Manningham City Council v Dura

2. This is the return of a summons by the defendant in a proceeding instituted by writ seeking an order that the proceeding be stayed pursuant to s.53(1) of the Commercial Arbitration Act 1984 ("the Act").

5. The plaintiff, Manningham City Council, in its general endorsement seeks damages and declaratory relief against the defendant, Dura (Australia) Constructions Pty Ltd arising out of alleged breaches of a building contract.

8. The plaintiff and the defendant entered into a building contract dated 3 March 1997 whereby the defendant agreed to perform construction works to the Manningham Community Hostel.

11. The plaintiff alleges that the defendant failed to proceed with the works diligently, failed to proceed with the works in a competent manner and substantially breached the contract by failing to bring the works to practical completion by the date specified in the contract. The plaintiff caused a notice to be served on the defendant of its intention to determine the contract and it is alleged that on 14 January 1999 notices of determination and dispute were served, and thereafter negotiations took place which failed to resolve the dispute.

14. The plaintiff claims damages and a declaration that it is not bound to make any further payments to the defendant until completion of the works.

17. The defendant contends that it was a term of the building contract that disputes which could not be resolved be referred to arbitration.

20. The defendant relies upon s.53(1) of the Act which provides -

"(1) If a party to an arbitration agreement commences proceedings in a court against another party to the arbitration agreement in respect of a matter agreed to be referred to arbitration by the agreement, that other party may subject to sub-s.(2) apply to that court to stay the proceedings and that court, if satisfied -

(a) that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement; and

(b) that the applicant was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary for the proper conduct of the arbitration -

may make an order staying the proceedings and may further give such directions with respect to the future conduct of the arbitration as it thinks fit."

27. Sub-section (2) has been satisfied in that the defendant has not taken a step in the proceeding other than enter an appearance.

30. In support of its application the defendant relies upon two affidavits sworn by Richard Lim Hong Khor sworn 15 and 24 February 1999 respectively. There is no answering material.

33. As a general rule a court stays a proceeding where there is an agreement to arbitrate. The reason is obvious. The parties have made an agreement to that effect and the court should enforce it. The general rule should only be departed from if there is good cause.

36. In Huddard Parker Limited v. The Ship (Mill Hill) [1950] HCA 43; (1950) 81 CLR 502 at p.508 Dixon, J said -

"Under the statutory power expressed in s.5 of the Arbitration Act 1928 (Vict.) the Court or the judge, assuming that the other necessary conditions are fulfilled, must be satisfied that there is no sufficient reason why the matter should not be referred in accordance with the submission. This language might appear to place the burden upon the defendants applying for a stay. But the Courts begin with the fact that there is a special contract between the parties to refer, and therefore in the language of Lord Moulton in Bristol Corporation v. John Aird & Co., consider the circumstances of a case with a strong bias in favour of maintaining the special bargain or as Scrutton L.J. said in Metropolitan Tunnel and Public Works Ltd. v. London Electric Railway Co., 'A guiding principle on one side and a very natural and proper one, is that parties who have made a contract should keep it.' At the same time, as is shown by the two cases cited, the Court's discretion has not been restricted by any exclusive definition of the circumstances which will warrant a refusal of a stay: see per Lord Parker in Aird's Case, and per Scrutton L.J. in the Metropolitan Tunnel Case."

40. His Honour's observations apply to the present legislation. The court proceeds on the basis that the contract should be enforced. See also Halifax Overseas Freighters Ltd v. Tasno Export,, The Pine Hill (1958) 2 Ll. Rep. 146 at 151 and G.W.J. Blackman & Co v. Oliver Davey Glass Co Pty Ltd & Anor [1966] VicRp 77; (1966) VR 570 at 573-4. Mr Tiernan of counsel who appeared for the plaintiff accepted that there was a heavy burden resting on his client. He informed the court that his client was not relying upon any discretionary considerations as a ground for refusing the stay.

