Commercial arbitration - Leave to appeal from arbitrator's decision - Denial of natural justice or procedural fairness - Decision of arbitrator based on construction of contract neither party raised or argued - Turns on own facts

Commercial Arbitration Act 1985 (WA), s 4, s 14, s 38, s 42

1 MARTIN CJ: The applicant, Murray & Roberts Australia Pty Ltd (Murray & Roberts) applies for leave to appeal from an interim award issued by the arbitrator, Mr DS (Scott) Ellis, during an arbitration between Murray & Roberts and the respondent to this appeal GB Lifestyles Pty Ltd (GB Lifestyles). The arbitration is governed by the Commercial Arbitration Act 1985 (WA) (the Act). By the interim award, the arbitrator awarded and declared that Murray & Roberts had breached a contract between the parties by failing to transfer a blast unit to GB Lifestyles. Murray & Roberts seek leave to appeal against this decision on a number of grounds. For the reasons which follow, leave to appeal should be granted on grounds 1, 2, 4 and 5, and the question of whether leave to appeal should be granted in respect of ground 3 should be referred to the hearing of the appeal.

2 There are other proceedings before the court between these parties arising from the same contract. The issues raised by those proceedings have not been referred to arbitration. Directions for the mediation of those proceedings were made at the same time as the application for leave to appeal from the decision of the arbitrator was heard. At the conclusion of the hearing the parties agreed that the application for leave to appeal from the arbitrator's decision should also be referred to mediation, and directions were made to that effect. In that context, the parties agreed that my decision should be deferred pending the mediation. The mediation has now been conducted and I have been advised that the parties have not resolved their differences. That course explains the delay in the provision of this decision.

3 The application for leave to appeal was heard separately from the substantive appeal, consistently with the conventional procedure in such cases - see Cole v Gebaner Nominees Pty Ltd [2012] WASC 9; City of Canning v Avon Capital Estates (Australia) Ltd [2012] WASC 223; Gordian Runoff Ltd v Westport Insurance Corporation [2010] NSWCA 57; (2010) 267 ALR 74 (overturned on appeal on other grounds in Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37; (2011) 244 CLR 239). However, during the course of argument on the application for leave to appeal, I raised with the representatives of the parties the question of whether, if leave to appeal was granted, there was anything more that could be said in relation to the substantive issues, and if not, whether it would be appropriate for me to proceed to resolve the substantive appeal on the basis of the submissions advanced by the parties with respect to the grant of leave. I received inconclusive answers from the representatives of the parties with respect to that issue. Prior to delivery of these reasons I caused my Associate to renew enquiries of the parties on this topic. As there was no agreement as to the procedural course which should be followed, I will publish these reasons and invite further submissions from the parties on that question.

4 Since this matter was argued, the Commercial Arbitration Act 2012 (WA) (the 2012 Act) has come into operation. However, the 2012 Act has no impact upon these proceedings, because s 43(2) of that Act provides that if an arbitration was commenced before that section came into operation (as the relevant arbitration in this case was), the law governing the arbitration is that which would have been applicable if the 2012 Act had not been enacted, which in this case is the law provided by the Act.

General principles governing the grant of leave to appeal

(1) Without prejudice to the right of appeal conferred by subsection (2), the Court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law, on the face of the award.

(2) Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.

...

(4) An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement -

(a) with the consent of all the other parties to the arbitration agreement; or

(b) subject to section 40, with the leave of the Supreme Court.

(5) The Supreme Court shall not grant leave under subsection (4)(b) unless it considers that -

(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement; and

(i) a manifest error of law on the face of the award; or

(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.

(6) The Supreme Court may make any leave which it grants under subsection (4)(b) subject to the applicant complying with any conditions it considers appropriate.

6 Section 38 is concerned with finality in arbitration proceedings and is designed to limit the intervention of courts in arbitration - New Generation Enterprises Pty Ltd v Western Australian Planning Commission [2007] WASCA 89 [44]; D & M (Australia) Pty Ltd v Crouch Developments Pty Ltd [2011] WASCA 109 [18]. I recently outlined the general principles governing the grant of leave to appeal in D & Z Constructions Pty Ltd v IHI Corporation [2013] WASC 265 [2]:

1. An appeal lies on a question of law 'arising out of an award' (Act, s 38(2)).

2. The subject matter of any appeal is confined to questions of law (Westport Insurance Corporation v Gordian Runoff Ltd [2011] HCA 37; (2011) 244 CLR 239 [27] (Westport Insurance)).

3. The scheme of the Act is to hold parties to their agreement to accept factual findings made by arbitrators (Westport Insurance [27]).

4. In the absence of the consent of all parties to the arbitration agreement, an appeal can only be brought with the leave of the court (Act, s 38(4)).

5. Leave cannot be granted unless the court considers that the determination of the question of law concerned could substantially affect the rights of at least one of the parties to the arbitration agreement, and either:

(a) there is a manifest error of law on the face of the award; or

(b) there is strong evidence that the arbitrator made an error of law and that the determination of the question may add, or may be likely to add substantially to the certainty of commercial law (Act, s 38(5)).

6. The requirement that the error of law be manifest on the face of the award means that it must be apparent to that understanding by a reader of the award (Westport Insurance [42] (French CJ, Gummow, Crennan and Bell JJ), [163] (Kiefel J)).

7. The requirement that the error be manifest on the face of the award does not import a requirement that the error of law have a particular quality or character, so as to include only facile errors, and exclude complex errors (Westport Insurance [45] (French CJ, Gummow, Crennan and Bell JJ), [163] (Kiefel J)).

