Commercial Arbitration Act 1985, s 38(5)(b)(i)

Angelatos v Alternative Constructions Pty Ltd, unreported; FCt SCt of Vic; BC 9200588; 30 November 1992

Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873

Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6

Bostock v Ramsay Urban District Council [1900] 2 QB 616

Carpaolo Nominees Pty Ltd v Marrosan Nominees Pty Ltd [1997] NTSC 1; (1997) 136 FLR 328

Concrete Constructions Group Pty Ltd v McNamara (1990) 92 ALR 427

Cummings v Lewis (1993) 41 FCR 559

D Phillips Constructions (Vic) Pty Ltd v Mullavey & Adams [1980] VicRp 21; [1980] VR 171

Donald Campbell & Co Ltd v Pollak [1927] AC 732

F King & Co v Gillard & Co [1905] 2 Ch 7

Garner v Rohanna Pty Ltd [1999] WASCA 178

Godden v Alford [1960] WAR 235

Gold v Patman & Fotherington Ltd [1958] 2 All ER 497

House v The King [1936] HCA 40; (1936) 55 CLR 499

In the Marriage of Cantarella [1905] VicLawRp 59; (1976) 11 ALR 189

In the Marriage of Pennisi (1997) 141 FLR 401

Jones v McKie [1964] 1 WLR 960

Keywest Construction Group Pty Ltd v Footscray Holdings Pty Ltd, unreported; SCt of WA (Anderson J); Library No 930078; 23 February 1993

Leighton Contractors Ltd v Western Australian Government Railways Commission [1966] HCA 58; (1966) 115 CLR 575

LNC Harper Davidson Pty Ltd v Keywest Building Co Pty Ltd, unreported; SCt of WA (Kennedy J); Library No 7192; 13 July 1988

MacKinnon v Peterson, unreported; SCt of NSW (Cole J); 19 April 1989

Nicholson v Little [1956] 2 All ER 699

Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72

Rival Nominees Pty Ltd v Craig Davis Constructions Pty Ltd, unreported; FCt SCt of Vic; 26 June 1981

Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870

Warren v Coombes [1979] HCA 9; (1979) 142 CLR 531

1 MALCOLM CJ: In my opinion this appeal should be allowed, the decision of the learned Judge below set aside and an order made that the matter be remitted to the arbitrator for reconsideration of the question of costs in accordance with the reasons for judgment to be published by Steytler J with which I am in entire agreement.

2 STEYTLER J: The appellant ("the owner") is the owner of a house and land in City Beach. The respondents ("the builder") built the appellant's house. The owner and the builder fell into dispute over various matters relating to the building of the house. The owner commenced arbitration proceedings against the builder. It claimed the cost of rectifying what it said was defective work. It also claimed compensation for loss of rental and other damages. The builder denied that there was any substance to the owner's claims. It counterclaimed for money which it said was due to it under the building contract. After a lengthy arbitration, the arbitrator awarded to the builder an amount of $97,733.63. However he ordered the builder to pay the owner's costs of the arbitration and the fees and expenses of the arbitrator. The builder appealed against that costs order to a single Judge of this Court. Its appeal was upheld. The decision of the arbitrator in respect of costs was set aside and, in lieu thereof, the owner was ordered to pay the builder's costs of the arbitration and the fees and expenses of the arbitrator. The owner has appealed to this Court. It seeks an order that the arbitrator's award in respect of costs be reinstated.

3 Under the building contract (a written agreement dated 10 June 1998) the builder agreed to build the house for the owner at a price of $542,300. In its points of claim in the arbitration, the owner contended that the builder, in breach of the contract, had not built the house in a workmanlike manner. The owner alleged that, on 3 December 1999, the house had yet to be satisfactorily completed and that it terminated the contract on that day as a consequence of the builder's failure or refusal to remedy its breach. I have mentioned that it claimed rectification costs, loss of rental and other damages.

4 By its points of defence and counterclaim, the builder said that the house had been practically completed, to a satisfactory standard, prior to 3 December 1999. It said that it was entitled to a number of extensions of time in respect of the date fixed, by the building contract, for practical completion of the house. It denied that it had breached the contract in any respect which entitled the owner to terminate it. It said that the owner, in purporting to terminate the contract, had repudiated it. The builder also

said that the owner owed it the amount of a progress claim of $65,000 and a sum of $63,417.57 payable in respect of variations. It also claimed other losses which, it said, had resulted from the owner's repudiation of the contract.

5 The owner lodged a reply and defence to counterclaim. It denied that practical completion of the house was achieved on or about the date alleged by the builder. It also denied that the builder was entitled to any extensions of time. Finally, it denied that there was any amount due by it to the builder in respect of the progress claim or variations to the building contract.

