Arbitration - Ambit of reference - Building contract - Dispute as to practical date of completion - Whether misconduct by Arbitrator - Exercise of discretion under Commercial Arbitration Act 1985 (WA), s 42(2)

Arbitration - Building contract - Application for leave to appeal against interim award - Whether report is an interim award - Commercial Arbitration Act 1985 (WA), s 38(5) - Turns on own facts

Commercial Arbitration Act 1985 (WA)

Gas & Fuel Corp of Victoria v Wood Hall Ltd & Leonard Pipeline Contractors Ltd [1978] VicRp 41; [1978] VR 385

Pioneer Shipping Limited v BTP Tioxide Ltd (The Nema) [1982] AC 724

1 TEMPLEMAN J: Mr and Mrs David Rocci are the owners of the residence at Lot 222 Brookvale Rise, Kallaroo which has been built for them by Diploma Construction Pty Ltd ("the builder"). On 6 March 1997, the owners entered into a lump sum building contract with the builder to complete the construction of the residence. The price for the works was $450,000.

2 The contract was in a standard form published by the Housing Industry Association Ltd. It contained an arbitration provision. Various disputes arising under the contract have been referred to arbitration and have resulted in the production of a number of interim awards.

3 These proceedings arise out of the third interim award. It was delivered on 14 March 2001 and dealt with the question whether practical completion had been achieved. The arbitrator held, in substance, that practical completion was deemed to have taken place on 14 September 2000, pursuant to cl 17(e) of the contract, because the owners had taken possession of the premises on that date.

4 The owners contend that the arbitrator misconducted himself, or erred in law, in reaching that conclusion.

5 The builder is also dissatisfied with the third interim award. The builder contends that the arbitrator erred in law in finding that practical completion had not been achieved as at 28 August 2001. The builder contends that the arbitrator should not have allowed matters to be re-agitated before him, which had been closed by a report he had produced in June 2000. It is said that the report was, in substance an award.

6 In these circumstances, the owners and the builder seek to appeal from the arbitrator's decision.

7 It is not necessary to recount the history of the dispute before the second interim award was published.

8 In that award the arbitrator determined that practical completion had not been achieved by the builder on 10 November 1999 as claimed. In his reasons the arbitrator referred to a list of outstanding items dated 16 December 1999 which had been prepared by the owners' architects. The arbitrator then gave what he described as general directions in relation to Shelley Glass Windows & Doors, painting and shower roses. He summarised his award by saying that the "main reasons" for his conclusion that practical completion had not been achieved were:

"(1) Second coat of gloss required to all wood work.

(2) Correction of all defects internally together with touching up patches or an additional coat of paint."

9 The award directed the builder to attend to all items as expeditiously as possible. The arbitrator said that on completion of all the award items, practical completion would be achieved.

10 On 23 June 2000 the arbitrator carried out an inspection of the works. There is no evidence about the circumstances leading to that inspection. However, it is common ground that it was conducted informally, in the sense that the parties' legal representatives were not present. It is also common ground, having been agreed between counsel during the course of the hearing before me, that the parties invited the arbitrator to attend and express an opinion about the status of the works.

11 The arbitrator produced a report of his inspection which he sent to the parties and to the owners' architect under cover of a letter dated 26 June 2000.

12 In his report, the arbitrator referred to the second interim award of 22 March. He then listed items still requiring attention. He concluded:

"The majority of the items listed in my Award of 22 March 2000 have been completed, however some of the remaining items to be corrected that are contained in this list prevents practical completion being achieved as 23 June 2000. On completion of the items that would prevent the free and uninterrupted use of the premises by the Owner practical completion would then be achieved. Any further items, whilst they require to be attended to by the Builder would not prevent the issue of the Practical Completion Certificate. With concerted effort by all concerned persons practical completion can be achieved by 30 June 2000."

13 The builder contends that the arbitrator's report was, in substance, an award. I shall return to that contention in due course.