8. Even if the statutory requirements for the grant of leave are satisfied, the court retains a residual discretion to refuse leave (Westport Insurance [38] (French CJ, Gummow, Crennan and Bell JJ), [165] (Kiefel J)). That discretion will be exercised having regard to 'the rival merits of assured finality on the one hand and upon the other the resolution of doubts as to the accuracy of the legal reasoning followed by the arbitrator' (Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724, 739 (Lord Diplock), cited with approval in Westport Insurance [38]). Other matters to be taken into account when deciding whether leave should be granted (assuming the statutory requirements are satisfied) include the character or quality of the error of law (Westport Insurance [47]), whether the rights of the parties will be substantially affected by the determination of the question of law (Westport Insurance [165]), and all the circumstances of the case (Westport Insurance [29], [165]; Qantas Airways Ltd v Joseland and Gilling (1986) 6 NSWLR 327, 333 (McHugh JA)).

7 Murray & Roberts rely on both limbs of s 38(5)(b). They assert that there is either a manifest error of law on the face of the award, or strong evidence that the arbitrator made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law. However, as will appear, the issues raised by the proposed grounds of appeal are entirely idiosyncratic to the dispute between these parties, and depend almost entirely upon the particular way in which the arbitration was conducted by those parties and by the arbitrator. As will appear from the reasons which follow, it is abundantly clear that there is no question of law arising in these proceedings, the determination of which may add or be likely to add substantially to the certainty of commercial law. Accordingly, leave to appeal can only be granted if the court is satisfied that there is a manifest error of law on the face of the award. For that reason it will be necessary in due course to determine precisely which documents constitute the award for the purposes of s 38 of the Act.

8 That constraint would not have applied if Murray & Roberts had moved to set aside the interim award pursuant to s 42 of the Act on the grounds of misconduct on the part of the arbitrator being, relevantly in this case, failure to comply with the principles of procedural fairness (see the definition of 'misconduct' in s 4 of the Act). However, Murray & Roberts did not take that course.

9 On 9 January 2013, the arbitrator published an interim award dated 31 December 2012 in which he awarded and declared that Murray & Roberts breached a contract entered into between GB Lifestyles and the Murray & Roberts - Marine & Civil Joint Venture (MMJV), by failing to transfer a blast unit to GB Lifestyles in accordance with the contract. The arbitrator also published reasons for the award, dated 31 December 2012, which he expressly incorporated into the award.

10 In paragraph 8 of his reasons the arbitrator expressly adopted a Statement of Agreed Facts dated 26 November 2012. The agreed facts set out in that document may be summarised as follows.

11 GB Lifestyles carries on the business of providing commercial painting and other related services. Murray & Roberts are an engineering and construction contractor, and were party to an unincorporated joint venture with Marine & Civil Construction Pty Ltd (the MMJV). The MMJV was awarded a design and construction contract to perform works related to Chevron's Gorgon Liquefied Natural Gas Project, namely the construction of a materials offloading facility off the coast of Barrow Island (Barrow Island Project). Murray & Roberts exercised step-in rights and assumed control over the MMJV in August 2010.

12 The parties agreed that Murray & Roberts was the proper respondent to GB Lifestyles' claim, and did not seek to argue that Marine & Civil Constructions should be joined to the proceedings. Voluntary administrators were appointed to Marine & Civil Construction Pty Ltd in late 2010, and in February 2011, the MMJV was dissolved and Marine & Civil Construction Pty Ltd were released from the design and construction contract.

13 In April 2010, GB Lifestyles entered into negotiations with the MMJV relating to a subcontract for the supply of painting and blasting services for the Barrow Island Project.

14 On or around 3 December 2010, GB Lifestyles and the MMJV entered into a written Agreement for the Supply of Painting Services (Contract). The provisions of this Contract will be discussed in greater detail below [20].

15 Relevantly, as part of the performance of its obligations under the Contract, GB Lifestyles procured and mobilised a 'blast unit' to site, which was to be used to carry out works under the Contract.

16 On 14 May 2012, at 1.14 pm, a representative of Murray & Roberts, Mr Clive Watt, sent an email to a number of individuals, including Ms Barbara Malouf from GB Lifestyles, advising them that Murray & Roberts had accepted GB Lifestyles' offer to buy-back the blast unit, and 'agreed accessories' including a blast hose, nozzle and other accessories, for $42,000 (GST inclusive). The email was annexed to the Statement of Agreed Facts (Annexure B).

17 At 1.27 pm on the same day, Mr Watt sent a supplementary email to Ms Malouf, stating that as the blast unit had been sold, he needed to retract the offer to sell the blast unit to GB Lifestyles.

18 The parties also agreed that on 23 May 2012, GB Lifestyles paid $42,265 into the account of Murray & Roberts for the blast unit, and that on 24 May 2012, Murray & Roberts refunded the $42,265 received from GB Lifestyles by electronic funds transfer.

19 The arbitrator summarised the dispute between the parties at the commencement of his reasons. He referred to the mobilisation of a blast unit to site by GB Lifestyles pursuant to the Contract with Murray & Roberts. He referred to the assertion of GB Lifestyles that it was entitled to acquire or take possession of the blast unit for $42,625, and that it had exercised that right. He referred also to the concession by Murray & Roberts that it was unable to supply the blast unit to GB Lifestyles because it had sold the unit to someone else. The question posed for determination by the interim award was whether Murray & Roberts was liable to GB Lifestyles for breach of the Contract as a consequence of its inability to supply the unit in return for the payment.

20 The arbitrator referred to the relevant contractual provision upon which GB Lifestyles relied (the Provision), which formed part of Attachment C to the Contract. The Provision is in these terms:

Mobilisation and supply equipment as per Sea container equipment list attached

21 The arbitrator recorded in his reasons the fact that the sea container list includes the blast unit which was the subject of the dispute before him.

22 The arbitrator referred to the contention of Murray & Roberts to the effect that once the blast unit had been delivered to site, it was the owner of the blast unit and that the effect of the Provision was to provide it with a put option under which it could require GB Lifestyles to acquire the unit for a price of $42,625.

