BETWEEN : FIRST TRADE CONSULTING PTY LTD (ACN 009 557 053)

Jurisdiction : SUPREME COURT OF WESTERN AUSTRALIA

Citation : GRD KIRFIELD LTD - v - FIRST TRADE CONSULTING PTY LTD [2004] WASC 158

Arbitration - Appeal from decision under s 38 of Commercial Arbitration Act - Whether contract void for uncertainty - Turns on own facts

Commercial Arbitration Act 1985 (WA), s 38

Supreme Court (Court of Appeal) Rules 2005 (WA), r 32(4)

Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27; (2000) 22 WAR 101

Australian Broadcasting Corporation v XIVth Commonwealth Games Limited (1988) 18 NSWLR 540

Australis Media Holdings Pty Ltd v Telstra Corporation Limited (1998) 43 NSWLR 104

Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1

Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1981) 149 CLR 337

Lamac Developments Pty Ltd v Devaugh Pty Ltd [2002] WASCA 245; (2002) 27 WAR 287

Masawa Australasia Pty Ltd v J Corp Pty Ltd [2000] WASC 5

Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353

Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596

Terrex Resources NL v Magnet Petroleum Pty Ltd (1988) 1 WAR 144

Thorby v Goldberg [1964] HCA 41; (1964) 112 CLR 597

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

Upper Hunter County District Council v Australian Chilling and Freezing Co Limited [1968] HCA 8; (1967) 118 CLR 429

Allmore Constructions Pty Ltd v Faili (2004) 20 BCL 65

Isicob Pty Ltd v Baulderstone Hornibrook (Qld) Pty Ltd (in liq) (2001) 17 BCL 198

Kinnane v Zee Homes Pty Ltd (2003) 227 LSJS 496

Lindsay Sinclair Pty Ltd v Baily, unreported; SCt of Vic; No 4909 of 1992; 3 June 1993

Natoli v Walker (1994) 217 ALR 201

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

Thiess Contractors Pty Ltd v Placer (Granny Smith) Pty Ltd (2000) 16 BCL 255

Ukrainian Association of Western Australia in Perth (Inc) v Squire Constructions Pty Ltd [2004] WASC 4

2 McLURE JA: The appellant appeals from orders made by learned Commissioner Odes QC granting leave to the respondent to appeal under s 38 of the Commercial Arbitration Act 1985 (WA) ("the Act"), allowing the appeal and remitting the matter to the Arbitrator for determination in accordance with his reasons.

3 The appellant was the proprietor of land on the corner of St Georges Terrace and Victoria Avenue, Perth, on which was constructed a multi-storey building. In 2000, the appellant proposed to refurbish and convert the building into strata residential apartments, strata commercial units and a car park ("the project"). The project was to be funded by St George Bank. By letter of 13 October 2000, St George Bank conditionally approved a loan to the appellant of up to $19,400,000. The funding limit covered more than the construction costs of the project. The loan was conditional on, among other things, the contractors who were to be engaged to carry out the project being prepared to accept at least $3,750,000 in apartments in lieu of payment for work done. This was to be the secondary source of funding of the project and was a means of deferring the receipt of consideration for work done on the project until settlement of the sale of the apartments.

4 The respondent is a builder. Between October 2000 and February 2001, the respondent and the appellant negotiated in relation to a proposed building contract for the project.

5 By an agreement in writing dated 5 February 2001 between the appellant and the respondent ("the building contract"), the respondent agreed to undertake the project works for the sum of $17,925,000. The building contract was a standard form JCC-D 1994. Prior to the execution of the building contract the respondent agreed to take five completed apartments together valued at $1.83m as part payment of the consideration payable under the building contract ("builder deferral payment agreement").

6 The appellant and the respondent also had discussions concerning a subcontractor deferral payment arrangement whereby subcontractors would take a completed apartment in the project as part, or complete, payment for work done by them on the project. The appellant contended that the arrangement was orally agreed to by the parties. This subcontractor deferral payment agreement is variously described by the appellant as the secondary funding arrangement or the secondary funding

agreement. I will refer to it as the "subcontractor secondary funding agreement".

7 The respondent commenced works under the building contract in early February 2001. The building contract provided for practical completion by 8 February 2002.

8 The builder deferral payment agreement was the subject of an agreement in writing dated 11 June 2001 between the appellant, the respondent and St George Bank (the "Tripartite Agreement"). The Tripartite Agreement did not cover the subcontractor secondary funding agreement.

9 In March 2002 progress payment certificate 14 was issued under the building contract. It was for an amount of $1,427,629 and under the terms of the building contract was due for payment by 22 March 2002.

