Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd

BACKGROUND

1. The plaintiff (Lainson or the Principal) owned land at 25‑29 Tonkin Street, Cronulla, in Sydney's south. The defendant (Duffy or the Contractor) is a builder. They entered into a written building contract (the Contract) on or about 23 June 2015 under which Duffy was to carry out building work on the land for a contract sum of $21.9 million.
2. The Contract incorporates the AS4902-2000 General Conditions of Contract for Design and Construct. The parties contemporaneously entered into a Deed, which recited that they wished to record mutual accommodations made to reduce the risk to each of the Contract and to take priority over the Contract.
3. Clause 9 of the Deed contains the following dispute resolution provision: 9. Dispute resolution If a dispute arises between the parties, the complainant must not commence any court or arbitration proceedings, except where that party seeks urgent interlocutory relief, unless it has first complied with this clause: (a) Notification The complainant must inform the respondent in writing of the following: (i) The nature of the dispute; (ii) The outcome the complainant desires, and (iii) The action the complainant believes will settle the dispute. (b) Expert Determination (i) Any dispute or difference whatsoever arising out of or in connection with this contract shall be submitted to an expert in accordance with, and subject to, The Institute of Arbitrators & Mediators Australia Expert Determination Rules. (c) Continue to Perform Obligations (i) Notwithstanding the existence of a dispute, each party shall continue to perform its obligations under the Deed.
4. The Institute of Arbitrators & Mediators Australia is now the Resolution Institute. The Expert Determination Rules referred to in cl 9 of the Deed are in evidence and will be referred to later.
5. The Contract itself contains another dispute resolution provision (cl 42), which, in its original form, provided for disputes to be referred to arbitration. However, a special condition (cl 59) of the Contract provides that the word 'arbitration' is deleted and replaced by the words 'expert determination'. Neither party contended that this provision is in play, presumably because the Deed takes priority over the Contract.
6. The Contract obliged Duffy to provide and deliver to Lainson, within 14 days of the date of the Contract, two unconditional bank guarantees for $500,000 each, with no expiry dates, as security.
7. Although Duffy established such guarantees, it never delivered them to Lainson as the Contract required.
8. Lainson and Duffy fell into dispute (the Dispute). It is not necessary to traverse its details beyond what is said below.
9. Clauses 39.2, 39.3, and 39.4 of the Contract provide: 39.2 Contractor's default If the Contractor commits a substantial breach of the Contract, the Principal may, by hand or by registered post, give the Contractor a written notice to show cause. Substantial breaches include, but are not limited to: (a) failing to: (i) perform properly the Contractor's design obligations; (ii) provide security; (iii) provide evidence of insurance; (iv) comply with a direction of the Superintendent pursuant to subclause 29.3; or (v) use the materials or standards of work required by the Contract; (b) wrongful suspension of work; (c) substantial departure from a program without reasonable cause or the Superintendent's approval; (d) where there is no program, failing to proceed with due expedition and without delay; and (e) in respect of clause 38, knowingly providing documentary evidence containing an untrue statement. 39.3 Principal's notice to show cause A notice under subclause 39.2 shall state: (a) that it is a notice under clause 39 of these General Conditions; (b) the alleged substantial breach; (c) that the Contractor is required to show cause in writing why the Principal should not exercise a right referred to in subclause 39.4; (d) the date and time by which the Contractor must show cause (which shall not be less than 7 clear days after the notice is received by the Contractor); and (e) the place at which cause must be shown. 39.4 Principal's rights If the Contractor fails to show reasonable cause by the stated date and time, the Principal may by written notice to the Contractor. (a) take out of the Contractor's hands the whole or part of the work remaining to be completed and suspend payment until it becomes due and payable pursuant to subclause 39.6; or (b) terminate the Contract.
10. On their face, given Duffy's substantial breach of the Contract in not providing security (which is not in issue), these provisions entitled Lainson to give Duffy notice to show cause. Lainson did this on 28 September 2015, giving Duffy until 5 October 2015 to show cause why Lainson should not take the work out of Duffy's hands or terminate the Contract.
11. On 5 October 2015, Duffy responded, through solicitors, giving its own notice to show cause (other provisions of the Contract provided for this) and responding to Lainson's notice.
12. On 6 October 2015, Lainson gave Duffy notice that it was terminating the Contract.
13. On 9 October 2015, Duffy responded to Lainson asserting that Lainson had repudiated the Contract and communicating its acceptance of the repudiation.
14. On 5 May 2016, Duffy gave to Lainson notice of dispute claiming that it had not been paid for work and claiming loss of profit.
15. On 26 May 2016, Lainson issued Duffy with notice of dispute claiming loss and damage by reason of Duffy's failure to perform the work in a competent manner.
16. On 26 May 2016, the second defendant (the Expert) was appointed by the Resolution Institute to be the expert under cl 9(b) of the Deed.
17. The process of expert determination that then followed was, by all accounts, complex and lengthy. The parties made claims and counter-claims in prolix documents bearing the names of traditional pleadings. The Dispute was heard by the Expert over some days during the period 16 December 2016 to 13 April 2017.
18. On 14 March 2018, the Expert delivered his determination (the Determination) in 773 paragraphs (137 pages excluding annexures).
19. The Expert determined that Lainson's purported termination of the Contract on 6 October 2015 was invalid because Lainson's power to issue a Notice to Show Cause and a Notice of Termination pursuant to cl 39 was subject to a duty to act reasonably and in good faith, and Lainson had exercised the power in cl 39 for an extraneous purpose in breach of that duty.
20. He determined that Duffy had treated Lainson's issue of the Notice of Termination, dated 6 October 2015, as a repudiation, which it accepted, and that Duffy had terminated the Contract on 9 October 2015.
21. It is apt to quote the following paragraphs from the Determination: 597. The fundamental issue remains that the Principal relied upon the Contractor's failure to provide the bank guarantees, which was not the reason for the Principal's issue of the Notice to Show Cause, to achieve a collateral but desired result of bringing the contractual relationship to an end. 598. Although the issue is finely balanced, as are several other disputed matters, I find that the Contractor's issue of the Principal's Notice to Show Cause and its subsequent issue of a Notice of Termination, was in breach of the implied obligation to exercise the power in GCC Clause 39 in good faith and not for an extraneous purpose. 599. The purported termination was ineffective because it was in breach of an implied term of the Contract that the Principal would exercise its powers in relation to the issue of a Notice to Show Cause and Termination reasonably, in good faith and, in this instance, not for an extraneous purpose. 600. By purporting to issue its Notice of Termination, following on from its Notice to Show Cause, the Principal evinced an intention to no longer be bound by the Contract, constituting repudiation which the Contractor accepted and thereby terminated the Contract.
22. The Expert went on to determine that Lainson's claim failed. He determined that Lainson was obliged to pay Duffy $1,837,212 (inclusive of interest in the amount of $414,557 and GST), and that Lainson is obliged to pay interest of $585.46 for each day that the determined amount, excluding interest, remains unpaid.
23. Lainson has not met its obligation to pay its half of the Expert's fee ($82,796.25).