14 Following the arbitrator's report, the builder carried out further work and then served a notice contending that practical completion had been achieved by 28 August 2000.

15 The owners and the architect did not accept that practical completion had taken place as claimed. Having previously served a default notice, the owners' solicitors served a notice of termination of the contract on the builder and its solicitors. A copy was sent also to the arbitrator.

16 The notice was dated 14 September 2000 and was sent under cover of a letter of that date. It is common ground that the notice was received by the builder at 4.10 pm on 14 September.

17 Also on 14 September, the owners' solicitors wrote to the builder's solicitors, with a copy to the arbitrator, in the following terms:

"Please note that as the Building Contract has been terminated your client no longer has any right to enter the works or any part of our client's property situated at Lot 222 Brookvale Rise, Kallaroo and any attempt by it or its employees, agents or subcontractors to do so, in the absence of our clients' express written permission, will constitute trespass. Our clients will only grant written permission to your client to enter the works at the arbitrator's request for purposes of the arbitration.

As it is our clients' contention that your client has not achieved practical completion, a dispute has clearly arisen. On the instructions of our clients we hereby give your client notice of such dispute, and on the expiration of five days, and in the absence of any settlement, they will refer the dispute to the arbitrator ... for arbitration."

18 On 25 September the owners' solicitors wrote to the arbitrator requesting him to arrange a date for the inspection of the site "for purposes of a determination by you as part of the arbitration process with regard to whether or not (the builder) has achieved Practical Completion".

19 On 12 October, the builder's solicitors wrote to the arbitrator referring to the notice of termination of the contract. They said the notice had been issued on the basis that practical completion had not been achieved: a fact which the builder denied. That being so, the builder contended that the owners had repudiated the contract and that the builder was entitled to accept that wrongful repudiation and itself terminate the contract. The solicitors pointed out that the issue needed to be resolved by the arbitrator. They requested that he convene a directions hearing to set a timetable.

20 After some further correspondence, the arbitrator wrote to the parties on 24 November to notify them of dates which had been reserved for the hearing of evidence "relating to the issue of whether or not practical completion was achieved". The arbitrator wrote in similar terms on 20 December.

21 On 29 January 2001 the arbitrator wrote again to the parties' solicitors for the purpose of persuading them to pursue a course which would lead to the determination of all outstanding matters. In particular, the arbitrator pointed out that:

" ... determination of whether or not practical completion was achieved on August 28 as claimed by the Builder or September 14, 2000 as claimed by the Proprietors, does not in my view advance the dispute resolution procedure because a further arbitration is necessary to determine all claims and counterclaims." (My emphasis)

22 With respect to the arbitrator, the statement which I have emphasised is somewhat curious. It is common ground that the owners have never asserted that practical completion was achieved on 14 September 2000. Indeed, it is common ground, that no further work was carried out by the builder after 27 August.

23 The point of the arbitrator's letter was to attempt to persuade the parties to have all outstanding matters dealt with in a Final Award, because in the arbitrator's view, if that was not done, the dispute would become unnecessarily prolonged and expensive.

24 The owners' response to the arbitrator's approach is contained in a letter dated 30 January from their solicitors to the builder's solicitors. The owners' solicitors said:

"The only issue before the arbitrator in respect of the almost completed hearing is whether or not the builder has achieved practical completion. The arbitration hearing has endured for three full days and occupied 15 to 17 January 2001 both dates inclusive. As part of this arbitration an inspection of the building works took place on 19 October 2000.

The evidence which has been adduced and the cross-examination of witnesses has (save for a few credibility issues) been limited to the issue of whether or not practical completion has been achieved.