10 The appellant contended that the Tripartite Agreement and the subcontractor secondary funding agreement entitled the appellant to satisfy its obligation to pay progress payment certificate 14 by offsetting the amounts due to the respondent and to specified subcontractors against the purchase price of relevant project apartments. The respondent denied the existence of the subcontractor secondary funding agreement. As a result of the non-payment of progress payment certificate 14, the respondent suspended the project works from 15 May 2002 to 27 June 2002.

11 The suspension impasse was resolved on terms contained in an agreement in writing dated 27 June 2002 between the appellant and the respondent ("Heads of Agreement"). The Heads of Agreement provided for the payment to the respondent of outstanding progress payment certificates (including certificate 14) and the lifting of the suspension but it did not alter the parties' accrued rights or prevent them from having them determined under the building contract.

12 The respondent commenced an arbitration claiming, inter alia, extensions of time to the date of practical completion which claim depended on the lawfulness of the suspension which in turn depended on whether or not there was an enforceable subcontractor secondary funding agreement.

13 In an interim award made on 8 December 2003 ("the award"), the Arbitrator found in the appellant's favour. The parties disagree as to the findings made by the Arbitrator. It is sufficient to say at this stage that the Arbitrator found that there was a subcontractor secondary funding agreement which, together with the Tripartite Agreement, satisfied the appellant's obligation to pay progress payment certificate 14 and accordingly, the respondent was not entitled to suspend the project works. The Arbitrator also found that the respondent was obliged to produce an "administrative protocol" for the implementation of the subcontractor secondary funding agreement.

14 The respondent applied for leave to appeal and to appeal under s 38 of the Act. The Commissioner concluded that the subcontractor secondary funding agreement was incomplete or constituted an agreement to agree and was unenforceable. As a consequence, the Commissioner concluded that the Arbitrator erred in concluding that the respondent was not entitled to suspend the project works for non-payment of progress payment certificate 14.

15 As there is a difference of view as to the scope of the appellant's grounds of appeal, it is necessary to set them out. There are four grounds, being that the learned Commissioner erred in law:

1. in granting the respondent leave to appeal in circumstances where:

(a) the Commissioner failed to determine what the actual findings of the Arbitrator were in relation to the secondary funding arrangement;

(b) the Commissioner ignored the actual findings made by the Arbitrator in relation to the secondary funding arrangement;

2. when he substituted his own finding that the secondary funding agreement was 'incomplete or constituted an agreement to agree and therefore unenforceable' without having regard to:

(b) the evidence considered by the Arbitrator over the course of the arbitration; and/or

(c) the numerous findings of the Arbitrator that there was a concluded, binding agreement between the parties;

3. in concluding that the Arbitrator's finding that the respondent was under an obligation to implement the secondary funding arrangement by an administrative protocol was a manifest error of law on the face of the record without having regard to:

(b) the evidence considered by the Arbitrator; and/or

(c) the findings of the Arbitrator referred to in ground 2; and/or

(d) the Arbitrator's specific findings that implementation of the secondary funding agreement could be done as a simple administrative matter and the parties agreed this was so;

(e) the Arbitrator's finding that the secondary funding agreement had in fact been implemented by the parties; and

4. in concluding that the Arbitrator's finding that the respondent was under an obligation to implement the secondary funding arrangement by an administrative protocol was a manifest error of law on the face of the record without setting out or referring to:

(a) any facts which justified or supported the Commissioner's conclusion;

(b) any law which supported the Commissioner's conclusion; and

(c) any reason for the conclusion other than his own personal view.

16 The grounds of appeal fall well short of the standard required by r 32(4) of the Supreme Court (Court of Appeal) Rules 2005 (WA). They serve to obfuscate rather than enlighten. When read together with its submissions, the appellant's contentions are that the Commissioner's conclusions identified in the grounds are inconsistent with or not open on the factual findings made by the Arbitrator or that the Commissioner went behind the award and made his own findings which were not open.

17 The respondent's points of claim in the arbitration were straightforward. The claims were based on the express terms of the building contract. In its points of defence to the respondent's claim for extensions of time, the appellant relied on a representation based defence and the builder and subcontractor deferral payment agreements. The appellant pleaded that the respondent represented that:

"4.5(c) [The respondent] would defer seeking payment under the Building Contract until [the appellant] was able to settle on and deliver certificates of title to the Apartments for sums or a sum equal to:

(i) $1,831,163; and

(ii) the value of works done or material supplied under the proposed building contract by subcontractors who had agreed to be paid for that work and/or materials directly by [the appellant] by receipt of either a certificate of title to an Apartment or a reduction in the purchase price of an Apartment upon the settlement thereof;

('the Deferral Representation');

(d) [the respondent] would use its best endeavours to facilitate and implement the Deferral Representation ('GRD's Promise').

...

4.6 In reliance upon the Deferral Representation and GRD's Promise, [the appellant]:

(a) awarded the Building Contract to [the respondent];

(b) obtained funding for the Building Contract from St George Bank.