the expert determination rules

1. The Resolution Institute Expert Determination Rules (Rules) are divided into three parts: Part I - Preliminary (Rules 1 to 4), Part II - Procedure (Rules 5 to 10), and Part III - General (Rules 11 to 17).
2. The following Rules are relevant: RULE 1 Definitions In these Rules: 'Agreement' is any agreement between the parties embodying a submission of present or future disputes to expert determination. … 'the Dispute' means the disputed issues for expert determination in accordance with these Rules. 'Expert' means a person who has accepted appointment to determine the Dispute in accordance with these Rules. … 'the Process' means expert determination of the Dispute in accordance with these Rules. … RULE 3 Agreement to be Bound 1. The parties agree that the Expert is deemed to be an expert in the subject matter of the Dispute. 2. Unless otherwise agreed in writing by the parties, the determination of the Dispute by the Expert shall be final and binding between the parties. … RULE 5 Role of the Expert 1. The Expert shall determine the Dispute as an expert in accordance with these Rules and according to law. 2. The parties agree that: a. the Expert is not an arbitrator of the matters in dispute and is deemed not to be acting in an arbitral capacity; b. the Process is not an arbitration within the meaning of any statute. 3. The Expert shall adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay and expense, so as to provide an expeditious cost effective and fair means of determining the Dispute. 4. The Expert shall be independent of, and act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting its case and dealing with that of any opposing party, and a reasonable opportunity to make submissions on the conduct of the Process. 5. Any dispute arising between the parties in respect of any matter concerning these Rules or the Process, (including the Expert's jurisdiction) shall be submitted to and determined by the Expert. … RULE 10 The Expert's Determination 1. As soon as reasonably practicable after receiving the submissions and evidentiary material from the parties pursuant to Rule 9, the Expert shall determine the Dispute between the parties and notify such determination in writing to the parties. Subject to any rule of law or equity or written agreement of the parties to the contrary, the Expert's determination shall contain a statement of reasons in such form as the Expert considers reasonably appropriate, having regard to the amount and complexity of the Dispute. 2. Subject to any rule of law or equity or written agreement of the parties to the contrary, the Expert's determination may include for the payment of interest on any monetary sum determined, in such amount as the Expert considers reasonable. …