23 The arbitrator then referred to an issue between the parties as to whether he could have regard to extrinsic evidence as an aid to the construction of the Provision. In that context he referred to documents annexed to the submissions of Murray & Roberts which were said to be admissible as an aid to the construction of the contract.

24 The arbitrator considered that the Provision was ambiguous with the result that extrinsic evidence of the surrounding circumstances known to the parties at the time of their contract was admissible. However, he considered that the materials upon which Murray & Roberts relied were, in the main, documents relating to negotiations between the parties which were not admissible as an aid to construction of the contract. Nevertheless, he identified one fact evident from the materials which was admissible as an aid to the construction of the contract - namely, that the blast unit was to be new equipment, and was not equipment already owned by GB Lifestyles. The arbitrator also took into account the nature of the blast unit and the function that it was to perform, based on evidence which had been provided in the form of a witness statement of Mr Adrian Joseph Malouf. Another fact which he took into account as an aid to construction was the fact that GB Lifestyles carries on the business of providing commercial painting and related services. He drew an inference from the facts to which he had referred that it was unlikely that Murray & Roberts would have had an ongoing use for the blast unit once the contract was complete, whereas GB Lifestyles may well have had such an ongoing use.

25 The arbitrator referred to the contention of GB Lifestyles to the effect that the blast unit was at all times its property, and that it was entitled to demobilise the unit from site upon payment of a fee of $42,625, which it had paid. At no point in his reasons did the arbitrator refer to the discrepancy between the agreed fact with respect to the amount actually paid by GB Lifestyles, and refunded by Murray & Roberts, which was $42,265, and the amount specified in the relevant contractual provision, which was $42,625.

26 The arbitrator referred to the reliance which GB Lifestyles placed on other provisions of the Contract, including general condition 18.1 and general condition 17. General condition 18.1 provides that the subcontractor (GB Lifestyles) assumes the risk of loss in respect of the Subcontract Equipment, which is defined as meaning 'any equipment ... owned, leased, borrowed, utilised, chartered, hired or provided by Subcontractor to perform the work that will not be permanently incorporated into the Work'. General condition 17.1 provides that title to the 'Work and Subcontractor Material intended for incorporation into the Work shall pass to and vest with the Owner from the earliest moment of identification to the Work'.

27 The arbitrator recorded the contention of GB Lifestyles to the effect that because, under general condition 18.1, it carried the risk of loss in respect of the blast unit, and because general condition 17 did not have the effect that title in the blast unit was transferred to Murray & Roberts, because the unit was not incorporated into the Work, property in the blast unit was not transferred to Murray & Roberts, but remained with GB Lifestyles at all times.

28 The arbitrator rejected that proposition. The arbitrator placed considerable reliance on the fact the Provision stated that GB Lifestyles were to 'buyback' the blast unit on the provision of $42,625 to Murray & Roberts, on the basis that it formed part of a schedule which must have been specifically negotiated between the parties. He held that it could be inferred that GB Lifestyles would gain 'something' in return for this payment, namely ownership of the blast unit. He said that this in turn suggested that Murray & Roberts was the owner of the blast unit until the payment was made (reasons [21]). He did not accept GB Lifestyles' argument that general condition 18 of the Contract meant that they were the owner of the blast unit. Instead, he said that this indicated an intention that GB Lifestyles would need to replace the blast unit on site if it was damaged prior to completion of the Contract, not that they would have title in either the unit or in any replacement equipment.

29 He also rejected GB Lifestyles' argument that the payment of $42,625 constituted a demobilisation fee, as other demobilisation fees in the Contract had been expressly identified in the Contract (reasons [22]).

30 The arbitrator then addressed Murray & Roberts' argument that the Provision constituted a put option, entitling it to compel GB Lifestyles to repurchase the blast unit after the completion of the works. He rejected this argument and held that on its proper interpretation, the Provision constituted a call option, conferring upon GB Lifestyles a right to compel Murray & Roberts, as the owner of the blast unit, to sell it to GB Lifestyles for $42,625.

31 The arbitrator went on to consider whether the option had been exercised by GB Lifestyles. He held that as the Provision did not detail how the right to purchase was to be exercised, as a matter of necessary implication an unequivocal assertion by GB Lifestyles of its 'buyback' rights would be required. He held that GB Lifestyles had done what was necessary to require the blast unit to be transferred to it, asserting that this was 'apparent from paragraphs [14] and [17] of the statement of agreed facts, and from paragraph [16] of Mr Malouf's statement' (reasons [28]).

32 The reference to [17] of the statement of agreed facts is problematic, because the statement of agreed facts dated 26 November 2012 contains only 15 paragraphs. It is common ground between the parties that the arbitrator should be taken to be referring to [17] in a draft statement of agreed facts dated 26 October 2012 which was sent to him by one of the parties, but which was never agreed. That paragraph corresponds exactly with [12] of the statement of agreed facts dated 26 November 2012. It was also common ground that the arbitrator's reference to [14] of the statement of agreed facts at this portion of his reasons should be taken to be a reference to the paragraph bearing that number in the draft statement of agreed facts dated 26 October 2012, which was in the following terms:

In or around April 2012, the Applicant advised the Respondent in writing that the Blast Unit was no longer required for the works under the Contract and that the Applicant wished to buy back the Blast Unit [14].

33 There is no paragraph to this effect in the statement of agreed facts dated 26 November 2012.

34 Paragraph 16 of Mr Malouf's statement is in the following terms:

On 23 May 2012, GBL paid the amount of $42,265 by electronic funds transfer to the account of M&R.

35 Again, the arbitrator makes no reference to the discrepancy between the amount paid (and refunded), and the amount required to be paid pursuant to the Provision. It seems a fair inference that this discrepancy was not drawn to his attention by the parties.

36 In the result, having concluded that GB Lifestyles had exercised the option to acquire the blast unit conferred by the Contract, and having regard to the admitted fact that Murray & Roberts had failed to transfer the blast unit to GB Lifestyles, the arbitrator concluded that Murray & Roberts had breached the Contract and issued his award to that effect.