4.7 Alternatively, by an oral agreement made between November 2000 and February 2001 between [Mr] Amara, on behalf of [the respondent], and the Alessandrinos, on behalf of [the appellant], it was agreed that in consideration of [the appellant] awarding the Building Contract to [the respondent], the Building Contract would be subject to:

(a) the Deferral Representation; and

(b) GRD's Promise."

18 The appellant relies on a further representation made during the negotiations leading to the Tripartite Agreement. It is pleaded in par 11.2 that:

"During the negotiations prior to the execution of the [Tripartite Agreement], [Mr] Amara, on behalf of [the respondent], orally represented to both [the appellant] and St George Bank that [the respondent] would honour the Deferral Representation and GRD's Promise ('the Further Representation')."

19 The effect on the appellant's obligation in relation to progress payment certificate 14 is pleaded in par 12.2 as follows:

"As at 22 March 2002 and by virtue of the Deferral Representation, GRD's Promise and the Further Representation, [the appellant] was not obliged to pay [the respondent] the amount due under progress certificate number 14.

Particulars

(a) [The appellant] was entitled, as against Progress Certificate No. 14, to set-off the value of the [5 apartments to be purchased by the respondent]; and

(b) [The appellant] was entitled, as against Progress Certificate No. 14, to set-off the value of monies owed by [the respondent] to those subcontractors who had agreed to defer seeking payment of monies owed to them by [the respondent] until the apartments were able to be settled."

20 The respondent in its reply denies the pleaded representations and the oral agreement pleaded in par 4.7. There is no plea that the oral agreement was incomplete or otherwise void for uncertainty.

21 The Arbitrator, Mr A C De Leo, is a consulting architect and arbitrator. His award was made on 8 December 2003. The content and arrangement of his reasons present some difficulties for the reader, particularly those unfamiliar with all the evidence adduced in the arbitration. There is room for inference and interpretation.

22 As already noted, the Arbitrator concluded that there was a subcontractor secondary funding agreement that applied to progress payment certificate 14. He did not determine the appellant's alternative misrepresentation defence.

23 The background facts and findings made by the Arbitrator are as follows. In mid-October 2000, St George Bank conditionally approved a loan to the appellant of up to $19,400,000, part of which was to cover the construction costs of the project. It was also a condition of approval of the loan that the builder be acceptable to St George Bank and that there be a "Tripartite Agreement between the Borrower, the building contractor and St George in connection with the Project containing such terms and conditions as St George requires at its sole discretion".

24 The Arbitrator stated that the principal purpose of St George Bank's requirement that construction costs be reduced by approximately $3.75 million through presale of apartments to contractors was "to reduce the amount to be loaned by St George Bank for the [appellant] to pay in cash ... for contract work", which the Arbitrator describes as St George Bank's "loan reduction and payment deferral plan". As to the St George Bank funding, the Arbitrator made the following finding (at D 2):

"It is my finding that the primary funding on which the building contract relied for its commencement was conditional on the achievement to the satisfaction of the primary funder of an effective reduction of $3.75 m of any probability of call on primary loan funds.

Furthermore, that the [appellant] was obliged to achieve this 'reduction' by prearranging the co-operation of sufficient participating contractors to individually buy enough apartments on the following terms:

• To buy one or more apartments once practically completed.

• To defer calls for payment on the last amount of its work done to a like value of the apartments (less deposit and other payments) until settlement took place for the sale of the apartments.

• To accept payment for the related component of work done by means of a legal transfer of the freehold ownership in the designated apartment/s."

25 The Arbitrator found that the deferral figure of $3.75 million was subsequently increased to $4.9 million.

26 The Arbitrator described the respondent as a new builder on the block that needed to make its mark in the Perth Central Business District and who was a late inclusion in the tender process for the project and was successful in getting the tender period extended.

27 The contractual negotiations were conducted by Mr Amara for the respondent and Messrs Carl and Vince Alessandrino for the appellant. Mr Amara and the respondent's finance director met with officers of St George Bank in January 2001. The purpose of the meeting was for the respondent to present its credentials to St George Bank and for the bank to explain the terms of its funding agreement. The need for a Tripartite Agreement was also discussed.

28 The Arbitrator found that prior to entering into the building contract, the respondent was aware of the terms and conditions of the St George Bank approval of finance, in particular its loan reduction and payment deferral plan and its requirement for a Tripartite Agreement.

29 The Arbitrator also found that the appellant was well supported by a stable of loyal subcontractors. Mr Vince Alessandrino gave evidence (which appears to have been accepted by the Arbitrator) that by November 2000 over $3 million in subcontractor apartment presales or equivalent work deferrals had been tentatively agreed with a number of preferred subcontractors (at D 26).

