MATTER : Commercial Arbitration Act 1985

Commercial arbitration - Application for leave to appeal from award - Application to set aside award for alleged misconduct - Assessment by Arbitrator of owners' claim for damages for breach of building contract - Method of assessment of builder's entitlement to remuneration under building contract terminated for breach by builder when owner claims for damages - Alleged misconduct by Arbitrator - Absence of notice of application to arbitrator - Criteria for granting leave to appeal on a question of law

Commercial Arbitration Act 1985

Ames v Milward [1818] EngR 737; (1818) 8 Taunt 637

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

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

London Export Corp Ltd v Jubilee Coffee Roasting Co Ltd (1958) 1 All ER 494

Miles & Anor v Palm Bridge Pty Ltd [2001] WASC 42

Palm Bridge Pty Ltd v Miles & Anor [2001] WASCA 334

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

Varley v Spatt [1955] VicLawRp 67; [1955] VLR 403

1 EM HEENAN J: Trouble has beset the construction of the house on Lot 222 Brookvale Rise, Kallaroo, owned by Mr and Mrs David Rocci the applicants/appellants, in these proceedings. The first builder engaged by them became insolvent and was replaced. The present respondent, Diploma Construction Pty Ltd, was then engaged under a lump sum building contract to complete the construction of the residence for a total price of $450,000 upon the terms and conditions contained in a standard form Housing Industry Association Limited Lump Sum Building Contract between the parties dated 6 March 1997. This allowed the builder 10 working days to commence work and 198 working days to complete the works, subject to extensions for time which might be granted for various reasons, including variations to the scope of the works. Hence, the approximate date for completion of the contract was envisaged as being in late September or early October 1997. As these proceedings show, there was still an issue between the parties in September 2002 over whether or not the house was practically complete on about 14 September 2000 when the applicants had terminated the building contract on 14 September 2000 by notice given under the contract.

2 The disputes between the owners and the builder have led to three interim awards and one final award as a result of arbitrations conducted pursuant to the contract and three applications to this Court for leave to appeal from, or to set aside, awards made in the various arbitrations. In the first of these applications leave to appeal from an award was refused by Miller J and his Honour also found that there was no misconduct of the arbitrator as alleged so the application to set aside that award in part was also dismissed - Rocci & Anor v Diploma Construction Pty Ltd [1999] WASC 195. By a decision of 21 September 2001 Templeman J refused to grant leave to appeal to the owners from the third interim award made by an arbitrator but, pursuant to s 42 of the Commercial Arbitration Act 1985, set aside one finding contained in that award on the ground that the issue so purportedly determined, had not been referred to the arbitrator on that reference and hence there was "misconduct" in making a finding on such an issue. The particular issue was whether or not there had been a deemed practical completion of the works by the builder on 14 September 2000 occurring because, on that date, the owners took possession of the premises upon the termination of the building contract on the grounds of the respondent builder's default. It is common ground between the parties that no, or no significant, further work on the premises was undertaken by the respondent builder after 27 August 2000.

3 A further arbitration has since been conducted and a fourth award of the arbitrator, Mr A B Goold, purporting to be a final award, was made on 5 September 2002. By that award Mr Goold determined that there was a total amount of $533,167.07 due to the builder under the contract and that $434,000 had been paid by the applicants as progress payments, resulting in a balance of $99,167.07 then being due to the builder. The arbitrator also determined that, in respect of the owners' claims against the builder for breach of contract an amount of $76,992.40 was payable by the builder as damages. That sum was set off against the amount found to be owing to the builder leaving a final balance of $22,174.67 owing which the applicants were ordered to pay.

4 In this final award the arbitrator also dealt with the issue of costs arising from the four arbitrations. He observed that the first interim award and the final award had been made in the respondent builder's favour but that the second and third interim awards had been made in the applicants' (owners') favour. In those circumstances, and in the exercise of his undoubted discretion, the arbitrator ordered that the owners and the builder were each responsible for their own costs and that each should pay half the arbitration cost (meaning the arbitrator's fees).

5 In these circumstances the applicant owners seek leave to appeal to this Court under s 38(5) of the Commercial Arbitration Act 1985 from the determination of the arbitrator of the entitlement of the builder by the final award, and also in relation to the arbitrator's determination of the extent of their claim for damages. In addition, the applicants seek leave to appeal from the arbitrator's determination of the issue of costs contained in the final award. As an alternative the applicants seek to have the award, or parts of the award, including the determination made in regard to costs, set aside pursuant to s 42 of the Act on the grounds of alleged misconduct by the arbitrator.

6 The respondent builder had also made application for leave to appeal to this Court from the final award of the arbitrator on the grounds of alleged errors of law, but that application was abandoned by the respondent at the commencement of the hearing. By consent, I then made an order dismissing the respondent builder's application for leave to appeal from the arbitrator's final award and ordered that the respondent should pay the applicants their costs of those proceedings to be taxed. It is, therefore, not necessary to describe the nature or detail of the builder's application for leave to appeal.

7 This building contract required the payment of the contract sum of $450,000 plus any additions arising from authorised variations to the works by six designated progress payments and by a seventh "final" payment upon the achievement of certain nominated stages of the works, subject always to the determination by arbitration of any disputes which might arise as to the entitlement to, or extent of, a payment due at any particular stage. By the time of the fourth arbitration six of the seven staged payments had been made by the owners to the builder and the major issues then between them were whether or not the builder was entitled to the final payment provided for by the contract, including an additional component for authorised variations and, if so, the amount of any payment to which the builder was entitled.

8 The submission by the builder, eventually upheld by the arbitrator, was that the builder was entitled to be paid an amount representing the contractual amount due under the contract on completion, including allowances for variations, less the expense incurred or to be incurred by the owners in having others complete the unfinished work under the contract and to remedy defects for which the builder was responsible. It was also accepted by the arbitrator that any entitlement to damages by the owners against the builder for breaches of the contract, such as for unauthorised delays or other causes, should be deducted from the builder's entitlement which had otherwise been calculated by the method described. This meant that, as already appears from the result which the arbitrator ordered, the arbitration also involved the determination of the owners' claim for damages against the builder for breach of contract including the quantification of those damages.

