Building arbitration - Application to set aside award for misconduct of arbitrator - Failure of arbitrator to deal with issues raised by reference - Turns on own facts

Commercial Arbitration Act 1985, s 38, s 42

Abigmano Ltd v Electricity Commission of NSW (1986) 3 BCL 290

Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349

Buckley v Bennell [1978] HCA 20; (1978) 140 CLR 1

Burger King Corporation v Hungry Jack's Pty Ltd [2001] NSWCA 187

Calabria v The Queen (1982) 151 CLR 671

Commonwealth v Cockatoo Backyards Pty Ltd (1995) 36 NSWLR 662

Dennis Willcocks Pty Ltd v Commissioner of Taxation (Cth) (1988) 79 ALR 267

Dornan v Riordan (1990) 95 ALR 451

Far Horizons Pty Ltd v McDonalds Australia Ltd [2000] VSC 310

Fercometal SARL v Mediterranean Shipping Co [1988] 3 WLR 200

Forsayth v Australasian Gold Mines (1992) 7 WAR 549

Friend and Brooker Pty Ltd v Council of the Shire of Eurobodalla, unreported; NSW C of A; 40293 of 1993; 24 November 1993

Frost v Knight (1872) LR 7 Ex 111

Garrett v Nicholson [1999] WASCA 32; (1999) 21 WAR 226

Holme v Guppy (1838) 2 M & W 387

Imperial Leatherware Co Pty Ltd v Macri & Marcellino Pty Ltd (1991) 22 NSWLR 653

Jennings Construction Ltd v Q H & M Birt Pty Ltd (1986) 8 NSWLR 18

John Hollywood Pty Ltd (trading as) John Hollywood Home Builders v LR & J Stagoll, unreported; 28 November 1996

Kalwy v Secretary, Department of Social Security [No 2] [1993] FCA 644; (1993) 32 ALD 451 (Fed Cth)

Larkin v Parole Board (1987) 10 NSWLR 57

Melwood Units Pty Ltd v Commissioner of Main Roads (1978) 52 ALJR 593

Mineco Pty Ltd v Abigroup Contractors (WA) Pty Ltd (1992) 7 WAR 576

Minister for Industrial Affairs v Civil Tech Pty Ltd [1997] SASC 6298; (1997) 69 SASR 348

Morgan v S & S Constructions Pty Ltd [1967] VicRp 17; [1967] VR 149

Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124

Percy Bilton Ltd v Greater London Council (1982) 20 BLR 1

Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd [1954] HCA 25; (1954) 90 CLR 235

Pimas Constructions Pty Ltd v Metropolitan Waste Disposal Authority [1988] 7 ACLR 68

Pioneer Shipping Ltd v BTP Trioxide Ltd (NEMA) [1982] AC 724

Pollock v Wellington (1996) 15 WAR 1

Pownall v Conlan Management Pty Ltd (1995) 12 WAR 370

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

QBE Insurance Ltd v Moltoni Corporation Pty Ltd [2000] WASCA 82; (2000) 22 WAR 148

Renard Construction (ME) Pty Ltd v Minister for Public

RP Robson Construction Pty Ltd v Williams (1989) 6 BCL 219

Shirley Sloan Pty Ltd v Merril Holdings Pty Ltd [2000] WASC 99

State of South Australia v Fricker Carrington Holdings Pty Ltd (1987) 3 BCL 72

Sydney Water Corporation Ltd v Aqua Clear Technology Pty Ltd, unreported; SCt of NSW (Rolfe J); 55047 of 1996; 17 December 1996

Thiess Watkins White Construction Ltd v Commonwealth of Australia (1992) 14 BCL 61

Turner Corporation Ltd (Receiver and Manager Appointed) v Austotel Pty Ltd (1994) 13 ACLR 62

UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57; (2002) 22 WAR 221

Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251

Wells v Army and Navy Co-operative Society (1902) 86 LT 764

Westminster Corp v Jarvis [1970] 1 WLR 637

White Constructions (NT) Pty Ltd v Mutton [1988] NTSC 53; (1988) 91 FLR 419

Worthmore Homes Pty Ltd v Martin & Anor [2002] WADC 237

1 MASTER SANDERSON: By notice of originating motion, the applicants in these matters sought leave to appeal, pursuant to s 38 of the Commercial Arbitration Act 1985 ("the Act"), on a question of law arising out of the second interim award of Mr A B Goold, the award being handed down on 17 April 2003. Alternatively, the applicants sought to have the award set aside under s 42 of the Act. The notice of originating motion by its terms is somewhat unclear but at the hearing of the applications, both parties accepted the applications were made on the basis I have just set out. At the conclusion of the hearing I indicated to the parties that I would remit the matters to the arbitrator for reconsideration, pursuant to s43 of the Act. I indicated I would publish reasons for that decision. These are those reasons.

