Seal Rocks Victoria (Australia) Pty Ltd v State of Victoria [2003] VSC 85

5. By such award, the Arbitrator found in favour of the company and held that it was entitled to elect either:

(a) to recover damages for breaches of agreement and the terms of a lease and proceed further with the contractual arrangements between the company and the first defendant ("the State"); or

(b) to accept the repudiation by the State of such contractual arrangements, terminate such arrangements and upon their termination recover damages for repudiation.

11. It is common ground between the parties that following the interim award the company elected to terminate the relevant contractual arrangements and in his final award the Arbitrator assessed the damages payable in accordance with the principles stated in his interim award to be applicable to this situation.

14. In the circumstances, it might be thought that the final award should have been the subject of an application for leave to appeal, nevertheless it is the reasons for the interim award (the "Reasons") which disclose the Arbitrator's reasons for the basis on which he subsequently assessed damages. It is this question of the proper basis of the assessment of damages which forms the subject of the alleged error of law asserted in this proceeding. The fundamental question of law upon which the plaintiff seeks to rely is formulated in the materials lodged in support of the application as follows:

"Having found that the defendant breached the provisions of the Development and Concession Agreement dated 27 March 1997 ("the DCA") and other State documents and in consequence the plaintiff was entitled to terminate the DCA and other State documents, did the Arbitrator make an error of law in the circumstances by calculating the amount of loss and damage to which the plaintiff was entitled to be paid by the State by way of compensation on a 'Reliance loss' (return of capital expended plus interest thereon) basis and not on an 'Expectation loss' (loss of profits for the term of the contract inclusive of stage 2) basis?"

18. Section 23 of the Act provides for interim awards and s.4 of the Act defines "award" to include both a final and interim award.

21. Section 29(1)(c) further requires the Arbitrator to include in an award a statement of reasons for making the award.

24. Section 22(1) provides that unless otherwise agreed in writing by the parties, any question that arises for determination in the course of proceedings under an arbitration agreement shall be determined according to law.

27. Section 38(2) of the Act provides, subject to s.s.(4) for an appeal "on any question of law arising out of an award."

30. Section 38(4) in turn provides that an appeal may be brought by any of the parties to an arbitration agreement:

"(a) with the consent of all the other parties to the arbitration agreement; or (b) subject to s.40, with the leave of the Supreme Court."

34. Section 38(5) materially constrains the circumstances in which the Court may grant leave to appeal.

"(5) The Supreme Court shall not grant leave under s.s.(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."

38. It is necessary to say something concerning the requirements of s.38(2) and (5) of the Act. The starting point must be that s.38 is concerned with questions of law arising out of an award and not with questions of fact.

41. The distinction between an error of law and an error of fact is of fundamental significance in the present case. This distinction was addressed by the High Court in Australian Broadcasting Tribunal v Bond[1]. This decision together with authorities of this Court were carefully analysed by Batt J in Roads Corporation v Dacakis[2]. The analysis of Batt J was approved by the Full Court of the Federal Court in MIMA v Epeabaka[3] and I respectfully adopt it.

44. It is sufficient for present purposes to record that an error of fact may amount to an error of law where an appeal court concludes that it was not open to an inferior tribunal to find a fact or reasonably open to an inferior tribunal to draw inferences or reach overall conclusions of fact. The word "reasonably" in this context may be thought strictly unnecessary for the reasons stated by Phillips JA in S v Crimes Compensation Tribunal[4]. It is to be understood in the sense used by Mason CJ in Bond at 356 (with whom on this point Brennan, Toohey and Gaudron JJ agreed):

"Thus, at common law, according to the Australian authorities, want of logic is not synonymous with error of law. So long as there is some basis for an inference - in other words the particular inference was reasonably open - even if that inference appears to have been drawn as a result of illogical reasoning there is no place for judicial review because no error of law has taken place."

48. Section 38(5)(a) of the Act requires that the Court be satisfied that the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement. An alleged error of law could not have this effect unless it potentially vitiated the Arbitrator's reasoning and did so with respect to an aspect of the award which was in itself "substantial" in its effects upon a party.

51. Section 38(5)(b)(i) requires "a manifest error of law on the face of the award." In Promenade Investments Pty Ltd v New South Wales[5] Sheller JA said:

"There should ... 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."

