Commercial Arbitration Act 1985 - Application for leave to appeal - Duty of owner to make payment of progress claim - Proper construction of standard form contract

Commercial Arbitration Act 1985, s 38

Lamac Developments Pty Ltd v Devaugh Pty Ltd [2002] WASCA 245

Mount Lawley Pty Ltd v Western Australian Planning Commission [2004] WASCA 149

Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203

UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57; (2000) 22 WAR 221

Algons Engineers Pty Ltd v Abbigroup Contractors Pty Ltd, unreported; SCt of NSW; Library No 55026; 1 August 1997

Banir Pty Ltd v Owston Nominees (No 2) Pty Ltd [2001] FCA 1833

Besser Industries v Straton [1995] FCA 1163; (1995) 16 ACSR 596

Concrete Constructions Group Pty Ltd t/as Concrete Constructions (ACT) v Coddlestone Pty Ltd & Anor [1995] ACTSC 91

Concrete Constructions Group Pty Ltd; Blue Chip Pty Ltd v Concrete Constructions Group Pty Ltd [1997] Qd R 6

Egan v State Transport Authority (1982) 31 SASR 542

LU Simon Builders Pty Ltd v M D Fowles [1992] VicRp 60; [1992] 2 VR 189

Pindan v Uniseal [2004] WASC 152

1 MASTER SANDERSON: This is an application for leave to appeal against an arbitration award made by the second respondent. The application for leave to appeal is brought pursuant to s 38 of the Commercial Arbitration Act 1985. The application for leave and, if leave is granted, the appeal, were heard together.

2 The Commercial Arbitration Act provides only a limited basis upon which a party to an arbitration award can appeal. Section 38 of the Act is in the following terms:

"38. Judicial review of awards

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

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

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

(a) confirm, vary or set aside the award_;_ or

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

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

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

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

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

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

(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of 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.

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

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

3 In Lamac Developments Pty Ltd v Devaugh Pty Ltd [2002] WASCA 245, the Full Court considered the application of s 38(5) of the Act. Murray J cited with approval the decision of Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203. Sheller JA said (at 222):

"The added requirements of manifest error of law on the face of the Award or strong evidence that the Arbitrator made an error of law and that the determination of the question may add substantially to the certainty of commercial law suggests that the draftsmen were seeking to constrain the exercise of court control over arbitral awards in the manner described by the House of Lords in Nema. A manifest error of law on the face of the Award may be an error which would be apparent to the Judge upon a mere perusal of the reason to award itself without the benefit of adversarial argument.

A determination which adds substantially to the certainty of commercial law may be a determination of a question of the construction of a contract in standard terms rather than the construction of a one-off clause. In such a situation, strong evidence that the Arbitrator made an error of law may equate with the strong prima facie case that the Arbitrator had been wrong in his construction."

4 The decision in Promenade Investments Pty Ltd v New South Wales (supra) was also adopted by Steytler J in UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57; (2000) 22 WAR 221 at [51]. His Honour considered that the Court should adopt what was said by Sheller JA, namely that, before leave is granted, there should be "powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the Award an error of law.

5 Against that background, and bearing in mind the significant hurdles placed in the way of the applicant obtaining leave, it is appropriate to consider the facts of the case. The respondents are and were at all material times the owners of land situated at 8 Voyager Close, Port Bouvard, Mandurah. The applicant carries on business as a builder. Pursuant to a written contract made between the first respondents and the applicant, dated 6 August 1999, the applicant agreed on terms to prepare working drawings for and construct a brick and tile residence on the first respondent's land. The contract sum for the works was $524,890.

6 The contract itself was a standard form agreement. It is described as "Lump Sum Contract For Medium Works (for use in works without an architect)". The contract was prepared by the Master Builders' Association of WA. It was common ground between the parties that this form of standard contract is in wide use throughout the State. As will become apparent, that is a point of some significance.