30 By December 2000, the respondent had agreed to purchase (or underwrite the purchase of) five apartments in the project with a total sale price of $2 million less a 10 per cent discount. According to the Arbitrator, the Alessandrinos made it known to the respondent that, in addition to the deferrals involved in the respondent's purchase of five apartments, the balance of the payment deferrals required by St George Bank would come from the purchase of apartments by subcontractors. The Arbitrator also found (at D 14/D 15) that the respondent was told and understood that if it was to accept a construction role as builder it had to be a "pre-buyer" and in effect a secondary funder of the project and knew that it had to allow for a total of $4.9 million in contractor related deferrals that had to be dealt with in a manner that satisfied St George Bank's funding conditions. The specific finding is in these terms (at D 8):

"I find it was imperative that if [the respondent] was to be awarded the contract that it take upon itself the obligation to cooperate with and successfully facilitate the implementation of the St George 'loan reduction and payment deferral plan' in a manner that retained the integrity of the principle purpose of the Loan. That is what I find to be the essence of what Mr Amara is implied to have agreed with the Alessandrino brothers once [the respondent] was admitted into the building contract race ["the implied agreement"]."

31 The Arbitrator found that there were outstanding matters to be agreed between the appellant and the respondent as to the "procedures" to implement the contractor (builder and subcontractor) payment deferral agreement or what he describes as "protocols" for their implementation and timing. That is to what the Arbitrator refers when he speaks of the need for the parties to work out a reasonable or sensible "commercial arrangement" (at D 12 and D 13). He also observed (at D 7) that the concept of offset/deferral was simple to agree but not so simple to implement.

32 However, those matters were not addressed before the parties entered into the building contract which contained no reference to contractor (builder or subcontractor) payment deferrals. It contained standard terms as to payment on a progress certificate and for the suspension of works in the event of non-payment. However, notwithstanding the express terms of the building contract, the respondent agreed to subcontractors progressively transferring the net certified value of work done under their subcontract with the respondent to their apartment purchase account when cash was still available from the primary funding source (St George Bank). In April/May 2001, the respondent, with the assistance of its solicitors, developed what the Arbitrator described as a protocol for the offsetting of "midstream" progress payments to two preferred subcontractors. The protocol involved a movement of cheques between the appellant, the builder and the subcontractor. The respondent's solicitors also prepared a pro forma release document for execution by the subcontractors (see D 35). The Arbitrator noted that the midstream offsets were handled satisfactorily and eventually went over $850,000. Further, in August 2001 the appellant wrote to the respondent informing it of a future requirement to defer paying a particular subcontractor the sum of $420,323 under the offset/deferral arrangement. The respondent did not reject or query the request (D 37).

33 The terms of the Tripartite Agreement referred to in the St George Bank approval letter were negotiated in March, April and May 2001. In a draft of the agreement, cl 8 provided that the respondent was responsible for deferring some $5.1 million in payments pending settlement on apartments to be purchased by the respondent (to the value of $2 million which was subsequently amended to $1.83 million) and by subcontractors (to the value of $3.1 million). The subcontractors were not parties to the draft or the final Tripartite Agreement. Paragraph (a) of cl 8 of the draft related to the respondent's position; par (b) of cl 8 concerned subcontractor deferrals and purchases. The parties agreed to remove so much of cl 8 as related to subcontractor deferrals and purchases.

34 Clause 8 of the final Tripartite Agreement materially provided:

8.1 Provided that practical completion of the Works has occurred by 30 June 2002, the Builder acknowledges and agrees with the Owner and St George that when the 'cost to complete' the works is $1,831,000 then the balance of the progress claims under the Building Contract will be deferred until and take place simultaneously with such time as Octagon ... has paid to the owner a sum of at least $1,831,000 in respect of the purchase of strata titled units in the Project and which sum has been paid to St George by the Owner.

8.2 The parties acknowledge that clause 8.1 is for the benefit of the parties to this Deed only and will not operate in the event of the Building Contract being novated.

8.3 The deferral of the payment referred to in Clause 8.1 will not operate if for any reason attributable to the Owner or to St George settlement does not occur and Octagon has validly terminated the contract for the purchase of strata titled units in the Project pursuant to Clauses 18 and 19 of the Joint Form of General Conditions For The Sale of Land 2000 Revision."

35 Thus, cl 8 provided for the deferral of payments to the respondent when the cost to complete the remaining works equalled the purchase price to be paid to the respondent for the five apartments. This is described by the Arbitrator as the deferral of "endstream" payments.

36 As to the removal from the Tripartite Agreement of any reference to subcontractor deferrals, the Arbitrator found that there was an oral agreement ("the April 2001 agreement") in the following terms:

"I find that [the respondent], [the appellant] and St George agreed in April 2001 to the subcontractor deferral wording being removed from new clause 8 in the draft TPA, and left to be resolved as an administrative matter the development of a 'substitute' protocol that would achieve the equivalent of 'subcontractor deferrals' in a way that would not diminish the relevant intent and purpose of the prevailing St George funding plan."