9 The applicants make a series of criticisms of this approach to the determination by the arbitrator of the issues between the parties and submit that it involved errors of law which substantially affected the rights of the parties to the arbitration agreement and which, therefore, justify the grant of leave to appeal pursuant to s 38(5)(a) of the Act. At this point the question of whether an additional condition essential for the grant of leave to appeal has been established, namely the existence of a manifest error of law on the face of the award or strong evidence that the arbitrator made an error of law the determination of which may be likely to add substantially to the certainty of commercial law (subs 38(5)(b)), can be left for later examination.

10 The submissions of the applicants in this regard can be summarised as follows:

(a) That because this contract was an "entire" contract for the construction of a house and as the builder had not fully completed the works in accordance with the contract, as had been found by the third award in that practical completion had not been achieved as at 28 August 2000 and because it was admitted that no significant work had been done by the builder since then, there was no entitlement of any kind to the final payment prescribed by the contract.

(b) That because the contract had been terminated by the owners on 14 September 2000 on the grounds of the builder's substantial breach of contract in failing to achieve practical completion by then and for other additional reasons, the only entitlement of the builder to any further payment for work done was pursuant to cl 13(c) of the building contract which, in effect, provided for an assessment of the builder's entitlement, if any, on the basis of a quantum meruit for the value of the work properly chargeable to the date of termination plus a designated allowance for profit on that sum.

(c) In the course of the arbitration the builder had failed to present any evidence which would allow a finding to be made on the basis of a quantum meruit plus an allowance for profit on work properly done as required by cl 13(c), so that any claim to further remuneration which the builder might possibly have had failed for want of proof. The converse to this submission is that in the light of the contract terms the builder and the arbitrator were in error in propounding and determining a claim for the builder's remuneration on the basis of the contract price less the cost to complete the works at the date of termination of the contract.

(d) That in determining the extent of the owners' claim to damages against the builder for the latter's breach of contract in the amount of $76,992.40, the arbitrator made a series of errors of law, including reductions in the amount of the damages claimed for set-offs which had not been claimed by the builder which, in aggregate effect, wrongly reduced to the sum allowed a claim which should have been assessed in the amount of $104,411.30 or, alternatively, in the amount of $80,992.40.

(e) That, but for the errors of law alleged, the respondent builder should have been awarded nothing in the way of further remuneration (beyond progress payments previously made) and that the applicants should have been awarded damages of $104,411.50 (alternatively, $80,992.40).

(f) That, for the foregoing reasons, the correct result which should have followed from this arbitration was that instead of the builder being awarded, on balance, the sum of $22,174.67, the applicants as owners should have been awarded $104,411.50 (alternatively, $80,992.40). On this submission the discrepancy between the award made and the result which the applicants say should have occurred was of a magnitude which substantially affected the rights of the applicants.

With regard to the application to set aside the award, in whole or in part, pursuant to s 42 of the Act on the grounds of alleged misconduct by the arbitrator it was submitted that the erroneous approaches which it was argued had occurred in relation to the assessment of the builder's entitlement to remuneration under the contract and in the reduction of the owners' claim for damages because of factors not relied upon by the builder, were in each case "misconduct" by the arbitrator authorising and requiring intervention by this Court under s 42.

11 In order to determine whether there is manifest error of law on the face of the award, or powerful reasons for considering, on a preliminary basis, without any prolonged adversarial argument, that the arbitrator 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 - per Steytler J in UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57 at [46]; Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203; Leung v Hungry Jack's Pty Ltd [1999] VSC 477; Masawa Australasia Pty Ltd v J-Corp Pty Ltd & Anor [2000] WASC 5; Re Tiki Village International Ltd [No 2] [1994] 2 Qd R 674; Ukrainian Association of Western Australia in Perth Inc v Squire Constructions Pty Ltd [2004] WASC 4; and per Templeman J in Rocci & Anor v Diploma Constructions Pty Ltd [2001] WASC 256, it is necessary to undertake some examination of the rights of the parties under this contract, after it had been terminated by the applicants because of the builder's breach, where the arbitrator was considering claims by both parties, namely claims by the owner/applicants for damages for breach of contract and the claim for remuneration by the builder. To do this it is necessary first to give some attention to material terms of the building contract itself.

12 As already mentioned, the building contract provided for the respondent to construct and complete a house on the applicants' land according to specifications for a lump sum price of $450,000 subject to such increase or decrease as may be produced by the contractual formula relating to the costs of approved variations (cl 10(c)). The contract sum, subject to variations, was payable by the six progress payments and the final payment already mentioned with no provision for any retention by the owners. It is unnecessary to determine whether the progress payments were provisional and subject to adjustment at the end of the contract - Tharsis Sulphur & Copper Co v McElroy (1878) 3 App Cas 1040 and Re Sanders Constructions Pty Ltd and Eric Newham (Wallerawang) Pty Ltd [1969] Qd R 29 at 39 or whether they were payments which had accrued due following a certification accepted by the owners or affirmed by arbitration in an interim award - see Ownit Homes Pty Ltd v Batchelor [1983] 2 Qd R 124 at 134 - because, in the present case, the owners only disputed the entitlement of the builder to receive the final payment under the contract and did not challenge his entitlement to earlier progress payments. They did, as mentioned, bring a claim for damages which exceeded the amount provided in the contract for the final payment and which, as already described, was set-off against the builder's entire entitlement to remuneration, but that did not involve any issue over whether or not the builder was entitled to receive the penultimate payment at the time it was demanded.

13 Such a contract, is one where the entire fulfilment of the promise made by one party is a condition precedent to the right to call for payment, being the obligation of the other party. As observed in "Hudson's Building and Engineering Contracts", 11th ed (1995), Sweet and Maxwell at 4-008:

"The great majority of building contracts in the traditional form consist of an undertaking to complete the work for a contract price either ascertained (in the case of a specification form of contract without quantities) or ascertainable (in the case of a measurement contract with quantities on schedules of rates) and are therefore 'lump sum' or entire contracts, in the legal sense, save only to the extent that they may contain express provisions for interim or stage payment."