7 In January 2001 a dispute arose between the applicant and the first respondents. For present purposes it is unnecessary to state with any precision the nature of the matters in dispute between the parties. Pursuant to the arbitration provisions found in the contract, the second respondent was appointed Arbitrator. The arbitration commenced on 24 May 2002 and proceeded over seven days. The Arbitrator reserved his decision on 8 November 2002. Thereafter the parties submitted further written submissions, the last of which was delivered in May 2003. The Arbitrator delivered his award on 1 August 2004. That means that there was a delay of some 21 months between the date upon which the decision was reserved and the date upon which it was delivered. Even allowing for the length of time taken to deliver submissions, there was a delay of 15 months between the delivery of the last set of submissions and the delivery of the award. This lengthy delay was a factor which the applicant said, in and of itself, was sufficient to show an error on the face of the record which warranted a grant of leave to appeal. I will return to this issue later in these reasons.

8 The Arbitrator had before him a number of matters which were in dispute. One of these matters related to a failure by the first respondents to make payment of a progress claim. The way in which this issue was raised by the applicant in its counterclaim in the arbitration in proceedings can best be explained by actually quoting from the counterclaim itself. (In reading what follows it is to be remembered that in the arbitration the present applicant was the "Respondent" and the present first respondents were the "Claimants".):

"13. On 16 February 2001 the respondent made progress claim 12A and B totalling $30,579.30 on the claimants.

14. The claimants paid $14,331.90 in respect of the said progress claim.

15. As at 12 March 2001 the claimants were in default under the contract and owed the respondent $16,247.40 (the unpaid amount).

16. By notice of default undated but served on the claimants by hand on 12 March 2001 the respondent gave notice of default in respect of the unpaid amount.

17. The claimants failed to remedy the default within 5 days of the notice of default or at all.

18. By a notice in writing dated 23 March 2001 served on the claimants on or about 23 March 2001 the respondent terminated the contract."

9 The first respondents did not, in their defence to counterclaim, dispute the facts set out by the applicant in its pleading. They responded in the following way:

"6. As to paragraph 12 of the respondent's points of defence and counterclaim (Counterclaim) the claimants:

(1) admit that the Contract (as defined in paragraph 3 of the points of claim) contained clauses pleaded in paragraphs 12(1) and (2) of the Counterclaim;

(2) say that pursuant to the Contract, the claimants were only obliged to make payments after the service of progress claims properly made in accordance with the Contract; and

(3) otherwise deny the matters pleaded therein.

7. The claimants admit the allegations pleaded in paragraph 13 of the Counterclaim.

8. The claimants admit the allegations pleaded in paragraph 14 of the Counterclaim.

9. The claimants deny each and every allegation pleaded in paragraph 15 of the counterclaim and say that:

(1) the respondent had no entitlement to the unpaid amount as defined in paragraph 15 of the Counterclaim; and

(2) the claimants had referred to arbitration part of the respondent's claim for the unpaid moneys.

10. Save that the claimants admit that they were served with a notice on 12 March 2001 which purported to be a notice of default, the claimants otherwise deny the allegations pleaded in paragraph 16 of the Counterclaim and:

(1) deny that the claimants were in default;

(2) say that the respondent was not entitled under the Contract or otherwise to require the claimants to pay the unpaid sum;

(3) say that the respondent was not, at the date of the purported notice of default, itself willing to perform in accordance with the terms of the Contract; and

(4) deny that the respondent had any entitlement to issue such a notice.

Particulars of unwillingness to perform

The claimants reply upon the matters pleaded in the points of claim and the matters pleaded herein.

11. Save that the claimants admit that they have not paid the unpaid sum, the claimants otherwise deny the allegations pleaded in paragraph 17 of the Counterclaim.