This statement was referred to with approval by Ormiston and Hansen JJ in Melbourne VV Pty Ltd v Pratt[6] and by Ormiston JA with whom Winneke P, Phillips, Buchanan and Vincent JJA agreed in Energy Brix Corporation Pty Ltd v National Logistics Coordinators (Morwell) Pty Ltd[7].

56. In Leung v Hungry Jacks Pty Ltd[8], Hedigan J stated the error must be "evident and obvious rather than merely arguable."

59. In Natoli v Walker[9], after canvassing United States authority with respect to comparable requirements Kirby P said of the term "manifest":

"Obviously, there is difficulty in the word 'manifest'. What may be 'manifest' to one judicial officer may fail to persuade another. The criterion cannot be the swiftness of mind of the sharpest intellect. Nor can it be the perception of one whose whole career has been devoted to examining and reflecting upon building contracts. An objective, not a subjective, test for what is 'manifest' is contemplated. But the word will not go away. Against the background of its history in this context it requires swift and easy persuasion and rapid recognition of the suggested error."

63. The present proceedings concern an award which was made after 145 days of hearing and in respect of which the Arbitrator's Reasons are some 350 pages in length. It cannot be that the complexity of the matter precludes the Court from arriving at the conclusion that there is a manifest error of law on the face of the award. Conversely, however, it is necessary once the substance and effect of the Reasons are understood for the Court to be satisfied that a manifest error or errors of law have been demonstrated in the sense referred to in the above authorities if s.38(5)(b)(i) is to be satisfied.

66. Section 38(5)(b)(ii) provides an alternative criterion requiring "strong evidence" of error and the likelihood that determination of the question may "add substantially to the certainty of commercial law". This requires that the question should be one of wider and greater importance than, for example, the construction of a one off clause in the context of a particular agreement between the parties.[10]

69. In the present case the plaintiff's case was put expressly by reference to the criterion of "manifest error of law on the face of the award". I am not satisfied that such an error of law has been demonstrated. This conclusion is supported by three considerations:

(a) the Arbitrator's Reasons reflect a proper understanding of the concept of reliance damages;

(b) the Arbitrator's decision turned on his view of the evidence before him;

(c) it was open to the Arbitrator to award reliance damages in circumstances where he found it impossible to satisfactorily assess future losses on an expectation basis.

The Concept of Reliance Damages

75. The Arbitrator states at paragraph 811 of his Reasons:

"811. I assume that the Claimant and the State accept what was said in Commonwealth v Amann Aviation [1991] HCA 54; (1991) 174 CLR 64 at p.85 that damages for 'reliance losses' are simply another manifestation of the general principle enunciated in Robinson v Harman. If the Claimant had been able to perform the Agreements as intended by the parties, even if it had not made a profit, but nevertheless would have been able to recover all or some of the capital and expenditure outlaid by it, the Claimant is entitled to recover, by way of compensation, an amount equal to the capital and expenditure it would have recovered in the course of conducting its business but was prevented from doing by the State's conduct."

79. The passage referred to by the Arbitrator in the judgment in Amann comes from the judgment of Mason CJ and Dawson J:

"We do not regard the language of election or the notion that alternative ways are open to the plaintiff in which to frame a claim for relief as appropriate in a discussion of the measure of damages for breach of contract. In truth, as has been seen, damages for loss of profits and damages for expenditure reasonably incurred are simply two manifestations of the general principle enunciated in Robinson v Harman ... Naturally, the categories of case in which a plaintiff is likely to make a claim for the recovery of expenditure incurred are those in which the plaintiff has not suffered a loss of profits and those in which it is impossible to assess what would have been the outcome had the contract been performed or those in which that outcome is otherwise uncertain. So much is acknowledged by Lord Denning in the passage from Anglia Television already cited. The manner in which a plaintiff frames his or her claim for damages will be dictated not so much by a choice of alternatives giving rise to an election but simply according to whether the contract, if fully performed would have been and could be shown to have been profitable (even if the actual amount of profit is not readily ascertainable). If this can be demonstrated, a plaintiff's expectation of a profit, objectively made out, will be protected by the award of damages. Otherwise, subject to it being demonstrated that a plaintiff would not even have recovered any or all of his or her reasonable expenses, a plaintiff's objectively determined expectation of recoupment of expenses incurred will be protected by the award of damages."[11]