43. The evidence before me establishes that the parties entered into a building contract in the form JCC-D 1994 (without quantities). During the course of the construction disputes arose between the parties and in particular a dispute about time and delays. It is alleged that the plaintiff purported to terminate the contract on 14 January 1999 without cause and the defendant elected to terminate the contract on or about that date. In the meantime, on 14 January 1999, the plaintiff issued a notice of dispute and on 29 January 1999 the parties held a meeting in order to resolve the dispute. The dispute was not resolved.

46. Thereafter each party put in train a procedure aimed at bringing the dispute to a different dispute resolution system; the plaintiff instituted a proceeding in this court, the defendant had an arbitrator appointed.

49. Section 13 of the contract sets out a step by step dispute resolution procedure.

52. Because of the submissions put by counsel it is necessary to set out part of Section 13.

55. Before doing so I set out the rival contentions.

58. The defendant asserts that there is an arbitration agreement within the meaning of s.4 of the Act even though the reference to arbitration occurs as a result of an act of one party. Further, the defendant's right to refer to arbitration has not been lost because the plaintiff's notice to go to litigation was given prior to the defendant giving its notice to refer the dispute to arbitration.

61. The plaintiff contends that the building contract gave the parties an option to go to litigation or arbitration and once a party had exercised an option in favour of one dispute resolution procedure the option open to the other party was extinguished. As the plaintiff had given notice first that it was referring the dispute to litigation the notice subsequently given by the defendant to refer the dispute to arbitration was of no effect because it had lost the right to refer the dispute to arbitration.

64. It followed, according to the plaintiff, since the jurisdiction of the court to stay a proceeding under s.53 is grounded on the fact that the party applying for the stay is a party to an arbitration agreement the court did not have jurisdiction to grant a stay either because there was no arbitration agreement or there was no longer an arbitration agreement between the parties because of the plaintiff's reference to litigation.

67. Section 13 of the building contract is concerned with dispute resolution and relevantly provides as follows -

In the event of any dispute or difference arising between the Proprietor (or the Architect on his behalf whether or not acting under paragraphs 5.02.01 or 5.02.02) and the Builder (subject to the provisions of Clause 6.09) at any time as to the construction of this Agreement or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith then either party may give to the other notice in writing which shall be delivered by hand or sent by certified mail adequately identifying the matters the subject of that dispute or difference and the giving of such notice shall be a condition precedent to the commencement by either party of proceedings (whether by way of litigation or arbitration) with regard to the matters the subject of that dispute or difference as identified in that notice.

Within ten (10) days after service of a notice of dispute referred to in Clause 13.01 the parties shall confer at least once, but at the option of either party and provided the Architect so agrees, in the presence of the Architect, to attempt to resolve the dispute and failing resolution of the dispute, to explore and if possible agree on methods of resolving the dispute by other means. At each such conference each party shall be represented by a person having authority to resolve the dispute in the course of the conference.

13.03 FURTHER NOTICE BEFORE ARBITRATION OR LITIGATION

In the event that the dispute cannot be resolved in accordance with the provisions of Clause 13.02 or if at any time either party considers that the other party is not making reasonable efforts to resolve the dispute, either party may by further notice in writing which shall be delivered by hand or sent by certified mail to the other party refer such dispute to arbitration or litigation. The service of such further notice under this Clause 13.03 shall also be a condition precedent to the commencement of any arbitration or litigation proceedings in respect of such dispute.

At the time of giving the notice referred to in Clause 13.03 the party who wishes the dispute to be referred to arbitration shall provide to the other party evidence that he has deposited with the Chapter of The Royal Australian Institute of Architects or the Master Builders' Association, in each case of the State, Territory or place in which the Site is located, the sum of one thousand dollars ($1000.00) by way of security for costs of the arbitration proceedings. Subject to compliance with the provisions of Clause 13.03 and the foregoing provisions of this Clause 13.04 such dispute or difference (unless meanwhile settled) shall be and is hereby referred to arbitration pursuant to the succeeding provisions of this Section 13.

