GEBAUER NOMINEES PTY LTD -v- COLE [2012] WASC 10 (12 January 2012)

3 The written submissions filed in support of the application argue all grounds on the basis of manifest error of law on the face of the award: see Commercial Arbitration Act s 38(5)(b)(i). Ground 8 and the submissions in support of it refer also to a denial of natural justice.

4 The application was heard at the same time as a crossapplication by the respondents, Mr Gerhard Cole and Mr Patrick Mullally. I have given separate reasons in that matter, in which I have set out the background, including the material findings made by the arbitrator, the relevant provisions of the Commercial Arbitration Act, and the principles to apply on an application for leave to appeal. These reasons should be read with that judgment: see Cole v Gebauer Nominees Pty Ltd [2012] WASC 9.

5 These proceedings arise out of the arbitrator's final award. He had already, in an interim award, found the applicant liable for breach of the lease. In the final award he was to determine questions including whether the respondents were entitled to any damages, and assess the amount of damages. That determination was to be made according to law: s 22.

6 Accordingly, the respondents (as claimants before the arbitrator) bore the onus to prove the nature and extent of the damages they suffered as a result of the applicant's breach of the lease: Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 192 CLR 603, 608, 612, 627, 628, 640; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 80. The assessment was to be carried out according to the principle that the respondents are to be placed in the same situation with respect to damages, so far as money can do it, as if the contract had been performed: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272, 286 [13]; Robinson v Harman [1848] EngR 135; (1848) 1 Exch 850, 855 (Parke B); Commonwealth v Amann Aviation Pty Ltd (80). The respondents are not, however, to be placed in a better position than they would have been in had the contract been performed, and are entitled to no more than the net benefit they would have received under the contract: Commonwealth v Amann Aviation (99, 128). The applicant is not, by its breach, made an insurer of the respondents' venture: Commonwealth v Amann Aviation (82, 84, 136).

7 There is one further preliminary matter. Five of the grounds allege that the arbitrator failed to make findings or to give adequate reasons for making the award. Under s 29(1) of the Commercial Arbitration Act:

Unless otherwise agreed in writing by the parties to the arbitration agreement, the arbitrator or umpire shall

(a) make the award in writing;

(b) sign the award; and

(c) include in the award a statement of the reasons for making the award.

8 After this matter was argued, the High Court delivered judgment in Westport Insurance Corporation v Gordian Runoff Limited [2011] HCA 37. In Westport Insurance, the arbitrators, in reaching their award, had been required to determine whether the various integers of a complex section of the Insurance Act 1902 (NSW) were satisfied. In particular, the section (s 18B(1)) required the arbitrators to determine whether 'in all the circumstances it is not reasonable for the insurer to be bound to indemnify the insured' (the proviso). The majority of the court (French CJ, Gummow, Crennan and Bell JJ in a joint judgment, and Kiefel J in separate reasons) held that, under s 29 of the Commercial Arbitration Act 1984 (NSW), the arbitrators' reasons were required to explain succinctly why each of those integers had been satisfied. The majority accepted the submission that 'no wholly satisfactory formula can be found to flesh out the requirement in s 29(1)(c)', and what is required by way of reasons in a given case will depend upon the circumstances of that case: [53], [54], and Kiefel J [107]. The arbitrators' reasons did not meet the requirements of s 29 because there was no indication of factual findings which supported their conclusion that the proviso did not apply, nor of the considerations which tended to support its application: [56]. As Kiefel J said:

In this case the arbitrators could not apply s 18B(1) without determining whether it was reasonable to hold the reinsurers bound to indemnify Gordian in all the circumstances. More was therefore required than a statement of conclusion. It was necessary that they say why it was reasonable to do so, in order to fulfil the requirement of s 29(1)(c). The failure to do so constituted an error of law [170].

9 Ground 2 asserts that the arbitrator erred in failing to make any findings on the cause of the respondents' damages. Ground 3 claims that the arbitrator failed to provide adequate reasons for any finding that the applicants' breach of cl 12.3 of the lease agreement was the cause of the loss and damage. The arbitrator characterised the respondent's case as a claim for damages for loss of a chance to pursue a commercial opportunity. I read grounds 2 and 3 as referring to the fact of loss, and not the amount (which is the subject of other grounds).

