arbitrator directed Fletcher to deliver this pleading by 23 June 1999.

35. On 23 December 1998 Fletcher issued two notices of dispute against DETCO, initiating the Fletcher/DETCO arbitration. In the Fletcher/DETCO arbitration, Fletcher was to have delivered its points of claim by 11 June 1999, but with leave from the arbitrator, delivered the same on 18 June 1999.

38. On 18 May 1999 the arbitrator directed consolidation of the Fletcher/DETCO arbitration with the three arbitrations already consolidated on terms which mirrored the first consolidation order on terms made by the court on 21 December 1998, save that DETCO was granted leave to call evidence of the Fletcher/Varnsdorf arbitration, which leave had not then be granted to Command but has since been given by consent of the parties.

41. On 28 May 1999 the arbitrator refused Command's application that he "fully consolidate" the four arbitrations pursuant to s.26(1) of the Act or alternatively make interlocutory orders to similar effect. Other aspects of the history of the proceeding are referred to in my reasons in (1998) VSC 206 and I do not repeat them.

44. Command applies by originating motion dated 9 June 1999 for orders pursuant to s.26(1) of the Act that all four arbitrations be fully consolidated on stipulated terms which importantly include a term that they be heard and determined as one arbitration. Alternatively, the same order is sought pursuant to s.47 of the Act.

47. Command's application is opposed by all other parties in the four arbitrations. In order to decide whether such an application can now be made by Command under s.26 of the Act, it is necessary to consider the present status of the four arbitrations as a consequence of the order made by the court in December 1998 and the subsequent orders made by the arbitrator, the purported combined effect of which was to consolidate all four arbitrations on certain terms.

50. In my opinion the essence of the concept of consolidation, as contemplated by s.26 of the Act, is the combination and merger of two or more arbitration proceedings into one arbitration proceeding. This may be contrasted with s.26(1)(a)(ii) which contemplates that the proceedings remain separate but may be ordered to be heard either at the same time or one immediately after the other. It may also be contrasted with s.26(1)(a)(iii) which contemplates that the proceedings remain separate and that any of them may be ordered to be stayed until after the determination of the other or others.

53. In my opinion the arbitrator now has before him one arbitration as a result of the three consolidation orders and all of the parties are parties to that one arbitration. However, because an arbitrator is under s.26 of the Act empowered to order such a consolidation on terms, terms have been able to be imposed which have the benefit both of binding all parties to the findings of fact of the arbitrator and also of splitting the issues in the consolidated arbitration along the same lines as might have been achieved by orders under s.26(1)(a)(ii) and (iii), that is to say by maintaining the division between the issues created by the pleadings in the formerly separate arbitration proceedings and by providing in substance that the Fletcher/Varnsdorf arbitration issues be heard and determined first. I note also that those issues are in the first instance restricted to the question of liability.

56. It has been convenient to refer, therefore, to each of the arbitrations and the parties to them as if they remain separate. The pleadings have not been consolidated and the issues in three of the four former proceedings await determination of the issues in the other, after which all other issues may or may not be heard together consecutively or as the arbitrator then considers appropriate. However, that should not obscure the fact that the proceedings have been consolidated pursuant to the statutory power to do so. It follows in my opinion that the arbitrator's power under s.26 has been exhausted because there are no "arbitration proceedings all of which have the same arbitrator" within the meaning of s.26; there is but one arbitration with one arbitrator. Accordingly, the court has no power to make an order under s.26(1)(b).

59. That brings me to Command's alternative application, that pursuant to s.47 of the Act the court should in effect order that there be one hearing of all issues in the consolidated arbitration. S.47 provides:

"The Court shall have the same power of making interlocutory orders for the purposes of and in relation to arbitration proceedings as it has for the purposes of and in relation to proceedings in the Court."

63. Probably the arbitrator has power to make procedural orders of the kind now sought by Command, which are simply variations of the terms and conditions of his consolidation orders as part of the arbitrator's continuing power to regulate the procedure in the arbitration. It is unnecessary to consider whether there might be any limit to such a power of variation. However the arbitrator considered that he had no power to vary the terms of the court's consolidation order made in December 1998. Command submits that he has such a power and as I understand it Fletcher and Varnsdorf contend that he does not. Curiously, if the arbitrator has such a power, this arguably counts against the court intervening pursuant to s.47 of the Act, whereas if he does not have such a power the court's power to intervene may more readily be discerned or justified under s.47.

66. Judicial views have differed both as to the scope of the court's power under s.47 and as to the spirit and intent of the provision (see South Australian Superannuation Fund Investment Trusts v Leighton Contractors Pty Ltd (1990) 55 SASR 327; Imperial Leatherware Co Pty Ltd v. Macri & Marcellino Pty Ltd (1991) 22 NSWLR 653; Nauru Phosphate Royalties Trust v Matthew Hall Mechanical & Electrical Engineers Pty Ltd, [1994] VicRp 67; (1994) 2 VR 386; Commonwealth of Australia v Cockatoo Dockyard Pty Ltd, (1994) 35 NSWLR 705 and on appeal (1995) 36 NSWLR 662).

69. I find it unnecessary to determine the scope of s.47 because, on the assumption that this court in this case has both the power and a wide discretion to make the orders sought by Command, I am of the clear view that those orders should not be made. My primary basis for so deciding is that I am not persuaded that there is any good reason for altering the present procedural directions and arrangements by ordering that there be a "full consolidation" and one hearing as sought by Command.

