Fluor Australia Pty Ltd v Anaconda Operations Pty Ltd [2003] VSC 276

Supreme Court of Victoria|2003-07-28|Before: DODDS-STREETON J.

ARBITRATION - Commercial Arbitration - Award - Application for leave to appeal against award of Arbitral Tribunal - Construction of contractual terms adopted by Arbitral Tribunal alleged to constitute manifest error of law on face of award - Contractor alleged award misconstrued relevant contractual clauses - Literal construction of terms devoid of common sense, unworkable, contrary to authority - Careful exercise of judicial discretion to grant leave to appeal against construction of "one off" contractual clauses - Error must be obvious and evident, rather than merely arguable - Where arbitral tribunal's construction fairly arguable or reasonably open, or two views possible, manifest error not made out - Arbitral Tribunal's construction gives effect to interrelated literal terms in context, workable and preferred to Contractor's proposed construction - No manifest error of law on the face of award - Application dismissed.

By originating motion filed 7 October 2002 Fluor seeks leave to appeal pursuant to s.38(5) of the Commercial Arbitration Act 1984 (Vic) ("the Act") from certain findings of the Arbitral Tribunal comprising Messrs Philip Naughton QC, John Uff QC and Jan Paulson expressed in an Interim Award dated 7 September 2002 in an arbitration between Fluor and Anaconda. Fluor disputes the construction of certain contractual terms adopted by the Arbitral Tribunal in the Interim Award. If leave is granted, it seeks that the appeal be heard and determined instanter.

The detailed background of the parties, the arbitration and Fluor's claim is set out in paragraphs 11 to 23 of the Reasons for Judgment in the related Proceeding No. 7600 of 2002 which should be read with these Reasons for Judgment.

In essence, Fluor contends that the Arbitral Tribunal's adoption of a construction of the relevant clauses of the EPC Contract which failed to limit Fluor's obligations or liability under the EPC Contract in respect of Early Works performed by Early Works Contractors to the obligations or liabilities assumed by the Early Works Contractors, constituted a manifest error on the face of the award with terms of s.38(5) of the Act.

Fluor identifies the error as the application of erroneous principles of construction. It submits that the Arbitral Tribunal has applied a literal construction, which would lead to absurdity, or render part of a clause totally devoid of any content or purpose, contrary to the principles recognised in established authority, including Fitzgerald v Masters,[1] Watson v Phipps[2] and Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd.[3] Fluor submits that the construction adopted by the Arbitral Tribunal flouts common sense, is unworkable and ignores the ordinary and natural meaning of the words used, and the general contractual regime.

Fluor further submits that the determination of the questions of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement, for the reasons set out in the affidavit of Richard Hugh McDonald sworn 14 October 2002, thus satisfying the pre-condition of the grant of leave to appeal in s.38(5)(a) of the Act. Fluor submits, in particular that

"the Arbitrators (in paragraphs 7.10 - 7.18 of the Award) misconstrued clauses 2, 6, 7, 8 and 9 of the EPC Contract made between Fluor and the first defendant (Anaconda) on 21 August 1997 by:

* holding that in the absence of novation or assignment, clauses 2.9(1) and (d) of the EPC Contract render Fluor liable for any defect in the Facility as those terms are defined in clause 1 of the EPC Contract;

* holding that the cumulative effect of clauses 2, 6, 7, 8 and 9 of the EPC Contract is to create an obligation upon Fluor to design, construct and deliver a Facility complying with the Revised Scope Book with materials, where not otherwise specified, complying with clause 9.1(a) and/or (b), regardless of the operation of clause 2 upon Early Works Contracts;

* failing to hold that clauses 2, 6, 7, 8 and 9 of the EPC Contract have the effect that the obligations assumed by Fluor to Anaconda pursuant to the terms of the EPC Contract with respect to work performed by Early Works Contractors (as to which see paragraph 16 of the McDonald affidavit) were no greater than, and could rise no higher than, the obligations owed by the Early Works Contractors to the Owner (effectively Anaconda) pursuant to the Early Works Contracts."

Anaconda denies that there is manifest error on the face of the award. It contends that Fluor's construction of the relevant clauses is wrong, and changed several times during the course of the arbitration.

Prior to Fluor's entry into EPC Contract on 21 August 1997, 77 Early Works Contracts had been entered into, pursuant to which work on plant and equipment in the Facility was undertaken. The total value of the Early Works Contracts was approximately $350 million. In some instances, works pursuant to Early Works Contracts had been substantially completed prior to entry into the EPC Contract on 21 August 1997.

It was in that context that the dispute over the proper construction of certain provisions of the EPC Contract arose.

By clause 1.1 "Project Works" are defined as "includes all things or tasks which are necessary for the [Fluor] to do to perform and observe its obligations under this Deed."

"Early Works Contract" is defined as "A contract between [Anaconda] and an Early Works Contractor pursuant to which the Early Works Contractor agrees to perform work which constitutes, or will constitute, part of the Project Works".

"Facility" is defined as "The facility, or part thereof, which [Fluor] must design construct and hand over to [Anaconda] pursuant to this Deed".

"Defects" are relevantly defined as "means any defect or omission in the Facility or any other aspect of the Facility which fails to conform with the Contract requirements ... ".

"Contract" is defined as "the contract between the parties evidenced by the Deed".

"2. COMMENCEMENT 2.1 Contractor's Obligation to Commence The Contractor must immediately commence to perform the Project Works. 2.2 Owner to co-operate The Owner shall:

(a) cooperate with the Contractor during the performance of this Contract; and

(b) not materially interfere with the Contractor's agents, employees or Sub-contractors.