6 The arbitrator, in lengthy and careful reasons, arrived at the conclusion that, while the builder was obliged to pay to the owner an amount of $26,495 in respect of the cost of making good defective workmanship, the owner had not been justified in terminating the building contract. He also found that the builder was entitled to be paid the sum of $97,733.63 which I have mentioned above, being the outstanding balance owed to it under the building contract, including the cost of variations, less the sum of $26,495.

7 The arbitrator then turned to the question of costs. After touching on issues which are not material to the appeal, he said:

"In the exercise of the discretion given to me in this Section of the Act [s 34 of the Commercial Arbitration Act 1985] I direct that the unsuccessful party shall pay to the successful party the successful party's costs as between party and party which unless otherwise agreed between the parties shall be taxed in the Supreme Court. I also direct that the unsuccessful party shall pay my costs and expenses.

... It is therefore necessary for me to determine which party is the successful party."

8 He went on to say that there had been several issues in the arbitration and that the "final flow of money was necessarily from one of the parties to the other", but that it was not the case that "the receiving party" was the successful party in all issues or even in a majority of issues.

9 Towards the end of his reasons on the issue of costs, the arbitrator said this:

"I have referred above ... to the proposition that 'costs follow the event' means that costs follow the final flow of money. That is certainly the Respondent's view, made clear by its reference to Hudson's Building and Engineering Contracts, 10th edition, page 870, where in elaboration of 'the usual rule that costs should follow the event' it is added: 'the party ultimately successful on a final balance of claim and counterclaim should be paid his costs'.

A different view of 'costs follow the event' is found in John Holland Pty Ltd v Ng, in which is quoted a number of propositions in Scherer and Anor v Counting Instruments Ltd in which no 1 reads

The normal rule is that costs follow the event. That party who turns out to have unjustifiably either brought another party before the court, or given another party cause to have recourse to the court to obtain his rights is required to recompense that other party in costs.

... These two views of 'costs follow the event' are both clearly relevant in this arbitration but they do not match. Thus the question arises, which should prevail over the other?

My summarising of the outcomes issue by issue above tells me that

(i) The Claimant [owner] was not unjustified in bringing the Respondent [builder] to the arbitration, and

(ii) The Respondent did give the Claimant cause to have recourse to arbitration to obtain its rights

notwithstanding that the Respondent was the party to whom the final money flowed. I find as a consequence that the Respondent should not expect the Claimant to pay its costs in addition to paying the money I have directed to be paid under the interim award. I do not accept that 'Whoever secures or avoids paying the balance in effect has won' is in this arbitration an appropriate guide to payment of costs."

10 The arbitrator then considered whether each party should be required to bear its own costs. He said that, having found that the owner was "not unjustified" in bringing the builder to the arbitration, that the builder gave the owner "cause to have recourse to arbitration to secure its rights" and that the owner won most of the issues in which there was a winner, he could not see how an order that the owner should pay its own costs could be justified. He then referred back to the proposition that it was necessary for him "to determine which party is the successful party" and held that the owner was the successful party. He awarded costs accordingly.

11 The builder, in its appeal to a single Judge of this Court, contended, successfully, that the arbitrator had misunderstood the applicable legal principles.

12 The learned Judge, after a careful and thorough analysis of the law and of the arbitrator's award, concluded that the arbitrator had misunderstood, and consequently misapplied, the proposition quoted from the case of Scherer v Counting Instruments Ltd [1986] 1 WLR 615 at 621 in John Hollywood Pty Ltd v Ng, unreported; SCt of WA (Acting Master Hawkins); Library No 920239; 28 April 1992. He said that the arbitrator was mistaken in understanding this proposition as representing "a different view" to that expressed in Hudson's Building and Engineering Contracts. Rather, he said, it was simply an expression of the "conventional view" that costs will normally follow the event.

13 He said that the second sentence of the quoted proposition (that to the effect that the party who turns out to have unjustifiably brought another before the court or who has given the other party cause to have recourse to the court to obtain his rights is required to recompense that other party in costs) could be regarded "simply as an illustration of the normal rule". That is to say, his Honour said, if a party raises some flimsy defence to a claim, with the result that the claimant is obliged to proceed to arbitration in order to recover the amount due, then the party with the flimsy defence can be said "to have given the claimant cause to have recourse to the court to obtain his rights and it is therefore appropriate and just that the claimant should recover his costs". His Honour went on to say that, similarly, "a party with a flimsy claim can be said to have unjustifiably brought the other party before the Court and this, too, is an illustration of the underlying rationale for the normal rule that the successful party should obtain his costs".

