O'BRIEN LOVRINOV CRAFTER P/L v CORRADINI & ANOR No. SCGRG-98-1762 Judgment No. S159 [1999] SASC 159

3 The appellant is now suing the respondents for just over $100,000, which he says is the amount owed for the work done in accordance with the terms of the engagement pursuant to which the appellant carried out certain alterations and additions to the respondents' property.

4 The respondents deny that any amount is owing and allege that they have suffered loss and damage which is to be set off against any amount they might owe the plaintiff. A number of issues are raised in the pleadings and they can be summarised as follows.

1. The nature and terms of the contract between the parties.

3. The legal consequences arising from the nature and terms of the contract for alleged defective work.

5 An examination of the file reveals a disturbingly familiar picture of constant wrangling over pleadings and other preliminary issues. The proceedings commenced in 1995 and an appearance was entered in June 1995. The latest version of the statement of claim appears to have been filed in November 1998. It is not difficult to conclude that the costs of this matter, should it continue on its present course, will ultimately be out of all proportion to the amounts in dispute.

6 By application dated 23 July 1998, the respondents sought a number of orders, including the following:

1. That the progress of this action to trial be delayed.

3. That in accordance with s34 of the District Court Act 1991, that the court refer all questions of a technical nature arising in this action for an investigation and report by an expert, yet to be determined, in the relevant field to which this matter relates.

4. Alternatively, in accordance with s33 of the District Court Act 1991, that the court refer the action or any technical issue arising in the action for trial by an arbitrator.

7 I have been advised that the parties have agreed that Mr Sarah should be the arbitrator and that he is not legally trained.

8 The application came on for hearing before a master of the District Court on 1 September 1998. It was opposed by the appellants. In essence, the respondents argued that many of the issues are technical and involve extensive documentation which could require the examination of many invoices. It was said that these matters could take a court many weeks and it was more appropriate that they be dealt with by an expert in the field.

9 In opposition to the application, the appellant argued that the following matters should be determined by a trial judge.

3. The appellant's claim based on quantum meruit and principles of unjust enrichment.

10 The appellants did not oppose the following issues being placed before either an expert or an independent arbitrator.

3. The variations to the contract and, in particular, whether the works as carried out were inside the scope of the original plans and cost estimates supplied by the appellants.

11 The master adjourned the application to 6 October 1998 in order that the parties might hold discussions with a view to identifying or narrowing the issues. In the interim, both parties requested that the matter be listed before a judge and that the hearing be shifted from 6 October 1998 due to the unavailability of counsel. On 6 October 1998, there was some discussion about the matter before the master who, understandably, wanted the parties to identify the preliminary questions and common facts upon which the application was to be argued. The transcript discloses a sense of frustration on the part of the master with the course and the expense of the action.

12 The application was adjourned to 29 October 1998. Full argument before the master took place on that day. The attitude of the appellants was that the legal issue concerning the nature of the contract should remain with the court. The master gave the following ex tempore ruling:

"Right. I'm going to make a ruling now. I'd much prefer, out of deference to the submissions I've heard, to reserve my ruling and produce elaborate reasons, but that would involve quite considerable delay and no-one would thank me for that.

I am of the opinion that the whole question should go to arbitration, save and with the exception of any clearly legal question, distinctively legal question.

Two legal questions occur to me: One, what I will call the s.23 question. That is whether there was a failure to comply with that section and, if so, what the consequences of that should be. Now, that's largely a legal question and I don't think the arbitrator would want to determine it. The other question is whether, if there is to be an assessment on a quantum meruit basis, the quantum meruit should be limited in light of the conversations that were had between the parties. Those conversations would, of course, in that premise, be non-contractual conversations. The defendants would want to argue the form of estoppel in that case, I imagine, to put a limit upon the assessment of the quantum meruit. Those two questions, I think, should be reserved to the court.

But as to the main issue that's been argued this morning, that is whether this court or an arbitrator should determine the nature of the contract that was entered into between the parties - that is if they did enter into a binding contract, in the light of s.23, - I am with the defendants' submission, I favour the defendants' submission, that that question should go to arbitration."

13 A discussion followed as to the preparation of minutes of order during which his Honour said that whatever else was taken from his ex tempore reasons, he was "clear that the main question, the question of the nature of the contract should be referred to arbitration."

14 The appellants appealed to a District Court judge by a notice of appeal dated 12 November 1998. The grounds were as follows:

1. That the learned master erred in the exercise of his discretion by referring to arbitration the legal question of the nature of the contract, if any, in question, and the consequences thereof;

2. The learned master erred in the exercise of his discretion in that he failed to give any or any sufficient weight to the fact that issues of credit would be involved in determining the question of the formation of the contract;

3. That the learned master erred in the exercise of his discretion by failing to give any or any sufficient weight to the difficulty in appealing against an arbitrator, or award.