Any arbitration under this Section 13 shall be effected:

13.05.01 By either a single arbitrator or by two arbitrators agreed upon in writing between the Proprietor and the Builder; or

13.05.02 failing such agreement within ten (10) days after receipt by the other party of the notice in writing given under Clause 13.03 by the one party, then by two arbitrators, one being selected by the President or Acting President for the time being of the Chapter of The Royal Australian Institute of Architects in the State or Territory in which the Site is located and the other being selected by the President or Acting President for the time being of the Master Builders' Association of the State or Territory or place in which the Site is located."

83. The balance of the section is concerned with the appointment of an umpire, provision of security, consolidation of disputes and costs.

86. The parties followed the procedure set out in clause 13.01 and 13.02. The plaintiff issued a notice of dispute and the parties met to attempt to resolve the dispute on 29 January 1999 but were unable to do so.

89. What thereafter followed can only be described as an unseemly scramble by the parties to gain an advantage. I set out in chronological form the steps that occurred -

Monday, 1 February 1999 at 10.20 a.m. the plaintiff delivered to the defendant a notice of reference to litigation.

Monday, 1 February 1999 at 11.40 a.m. the defendant delivered to the plaintiff a notice referring the dispute to arbitration and attached thereto was a receipt from the Master Builders' Association of Victoria for the sum of $1,000, being the deposit required by clause 13.04.

Monday, 1 February 1999 at 12.04 p.m. plaintiff issued writ with general endorsement.

Thursday, 4 February 1999 writ was served on the defendant.

Monday 22 February 1999 arbitrator appointed by President of Master Builders' Association of Victoria.

97. Mr Tiernan on behalf of the plaintiff submits that since the plaintiff gave notice of reference to litigation ahead of the notice by the defendant to refer the dispute to arbitration, the right of the defendant to refer the dispute to arbitration was extinguished, there was no arbitration agreement in existence between the parties and hence the defendant is not entitled to invoke the jurisdiction of the court under s.53 of the Act.

100. Mr Tiernan submitted that it was the common intention of the parties that clause 13.03 gave an option to either party but once a party had exercised its right to refer the matter to litigation the other party's right was extinguished.

103. Mr Foxcroft of counsel who appeared for the defendant submitted that there was an arbitration agreement within the meaning of s.4 of the Act prior to the service of any document and the service of the notice by the plaintiff could not terminate that agreement. He further submitted that if he was wrong and the arbitration agreement only came into existence upon the service of the notice referring the matter to arbitration, the defendant still had that right despite the service of the notice to litigate. The defendant exercised that right by giving notice prior to the issue of the writ. Therefore, there was an agreement to arbitrate prior to the issue of the writ and the court had jurisdiction to grant a stay under s.53 of the Act.

106. I am satisfied that there is no good reason why the matter should not be referred to arbitration, no discretionary factor has been advanced against the grant of a stay and the evidence establishes that the defendant at all relevant times is and has been ready and willing to proceed with the arbitration.

109. The one issue between the parties is whether there was an arbitration agreement between the parties when the writ was issued?

112. The issue involves two discrete questions, namely -

(i) Irrespective of the giving of any notice to refer the dispute to litigation or arbitration, is there an arbitration agreement between the parties as defined by s.4 of the Act?

(ii) If one party gives notice to refer the dispute to litigation does this preclude the other party exercising the right to refer the dispute to arbitration?

Is it an arbitration agreement?

118. Section 4(1) defines arbitration agreement as meaning -

"An agreement in writing to refer present or future disputes to arbitration."

122. Whether or not an agreement which gives either or both parties an option or election to refer a dispute to litigation or arbitration, is or is not an arbitration agreement prior to the option or election being exercised has been the subject of some controversy.