Lainson's case

1. Lainson argues that it is not bound by the Determination. It puts two alternative arguments.
2. First, it argues that the Expert did not discharge the task entrusted to him by the Contract.
3. It argues that where Rule 5.1 requires the Expert to determine the Dispute 'according to law' it requires him not to make any mistakes of law which affect the result.
4. It puts that the Expert went wrong, as a matter of law, in finding that it was an implied term of the Contract that Lainson's power to issue a Notice to Show Cause and a Notice of Termination was subject to a duty to act reasonably and in good faith and not for an extraneous purpose (the implied term).
5. Second, it argues that where parties contractually refer to an expert for determination a dispute in the decision of which a question of law becomes material (as distinct from the case where a specific question of law is referred to the expert) the Court can interfere where, on the face of the record, the expert has made a mistake of law. It argues that the finding of the implied term is a mistake of law which is obvious on the face of the record.
6. Lainson seeks a declaration that it is not bound by the Determination. If this relief were to be granted, it would have the consequence that the Dispute would not yet have been determined by the Expert.

Duffy's case

1. Duffy cross-claims for judgment in the amount found by the Expert to be owed to it by Lainson plus the unpaid half-share of the Expert's fees.
2. The parties are agreed that, if Lainson fails, Duffy is entitled to this relief.

Consideration

1. I will deal with Lainson's arguments in turn.
2. If the Expert was right in finding the implied term, Lainson would, of course, fail.
3. It is, however, not necessary to consider whether the Expert was wrong in that respect. For present purposes, it may be assumed that he was. I record that no complaint is made with respect to the Determination otherwise.

Lainson's first argument

1. The legal principles which apply to consideration of this argument are not in issue.
2. As the authorities on the subject make clear, the parties will be bound if the Expert did what the Contract, on its proper construction, required him to do, irrespective of the result. Conversely, the Determination will not be binding if the Expert went outside the ambit of what the Contract required him to do: see, for example: Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314; Holt v Cox (1997) 23 ACSR 590; AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173; Australian Vintage Ltd v Belvino Investments No 2 Pty Ltd (2015) 90 NSWLR 367.
3. By contract the parties agreed that the Determination of the Dispute will stand as a final and binding consensus between them, enforceable as such.
4. If the Determination is binding, this is not because the Expert exercised some quasi-judicial or administrative jurisdiction or power to determine, with the force of law, rights between the parties, but as a contractually binding stipulation which the Court will enforce as such.
5. Where an expert goes outside the ambit of what a contract requires, the determination is not binding because the consensus it is intended to reflect will be absent.
6. The question is: what did the Contract require the Expert to do in requiring him to determine the dispute 'according to law'? This is a matter of construction.
7. The meaning of the words used is to be determined objectively. That is, by what a reasonable person would have understood them to mean. It requires attention to the language used by the parties, the commercial circumstances which the document addresses, the purpose of the transaction and the objects which it was intended to secure. The whole of the instrument has to be considered. Preference is given to a construction supplying a congruent operation to the various components of the whole and which does not make commercial nonsense or work commercial inconvenience: see, Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350-352; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 29; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 657; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117.
8. Sometimes, where an expert determiner makes a mistake, the dividing line between the expert having gone outside the ambit of what the contract required, on the one hand, and having made a mistake or reached a wrong result after doing what the contract required, on the other, is not bright. That is not this case.
9. Lainson argues that the words 'according to law', used in Rule 5.1, mean by the correct application of only legally correct principles. Or, put another way, in a manner free from legal error affecting the result.
10. This argument must be rejected.
11. The meaning of the words 'according to law' contended for by Lainson is akin that it traditionally has when a Court or Tribunal overturns an inferior Court or Tribunal for having made a mistake of law and remits the matter for hearing in accordance with the law as stated by the superior body: see, for example, Plaintiff S297/2013 Minister for Immigration and Border Protection (2015) 255 CLR 231 at 247. In this sense, it is used in the context of where an inferior body must, to discharge its functions validly, apply the substantive law of the land.
12. In the context in which they appear here, however, the words 'according to law' mean in the manner which the law requires a person in the position of the Expert to go about the mandated task, so as to give it contractual efficacy; for example, honestly, without bias or collusion, and while not intoxicated. There is no suggestion that the Expert acted in any way not 'according to law' in this sense. Significantly, the words appear in that part of the Rules headed 'The Procedure'.
13. The construction contended for by Lainson works commercial inconvenience. Its acceptance would have the consequence that the Determination is, in effect, subject to appeal on any and every question of law determined or legal precept relied on by the Expert, which, if determined or seen differently, would lead to a different result. A mistake of law could include misapplication of the law of evidence. A party seeking to sustain the Determination might raise, in a manner similar to the way it would raise by way of a Notice of Contention in an appeal, alternative bases in law upon which the Expert could have reached the result. The construction would burden the Expert with an obligation to try the Dispute as if he were acting as a court of law.
14. Lainson's construction would give a far wider right of review of the Determination than there would be if it was an arbitral award. Rule 5.2 makes it clear that the parties did not intend the Contract to provide for arbitration. Also, as mentioned earlier, they substituted the words 'expert determination' for the word 'arbitrator' in cl 42 of the Contract.
15. I consider it unlikely that reasonable persons in the position of the parties would have understood the words of the Contract to bear the meaning contended for by Lainson. It is inimical to two of the principal commercial objects that expert determination is intended to secure, namely, celerity and finality.
16. It is to be observed that Rule 5.5 provides that any dispute arising between the parties in respect of any matter concerning the Rules or the Process, (including the Expert's jurisdiction) shall be submitted to and determined by the Expert. This would include the present controversy as to the reach of Rule 5.1, and is further indication of the contractual intention of the parties that the Expert be the final arbiter.