15 In essence, on that appeal the appellant sought orders that the application proceed before a judge of the District Court on the preliminary issues of whether there was a contract in existence and, if so, the nature of the terms of the contract. In particular they sought a determination whether the contract was a costs plus commission or fixed price contract. They also sought a determination as to whether there was a failure to comply with s23 of the Builders Licensing Act 1986 and, if so, the consequences. Finally, they sought a determination as to whether in the event that no contract was in existence, the plaintiff was entitled to recover on a quantum meruit or an unjust enrichment basis.

16 The appeal was heard on 9 December 1998. After hearing full argument, his Honour dismissed the appeal without giving separate reasons. The transcript discloses that his Honour considered the matter to be delicately balanced. He expressed the view that he was bound by the decision of Mullighan J in George v Dowling, 1992, 57 SASR, p579 and, that while he had a discretion to exercise, it was very difficult to overturn the decision of the master.

17 The appeal to the District Court judge was conducted pursuant to District Court rules 97.01 and 97.10. In particular, District Court rule 97.01 provides:

"There shall be an appeal to a Judge from any finding, decision, order or direction by any mediator pursuant to Section 32(2) of the Act, or officer of the Court pursuant to rule 56.06. Such appeals and an appeal pursuant to Section 43(2) of the Act against an interlocutory judgment of a Master shall be by way of re-hearing and, in matters involving the exercise of a discretion, the Judge may exercise his own discretion without regard to the manner in which it was exercised in the decision, order or direction appealed against."

18 In my opinion, his Honour fell into error in not treating the matter as a re-hearing in which he was free to exercise his own discretion, without regard to the manner in which the master had exercised the discretion. There are two passages in the transcript which clearly demonstrate the error. First, his Honour plainly said he was not considering the matter afresh and he had to adapt his approach to the matter because he was dealing with it as an appeal. Secondly, having said that he may have come to a different decision from that made by the master, and appreciating the force of what had been put to him on behalf of the appellants, his Honour said he was bound by what Mullighan J had said in George v Dowling as to the appropriate approach. He added that the reasoning followed by Mullighan J in that case "must be the approach that I take in this matter."

19 In George v Dowling, Mullighan J referred to the wording of the 1987 rule which was in identical terms to the rule now under consideration in respect of the exercise of the discretion on appeal. However, the rule applicable to the matter before his Honour was in different terms. His Honour was concerned with an appeal against the decision of a master and the old rule had been amended by removing the power to exercise a discretion afresh, without regard to the manner in which it had been exercised, in respect of an appeal from a master. The appeal was therefore, of a different nature and the question before Mullighan was whether the master's decision ought to be affirmed, or overturned in the light of the material which was before him. In addition, where the order involved the exercise of a discretion by the master, Mullighan J was required to consider whether some error had been established.

20 The approach that Mullighan J was required to take in George v Dowling is not applicable to the nature of the appeal before the judge of the District Court in this matter. The rule is quite plain. The judge may exercise the discretion without regard to the manner in which it was exercised by the master. The rule does not require the District Court judge to ignore the manner in which the master exercised the discretion. Mr Floreani has urged that notwithstanding the terms of the rule, a judge on appeal in the District Court and in this court should exercise caution before overruling the exercise of the discretion by the master. In my opinion, the appellant has established that his Honour erred in law.

21 As mentioned, the master considered two matters should remain with the court, namely, whether there was a breach of s23 of the Builders Licensing Act and, if so, the effect of that breach and, if there was no contract, whether the appellant can recover by way of quantum meruit, or unjust enrichment. In addition to these matters the appellant seeks orders that the matter be heard as a trial in the District Court on two other preliminary issues. First, whether there was a contract in existence between the parties and secondly, what the terms of the contract were. The notice of appeal seeks that a third issue of quantum meruit or unjust enrichment also be heard but that third issue has already been reserved for the court by the decision of the master.

22 In support of the appeal, senior counsel for the appellant has argued that a party who has taken proceedings in a court is prima facie entitled to have that dispute resolved by a court, subject to the exception that technical questions might more efficiently be determined by an arbitrator in the field. To that extent the appellant does not contest that a number of issues should be referred to the arbitrator, but maintains that the question as to whether there was a contract and, if so, what its terms were is a matter that is properly reserved for the consideration of the court rather than the arbitrator.