37 Because the circumstances of this case do not give rise to any question, the determination of which may add, or be likely to add substantially to the certainty of commercial law, it is necessary to identify with precision the documents which comprise 'the award' for the purposes of s 38 of the Act, and in particular, for the purposes of the requirement that Murray & Roberts demonstrate that there is a manifest error of law on the face of the award in order to sustain the grant of leave to appeal.

38 Murray & Roberts assert that a number of documents other than the award itself, and the reasons for the award, should be taken to be incorporated into the award for the purposes of s 38 of the Act. Those documents are:

(2) The draft agreed statement of facts dated 26 October 2012;

(3) The agreed statement of facts dated 26 November 2012;

(5) The written submissions provided by the parties to the arbitrator; and

(6) The witness statements of Adrian Joseph Malouf and Andrew Scott Fanton.

39 It is trite to observe that the award will include all documents which the arbitrator intended to incorporate into it, and that this intention is assessed objectively - Gold Coast City Council v Canterbury Pipe Lines (Australia) Pty Ltd [1968] HCA 3; (1968) 118 CLR 58, 63; Hodgkinson v Fernie [1857] EngR 940; (1857) 3 CBNS 189; Champsey Bhara & Co v Jivraj Balloo Spinning and Weaving Co Ltd [1923] AC 480; [1923] All ER Rep 235; New Generation Enterprises Pty Ltd v Western Australian Planning Commission [49] (Pullin JA); Zurich Bay Holdings Pty Ltd v Iluka Midwest Ltd [2009] WASC 237 [15].

40 A number of factors will influence whether the documents sought to be relied upon by Murray & Roberts were intended by the arbitrator to have been incorporated into the award. If the arbitrator's reasons cannot be understood without reading the document, the reasons will be regarded as incorporating the document - New Generation Enterprises Pty Ltd v Western Australian Planning Commission [49] (Pullin JA); Alvaro v Temple [2009] WASC 205 [37]; Zurich Bay Holdings Pty Ltd v Iluka Midwest Ltd [16]; Anaconda Operations Pty Ltd v Fluor Australia Pty Ltd [2003] VSC 275 [49]; RP Robson Constructions v D & M Williams (1989) 6 BCL 219, 222; Ukrainian Association of Western Australia in Perth (Inc) v Squire Constructions Pty Ltd [2004] WASC 4 [25]. Put another way, if the decision or direction given is in terms which mean that it is not possible to understand what has been decided or directed without reference to another document, that document should be treated as incorporated into the award - Anaconda Operations Pty Ltd v Fluor Australia Pty Ltd [45] (Dodds-Streeton J); Gianfriddo v Garra Constructions Pty Ltd [1971] VicRp 34; [1971] VR 289, 290 291 (Smith J).

41 However, a mere recital or narrative statement referring to a document will be insufficient to incorporate the document into the award - Ukrainian Association of Western Australia in Perth (Inc) v Squire Constructions Pty Ltd [25]; Zurich Bay Holdings Pty Ltd v Iluka Midwest Ltd [16]; Gianfriddo v Garra Constructions Pty Ltd; City of Canning v Avon Capital Estates (Australia) Ltd [60].

42 I will apply these principles to the various documents which Murray & Roberts assert should be taken to be incorporated into the award.

43 The notice of reference to arbitration should be taken to be incorporated into the award. In W J Alan & Co Ltd v El Nasr Export & Import Co [1971] 1 Lloyd's Rep 401, Orr J confirmed 'that as regards an interim award the court is always entitled to look at the relevant documents to see what was submitted to arbitration' (408). This passage was cited with approval by Dodds-Streeton J in Anaconda Operations Pty Ltd v Fluor Australia Pty Ltd [46], and Applegarth J in Discovery Beach Project Pty Ltd v Northbuild Construction Pty Ltd [2011] QSC 306 [78].

44 To the extent that the terms of reference to arbitration are not recited in an interim award itself, to understand the scope of the reference to arbitration the court should be entitled to consider the reference to arbitration - see Discovery Beach Project Pty Ltd [78].

45 Whilst the arbitrator broadly refers to the question for determination by the award being whether Murray & Roberts were liable to GB Lifestyles for breach of contract as a result of its failure to deliver up the blast unit, it is necessary to have regard to the notice itself to understand his reasons and the scope of the reference to arbitration. It should therefore be taken to be incorporated into the award.

46 For the reasons I have already given, the arbitrator's reference to paragraphs [14] and [17] of the statement of agreed facts is incomprehensible unless reference is made to the draft statement of agreed facts that was provided to him by one of the parties. Because that statement was never agreed, the facts asserted therein cannot be taken as facts for the purposes of the application for leave to appeal. However, the document should be taken to be incorporated into the award for the purpose of rendering its terms comprehensible.

47 In [8] of his reasons, the arbitrator expressly adopts the statement of agreed facts and observed that it was not necessary for him to repeat them. That is a clear indication that the arbitrator intended that the statement of agreed facts should be incorporated by reference into his award, and the award should be construed accordingly.

48 Murray & Roberts also contends that the entirety of the Contract should be incorporated into the award. It refers to Gianfriddo v Garra Constructions Pty Ltd, where Smith J held that:

If the decision or direction is expressed to be based upon the wording of a specified clause of a contract, the clause is incorporated ... How matters stand where the decision or direction is expressed to be based not upon the wording or effect of any specified clause, but upon the wording or effect of the contract as a whole, or of the provisions of the contract relating to a particular subject matter, is debatable; but the weight of authority supports the view that in such circumstances the contract, or the relevant part of it, is incorporated (290 - 291).

See also - Anaconda Operations Pty Ltd v Fluor Australia Pty Ltd [45] (Dodds-Streeton J).

