Supreme Court of WA|2003-08-06|Before: Mr P, Tadgell AJ, Ormiston AJ, McKechnie J

Pindan Pty Ltd v Uniseal Pty Ltd [2003] WASC 168 (6 August 2003)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : PINDAN PTY LTD -v- UNISEAL PTY LTD [2003] WASC 168

Commercial arbitration - Setting aside award - Errors of law - Misconduct of arbitrator - Whether reasonable apprehension of bias in knowing of offer to settle

1 MCKECHNIE J: This is an application under the Commercial Arbitration Act 1985 (WA) ("the Act") seeking to set aside the award and remove an arbitrator due to misconduct in the proceedings. By agreement between the parties the application for leave to appeal and the appeal have been heard together.

2 Pindan engaged Uniseal to provide waterproofing work on five residential premises being constructed by them. Two of the engagements were in the form of a written subcontract agreement. The precise terms of agreement for the other three engagements are matters of contention.

3 A dispute arose between the parties and as a result they entered into an arbitration. They agreed that the issue of liability should be determined first and that the question of quantum be determined later. The question is yet to be determined. The arbitrator published his award on liability, making separate determinations on the various claims, in favour of Pindan in some cases, and Uniseal in others.

4 This application is made under the Act s 44. Pindan does not assert there has been any moral turpitude on the part of the arbitrator but puts its case on three events which singly or together it says gives rise to a reasonable apprehension of bias. The test for reasonable apprehension of bias of an arbitrator is conveniently set out in Gascor v Ellicott [1997] 1 VR 332 per Tadgell AJ at 340 and 342 - 343 and Ormiston AJ from 348 - 352. The three events here are all actions of or precipitated by Uniseal. It is accepted by counsel for Uniseal that the communications were improper. They were obviously so.

5 The first is a letter from Uniseal to the arbitrator of 26 November 2002 which sets out three principal reasons for Uniseal's difficulty in paying the arbitrator's fees. Item 2 was the strangulation of Uniseal's cash flow as a result of the extensive unpaid remedial work that Uniseal undertook for Pindan during the arbitration without any admission of or proof of liability in this respect and despite which Pindan refused to honour any of its debts under various contracts.

6 Item 3 was Pindan's refusal to allow access to funds held in a joint account between Pindan and the Uniseal directors set up prior to entering into the arbitration. To that the arbitrator responded by facsimile of 28 November 2002 and said relevantly:

"... The comments regarding Uniseal's financial position have been put to me before, and whilst I sincerely sympathise with Mr Pawl there is little I am able to do. ..."

7 The arbitrator at that stage declined to waive his fees. On 8 January 2003 Uniseal wrote again pointing out:

"For the reasons previously outlined, the availability of funds to Uniseal is extremely limited and whilst every effort has been made to keep the company viable, it is evident that, ultimately, its future rests with the resolution of this dispute. ..."

8 The letter concluded by asserting that the only option for the fees was to sell company assets to raise the funds. On 8 January 2003 the arbitrator released his award and said:

"... It would be repetitious to recant the parties, and my, positions on the matter, and clearly there seems little point in continuing the impasse that exists with respect to the release of the Award.

The parties have expended a considerable amount of time, funds and energies in an effort to determine the disputes that exist between themselves, so, in the interests of general justice I have decided to release the Award. ..."

9 I am unable to see anything in the nature of prejudgment or bias in the actions of the arbitrator. His expression of sympathy for the position is no more, I think, than a polite comment but does not of itself indicate anything out of the ordinary.

10 The second event commences with a letter of 10 January 2003 from Uniseal thanking the arbitrator for the award. It reads:

"... We also note your advice in respect of finalising all matters with Pindan, including costs. A submission in this regard is being prepared and we will be contacting Pindan at the earliest opportunity."

11 More particularly, there is a letter of 14 January 2003 entitled, "Without prejudice," and addressed to the manager of Pindan Construction but sent also to the arbitrator. This letter would have inevitably raised a reasonable apprehension of bias had the arbitrator seen it and in that event I would have no hesitation in acting under s 44. It set out in some form and detail an offer of settlement. However, as Pindan accepts, the arbitrator did not actually see the letter.