2.3 Contractor occupation of Site

The Owner:

(a) grants the Contractor and all persons authorised by it or by its Sub-contractors a non-exclusive, revocable, non-transferable contractual licence on and from the date of this Deed until Final Acceptance to enter, occupy and use the Site to carry out, or cause to be carried out, the Project Works;

(b) warrants that the Site is free from all Hazardous Material except any such material which may be brought on to the Site by the Contractor or those for whom it is responsible.

2.4 Owner's financing arrangement

(a) The Owner shall be responsible for obtaining sufficient financing for the Project Works.

(b) As security for meeting its obligations under this Contract, the Owners shall, within seven days, or such longer period to which the Owner and the Contractor agree, of the Award Date, provide to the Contractor an unconditional bank guarantee given by a bank reasonably approved by the Contractor for an amount of $40 million. The guarantee shall be returned to the Owner upon reasonably satisfying the Contractor that it has in place full financing to meet its payment obligations under the Contract.

2.5 Owner's Personnel

The Owner shall provide qualified, competent and, where necessary, licensed operations and maintenance personnel for testing, start-up and initial operation of the Facility. The Owner shall provide that such personnel perform the duties to which they are assigned in accordance with generally accepted practices and standards of the industry. The Owner shall supply, or cause to be supplied, sufficient small tools to facilitate on-the-job training of the operations and maintenance personnel.

2.6 Novation of Early Works Contracts

Promptly after the Award Date (or such later time as the Owner may direct), the Contractor shall execute a Deed of Novation in respect of each Early Works Contract.

2.7 Assignment of Early Works Contracts

If the Owner notifies the Contractor that a Deed of Novation cannot be executed in respect of an Early Works Contract, unless prohibited from so doing, the Owner or Anaconda Nickel NL, as the case may be (the `Assignor'), will irrevocably assign to the Contractor in accordance with this Clause the benefit of the Early Works Contract.

2.8 Contractor as agent if no assignment

(a) If the Assignor is unable to assign the benefit of any Early Works Contract pursuant to Clause 2.7, the Assignor hereby appoints the Contractor as its agent to perform and observe the Assignor's obligations under the Early Works Contract instead of the Assignor.

(b) If paragraph (a) applies the Assignor shall, at the request of the Contractor, do everything reasonably necessary (including the execution of documents) to assist the Contractor in commencing and prosecuting proceedings against an Early Works Contractor for a breach of an Early Works Contract, and in particular, shall:

(i) permit the Contractor to bring those proceedings in the name of the Assignor; and

(ii) provide the Contractor with reasonable evidence, information and assistance in relation to those proceedings,

provided that the Contractor shall:

(iii) keep the Assignor fully informed of the progress of, and consult with the Assignor in relation to, those proceedings;

(iv) not incur or admit any liability on the part of the Assignor in those proceedings without the prior consent of the Assignor; and

(v) indemnify the Assignor against all legal and other costs, losses, damages or claims incurred or suffered by the Assignor in respect of those proceedings, except to the extent to which the cost, loss, damage or claim is attributable to the negligent act or omission of the Assignor.

(c) The Contractor shall be entitled to any moneys recovered against an Early Works Contractor pursuant to this Clause 2.8.

2.9 Responsibility for work carried out by Early Works Contractors

(a) The Contractor assumes responsibility to the Owner from the Award Date for the proper performance of all the work carried out by each Early Works Contractor under an Early Works Contract prior to and following the Award Date.

(b) The Contractor:

(i) bears the risk of any Defects in the Facility which may arise (whether directly or indirectly) as a result of any work carried out by the Early Works Contractor; and

(ii) indemnifies the Owner against any liability which the Owner may have to an Early Works Contractor where an assignment occurs pursuant to Clause 2.7 or an appointment of agent occurs under Clause 2.8,

whether this work or liability occurred or arose prior to, or after, the date of execution of a Deed of Novation, or any assignment pursuant to Clause 2.7 or an appointment of an agent under Clause 2.8.

(c) The Contractor has no entitlement to any sums in addition to the Contract Price or to any extensions of time to any Date for Mechanical Completion or otherwise to make any Claim, solely because of the assumption by the Contractor of the obligations set out in paragraphs 2.9(a) and 2.9(b) and accepts the entire risk of the work to be performed under the Early Works Contract on the basis that it forms part of the Project Works.

(d) The Contractor shall require that each Early Works Contractor complies with its obligations under its Early Works Contract, provided that nothing contained in Clauses 2.7 and 2.8 shall require the Contractor to assume any greater obligation or liability pursuant to the terms of this Contract than the Early Works Contractor assumed to the Owner. However, nothing in this paragraph lessens or otherwise modifies the Contractor's obligation to pay liquidated damages pursuant to Clause 13.7.

6. DESIGN AND DOCUMENTATION 6.1 The Contractor's Design Obligation The Contractor: (a) acknowledges and warrants that:

(i) it prepared the documents which comprise the Revised Scope Book and that those documents are fit for the purpose of enabling the Contractor to carry out the Project Works in accordance with the Contract;

(ii) it prepared, or has checked and is satisfied with, the Drawings and specifications, and that they comply with the requirements of the Contract;

(iii) the design of the Facility will comply with the requirements of the Revised Scope Book and satisfy the requirements of the Contract; and

(iv) construction in accordance with the design of the Facility will satisfy the requirements of the Contract;

(b) except as provided in Clause 2.9(d), agrees that its obligations under, and the warranties given in, this Clause 6.1 will remain unaffected and that it will bear and continue to bear full liability and responsibility in accordance with this Contract for the performance of the Project Works notwithstanding:

(i) any design work carried out by the Contractor or by others prior to the date of this Contract and incorporated in this Contract; or

(ii) any review or approval of, or comments upon, such design by the Owner, or anyone on its behalf, prior to the Award Date.

