Plaintiff v First Defendant Second Defendant

1 That the plaintiffs, Thiess Pty Ltd and John Holland Pty Ltd, trading as ConnectEast Construct (TJH), should have expected to finish the design and construction of the Mitcham-Frankston extension of the East Link freeway some months ahead of schedule might have been a cause for celebration for all persons concerned. These persons might include the defendants, ConnectEast Nominee Company Pty Limited as trustee of the ConnectEast Asset Trust and ConnectEast Pty Limited ("ConnectEast"), who, as proprietors of the project, would then enjoy the benefit of the early completion as well as TJH who would thereby enjoy an early completion bonus. But it was not to be.

2 By notice dated 28 February 2008, TJH referred to arbitration a dispute between it and ConnectEast regarding the amount which TJH was to receive upon completion[1] as its Semi-final Payment under cl 39.2 of the construction contract between them. The issue between the parties was whether TJH should then be entitled to receive payment of the value of the work completed after making allowance for sums previously certified for payment, as it contended; or whether its entitlement should be capped in accordance with the contract price payment schedule ("the payment schedule"). Under the payment schedule the whole contract price of $2.502 billion was not payable before the certificate was issued in respect of the September 2008 claim.[2] At the time of the notice of dispute, TJH expected to achieve completion in mid-2008 and then to be in a position to submit its Semi-final Payment claim. The date for completion under annexure 12 of the construction contract is 30 November 2008.

3 The issue between the parties turned on the construction of cl 39 of the construction contract. Clause 39.1 contains provisions for making monthly progress claims, the issuing of monthly progress certificates and for payment of the sums certified to be payable. Clause 39.2 provides for claims for payment upon completion, the certification of the sum payable at that time and payment of the sum certified. Clause 39.2A deals in rather similar terms with claims to be made at the end of the defects liability, the certification of the amount payable and payment of the sum certified. ConnectEast contends that, upon a proper construction of the construction contract, the provisions of the payment schedule apply to all payments of the contract price, including the Semi-final Payment; TJH contended that it applied only to monthly progress payments.

4 The arbitrator was asked to treat the dispute as one of urgency and, with the cooperation of the parties, he did so. The hearing was conducted over one day on 28 April 2008 and the arbitrator's interim award number 1 was published on 9 May 2008.

5 The award, in terms, was addressed to the claim of TJH that the arbitrator should declare:

That the lodgement, certification and payment of the Semi-final Payment claim under clause 39.2 of the Construction Contract is not subject to or in any way limited or fettered by clause 39.1 and the Contract Price Payment Schedule.[3]

The arbitrator concluded that the Semi-final Payment was subject to the limits imposed by the payment schedule and, accordingly, he refused to make the declarations sought.

6 TJH, by summons filed on 6 June 2008, seeks leave to appeal against the award pursuant to s 38(5) of the Commercial Arbitration Act, alternatively, that the award be set aside pursuant to s 42 for technical misconduct. The arbitrator, as is customary, took no part in the proceeding.

Leave to Appeal - Section 38

1"> 7 In the present case, TJH cannot appeal against the award without leave.[4] The statute, relevantly, directs the court to refuse leave unless it is satisfied of two matters,

(i) the determination of the question of law could substantially affect the rights of the parties; and

(ii) there is a manifest error on the face of the award.

TJH argued that the award contained three manifest errors.

8 The first suggested error is identified in Ground 1A of the proposed notice of appeal in these terms:

(a) Clause 39.2 as being limited to the notification and certification of the Semi-final Payment Claim and without an independent covenant to pay separate to the covenant to pay contained in clause 39.1(a)(i) [Award page 50 paragraph 55; Award page 52 paragraph 56]; and

(b) Clause 39.1(a)(i) and the Contract Price Payment Schedule as applying to the Semi-final Payment Claim including the components of the Semi-final Payments Claim which are for amounts not referrable to the Contract Price [Award page 51 paragraph 56].