49 It is true that this is a case involving contractual construction, requiring the arbitrator to consider whether Murray & Roberts breached the contract by reference to a number of its provisions. However, on balance, it is my view that the arbitrator's reasons in this instance set out the provisions and the scheme of the Contract which he was asked to interpret in sufficient detail to indicate that he did not intend for the entirety of the Contract to be incorporated into the award. His reasons are wholly understandable without reference to the Contract.

50 Murray & Roberts contend that both their submissions and those of GB Lifestyles should be held to be incorporated into the award. However, on my view of the arbitrator's reasons, he has summarised the parties' submissions where relevant, and for the most part they may be readily understood without reference to those submissions.

51 There are two exceptions. In [13] of his reasons, the arbitrator refers to the primary battleground between the parties in relation to the admission of extrinsic materials being whether the contract was ambiguous, and states 'see applicant's submissions [5] - [8]'. By this reference, I infer that the arbitrator intended to incorporate [5] - [8] of GB Lifestyles' submissions into the award, as he does not otherwise summarise this portion of the submissions. However, this portion of GB Lifestyles' submissions merely outlines trite principles of contractual construction, and is not relevant to the application for leave to appeal.

52 Secondly, in his discussion of the extrinsic materials, the arbitrator refers to correspondence exchanged between the parties, comprising annexures B and C of Murray & Roberts' submissions. He does not, however, purport to outline the contents of the emails. His discussion of his reasons for refusing to consider these extrinsic materials proceeds on the assumption that the reader has read the materials, and is difficult to understand without reference to the annexures. Those annexures should, on balance, be held to be incorporated into the award.

53 Murray & Roberts also contend that the arbitrator's references to paragraphs of the parties' submissions in his summary of their arguments indicated that he intended to incorporate the submissions into the award (see, for example, reasons [19]). This contention should be rejected; the arbitrator's summary of the parties' arguments is perfectly understandable without reference to the submissions.

54 Subject to the exceptions to which I have referred, the submissions should not be held to be incorporated into the award for the purposes of this appeal.

The witness statements of Adrian Joseph Malouf and Andrew Scott Fanton

55 As I have noted, [16] of the witness statement of Adrian Joseph Malouf is expressly referred to by the arbitrator (at [28]). It is not paraphrased in the reasons or reproduced in full. Without reference to that portion of Mr Malouf's statement, the reason for the arbitrator holding that GB Lifestyles had done what was necessary to require the transfer of the blast unit would not be apparent, and it should therefore be taken to be incorporated into the award.

56 Mr Malouf's statement is also referred to as generally being accepted by the arbitrator (reasons [9]). However, this is not sufficient to justify the remainder of Mr Malouf's statement being incorporated into the award, as the terms used do not suggest incorporation by reference and the reasons may be understood without reference to the statement generally.

57 Mr Fanton's witness statement is referred to generally in the arbitrator's reasons [9]. However, the terms of the reasons do not suggest it should be regarded as incorporated by reference and I reject Murray & Roberts' submission that the arbitrator's reasoning process cannot be understood without reference to the terms of the statement. It should not be considered to be incorporated into the award.

58 The grounds of appeal for which leave is sought are as follows:

1. The Arbitrator erred in law in holding in the Interim Award that Murray & Roberts Australia Pty Ltd ('MRA') had breached the subcontract dated 3 December 2010 (the 'Subcontract') by failing to deliver up the blast unit (the 'Blast Unit') upon exercise by GB Lifestyles Pty Ltd ('GBL') of the call option found by the Arbitrator to be contained therein, in circumstances where GBL did not plead or otherwise in any way claim before the Arbitrator that:

(a) the Subcontract contained an option agreement in respect of the Blast Unit;

(b) the option agreement found by the Arbitrator should be interpreted as a call option in favour of GBL; nor that

2. The Arbitrator erred in law in failing to dismiss the proceeding before him and instead finding a breach of the Subcontract not asserted by GBL after having rejected the only claims advanced by GBL.

3. In the alternative, the Arbitrator erred in law in construing the relevant provisions of the Subcontract as a call option rather than a put option.

4. In the alternative, if the Arbitrator did not err in law by finding that the Subcontract contained a call option in respect of the Blast Unit, the Arbitrator nonetheless erred in law in proceeding to find that GBL had exercised that option, and that in consequence MRA had breached the Subcontract, in circumstances where neither party had been given the opportunity to call evidence or to make submissions on that issue as it had never been alleged in the course of the arbitration.

5. In the further alternative, if the Arbitrator did not err in law by finding that the contract contained a call option in respect of the Blast Unit, the Arbitrator nonetheless erred in law in proceeding to find that GBL had exercised that option, and that in consequence MRA had breached the Subcontract, by relying upon material which was not in evidence in reaching that finding, to wit [sic] the Arbitrator relied upon a Draft Statement of Agreed Facts which was materially different to the final statement of agreed facts placed in evidence, which final version omitted one of the paragraphs from the draft expressly relied upon by the Arbitrator to reach the finding of breach of contract contained in the Interim Award.

59 Grounds 1, 2 and 4 are interrelated and must be considered together. These grounds were originally framed by counsel for Murray & Roberts as alleging an error of law on the part of the arbitrator by construing the Contract in a way for which neither party contended with the result that the arbitrator went beyond the scope of the referral to arbitration.

60 Counsel for Murray & Roberts relied on the fact that in the arbitration, GB Lifestyles' argument was that Murray & Roberts breached the Contract by not delivering up the blast unit, when the blast unit was at all times the property of GB Lifestyles. By contrast, the arbitrator found that whilst the blast unit was Murray & Roberts' property upon its transfer to site, the Contract conferred upon GB Lifestyles an option to re-purchase the unit, and that Murray & Roberts breached the Contract by failing to deliver the unit after this option had been exercised by GB Lifestyles.