We expressed the view that should the ambit of the arbitration be broadened at this late stage to extend to other potential disputes, such as any damages to which our clients might be entitled, or any payment to which your client might be entitled, or the clause 17 (e) issue, a further hearing of mammoth proportions would have to be embarked upon and witnesses would have to be recalled." (My emphasis)

25 The reference to the "clause 17 (e) issue" is clearly a reference to the proposition that because the owners had asserted exclusive possession of the site, practical completion of the works would be deemed to have taken place pursuant to cl 17(e) of the building contract. That clause provides:

"If the owner shall take possession of the Site ... before practical completion ... such action shall constitute a waiver (or) release to the builder and discharge absolutely ... any and every claim which the owner had or might otherwise have had against the builder hereunder and the builder shall thereupon be discharged, released and relieved absolutely from all of his obligations and responsibilities under this Contract ...."

26 The owners' solicitors sent a copy of their letter to the arbitrator. On the following day, they wrote directly to the arbitrator stating their clients' requirement that the arbitration relating "to whether or not practical completion has been achieved be finalised by way of an interim award as agreed between the parties and as accepted by you."

27 On 1 February 2001 the arbitrator wrote to the parties' solicitors noting that agreement could not be reached on his proposal for a final arbitration award. He said that the hearing date reserved for 2 February 2001 would proceed and that if no further witnesses were to give evidence, there would be directions hearing to resolve the following issues:

"(1) Date for parties submissions

(2) Date interim award no 3 to be completed

(3) Pleadings dates for final arbitration unless matters resolved between the parties

(4) Hearing date for final arbitration."

28 The reference to "interim award no 3" appears to be a reference to an interim award in relation to the question of practical completion. Thus the arbitrator tacitly accepted that he would not extend the ambit of the arbitration.

29 However, on 14 March 2001 the arbitrator published his third interim award in which he recited that a dispute had arisen between the parties:

"As to whether or not practical completion has been achieved according to contract clauses 17 (a) - (e)."

30 With all respect to the arbitrator, this appears to ignore the fact that the owners had not agreed to have the cl 17(e) issue determined as part of the interim award procedure. The award went on to state that the builder claimed practical completion had taken place as at 28 August 2000. There was then reference to documents relevant to the arbitrator's determination, these being his report of 26 June 2000, the builder's notice of practical completion of 28 August 2000, the architect's handover list of 4 September 2000 and "evidence given and documents tendered at hearing".

31 The arbitrator then listed items set out in his second interim award of 22 March 2000 which, he said, still required attention.

32 The arbitrator then referred to the architect's handover list dated 4 September 2000 and the architect's punch list also dated 4 September.

"I determine that practical completion of the contract as per cl 17(a) was not achieved as at August 28, 2000 as claimed by the Builder. The main reason is that the remedial work required to be carried out as per my report dated June 26, 2000 to the windows and doors was not done.

The remedial work referred to is item 1.4 of my second interim award ...

Mr D Rocci stated in his evidence that he took possession of the building on September 14, 2000, therefore practical completion was achieved on this date as per cl 17(e) of the contract."

34 It is against this background that both parties have sought leave to appeal.

35 In application ARB 16 of 1999, the owners say, in substance, that the arbitrator erred in law in determining that practical completion had been achieved on 14 September 2000 pursuant to cl 17(e) of the contract because he reached that conclusion without having regard to the notice of termination. In other words, the arbitrator erred in concluding that cl 17(e) applied, without taking account of the fact that the contract had been terminated for breach.

36 It is clear from the extract from the third interim award which I have set out above, that the arbitrator made no mention of the notice of termination. That being so, it was submitted by counsel for the builder that the arbitrator must have held that the owners took possession before the notice of termination was served, thereby triggering cl 17(e).

37 Despite some previous disagreement between the parties, it is now common ground that Mr Rocci did say in his evidence that he had taken possession on 14 September. In these circumstances, the builder submits that, the arbitrator has made a funding of fact, based on all the evidence: and that it would be wrong for me to interfere with it.

38 That submission would be attractive, if the arbitrator had made a finding of fact which was relevant to an issue he was required to determine. However, in my view, it was not.