23 Counsel for the appellant pointed out that issues of credit will be involved. The court will be required to consider what was said between the parties, what documentation passed between the parties and the legal effect of those matters. Counsel acknowledged that if the court determines these preliminary issues and makes findings as to credit, there is the potential in some circumstances for the arbitrator to be required to consider the credit of the same witnesses on other matters. That possibility is one of the reasons advanced by Mr Floreani in opposition to the present appeal.

24 I was referred to a number of decisions by the appellant in support of the propositions that I have mentioned and in support of the contention that the power to refer a matter to arbitration should only be exercised in cases of an exceptional nature where the parties do not consent. In Honeywell Pty Ltd v Austral Motors Holdings Ltd (1980) QR 355 Campbell J said:

"In my opinion that discretion should rarely be exercised in the absence of consent of both parties. I think that there is much force in the argument for the defendant that every person is as a general rule entitled to have his civil disputes tried and determined in a court of law and that the discretion to refer to arbitration should in the absence of consent be exercised only in cases of an exceptional nature."

25 A similar approach appears to have been taken in Victoria in AT & NR Taylor and Sons Pty Ltd v Brival Pty Ltd [1982] VicRp 75; (1982) VR 762. Beach J expressly agreed with the decision in Honeywell.

26 Counsel acknowledged that the more flexible approach is taken to this question in New South Wales. The respondent relies upon the approach in New South Wales and has pointed out that the decisions to which I have referred were given some years ago and prior to the legislative developments and the introduction of rules which have heralded a change in attitude by the courts. He suggests courts are now more amenable to referring entire disputes or particular issues to arbitration.

27 In Park Rail Developments Pty Ltd v Pearce Associates Pty Ltd (1987) 8 NSWLR 123 Smart J referred to the decisions of Honeywell and Taylor and observed that they were given prior to the enactment of relevant legislation. His Honour observed that whatever be the position in other States, in New South Wales there were a number of referees well known to the court with extensive experience in handling a variety of large complex building and engineering matters. He said they were used to having junior and senior counsel appear before them and to ruling on evidence, controlling proceedings and resolving difficult factual and contractual disputes. His Honour referred to a number of matters which would require consideration in an application such as this. They include the suitability of the issues for determination by referee, the availability of a suitable referee, the likely delay that would be experienced before the court could hear and determine the matter and any additional costs likely to be incurred by reason of the reference.

28 It appears that Smart J was particularly influenced by the likely delay if the matter remained with the court. He referred to the fact that, as a general rule, defendants are not often as dismayed by a delay of two or three years in a hearing as plaintiffs. In his Honour's view, in New South Wales the court had no predisposition to making or refusing an order. His Honour did state, however, the court would be understandably cautious in making an order against the wishes of both parties.

29 In this particular matter, the respondent has urged that even determining whether there was a contract and the terms of the contract would necessarily involve a detailed examination of extensive documentation. I am not convinced that those issues would require an examination of extensive documentation to the extent suggested by counsel. Even if there is considerable documentation, it does not appear to be of such a nature that a court would have particular difficulty in understanding or appreciating the significance of the documentation in the context of deciding whether there was a contract in existence and, if so, what the terms of the contract were.

30 While I appreciate the point made that courts are in recent times more amenable to referring matters to an arbitrator, it seems to me at the least, a party is entitled to have the court determine relevant legal issues such as these unless good reason exists to direct otherwise. In expressing the matter in this way, I am not endeavouring to enunciate a definitive principle. In my opinion good reason to direct otherwise has not been established with respect to the particular issues that the appellant wishes to be determined by a court. It also appears that those issues have the potential to impact upon the other question as to whether there has been a failure to comply with s23.

31 In all the circumstances, in my opinion the master erred in directing that the particular issues of whether there was a contract in existence between the parties and, if so, what the terms of the contract were, be referred to an arbitrator. Even if it could not strictly be said that he erred, in the exercise of my discretion I would allow the appeal. The appellant is entitled to have the issues determined by a court and those issues are better suited for determination by a court.

32 The appeal is allowed. The orders of the master to the extent that the master directed that the issues as to whether there was a contract between the parties and, if so, what the terms of the contract were, be referred to an arbitrator are set aside.

33 I direct that this matter be heard as a trial in the District Court on the preliminary issues:

(1) whether there was a contract in existence between the parties and (2) what the terms of the contract were.

34 As mentioned previously there are two other issues that the master declined to refer to the arbitrator. Those issues should also be heard as a trial in the District Court as part of the trial on the first two preliminary issues. They concern s23 and the issues of quantum meruit or unjust enrichment.

35 The trial of these various issues in the District Court should obviously be conducted prior to any hearing before the arbitrator on the other matters that the parties have agreed should be determined by an arbitrator.

36 I order that the respondent pay the appellant's costs of the application before the master, the costs of the appeal before the District Court judge and of this appeal.