125. In Hammond v. Wolt [1975] VicRp 10; (1975) VR 108, Menhennitt, J was concerned with a clause in a standard form contract which gave either party to a dispute, the right to give notice of such dispute and refer the matter to arbitration. His Honour held that there had to be in existence at the time of the commencement of the proceeding an arbitration agreement and in that case there was not agreement to submit differences but only an option given to the parties to have differences submitted. The option was not exercised prior to the issue of the proceeding. The case was followed by some courts and not followed by others.

128. In Turner Corporation Ltd v. Austotel Pty Ltd (1992) 27 NSWLR 592, Giles, J considered the authorities and declined to follow Hammond v. Wolt.

131. In that case his Honour was concerned with standard contract form JCCA 1985 which is the predecessor of the 1994 version with which I am concerned. Section 13 in the earlier contract was headed "Arbitration" and is in similar form to the present contract save that the present contract provides for private negotiation in the dispute resolution path and requires notice to be given before arbitration or litigation. However, under the earlier contract either party could give notice of a dispute to the other and at the expiration of ten days the party actually giving the notice "shall ... notify the other party in writing that he requires the dispute or difference to be referred to arbitration."

134. Once the notice and other prerequisites were satisfied the dispute was referred to arbitration. The contractor issued court proceedings and the proprietor sought a stay of the proceeding.

137. The question that Giles, J had to consider was whether the clauses in Section 13 constituted an arbitration agreement as application had been made to stay the proceeding pursuant to s.53(1) of the New South Wales Commercial Arbitration Act 1984.

140. His Honour held that a contractual term giving the right to a party to elect to litigate or arbitrate a dispute constituted an arbitration agreement within the meaning of the Act. He held that the agreement to refer a dispute to arbitration within the statutory definition of arbitration agreement was found in the contractual term itself and did not depend upon a party exercising an option to refer a matter to arbitration.

143. His decision was approved by the Court of Appeal of New South Wales in ABB Powerplants Ltd v. Electricity Commission of New South Wales (1995) 35 NSWLR 596.

146. The controversy was put to rest by the High Court in PMT Partners Pty Ltd v. Australian National Parks and Wildlife Service [1995] HCA 36; (1995) 184 CLR 301.

149. In that case the court was concerned with a contract which set out a step by step dispute resolution procedure which provided for a superintendent to consider a contractor's claim and if the contractor was dissatisfied he could refer the matter to the Principal for decision. The contract went on to provide that if the contractor was dissatisfied by the Principal's decision the contractor -

"May, not later than 28 days after the decision of the Principal is given to him, give notice in writing to the Principal requiring that the matter at issue be referred to arbitration and specifying with detail particulars the matter at issue and thereupon the matter at issue shall be determined by arbitration."

153. The High Court held that the clause in question did constitute an arbitration agreement within the meaning of the Act. I should add that the statutory definition with which the court was concerned is in exactly the same terms as s.4(1) of the Act.

156. Brennan, CJ, Gaudron and McHugh, JJ said at p.310 -

"The words 'agreement ... to refer present or future disputes to arbitration' in s.4 of the Act are, in their natural and ordinary meaning, quite wide enough to encompass agreements by which the parties are bound to have their dispute arbitrated if an election is made or some event occurs or some condition is satisfied, even if only one party has the right to elect or is in a position to control the event or satisfy the condition. To some extent, that meaning is confirmed by s.53(1) which, as already indicated, confers the power exercisable on the application of a party to an arbitration agreement with respect to 'a matter agreed to refer to arbitration.' However and more important, there is nothing in the Act which requires that the natural and ordinary meaning of the words used in the definition be qualified in any way. When it is given its natural and ordinary meaning, the definition is clearly satisfied by clause 45, even if, as was held by the Court of Appeal, clause 45 does not preclude the contractor from pursuing its claim in the courts."

160. The High Court went on to hold that the Court of Appeal was wrong in construing the clause as permitting the contractor to elect between proceeding in the courts and by way of arbitration prior to the expiration of the 28 day period.

163. In Turner Corporation Ltd v. Austotel Pty Ltd, supra, Giles, J, as I have already stated, was considering the predecessor of the contract with which I am concerned which was substituted for the earlier contract in August 1994. I have already set out above the difference between the two contracts.