72. Command submitted that there was a real risk of injustice in that it might be prejudiced by findings of fact made at the first stage of the hearing, that is of the Fletcher/Varnsdorf arbitration issues, and that such findings might be made in ignorance of or without full regard to other issues which might be relevant at later stages, and further that such findings might be of such a nature as would give rise to ambiguity and difficulty of application when those later issues came to be fought out. I note that this is very much a belated submission inconsistent with the stance taken by Command since December last year and until quite recently.

75. The risks thus raised are in my view more theoretical than real. To the extent to which they have any substance I consider that there will be more than adequate opportunity in an arbitration of this size and duration possessing this quality of experienced legal representation to fully and clearly canvass any such risks with the arbitrator by both oral and written submission in order to avoid them.

78. Command also submitted that there was a danger of injustice because evidentiary rulings might shutout material which, whilst irrelevant to the issues in the first stage, had a bearing on issues to be determined later but it might then be too late to explore such issues having regard to binding findings of fact already made. This contention seems to me to be misconceived. The arbitrator will be bound, generally speaking, to admit all evidence possibly relevant to an understanding of the issues at that stage and to findings of fact which he is being asked to make at such stage. In addition, of course, matters going to the credibility and credit of witnesses will be admissible.

81. Looking at the examples canvassed in argument, it is hard to imagine that evidence relating to which party was factually as opposed to legally responsible for a particular alleged defect could ever be shutout where such a defect was in issue.

84. Listening carefully to Mr Shaw's argument this morning, I am not persuaded that Command will be precluded from calling any evidence relevant to its interests insofar as affected by the issues in the first stage of the arbitration. Clearly matters pleaded by Command relevant to a later stage will not be directly relevant but may be put in evidence so far as necessary to rebut allegations by other parties or to deal with potential findings of fact affecting Command.

87. Of course there are both advantages and disadvantages in splitting issues on the one hand and in hearing them all at once on the other but I do not think that there is a significant balance of convenience in favour of the course proposed by Command. On the contrary, the cost, complexity and no doubt substantial additional delay attendant upon that course counts strongly against it. I am also mindful of the pressure which would be placed on DETCO by such a course, as comprehensively explained by DETCO's counsel. I consider, therefore, that this court should not intervene.

90. In addition, if the arbitrator has power to make these orders, which I think he has but I need not decide, the matters have never been properly or fully canvassed before him. The court should not intervene in such an interlocutory procedural matter in those circumstances. I would propose to order that Command's originating motion and summons be dismissed and that Command pay the costs of each of the other parties of that proceeding. Command also sought to utilise the liberty to apply granted in the court's order of 21 December 1998. It is enough to say that I do not think that such a reservation is sufficient to support the present application.

93. DETCO applies by originating motion dated 16 June 1999 for an order pursuant to s.47 of the Commercial Arbitration Act 1984 that the Fletcher/DETCO arbitration not be consolidated with the Fletcher/Varnsdorf arbitration and not be stayed. Alternatively, DETCO seeks leave to appeal from the interim award, C3, made by the arbitrator on 18 May 1999 in which the relevant consolidation order was made.

96. In argument, primary emphasis was placed on the leave to appeal application. An award is a final and conclusive determination by an arbitrator of the issues referred or submitted to him for decision. An interim award is such a determination deciding some but not all of the issues the subject of the reference or submission (see Commonwealth of Australia v Cockatoo Dockyard Pty Ltd No. 2 Supreme Court of New South Wales, Rolfe J, 15 November 1994, unreported).

99. In my opinion, interim award C3 is not an interim award but simply contains an interlocutory procedural order and reasons therefor. It does not decide any issue referred or submitted to the arbitrator in a relevant sense. S.38 of the Act is therefore inapplicable.

102. If I am wrong about that I consider that DETCO has failed to surmount any of the other obstacles which are erected by s.38 of the Act because in brief: (1) I do not think any question of law has been identified as arising out of the assumed award; (2) I do not think that the matters raised by DETCO, if they are questions of law, could substantially affect the rights of DETCO or any other relevant party; (3) I do not think that there is any manifest error of law on the face of the assumed award.

105. Finally, I would not have in my discretion granted leave to appeal because in my opinion the orders made by the arbitrator are prima facie a sound exercise of his discretion under s.26 of the Act having regard to the circumstances, including the clear and full satisfaction of the criteria contained in s.26(3) of the Act.

108. DETCO contended that it would be and was substantially prejudiced by the fact that the issues of quantum and liability as between Fletcher and Varnsdorf were split and it was therefore unable to assess its potential liability to Fletcher because in short it had no or insufficient particulars, itemisation and breakup of Varnsdorf's and Fletcher's damages and of their nexus with any and if so what defects in plant which it had supplied to Fletcher. I am somewhat doubtful that DETCO is so prejudiced but I will assume that it is at least to some extent in relation to, for example, making an offer of compromise. It remains pre-eminently a matter for the arbitrator to deal with.

111. In so deciding the arbitrator would have to balance the position and rights of DETCO with any matters of justice and convenience which might be raised by other parties. I am satisfied that these matters have not been properly ventilated before the arbitrator. The arbitrator is still entitled in his discretion to order that appropriate particulars be provided to DETCO by any other party.

114. I am therefore of the view that it would be premature to deconsolidate the DETCO/Fletcher arbitration under s.47 of the Act even if the court had power to do so and even if that were the appropriate remedy for DETCO's complaints, which I doubt. Accordingly I propose to dismiss DETCO's originating motion and summons and order it to pay the costs of each of the other parties of that proceeding. Unless there are any submissions about orders I will make those orders.

123. HIS HONOUR: I will order that Command's originating motion and summons be dismissed and that Command pay the costs of each of the other parties of that proceeding and I will order that DETCO's originating motion and summons be dismissed and that DETCO pay the costs of each of the other parties of that proceeding. The court will adjourn sine die.