39 That is because the finding was relevant only to the cl 17(e) issue, which the owners' solicitors, in their letter dated 30 January 2001 to the arbitrator, had declined to include in the then part-heard proceedings: a position which the arbitrator had apparently accepted.

40 It follows, that in determining that practical completion was achieved on 14 September 2000, pursuant to cl 17(e) of the contract, the arbitrator misconducted himself. He should have addressed only the question whether the work carried out by the builder was such as to constitute practical completion.

41 In these circumstances, I propose to exercise the discretion contained in s 42(2) of the Commercial Arbitration Act 1985 to set aside that part of the Third Interim Award in which the arbitrator stated:

"Mr D Rocci stated in his evidence that he took possession of the building on September 14 2000, therefore practical completion was achieved on this date as per Clause 17(e) of the contract.

I determine that the balance of the contract price claimed by the Builder be held in abeyance until the issue of the Final Award."

This part may be set aside, pursuant to s 42(2) "without materially affecting the remaining part of the award". That is to say, the findings made by the arbitrator in relation to the status of the works are not affected.

42 I turn to the builder's application in ARB 17 of 1999. The builder seeks leave to appeal from that part of the third interim award in which the arbitrator held that practical completion had not been achieved as at 28 August 2000 because certain work had not been carried out.

43 The builder contends that the arbitrator erred in law in reaching that conclusion because in his report dated 26 June, the arbitrator had said, in substance, that the builder had carried out the outstanding work identified in the second interim award of 22 March 2000.

44 It is in this context that the builder contends the arbitrator's letter of 26 June was an interim award. It is then contended that in the third interim award, the arbitrator made findings which were inconsistent with the second interim award and the letter of 26 June.

45 In order to obtain leave to appeal against the third interim award, the builder must satisfy the requirements of s 38(5) of the Commercial Arbitration Act 1985. That section provides:

"(5) The Supreme Court shall not grant leave under subsection (4)(b) unless it considers that -

(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement; and

(b) there is -

(i) a manifest error of law on the face of the award; or

(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law."

46 It is common ground between the parties that the determination of the questions of law could substantially affect their rights. Given the magnitude of the owners' claim against the builder and the significance of the as yet unresolved question whether the owners were justified in terminating the contract, I consider that par (a) above has been satisfied.

47 That being so, it is necessary to consider whether there is a manifest error of law on the face of the award. It is now settled that an error of law of that kind must be "more than arguable". That is the test proposed by McHugh JA in Larkin v Parole Board (1987) 10 NSWLR 57 at 70 - 71. The test was adopted by Sheller JA in Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203 in which, his Honour said at 225 - 226:

"There should, in my opinion, before leave is granted be powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law."

48 That approach was adopted by Steytler J in UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57.

49 Given that some adversarial argument is permissible in determining whether there has been a manifest error of law on the face of the record, there is likely to be a blurring between that question and the subsequent question raised by s 38(5)(b), whether there is "strong evidence" that the arbitrator made an error of law.

50 In the present case, I have had the benefit of a considerable amount of adversarial argument covering both of these questions. However, I am not persuaded either that there has been a manifest error of law or that the arbitrator fell into error.

51 To support the proposition that the arbitrator's report of 26 June 2000 was an award, the builder relies on the decision in Lock v Vulliamy (1833) 5B & AD 600; [1833] EngR 828; 110 ER 912. That decision was applied by the Court of Appeal in Victoria, in Gingis v Mount Scopus Memorial College Ltd [1998] VSCA 49.

52 In Lock's case Denman CJ held that no precise form of words was necessary to constitute an award: that it was sufficient if the language used by the arbitrator was such as to show clearly that he had come to a decision upon the points submitted to him. That proposition must be read subject to the qualification, which is now well established, that to be valid, an award must be final, certain and complete: Gingis at par (25).

