Commercial arbitration - Application to set aside award - Misconduct by arbitrator - Failure to determine all issues in dispute - Whether such failure amounts to misconduct - Duty to give reasons - Application to remove arbitrator - No moral turpitude or bias

Commercial Arbitration Act 1985 (WA)

Forsayth NL v Australasian Gold Mines NL (1992) 7 WAR 549

Holland Stolte Pty Ltd v Murbay Pty Ltd (1991) 105 FLR 304

Oldfield Knott Architects Pty Ltd v Ortiz Investments Pty Ltd [2000] WASCA 255

1 This application seeks to set aside an award of an arbitrator and remove the arbitrator for misconduct, the misconduct being particularised as follows:

"The arbitrator misconducted the proceedings by failing to decide substantial pleaded issues between the parties."

2 The application is brought by Mr and Mrs Villani who had contracted with Delstrat Pty Ltd the respondent, trading as Seacrest Homes, to build a residence for them on Lot 322 Samphire Street, Ascot Waters.

3 A dispute arose between the parties and as a result the matter was referred to arbitration under the provisions of the contract.

4 The second defendant, Mr Goold, was the arbitrator whose award, delivered on 20 December 2001, is the subject of this application.

5 Mr Goold has filed a notice that he does not intend to participate in the proceedings and will abide by the decision of the Court.

6 In 1999 Mr and Mrs Villani wished to have a house built for them.

7 There were discussions and negotiations with representatives of Seacrest Homes in September 1999. Mr and Mrs Villani assert that those discussions and representations are part of the building contract. They assert that an oral term of the contract was that the house would be finished no later than September 2000. The parties entered into a written "Housing Industry Association Limited Lump Sum Building Contract with GST Clause Annexure" on 22 November 1999.

8 The building was eventually completed. The date of practical completion became a source of dispute between the Villanis and Seacrest Homes.

9 Mr and Mrs Villani withheld a sum of money from final payment and as a result, under cl 16 of the written contract, Seacrest Homes commenced arbitration proceedings.

10 As part of the arbitration proceedings, Seacrest Homes filed points of claim. In response, Mr and Mrs Villani filed points of defence and counterclaim. The counterclaim asserted by par 5:

"Between 14 and 20 September 1999, the parties entered into an agreement for the Claimant to build a house on the Property ('the Works') which was partly oral, partly written, partly express and partly implied ('the First Agreement')."

11 By cl 15 of the counterclaim it was asserted that a second agreement was entered into which contained written and oral express and implied terms. The oral express terms were alleged at 15(c):

"(c) There were express oral terms of the contract:-

(i) by 1 July 2000 the majority of the Works would be completed.

(ii) by 1 July 2000 the home would be locked up and the ceramic tiles will have been completed.

(iii) by 1 July 2000 only 10% of the Works would require completion attracting GST liability.

(iv) the signing of the HIA building contract was a mere formality as the terms of the contract had already been agreed by the parties.

(v) the Claimant was not able to begin construction on the Property until the contract was signed because of their legal obligations.

(vi) the lack of revised drawings would not alter the late December start."

12 The counterclaim asserted that Seacrest Homes breached the contract in failing to complete the practical completion on or before 20 September 2000.

13 The Villanis also claimed, as an alternative to the contractual basis for their claim, that an oral representation that the works would be completed by 20 September 2000 was misleading and made in contravention of the Trade Practices Act 1974 (Cth) s 52 and the Fair Trading Act 1987 (WA) s 10.

14 The arbitrator conducted a hearing on 8 and 9 November 2001. Evidence was given by Mr and Mrs Villani, an architect/building inspector on their behalf, and by a director of Seacrest Homes, and a sales person who had been responsible for dealing with the transaction on behalf of Seacrest Homes.

15 Each party filed a closing statement. Issue was joined on the question of the oral agreement.

16 In support of this application, Mrs Villani has sworn an affidavit in which she deposes at par 9:

"Annexed hereto and marked 'E' is a copy of the Outline of Submissions and List of Authorities filed on behalf of the Applicants".

17 The document annexed "E" is wrongly entitled and dated 1 February 2002.

18 Despite the misleading nature of the heading, I will treat the document as being in fact the submissions made before the arbitrator, partly because Mrs Villani has deposed to that fact, and partly because they appear to so relate.

19 Those submissions deal exhaustively with the issue whether there was a contractual term that practical completion would occur no later than 20 September 2000. The submissions also dealt in detail with the misleading and deceptive conduct alleged against Seacrest Homes.

20 The arbitrator's award, comprising four pages, is succinct. The arbitrator set out what he considered were the contract documents as follows:

• Housing Industry Association Lump Sum Building Contract with GST Clause Annexure Exhibit R-12 dated November 22 1999.
• HIA Specifications for brick or framed construction Exhibit R-7 dated November 19 1999.
• Contract Plans Exhibit R-22 marked in red and printed on November 17 1999.
• Addenda to specifications Exhibit R-23 dated February 18 2000.
• Final working drawings 4 and 24 March 2000 Exhibits R-35 and R-66.