14 Having found that there was "a manifest error of law on the face of the award", his Honour granted the builder leave to appeal pursuant to s 38(5)(b)(i) of the Commercial Arbitration Act 1985 ("the Act") and allowed the appeal.

15 He then considered whether he should remit the question of costs to the arbitrator or decide it himself. He did the latter. He said, in that respect, the following:

"[66] After a careful review of the Arbitrator's reasoning and the related materials, I am not persuaded that the matter should be remitted to the Arbitrator. I will not embark upon an exhaustive study of the many issues addressed by the Arbitrator in the course of his review of the matters in issue. It is significant, however, as I noted earlier, that after a review of the various grounds which were said by Palm Bridge [the owner] to justify its purported termination of the contract, the Arbitrator did not find in favour of Palm Bridge in respect of any of the grounds. This illustrates the difficulty in a case of this kind of determining the successful party by looking at the outcome of specific issues. It indicates also that there was much to be said on the builder's side. The owner's claim for loss of rental and many of its claims concerning variations and defective workmanship were not allowed. The Arbitrator noted at par C.9 of his final award that of the 60 workmanship issues in dispute, 30 were "won" by each party, although the owner was the "winner" in financial terms. This summation does not suggest that the builder was acting unreasonably in putting the owner to proof of its claims. The Arbitrator accepted at par C.13 that as to variations, the builder "won" more issues than the owner, both in numbers and in valuations.

[67] In the circumstances of the present case, I consider that the builder is entitled to the costs of the award upon the basis that the builder, pursuant to the principles mentioned earlier, should be regarded as the successful party. It does not appear from the Arbitrator's review of the issues that the builder was instrumental in advancing extravagant claims. It is true that the builder did not succeed in respect of a number of contentious issues, but it is also apparent that he was obliged to proceed to arbitration in order to recover moneys alleged to be due to him and some of which were subsequently found to be due to him.

[68] Against this background, I consider that the matter falls within the rationale expressed in Hudson (supra) whereby the parties in the case of a building dispute of this kind are ultimately looking to the final balance owing one way or another. In the present case, the flow of money is to the builder. Accordingly, I do not consider that there are sufficient special circumstances to justify a displacement or amelioration of the rule whereby the party who has been successful on a balance of claims and cross-claims will generally be awarded the whole of the costs."

16 The owner, in its limited appeal to this Court, raised a number of contentions. It is enough to say of them that they encompass a ground to the effect that his Honour overlooked material considerations and, had he not done so, he would have remitted the question of costs to the arbitrator rather than decide that question himself.

17 Central to the owner's contentions on the appeal was the fact that a good deal of time had been expended, in the arbitration, upon the issue of the builder's entitlement to extensions of time and to costs arising out of those extensions. Counsel for the owner contended that it was fundamental to the issue of costs to appreciate that, while the builder had succeeded in establishing an entitlement to some extensions, and to some costs arising from those extensions, it had not, prior to the arbitration, made any claim in that respect.

18 In the course of his reasons, the arbitrator, under the heading "Time for performance", said the following:

"The Respondent's claims for extensions of the contract period had not been made before they appeared in the pleadings. If they had first been made during the normal course of the contract management and administration then it would be reasonable to expect that the arbitration time and expense devoted to this issue would have been less than what was in fact required.

Unfortunately for the Claimant, after the issue was introduced into the arbitration the details were later amended and then amended again.

Given these circumstances, I do not see how the fact that the Respondent 'won' about 6% of its claimed time extensions can be translated into an assertion that therefore the Respondent won on this issue.

It is not too far fetched, I think, to say that had the time claims been made during the normal course of the contract then the builder would probably have been granted about 6% in any event. That, of course, is conjecture but what is not conjecture is the fact that the Respondent's sundry amendments to the time claims during the arbitration caused the Claimant to have to reconsider the issue each time. It seems to me that the Claimant's extra time and cost in this issue for that reason would outweigh the Respondent's 'success' in being awarded about 6% of the time claimed.

I doubt if there is any 'clear winner' in this issue but I do not doubt that the Claimant is the winner in the sense that it is the party whose costs expended on this issue in the arbitration should be paid by the other party, for the foregoing reasons."

19 The reference to "6% of the time claimed" seems to follow from the fact that the builder obtained extensions of 52 days but had claimed extensions which totalled 850 days (although many of the claimed extensions were concurrent rather than cumulative).