"... an award of reliance damages does not represent the direct recovery of the wasted net expenditure. The basis of an award of reliance damages is the ordinary one in an action for repudiation or breach, namely, that the plaintiff is, so far as money can do it, to be placed in the same situation with respect to damages as if the repudiation or breach had not occurred. Such an award represents the recovery of the wasted net expenditure only in the indirect sense that, in the assessment of damages, the net benefits which would have been derived but for the repudiation or breach are quantified in monetary terms by reference to the presumption that their value would have at least equalled that wasted expenditure. In other words, the wasted expenditure represents 'an alternative measure of gains prevented'."

87. In my opinion the Arbitrator's Reasons read as a whole do not demonstrate a manifest misunderstanding of the underlying concept of reliance damages.

91. The Arbitrator's decision as to the appropriate measure of damages clearly turned on his view as to the evidence before him. In Wenham v Ella[12] Walsh J stated as follows:

"In my opinion the error that is contained in the argument for the appellants consists in treating rules which constitute useful guidance in the ascertainment of damages as rigid rules of universal application, instead of treating them as prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation for a breach of contract without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept. The achievement of such a result is the purpose of the principles laid down in Hadley v Baxendale as explained in subsequent cases, including those to which Gibbs J has referred in his judgment in the present case. I add a reference to some observations made in the case of Monarch Steamship Co Ltd v Karlshamns Oljefabriker. Lord Wright referred to 'the broad general rule of the law of damages that a party injured by the other party's beach of contract is entitled to such money compensation as will put him in the position in which he would have been but for the breach.' The entitlement of the injured party is limited of course by the requirement that the damages must not be too remote. Lord Wright went on to say that remoteness 'is in truth a question of fact' and he cited a passage from the speech of Lord Haldane in an earlier case, to the effect that the apparent discrepancies found in the statements of general principles governing damages are due mainly to the varying nature of the particular questions which have arisen in different cases and to the need to mould the expression of the general principles, in applying them to the circumstances of particular cases. Lord de Parcq expressed agreement with what Lord Wright had said and added: 'Circumstances are so infinitely various that, however carefully general rules are framed, they must be construed with some liberality, and not too rigidly applied. It was necessary to lay down principles lest juries should be persuaded to do injustice by imposing an undue, or perhaps an inadequate, liability on a defendant. The court must be careful, however, to see that the principles laid down are never so narrowly interpreted as to prevent a jury, or judge of fact, from doing justice between the parties. So to use them would be to misuse them'."[13]

(citations omitted)

"It has been truly said that the assessment of damages in contract and tort is 'a pragmatic subject ... (which) does not lend itself to hard and fast rules'. The explanation of that is to be found in the fact that the assessment of common law damages for breach of contract or tort was traditionally seen as a matter for the good sense of the jury. Within the context of the principles laid down in Hadley v Baxendale, the more particular rules for assessing damages for repudiation or breach of contract should be treated not 'as rigid rules of universal application' but as 'as prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation ... without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept.' That being so, it is neither desirable nor practicable to seek to formulate an exhaustive comprehensive rule deciding the circumstances in which it is appropriate for a court to assess damages on the basis that what has been lost or inflicted is the probability or possibility of benefit or detriment as distinct from the benefit or detriment itself. It suffices for the purpose of the present case to say that damages should be assessed on that basis in a case where the extent of the final loss or injury actually sustained by reason of the repudiation or breach depends on what would have happened or what will happen and the circumstances are such that the court can identify or estimate a precise or approximate proportionate chance of benefit or detriment but can do no more than speculate, on the basis of probabilities and possibilities, about what would have or will actually come about." (citations omitted)

99. The factual issues before the Arbitrator fell to be determined in accordance with well accepted general principles. In Transport Industries Insurance Co Ltd v Longmuir[14] Tadgell JA stated in a different context at 141:

"In a civil case like this, where there is no direct evidence of a fact that a party bearing the onus of proof seeks to prove, 'it is not possible to attain entire satisfaction as to the true state of affairs': Girlock (Sales) Pty. Ltd. v. Hurrell [1982] HCA 15; (1982) 149 C.L.R. 155 at 169, per Mason J. In such a case, however, the law does not require proof to the 'entire satisfaction' of the tribunal of fact. A definition of the sufficiency of circumstantial evidence in a civil case to support proof by inference from the directly proved facts was given by the High Court in the unreported case of Bradshaw v. McEwans Pty. Ltd. (27 April 1951) in a passage since repeatedly adopted: e.g. Luxton v. Vines [1952] HCA 19; (1952) 85 C.L.R. 352 at 358; Holloway v. McFeeters [1956] HCA 25; (1956) 94 C.L.R. 470 at 480-1; Jones v. Dunkel, at 304; Girlock's case, at 161 and 168. The relevant passage in _Bradshaw's c_ase is this - 'Of course as far as logical consistency goes many hypotheses may be put which the evidence does not exclude positively. But this is a civil and not a criminal case. We are concerned with probabilities, not with possibilities. The difference between the criminal standard of proof in its application to circumstantial evidence and the civil is that in the former the facts must be such as to exclude reasonable hypotheses consistent with innocence, while in the latter you need only circumstances raising a more probable inference in favour of what is alleged. In questions of this sort, where direct proof is not available, it is enough if the circumstances appearing in evidence give rise to a reasonable and definite inference: they must do more than give rise to conflicting inferences of equal degrees of probability so that the choice between them is mere matter of conjecture: see per Lord Robson, Richard Evans & Co. Ltd. v. Astley [(1911) A.C. 674, at p.687]. But if circumstances are proved in which it is reasonable to find a balance of probabilities in favour of the conclusion sought then, though the conclusion may fall short of certainty, it is not to be regarded as a mere conjecture or surmise ...' "

103. Once it is accepted that the ascertainment of damages by the Arbitrator was in a fundamental sense concerned with findings of fact, it can be seen that the Court could not be satisfied that there was a manifest error of law on the face of the award unless it could be said that the conclusions of the Arbitrator were not reasonably open to him. The evidence before the Arbitrator is not before the Court and I am not so satisfied. There is no manifest error in his Reasons which demonstrates such findings were not reasonably open to the Arbitrator.

106. The Arbitrator's Reasons do not demonstrate that he misapprehended the evidentiary principles which he should apply in determining the relevant facts. At paragraph 809 he specifically states:

"809. In arriving at this conclusion I am most aware that a court or tribunal should not allow difficulties of estimating loss of money to defeat the only remedy it provides for a breach of contract - an award of damages."

The Circumstances Which Might be Said to Make an

112. In my opinion it is clear that it was open to the Arbitrator to refuse to award "expectation loss (loss of profits for the term of the contract inclusive of stage 2)" as contended for by the plaintiff by reason of his findings as to the impossibility of assessing future loss of profits.

"808. Although it may be possible by reference to the May 2000 business plan to access [sic] what revenue the Claimant has earned over 435 days. The difficulties are created by the costs and expenses of bringing Stage 2 to operation. It may be much cheaper than the parties anticipate so that the likely revenues return as stated in the business plan are excessive. Conversely, it may be much more expensive. During the hearing figures were bandied about that Stage 2 may cost anywhere between $30m and in excess of $100m. The parties anticipate the price of an entry ticket in the first year of operation of Stage 2 to be $35 for adults and $15 for children and forecast gross revenues in excess of $15m in the first year. Ultimately, the price of the ticket will be dictated by what the development will cost and what the market can afford to pay for a ticket. If the cost is nearer to $100m, which I believe it will be, the price of tickets will be much higher than $35 for an adult. In my opinion the ultimate cost will be largely determined by the difficulties of constructing, ventilating and making 'risk proof' the tunnel. The relevant State Authorities will require a quick evacuation of the tunnel. Bearing all these factors in mind, it is simply too difficult to arrive at an amount of compensation which should be paid by the State to the Claimant. The Claimant for its part urges that I accept the return of revenue forecast in its May 2000 business plan. For its part the State submits it is all 'pie in the sky'. Because of all these difficulties I am simply unable to arrive at an amount of compensation. If I did so, it would necessarily require me to ignore most of the factors which I have identified that create this dilemma for me and which I consider to be significant. In assessing compensation it is simply too difficult to arrive at a sum. The Claimant for its part urges that I accept the return of revenue forecast by the parties in amended Model 5 and in its business plan. For its part the State submits it is all 'pie in the sky'. Because of all these difficulties I am simply unable to arrive at an amount of compensation. If I did so, it would necessarily require me to ignore most of the factors which I have identified that creates this dilemma for me and which I consider to be significant." [sic]

116. It can be seen that in the above finding the Arbitrator effectively repeats himself although in the second iteration of his conclusions he refers specifically to the evidence as to amended Model 5. In substance, however, it is clear that after considering the relevant evidence the Arbitrator has concluded that it was impossible to assess damages on the basis of future loss of profits in this case.