The fact that a contract contains provisions for progress or staged payments will not change its character from being an "entire contract", at least in relation to the entitlement of any one of the periodical payments, when that is claimed, or to the final payment when that is demanded. In each case the builder will only be entitled to the progress payment or final payment if it has fully performed the obligations provided in the contract and has met the conditions for entitlement to that particular or final payment.

14 This building contract provides expressly for events which would allow the builder or the owners to terminate the contract. Insofar as the owners' right to terminate is concerned, this is addressed by cl 15 which provides as follows:

The Owner may, in addition to other rights under this Contract, terminate this Contract in any of the following events:

(a) Any substantial breach of this Contract by the Builder.

(b) If the Builder shall make an assignment for the benefit of or enter into any composition with his creditors or go into liquidation (whether voluntary or compulsory except for the purpose of reconstruction or amalgamation) or commit an act of Bankruptcy or have a Receiver appointed or if a sequestration order is made against the Builder's estate.

(c) If the Builder shall without reasonable cause wholly suspend the Works before practical completion."

The method by which termination of the contract could be achieved is set out in cl 13, as follows:

(a) In addition to their respective rights and remedies hereinbefore contained or in equity the Builder may terminate this Contract in any of the events mentioned in Clause 14 hereof and the Owner may terminate this Contract in any of the events mentioned in Clause 15 hereof.

(b) Except as provided herein neither party shall be at liberty to terminate this Contract or exercise or enforce any other right or remedy in relation hereto whether pursuant to this contract or at law or in equity without first giving to the other party a notice in writing specifying the matter complained of and requesting that other party to remedy it within TEN (10) days of the service of such notice. If such notice is given and the other party fails within such period to remedy the matter complained of then the party giving such notice may terminate the contract forthwith.

(c) On such termination, subject to any agreement to the contrary or to any determination made pursuant to Clause 16 [the arbitration clause] the Builder shall be entitled to be paid forthwith for all work done and materials used or procured by him and properly chargeable to that date. The amount to be paid shall be determined on the basis that all work done and materials provided and procured as aforesaid and all costs incurred by the Builder shall be deemed to be variations in cost and shall be calculated in accordance with the provisions of Clause 10 [relating to the costs of variations] but proper allowance shall be made for all payments on account of the Contract Price already made by the Owner to the Builder. The Builder may claim interest at the rate specified in Item 8 of the Schedule hereto on the outstanding balance of monies found to be due and payable from and after the expiration of FIVE (5) days from the date of such termination of Contract until payment of balance of monies as received by the Builder."

Because of the importance which was accorded to them by the parties it is also necessary to set out, in part, the provisions of the contract relating to practical completion:

(a) Practical completion of the Works shall be deemed to have occurred when the same are structurally complete and reasonably fit for habitation and notwithstanding any unfinished work of a minor nature which does not unduly interfere with the free and uninterrupted use of the premises by the Owner.

(b) ...

(c) ...

(d) The final payment shall be due within TEN (10) days after practical completion and upon payment thereof the Builder shall hand the keys of the Works to the Owner or to such persons as the Owner may direct and on acceptance of the keys the Owner shall be deemed to have entered into possession of the Works and to have acknowledged that they have been completed by the Builder in accordance with this Contract and the Builder shall thereupon be relieved and discharged from all responsibilities under this Contract other than his obligations pursuant to Clause 12 [defects liability period].

(e) If the owner shall take possession of the Site permit work outside this contract or deliver goods or chattels to the Site without written consent of the Builder, before practical completion or before paying all monies due and payable hereunder (whichever is the earlier), such action shall constitute a waiver release to the builder and discharge absolutely on the part of the Owner of 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 his obligations and responsibilities under this Contract (other than his obligations pursuant to Clause 12) and all monies due and payable under this Contract shall immediately become due and payable together with interest thereon at the rate specified in Item 8 of the Schedule calculated from the date of taking such action.

(f) ... "

It was common ground between the parties that the building contract had been terminated by a notice of termination given by the owner pursuant to cl 13(b) on the grounds of a substantial breach of the contract by the builder (cl 15(a)) and that the termination had been effected on 14 September 2000. One of the grounds for termination was the failure of the builder to reach practical completion. It had been decided by the arbitrator in the third interim award that practical completion had not been effected by 28 August 2000. It was also common ground that there had been no significant work done on the premises by the builder after 28 August 2000. The finding by the arbitrator, in the third interim award, that there had been a deemed practical completion by the owner taking possession on 14 September 2000 after the notice of termination had been set aside by Templeman J in the second application to this Court already described.

15 The case for the applicants before the arbitrator on the fourth arbitration and on this application was that as the works had not been fully completed in accordance with the contract, as demonstrated by the finding of the absence of practical completion, there was no entitlement by the builder to the final payment - Steele v Tardiani [1946] HCA 21; (1946) 72 CLR 386 at 401 - 402; Phillips v Ellinson Brothers Pty Ltd [1941] HCA 35; (1941) 65 CLR 221 and Corio Guarantee Corp v McCallum [1956] VicLawRp 110; [1956] VLR 755. These authorities explain the doctrine that, in the absence of exact performance of an entire contract, substantial performance is not sufficient, even if it is of equal or greater value than the amount contracted for, for payment of the agreed lump sum leaving the party in breach liable for the cost of rectification - Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 at 617.

16 There is no doubt that this is a correct statement of the law and it does not appear to have been questioned by the arbitrator, or by the parties, that the builder was not entitled to the final payment under the contract without deduction. Rather, the issue of significance was whether or not, in the event of the termination of the contract for breach by the builder, the only approach to an assessment of any remuneration due to the builder was the quantum meruit approach plus a prescribed allowance of profits under cl 13(c).

17 In practical application this controversy involved the contention by the applicants that in order to prove any entitlement to remuneration beyond the progress payments previously received, the builder needed to adduce evidence showing that the work done and materials provided and procured, valued in accordance with the formula prescribed by cl 13(c) and cl 10, exceeded the value of all previous payments made under the contract. The contrary contention, advanced by the builder and applied by the arbitrator, was that in the circumstances of this case it was permissible to determine the builder's remuneration by taking the contract price, plus the value of authorised variations, and deducting from that sum the cost to complete the works fully in accordance with the contract.