37 Later in his reasons (at D 38), the Arbitrator describes the April 2001 agreement as having been made orally and by conduct at executive management level.

38 The Arbitrator's reasons for the finding as to the April 2001 agreement are as follows. First, he refers to the earlier implied agreement saying that, on the balance of probabilities, "the contractor related conditions of funding and payment deferral ... had to be considered acceptable by Mr Amara for St George to have allowed the parties to progress into a formal contract which relied on St George to guarantee funding and to provide draw downs on primary loan funds as work was done and certified". The Arbitrator continued (at D 20):

"[The respondent] knew it was important to defer contractor related end payments ...

It had the written words for the subcontractor related end payment deferrals moved aside and out of the TPA clause but this was not because there had been a change of plan by the Funders or by the [appellant], and it was not because subcontractor payments had become unimportant.

In effect it was only [the respondent's] exposure to related contractual risks for matters such as delays that was taken out as the parties orally accepted that the subcontractors could be handled administratively to achieve the same effect for the [appellant] and St George. Therefore subcontractor payments had to be deferred in a manner that would not place residual risk on the [respondent] but in a manner that would nonetheless place no demand on the [appellant] to pay in cash for the work in question. They could be offset by legally appropriate means to achieve an equivalent result."

39 The Arbitrator subsequently referred again to the reasons for excluding any reference to subcontractor deferrals in the Tripartite Agreement. He noted that the draft of cl 8 exposed the respondent "to a $3.1 m burden of responsibility for 'end payment' of subcontractors if something went wrong with say the getting of titles for their apartment purchases". This risk arose under the draft Tripartite Agreement because of the unconditional obligation to defer subcontractor payments yet the subcontractors were not parties to that agreement and the offset/deferral arrangements were not the subject of agreement between the respondent and the subcontractors. The offset/deferral arrangements were the subject of two separate categories of agreement, one between the appellant and individual subcontractors and the other between the appellant and the respondent.

40 The Arbitrator said it would be too intrusive for subcontractors to be included as parties to the Tripartite Agreement. He continued:

"And I accept that subcontractor related matters were considered capable of being handled administratively which was possible because no change was being made to the prevailing principle of the St George funding plan."

41 The Arbitrator then considered who was liable to develop the substitute protocol. He found that "before the time came in February 2002 and onwards to start dealing with deferral and offsetting of 'endstream' payments to participating contractors, it was incumbent upon [the respondent] to have produced to a stage of readiness for effective implementation a satisfactory substitute protocol to deal with the deferral of subcontractor payments". I infer from this finding, the funding finding (at D 2) and the comments at D 20 quoted above that the Arbitrator found that it was a term of the April 2001 agreement that there was also to be endstream deferrals of subcontractor payments.

42 The Arbitrator said the substitute protocol would cover:

• appropriate payment discharges to be provided by subcontractors;

• the respondent must maintain its contractual rights and access to withholdings in relation to the subcontractor; and

• the respondent must find itself in a cash neutral position and be financially compensated for any unforeseen costs.

43 It is apparent from the Arbitrator's reasons as a whole that he regards the protocols for both the implied agreement and the April 2001 agreement as relating to administrative or procedural matters for the implementation of the deferrals. Whether that is an accurate description is another matter.

44 It is appropriate at this stage to clearly identify what the Arbitrator found concerning the April 2001 agreement. First, the parties did not intend to discharge, but rather to affirm, the implied agreement. Second, the subcontractor deferrals had to be consistent with the intent and purpose of the St George Bank funding approval. That relates back to the funding finding (at D 2) which addresses the timing of subcontractor deferrals and provides that there was only to be an offset and deferral for work already done by the subcontractor. Third, the substitute protocol (which the respondent was obliged to prepare) had to be consistent with the intent and purpose of the St George Bank funding approval.

45 Further, the clear underlying premise in the Arbitrator's reasons as a whole is that the respondent, as builder, would (and in due course did) have a contractual relationship with subcontractors for the performance of part of the project works ("works subcontract") and the appellant would (and in due course did) have a contractual relationship with a number of subcontractors relating to the purchase of apartments and the fact, amount and timing of works subcontract offset payments to fund (in whole or in part) the purchase. There is nothing in the Arbitrator's award or elsewhere to indicate whether the respondent entered into written agreements with its subcontractors or the particular terms thereof.

46 By March 2002, the primary funding provided by St George Bank had been fully drawn. The appellant advised the respondent that the payment deferral zone had been reached. The appellant presented the respondent with a deferral schedule identifying the subcontractors who it said had agreed to participate in the deferral arrangement and the amount to be paid to them by way of, and at, the settlement of the purchase of an apartment.