6.2 Acknowledgement of Reliance

The Contractor acknowledges that the Owner:

(a) has relied on each of the acknowledgements, warranties and agreements given in Clause 6.1 in entering into the Contract; and

(b) would not have entered into the Contract but for those acknowledgements, warranties and agreements.

6.3 Review of Documentation

The Contractor and Owner acknowledge and agree that:

(a) the Contractor shall provide the Project Manager with copies of all Design Documents as they are produced. The Project Manager may review such documents. If the Project Manager concludes that any of the Design Documents does not comply with the requirements of the Contract, he may reject such documents. Upon such rejection the Contractor shall rectify the defect;

(b) the receipt and review by the Project Manager of any Design Documents submitted by the Contractor is solely for the purposes of administration of this Contract and monitoring the performance of the Contractor;

(c) the Project Manager does not accept any responsibility, or assume any duty of care, to the Contractor to review, or in reviewing, the Design Documents submitted by the Contractor for errors, omissions or compliance with the requirements of the Contract; and

(d) no comment upon, review or rejection of the use of, or any failure to review or comment upon, the Design Documents or any other Direction by the Project Manager about the Design Documents will:

(i) affect the Contractor's warranties in Clause 6.1 or otherwise relieve the Contractor from, or alter or affect the Contractor's liabilities or responsibilities under, the Contract or otherwise according to Law; or

(ii) prejudice the Owner's rights against the Contractor, whether under the Contract or otherwise according to Law.

6.4 Ownership of Design Documents

(a) The Owner owns, and the Contractor assigns to the Owner copyright, and all other intellectual property in:

(i) the Revised Scope Book; and

(ii) the Design Documents when each Design Document comes into existence,

provided that the Owner may only use the Design Documents for the operation and maintenance of the Facility and any other use shall be at the Owner's sole risk and without liability or legal exposure to the Contractor and the Owner shall indemnify and hold harmless the Contractor from all claims, losses, costs, damages and expenses (including attorney's fees on a solicitor client basis) arising out of or resulting therefrom.

(b) The Contractor has an irrevocable licence to use the Design Documents for:

(i) completion of the Project Works and performance of its obligations under the Contract; and

(ii) (omitting any specific project reference (including relevant title blocks)) any other project undertaken (either alone or in joint venture with another person).

6.5 Resolution of Ambiguities in Contract

If there is any ambiguity, discrepancy or inconsistency in the documents which make up the Contract or between the Contract and any Design Document which the Contractor is entitled to use for construction purposes under Clause 6.4:

(a) the order of precedence in the Contract Particulars will apply;

(b) where the ambiguity, discrepancy or inconsistency is between the Revised Scope Book and the Design Documents, the higher standard, quality or quantum will prevail but if this does not resolve it the Revised Scope Book will prevail;

(c) if the matter is not resolved by paragraphs (a) or (b) the true intent of the Revised Scope Book as determined by reference to the Revised Scope Book as a whole will be used to determine the requirements under the Contract;

(d) if it is discovered by the Contractor or the Project Manager, then the party discovering it must give notice to the other; and

(e) the Project Manager must instruct the Contractor as to the course it must adopt within 2 days of the notice under paragraph (d).

6.6 Intellectual Property Rights

The Contractor must ensure that the Project Works do not infringe any patent, registered design, trade mark or name, copyright or other protected right and the Owner must ensure that in respect of any process or part thereof, which the Owner provides, such process or part thereof does not infringe any patent, registered design, trade mark or name, copyright or other protected right.

The Contractor acknowledges that prior to the Award Date it has:

(a) ascertained the nature extent of the risks relating to the Project Works;

(b) visited and examined the Site and its surroundings and informed itself as to the Site conditions which may affect its performance of the Contract;

(c) informed itself as to the nature of the work and materials necessary for the execution of the Project Works and the means of access to and facilities at the Site and transport facilities for deliveries to or from the Site;

(d) informed itself of all requirements of the authorities in relation to the Project Works generally and, without limitation, in relation to measures necessary to protect the environment from any adverse effect or damage arising from execution of the Project Works; and

(e) reviewed and checked the Information Documents to the extent reasonably appropriate to agree the Contract Price and perform the works done to date and it is expressly agreed that such review and checking does not include a check or review of the test work carried out by Sherritt International Consultants Inc., and the resulting preliminary flow sheets process data and preliminary P&IDs.

7.2 Risk of Accuracy of Information and Site Conditions

Other than to the extent set out in Clause 7.3 the Contractor:

(a) is responsible for, and assumes the risk of, all increased costs and any damage, losses, expenses and liability it suffers or incurs arising out of, or in connection with, the Site conditions actually encountered at the Site during the execution of the Project Works or the accuracy of the information and design in the Information Documents;

(b) acknowledges and agrees that the Contract Price includes an amount to compensate the Contractor for all risk associated with the Site conditions or the information and design in all the Information Documents; and

(c) is not entitled to any extension of time to any Date for Mechanical Completion or any adjustment to the Contract Price or to make any other Claim against the Owner arising out of, or in connection with, any Site conditions or any inaccuracy in the information and design contained in the Information Documents.

(a) If the Contractor considers it has encountered or found a Latent Condition, it must immediately give the Project Manager notice in writing.

After receipt of a notice from the Contractor the Project Manager must:

(i) determine whether a Latent Condition has been encountered or found; and

(ii) within 3 days make a determination, and notify the parties of its determination.

(b) If a Latent Condition has been encountered, the Contractor will be entitled to:

(i) claim an extension of time to the Date for Mechanical Completion where it is entitled to do so under Clause 10.5; and

(ii) be paid by the Owner any extra costs incurred by the Contractor after the giving of a notice under this Clause arising from the Latent Condition, which will be determined by the Project Manager and added to the Contract Price.