12. Save that the claimants admit that they were served with a notice on or about 23 March 2001 which purported to terminate the Contract, the claimants otherwise deny the allegations pleaded in paragraph 18 of the counterclaim and say that:

(1) the claimants were not in breach of the contract on 23 March 2001 or at all;

(2) the respondent's conduct in purporting to terminate the contract was a repudiation of the Contract by the respondent;

(3) in the premises, the claimants were entitled to accept the respondent's repudiation;

(4) on or about 29 March 2001 the claimants' accepted the respondent's repudiation and terminated the contract; and

(5) as a consequence of the respondent's repudiation the claimants have suffered loss and damage.

Particulars of acceptance of repudiation

Written notice of acceptance of repudiation dated 29 March 2001

Particulars of loss and damage

Detailed in paragraphs 17 and 18 below."

10 It can be seen then that as at the date of the arbitration, both parties accepted that the contract had come to an end. The applicant said that it had come to an end as a consequence of the first respondents' failure to remedy a default after the service of a notice requiring them to do so. The first respondents said that it had come to an end because the delivery of the default notice was unjustified and amounted to a repudiation of the contract by the applicant, which had been accepted by the first respondents.

11 The Arbitrator concluded that the claimant was not entitled to payment for the amounts claimed in progress claims 12A and 12B. Rather, he found that the first respondents, in paying the applicant $14,331.90, had paid all they were obliged to pay. For present purposes, that finding of fact can be accepted. In other words, it can be accepted that the appropriate amount of the progress claim was $14,331.90. At the hearing of this application, counsel for the applicant attempted to demonstrate that there had been an arithmetical miscalculation by the Arbitrator. Even assuming that such an error had been made, it is not an error of such significance as would warrant the grant of leave to appeal. So that factor can be put to one side. Having found then that the first respondents had paid all that they were obliged to pay, the Arbitrator went on to hold that there was no basis upon which the applicant could have issued a notice of default and consequently, no basis upon which the contract could have been terminated. In other words, he was satisfied that the first respondents had made out their defence to the counterclaim: see pages 22 to 24 of the Arbitrator's First Interim Award.

12 The way in which the applicant was to be paid for the building works is set out in cl 25 of the contract. That clause is of singular importance in this application and I will quote it in full:

(a) The Contract Sum shall be paid to the Builder by payments made progressively during the execution of the Works. Progress claims shall be made not more frequently than each four weeks.

(b) A claim for payment submitted to the Owner by the Builder shall show:

(i) the accumulative percentum of the Contract Sum appropriate to the stage to which the Works have progressed.

(ii) A schedule of Variations in accordance with Clause 16 and any adjustments occasioned by provisions of this contract - each briefly described and quantified and with a total for the schedule.

(iii) The total value of the works executed being the total of (i) and (ii).

(iv) A schedule of the amounts paid and received to date with a total for the schedule.

(v) The amount now claimed being the difference between (iii) and (iv).

(vi) Amount to be retained.

(c) Payment of the progress claims shall be made by the Owner to the Builder within the period stated in Item 4 of Appendix I or, if not stated, within ten (10) days of the date of submission to the Owner of the said claim or account.

(d) The making of any payment to the Builder shall not be taken as proof or admission that any Works have been executed in accordance with the drawings and specification but shall be taken to be a payment on account.

(e) Should the Builder not receive from the Owner any or part of any progress payment by the due date therefore the Builder shall be entitled to interest thereon at the rate specified in Item 6 of Appendix I.

(f) In the event that the Owner disputes the entitlement to any of the claims made by the Builder, the Owner shall be entitled to refer that dispute in accordance with Clause 31."

13 This clause gives to the builder considerable discretion. It stands in contrast to clauses found in commercial building contracts where a progress claim is certified by an architect or some other party, and thereafter payment is required. This clause anticipates the owner of being, to a significant extent, at the mercy of the builder. But in my view, it clearly anticipates that when a progress claim is made, it will be paid. It does not anticipate an owner making payment of as much of the progress claim as the owner thinks is proper and appropriate. The first respondents would read into the clause a requirement that the progress claim be "reasonable"; or, to adopt the wording used in par 6(2) of the defence to counterclaim, progress claims be "properly made". In my view there is no warrant for reading cl 25 in that way.