18 Subject to the terms of any particular contract, this latter approach as followed by the arbitrator in the present case, is the method of assessment of the entitlement of the builder in cases where there have been substantial performance of the contracts rather than complete performance - Dakin (H) & Co Ltd v Lee [1916] 1 KB 566; Phillips v Ellinson Brothers Pty Ltd (supra) and Williamson v Murdoch (1912) 14 WALR 54. In the case of substantial, but not complete, performance the builder is still in breach of contract in that he has not completed in accordance with the terms of the contract but, because the failure to perform is relatively slight or trivial, the contract price may be recovered less the cost to achieve full completion.

19 In the present case the parties were opposed, before the arbitrator, over the question of whether or not there had been a practical completion. There was no express finding by the arbitrator on that issue. However, the approach of the arbitrator in assessing the builder's remuneration on the basis of the contract price, less the cost to complete, can only mean that the arbitrator had concluded that full completion had not been achieved. In the context of this particular contract the degree of completion necessary to achieve practical completion, and hence entitlement to the final payment, must be regarded as the completion of all the works in accordance with the terms of the contract except for the performance of such obligations as may arise during the defects liability period. There does not appear to have been any issue specifically raised or addressed before the arbitrator, or in his final award, over whether or not the builder had substantially performed this contract. No doubt this was due to the definition in the contract of the term of "practical completion" in terms which bear a marked similarity to the accepted test for substantial performance. In this case, the approach followed does not appear to have led to any error in principle or result because the builder did not advance any argument that, although not practically complete, this contract had nevertheless been substantially performed, nor did the arbitrator make any such finding. While the concepts of "practical completion" and "substantial performance" may be very similar, in this case particularly so because of the terms of a contract, they are not identical. The stage of completion termed "practical completion" is not one known to the law but rather is an expression commonly found and defined in building contracts themselves - Emson Easlain Ltd (In Rec) v EME Developments Ltd (1991) 55 BLR 117, whereas the doctrine of substantial performance is a doctrine of the common law which permits the builder to recover the price subject to a deduction for the cost of rectifying defects or completing the work - Sumpter v Hedges [1898] 1 QB 673 and Hoenig v Isaacs [1952] EWCA Civ 6; [1952] 2 All ER 176.

20 Because the approach to the assessment of the builder's remuneration adopted by the arbitrator might, subject to one important qualification to be mentioned later, be consistent with a view taken by the arbitrator that there had been substantial performance of this contract considerable attention was devoted, in the course of submissions, to whether or not this was the footing upon which the arbitrator made his assessment. Counsel for the applicants stressed that, in the light of the definition attributed to the term "practical completion" in this particular contract and the finding in the third interim award that there had not been practical completion, such a conclusion was not open. Furthermore, there is nothing in the points of claim before the arbitrator, nor in the arbitrator's final award to suggest that the builder ever asserted that, although not practically complete (which he denied) the work under the contract had been substantially performed.

21 The important qualification upon the assumption that the arbitrator's award might have been based on the footing that there had been substantial performance by the builder arises from the terms of cl 13(c) of the contract. As set out, this provides that in the event of termination for breach the only entitlement to remuneration for the builder is to be assessed on the basis of a quantum meruit plus an allowance for profits and giving credit for previous payments made by the owners. The applicants submit that the existence of this provision precludes resort to assessment of the builder's entitlement on the basis of taking the contract sum and reducing this by the cost to complete or the cost to remedy defects and, in this regard, relies upon the decision of Connelly J in Chalet Homes Pty Ltd v Kelly [1978] Qd R 389 at 391 - 392. It is to be noted, however, that the refusal of Connelly J to uphold the builder's claim for a final payment under that contract, because of another contractual provision which authorised another builder to complete the works in order to determine the actual costs of doing so before making any payment to the original builder, applied when the building contract remained executory and not where it had been terminated as in the present case. A further distinguishing feature which differentiates this case from Chalet Homes Pty Ltd v Kelly (supra) is that, in the present case, the owners have brought and the arbitrator has heard and determined their own claim for damages against the builder.

22 I do not consider that even if, in this case, there had been substantial performance of the contract by the builder, the builder could avoid assessment of his entitlement to remuneration being undertaken in accordance with cl 13(c) of the contract if that were the only issue before the arbitrator or before a court. However, it is very difficult to imagine how there could be an effective termination of the contract by the owner on the grounds of substantial default by the builder at, or after, a point when substantial performance had been achieved. Consequently, as the issue of substantial performance does not appear to have been raised by the parties, nor specifically addressed by the arbitrator, there does not appear to be any scope for a finding that the incomplete contract had nevertheless been substantially performed. Accordingly, I am satisfied that it is not possible to treat this award as proceeding upon an implied finding of substantial performance.

23 The accepted rule for the measure of damages for breach of contract is that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed - Robinson v Harman [1848] EngR 135; (1848) 1 Ex Ch 850 at 855 and Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 per Gibbs J at 471. Consequently, if under a building contract the owner decides to sue for damages he must give credit for what the work would have cost if properly completed or performed - Mertens v Home Freehold [1921] 2 KB 526. This can also be expressed by the rule that a party suing for damages for breach of contract may only recover for the net loss sustained, that is, the value of the benefit of the contract fully performed less the contracted price for securing such performance - Amann Aviation Pty Ltd v Commonwealth [1991] HCA 54; (1990) 174 CLR 64. Accordingly, an owner under a building contract needs to appreciate that an entire performance defence is an alternative to advancing a claim for damages and that if damages are claimed credit must be given for the sums due under the contract. The correct position is described in "Hudsons: Building and Engineering Contracts" (supra) in the following passage at 476:

"Thus where the contract is entire, the owner may get the benefit of valuable works not entirely completed by the builder without having to pay for them, unless the circumstances are such as to justify a quasi-contractual remedy. So a builder who has not fully completed the work, through not fault of the owner, cannot overcome his difficulty by ignoring the contract and sue on a quantum meruit for the work he has done. However, the rigours of this rule are often considerably reduced because, in a large number of cases where there is not entire performance, the owner may decide to sue the builder for damages for breach of contract. If he does, he will, on general principles of damages for breach of contract, have to give credit for what he would have had to pay had the contract been properly performed. But in a case where the owner decides not to sue he may derive considerable advantage from the foregoing rules, which are, however, an essential and necessary sanction to discourage the deliberate breaking or abandonment of contracts, which would be absent if in such cases the builder was entitled to demand partial payment notwithstanding his own breach ... ."