119. This finding brings the case squarely within that category of case identified by Mason CJ and Dawson J in the passage quoted from Amann above as "... those in which it is impossible to assess what would have been the outcome had the contract been performed."

122. Likewise, the other members of the Court in Amann accepted that reliance damages are appropriate in such circumstances. Brennan J stated at 105:

"... when a contract is rescinded for breach and that breach, by preventing the performance of the contract, has made it impossible for the plaintiff to prove that the net value of his contractual benefits ... exceeds the wasted expenditure incurred in reliance on the defendant's promise prior to rescission ... it is just to shift to the defendant the ultimate onus of proving that, had the contract been performed, the net value of the plaintiff's benefit would not have covered the expenditure he had incurred before recision."

"In a case where a plaintiff has incurred expenditure either in procuring the contract or in its performance but it is impossible or difficult to establish the value of any benefits which the plaintiff would have derived from performance by the defendant, considerations of justice dictate that the plaintiff may rely on a presumption that the value of those benefits would have been at least equal to the total detriment which has been or would have been sustained by the plaintiff in doing whatever was reasonably necessary to procure or perform the contract. In my view, the rational basis of that presumption is that that total detriment represents what would reasonably have been in the contemplation of the parties themselves as the cost to the plaintiff of full performance by the defendant and constitutes some evidence, in proceedings between them, of the value of the total benefits which would have been derived by the plaintiff from such performance. It follows from it that, at least in a case where proof of value is impossible or difficult, it is presumed in the plaintiff's favour that the future net benefits (i.e. excess of future benefit over future detriment) which would have been derived from performance of the contract would have been of a value sufficient to recoup the past net expenditure reasonably incurred in procuring or performing it. Where that presumption is operative, it enables the recovery by a plaintiff of what are commonly referred to as 'reliance damages', that is to say, damages equivalent to the wasted expenditure which has been reasonably incurred in reliance upon the assumption that the contractual promises of the defendant would be honoured."

130. In turn Toohey J referred to the availability of reliance damages "where the plaintiff cannot prove loss of profits with any certainty" (at 137). Gaudron J referred to the availability of reliance damages where "it would not be possible, applying that usual method of valuation, to make a reliable estimate of the value of Amann's contractual rights" (at 153). McHugh J, who dissented as to the principal issues before the Court, nevertheless referred to the availability of reliance damages where "it is impossible to determine the financial outcome of the contract or the value of the defendant's promise" (at 163).

133. The Arbitrator has specifically found circumstances which may preclude the award of expectation damages and justify an award of reliance damages at law.

137. The plaintiff's case was put by reference to s.38(5)(b)(i) of the Act. For the above reasons this case must fail. For the sake of completeness, I add that I am not persuaded that the determination of the questions of law agitated before me may or may be likely to add substantially to the certainty of commercial law as required by s.38(5)(b)(ii).

140. Leave to appeal pursuant to s.38 of the Act is refused.

[1] [1990] HCA 33; (1990) 170 CLR 321

[2] [1995] VicRp 70; [1995] 2 VR 508

[3] [1999] FCA 1; (1998-99) 160 ALR 543 at 552

[4] [1998] 1 VR 83 at 89-91

[5] (1991) 26 NSWLR 203 at 226

[6] Unreported decision, Victorian Supreme Court, 10 February 1995.

[7] [2002] VSCA 113, at [31]

[8] [2000] V Conv R 54-614

[9] Unreported decision, New South Wales Court of Appeal, 26 May 1994.

[10] Promenade Investments Pty Ltd v New South Wales, Sheller JA at 226

[11] [1991] HCA 54; (1991) 174 CLR 64 at 85

[12] [1972] HCA 43; (1972) 127 CLR 454

[14] [1997] 1 VR 125