2 On 11 August 1999 the applicants and the first respondent entered into a contract pursuant to which the first respondent was to construct a single residence on Lot 54 St Leonard's Avenue, West Leederville, for a sum of $203,077. A number of disputes arose in relation to the contract and the construction of the residence. On 30 August 2001 Mr John Duncan, as arbitrator, handed down an interim award requiring the first respondent to undertake certain rectification work on the building. This award is not relevant to the present application.

3 Further disputes and differences which arose between the parties could not be resolved and on 10 May 2002 the second respondent was nominated as an arbitrator, pursuant to the provisions of the building contract by the president of the Housing Industry Association. The second respondent's appointment was confirmed by both parties at a preliminary meeting held on 6 June 2002. On 3 December 2002 the second respondent made a first interim award which determined that certain remedial works and maintenance were to be carried out by the first respondent. That first interim award is not relevant to this application.

4 Pursuant to the directions of the second respondent, the first respondent filed points of claim. Relevantly, it filed amended points of claim on 8 August 2002 (Appeal Book, volume 1, page 192). These points of claim identified the parties, detailed the documents comprising the building contract and referred to certain express terms of the agreement (par 1 to 5). By par 6 of the amended points of claim the first respondent pleaded that there were terms to be implied in the building contract that first the appellants would not interfere with the progress of the works and second, the first respondent would not be liable to the applicants for any delay caused by any act "of prevention" on the part of the respondents. It is said (by par 7) that the first respondent commenced the works on or about 21 February 2000 and that it brought the works to practical completion on 20 March 2002 (par 8). It is then said that pursuant to the terms of the building contract the first respondent was entitled to extensions of time for completion of the work totalling 335 days (par 9). Particulars of this claim were provided. It was said that pursuant to special condition 1 of the building contract, the first respondent was entitled to an amount of $16,432 by way of compensation for GST (par 10). The first respondent claimed it was entitled to interest on progress claim no 3 as a consequence of the applicants' failure to make payment on time (par 11) and it was said that consequent upon adjustments under the building contract, the sum due on practical completion had increased from the contract sum and allowing for payments made to date, there was a balance of $101,250.08 outstanding (par 12 and 13).

5 It was then pleaded that the applicants had breached the implied terms of the contract and had caused delays, and as a consequence, the applicants were liable to the first respondent in an amount of $45,696.31 (par 14 and 15). Particulars of this last claim were provided.

6 The applicants replied to these amended points of claim with a further amended points of defence and counterclaim dated 14 October 2002 (Appeal Book, volume 1, page 203). It is unnecessary for me to go through that document in detail. It is sufficient if I say that the applicants admitted the first five paragraphs of the points of claim so that there was no dispute between the parties as to the documents comprising the building contract or the express terms the first respondent said were contained in the contract. The applicants denied that there were to be terms implied in the building contract as set out by the first respondent in the points of claim. The applicants went further and said, in effect, that the terms of the building contract dealt with the issue of delay, the implication being that the terms the first respondent was seeking to imply into the building contract were at odds with the express terms of the building contract. This then was an issue between the parties - were there any terms to be implied into the contract?

7 The applicants specifically denied that the works were brought to practical completion by the first respondent on 20 March 2002. In fact, the applicants denied that there was ever practical completion. They said that the first respondent having failed to achieve practical completion by 4 August 2000 (the date they said practical completion was due) terminated the building contract on 17 April 2002. This raises the second issue between the parties - was practical completion achieved by the first respondent and if so, on what date?

8 The applicants denied that the first respondent was entitled to claim for GST either pursuant to special condition 1 of the building contract or otherwise. Further, the applicants said that if there was any entitlement to claim GST pursuant to the building contract, the first respondent had represented prior to the parties entering into the building contract, that no such claim would be made. It was said that to now seek to enforce any available contractual rights would be unconscionable and the first respondent should not have any award made in its favour. This then was the third issue between the parties - the first respondent's entitlement to make a claim for GST payments.

9 The applicants denied that they were late in making any payments on progress claims 3 and 4 and they denied that they were liable to make any interest payments pursuant to the provisions of the contract. This was the fourth issue between the parties - was the first respondent entitled to any interest on late payment of progress claims numbered 3 and 4?