"Commercial Arbitration Act Section 22:

It was agreed at the preliminary meeting that the application of section 22(1) (according to law) of the Commercial Arbitration Act would apply. My determination is therefore based on the contract documents.

After hearing the evidence of the witnesses, examining the contract documents and other exhibits together with the points of claim and defence and the parties final submissions, I award and determine as follows. ..."

22 There followed a series of matters upon which the arbitrator made findings. One finding was that the practical completion could have been achieved on or about 5 April 2001 but was not in fact achieved until 13 June 2001. As he said:

"Based on the Arbitrator's calculation of contract completion time of April 5 2001 and practical completion of June 13 2001, there is a time over run on 9.6 weeks which equates to a 18 per cent of the 53 weeks building time."

23 The arbitrator did not at any stage expressly deal with the Villanis' claim that a term of the contract relating to practical completion on or before 20 September 2000 had been breached and that damages therefore flowed from that breach.

1. Whether as a question of fact to be inferred from all of the circumstances, and particularly the omission in the arbitrator's award of any reference to it, the arbitrator has ignored or failed to consider or decide a material aspect of the arbitration.

2. If such a failure is found as a fact, whether that amounts in law to misconduct under the provisions of the Commercial Arbitration Act s 42.

3. If it does amount to misconduct, whether a discretion ought to be exercised to set aside the award.

4. Whether in the event that the award is set aside the matter should be remitted to the same arbitrator or whether the arbitrator should be removed.

25 The issue as to what constituted the contract, and whether the oral term as to the date of practical completion was central to the Villanis' counterclaim. Resolution of that question in their favour would have materially affected the final award.

26 The arbitrator limited the contract documents to those set out above. The documents he specified were less than those asserted by the Villanis as comprising the partly oral, partly written, contract with partly express and partly implied terms. The arbitrator provided no reasons for the exclusion. He did not determine whether other documents were part of the contract or whether the contract included oral terms. He failed to deal at all with the assertion that the contracted practical completion date was 20 September 2000. It is not of course necessary for an arbitrator to deal with every issue which arises, or every argument or submission put forward. An arbitrator must, however, deal with the substance of a claim or counterclaim, particularly those matters which will materially affect the result. In the circumstances, the issues as to what constituted the contract and what was the contracted date of completion being so central to the Villanis' counterclaim, I find that the arbitrator omitted to determine all the necessary issues and controversies within the arbitration. I further find that the issue as to the contracted completion date was a material fact which may have influenced the award.

27 The Lump Sum Building Contract by cl 16.(b) provides that the decision of the single arbitrator appointed shall be final. The Commercial Arbitration Act 1985 provides for judicial review of awards under Part V. In general, appeals are limited to questions of law.

28 The court is given power to set aside an award where under s 42(1)(a) there has been misconduct on the part of an arbitrator or an arbitrator has misconducted the proceedings.

29 It is important to maintain the distinction between an appeal and an application to set aside an award on the grounds of misconduct. The scheme of the Commercial Arbitration Act and the general purpose of arbitrations will be undermined if misconduct proceedings are used as a guise to appeal against a decision on issues of fact.

30 That said, a party should not be prevented from bringing an application under s 42 simply because the party may have a concurrent right to bring an appeal on a question of law.

31 "Misconduct" is defined under s 4 inclusively as follows:

"'misconduct' includes corruption, fraud, partiality, bias and a breach of the rules of natural justice;"

32 It is not asserted here that the arbitrator has been corrupt, fraudulent, partial or biased.

33 Over the years there have been many decisions on the question of misconduct by arbitrators.

34 In Shirley Sloan Pty Ltd v Merril Holdings Pty Ltd t/as Airen Constructions [2000] WASC 99 Steytler J examined and analysed the authorities. It is therefore unnecessary for me to do so and I adopt, with gratitude and respect, his analysis.

35 The arbitrator has a duty to give written reasons: s 29(1)(c). In this case the arbitrator has done so. Whether the failure to give sufficient reasons is a breach of the rules of natural justice is a more difficult question. Counsel for the appellant referred to Garrett v Nicholson [1999] WASCA 32; (1999) 21 WAR 226; and QBE Insurance Ltd v Moltoni Corporation Pty Ltd [2000] WASCA 82; (2000) 22 WAR 148; in support of the proposition that courts are required to give reasons. So much is clear: Lloyd v Faraone (1989) WAR 154. The principal rationale underlying the rule is in order to afford parties the opportunity to exercise their rights of appeal. A further reason to comply with the duty is as part of an overall obligation to afford procedural fairness to all parties.

36 Procedural fairness may or may not always equate with the rules of natural justice. In QBE Insurance Ltd v Moltoni Corporation Pty Ltd (supra) the catchwords say: "Courts and Judges - Natural justice - Requirement to give reasons".

37 However, the two Judges who deal with the adequacy of the reasons given in that case, Wallwork and Murray JJ, did not support their reasoning (which differed) by reference to the rules of natural justice.