"But it remains true that an owner should weigh carefully the damages recoverable, on the one hand, against the advantage he may derive under the [entire contract rule] from the builder's inability (depending on the state of the accounts) to sue for the balance of the price of the work, on the other, since if the owner decides to sue for damages he will have to give credit under the basic Robinson v Harman (supra) principle set out above, for what the work would have cost him if properly completed or performed."

24 In the present case the applicants initiated the fourth arbitration in order to recover damages against the builder for breach of contract, claiming $104,411.30, and have maintained this claim on the application to this Court. In fact their claim for damages succeeded although it was reduced to $76,992.40. The pursuit and recovery of this claim for damages means that, consistently with the principle of placing the owners in a monetary position in which they would have been had the contract been fully performed, credit must be given to the builder for the amount payable to him had the contract been fully performed. Consequently, this becomes the starting point for the assessment of damages. This is the method which was followed by the arbitrator in his final award and it was correct in principle and in application. Consequently, it follows that the applicants' submissions that the only method permitted by the contract for the determination of any further remuneration due to the builder was the approach contemplated by cl 13(c) must be rejected.

Arbitrator's determination of the owners' claim for damages

25 The owners submit that, as a result of a series of alleged errors of law, the arbitrator wrongly assessed their claim for damages against the builder in the amount of $76,992.40 when it should have been assessed at $104,411.30 or, alternatively, at $80,992.40. The arbitrator's assessment resulted from the determination of a series of issues of fact based upon his assessment of the evidence before him and upon application of the principles of assessment of damages and the terms of the contract to the facts as found. Only in relation to the latter two aspects would it be possible for an error of law, as opposed to an error of fact, to be established. Accordingly, it is necessary to identify the findings of the arbitrator and to compare them with the claims of the applicants only so far as these do not involve any disputes of fact or value unrelated to questions of law.

26 The details of the components of the Arbitrator's assessment of the owners' damages are set out at AB 65, as follows:

The applicants/owners submit that the allowance for delay cost should have been $78,918.90 rather than the $51,500 allowed and, if so, the claim would then total $104,411.30.

27 In the award (AB 64C) the arbitrator described the applicants' claims "I through to R" as comprising finance costs, rates, taxes, water, electricity and gas totalling $78,918.90 and being for costs incurred due to late completion of the residence and on the basis that the building should have been completed by 18 May 1998 as determined by an earlier award. In relation to these claims the arbitrator concluded:

"Delay costs have been assessed as from May 18 1998 to September 14 2000, the date the Claimant took possession of the site. This period has been reduced by paid and unpaid extensions of time for variations and delays caused by the Claimant Proprietor.

May 18 1998 to September 14 2000 is 850 days, approximate

The figure of $600.00 per week for rent is claimed by the Claimant in claim B. No evidence was produced at the Hearing to justify this rate. I determine $500.00 is a fair and reasonable rental rate.

The Claimant Proprietor is awarded 103 weeks at $500.00 per week for delay costs. Total awarded $51,500.00."

28 On the hearing of the present application the applicants submitted by counsel, and the respondent by counsel accepted, that the respondent builder had not claimed or sought to set-off against the delay claims, three of the alleged causes of delay (totalling 10 weeks) included by the arbitrator. These being the three marked with an asterisk (*) in the summary in the preceding paragraph. So, it was submitted that the arbitrator had made an error of law in deducting from, or setting off against, the owners' claim for damages for delay periods of alleged delay caused by the owners which had not been advanced or claimed by the builder. I accept that that is an error of law and, had it not been made, the period of delay for which the applicant/owners would be entitled to damages would have been 113 weeks (121 minus 8).

29 The learned arbitrator then went on to observe and find:

"The figure of $600.00 per week for rent is claimed by the Claimant in claim B. No evidence was produced at the Hearing to justify this rate. I determine $500.00 is a fair and reasonable rental rate.

The Claimant Proprietor is awarded 103 weeks at $500.00 per week for delay costs. Total awarded $51,500.00."

30 This reveals that the arbitrator rejected the applicants' claim for damages for delay insofar as it comprised costs for losses actually incurred by the applicants (details of which are set out in the claimants' particulars of claim lodged in the arbitration at AB 106 - 109) and has, instead, assessed these damages by taking what he has determined as a fair rental value for another property into which the applicants might have moved when the works were not completed on time and in which they should have continued to reside until the date of termination of the building contract on 14 September 2000.

31 The arbitrator has not made any finding as to whether the damages claimed of $78,918.90 under these subheadings were in fact incurred by the applicants nor, if they or any part of them were, whether they were damages which were recoverable under this contract or were too remote. Considering that the contract was due for completion, on this approach, on 18 May 1998 and that earlier arbitration proceedings had been taken and had led to the expectation that practical completion should be achieved by 25 August 1999, it is hardly surprising that the applicants did not move out of their old home on 18 May 1998 into rental accommodation for what was then probably thought to be some short but indefinite period but which, in the event, was progressively extended by the builder's delays until September 2000. In such circumstances it appears to be strongly arguable that it was reasonable for the owners to remain in their former home in the hope of imminent completion of the project works. The successive delays caused by the builder which resulted in a lengthy prolongation of the contract's duration do not seem to me to suggest that any other approach should be taken or that it was unreasonable for the owners to remain in their former home.

32 The question still remains, however, of whether all the costs claimed by the owners, by way of damages, for these delays are recoverable within the rules in Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex Ch 341 and Amann Aviation Pty Ltd v Commonwealth (supra). The applicants have advanced an arguable case of an error of law in this regard which, if ultimately upheld, might at best result in an increase in the assessment of damages due to them on this ground in an amount of $22,201.12 ($78,918.90 ÷ 121 x 113 - $51,500 = $22,201.12), making the potential result of the award, after set-off, an amount of $26.45 due to the applicants rather than the sum of $22,174.67 awarded to the respondent. But in the absence of actual findings it is not possible to say that there is any error of law manifest on the face of the award.