12 On 23 January 2003 the arbitrator wrote to both parties pointing out that his office procedure had changed last year and he had not seen the fax and he ordered its destruction. He concluded:

a. I am aware that an offer to settle has been exchanged between the parties, but that,

b. I am unaware of its contents. ..."

13 In a further letter, Uniseal wrote on 23 January 2003, apparently not having yet received the point:

"We reiterate our advice, sent earlier this morning, that a settlement offer had indeed been made by Uniseal, but subsequently ignored by Pindan and that, in accordance with the terms of that offer, we now formally request a reconvening of the arbitration so that the matter can be finally resolved."

14 Finally on this point, the arbitrator in a letter dated 29 January 2003, to which I will shortly refer in a different context, wrote:

"... It has been clear to me from the outset that even prior to the Preliminary Meeting the parties had already entered into discussions and offers to settle in some or another had been exchanged.

Part 6. of the Supplementary demonstrates that they were unable to come to terms except for the fact that monies had been mutually deposited into their respective solicitor's trust accounts.

Furthermore, it is commonplace for parties to enter into discussions at various times during the course of arbitration, either as pleadings filed, during the hearing or more particularly when an interim Award is published. ..."

15 In all the particular circumstances, the fact that an offer was made and not accepted, or ignored, does not give rise to a reasonable apprehension of bias in this case. However, this finding is not intended to extend to facts in other cases. Communications of this nature by one party to the arbitrator are always dangerous and likely to provoke an application of this kind.

16 This matter relates to the arbitrator's refusal to disqualify himself. It was argued that he should have received submissions on the matter and also that having become aware of an application to this court should not have delivered his reasons for refusal.

17 As to the first point, Pindan's advocate wrote to the arbitrator on 24 June 2003 submitting why the arbitrator should disqualify himself. Uniseal also wrote to the arbitrator on the same day contending that Pindan's position was not compromised. I consider that the arbitrator did receive submissions and as a consequence had to determine the issue of his disqualification.

18 The arbitrator prepared a letter which is dated 29 January 2003 which contains the following post note:

"The above letter was drafted on Tuesday (Monday being a public holiday), but because of its complex nature needed more time to finalise before sending it.

It was proofed and awaiting signature when the fax from Jackson McDonald arrived."

19 I interpose to note that that was a fax advising of an application to the court. To return to the post note:

"I have deliberated further before sending it and have decided that the parties deserved to see it. It has not been amended despite the arrival of the notice of the application for appeal.

However, under those circumstances, I hereby stay the directions in (a.) above until further notice."

20 To my mind, the arbitrator's actions in sending the letter are unexceptional and cannot be criticised. He might have refrained from sending the letter but the act of sending it, and, for that matter, its contents, do not raise any issue of bias, actual or apprehended.

21 None of the three events give rise to misconduct by way of a reasonable apprehension of bias sufficient to disqualify the arbitrator.

22 Pindan's submission is that leave should be granted and the appeal be allowed because of a manifest error of law substantially affecting the rights of one or more parties to the agreement. That of course is a submission based on the Commercial Arbitration Act, s 38 which was considered in UDR Equipment v Afkos Industries [2000] WASC 57; (2000) 22 WAR 221, a decision which I follow and apply.

23 Pindan has made good its application that there is a manifest error of law in the face of the award. The error affects both parties.

24 The relationship between Pindan and Uniseal was relevantly a contractual relationship. Consequently, the terms of the contracts in each case represented the bargain made between them.

25 As I previously remarked, some of these terms are disputed. The arbitrator does not appear to have determined the terms of each of the five contracts, determined whether one or other party had breached a term and, if so, whether that breach was a cause of loss. Instead the arbitrator commenced what he described as commentary on legal and related issues by setting out as his first legal issue:

"1.1.1. DUTY OF CARE, OBLIGATIONS AS TO DESIGN, WORKMANSHIP AND MATERIALS.

As the written and oral submissions of the parties touched on the roles of the parties in a significant way, it is worth outlining the duties of the parties in a generalised sense, first. That is:

A Builder owes a duty of care to its sub contractors to:

• Ensure all sub contractors have access to all relevant information,

• That information is updated to the sub contractors in a timely fashion,

• Sufficient prior notice is given to the subcontractors when they are required on site, so that foreseeable problems are properly dealt with

• Have available a competent and suitably skilled site supervisor to deal with day-to-day matters including scheduling, issuing instructions and the like,

• Advising subsequent trades of any areas which might be hazardous (with respect to personal injury) or the need for caution because of susceptibility (e.g. recently completed brickwork or ceramic tiling, fresh paint) so as protect the work from unnecessary subsequent damage.