166. His Honour held on the 1989 version that the term which gave the complaining party the right to give notice to the other party that it required the matter to be referred to arbitration was an arbitration agreement within the meaning of the statutory definition.

169. The 1994 contract provides for a private negotiation procedure - see clause 13.02 - which was not in the previous edition of the contract. Further, by reason of clause 13.03 either party was given the right to give notice to the other party to refer the dispute to arbitration or litigation. This latter step was a condition precedent to the commencement of any dispute resolution proceedings. It follows that the agreement to arbitrate would not be activated until there was an election.

172. In my opinion, clause 13.03 when read in context constitutes an agreement to refer present or future disputes to arbitration within the meaning of s.4(1) of the Act because the agreement to proceed to arbitration is found in clause 13.03 and this is made clear by the fact that once the steps were carried out the parties agreed that the dispute would be referred to arbitration - see clause 13.04.

175. It follows, at the time the writ was issued there was an arbitration agreement between the parties which had been activated by the giving of notice by the defendant prior to the issue of the writ.

178. This brings me to the second question, namely, that since the plaintiff gave notice referring to litigation ahead of the defendant's notice referring to arbitration that the defendant's right to go to arbitration was lost.

181. The answer to this question depends upon a proper construction of Section 13 in the context of the agreement as a whole and in accordance with its commercial purpose.

184. The court's object in interpreting a contract is to determine the common intention of the parties. The primary source of the common intention is the words of the contract itself. They are to be considered in context after taking into account the whole document.

187. The words are to be given their normal every day meaning unless the words bear a special meaning which is established.

190. If the language used is clear and definite there is no necessity to resort to any aids to interpret the agreement. Clear language must be given effect to. But if language is obscure, uncertain or ambiguous the court must seek to determine what the parties intended by resorting to admissible evidence and aids to construction.

193. The quest of the court to determine the common intention requires the court to approach the task on an objective basis. The function of the court is to ascertain the presumed intention of the parties. The court is not concerned with what a party actually intended.

196. In a commercial contract the court must consider the commercial purpose and give effect to what one would describe as the commercial common sense of the transaction. See Schenker (Aust) Pty Ltd v. Maplas Equipment and Services Pty Ltd [1990] VicRp 74; (1990) VR 834 at 837, 840 and 848. The court seeks to avoid a result which is unreasonable or absurd when viewed in a commercial setting. See L. Schuler A.G. v. Wickham Machine Tools Sales Ltd [1973] UKHL 2; (1974) AC 235 at pp.251, 255-6, 264 and 272. Clearly parties do not intend an absurd or an unjust result.

199. Under the 1994 edition of the contract, a mediation-type procedure is required before the parties may refer their dispute to arbitration or litigation.

202. Clause 13.03 gives either party the right to give notice to refer the dispute to arbitration or litigation. The sub-clause makes it clear that the service of such notice is a condition precedent to commencement of either arbitration or litigation.

205. It is important to note that under clause 13.04 if the party seeking arbitration gives notice accompanied by the deposit of $1,000 by way of security for costs, then the dispute "shall be and is hereby referred to arbitration pursuant to the succeeding provisions of this Section 13."

208. In my opinion, the plain reading of the words of clauses 13.03 and 13.04 lead to the conclusion that the mere fact that one party seeks resolution by litigation does not preclude the other party from exercising the right given to it to refer the matter to arbitration. There are no words in Section 13 or the contract which in any way excludes the right to elect to either party. The mere fact that one does ahead of the other does not exclude the other's right.

211. If the parties intended to exclude the other option, the parties could have expressly said so. They did not.

214. Once the defendant gave notice accompanied by the evidence of the payment of the deposit the agreement to arbitrate was activated and the dispute was referred to arbitration. That is what the parties agreed in clause 13.04. This was done by the defendant prior to the institution of the legal proceeding and accordingly as at the commencement of the proceeding the plaintiff was a party to an arbitration agreement.