So expressed, this ground amounts to nothing more than that the arbitrator reached the wrong conclusion in construing the construction contract. In their argument, counsel for TJH developed this contention, taking me through the arbitrator's detailed analysis of cl 39.

9 In essence, they argue that cl 39.2(f) which provides that "where an amount is payable from [ConnectEast] to [TJH] in respect of the Semi-final Payment Certificate, [ConnectEast] must pay [TJH] the amount certified... as payable by.. " a certain date, creates an independent obligation to pay the amount claimed in the semi-final claim. The position of ConnectEast is that this is a machinery provision for the payment of a portion of the contract price and any additional amounts payable under the construction contract which ConnectEast was obliged to pay under cl 39.1(a)(i). This contention of TJH which was developed by a detailed comparison of the other provisions of cl 39.1 and cl 39.2, was rejected by the arbitrator.

10 Clause 39.2(f) provides a time for the payment of the amount certified to be payable by ConnectEast to TJH in the Semi-final certificate pursuant to cl. 39.2(e)(v). In this regard, it is to be contrasted with cl 39.2(g) which provides the time for payment when a certificate is issued pursuant to cl 39.2(e)(vi) in respect of the sum to be paid by TJH to ConnectEast.[5] The trigger which activates ConnectEast's obligation to pay a certified sum is the issue of the relevant certificate. The certifier under cl 39.2(e)(vi) is directed to state in the certificate the amount "then being due for payment". The arbitrator's award identifies the role of the payment schedule as fixing a cap on the amount then due for payment.[6]

11 I reserved my decision in order to look again at the arbitrator's reasons in the light of the submissions received and having regard to the complicated nature of the contracts. Having done so, I find no manifest error. Indeed, in my opinion, the construction of the contract adopted by the arbitrator was clearly open to him.

12 The second and third suggested errors may be dealt with together. Grounds 2A and 3A are in these terms:

1. The Arbitrator erred in law in construing clause 39.2, and did so out of its proper context, by failing to consider or give adequate weight:

(a) to the fact that pursuant to the Loan Notice Subscription Agreement (clauses 4.1(a)(iii), 4.3(a) and 2.1(a) & (b)) during the period of Tolling Completion the Respondent will have drawn down on the unpaid balance of the Contract Price and can only use that money to pay the Appellant for the construction activities undertaken under the Construction Contract; and

1. The Arbitrator erred in law in construing clause 39.2, and did so out of its proper context, by failing to consider or give adequate weight:

(a) to the interrelationship between the Drawdown Schedule under the Loan Note Subscription Agreement and the Contract Price Payment Schedule under the Construction Contract;

(b) to the fact that the Drawdown Schedule could be amended under clause 4.5 of the Loan Note Subscription Agreement and the relevance and effect of this fact to the contention that the Contract Price Payments Schedule does not apply to the Semi-final Payment Claim under clause 39.2; and

(c) to the fact that the last drawing under the Contract Price Payment Schedule could be varied and the relevance and effect of this fact to the contention that the Contract Price Payment Schedule does not apply to the Semi-final Payment Claim under clause 39.2.

13 The point here is a relatively subtle one. At the time the construction agreement was entered into between ConnectEast and TJH, a complex series of finance arrangements were put in place between ConnectEast and its finance providers. These concluded a loan note subscription agreement (LNSA) which contained a drawdown schedule which matched the payment schedule. It was argued on behalf of ConnectEast that this funding arrangement was part of the background against which cl 39 of the construction contract should be construed, and that it indicated that the payment schedule applied to the Semi-final Payment. Counsel for TJH challenged this, arguing that the terms of cl 39.2 were clear so that resort should not be had to the extrinsic material. The arbitrator upheld this submission[7] but accepted that he should have regard to the financial arrangements known to the parties at the time of contract as part of the factual matrix in which the contract was entered into.[8] He concluded that the congruity between the drawdown schedule and the payment schedule lent support for the interpretation of cl. 39 which, however, he considered to be free of ambiguity.[9]