33 It may still be possible for the applicants to contend that there is strong evidence that the arbitrator made an error of law in failing to consider, in the manner presented, the applicants' case that their claim for damages should include the amount of $78,918.90 for delay costs under Items I to R. The obstacle to success in this argument is that it is implicit that the arbitrator did address this aspect of the damages claim if only to reject it. That might be an error of law which is not manifest on the face of the award but, it is not possible in any realistic way to measure its extent in money terms without an evaluation of the evidence relied upon by the applicants. How much more, if at all, the award might have favoured the applicants had that been done is simply conjecture.

34 However, if one disregards the claim for damages for expenses actually incurred and adopts the arbitrator's methodology of allowing $500 per week for these delays then an adjustment still needs to be made to take account of the excessive period credited to the builder for delays which it did not claim. On this approach the claim becomes 113 weeks at $500 per week = $56,500 or $5,000 more than allowed, so reducing the award in favour of the respondent to $17,174.67. This would follow from the methodology adopted by the arbitrator if it is appropriate to adjust for his error.

35 However, these alleged errors of law relating to the computation of the owners' claim for damages, under the subheading for "Delay", are not manifest on the face of the award (s 38(5)(b)(1)) because it is necessary to go to the points of claim to elucidate them. While doing so may provide strong evidence that the arbitrator made an error of law it then becomes necessary for the court to be satisfied that the determination of the question involved may add, or may be likely to add, substantially to the certainty of commercial law before leave to appeal can be granted - Commercial Arbitration Act, s 38(5)(b)(ii).

36 As these are matters of the application of established principles to the facts of the particular case I am not satisfied that a determination of these questions would have any significance at all beyond the quantitative outcome of this arbitration. Errors of law there may well have been in this respect, but they do not appear to be of a character which would allow leave to appeal to be granted.

37 There are further areas of alleged errors of law by the arbitrator relied on by the applicants. These are:

(a) Amount of $28,901.87 awarded to the respondent builder for variations under Variation Orders (V/O 33-60).

The principal argument advanced for challenging these findings was, again, that in the circumstances of this case the value of any remuneration to which the builder may be entitled could only be calculated under cl 13(c) of the contract and, with respect to variations, this required an assessment in accordance with cl 10 and, in particular, cl 10(c) of the contract. Subject to what follows there is nothing to suggest that the value of the work performed for the various variations was not assessed by the arbitrator on this basis. However, with respect to Variation Order 57 "Profit and attendance for looking after owners' contractors", an amount of $3,043 was allowed to the builder out of a claim for $14,250. This obviously resulted from a process of assessment and evaluation by the arbitrator but the respondent had never advanced a claim for this item so to arbitrate upon it and to include such an allowance necessarily involves an error of law. To identify this error it is necessary to look beyond the award to the respondent's defence and counterclaim but, because that was specifically referred to in the award, such a reference is permissible - D S Blaiver & Co Ltd v Leopold Newborne (London) Ltd [1953] 2 Lloyds Rep 427 at 429 and Chalet Homes Pty Ltd v Kelly (supra) at 392. Correction for this particular error would involve a reduction in the award to the builder of $3,043.

(b) The applicants also assert an error of law by the arbitrator made in dealing with the builder's Variation Order 41 under which the cost for extra time under Variation Order 39 amounting to $6,060 was claimed and in respect of which an amount of $1,233.50 was allowed to the respondent builder.

The error of law alleged was that allowances for extra time could only be made under cl 7(c) of the contract and that such a claim required proof of extra costs necessarily incurred by the builder by reason of any extension of time granted due to a breach of the provisions of the contract by the owner. The applicants contend that there was no evidence to support additional costs incurred by the builder in respect of this particular delay claim and that, accordingly, the Arbitrator erred in law to make any such allowance.

38 It is not manifest from the face of the award what, if any, evidence the arbitrator relied upon for this finding, nor do the terms of the award refer to any other document to which resort might, therefore, be had to examine the basis for the conclusion and allowance. This being the case, it is not possible to say that there is any error of law on the face of the award. As this particular finding relates entirely to whether or not there was evidence to support the finding its effect must be confined to this case and its determination will not add or be likely to add substantially, or at all, to the certainty of commercial law. Accordingly, by reason of subs 38(5)(b)(ii), leave to appeal on this ground cannot be given.

(d) The applicant owners also submit that an error of law was made at AB 65 where the arbitrator allowed a delay cost of $15,809 to the respondent for an amount which had been referred to in Interim Award No 1 dated 31 May 1999 (Items 26 - 29) but only provisionally.

Upon examination, it is clear that Award No 1 did not direct payment of that sum of $15,809 or any other sum of which it was a component. The reason for it being provisional was that it had been assessed on the basis that the respondent would complete the contract and, if that were not the case, that it may need to be assessed on a different basis. While it is true that the respondent did not fully complete the contract, the implications from the final award are that, for the purposes of assessment of this item, the respondent should be treated as having completed the particular work and that it was appropriate to confirm the entitlement to the amount of $15,809 previously assessed on a provisional basis. The allowance is incorporated in the sum of $68,289 for variations added to the contract sum by the arbitrator's final assessment (AB 69).

39 Counsel for the applicants also submitted that including this allowance of $15,809 in this fashion involved an element of double counting and, further, that no allowance for delay could be granted to the builder under cl 7(c) when the contract had been terminated because of his default and where the only measure of the builder's entitlement to remuneration was provided by cl 13(c). The submissions relating to the application of cl 13(c) and cl 7(c) to this issue must also be rejected for the same reasons given previously, namely, the existence and allowance of the applicants' claim for damages. Insofar as the applicants submit that this allowance involved double counting, this is a reference to the inclusion of the sum of $68,289 (of which $15,809 was admittedly a component) in the calculation of the value of the work in progress in the interim award of 31 May 1999. However, not only does the arbitrator himself state that the earlier allowance was only provisional but it is apparent that payment of that sum was not directed by the first interim award. The subject of that award was whether or not progress claim No 6 was due and payable and whether or not disputed cash payments of $34,000 by the applicant owners had been made to the respondent builder. The finding was that the cash payments of $34,000 had been paid and should be brought to the applicants' credit and that progress payment No 6 was due and payable.