The Contractor's entitlement under paragraph (b) will be its only right to payment of money arising from the Latent Condition.

(a) the only liability which the Owner may have for any information or design in the Information Documents is that which may arise pursuant to Clause 7.3(b);

(b) the Owner does not warrant, guarantee, make any representation or assume any duty of care in respect of the accuracy or adequacy of any information or data made available to the Contractor (including the Information Documents) prior to the Award Date;

(c) the Contractor acknowledges that such information or data (including the Information Documents) does not form part of the Contract and that Clause 18.8 applies to the information and data (including the Information Documents);

(d) to the extent permitted by Law, the Owner will not be liable upon any Claim by the Contractor arising out of or in connection with:

(i) the provision of, or the purported reliance upon, or use of, that information or data (including the Information Documents) by the Contractor or any other person to whom the information or data (including the Information Documents) is disclosed; or

(ii) a failure to provide any other information or data to the Contractor; and

(e) apart from any liability which may arise pursuant to Clause 7.3(b), the Contractor releases the Owner from any Claim for any costs, losses or damages suffered or incurred by the Contractor;

(iii) the provision of, or the purported reliance upon, or use of, the information or data (including the Information Documents) by the Contractor or any other person to whom the information or data (including the Information Documents) is disclosed.

(a) will, to the extent reasonably practical, provide the Contractor with sole, uninterrupted or continuous possession or access to the Site;

(b) may engage or allow Special Contractors and Other Contractors to work upon or in the vicinity of the Site or the Facility at the same time as the Contractor is performing the Project Works at the Facility; and

(c) will notify the Contractor in writing of the identity of the Other Contractors and details of the work they are to perform.

7.6 Contractor's to allow Owner Right of Access to the Site

(a) at all reasonable times give the Project Manager, the Owner and any person authorised by either the Project Manager or the Owner access to the Facility, the Site or any areas off-Site where Project Works are being performed; and

(b) provide the Owner and the Project Manager with every reasonable facility necessary for the supervision, examination and testing of the Project Works.

Clause 8 of the EPC Contract deals with Construction. Clause 8.1 of the EPC provides that, subject to Clause 6.5, Fluor must construct the Facility in accordance with the requirements of the Contract, the Revised Scope Book and documents issued by Anaconda, any complying Design Documents and any Direction of the Project Manager given under a provision of the Contract.

Clause 8.2 of the EPC Contract provides that Fluor must, without adjustment of the Contract Price, provide all work or materials necessary for the Project Works, whether or not they are expressly mentioned in the Revised Scope Book or any complying Design Documents.

Clause 8.5(a) of the EPC Contract provides that Fluor may sub-contract any part of the Project Works. By Clause 8.5(b), Fluor will be responsible for the Project Works, notwithstanding that it has sub-contracted the performance of any part of the Project Works.

In Chapter 7, dealing with claims in relation to One Preparation, the Interim Award addresses the contractual foundation of Anaconda's claims. In paragraph 7.10 the Interim Award identifies two substantive defences invoked by Fluor in that context. Relevant to Fluor's claim in the present proceeding is the second defence invoked by Fluor.

Paragraph 7.10 of the Award relevantly states:

"7.10 Fluor invokes two substantive defences which apply potentially to all elements of the Facility currently under consideration. First, Fluor contends that the satisfactory operation of the Facility was conditional upon Fluor's being provided with a blended ore substantially the same as composite sample OC3. This contention is evaluated further below. Secondly, Fluor contends that Clause 2 of the EPC Contract had the effect of restricting Fluor's liability in respect of Early Works Contractors (`EWCs') and that the obligations created by Clauses 6, 7, 8 and 9 did not apply to work which was the subject of Early Works Contracts. These contentions will be dealt with immediately."

The Interim Award then proceeds to deal with the competing constructions of the provisions advanced by Fluor and Anaconda.

The relevant paragraphs of the Interim Award the subject of Fluor's present claim are set out in full.

"7.11 By Clause 2.6 of the EPC Contract (set out in Section 4 above) the Contractor (Fluor) is required to execute a Deed of Novation in respect of each EWC. If the Owner notifies the Contractor that a Deed of Novation cannot be executed in respect of an EWC, the benefit of the Early Works Contract is to be irrecoverably assigned to the Contractor (Clause 2.7). If the benefit cannot be assigned, the Contractor is appointed as agent to perform the obligations of the Owner (Clause 2.8). Clause 2.9 then provides that:

(a) the Contractor assumes responsibility to the Owner for the proper performance of work carried out by each EWC;

(b) the Contractor bears the risk of any defects which may arise as a result of work carried out by the EWC;

(c) the Contractor accepts the entire risk of the work to be performed under the Early Works Contract on the basis that it forms part of the project works;

(d) the Contractor is to require each EWC to comply with its obligations.

The latter obligation is subject to the following proviso: `Provided that nothing contained in Clauses 2.7 (assignment of early works contract) and 2.8 ((contractor as agent if no assignment) shall require the contractor to assume any greater obligation or liability pursuant to the terms of this Contract than the Early Works Contractor assumed to the owner ... "

7.12 It is common ground between the Parties that none of the Early Works Contracts relevant to Areas 3100 and 3200 were novated; further, none of the remaining Early Works Contracts was assigned. The contentions raised by Fluor, therefore, apply to the whole of the issues currently under review. Anaconda submits that Clauses 2.6 to 2.9 were intended to ensure that Fluor becomes liable for the due performance of EWCs in the same way as sub-contractors appointed after the execution of the EPC Contract. Fluor retorts that, despite the clumsy drafting, the intention of the proviso to Clause 2.9(d) is that the Contractor is not to assume any greater obligation pursuant to the terms of the EPC Contract than the EWC assumes to the Owner. Accordingly, exclusion and limitation provisions in Early Works Contracts take effect to exclude or limit Fluor's liability under the EPC.