14 On behalf of TJH, it was also put to the arbitrator in reply, perhaps not correctly, that the ConnectEast submission based on the financing agreements amounted to a contention that, under its terms, ConnectEast would not have the funds to meet an obligation to make payment upon early completion.[10] Having set up this argument, counsel for TJH then proceeded to knock it down. They pointed to a number of provisions in the finance agreement under which the drawdown schedule might be modified to deal with an early completion.[11] These provisions included cl 4.5 of the LNSA.[12]

15 Counsel for TJH then moved the argument one stage further, contending that, upon a proper construction of the LNSA, if payment under the Semi-final claim were deferred beyond completion in accordance with the payment schedule there would be no money available from the financiers under the LNSA to make the payment. This, they argued, was a strong indication that the payment schedule should not apply.

16 Consistent with his view that the LNSA was an inadmissible extrinsic fact, the arbitrator rejected these arguments. He said, however, that he was obliged by authority to give some consideration to the finance agreements to see if they meant that it would not be possible for ConnectEast to receive payment from their financiers after completion. He concluded that such an impossibility had not been demonstrated.[13]

17 In light of this rather lengthy introduction, it will be seen that it is not correct to say that the arbitrator failed to consider or give adequate weight to the matters set out in Ground 2A. Indeed, given that he concluded that the finance agreements were inadmissible extrinsic material, it may be that the suggested failure did not amount to an error of law which could substantially affect the rights of the parties within the meaning of s 38(5)(a). But the point was not taken before me. The fact remains that there is here no manifest error.

18 Ground 3A is associated with Ground 2A in the sense that it concerns the arbitrator's consideration of the financing arrangements as an aid to construction. This ground fastens upon the submission put on behalf of TJH that the drawdown schedule might be varied to accommodate an early requirement for funds to meet the Semi-final Payment certificate.

19 It is clear that, notwithstanding his view that they were inadmissible, the arbitrator considered the contention of TJH that the terms of the LNSA and its operation tended to support the contention that the payment schedule had no application to a semi-final claim. He considered this submission and rejected it.

20 It is true that the award contains no reference in terms to cl 4.5 of the LNSA. This was, however, a peripheral matter. I would not be prepared to infer that the arbitrator has overlooked it. I find no manifest error as alleged in Grounds 2A and 3A. Leave to appeal will be refused.

21 A further argument was presented based upon the old House of Lords decision in Kelantan Government v Duff Development Co[14] which has been applied in this country by the High Court in Melbourne Harbour Trust Commissioners v Hancock.[15] Pursuant to this principle, in a case such as the present, the award of an arbitrator upon a question as to the construction of a contract which question is specifically referred for consideration, will not be set aside for error of law on its face only because the court would have come to a different conclusion. The party impugning the award must show that the arbitrator proceeded illegally.[16] The examples of illegality offered in the Kelantan case were that the arbitrator made the decision upon inadmissible evidence or upon erroneous principle of construction.[17] It will be apparent that there is no such illegality here. If the Kelantan principle applies this is a further reason for rejecting the proposed appeal. It is, however, not necessary that I consider this point further and, in particular, the question as to the continuing application of the principle to arbitration law in Australia given the passage of the uniform Commercial Arbitration Acts.

Misconduct - Section 42

1"> 23 There are three allegations of technical misconduct asserted on behalf of TJH.

24 The first allegation is contained in Ground 1B:

1. The Arbitrator has misconducted the proceeding by determining [Award pages 51-53 paragraph 56; Award pages 55-58 paragraphs 59 and 60] that clause 39.1 contains the "covenant to pay" for clause 39.2, a contention which was not raised by either party in the terms the Arbitrator ultimately accepted and the Arbitrator did not invite the Appellant to address this contention.

25 The contention here is a want of natural justice in as much as the arbitrator failed to give TJH the opportunity to address this matter.