61 Counsel originally argued that this interpretation of the Contract by the arbitrator was beyond the scope of the referral to arbitration; in ground 1, because it was an argument not raised by either party, and in ground 2 because if the arbitrator did not accept GB Lifestyles' contentions with respect to the construction of the Contract, he should have dismissed the arbitration. These arguments are misconceived. The notice of arbitration alleges breach of the Contract by Murray & Roberts as a result of its failure to deliver up the blast unit after GB Lifestyles had paid $42,265. In resolving the dispute referred to arbitration, the arbitrator was undoubtedly required to construe the Contract, and make findings as to whether Murray & Roberts' failure to deliver up the unit was in breach of its provisions. The fact that the arbitrator did not accept a construction of the Contract, or the 'legal pathway' to finding a breach of contract, put forward by GB Lifestyles, does not in itself mean that he acted beyond the scope of the referral. Put another way, the dispute which was referred to arbitration was GB Lifestyles' assertion that Murray & Roberts had breached the Contract by not delivering up the blast unit. Neither the dispute nor the arbitrator's jurisdiction were confined by a particular process of legal reasoning.

62 When this was put to counsel for Murray & Roberts during the hearing, he proceeded to reframe these grounds as asserting a denial of procedural fairness by the arbitrator adopting a construction of the Contract for which neither party contended without providing the parties with the opportunity to put evidence or submissions before him on that issue. Counsel for GB Lifestyles did not oppose the grounds being construed in this way.

63 As I have noted, no application was made by Murray & Roberts to set aside the award pursuant to s 42 of the Act for misconduct, which includes breaches of the rules of natural justice (see s 4 of the Act).

The arbitrator is subject to the rules of procedural fairness.

64 Section 14 of the Act provides that the arbitrator may conduct the proceedings as he or she sees fit. However, the arbitrator's power to conduct an arbitration under the Act is conditioned upon their observance of the rules of natural justice or to use more contemporary language, procedural fairness. This is apparent from ss 42 and 4 of the Act, which give the Court a discretion to set aside awards where there has been a denial of natural justice - see Brecon Builders Pty Ltd v Ripa Steel Fabrications Pty Ltd [2004] NSWSC 838; (2005) 21 BCL 150 [23]. Sections 19 and 20 of the Act may also be seen to be indicative of a legislative intention that procedural fairness be accorded to parties during the arbitral process - see Morgan Belle Pty Ltd v API Services (Vic) Pty Ltd [2005] SASC 488 [36] - [37] (Gray J) (Morgan Belle). See also Sugar Australia Pty Ltd v Mackay Sugar Ltd [2012] QSC 38 [32]; Garms v Telstra Corp Ltd [1998] VSC 40 [37]; Exxon Coal Australia Ltd v Chadtech [1999] NSWSC 574; Shirley Sloan Pty Ltd v Merril Holdings Pty Ltd t/as Airen Constructions [2000] WASC 99.

65 A breach of the rules of procedural fairness apparent on the reasons of the decisionmaker is an error of law - Clements v Independent Indigenous Advisory Committee (2003) 131 FCA 28; Craig v South Australia [1995] HCA 58; (1995) 184 CLR 163.

66 One aspect of the rules of procedural fairness is the hearing rule, which entitles each party to know the nature of the case which has to be met, and to be given a fair and reasonable opportunity to adduce evidence and present submissions in order to meet that case.

67 The precise content of the hearing rule depends upon the nature of the dispute and the circumstances of the case - Bread Manufacturers of New South Wales v Evans [1981] HCA 69; (1981) 180 CLR 404, 414 - 415 (Gibbs CJ). What is necessary to provide procedural fairness will depend on the nature of the arbitral process and procedures agreed to and adopted by the parties - Morgan Belle [37]. However, it is clear that in an arbitral context, the parties must be informed of and able to respond to relevant issues in the arbitration. In Morgan Belle, Gray J held that:

The Commercial Arbitration Act confers powers. There is a corresponding duty of procedural fairness that arises particularly where the power involved is one which may destroy, defeat or prejudice a person's rights, interests or expectations.

It is the fundamental rule of procedural fairness that when an order may be made that deprives a person of some right or interest or the legitimate expectation of a benefit, that person is entitled to know the case to be made against him or her and to be given the opportunity of replying to that case [38] [39].

68 This passage has been approved in Sugar Australia Pty Ltd v Mackay Sugar Ltd [32] (McMurdo J); and Viterra Operations Ltd (T/A Abb Grain and Handling) v Ewing International Ltd Partnership (No 2) [2011] SASC 83.

69 In Interbulk Ltd v Aiden Shipping Co Ltd (The Vimeira) [1984] 2 Lloyd's Rep 66, the owners of a vessel claimed against the charterers in an arbitration in relation to damage sustained by the vessel when sub-charterers discharged it at an allegedly unsafe port. The arbitration proceeded on the assumption that the damage was incurred because the vessel was taken into shallow water. However, the arbitrators found that the port was unsafe because the turning area was insufficient for a vessel of that size. The charterers sought to set aside the award on the basis of misconduct, arguing that the issue of a lack of turning space had not been pleaded, and that the subject matter of this finding had therefore never become an issue in the arbitration. In this context, Goff LJ said:

There is plain authority that for arbitrators ... to decide a case, without giving a party any warning that the point is one which they have in mind and so giving the party no opportunity of dealing with it, amounts to technical misconduct and renders the award liable to be set aside or remitted... In truth, we are simply talking about fairness. It is not fair to decide a case against a party on an issue which has never been raised in the case without drawing the point to his attention so that he may have an opportunity of dealing with it, either by calling further evidence or addressing argument on the facts or the law to the tribunal (74 - 75).

If an arbitrator considers that the parties or their experts have missed the real point ... then it is not only a matter of obvious prudence, but the arbitrator is obliged, in common fairness or, as it is sometimes described, as a matter of natural justice, to put the point to them so that they have an opportunity of dealing with it (76).