14 It is important to bear in mind how progress claims fit in with the scheme of a building contract. A builder is required to commit his funds to take the construction up to a certain point. He then estimates the percentage of the building works which have been completed. He is entitled to payment for those completed works. He is also entitled to be paid for variations. He might overestimate or underestimate the amount of work that has been completed. That is a risk which both parties have accepted by the terms of their contract. But once the progress claim is made, it must be paid in full by the owner. That is the obligation under the bargain - the counterpoint to the builder's obligation to expend his funds to take the construction to a point where the progress claim can be made.

15 If the owner is dissatisfied with the builder's claim, he has rights to take the matter to arbitration. Those rights are specifically preserved by cl 25(f). Moreover, by making payment of a progress claim, the owner does not make any admission that the claim is justified in whole or in part: see cl 25(d). But however aggrieved an owner might be by a progress claim, the contract does not allow him arbitrarily to decline to make payment, or pay only that part of the claim which he believes is due. To reach that conclusion, as the Arbitrator did, runs counter to the clear intent of the contract.

16 Counsel for the first respondents, in support of his submissions, postulated a situation where in his first progress claim a builder claimed 99 per cent of the contract price when it was clear that no more than 10 per cent of the building work had been done. In that situation, counsel submitted, the owner could not be required to pay the full amount of the progress claim. To require him to do so would be absurd. It followed, in counsel's submission, that there had to be a requirement of reasonableness read into cl 25.

17 In my view, even in that situation, an owner would be obliged to make payment of the progress claim. Pursuant to cl 25(b)(i), the progress claim must show the accumulated percentage of the contract sum appropriate to the stage to which the works have progressed. Doubtless, if the claim was made that a certain percentage of works had been completed and that claim was obviously wrong, it would not take an arbitrator long to put things to rights. But even in that situation the commercial risk of being asked to make an overpayment lies with the owner. That is the agreement that has been reached.

18 It follows then that I am satisfied that the Arbitrator has fallen into error. Clearly the error substantially affects the rights of the applicant. The error of law is manifest on the face of the award. Given the general application of contracts of the kind entered into between the applicant and the first respondents in this case, determination of the parties' obligations with respect to progress payments would add substantially to the certainty of commercial law. For all of these reasons I am satisfied that there ought be a grant of leave.

19 I am also satisfied that the appeal ought be allowed. In its originating summons the applicant sought to have the award wholly set aside. That, I think, is an appropriate order. The applicant also sought to have the arbitration remitted to a new arbitrator for consideration. This issue was not the subject of any argument during the course of the hearing and I will hear the parties further as to whether a new arbitrator ought be appointed.

20 I referred above to the significant delay in the Arbitrator delivering his award in this matter. It was the applicant's position that the length of the delay in and of itself showed an error of law. Particular reference was made to the Full Court decision of Mount Lawley Pty Ltd v Western Australian Planning Commission [2004] WASCA 149. Having reached the conclusion that the applicant succeeds on other grounds, it is not necessary for me to deal with this aspect of the applicant's submissions. However, it is appropriate to make some general comments.

21 Disputes which arise in the course of construction of a domestic dwelling need to be resolved quickly. The speed with which such disputes can be resolved is seen generally as one of the virtues of arbitration. Delays of the kind found in this case are simply unacceptable. It undermines the whole arbitration process. It may well be, as counsel for the first respondents submitted, that delay in delivery of an award, without more - such as a clear indication that the evidence has not been properly considered - is not of itself sufficient to justify a grant of leave to appeal, let alone grounds for a successful appeal. I expressed no concluded view on that matter. What I do say is that arbitration awards should be delivered promptly and it runs counter to the interests of justice if they are not.

22 I will hear the parties as to whether a new arbitrator ought be appointed, as to the form of orders and as to costs.