26 In paragraph 56 of the award, the arbitrator makes clear that he uses the expression "covenant to pay" in this context as a shorthand reference to the argument presented on behalf of ConnectEast that cl 39.1(a)(i) is the lynchpin provision of cl 39. This provides, relevantly, for the payment of the contract price "in accordance with the requirements of this Deed (including the Contract Payment Price Schedule)". What is then considered are the consequences of this, namely, how the provisions of the deed bear upon this lynchpin obligation. One of these provisions is cl 39.2(f) which prescribes the time within which the certified Semi-final Payment is to be made. It is, of course, correct to say, as counsel for TJH submitted, that the obligation of ConnectEast to make the Semi-final Payment does not arise until the various steps prescribed in cl 39.2 have been completed. When this has been done and the stipulated time has elapsed after the issue of the semi-final certificate, then, and only then, does the enforceable obligation arise to pay the certified amount. This was the subject of extensive argument before the arbitrator. The adoption by the arbitrator of the expression "covenant to pay", in the sense that he uses it, does not mean that he was embarking on some new and unargued point. There is no misconduct here.

27 The second and third allegations of misconduct are set out in Grounds 2B and 3B:

1. The Arbitrator has misconducted the proceeding by delivering an Interim Award that failed to deal with substantial submissions which were seriously advanced by the Appellant in relation to clauses 4.1(a)(iii), 4.3(a) and 2.1(a) and (b) of the Loan Note Subscription Agreement and the application and effect of these clauses on the contention that the Contract Price Payment Schedule does not apply to the Semi-final Payment Claim.

1. The Arbitrator has misconducted the proceeding by delivering an Interim Award that failed to deal with substantial submissions which were seriously advanced by the Appellant in relation to:

(a) the interrelationship between the Drawdown Schedule under the Loan Note Subscription Agreement and the Contract Price Payment Schedule under the Construction Contract and the capacity to amend the Drawdown Schedule under clause 4.5 of the Loan Note Subscription Agreement; and

(b) the application and effect of the matters raised in sub-paragraph (a) above on the contention that the contract price payment schedule does not apply to the Semi-final Payment Claim.

It will be seen that these grounds resemble Grounds 2A and 3A for the proposed appeal. Much of what I have written about the way these matters arose in the arbitration is relevant here.

28 The contention is that the arbitrator in his award failed to deal with these arguments. He concluded that the LNSA was not admissible as an aid to construction, a conclusion which is not challenged. It cannot be said in these circumstances that his failure to deal with these matters is misconduct.

29 In any event, the argument here concerns the sufficiency of the arbitrator's reasons. The arbitration was conducted as an urgent matter without pleadings.[18] The issues emerged from the submissions of the parties and it is inevitable that the arbitrator formed a view as to the relative significance of the various contentions. His obligation to give reasons is not an obligation to give reasons for rejecting peripheral or subsidiary arguments upon which the outcome does not depend.

30 For reasons which I have set out, I am not satisfied that the arbitrator failed to consider the contentions of TJH based upon the financing agreements. To my mind it is not misconduct for him not to have referred to them in terms in his reasons.

31 I conclude, therefore, that the application to set aside the award pursuant to s 42 must also fail.

[1] In this contract "completion" represents practical completion, that is, the stage of completion prior to the Defects Liability Period.

[2] Construction agreement annexure 4 SFPC.001.282.

[4] Section 38(4)(b).

[5] Compare also cl 39.1(d) and (f); 39.1(d)(iii) and (h); and 39.2A(e)(vi) and (f) and cl 39.2A(e)(v) and (g).

[6] Compare cl 39.1(d)(iv) and cl 39.2A(e)(vi).

[7] Award para 63, relying on Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337 at 352, per Mason J.

[10] Arbitration Reply submission para 23.

[11] There is no equivalent provision in the payment schedule.

[12] Arbitration Reply submission para 36.

[14] [1923] AC 395.

[15] [1927] HCA 26; (1927) 39 CLR 570.

[16] See also NSW Rutile Mining Co Pty Ltd v Hartford Fire Insurance Co (1972) 46 ALJR 391 at 392, per Gibbs J.

[17] Kelantan Government v Duff Development Co [1923] AC 395 at 409, per Viscount Cave LC.