10 In his interim award the arbitrator determined that the applicant, as lessor, was in breach of its obligation under cl 12.3 of the lease to perform structural works that were required to keep the premises in good condition. He found the respondents were entitled to an abatement of rent from 15 June 1999 by reason of those breaches. The interim award was incorporated in the final award as an attachment to the reasons.

11 In section D of the reasons in the final award, under the heading 'Analysis of evidence of the effect of ingress of water', the arbitrator found that at the time of the flooding of the factory, Mr Cole had not yet proved the ovens he was using were the correct size and makeup to produce briquettes of the required standard. The flooding held him up and he ran out of further time and capital to develop the ovens. Those findings were not sufficient to resolve the dispute. There were other issues that also required resolution before it could be concluded that the water ingress caused the loss of a business opportunity, and accordingly caused the loss and damage found.

12 In section E of the award, 'Legal considerations', the arbitrator set out the submissions made by each of the parties on one critical issue. He said of the competing cases:

The [respondents say] everything was going well when the ingress of water into the premises brought the business to a halt. The [applicant] says that the [respondents were] bankrupt by the time of the ingress of the water, which event was therefore merely a fortuitous interruption to the inevitable failure of the business, but in any event had no contributory influence on the financial demise of [the respondents].

13 The parties had led expert evidence on the respondents' financial position in June 1999. The applicant adduced expert evidence from Mr Philip Litton, a chartered accountant. In summarising Mr Litton's evidence of the financial position of the respondents at 30 June 1999, the arbitrator said:

At [Table 24 of his report] the total of liabilities were $600,000 more than the total assets - an indication of prima facie insolvency. After 30 June 1999 the company did get some money but really it went to pay accumulated losses ... he concluded that profits were never going to fix the problem.

14 The respondents' expert, Mr Anthony Sheppard, had expressed the opinion that '[had] they been able to trade as forecast then the business would have been liquid'.

15 The arbitrator found that Mr Litton had not taken into account the 'probability of a breakthrough' by the respondents. He said that Mr Litton's expert evidence

does not really help me to make any informed prediction as to what the losses would have been where the business was able to make a small but effective start, but for the ingress of the water. (my emphasis)

16 On the other hand, he described Mr Sheppard's profit forecast as simply not possible, even without the ingress of water. The arbitrator concluded:

In the circumstances an actual assessment of the likely outcome of production on a small scale is not possible to be made either in actual financial or in percentage terms.

17 He made no further findings about the financial position of the respondents, and whether they could have continued to operate. As a result, the parties (and the court) do not know how the arbitrator resolved an issue that is critical to whether the applicant's breach of the lease caused loss.

18 The court in Westport Insurance was concerned with the elements prescribed in a section of an Act. It had previously been held that it is the duty of the arbitrator to consider and deal with all matters the subject of the reference; his reasoning must address the central contentions advanced by the parties, and deal with every 'submission worthy of serious consideration': Alvaro v Temple [2009] WASC 205 [46]; Villani v Delstrat Pty Ltd [2002] WASC 112 [40]; Peter Schwarz (Overseas) Pty Ltd v Morton [2003] VSC 144 [34]. Failure to do so is an error of law. Those authorities, in my opinion, are consistent with the decision in Westport Insurance.

19 The reasons for the award mention that the respondents' financial position was an issue, but do not make any of the findings needed to resolve that issue. But it had to be resolved for the arbitrator to determine whether the applicant's breach of contract caused the respondents to lose a business opportunity.

20 The applicant submits that the arbitrator failed to actually carry out an examination and evaluation of the business opportunity the respondents say they lost, and did not make the findings required to conclude that the respondents had lost an opportunity. Alternatively, it submits that he did not give adequate reasons as to how he carried out the task of assessing the respondents' loss. Where grounds 2 and 3 relate to the fact of loss, grounds 4 and 5 go to the amount.

