MATTER : Commercial Arbitration Act 1985

Arbitration - Application for leave to appeal from interim award - Building contract - Termination of contract by owner following substantial default by builder - Determination by Arbitrator that although practical completion not in fact achieved, it was contractually achieved as a result of the owner occupying the property immediately following termination - Whether or not a manifest error of law - Principles governing the exercise of the discretion to grant leave to appeal

Arbitration - Application for leave to appeal against interim award - Building contract - Prior determination by Building Disputes Tribunal of issue raised in arbitration - Whether or not Arbitrator erred in law in failing to rule that party estopped from raising the same issue

Builders Registration Act 1939 (WA), s 12A

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

GRD Kirfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158

Masawa Australasia Pty Ltd v J Corp Pty Ltd & Anor [2000] WASC 5

1 BLAXELL J: This is an application for leave to appeal from an interim award of the second respondent Arbitrator partially resolving a building dispute between the appellant ("the builder") and the first respondents ("the owners"). The dispute arose from a contract made between the parties on 25 July 2002 for the construction of a house at Banjup by the builder for the owners.

2 The contract was a standard form "Lump Sum Building Contract" (Form 8B) as published by the Housing Industry Association Ltd in November 2001. The contract price was for a total sum of $264,365, and the works were to commence within 28 working days and to be completed within 150 working days thereafter. The contract also made provision for the referral of any dispute to arbitration pursuant to the Commercial Arbitration Act 1985 ("the Act").

3 The builder duly proceeded with the works, and claimed to have reached practical completion on 5 May 2003 by which date the owners had made all payments due under the contract other than the final progress payment. The owners disputed that practical completion had occurred and on 26 June 2003 they made a complaint to the Builders' Registration Board claiming that there were numerous substantial defects.

4 On 18 August 2003 the Building Disputes Tribunal issued an order requiring the builder to remedy a total of 31 defects in the works. At all material times subsequent to then there has been an issue between the parties as to whether or not the builder fully complied with that order.

5 On 8 August 2003 the owners served a default notice on the builder requiring it to remedy specified breaches of the contract within 10 days. As a result of the alleged failure of the builder to comply with that notice, the owners on 16 September 2003 purported to terminate the contract, and on the same date entered into occupation of the property.

6 On 5 July 2004 the Arbitrator was appointed to arbitrate the continuing dispute between the parties. On 20 March 2006 the Arbitrator issued the interim award which is now the subject of the present application by the builder for leave to appeal.

7 Given the complex nature of the dispute, the interim award contained numerous findings and determinations and also annexed very lengthy reasons for decision. However, the essential findings that are relevant to the present application for leave to appeal were as follows:

(1) "The builder had failed to conform to the terms of the contract and not only were the works late in completion; there were numerous serious faults and defects and were NOT at Practical Completion. This situation was clearly evident at the view (on 6 October 2004) and the subsequent inspection." (AB 104 and 106.)

(2) The owners had terminated the contract (and implicitly had validly terminated the contract) on 16 September 2003. (AB 104 and 106.)

(3) However the owners then took possession of the house and occupied the property on or about 16 September 2003 with all of the defects still to be rectified. It was the owners' "own decision to occupy and take up residence and therefore their actions can only be interpreted as:

' ... the Works are reasonably capable of being used by the Owner', as required by the Clause 17(a) of the Contract."

(4) Consequently "the construction of the property reached the contractual stage of Practical Completion on 16 September 2003, because the owners/respondents had taken possession and have lived in the property since that date ... " (AB 104.)

(5) The builder was entitled to the sum of $77,001 being the final payment due under the terms of the contract. (AB 105.)

(6) The builder was not entitled to interest on late payment of the contract sum (pursuant to cl 17(e) of the contract) because the owners had terminated the contract before taking possession. (AB 106.)

(7) Given that the builder had agreed (in the course of the arbitration) to undertake a programme of rectification to the works, "the owners are justified in withholding any funds due until the final award is published in this arbitration". In this regard:

"Clause 17(e) dictating that payment is due although the Works are faulty and the Builder has refused to complete and, or, rectify faulty workmanship attempts to take away the legal rights from the Owner for restitution and cannot be upheld." (AB 106.)

8 The Arbitrator also made findings in respect of the garage doors of the owners' house, which findings are also subject to the application for leave to appeal. However, the question arising from these findings is very much a subsidiary issue, and I will deal with it separately at the end of these reasons for decision.

9 The builder contends that the finding that the works reached "practical completion" on 16 September 2003 means that the Arbitrator has erred in law in failing to also find that the balance of the contract sum of $77,001 plus interest are immediately payable.

10 There would obviously be some substance to this contention if the Arbitrator had not also found that the contract was validly terminated. As it is, the finding that the owners validly terminated the contract cannot (as a matter of law) co-exist with the finding that there was a contractually deemed "practical completion" as a result of their subsequent occupation of the property. This is because subcl 17(a) and (e) could not take effect once the contract was terminated.