71 More recently, in Pacol Ltd v Joint Stock Co Rossakhar [2000] 1 Lloyd's Rep 109 Colman J observed:

In a paper arbitration the temptation to arrive at a conclusion which may not have been envisaged by either party by reference to matters upon which the parties have not had the opportunity of addressing the arbitrators or in respect of which they have not had the opportunity of adducing further evidence, may be a particular temptation which arbitrators should be careful to avoid (115).

72 These passages were cited with approval by Steytler J (as his Honour then was) in relation to proceedings under s 42 of the Act alleging misconduct for a denial of natural justice, in Shirley Sloan Pty Ltd v Merril Holdings Pty Ltd t/as Airen Constructions [29] [31].

73 Similarly, in another case where the arbitrator's decision was challenged for misconduct pursuant to s 42 of the Act, D & M (Australia) Pty Ltd v Crouch Developments Pty Ltd [2010] WASC 130 [91], Blaxell J held that there may be breach of the rules of natural justice if an arbitrator decides a case without first warning the parties that a point or issue is one on which the outcome might turn, and providing them with an opportunity to deal with the issue. The appeal against this decision was dismissed - see D & M Australia Pty Ltd v Crouch Developments Pty Ltd [2011] WASCA 109. See also - Société Franco-Tunisienne D'armement-Tunis v Government of Ceylon [1959] 3 All ER 25; Fox v PG Wellfair Ltd [1981] 2 Lloyd's Rep 514.

74 However, it is not necessary for a decision maker to disclose all of his or her thinking processes or proposed conclusions to discharge the duty of procedural fairness - Hoffmann La Roche v Secretary of State for Trade and Industry [1975] AC 295, 369 (Diplock LJ); Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd (No 2) [2012] FCA 1214 [162]. It has been suggested that to establish a denial of procedural fairness, it must be shown that a reasonable litigant would not have foreseen the possibility of reasoning of the type revealed in the award and that with adequate notice it might have been possible to persuade the arbitrator to a different result - Methanex Motunui Ltd v Spellman [2004] 1 NZLR 95, 136 137; Castel Electronics Pty Ltd v TCL Air Conditioner (Zhongshan) Co Ltd [166]. I do not need to decide whether this line of authority should be accepted for the purposes of this leave application. It is sufficient to observe that if a reasonable litigant would be taken by surprise by the arbitrator's findings on an issue upon which the outcome may turn, in light of the issues traversed through the arbitration, and is not given the opportunity to respond to such findings, this will constitute a denial of procedural fairness. It is not necessary for me to go so far as to conclude that this is the only way in which a denial of procedural fairness can be established.

75 In this case, the arbitrator's construction of the Contract was not proposed by either party. The arbitrator's reasons reveal that he rejected both GB Lifestyles' argument that it retained title in the blast unit, and Murray & Roberts' argument that the Provision amounted to a put option through which it could compel GB Lifestyles to repurchase the unit. Instead, he construed the Provision as providing a call option exercisable by GB Lifestyles, and which had been validly exercised. The arbitrator's construction of the Provision was undoubtedly an issue upon which the outcome of the case for breach of contract turned. However, he did not foreshadow that he was intending to reject the submissions of both parties. Nor did he invite further submissions regarding his construction of the contract, or invite the parties to provide submissions or adduce evidence on the question of whether the option had been validly exercised. In these circumstances, it is strongly arguable that there has been a denial of procedural fairness arising from the arbitrator's failure to allow the parties to make further submissions with respect to the interpretation of the Contract which he adopted, or to provide submissions or evidence on the question of whether the call option was validly exercised.

76 I am satisfied that the course followed by the arbitrator arguably constituted an error of law, and that the error is apparent on the face of the award.

Did the failure to afford procedural fairness have a substantial effect on rights of parties to the arbitration?

77 However, in order to obtain the grant of leave pursuant to s 38, it must be shown that the determination of the question of law could substantially affect the rights of the parties to the arbitration. The question of law must be a matter of practical importance, and not merely of academic interest - Pioneer Shipping Ltd v BTP Tioxide Ltd [1980] QB 547, 564 (Denning MR); Ipswich Borough Council v Fisons PLC [1990] 1 Ch 709, 721; Gold City Developments Pty Ltd v Portpride Pty Ltd [2010] WASC 148 [29]; City of Canning v Avon Capital Estates [55]. Further, the extent to which the rights of the parties will be affected by the determination of the question of law may also be relevant to the question of whether the court should exercise its discretion to require leave - see Westport [165] and [6] above.

78 The assessment of whether a denial of procedural fairness has had a substantial effect on the rights of parties to an arbitration is similar to the assessment of whether a litigant has demonstrated that a denial of procedural fairness deprived him or her of the possibility of a successful outcome, so as to secure a judicial remedy. In Stead v State Government Insurance Commission [1986] HCA 54; (1986) 161 CLR 141, the High Court said:

[N]ot every departure from the rules of natural justice at a trial will entitle the aggrieved party to a new trial. By way of illustration, if all that happened at a trial was that a party was denied the opportunity of making submissions on a question of law, when, in the opinion of the appellate court, the question of law must clearly be answered unfavourably to the aggrieved party, it would be futile to order a new trial.

Where, however, the denial of natural justice affects the entitlement of a party to make submissions on an issue of fact, especially when the issue is whether the evidence of a particular witness should be accepted, it is more difficult for a court of appeal to conclude that compliance with the requirements of natural justice could have made no difference (145-146).

79 The principle enunciated in Stead may be applied to refuse relief despite a denial of procedural fairness when a decision-maker denied the party the opportunity to make submissions on a question of law that must be answered unfavourably to that party (Re Refugee Tribunal; ex parte Aala [2000] HCA 57; (2000) 204 CLR 82, 109 (Gaudron and Gummow JJ)), or which left no possibility of a favourable decision (SZBYR v Minister for Immigration and Citizenship [2007] HCA 26; (2007) 81 ALJR 1190; Austwide Institute of Training Pty Ltd v Dalman [2009] VSCA 25; (2009) 23 VR 45). See further - Aronson M and Groves M, Judicial Review of Administrative Actions (5th ed, 2013) [7.380].