10 Finally, there is the first respondent's claim for damages caused by the applicants' alleged breach of the implied terms of the contract. The respondent had already denied that there were terms to be implied in the contract as set out by the first respondent. However, it appears that the applicants put in issue the amount of any damages to which the first respondent might have been entitled if it established that there were terms to be implied in the agreement and that those implied terms had been breached by the applicants. This then is the fifth issue - what damages should be awarded to the first respondent for breach by the applicants of the implied terms set out in the points of claim. It is worthy of note that particulars of loss and damage for this last claim were supplied in annexure 3 to the points of claim. The damages claimed related to seven separate matters. The first of these matters was "administration overhead". Although the wording in the particulars is somewhat obscure, it appears that the first respondent put its administration costs at 5 per cent of the contract price. It then calculated a daily rate for administration costs of $63.46 per day. It was said that the claimants were responsible for 260 days of 335 days delay, leading to a claim of $16,499.16.

11 Hearing of the arbitration occupied seven days between 16 August and 19 November 2002. The second interim award set out the second respondent's findings as to the documents which comprised the building contract. He then outlined the respective claims of the applicants and the first respondent and quantified each of those claims. The second respondent then, under the heading "Delays to Contract", appears to have determined a number of issues. For instance, in relation to the date of practical completion it appears that the second respondent determined that the date of practical completion was 15 April 2002. It is not possible to ascertain from a reading of the award how he arrived at that date. It was not a date put forward by either party. Equally, the second respondent does not appear to have determined whether or not the implied terms contended for by the first respondent formed part of the contract. Given that an award was made to the first respondent for an amount to cover delays, it can perhaps be implied that the second respondent found that the first respondent had made out its case. But that is nowhere stated. Nor are the other matters which were at issue between the parties and which emerged from the points of claim clearly addressed.

12 With due respect to the second respondent, it is by no means clear from his award just what issues he has addressed and how he has reached the conclusions which have led to the award in favour of the first respondent. The purpose of points of claim and points of defence - indeed the point of any pleading, whether it be in an arbitration or in a matter before the courts - is to define the issues. That has been done in this case. These issues ought then be addressed and the process of reasoning which led to the arbitrator's conclusions ought be set out. As matters stand at the moment, it is not possible to tell how and why he came to the conclusions that he did.

13 In Villani & Anor v Delstrat Pty Ltd & Anor [2002] WASC 112, McKechnie J confronted a similar problem. His Honour was there considering an application to set aside an award on the basis of misconduct. As I understand the decision, the applicants had argued that the failure to produce reasons for his decision was a breach by the arbitrator of the rules of natural justice. His Honour expressly declined to deal with this issue. Rather, he focussed on the need of the arbitrator to determine matters in issue between the parties. His Honour said (at par 40):

"Where parties under a contract agree to submit a dispute to arbitration, there must be implied a condition that the arbitrator will determine the matters in controversy. No doubt there is some limit to such a rule. It may not be essential for every matter in controversy to be resolved in order for a proper award to be made. However, where the matters in dispute are defined by points of claim and points of defence, unless there is a formal or practical abandonment of any such points, the arbitrator has a duty to resolve those defined issues."

14 With respect, that statement of principle seems to me to go to the heart of the dispute resolution process - whether the matter is dealt with by way of arbitration or by judicial determination. The failure to determine all issues in dispute in an arbitration can amount to misconduct because the procedure "has, or may have, unjustly prejudiced a party in some respect material to the outcome": see Thiess Contractors Pty Ltd v Water Corporation of Western Australia, unreported; SCt of WA; Library No 970561; 28 October 1997 per Parker J at 38.

15 I should emphasise that it is in no way suggested that the second respondent has in any way conducted himself in this matter which might be said to involve moral wrongdoing or display bias, prejudice, interest or corruption. I am not using the term "misconduct" in that sense. Rather, the word is used in the sense that the adjudication process has gone wrong as a consequence of the way that the arbitrator has approached the matter. On that basis it is proper that I set aside the award and refer the matter back to the second respondent.

16 There is one further matter raised by counsel for the first respondent which deserves attention. Counsel made the point that this case involves a domestic arbitration where by any measure the amount involved is modest. Counsel pointed out that the dispute has now dragged on for an inordinate period of time and that the parties have incurred substantial costs. Counsel submitted that I ought exercise my discretion and leave the award untouched. Counsel's point was, essentially, that taken as a whole, the arbitrator's award represented a reasonable compromise between the competing claims of the parties. That being so, even if the reasoning which led to the award being made was not entirely transparent, no real purpose would be served by setting aside the award.

17 Counsel's reasoning has some attractions. His points about cost and delay are well made. But in the end, a party who submits a dispute for arbitration is entitled to know why it is that an arbitrator comes to a particular conclusion. If that is not done, even if it can be said that the award looks "about right", the process has miscarried. That is what has happened here. Regrettable as it may be, the matter must go back to the arbitrator.

18 I will hear the parties as to the precise form of order and as to costs.