47 The respondent stated its position in a letter dated 29 May 2002. It asserted that at the time of tender and execution of the building contract the respondent was not aware of St George Bank's requirement for a Tripartite Agreement and that it had understood the project was fully funded. The respondent denied any agreement in relation to subcontractor deferrals and insisted on payment in cash of progress payment certificate 14. After the issue of that certificate, the respondent commenced issuing late claims for variations for work done up to 12 months previously.

48 The Arbitrator then determined the commencement date for offset and deferrals under both the Tripartite Agreement (for the respondent itself) and the April 2001 agreement (relating to subcontractors). The variations issued by the respondent after progress payment certificate 14 had the potential to defer the commencement date, at least for the respondent's own deferrals. There is nothing in the award to suggest that the claimed variations affected the determination of the commencement date of the endstream deferrals for subcontractors. In any event, the Arbitrator found that the respondent was obliged to commence endstream offsets/deferrals for itself and its subcontractors in March 2002 in relation to progress payment certificate 14. This finding is not challenged. The only available inference is that the amount of offsets/deferrals related to the full amount of that certificate.

49 The respondent required leave to appeal from the Arbitrator's decision. Section 38(5) of the Act provides:

"(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 ... 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."

50 Although both grounds of s 38(5)(b) were relied upon, the primary focus before the Commissioner was whether there was a manifest error of law on the face of the award. A manifest error of law requires that the error of law be evident or obvious on a preliminary basis: UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57; (2000) 22 WAR 221 at [46]; Lamac Developments Pty Ltd v Devaugh Pty Ltd [2002] WASCA 245; (2002) 27 WAR 287 at [60] and [132].

51 The purpose and rationale of s 38 of the Act was discussed by Parker J in Masawa Australasia Pty Ltd v J Corp Pty Ltd [2000] WASC 5. He said (at [5]):

" ... s 38, like similar provisions in other jurisdictions, is concerned with finality in arbitration proceedings. It is designed to limit the intervention of the courts in arbitration ...

'The philosophy of the ... Act clearly is that the election of parties to have their disputes resolved by arbitration should be respected in the sense that awards should not be scrutinised with an over critical eye and that the court should exercise restraint ... in seising themselves of legal questions.'"

52 In its grounds of appeal to the Commissioner, the respondent challenged the Arbitrator's findings of the implied agreement, the April 2001 agreement and the term of the April 2001 agreement that the respondent had to produce a substitute protocol. It did so on a number of grounds, including that the findings went beyond the pleadings, were in conflict with the building contract and the Tripartite Agreement (both of which had entire contract clauses), and that the agreements were void for uncertainty. The Commissioner (at [40]) rejected the pleading ground. He determined the application on the ground of uncertainty. There is no cross-appeal and no notice of contention that the Commissioner's decision should be affirmed on other grounds.

53 The Commissioner interpreted the Arbitrator's award as containing a finding of one agreement which was inconsistently described. He said (at [9]):

"The implied agreement ... was found to have been concluded in or about October/November 2000. At a later stage in his award, the arbitrator found this previously labelled 'implied agreement' to have been concluded orally in April 2001 ... and later, concluded 'orally and by conduct at executive management level' ... "

54 In fact, the Arbitrator found that there were two (related) agreements: the implied agreement, which was made before the parties entered into the building contract, and the April 2001 agreement, which is a variation of the implied agreement. The latter is not inconsistent with the implied agreement; further matters were agreed.

55 The Commissioner concluded that "the implied or oral agreement" was incomplete or constituted an agreement to agree which was unenforceable and constituted a manifest error of law on the face of the award. In reaching that conclusion, the Commissioner identified what he understood or found to be the outstanding matters that had to be negotiated between the parties. They included the matters referred to by the Arbitrator in par 42 above. The Commissioner also identified a number of further matters that he described as being of considerable importance and which on his view the respondent was required to negotiate with subcontractors. These matters included: the amount of any work-related reduction in the purchase price of an apartment; the location of the apartment to be purchased by the subcontractor; whether the amount was to be deducted progressively or in one amount; and the size of each progressive deduction ("the further matters"). He concluded:

" ... I have some difficulty in concluding that the obligation to negotiate all the above aspects rested with the builder.

One would have thought that, in those circumstances, the parties which could most readily have negotiated and agreed to the terms necessary to implement the secondary funding plan were the proprietor and 'his stable of loyal supporters' (the subcontractors) and not the builder, whose role, once agreement had been reached, would be to co-operate in its implementation ... Certainly the basis of imposing such an obligation on the builder, as found by the arbitrator, namely that the builder had to provide a substitute protocol because it insisted on the deletion of cl 8(b) in the draft TPA ... is untenable and in my opinion, constitutes a manifest error of law on the face of the award.