80 If the issues upon which the parties were denied procedural fairness were limited to issues of law, and if I was satisfied that those issues of law could only be resolved as the arbitrator resolved them, it might be concluded that the denial of procedural fairness had no substantial effect on the rights of the parties to the arbitration. However, the issues upon which the parties were denied procedural fairness were not limited to issues of law. They concerned not only the proper construction of the contract, but also the question of whether GB Lifestyles had validly exercised the call option which the arbitrator found had been conferred by the contract. The issues arising in relation to that question involved both issues of law and fact. The issues of law concerned the determination of precisely what had to be done by GB Lifestyles in order to validly exercise the option. The issues of fact concerned whether GB Lifestyles had taken the necessary steps to exercise the option given that the amount which it deposited into Murray & Roberts' account was not the amount specified in the Contract, but was $360 less than that amount ($42,265 was deposited, whereas the contract required payment of $42,625).

81 In the past, it was generally thought that options had to be exercised in strict compliance with the provisions of the option - United Dominions Trust (Commercial) Ltd v Eagle Aircraft Services Ltd [1968] 1 All ER 104, 107; [1968] 1 WLR 74; United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904 (Denning LJ); Hare v Nicoll [1966] 2 QB 130, 141 (Willmer LJ), 148 (Winn LJ); Tonitto v Bassal (1992) 28 NSWLR 564. More recently, a somewhat more refined approach has emerged which distinguishes between terms which, upon the proper construction of the option, must be strictly complied with for its valid exercise, and terms which are not of that character - see Phillips Fox (A Firm) v Westgold Resources [2000] WASCA 85 [67] - [70]; Buckland v Bay of Islands Electric Power Board [1980] ANZ Conv R 513, 80 81; Boreland v Docker [2007] NSWCA 94. Put another way, if particular requirements for the exercise of an option are, as a matter of construction, intended by the parties to be essential for the exercise of the option to be effective, compliance with these requirements is necessary if the stated contractual relationship is to result - Comdox v Robins [2009] NSWSC 367 [23].

82 However, it has been suggested that the debate over whether the terms upon which the option could be exercised should be construed 'strictly' or 'liberally' may distract from the primary duty of the court to construe, and to give effect to, the intention of the contracting parties - C & P Syndicate Pty Ltd v Reddy [2013] NSWSC 643 [81]; Kavia Holdings Pty Ltd v Suntrack Holdings Pty Ltd [2011] NSWSC 716; Comdox v Robins; see also Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] UKHL 19; [1997] AC 749, 776 (Hoffman LJ).

83 If, on the proper construction of the option, it is not essential that it be exercised precisely in accordance with a particular method, it will be sufficient if the actions of the optionee convey clearly and unequivocally that the exercise of the option was intended - Phillips Fox (A Firm) v Westgold Resources [70]. See Ballas v Theophilos (No 2) [1957] HCA 90; (1957) 98 CLR 193, 196 (Dixon CJ); Prudential Assurance Co Ltd v Health Minders Pty Ltd (1987) 9 NSWLR 673 at 677B 678A; Whitegum Petroleum Pty Ltd v Bernadini Pty Ltd [2010] WASCA 229 [32].

84 So, in the circumstances of this case, even if the court was satisfied that the arbitrator was undoubtedly correct in construing the Contract as including a call option which could be exercised by GB Lifestyles, significant questions remain with respect to precisely what, on the proper construction of the Contract, was required for the valid exercise of that option and whether, as a matter of fact, GB Lifestyles complied with those requirements. To the extent that issues of fact are or may become relevant, the course followed by the arbitrator arguably denied the parties the opportunity to place evidence before him with respect to those issues. This denial may have substantially affected the rights of the parties to the arbitration.

85 For these reasons, leave to appeal should be granted on grounds 1, 2 and 4.

86 Ground 3 poses the substantive question of whether the arbitrator was correct to conclude that the Contract conferred a call option upon GB Lifestyles. If the grounds of appeal to which I have already granted leave (grounds 1, 2 and 4) are upheld on the hearing of the substantive appeal, it would seem to be highly likely, perhaps inevitable, that the interim award will be set aside and the matter remitted to the arbitrator for further determination. If that occurs, it would be appropriate for the arbitrator to receive further submissions from the parties with respect to the proper construction of the Contract, and in particular whether, on its proper construction, the Contract confers a call option upon GB Lifestyles, rather than for the court to usurp the arbitrator's function. That approach is consistent with the wellestablished approach of holding the parties to their bargain where the bargain includes an agreement that their disputes will be resolved by arbitration - Manningham City Council v Dura (Australia) Constructions Pty Ltd [1999] VSCA 158; [1999] 3 VR 13 [35]; Huddart Parker Ltd v The Ship (Mill Hill) [1950] HCA 43; (1950) 81 CLR 502, 508. For that reason, the question of whether leave to appeal should be granted in respect of ground 3 should be referred to the hearing of the appeal.

87 Ground 5 concerns the arbitrator's apparent error in referring to and relying upon a portion of the draft statement of agreed facts which did not comprise part of the statement of facts ultimately agreed by the parties. The arbitrator's apparent reliance upon assertions of fact which were neither agreed nor in evidence before him is, at least arguably, an apparent error of law manifest on the face of the award. Because the fact to which reference is made concerns the question of whether GB Lifestyles had validly exercised the call option which he found was conferred by the Contract, the error could substantially affect the rights of the parties to the arbitration, for the reasons I have enunciated above. Accordingly, leave to appeal should be granted on ground 5.

88 For these reasons, leave to appeal should be granted with respect to grounds 1, 2, 4 and 5. The question of whether leave to appeal should be granted in respect of ground 3 should be referred to the hearing of the appeal.