21 The respondents relied on the loss of their existing agreement with Worldzone, under which they would supply briquettes for sale by Worldzone in Korea. The arbitrator found that, even without the disruption to the business caused by the leaks, the respondents would not have been able to meet that contract. He described Mr Cole's predictions as 'wildly optimistic': the factory would not take the number of ovens contemplated by the respondents; there was no planning for essential safety and environmental matters, such as the flares to release heat; and the respondents had not obtained approvals from either the local government or the owner.

22 The arbitrator found, however, that the respondents could have secured a contract with Worldzone for smaller loads, and had lost that prospect. He assessed damages on the basis of a small number of loads for shipment to Korea for sale in a limited niche market. That general finding is reflected in comments that the respondents were 'on the brink of production for a small niche market'; and that 'they were on the cusp of being able to commence business, albeit on a minor scale'.

23 In considering grounds 2 and 3, I referred to the arbitrator's conclusion that he could not make an actual assessment of the likely outcome of production on a small scale in either actual financial or percentage terms. Nevertheless, he arrived, with no further findings, at an award of damages of $500,000.

24 The respondents were entitled to damages if they proved that as a result of the applicant's breach of the lease, they lost a business or commercial opportunity, and the loss of the opportunity falls within the rules of remoteness in contract. To obtain damages for a loss of a chance or opportunity it was not necessary for the applicants to establish that the chance would probably have been realised. It was sufficient if they proved that there was a chance that might have been realised, even though the likelihood is assessed at less than 50%: Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332, 349.

25 In some cases a party cannot adduce precise evidence of what has been lost. The assessment of the degree of probability that an event would have occurred, or might occur, and the consequent adjustment of the award of damages to reflect the degree of probability, involve matters not capable of precise proof: Malec v J C Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638, 643. There is no doubt that assessment in this case was a difficult task, requiring the arbitrator to consider the respondents' position in June 1999 and the business opportunities then open to them, and to estimate the chance the respondents had, and had lost, to take advantage of those opportunities. Further, as the arbitrator recognised, difficulty in estimating damages did not relieve him from the responsibility of estimating them as best he could: Commonwealth v Amann Aviation (83); Fink v Fink [1946] HCA 54; (1946) 74 CLR 127, 143; McRae v Commonwealth Disposals Commission [1951] HCA 79; (1951) 84 CLR 377, 411 412.

26 The authorities also recognise that assessment may, of necessity, involve guesswork rather than estimation: Jones v Schiffmann [1971] HCA 52; (1971) 124 CLR 303, 308; Commonwealth v Amann Aviation (143). There is no clear line dividing those circumstances where 'guesswork' is permissible, from those where it is not: JLW (Vic) Pty Ltd v Tsiloglou [1994] VicRp 16; [1994] 1 VR 237, 243; McCrohon v Harith [2010] NSWCA 67. But as Campbell JA said in Zorom Enterprises Pty Ltd v Zabow [2007] NSWCA 106; (2007) 71 NSWLR 354 [84]:

The use of the word 'guess' in some of these authorities should not be taken as detracting from the obligation of the judge to adopt a reasoning process that has a rational basis, to the extent that the evidence presented, and the intrinsic nature of the materials and subject matter under consideration, permit. In its ordinary meaning, 'guess' can extend to picking a number at random, and no judge is justified in guessing, in that sense, in assessing damages. Rather, the word 'guess' in these authorities recognises that sometimes such reasoning as is possible in the circumstances is far from compelling, and human beings have not been granted omniscience, but must make decisions on the basis of such incomplete knowledge as they have.

27 The reasons required from the arbitrator are not the same as those required of a judge. But he still had to explain succinctly why he reached his decision that the proper measure of the respondents' loss to the date of the award was $500,000. The absence of any reasons for why that amount is a proper estimate, in my opinion, manifests error. Precision may be impossible, but it is not sufficient to pick a number at random. Nor is it enough merely to say that an educated guess is permissible. If $500,000 was not picked at random, the arbitrator has not explained how it was arrived at.

28 For example, the arbitrator relies on his finding that the respondents could have made a different contract for smaller loads to hold on to 'an exclusive and highly discerning niche market'. Whether a niche market for small quantities of high quality charcoal briquettes exists is critical to the decision. Unless the existence of a market was established, the assessment of the respondents' opportunity to participate in it does not arise. There are no findings about the existence of such a market, or its value, or whether it was economical to pursue it.