40 It is clear that, in determining whether or not progress claim No 6 was due and payable, the arbitrator concluded that the builder had a provisional entitlement to $15,809 but that was not a determining factor for whether or not progress claim No 6 was due and payable. That progress claim was due and payable in the event that the builder had achieved the stage of the works "tiling complete". There is nothing in that interim award or in the final award which has the effect, or which suggests, that this allowance (one which can only be additional to the contract sum) has been included more than once in the calculation of the moneys due to the builder in the event that the contract had been fully performed.

Effect of errors of law manifest on the face of the award

41 Those actual or potential errors of law which have now been identified involve the following:

42 To adjust for these errors the total remuneration under the contract due to the builder would be $533,167.07 - $8,043.00 = $525,124.07 so that the result, on balance, would be that the award should have resulted in a figure of $14,131.67 ($22,174.67 - $8,043.00) or thereabouts being payable to the builder after the set-off. This is only $8,043 less than the sum awarded. Even if the court were to assume that the applicants' claims for delay under Items I to R should have been allowed at $78,918.90 (as claimed instead of $51,500 being the figure derived from the mistaken inclusion of time not claimed by the builder) the difference would still be relatively small in proportion to this contract. The additional amount for the applicants in that case would be $25,244.12 ($22,201.12 + $3,043.00). The amount of the award on this approach (which has no supporting findings of fact and is therefore merely conjectural) would be $3,069.45 ($25,244.12 - $22,174.67) in favour of the applicants. As there is no basis in the findings of the arbitrator to justify such a view of the applicants' claim it can only be scrutinised with considerable reserve. At best it remains a potential finding only.

43 Having regard to the uncertainties and imperfections of the process of arbitration, the proper determination of the questions of law would not, in my view, substantially affect the rights of one or more parties to the arbitration or add substantially to the certainty of commercial law. Hence leave cannot be granted to appeal under s 38(5).

44 The applicants also submit that the alleged irregularities which they have identified in support of the application for leave to appeal from the award also constitute "misconduct" by the arbitrator entitling them to have the award set aside under s 42 of the Act. They particularly stress those involving instances where the arbitrator has made allowances for claims which were not advanced by the builder. The applicants further submit that there is power for the court to set aside an award in part (s 42(2)) and that, in the present case, the effect of such errors/misconduct are readily identifiable and severable so that these parts of the award can be set aside without materially affecting the remaining part of the award. While it was acknowledged by counsel that if the award were to be set aside, in whole or in part, that would raise the question of whether or not the matter should then be remitted to the arbitrator for further consideration under s 43, it was submitted that it would be undesirable and unnecessary to remit any matter to the arbitrator because an effective correction, without the need for further determination, could occur by setting part of the award aside as, indeed, occurred when Templeman J set aside part of the third interim award in Rocci & Anor v Diploma Construction Pty Ltd [2001] WASC 256.

45 These submissions, however, raise a series of issues which were not fully addressed in the course of argument, including: the need for the arbitrator to be given notice of these proceedings; the nature of "misconduct" where that term is contained in s 42; and legislative restrictions upon the power of the court to set aside an award in whole or in part, or to remit any matter for further consideration by the arbitrator in the light of s 38(1) which expressly provides that the court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the award.

46 Turning first to the question of notice to the arbitrator. If the grounds of an application to set aside an award include an allegation that the arbitrator has misconducted himself or the proceedings then the arbitrator should, usually, be given notice of the application to set aside the award, so providing him with an opportunity to take a full part in the proceedings as an active party; to file an affidavit setting out any facts which he considers may be of assistance to the court; or simply to accept, passively or by formal appearance that he will abide by the decision of the court - Port Sudan Cotton Co v Gavindaswamy Chettiar & Sons [1977] 1 Lloyd's Rep 166; Stannard v Sperway Constructions Pty Ltd [1990] VR 693 at 681 and Bank Mellat v GAA Development and Construction Co [1988] 2 Lloyd's Rep 44. There was no evidence that notice of this application had been given to the arbitrator nor any reference to this potential requirement in the course of submissions. No point was raised by the respondent to the effect that the proceedings were defective for want of joinder of a necessary party or because of the absence of notice. This is not surprising because, on a previous occasion, the court heard and determined an application under s 42 in this litigation without any reference to a need to follow such a procedure.

47 In the absence of notice of the proceedings to the arbitrator, it is necessary to consider whether the allegations of misconduct sought to be raised by the applicants can, or should, be determined. The answer to this enquiry must, in my view, be confined to an analysis of the particular award in the light of the challenges which are raised. There will be some occasions upon which notice to the arbitrator of the application to set aside an award on the grounds of alleged misconduct is absolutely essential or so potentially significant that the interests of justice require that the court should insist upon it. There will be others where the nature of the "misconduct" alleged is of such a technical kind that it will not, or will be most unlikely to, reflect adversely upon the arbitrator. These will be cases where all necessary information for the resolution of such a claim is already before the court or is agreed by the parties. There will be others where the effect of setting aside the award in part is unlikely to necessitate a remission of the matter to the arbitrator for further hearing. In these latter cases it may not be essential for the court to insist upon observance of the requirement that notice of the application should be given to the arbitrator. There may also be other instances where the requirement may be dispensed with, as in Bank Mellat v GAA Development and Construction Co (supra), or otherwise. If the parties are agreed that the application before the court is properly constituted and neither wishes any consideration to be given to the possibility of another party being joined, some reliance can be placed on the provisions of RSC O 18 r 6(1), although this does not in any way affect the necessity to have before the court the proper parties necessary for determining the point in issue: Kendall v Hamilton (1979) 4 App Cas 404.

48 In those cases where the court is required to consider whether or not an application to set aside an award on the grounds of alleged misconduct by an arbitrator may proceed in the absence of notice to the arbitrator it will be important to consider whether or not it is possible to determine the issues or questions in dispute, so far as they affect the rights and interests of the persons who are parties to the cause of the matter, without affecting the rights of the arbitrator or reflecting upon him in any material way. In the present case where, as will emerge later in these reasons, the only real scope for allegations of misconduct relate to instances where the arbitrator made findings in respect of claims not raised by the respondent, which the respondent by its counsel has frankly and commendably conceded, there is no need for any further evidence about the course which the arbitration took, nor for further explanation from the arbitrator. As these errors cannot in any way reflect upon the arbitrator in any pejorative way and because both parties have submitted that, in the event that misconduct in this sense is established, they would prefer this Court to deal with the matter if it can rather than remit it to the arbitrator for yet a further hearing, I consider that the omission to give notice to the arbitrator in the present circumstances is a difficulty which is more formal than real in its significance - compare Australasian Oil Exploration Ltd v Lachberg [1958] HCA 51; (1958) 101 CLR 119 per Dixon CJ, McTiernan and Taylor JJ at 124 - and that the court can and should proceed to determine this application.