The Sub Contractor owes a reciprocal duty of care to whom he is contracted, the Builder, so as to:

• Use the products and processes suitable for the intended purpose

• Raise issues relating to errors in documentation, problems on site and seek directions relating to them

• Comply with the directions or instructions of the site supervisor

• Not to commence work unless the area is suitable to receive his work/products

• Advise when work is complete and provide appropriate protection.

• Be available to deal with any ongoing matters of liability (warranty), repairs and the like.

The evidence in this matter led to the clear conclusion that, whilst there were infractions by both parties, the Respondent Builder failed to a large degree to ensure that it properly discharged its duty of care to not only the Claimant Sub Contractor, but, by default, to the building owner/s."

26 The arbitrator determined various matters relating to Pindan's duty of care which he enumerated as:

"a. Call the Claimant Sub Contractor early enough so that he was not being 'built out' (see also e. below),

b. Ensure the Claimant Sub Contractor always had free and uninterrupted access,

c. Warn off subsequent trades to avoid those areas (the supervisor would be making arrangements for those other trades as well), or at the very least take proper precautions to prevent damage to the waterproofing,

d. Actively assist, or seek external advice, when the Claimant Sub Contractor made it abundantly clear there were difficulties, and,

e. Call the claimant Sub Contractor back to site to complete staged works at times to suit the type of work (rather than when it suited the Respondent Builder's supervisor).

In this regard I believe this is due in part to the lack of understanding on the part of the Builder's supervisors with respect to the technical aspects of waterproofing, in particular the intimate sequencing involved.

I implied above that the Claimant Sub Contractor was not blameless. To that end, in my assessment the Claimant Sub Contractor ought to have stated in writing when certain aspects of their work was likely to fail (e.g. Claim 2/Volume 3/ Folio 12 - BC Control Joint), where incorrect instructions were given, or where there was untoward conditions existing.

In some isolated instances, the wrong advice was provided, but in the main I conclude that the Claimant Sub Contractor responded in a responsible manner in the selection and application of materials used, the tradesmen it employed and largely, but not entirely, fulfilled its duty of care it owed to the Respondent Builder."

27 There were no pleadings and it may be, as Mr Monaco for Uniseal suggests, that the arbitrator's reasons are a response to the way in which the case was argued. There are some indications to this effect. In the course of the arbitrator's comments, reference is made to the submissions of the parties. However, even if Mr Monaco is right, the arbitrator is not absolved from determining the dispute according to law. The parties did not agree to a determination by reference to considerations of general justice and fairness: Commercial Arbitration Act s 22(1). They might have done but did not.

28 This is at heart a contractual dispute or, as the arbitrator correctly noted, five contractual disputes. The arbitrator made only occasional reference to the contract and when he did, it was in terms relating it to a duty of care; for example at 1.1.4:

"That involvement includes the protection of work from subsequent damage by following trades or persons not authorised to enter the site. If it is a contractual obligation of the waterproofing contractor to protect the works, then the supervisor:

a. ought to be aware of that obligation

b. check that the obligation has been satisfied, and

c. if that obligation is not satisfied to refer it directly back to the contracting firm to complete that part of the work.

I have no evidence before me to suggest that any of these duties occurred at any of the sites. These are essentially 'Quality Controls'."

29 If it was an obligation to protect the works then the correct question was not whether the supervisor breached his duty but whether the contractor had breached a term of the contract causally resulting in loss.

"I (sic) determining the Claimant Sub Contractor's claims involving 'uncured membranes' is to decide whether the Claimant Sub Contractor is entitled to rely on the fact that the supervisor of the site had adequate knowledge of the material so he could test the surfaces for curing so that, in turn, he could schedule following trades.

The supervisor's knowledge may derive advice from the Claimant Sub Contractor or other sources. I first looked for any written information from the Claimant to the Respondent.

...