7.13 Fluor moreover argues that the warranties contained in Clause 6.1 of the EPC Contract relate only to the design work itself, and not the performance or capacity of the Facility; and that the warranties relate only to the facility designed and constructed by Fluor, not to the work of EWCs or to the design as modified by Anaconda. Fluor contends that by Clause 7.1(e), the Parties acknowledged that the limited review/check undertaken by Fluor did not include test work carried out by Sherrett, nor the Sherrett process package: Accordingly, Fluor did not warrant or assume responsibility for the Sherrett process or for performance of the Facility or of equipment, which was dependent upon the efficacy of the metallurgical process. Fluor contends that Clause 8 applies only to that part of the Facility which Fluor (as opposed to EWCs) was obliged to construct; and that the obligations placed on "the Contractor" by Clause 9 are not intended to include EWCs.

7.14 In its final submissions, Anaconda disputes all the foregoing contentions. In particular, Anaconda argues that:

(i) Clause 2.9(d) clearly applies only to Clauses 2.7 and 2.8 absent any plea for rectification of the contract;

(ii) the warranty contained in Clause 6.1(a) as qualified by Clause 6.1(b) expressly covers design work by others prior to the date of the contract;

(iii) Clause 7 is consistent with Fluor's design obligations, which cover the whole design, including the process design, subject to Clauses 7.1(e) and 7.3;

(iv) the language of Clause 8.1 is clear in creating an express obligation to construct the Facility in accordance, inter alia, with the Revised Scope Book;

(v) Clause 9.1 imposes an express obligation to perform the Project Works, including work performed under Early Works Contracts;

(vi) Clauses 8 and 9 expressly apply to the Project Works. Fluor's obligations under the EPC are not limited to those set out in Early Works Contract;

(vii) in any event, Anaconda's contentions are not concerned with performance under the Early Works Contracts but with Fluor's design obligations under the EPC Contract. .It is irrelevant that EWCs might not be liable for design under their Early Works Contracts.

7.15 Addressing first the arguments raised in relation to Clause 2 of the EPC Contract, the Arbitral Tribunal accepts that, in the absence of novation or assignment, Clause 2.9(a) and (d) renders the Contractor liable for any Defect in the Facility as those terms are defined in Clause 1 of the EPC Contract. The Arbitral Tribunal further accepts that the cumulative effect of Clauses 2, 6 and 8 of the EPC Contract is to require the Contractor to take on responsibility for delivery of the whole Facility, subject to the terms of the EPC Contract, irrespective of the existence of EWCs, and irrespective of any novation or assignment. The Arbitral Tribunal is unable to accept that Clause 2.9(d) limits the obligations of the Contractor to those contained in an EWC. The sub-clause must be construed as it stands. It is not otiose; it can be given effect in relation to Clauses 2.7 and 2.8, although these have no bearing on the present issues.

7.16 The primary obligations placed upon the Contractor as to the design and performance of the Facility are those contained in Clauses 6 and 8. Both Clauses 6.1 and 8.1 are somewhat repetitive and circular in their references to "the requirements of the contract." Both provisions, however, contain clear obligations, both as regards design and construction, to comply with the requirements of the Revised Scope Book. This must be taken to include, within the limits already discussed, the Process Design Criteria and the Mass Balance Rev. O. The obligations of the Contractor are, however, not unqualified. Clause 8.1(b) requires the Contractor to Construct the Facility in accordance with "any Design Documents which comply with the requirements of the Contract." Clause 6.3 provides for review of such documents by the Project Manager without relieving the Contractor of liabilities under the Contract. Clause 6.1(b) further provides (subject to Clause 2.9(d)) that the Contractor's obligations in relation to design will remain unaffected notwithstanding:

`(i) Any design work carried out by the Contractor or by others prior to the date of this Contract and incorporated in this Contract; or

(ii) Any review or approval of, or comments upon, such design by the Owner, or anyone on its behalf, prior to the Award Date.'

The words emphasised above show that the Contractor's responsibility for design of the Facility is to remain notwithstanding design work carried out prior to the EPC Contract by persons other than the Contractor. Further, any review or approval by the Owner or anyone on its behalf does not affect the Contractor's responsibility. What is not covered by these provisions is design by the Owner. The Contract is not to be construed, absent very clear words, as requiring the Contractor to take responsibility for design decisions insisted upon by the Owner itself.

7.17 As regards Clause 7 of the EPC Contract, the Arbitral Tribunal accepts that the Contractor's review and checking of Sherrett test work, data and drawings was subject to the limitation of Clause 7.1(e). Subject to this, the Arbitral Tribunal is satisfied that the design obligation undertaken by Fluor embraces the whole of the Facility, including the Process Design. The Arbitral Tribunal is, moreover, unable to construe the obligations as to quality set out in Clause 9 of the EPC Contract as excluding work carried out by EWCs. The cumulative effect of Clauses 2, 6, 7, 8 and 9 is to create an obligation upon the Contractor to design, construct and deliver a Facility complying with the Revised Scope Book with materials, where not otherwise specified, complying with Clause 9.1(a) and/or (b).

7.18 In sum, the Arbitral Tribunal does not accept Fluor's argument to the effect that its liability, if established, can be affected by the fact that relevant components of the work were undertaken by EWCs.