Lainson's second argument

1. This argument too must be rejected.
2. There is, as Lainson points out, authority, apparently going back to Kent v Elstob (1802) 3 East 18, to the effect that the Court can intervene to redress a mistake of law which appears on the face of an arbitral award: see, also, Henry v Uralla Municipal Council (1934) 35 SR (NSW) 15 and Gold Coast City Council v Canterbury Pipelines (Aust) Pty Ltd (1968) 118 CLR 58.
3. In Henry v Uralla Municipal Council, in a passage heavily relied on by Lainson, Jordan CJ said at 23 (citations omitted): When once the award has been made, the Courts, as a general rule, have regarded the parties as bound by their agreement to abide by it, whether it be right or wrong. This general rule is applied not only to the arbitrator's determination of questions of fact but also to his determination of any specific question of law referred to him […]. Where, however, a particular question of law had not been specifically referred to him, but became material for the decision of matters referred, the Court, by an exception to the general rule, assumed jurisdiction to set the award aside, if the arbitrator determined the question of law wrongly, and the fact that he had determined it wrongly appeared on the face of the award or in some document incorporated in the award.
4. It is worthy of mention that in Kent v Elstob, Lawrence J considered that it was not necessary that the arbitrator's reasons for making his award should appear on the face of it in order to examine them. In Gold Coast City Council v Canterbury Pipelines at 64, Barwick CJ, after referring to Kent v Elstob, observed that the law as to arbitration has been greatly altered since 1802.
5. This argument proceeds on what I consider to be the erroneous premise that the Determination is a record in the legal sense used in the authorities in cases where the Court can intervene when there is an error on its face. The record, in this sense, is those documents which are created or kept by a Tribunal, superior or inferior, for a memorial and testimony of its proceedings: see, R v Northumberland Compensation Appeal Tribunal, ex p Shaw [1952] 1 All ER 122 at 131-132, CA. The record of an arbitral tribunal will qualify. An arbitral award has the same effect as the judgment of the Court, and is enforceable in this jurisdiction as a judgment of the Court by dint of legislation.
6. Expert determination, on the other hand, is no more than a private contractual mechanism to which parties agree and which, as is dealt with above, does no more than create binding contractual obligations. It has no statutory backing as a process. It is not a process which resolves any dispute by the exercise of judicial, quasi-judicial, administrative, statutory or other power or jurisdiction.
7. There is no room here for the application of principles outside those earlier referred to which govern the validity of expert determinations. The Determination is not a record and it is not susceptible to correction because there is a mistake in it, if what the Expert did was in the ambit of the Contract.
8. I also do not consider that, in the contractual context of an expert determination, there is any juridical basis for distinguishing between a case where a dispute in the resolution of which questions of law arise and one where a single question of law is submitted for expert determination. In the Deed, the term Dispute is widely defined and both types of disputes are susceptible to it. To apply the distinction would give cl 9 of the Deed ambulatory effect because the first type of case would be subject to review for error and the second would not. This would not make commercial sense.
9. The Commercial Arbitration Act 2010 (NSW) s 7(1) defines 'an arbitration agreement' as 'an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.'
10. Neither party contends that the Contract is an arbitration agreement. If it is an arbitration agreement, then the Commercial Arbitration Act 2010 (NSW) would apply to it. That Act contains provisions that severely restrict the ability to challenge an award. The complaints made by Lainson would not found a valid challenge to an arbitral award.

Conclusion

1. The Summons is dismissed.
2. There will be judgment for Duffy for: 1. the amount determined by the Expert, adjusted for the effluxion of time since the Determination, or as otherwise required; and 2. $82,796.25.
3. The parties are to bring in short minutes reflecting this result.
4. I provisionally order that Lainson is to pay Duffy's costs of the proceedings. This order will solidify unless, within 7 days, either party notifies my Associate and the other party in writing that some other order is sought, stating the terms of the order and providing brief reasons. If such notice is received, I will make directions for the disposition of any question of costs.
5. The Exhibits are to be returned.

Amendments 25 June 2019 - Amendment to para 45 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 June 2019