20 Then, under the heading "Time extension costs", the arbitrator said this:

"The Respondent builder claimed time extension costs for 95 days. I awarded time extension costs for 43 days. The rate per day sought by the Respondent was similar to the rate I adopted from the evidence (but for different reasons). It is therefore reasonable to ignore the rate and say that the Respondent was successful in being awarded these costs for 45% of the time claimed. Since the Claimant was not prepared to concede that the Respondent should be awarded any such costs at all, the Respondent may be seen as the winner. However, there are circumstances that muddy that otherwise clear view.

I have previously pointed out, in addressing the issue of claims for time extensions, that the Claimant owner had no inkling of such claims until they appeared in the pleadings for this arbitration. The same applies, as a consequence, to the claims for time extension costs.

The history of the claims for time extensions and time extension costs is that there were no such claims at all during the course of the construction period. The builder did not seek either time extensions or costs until after the owner triggered the arbitration process. If the claims had been made by the builder during the normal times for contract administration and had been dealt with at those times by the owner then, it seems to me, much less arbitration time and expense would have been needed, if any at all.

In those circumstances and in view of the fact that the builder was awarded time extension costs for less than half of the period claimed to attract those costs, I do not see how the builder could be seen to be the successful party in the issue. I think it is reasonable to add that if there had been no arbitration there would have been no claim for either time extensions or costs thereof. Neither party was clearly a 'winner'."

21 It cannot be doubted that the arbitrator was, in arriving at his decision on the issue of costs, entitled to take into account the fact that the builder had not, at the appropriate time, claimed time extensions or time extension costs, and that, when it did make these claims during the course of the arbitration, it failed, for some time, adequately to support them. His error (and it was common cause, on the hearing of the appeal, that he was in error) was in misunderstanding the applicable legal principles. However, the Judge below, in considering that the builder should be regarded as the successful party, did not mention these considerations. Rather, his Honour said, as will be apparent from the extract from his reasons quoted above, that it did not appear from the arbitrator's review of the issues that the builder was instrumental in advancing extravagant claims. While that may be so, the arbitrator certainly considered that the builder had advanced claims which need never have been the subject of the arbitration proceedings had they been made, and appropriately supported, "during the normal course of the contract". In making the comments that the builder did not appear to have advanced any extravagant claims and that it "was obliged to proceed to arbitration in order to recover moneys alleged to be due to ... [it]" his Honour appears to have overlooked this consideration, which had been found by the arbitrator (not unreasonably in my respectful opinion) to have been important in considering what should be done about the costs of the application.

22 The arbitrator had disapproved, also, of the builder's conduct in respect of the claimed variations. He said, in that respect, that:

"An analysis of the outcomes of the disputed variations indicates that the Respondent builder 'won' more than the Claimant owner, both in numbers and in valuations but that is not necessarily a guide as to costs consumed in their disputing of the variations. The Claimant's view seems to be that if the Respondent had provided adequate details of costs properly incurred or properly saved, in the first place, then arbitration time and costs would not have been necessary. That is probably an over-simplification but, after reconsidering the claims and documentation of the Respondent, I have concluded that it is largely true. Money would have flowed from the Claimant to the Respondent in any event and therefore the 'final flow of money' from Claimant to Respondent, in respect to the issue of variations, is not the sole, or even the proper, determinant in influencing me on the question of costs in this issue. Money could not have possibly flowed in the other direction. A rule based on the final flow of money, in this issue, is not appropriate."

23 This, too, was not referred to by the Judge below in the course of his otherwise careful and thorough reasons.

24 While counsel for the builder contended that, had the owner not brought its claims in the arbitration, the builder would not have needed to raise the issues of extensions of time and variations in order to answer those claims, the fact remains that the owner did not know, and could not know, of the builder's entitlement in these respects until such time as it was actually proved during the course of the arbitration, no prior claims having been made in these respects and no adequate supporting documentation having been supplied until the arbitration was in progress.

25 It consequently seems to me that these considerations were material to the issue of costs and that his Honour erred in failing to take them into account in deciding what should be the ultimate disposition of the appeal. In my respectful opinion the more appropriate course would, in the light of those considerations, have been to remit the question of costs to the arbitrator, who had painstakingly considered each of the various claims and cross-claims advanced by the parties and who had observed, first hand, the manner in which the arbitration had been conducted, with a

direction to reconsider that question, unimpeded by his mistaken understanding of the applicable legal principles.

26 I would consequently allow the appeal, set aside the decision of the Judge below, and order that the matter be remitted to the arbitrator for reconsideration accordingly.

27 WHEELER J: I have read in draft the reasons for decision of Steytler J. I am in agreement with them, and with the orders proposed by his Honour.