53 In the second interim award, the arbitrator gave general directions which included several items of work listed under the heading Shelley Glass Windows & Doors. Under the heading of Painting, the arbitrator determined that the builder was to apply a second coat of gloss paint to all wood work internally and externally in accordance with particular provisions of the specification.

54 In his report of 26 June, the arbitrator noted that the builder had carried out certain of the work in relation to the Shelley Glass Windows & Doors. He noted also that when Shelley Glass installed flyscreens they were to check the frames and carry out any further work necessary to make good. The arbitrator noted that the builder had agreed to pay Shelley Glass for any additional work required.

55 The arbitrator went on to say that the painting to the wood work had been completed but that a Mr Greg McCann (the builder's representative) would arrange for a painter selected by the architect to rectify any defects that were still visible. The arbitrator noted that the builder had agreed to pay the painter for any additional work required to reach the architect's level of quality. The builder or his representative was to be present when the architect instructed the painter.

56 After dealing with a number of other items the arbitrator concluded:

"The majority of the items listed in my Award of March 22 2000 have been completed, however some of the remaining items to be corrected that are contained in this list prevents practical completion being achieved as at June 23 2000. On completion of the items that would prevent the free and uninterrupted use of the premises by the Owner practical completion would then be achieved. Any further items, whilst they require to be attended to by the Builder would not prevent the issue of the Practical Completion Certificate. With concerted effort by all concerned persons practical completion can be achieved by June 30 2000."

57 In my view, even if this report purported to be an award, it is very doubtful whether it would satisfy the criterion of certainty. I accept the submission by counsel for the builder that the arbitrator could not have envisaged that very much work would be required in order to achieve practical completion. That was because of his comment that practical completion could be achieved by 30 June, only four days after the arbitrator produced his report. However, the additional work required to the Shelley Glass Windows & Doors and the additional painting were not stipulated by the arbitrator: they were left to others to resolve.

58 It is not necessary to reach a concluded view on the question of certainty. That is because I am not persuaded that the arbitrator's report of 26 June was an award. As I have noted above, it was common ground between the parties that the arbitrator was simply asked to express an opinion about the state of the works when he carried out his inspection on 23 June. The inspection was carried out somewhat informally, there being no solicitors present, a fact which distinguishes the occasion from the formal arbitration proceedings in which the parties have engaged.

59 Further, neither party apparently regarded the report as an award: nor did the arbitrator. It is true, as counsel for the builder submits, that the arbitrator was asked to carry out the inspection because that was his role: and that he signed the report as arbitrator. However, those circumstances cannot, in my view, elevate to the status of an award, a report which the parties never intended nor agreed should be so regarded.

60 Even if I am wrong in my view that the arbitrator's report of 26 June 2000 was not an award, I do not think the result would be any different. That is because, in his third interim award the arbitrator determined that the work required to the Shelley Glass Windows & Doors had not been completed. Although it is not entirely clear whether the arbitrator regarded the remedial painting to have been satisfactory, he gave as his main reason for concluding that practical completion had not been achieved as at 28 August, the fact that the remedial work to the windows and doors had not been carried out.

61 That was a question of fact for the arbitrator. Adopting the builder's submission in ARB 16, it is not a matter with which I should interfere.

62 It is submitted by counsel for the builder that in his third interim award, the arbitrator either reopened matters which had been closed by his previous awards, or allowed matters to be raised which had not been raised previously. In my view, it is not necessary to consider that submission in these proceedings. The question for the arbitrator was whether practical completion had been achieved. The arbitrator held, as a matter of fact, that it had not. Ultimately, it will be a matter for the arbitrator to determine whether the builder has complied with its contractual obligations. Again, these will be questions of fact which the arbitrator - who I am told is a retired builder - is well qualified to answer.

63 In all the circumstances, I am not persuaded that there was a manifest error on the force of the third interim award, or that there is strong evidence that the arbitrator made of an error of law.

64 I therefore decline to grant leave to appeal. The application will be dismissed.