The applicable legislation and legal principles relevant to determining a manifest error of law on the face of the award are set out in detail in the Reasons for Judgment in the related Proceeding No. 7600 of 2000, at paragraphs 31 to 50.

In this context, it is only necessary to note that the error should be evident and obvious, rather than merely arguable, such that it requires only "swift and easy persuasion" and is capable of rapid recognition without prolonged adversarial argument.

The judicial discretion pursuant to the already circumscribed jurisdiction to review arbitral awards under the Act should be exercised carefully in relation to the construction of "one-off" clauses of a contract. Lord Diplock, in The Nema,[4] considered that in such cases, leave to appeal should not normally be given:

"Unless it is apparent to the judge, on a mere perusal of the reasoned award itself without the benefit of adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously wrong."[5]

Even in the case of construction of standard terms contracts, his Lordship stated that leave should not be given `unless the judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction'."[6]

Sheller JA in Promenade Investments Pty Ltd v New South Wales[7] stated that "The matters referred to by Lord Diplock in The Nema remain important factors in determining whether leave should be given."[8]

The approach of Australian courts has been to decline to view the factors outlined by Lord Diplock in The Nema as fettering the curial discretion conferred by s.38 of the Act, while recognising that they remain relevant to the exercise of the discretion.[9]

In determining that the construction of a contract constitutes a manifest error of law on the face of the award, it may suffice if the arbitrator's approach, or principles of construction, are erroneous as a matter of law.

That view was take by Knox CJ and Gavan Duffy J in Melbourne Harbour Trust Commissioners v Hancock[10] where they stated:

"No doubt the arbitrator gave additional reasons in support of the conclusion at which he arrived, but he definitely decided that the notice to omit was not within the provisions of clause 13 of the contract because on a consideration of all the terms of the contract and the nature and extent of the work to be done under it he thought that the words of the clause should be read as excluding omissions the extent of which would render the remaining part of the work a fundamentally different undertaking from that originally covered by the contract. If this can be described as a principle of construction, it is not, in our opinion, erroneous as a rule to be applied, though its application in a particular case may be erroneous."[11]

In other cases, the approach of the court has been to consider not only the principles of construction but their application in the particular case.[12] Nevertheless, as Windeyer J in Gold Coast City Council v Canterbury Pipe Lines[13] observed, the limited jurisdiction of the court in the present application must not be treated as a de facto appeal. The applicable standards are recognised in Re Tiki Village International[14] where Byrne J stated that if an arbitrator's construction of an instrument was "fairly arguable"[15] it did not constitute a manifest error of law within terms of s.38 of the Act. Similarly, in Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust[16] Debelle J observed that if the construction adopted by the arbitrator was "reasonably open" the applicant for leave to appeal would generally fail. In Natoli v Walker,[17] Kirby P endorsed American authority to the effect that "the existence of two possible views contradicts "manifest error"".[18]

It is necessary to consider in detail the construction of the relevant clauses and their relationship inter se.

Fluor's contention that the Interim Award misconstrued the relevant contractual clauses so as to produce a result devoid of commercial common sense depends on two central assertions.

First, that contrary to the Interim Award's finding, clause 2.9 was the part of the Contract intended to deal exhaustively with Fluor's responsibility for work carried out by Early Works Contractors and that the later parts of the EPC Contract (clauses 6, 7, 8 and 9) deal only with Fluor's obligations in respect of its work or with that part of the Facility constructed by Fluor.

Fluor contends that its construction of separate and exhaustive treatment of responsibility for Early Works Contract is borne out by the fact that Clause 6.1 (dealing with Fluor's design responsibilities) treats Clause 2.9(a) as containing an exception limiting Fluor's responsibility for design work done by others. The fact that Clause 8 (dealing with construction) and Clause 9 (dealing with workmanship) do not have such a purported exception is said to be consistent with the fact that those clauses properly construed, deal only with Fluor's own work, whereas Clause 6.1(b) expressly deals with liability for the work of others and hence, refers to the purported exception in Clause 2.9(d) relating to Early Works Contractors.

In paragraph 7.15 the Arbitral Tribunal stated that it was unable to accept that Clause 2.9 limited Fluor's obligations to those contained in an Early Works Contract.

In paragraph 7.16 of the Interim Award, the Arbitrators conclude that Clauses 6 and 8 contain the primary obligations placed on Fluor as to the design and performance of the Facility. The Interim Award notes that the clauses are somewhat repetitive and circular in their references to the requirements of the Contract, but nevertheless contain clear obligations, both as regards design and construction, to comply with the requirements of the Revised Scope Book.

The Interim Award recognises that there are qualifications to Fluor's obligations. The obligation in Clause 8.1(b) is to construct the Facility in accordance with the Design Documents. Clause 6.3(a) provides that the Design Documents are subject to review by the Project Manager as they are produced, and may be rejected. By Clause 6.3(a), any comment, review or rejection of or failure to review the Design Documents will not affect Fluor's warranties under Clause 6.1, otherwise relieve it of its liabilities under the Contract or prejudice Anaconda's rights against Fluor.

The Interim Award, in paragraph 7.16, also recognises a qualification to the obligation in Clause 6.1. Clause 6.1(b) provides (subject to Clause 29(d)) that the contractor's design obligations will remain unaffected notwithstanding (relevantly) any design work carried out by Fluor or by others prior to the date of this Contract and incorporated into this Contract.

The Arbitrators, in paragraph 7.16, conclude that the words emphasised show that the contractor's responsibility for design of the Facility is to remain, notwithstanding design work carried out prior to the EPC Contract by persons other than the contractor. They conclude, however, that any design work by the owner would not fall within Fluor's responsibility.