On building sites the supervisor needs a sound knowledge on such things as

• How to pour and finish concrete, including the curing

• Adhesives used in tiling and the preparation of the backgrounds and tiles

• Application of render - and the conditions in which they can/cannot be applied

It is not accidental that I elected to provide examples of 'wet trades', and especially the first (concrete) that also require knowledge of curing.

These are integral with quality control (as argued strongly by both parties) and duty of care, but as referred to by the parties.

My determination is that the responsibility for final checking of the membranes, be it curing or completion lies with the supervisor.

An exception to this may be if the contractual arrangements or quality control program in place particularly identifies the checking role requires the Sub Contractor (or another entity) to do the examination. But in any event I would expect that quality system must provide for the supervisor to be told that this step has been taken."

31 This is in a section of the award entitled Supervisor Curing. This passage does not sit well with any express or implied contractual term to perform the work competently in a manner fit for its purpose.

32 The notion of Pindan's obligation to supervise is carried throughout the analysis; for example:

"If the answer is in the negative, who is to check the substrate left by the Claimant Sub Contractor? That answer must be: 'the supervisor' - after all, his part of the role of 'managing and supervising'.

If Pindan wishes to assign that responsibility to the tiling contractors or landscape contractors, that is for them to deal with, not me.

What this does in essence is to put the responsibility onto the a (sic) supervisor to ensure the backgrounds - the waterproofing -is suitable to receive the tiling, brickwork, landscaping and even mechanical equipment before those trades are called to do their work.

To be perfectly clear, instructing a subsequent trade to proceed with its work is, in my determination, deemed as acceptance of the previous work by the Respondent Builder.

In other words, for a supervisor to instruct a tiler to commence laying tiles over a membrane, an earth worker to backfill, a bricklayer to lay bricks, a paviour to pave the area previously waterproofed, or to engage landscapers to fill planters without first inspecting and satisfying himself that all the work has been properly completed is nothing short of irresponsible.

This is no different to that described by Thompson and other witnesses having implications with such allegations of uncured membranes and incomplete work."

33 Acceptance of the work may be evidence that there are no defects. It does not, however, conclude the issue. If there are defects in the work, the correct question is whether a term of the contract provided for the responsibility to remedy such defects? If it did so provide, was the term breached and was any breach the cause of loss?

34 Seen in that light, it may be that notwithstanding acceptance by a builder of work subsequently shown to be defective, the contractor may still be liable. The focus on duty of care rather than the contractual terms has led the arbitrator into error on a number of occasions; for example, in relation to claim 4 as set out:

"Claim 4 Volume 3 Folio 4 West Block Unit 23 Lower Floor, South Terrace, and Upper Floor South Balcony, Leaks to Unit 21 Living Room

Award: I find in favour of the Claimant Sub Contractor and determine the liability is that of the Respondent Builder.

Reasons:

Woodford (examination-in-chief) testifies the cause of leak is due to the 1 course hob/upstand not being completed. In the intervening 8 months the Ultra-violet activity on the Polybit 3mm caused deterioration. There was further evidence to suggest that the upstand may not have been completed at all.

I accept the Claimant Sub Contractor's submission that the Respondent Builder ought to have identified the missed section, wherein it is stated:

'Before the following works had taken place, the omissions referred to by Pindan would have been obvious to anyone who bothered to look. ...there can be no possible excuse for Pindan authorising following works without ensuring that the waterproofing was finished...'

In other words, the allegation is that Respondent Builder failed to reciprocate with a duty of care to identify any shortcomings by the Claimant Sub Contractor.

While there is an implied admission of the defect, I believe the supervisor failed in his duties as previously described to bring the inadequacies to the notice of the Claimant Sub Contractor.

...

Claim 4 Volume 3 Folio 6 West Block Pond

...

Uniseal seems to accept their fate when Steve Marriott indicated: 'get used to it...we can get to it later'. As it happened they did not.

Miffin (examination-in-chief) gives testimony to the effect that he would not refuse to box in downpipe if asked (by Uniseal) but cannot recall being asked by Justin. He conceded that the area had certain difficulties for the waterproofers, but was not concerned because:

'I did not believe water would go through the tiles'

This comment is most significant. Here is a supervisor not expressing interest in the waterproofing being applied to the area, nor becoming involved in problems the Claimant Sub Contractor was bringing to him because in his assessment 'the tiles would be enough'.