11 Accordingly, there is a manifest error of law on the face of the award, and in my view, it is also self-evident that the determination of this question of law could substantially affect the rights of the builder. It follows that I have a discretion to grant the builder leave to appeal under s 38(4)(b) of the Act. That discretion is a very wide one, and as was stated by Parker J in Masawa Australasia Pty Ltd v J Corp Pty Ltd & Anor [2000] WASC 5 at [8]:

"While leave to appeal may not be granted by this Court unless the requirements of both s 38(5)(a) and either (b)(i) or (b)(ii) are satisfied, satisfaction of those requirements does not of itself entitle the applicant to a grant of leave. Section 38(5)(a) and (b) are in effect prerequisites or threshold requirements before leave may be granted. Satisfaction of those prerequisites or threshold requirements merely gives rise to an unfettered discretion to grant leave pursuant to s 38(4)(b). This discretion to grant leave is to be exercised after considering all the circumstances of the case; Qantas Airways Ltd v Joseland Gilling (1986) 6 NSWLR 327; Multiplex Constructions v International Golf Services Pty Ltd, unreported; SCt of WA (Olney J); Library No 6978; 17 December 1987; Thiess Contractors Pty Ltd v Water Corporation of Western Australia, unreported; SCt of WA (Parker J); Library No 970561; 28 October 1997 at 6-8."

12 Furthermore, in considering all of the circumstances of the case, it is appropriate to look at what the Arbitrator has in substance found, rather than to subject the award to microscopic scrutiny. In this regard I respectfully adopt what Commissioner Odes QC had to say in GRD Kirfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158 at [38]:

" ... an overcritical approach could well render the underlying purpose of such proceedings completely nugatory. The unravelling of technical building disputes by a lay arbitrator specialising in the building industry (in the instant case, an architect), should not generally be set at nought because he or she may not meet the exacting demands of a court of law in categorising with precision, the legal relationships existing between the parties. Parties may well be discouraged from resorting to arbitration if awards were to be overturned too readily because a lay arbitrator may be unable to evince the expertise of a lawyer in dealing with legal issues, which frequently arise."

13 Although the above remarks were made in the context of determining whether an Arbitrator had made an error of law, I consider that they are of equal validity with regard to the approach to be taken to the exercise of the discretion to grant leave to appeal.

14 In my view, the overwhelming considerations in the present case are the Arbitrator's findings that there were "numerous serious faults and defects" in the works, that immediately prior to termination "practical completion had not been achieved", and that the contract was validly terminated. It necessarily followed from these findings that the parties were released from all further performance of the contract, and that the owners were entitled to damages for the costs of rectifying the defects.

15 Given that practical completion had not occurred, the final payment to the builder of $77,001 had not fallen due at the time the contract had terminated. Accordingly, the builder was not entitled to payment of that sum, but it must nevertheless be accounted for in the final assessment of the owners' damages.

16 As it happens, the parties have agreed (at the instigation of the Arbitrator) that the builder should have further time to rectify the defects in the works. This should not be seen as a concession by the owners that the contract is still on foot, but as a willingness to provide the builder with a reasonable opportunity to limit the damages that are payable.

17 All of these considerations lead inevitably to the conclusion that the interim award of the Arbitrator, although in some respects erroneous in law, nevertheless reflects the broad justice of the case. There will be no real prejudice to the builder if the interim award is allowed to stand, because the Arbitrator is still in a position to accommodate a correct application of the law in his final award, and to arrive at a fair and just overall disposition of the case.

18 In these circumstances it is not appropriate that I should exercise my discretion to grant the builder leave to appeal from the interim award.

19 One of the complaints by the owners to the Builders' Registration Board (Complaint No 22) was that the "Garage doors are not as per signed plans or VO order - at no such time was there a pelmet fascia agreed upon". In this regard the owners' contention was that the builder had fitted a pelmet to the top of the garage door openings to cover up a defect in the levels (AB 52).

20 The building inspector who investigated the owners' complaints recommended that no action was required by the builder, and this recommendation was adopted by the Building Disputes Committee when dismissing the complaint (AB 20).

21 However, the issue was revived in the arbitration and the owners claimed the sum of $3700 for the costs of having another contractor rectify the alleged defect. The Arbitrator awarded this sum to the owners after finding that the pelmets fitted by the builder were unnecessary and "were fitted to hide the problem that the lintels above the doors were out of level".

22 On the present application, the builder essentially contends that the Arbitrator erred in law, or alternatively, misconducted the arbitration (within the meaning of s 42(1)(a) of the Act) by failing to find that the owners were estopped from pursuing the claim for the garage doors.

23 The simple answer to this proposition is that the statutory provisions governing the operation of the Building Disputes Tribunal prevent any issue estoppel arising from its orders. The power of the Tribunal to order a builder to remedy unsatisfactory building work is to be found in s 12A of the Builders Registration Act 1939. Subsection 12A(6) specifically provides that:

"Nothing in this section has the effect of limiting, restricting or otherwise affecting any right or remedy a person would have had had this section not been enacted ... ".

24 This provision is not in any way ambiguous and clearly allows a person who is party to an issue determined by order of the Tribunal to pursue any other remedy including arbitration.

25 Accordingly, there is no basis on which the builder can be granted leave to appeal from the determination of the arbitrator in respect of the "garage doors".