Wherever the obligation to negotiate these details lay, I cannot accept that they were merely 'procedural' or 'administrative'. They were material terms which required to be negotiated, and in their absence, all that was left was an 'overarching' understanding in principle or a conceptual arrangement about which the parties gave little or insufficient thought. In my view the implied or oral agreement ... was incomplete or constituted an agreement to agree and therefore unenforceable. I find that the arbitrator's conclusions to the contrary to be manifest errors of law on the face of the award.

In addition to the above the arbitrator also made findings which were either inconsistent or contradictory. The finding of an implied agreement in late 2000 to facilitate the deferral arrangements ... is inconsistent with the finding that such agreement was concluded orally in April 2001 ... and that it was concluded partly orally and partly by conduct ... "

56 The argument before the Commissioner and this Court proceeded on the assumption that the parties had an intention to create legal relations (as to which, see Masters v Cameron [1954] HCA 72; (1954) 91 CLR 353; Anaconda Nickel Ltd v Tarmoola Australia Pty Ltd [2000] WASCA 27; (2000) 22 WAR 101 at [21] - [27] per Ipp J). The only issue is whether the April 2001 agreement is void for uncertainty. The legal principles relating to uncertainty are comprehensively stated by Ipp J in Anaconda Nickel at [28] - [33]. The case supports the following propositions. A contract can be uncertain in a number of ways: it may be vague, ambiguous, contradictory or meaningless. Whatever the source of the problem, the contract must be so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention.

57 Further, a contract can be uncertain because it is incomplete. The following statement by Sugerman J, approved by Menzies J in Thorby v Goldberg [1964] HCA 41; (1964) 112 CLR 597 at 607, is often cited:

"It is a first principle of the law of contracts that there can be no binding and enforceable obligation unless the terms of the bargain, or at least its essential or critical terms, have been agreed upon. So, there is no concluded contract where an essential or critical term is expressly left to be settled by future agreement of the parties."

58 Incompleteness may occur where there is an "agreement to agree" which commonly arises where parties to an agreement provide that they will in due course agree on outstanding matters at some stage in the future.

59 A contract is affected by uncertainty only if its essential terms are uncertain or lacking: Upper Hunter County District Council v Australian Chilling and Freezing Co Limited [1968] HCA 8; (1967) 118 CLR 429 at 436 - 437 per Barwick CJ. Vague or incomplete non-essential terms can be ignored or severed. What is essential depends upon the intentions of the parties. The identification of what is essential was considered by Gleeson CJ (as he then was) in Australian Broadcasting Corporation v XIVth Commonwealth Games Limited (1988) 18 NSWLR 540. He said (at 548):

" ... it will normally be of importance that the court have an understanding of the commercial context in which the dispute arises, and a most significant feature of that context will relate to the subject which the parties regard, or would ordinarily be expected to regard, as matters to be covered by their contract. In some cases, such as transactions involving the sale and purchase of land, or leases, courts may properly feel well equipped to form a view on such matters without the need for much evidence. In many cases, however, ... there is a need for evidence in one form or another as to what subjects would be regarded as requiring agreement between the parties."

60 Questions of uncertainty are considered against an inclination or readiness to uphold bargains and more so if the parties have acted on the agreement: Terrex Resources NL v Magnet Petroleum Pty Ltd (1988) 1 WAR 144. Further, the use of implied terms and principles of construction can add flesh to the bones of an agreement. In Anaconda Nickel, Ipp J relied, inter alia, on the general obligation implied by law in all contracts that each party agrees to do all such things as are necessary on his part to enable the party to have the benefit of the contract: see Secured Income Real Estate (Australia) Limited v St Martins Investments Pty Ltd [1979] HCA 51; (1979) 144 CLR 596 at 607 per Mason J. This is usually referred to as the duty of cooperation.

61 The test for the implication of terms in fact is stated in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales [1982] HCA 24; (1981) 149 CLR 337 at 346 per Mason J. It is well known and does not require repeating.

62 The appellant did not claim, and the Arbitrator made no finding, that the parties were under a duty to negotiate in good faith: as to which, see Coal Cliff Collieries Pty Ltd v Sijehama Pty Ltd (1991) 24 NSWLR 1 at 21 - 26 per Kirby J; Australis Media Holdings Pty Ltd v Telstra Corporation Limited (1998) 43 NSWLR 104 at 126 - 129.

63 The Commissioner's conclusion that the agreement was incomplete and uncertain is based on a misunderstanding of the award. There is no proper foundation in the award or on the evidence before the Commissioner for the conclusion that the respondent was obliged to negotiate and agree with the subcontractors as to the further matters. As previously noted, the underlying premise of the award is that the further matters would be determined by agreement between the appellant and the participating subcontractors. Relevant information on the further matters would accompany the appellant's request to the respondent to offset and defer the amount agreed between the appellant and the subcontractor.