29 In some respects this ground covers the same area as those discussed above. It is manifest on the face of the award that the arbitrator has either failed to make the findings he needed to make, or, if he made them, he has failed to set them out in the reasons for his award.

30 Ground 7 refers to the finding that the respondents had proved on the balance of probabilities that, with the small oven at the factory in Fremantle, Mr Cole had arrived at the correct size of oven to produce briquettes. That finding immediately follows comments that the applicant had 'not prove[d] that [the] new oven was as hopeless as the large one at cooking the charcoal briquettes to the required temperature in a short space of time, other than through Professor Zhang's academic doubts'. The arbitrator said, further, that Professor Zhang had not produced any 'concrete evidence to disprove' Mr Cole's conclusion that he now had the correct size of oven.

31 Earlier in his award, the arbitrator also stated, in effect, that that none of the small ovens had been fully tested, and that whether one burner in the oven would be sufficient for a full load (a technical issue discussed by Professor Zhang) was 'never investigated'. He said that Mr Cole had produced no documentation to show how he had assessed the appropriate size for the oven; no calculations had been done to prove that an oven of this size would work as well as the prototype; no evidence was produced to show the size, shape and capacity of the prototype oven or its relationship to the ovens to be used in the factory.

32 The applicant submits that the arbitrator's comments show that he wrongly reversed the onus of proving that the respondents had lost a commercial opportunity. I agree that the arbitrator's comments show that he regarded the applicant as having the onus of proof on a critical factual issue.

33 The respondents submit that the arbitrator was not bound by rules of evidence, but could inform himself in relation to any matter in such manner as he thought fit: Commercial Arbitration Act s 19(2). The incidence of the burden of proof, however, is not a rule of evidence but a matter of law: see, for example, Purkess v Crittenden [1965] HCA 34; (1965) 114 CLR 164. Any question that arose for determination in the course of the arbitration was to be determined according to law: s 22. An error as to who has the burden of proving loss and damage is an error of law.

34 The applicant says that the arbitrator denied it procedural fairness in awarding costs to the respondents without giving the applicant an opportunity to be heard on the award of costs, 'in circumstances where the [applicant] had prior to the hearing of the arbitration offered to compromise the respondents' claim for a sum greater than the award of damages and had informed the learned arbitrator that it wanted to be heard in relation to any such order before it was made'. The arbitrator held in his award that costs 'should be assessed in accordance with the provisions of Order 66'.

35 A denial of procedural fairness may be an error of law. To support a grant of leave under s 38(5)(b)(i), however, the error must be on the face of the award. Ground 8, as formulated, would require the court to go behind the award.

36 I would also not grant leave for this ground under s 38(5)(b)(ii). The costs of an arbitration are in the discretion of the arbitrator: Commercial Arbitration Act s 34. Subsections (5), (6) and (7) of s 34 provide that certain matters shall be taken into account in the exercise of the discretion, but none of them is relevant here. The principles relating to the exercise of the discretion with respect to costs are settled. Resolution of the question of law agitated in ground 8 would not be likely to add to the certainty of commercial law.

37 In any event, the question of costs may need to be revisited depending on the outcome of the appeal on other grounds.

38 I am satisfied, for the purposes of the grant of leave, that the requirements of s 38(5)(b)(i) are made out for all but ground 1 (which was not pressed) and ground 8.

39 The grounds of the proposed appeal go to whether the award of damages against the applicant should stand. I am satisfied that the determination of the questions of law involved could substantially affect the rights of the parties to the arbitration agreement, and s 38(5)(a) is satisfied.

40 The applicant must still show that the discretion should be exercised in its favour. In my reasons in Cole v Gebauer Nominees Pty Ltd [2012] WASC 9, I observe that the delay in resolving this matter is a major factor against the grant of leave. On the other hand, I take into account the potential consequence for the applicant of a significant award of damages against it in circumstances where I have found that the arbitrator has not given reasons which support that award.

41 I would grant leave on all but grounds 1 and 8. I will hear the parties as to the proper formulation of the questions of law for the purposes of the appeal.