49 "Misconduct" is defined by s 4(1) of the Act in a non-comprehensive way to include corruption, fraud, partiality, bias and a breach of the rules of natural justice. This jurisdiction is part of the court's function to ensure that the power of the court to enforce an award is not abused by it being required, ultimately, to enforce an award made in breach of, or in a departure from, the contractual, statutory or common law requirements for arbitration - Stannard v Sperway Construction Pty Ltd (supra) per Brooking J. It is well-established that "misconduct", in this sense, is not confined to serious misconduct but includes "technical" misconduct such as making a mistake as to the scope of the authority conferred or by making an error of law of a character which might amount to misconduct: London Export Corp Ltd v Jubilee Coffee Roasting Co Ltd [1958] 1 WLR 271. It has been held that misconduct in this sense does not involve personal turpitude on the part of an arbitrator and amounts to not much more than a mishandling of the arbitration of such a kind as is likely to cause a substantial miscarriage of justice: Williams v Wallis and Cox [1914] 2 KB 478 per Atkin J at 485 and Doran Constructions Pty Ltd v Health Administration Corporation (NSW) (1994) 12 BCL 104 (CA-NSW).

50 Here, the applicants submitted that an innocent mistake had been made by the arbitrator about the scope of the matters before him, leading to the making of an award on grounds not advanced by the respondent. As earlier noted, it was conduct of this kind, a mistake by the arbitrator that a particular issue was before him when it was not, which resulted in Templeman J setting aside in part the third interim award in Rocci & Anor v Diploma Construction Pty Ltd [2001] WASC 256 at [41].

51 It is important, however, to recognise that erroneous findings of fact or law will not usually constitute misconduct, nor will every irregularity of procedure which may have occurred: Heaven & Kesterton Ltd v Sven Widaeus AB [1958] 1 WLR 248; Wilson v Glover [1969] NZLR 365 and Holland Stolte Pty Ltd v Murbay Pty Ltd (1991) 105 FLR 304. It has been said that the design of the model uniform commercial arbitration legislation does not permit errors of law to amount to misconduct under s 42 so as to provide a means to circumvent applications for leave to appeal under s 38: Friend & Booker Pty Ltd v Council of the Shire of Eurobodalla, unreported; SCt of NSW; 20 June 1991 per Brownie J and Forsayth NL v Australasian Gold Mines NL [No 1] (1992) 7 WAR 549. In the latter case, Ipp J held that an error of law on the part of an arbitrator which is not procedural and which does not result in an excess of jurisdiction does not constitute "misconduct" under s 42 and that the scope for judicial review of errors of that kind is confined to the limited rights of appeal conferred by s 38.

52 Accordingly, it follows that, in the present case there is no scope for the applicants to have any part of this award set aside on the grounds of an error of law not involving a procedural irregularity or misconduct in this accepted sense. This accounts for the earlier observation in these reasons that the applicants' claim for relief under s 42 must necessarily be confined to those parts of the award where it has been established that the arbitrator mistakenly made a finding in respect of an issue not raised by the respondent. There are two such acknowledged errors by the arbitrator which, I am satisfied, can be isolated and severed from the balance of the award. This allows the court to set aside those parts of the award and the result of doing so will be to produce a precisely identifiable reduction in the amount ultimately awarded by the arbitrator to the respondent.

53 In the circumstances, therefore, I consider that I should set aside so much of the final award as resulted in allowances for claims which had not been advanced by the builder, namely:

V/O 57 $3,043.00

Extension claims for periods not sought

by the builder under Items I to R on the

approach adopted by the arbitrator $5,000.00

$8,043.00

This means that, by setting aside those allowances, the award in favour of the respondent builder is reduced to $14,131.67 ($22,174.67 - $8,043.00 = $14,131.67).

54 The applicants submitted that even if they were not successful, or not substantially successful, in their challenges to the award so that the result reached by the arbitrator stood or stood without substantial variation, the arbitrator had also erred in law in determining that each party should be responsible for their or its own costs of the final arbitration but should each pay half the arbitration cost. It was submitted that this was such an erroneous exercise of the arbitrator's discretion with respect to costs that it revealed an error of law. However, the award for costs reflects the appreciation by the arbitrator that the builder had succeeded in the first interim award and in the final award and that the applicant owners had succeeded in the second and third interim awards so that the respective claims of the opposing parties, in effect, cancelled out. In my opinion, not only was this an acceptable exercise of discretion by the arbitrator but, so far as it is possible to assess, it is very likely to have been correct. After performing works to the value of $533,167.07 or a little less, having already been paid $434,000, the builder was ordered to pay damages of $76,992.40 producing a balance in favour of the builder of $22,174.67. On my findings, this balance should have been slightly less, namely $14,131.67, but the difference is only relatively small. Both the owners and the builder have had a measure of success in their claims and the balance between them in the end is small in proportion to the overall value of the works.

55 In the light of the resolution of the earlier arbitrations, I do not consider that any error has been shown by the arbitrator in directing that each party should bear its own costs of the final award subject to each contributing equally to the cost of the arbitration. It follows that I refuse to grant leave to appeal on the issue of costs as determined by this award. There is no basis for any claim that the arbitrator misconducted himself in any way in relation to the costs order which was made.

56 Accordingly, I consider that the order which should be made on this application is as follows:

A. Leave to appeal from the award of the arbitrator dated 5 September 2002 is refused.

B. Set aside those parts of the award which allowed the respondent builder remuneration, or which reduced the applicants' claims for damages, in respect of grounds which had not been advanced by the respondent, with effect that the amount awarded to the respondent builder of $22,174.67 is reduced to $14,131.67.