38 In Public Service Board of New South Wales v Osmond (1985-1986) 159 CLR 656 the High Court held per Gibbs CJ at 662:

"There is no general rule of the common law, or principle of natural justice, that requires reasons to be given for administrative decisions, even decisions which have been made in the exercise of a statutory discretion and which may adversely affect the interests or defeat the legitimate or reasonable expectations, of other persons."

39 The facts in Shirley Sloan Pty Ltd clearly indicate a breach of the rules of natural justice. I would prefer not to finally decide whether the failure to give adequate reasons is a breach of the rules of natural justice and, therefore, misconduct as defined under s 4, because I have reached the view that there has been procedural misconduct in this case in failing to resolve an issue in contention in the arbitration. The failure to give adequate reasons is thus the evidence of the failure to resolve the issues.

40 Where parties under a contract agree to submit a dispute to arbitration, there must be implied a condition that the arbitrator will determine the matters in controversy. No doubt there is some limit to such a rule. It may not be essential for every matter in controversy to be resolved in order for a proper award to be made. However, where the matters in dispute are defined by points of claim and points of defence, unless there is a formal or practical abandonment of any such points, the arbitrator has a duty to resolve those defined issues. Alexander v Bridge of Allan Water Co - 7 Macph (Ct of Sess) 498 referred to by Lord Watson in Adams v Great North of Scotland Railway Case (1891) AC 31 at 46 provides an example of misconduct in an arbitrator failing to do his duty by declining to deal with certain matters.

41 The failure to determine all issues in dispute in an arbitration can amount to misconduct because the procedure "has, or may have, unjustly prejudiced a party in some respect material to the outcome": Thiess Contractors Pty Ltd v Water Corporation of Western Australia, unreported; SCt of WA; Library No 970561; 28 October 1997 per Parker J at 38.

42 In the end, whether the failure to give adequate reasons is a breach of the rules of natural justice may not matter as Marks J pointed out in Gas & Fuel Corporation of Victoria v Wood Hall Ltd & Leonard Pipeline Contractors Ltd [1978] VicRp 41; (1978) VR 385 at 394:

"Thus it can be seen that from early reported cases the courts have insisted that principles, if not of natural justice, then those akin thereto, were to be observed by arbitrators simpliciter. In In re Badger (1819), 2 B & Ald 689; 106 ER 517 Abott, CJ said: 'If an arbitrator acts contrary to a general rule of law it is undoubtedly the duty of the court to set aside his determination. But there is a material distinction between those rules which are founded on the immutable principles of justice, from which neither the court nor an arbitrator can be allowed to depart, and those which depend on the practice of the court ...'" (Marks J's emphasis).

43 There are, in summary, two reasons for a finding of misconduct. The second is a consequence of the first. The first reason is that there has been a failure to determine all necessary issues in controversy between the parties. As a result the dispute submitted to arbitration under the contract has not been completely determined. The award is not an award with respect to the whole dispute. The second reason is that the reasons given by the arbitrator fail, by omission, to expose the reasoning process and therefore give rise to material procedural unfairness, whether or not that also amounts to a breach of the rules of natural justice.

44 The procedural misconduct just found does not involve a finding of moral turpitude in any way in respect of the arbitrator. The question is whether the discretion should be exercised to set aside the award. In my view it should. I apply the test articulated by Steytler J in Shirley Sloan Ltd.

45 In this case the applicants potentially may have been the beneficiaries of an award of the full amount of their claim. That being so, the applicants may have been materially unjustly prejudiced by the failure to deal with all the issues.

46 An arbitrator may be removed where the court is satisfied, inter alia, that the arbitrator has misconducted the proceedings: s 44(a). I do not consider any reason has been advanced why the arbitrator should be removed. On the contrary, there are good reasons why the matter should be remitted to this arbitrator for further consideration. The error of the arbitrator in failing to deal with a significant issue does not involve any moral wrongdoing or display any bias, prejudice, interest or corruption, sufficient to remove him. The arbitrator has already heard the evidence and is familiar with the issues. What may be required (and this is a matter for the arbitrator and the parties) is a further short hearing where the particular issues which the arbitrator has not yet determined are the subject of submission by each party to the arbitrator. The arbitrator has already determined many matters in controversy between the parties and except to the extent that his finding on the Villanis' claim as the contractual terms of the date of practical completion may affect them, there is no other reason for the arbitrator to revisit the findings made.

47 Once the award is set aside, the inevitable result in this case must be to remit it for reconsideration. In doing so, I should emphasise that my decision should not be interpreted by the arbitrator as in any way ruling upon the validity of the applicants' claim to have entered into a contract with express oral terms and written terms to the effect that the completion date will be no later than 20 September 2000. There are very considerable arguments on both sides of that question. The resolution of that question is entirely a matter for the arbitrator. I set aside the award and now remit it for further consideration because the arbitrator did not deal with it, not because I have formed any view as to the substance of the claim.

1. The award of the arbitrator dated 20 December 2001 be set aside.

2. The matter be remitted to the arbitrator for reconsideration in the light of these reasons.