217. My conclusion is supported by consideration of the commercial object of the dispute resolution provisions.

220. The contract is a standard form contract which was issued by a joint committee of bodies representing architects, master builders and building owners. It superceded the 1989 JCC-B version.

223. One of the drawbacks of the earlier version was that the only party which could refer a matter to arbitration was the party giving notice of a dispute and then only at the expiration of ten days from the receipt of a notice given by that party. Experience showed that during this ten day period often the other party issued proceedings in the court in an endeavour to avoid the arbitration. In the light of the authorities up to 1994 there was a strong argument that until the complaining party gave the notice there was no arbitration agreement.

226. This, on any view, defeated the object of the contract to refer disputes to arbitration. In this regard it cannot be overlooked that most if not all standard form building contracts contain an arbitration clause and that in the great majority of cases disputes are referred to arbitration. That is the preferred method of resolution of building disputes not only by contractors but also other players in the building industry.

229. With that background in mind one turns to the 1994 version which gives either party the right to refer a matter to arbitration but requires any party which proposes to go to litigation to give notice of same. In my opinion, the purpose of giving notice of proposed litigation is to enable the other side to decide whether to go down that path or refer the matter to arbitration. Whilst clause 13.03 contains no time limits between notice and the institution of a proceeding, in order to give effect to the intention of the parties it must be implied that reasonable notice should be given between the delivery and institution of the proceeding. Otherwise, why have any notice at all. The present facts demonstrate that giving notice and then instituting proceedings within two hours of giving notice hardly gives effect to the notice.

232. In this regard it cannot be overlooked that the mere fact that a party agrees to arbitrate does not preclude that party issuing proceedings in the court even though that step is in breach of the agreement. The courts decline to grant specific performance of an arbitration agreement and an action in the courts in breach of the arbitration agreement is not defeated by pleading by way of defence the agreement. Remedy for a breach of contract in these circumstances was by way of an action for damages which more often than not were no more than nominal damages. See Doleman and Sons v. Ossett Corporation (1912) 3 KB 257 at 267-9.

235. It follows that the mere fact that under clause 13.04 the dispute was referred to arbitration would not preclude the other side from bringing a proceeding but always subject to having it stayed pursuant to s.53 of the Act.

238. The giving of notice to refer to litigation with a reasonable period between notice and institution of proceedings gives the other party the opportunity to refer to arbitration. If the party still wishes to go to litigation he may do so and may succeed in opposing a stay for good cause. But at least the parties have an opportunity to consider their options. What happened here defeats that intention.

241. Further, given that that is the law, it would be surprising that the election by one party extinguishes the right to elect by the other party to the contract. Taken to its logical conclusion, Mr Tiernan's submission must be that if a party referred a matter to arbitration then this precluded the other side from issuing proceedings.

244. In my opinion, this could hardly have been the intention of the parties to this contract. It would be well-known to the framers of the contract that there may be very good reasons why a matter should proceed in a court and a stay would not be granted. It could hardly have been the common intention of the parties to destroy that right by one party electing to go to arbitration.

247. In my opinion, for all these reasons, on a proper construction of Section 13 of the contract in context and giving effect to the commercial purpose of the agreement, the parties did not intend that the election by one party extinguished the right to elect in the other party.

250. It follows that in my opinion the defendant's notice delivered on the morning of 1 February 1999 at 11.40 a.m. accompanied by a receipt for deposit of the sum of $1,000 activated the arbitration agreement and the parties thereby were bound to arbitrate their disputes. It follows that at the commencement of the proceeding there was an arbitration agreement. In the circumstances the defendant is entitled to its stay.

253. Subject to any submissions from counsel I propose to make the following orders -

(i) That the proceeding is hereby stayed pursuant to s.53(1) of the Commercial Arbitration Act 1984;

(ii) That the plaintiff pay the defendant's costs of its summons filed 15 February 1999;

(iii) That the plaintiff pay the defendant's costs of the proceeding.

---