In recognising that the obligation for the design work of others is subject to Clause 2.9(d), the Arbitrators stated in paragraph 7.15 that "the Arbitral Tribunal is unable to accept that Clause 2.9(d) limits the obligations of the contractor to those contained in an EWC. The sub-clause must be construed as it stands. It is not otiose. It can be given effect in relation to Clauses 2.7 and 2.8 although these have no bearing on the present issues".

I consider that there is no manifest error of law discernible in the Arbitral Tribunal's conclusion in paragraph 7.15 that Clause 2.9 does not limit Fluor's obligations to those contained in Early Works Contracts. Clause 2.9(a) expressly provides that the contractor assumes responsibility for the proper performance of all the work carried out by Early Works Contractors under Early Works Contracts. The responsibility is not limited by reference to the provisions of the Early Works Contracts. The Arbitral Tribunal also concludes in paragraph 7.16, that Clauses 6 and 8 of the EPC Contract are the source of the primary obligations placed on Fluor as to the design and performance of the Facility. I can discern no error in their conclusion that (contrary to Fluor's contention) Clause 6.1 imposes warranties on Fluor for the design and construction work of others (or designs reviewed by the other), including Early Works Contractors, excluding only design, by Anaconda as owner.

The Contractor's warranty and obligations acknowledged in Clause 6.1(b) of the EPC Contract include Fluor's assumption of full liability and responsibility in accordance with the Contract for the performance of the Project Works. By Clause 1.1 of the EPC Contract, Early Works Contractors' Works comprise part of the "Project Works". Clause 6.1(b) acknowledges that Fluor is liable for the performance of "Project Works", (by definition inclusive of Early Works Contracts Works) notwithstanding any design work by itself or others prior to the date of the EPC Contract, except as provided in Clause 2.9(d).

The definition in Clause 1.1 of "Early Works Contract" as a contract to perform works which constitute or will constitute part of the "Project Works", which in turn includes "all things necessary for the contractor to do to perform and observe its obligations under this Deed", supports the Arbitral Tribunal's construction that Clauses 6, 8, 9 and 10, in imposing obligations on Fluor in relation to Project Works, in the absence of express qualification, impose obligations in relation to Early Contract Works incorporated into such Project Works; and that references to "Project Works" in those clauses includes Early Contract Works. I am unable to discern any manifest error of law in the Arbitrators' principles of construction or their conclusion that the obligations, liabilities and responsibility imposed by those clauses cover work carried out by Early Works Contractors, except as expressly provided.

Fluor secondly contends that the Arbitral Tribunal's construction embodies a manifest error of law because, on analysis, Clause 2.9(d)'s apparent limitation of liability is futile. It provides that "nothing contained in Clauses 2.7 and 2.8 shall require the Contractor to assume any greater obligation or liability pursuant to the terms of the contract than the Early Works Contractor assumed to the owner". It is said that, on analysis nothing in Clauses 2.7 or 2.8 could require Fluor to assume any greater obligation to Anaconda than the Early Works Contractor assumed. Fluor contends that there is a manifest error of law in any construction which fails to give content to the purported limitation of liability. Further, it submits that the only sensible construction is that the proviso in Clause 2.9(d) is not a true proviso, but a limitation unqualified by reference to Clauses 2.7 and 2.8 (which should be disregarded entirely). Alternatively, it is said that a reference to Clauses 2.9(a) and (b) (which do purport to impose responsibility on Fluor for the Early Works Contractors' performance), should be substituted. Fluor submits that the Arbitral Tribunal's failure to adopt that construction is a manifest error of law because it is the only sensible or workable construction.

First, is the limitation of Fluor's responsibility expressed in Clause 2.9(d) unarguably incapable of being given content?

Clause 2.9 is said by Fluor to cover exhaustively Fluor's liability for Early Works Contract Works.

Clause 2.9(a) provides that the Contractor assumes responsibility to Anaconda from the Award Date for the proper performance of all the works carried out by each Early Works Contractor prior to and following the Award Date.

Clause 2.9(b) provides that the contract bears the risk of any Defects in the Facility arising out of any work carried out by an Early Works Contractor and indemnifies the owner against liability.

Clause 2.6 provides that Fluor shall execute a Deed of Novation in respect of each Early Works Contract. Clause 2.7 provides that if Anaconda notifies Fluor that a Deed of Novation cannot be executed, Anaconda will irrevocably assign the benefit of the Early Works Contract to Fluor. Clause 2.8(a) provides that if Anaconda is unable to assign the benefit of any Early Works Contract, Anaconda hereby appoints Fluor its agent to perform and observe Anaconda's obligations under the Early Works Contract. Clause 2.8(b) provides that if Fluor is appointed agent, Anaconda will assist it in relation to bringing proceedings for breach, provided that Fluor keeps Anaconda informed and consults it in relation to the proceedings, does not admit liability without prior consent of Anaconda and indemnifies Anaconda against all costs and damages suffered by Anaconda in respect of the proceedings.

Fluor contends that Clauses 2.6 to 2.8 are intended to constitute complete coverage of the field, placing Fluor in a position to exert control over Early Works by positing a series of alternatives, one of which would apply. In fact, as the Interim Award notes, in paragraph 7.12, neither novation nor assignment occurred.

Fluor further contends that Clauses 2.7 and 2.8 could not possibly impose any greater obligation or liability pursuant to the terms of the Contract than the Early Works Contract assumed to the owner. Hence, the exception or limitation in Clause 2.9(d) is nugatory in purporting to limit a non-existent source of liability. Fluor contends that the relevant limitation is not, properly construed, a proviso, as it has no relationship to the preceding subject matter. It should be construed as a unqualified freestanding limitation provision to the effect that "nothing in the EPC Contract requires Fluor to assume greater responsibility in relation to EWC Contracts than the Early Works Contractors had to Anaconda." Fluor submits that unless its construction is accepted it could be subjected to absurd and inconsistent obligations where an Early Works Contract contains a different specification from that in the EPC Contract, as under Clause 2.9(9) Fluor is responsible for the proper performance of works under Early Works Contracts.