In the end, the work that was done to rectify the problem was, for all intents and purposes, the same that was suggested at the outset.

Mifflin's comment put credibility to, and substantiated, the Claimant Sub Contractor's assertion that they were not obtaining any assistance from the Respondent Builder.

Accordingly, the Respondent Builder demonstrated it failed to exercise their duty of care."

35 I have said sufficient to illustrate why there has been manifest error. The error has been substantially to determine the arbitration on notions of fairness referable to the duties of care said to be owed by both parties in the responsibility for quality control, rather than on the contractual basis which governed the relationship. This is sufficient for me to grant the appeal and allow the appeal, which I determine should be remitted for determination.

36 On that remitter I give my opinion on the question of law as follows:

(1) the arbitrator should first determine in respect of each contract what are the terms and conditions, express or implied, which are incorporated into that contract;

(2) in respect of each claim, does the evidence establish there was a breach of any term of the contract;

(3) if so, what term and which party was in breach;

(4) if there was a breach, did the breach cause loss to the other party?

37 I recognise that the quantum of loss, if any, is yet to be resolved. In some cases this last question may not be able to be answered until then. As the matter will be remitted, I will add an opinion on another matter of law. Although I would not have classified the error as manifest, because of the remitter I will make these observations. It concerns the question of frustration and I refer to these examples from the award:

"Although it is not an argument specifically led by the Claimant Sub Contractor - perhaps due to his lack of legal training - I am entitled to deal with it having been led as a defence by the Respondent Builder.

Even if that were not the case, some events - 'supervening clauses' - did occur on site leading to what is tantamount to 'frustration'. In the strict legal definition it requires external causes beyond the contemplation of the parties such as a 'force majeure' but the effects of the events on site led to an outcome consistent with 'frustration'.

Accordingly, reference to 'frustration' in the Reasons below is not done so in the strict legal sense as I might just as easily refer to this as 'interference' with the Claimant Sub Contractor's due process.

...

This clause was relied on by the Respondent Builder for its position that the Claimant Sub Contractor failed to protect its work when completed.

References to alleged failure to fence off with bunting, signage, barriers and the like were canvassed with most witnesses. Where particularly relevant I have provided my determination in some of the claims below.

In global sense I find this clause to be unworkable and found that in its entirety, legally frustrated because to place the burden of protection on the Sub-contractor until Practical Completion is unconscionable, unreasonable and impracticable.

To do so would require the Sub-contractor to have greater control over subsequent visitors to the site (other trades) than the Site Supervisor.

...

The Respondent Builder's closing written submission asks me to consider the related common law principles, which states:

'that frustration can only very rarely come about in building and engineering contracts, since their performance is, as a matter of reasonable foresight, hedged about with many uncertainties and far more likely to be prevented by physical difficulties than in the case of other types of contract. In general the contractor is taken to have assumed the risk of the many uncertainties and difficulties associated with work in his field. Thus it has already been seen that the difficulty of the work is not in general a valid excuse for non-performance of a contract to execute it, nor is a contractor entitled to abandon work which proves unexpectedly onerous. A building owner does not impliedly warrant that the plans or methods specified by him or his agent are practicable, and a contractor who undertakes to carry out work in accordance with plans and a specification must do it or pay damages. (ref: Hudson' Building and Engineering Contracts, chapter 5)'

In theory this is meritorious and seemingly correct.

In reply, the Claimant Sub Contractor states, in its closing submission (my emphasis):

'Whilst Pindan has sought to rely on the strict interpretation of the technical detail of the works contracts to support its claims, Uniseal has had to deal with the day to day realities of construction sites and asserts that, in doing so, it has done everything that could be reasonably asked to fulfil its contractual obligations and to the greatest extent possible, has succeeded in doing so.

Whilst none of Pindan's legal arguments are contested per se, Pindan's interpretation of how these matters apply to this dispute, is.'

Further, the Claimant Sub Contractor's Closing Submission correctly states, on page 39, para 3 in reference to Claim 4 Vol 3 Folio 4 York Apartments (my emphasis):

'Whilst it is possible that higher levels of quality control on Uniseal's part may have avoided some such problems, exactly the same argument applies to Pindan's QC. Uniseal has presented evidence, however, that in most instances, even when such oversights were brought to Pindan's attention, there was no directive to "tear down and start over", rather, pressure was applied to find another, often second rate, solution.'