64 Further, the Commissioner erred in concluding that the findings of an implied contract, an oral contract and a partly oral/partly implied contract were either inconsistent or contradictory. They were neither. As previously explained, the Arbitrator found that there were two agreements, the second being a variation of the first.

65 Finally, the appellant contended that the Commissioner's conclusion that the respondent refused to include the subcontractor offset and deferral arrangements in the Tripartite Agreement is not supported by the award or the evidence. It is the case that the conclusion is incomplete and misleading without reference to the entire finding concerning the April 2001 agreement.

66 The remaining question is whether the Commissioner's errors are sufficient to invalidate the conclusion that the April 2001 agreement is uncertain. That requires the identification of any outstanding matters that had not been agreed and whether those matters are essential or critical. The identification of any outstanding matters can only occur after the April 2001 agreement has been construed in the commercial context in which it came into existence and its express and implied terms (by law or in fact) have been identified.

67 Starting with the commercial context. For this purpose, it is appropriate to focus on the April 2001 agreement which affirms and adds to the implied agreement. In addition to the April 2001 agreement, there was the building contract and the works subcontracts between the respondent and the subcontractors. There was no agreement between the respondent and its subcontractors concerning payment offsets and deferrals. This contractual configuration is an important determinant of the substance and mechanics of the April 2001 agreement. So for example, the appellant must initiate and provide the necessary information to activate the respondent's duty to offset and defer. The next question concerns what can be offset and deferred.

68 The Arbitrator found that it was an express term of the April 2001 agreement that the offset and deferral related to work already performed under the works subcontract. It follows that the maximum amount of the offset and deferral at any one time could only be the amount then due and payable by the respondent to the subcontractor under the works subcontract. If the total amount to be offset and deferred exceeded the amount then due and owing, the balance would be offset progressively as more money became due and payable under the works subcontract. There is nothing in the April 2001 agreement to support a finding that anything other than the amount due and payable by the respondent to the subcontractor under the works subcontract is the subject of the April 2001 agreement. Accordingly, if the works subcontract provided for retention or allowed the respondent to retain any moneys in dispute, the offset and deferral would not apply to those amounts; it can only apply to the net amount due and payable. This was the approach taken to the midstream payments. To the extent the works subcontract provided that certification was required before any amount became due and payable, certification would be required before the amount could be offset and deferred under the April 2001 agreement. The respondent would be under a duty to cooperate to identify the net amount due and payable to the subcontractor under the works subcontract.

69 It is also said that appropriate payment discharges had to be provided by subcontractors. There are two powerful indicators that such a term would be implied in fact in the April 2001 agreement. The first is the contractual matrix whereby there are a series of separate agreements

rather than a tripartite deferral agreement. Secondly, the circumstances leading to the April 2001 agreement, in particular the preparation and presentation by the respondent of a pro forma release for execution by subcontractors. I am satisfied that it is an implied term of the April 2001 agreement that the respondent's obligation to offset and defer moneys due and owing to the subcontractor be subject to the execution of an appropriate release by the subcontractor. An appropriate release, to be prepared by the respondent, would protect the respondent from any financial disadvantage as a result of acting on the appellant's offset/deferral instructions and information which clearly affect the subcontractor and which emanate from a contract to which the respondent is not a party. If a subcontractor executed the release, the respondent would be protected from any risk associated with delay in carrying out the project works and any consequential delay in practical completion and in settlement of the sale of the apartments. If a subcontractor refused to execute the release, the respondent's obligation to offset and defer would not arise. Thus, ordinary principles of construction and implication provide the answer to the matters to be addressed in the substitute protocol.

70 As to the timing of any offset and deferral, the Arbitrator found that it related to endstream payments under which deferral would commence when the amount not yet paid to the subcontractor under the works subcontract is equal to the total amount to be offset and deferred. Thus, all essential matters identified as such by the parties have been agreed. Even if the limited information before this Court did not enable it to make a positive finding that all essential terms had been agreed, that information would not be an adequate foundation for a positive finding to the contrary.

71 Applying ordinary principles of construction to the findings made by the Arbitrator and identifying the express and implied terms based solely on those findings leads to the conclusion that the Commissioner erred in concluding that the April 2001 agreement was uncertain. Accordingly, there is no proper basis for interfering with the award. For these reasons, I would allow the appeal, set aside the orders made by the Commissioner and dismiss the respondent's application for leave to appeal from the Arbitrator's award.

• The Arbitrator's reasons and findings
• Leave to appeal the Arbitrator's decision
• The Commissioner's reasons
• Legal principles - uncertainty
• Analysis