The Arbitral Tribunal in clause 7.15 first states:

"Addressing first the arguments raised in relation to Clause 2 of the EPC Contract, the Arbitral Tribunal accepts that in the absence of novation or assignment, Clause 2.9(a) and (d) renders the Contractor liable for any Defect in the Facility as those terms are defined in Clause 1 of the EPC Contract."

I am unable to discern any manifest error of law in that finding. In so far as the Facility to be handed over under the Deed incorporated works to be completed under Early Works Contracts, sub-clauses 2.9(a) and (d) provide, in terms, that Fluor is the party (rather than the Early Works Contractor) who will be responsible to the owner for performance of Early Works Contracts works and Fluor (rather than Anaconda) shall require compliance with Early Works Contract obligations.

The Arbitral Tribunal found that even in the absence of novation or assignment of the EWCs, Fluor would be liable for defects under those provisions; but given its finding on the primacy of Clauses 6 and 8, and their cumulative effect, it notes that, in any event, Fluor is liable to deliver a whole Facility subject to the terms of the EPC Contract, irrespective of the existence of Early Works Contracts and irrespective of any novation and assignment. As the Arbitral Tribunal also found in paragraph 7.16 that design work by the owner would not fall within Fluor's responsibility, the problem of inconsistent obligations would seem to be addressed.

The Arbitral Tribunal proceeds, in paragraph 7.15, to find that the sub-clause 2.9(d) must be construed as it stands. It notes that sub-clause 2.9(d) can be given effect in relation to Clauses 2.7 and 2.9 and is not otiose. The Arbitral Tribunal does not state what effect Clause 2.9(d) can be given in relation to Clauses 2.7 and 2.8.

The fact that the Arbitral Tribunal notes that it has identified an effect, without disclosing it, does not compel a conclusion of manifest error. The Arbitral Tribunal states that it has considered a relevant matter, and does not set out on the face of the award its specific deliberations, but simply the conclusion. I do not consider that the conclusion was not reasonably or fairly open, or embodies manifest error. Possible effects may be contemplated. Clause 2.7 contemplates Fluor as the beneficiary of an assignment of benefit of a contract from Anaconda and Clause 2.8 contemplates Fluor as the agent of Anaconda, with certain particularised obligations (and, it may be argued, general agency obligations). Such status in Fluor could arguably give rise to potential obligations or liabilities to Anaconda additional to those the Early Works Contractors assumed to Anaconda under the Early Works Contracts. There are 77 Early Works Contracts, the terms of which are not before the Court, and the interaction of their provisions with Fluor's status as assignee or agent creates a potential which Clause 2.9(d) addresses. However, ultimately it is unnecessary for the Court in the context of this application to reach a conclusion on that question. It is simply necessary to determine whether there is an obvious error on the face of the award, in that the construction it adopts is absurd or otherwise not reasonably open.

The Arbitral Tribunal expressly adopted a cumulative construction of inter-related clauses which evinced "clumsy drafting" and were "somewhat repetitive and circular" and in that context assigned primacy to different clauses from those to which Fluor assigned primacy. The Arbitral Tribunal's construction upholds the concept of a single contract with uniform standards governing all works comprised in the Project Works, irrespective of the identity of the contractor, rather than a multiplicity of standards. Fluor's rival construction is, in my opinion, merely arguable at best and less convincing than that of the Arbitral Tribunal. Fluor's construction concentrates on textual analysis of each contractual provision in isolation, whereas the Arbitral Tribunal has adopted a coherent and workable construction of complex and perhaps circular provisions.

I do not consider that the construction of the relevant sections of the EPC Contract adopted by the Arbitral Tribunal constitutes a manifest error of law on the face of the award. Its construction was, in my view, not only fairly and reasonably open but in Debelle J's terms, there is much to point to the validity of its conclusion_._[19] In my opinion, it applied recognised principles, giving effect, where possible, to the literal terms of the contract, construing particular "circular" provisions in the context of the document as a whole, and adopting a construction which does no violence either to the literal terms of the contract or to commercial common sense.

Fluor's construction requires the severance or substitution of literal terms. Prolonged and complex adversarial argument is required in order even to recognise the alleged error, which is of a very different character from the obvious errors readily recognised in Watson v Phipps and Fitzgerald v Masters, on which Fluor relies.

I consider that Fluor has not established a manifest error of law on the face of the award. It follows that its application pursuant to s.38(5) of the Act must be dismissed.

[9] Leighton Contractors Pty Ltd v Kilpatrick Green Pty Ltd [1992] VicRp 83; [1992] 2 VR 505; Qantas Airways Ltd v Joseland & Gilling [1986] 6 NSWLR 327; Pinaca Pty Ltd v Trinity Projects Pty Ltd (No. 2) (SC Tasmania, 19 December 1988, Underwood J).

[12] Qantas Airways Ltd v Joseland & Gilling) [1986] 6 NSWLR 327; Re Tiki Village International Ltd [1994] 2 Qd R 674.

[16] BC 900808, Supreme Court of South Australia, 11 November 1994, Debelle J, at 7.

[17] BC 9402554, Supreme Court of New South Wales, CA, 26 May 1994.

[19] Leighton Contractors Pty Ltd v South Australian Superannuation Trust Fund Investment Trust, supra, at 21.

At a glance

Court

Decision date

Before

Source

Judgment (143 paragraphs)

Parties

Cases Cited (4)