The highlighted section accords with the rulings I have made herein.

As the evidence unfolded, I found that certain parts of the works were frustrated (as per my interpretation) or at the very least compromised by the inabilities of the Respondent Builder giving weight to the Claimant Sub Contractor's position and that there was undue influence imposed by the Respondent Builder.

Based on the facts arising from this Arbitration, this line of argument of the Respondent Builder was rejected in many instances, as I have noted in the particular claims.

..."

38 I am inclined to think that, in context, the arbitrator's reference to frustration related to his view about the duty of care of the parties and the responsibility for causes of damage, supervening or otherwise. In my opinion, the doctrine of frustration is relevant only in its legal sense, conveniently described by Mason J in Codelfa Constructions v State Rail Authority of New South Wales [1982] HCA 24; (1981) 149 CLR 337 at 357 - 359:

"... I agree with Stephen J's acceptance of the approach adopted by Lord Reid and Lord Radcliffe in Davis Contractors. Lord Reid said that the task of the court is to determine 'on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances', 'whether the contract which they did make is ... wide enough to apply to the new situation: if it is not, then it is at an end' ([1956] AC, at pp 720-721). Later he described frustration as 'the termination of the contract by operation of law on the emergence of a fundamentally different situation' ([1956] AC, at p 723).

Lord Radcliffe (at 729) said:

'... frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract ... It was not this that I promised to do.'

...Two objectives may be urged to the width of the proposition I have stated.

The first is that the common assumption must be found in the contract itself. The answer to this objection is that, granted that the assumption needs to be contractual, in the case of frustration, as with the implication of a term, it is legitimate to look to extrinsic evidence in the form of relevant surrounding circumstances to assist us in the interpretation of the contract, unless its language is so plain that recourse to surrounding circumstances would amount to no more than an attempt to contradict or vary the terms of the contract. ...

The second objection is that the proposition does not sufficiently acknowledge the fact that the event which generally, if not universally, works a frustration, is an event which supervenes after the making of the contract, viz. a change in the law which makes it impossible for the parties to execute the contract. It is not surprising that the cases commonly throw up situations of supervening impossibility caused by a change in the law - they are the more common instances of the unforeseen or unexpected occurrence. But in principle there is no reason why a mutual assumption arising from a mistaken view that an activity is immune from injunctive relief should not attract the principle of frustration. No doubt it is more difficult in such a case to show that the grant of injunctive relief was not foreseen or could not reasonably have been foreseen, but if that can be shown then the doctrine of frustration should apply. The injunction is a supervening event though it does not stem from any alteration in the law."

39 It is a matter for the arbitrator to determine whether, in accordance with that test, the performance of any of the contracts or part of them has been frustrated, such as to release the parties from their mutual obligations.

40 Having decided to allow the appeal and to remit it for consideration in the light of these reasons, the question arises whether to remit it to the same or a different arbitrator. The answer is a question of judgment as to where the balance of fairness and convenience lies.

41 The dispute is significant in money and other terms. The arbitrator has heard the evidence and has made a detailed consideration of it, including acceptance and otherwise of certain portions of the testimony. He has applied the wrong legal test to the evidence. If he focuses on the issues as I have identified them, the arbitrator can review the evidence seeking answers to the proper questions. Weighing the matters of fairness and convenience, I conclude that justice will be best served by remitting the matter back to this arbitrator to determine after consideration of my opinion on the questions of law.

42 In relation to costs, it seems to me there were two issues. Each party has succeeded on one issue. I think each party regards the issue upon which they succeeded as substantial. The appropriate order is that each party bear their own costs. The formal orders will be:

(1) the applicant has leave to appeal pursuant to item 1;

(2) pursuant to s 33, the interim award be remitted to the arbitrator for reconsideration in accordance with the opinion on the question of law of this court;

Arbitration Act 1985

Pindan Pty Ltd v Uniseal Pty Ltd [2003] WASC 168

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Judgment (101 paragraphs)

Pindan Pty Ltd v Uniseal Pty Ltd [2003] WASC 168 (6 August 2003)

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