MATTER : Commercial Arbitration Act 1985 (WA)

Arbitration - Arbitrator engaged to construe a contract - Principle applicable to appeal when Arbitrator so engaged - Whether Arbitrator failed to determine issue as to respective monetary liabilities or parties - Whether error in not awarding costs

Commercial Arbitration Act 1985 (WA), s 38

Consolidated Constructions Pty Ltd v Australian Airlines Ltd, unreported; SCt of WA (Adams M); Library No 930191; 16 April 1993

Government of Kelantan v Duff Development Co Ltd [1923] AC 395

GRO Kirkfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158

Keywest Construction Group Pty Ltd v Footscray Holdings Pty Ltd trading as Premier Commercial Ceilings, unreported; SCt of WA (Anderson J); Library No 930078; 3 February 1993

Lamac Developments Pty Ltd v Devaugh Pty Ltd [2001] WASC 298

NSW Rutile Mining Company Pty Ltd v Hartford Fire Insurance Company (1972) 46 ALJR 391

Villani & Anor v Delstrat Pty Ltd & Anor [2002] WASC 112

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

Miles v Palm Bridge Pty Ltd [2001] WASC 42

Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72

Promenade Investments Pty Ltd v New South Wales (1992) 22 NSWLR 203

UDR Equipment Pty Ltd v Afkos Industries pty Ltd [2000] WASC 57; (2000) 22 WAR 221

1 TEMPLEMAN J: In 1999, the applicants, Mr and Mrs Robert and Carleen Villani, entered into a contract with the first respondent, Delstrat Pty Ltd, trading as Seacrest Homes, for the construction of a new house at Lot 322 Samphire Street, Ascot Waters. The house was completed in June 2001. Disputes then arose as to the entitlement of the applicants to recover damages for late completion from the first respondent; and as to the first respondent's right to recover moneys retained by the applicants.

2 The disputes were referred to arbitration. The second respondent, Adrian Goold, was appointed Arbitrator. He delivered an award on 20 December 2001.

3 The Arbitrator (as I shall refer to him) said in his award that his determination was "based on the contract documents". However, the applicants had contended in the arbitration that the contract was partly oral. The applicants were therefore dissatisfied with the award.

4 The applicants applied to have the award set aside, pursuant to s 42 of the Commercial Arbitration Act 1985 (WA) ("the Act") on the ground that the Arbitrator had misconducted himself in failing to consider the factual issue referred to above. They sought also to have the Arbitrator removed.

5 The application to set aside the award was successful: Villani & Anor v Delstrat Pty Ltd & Anor [2002] WASC 112. McKechnie J, who heard the application, held that there had been misconduct on the part of the Arbitrator for two reasons. First, there had been "a failure to determine all necessary issues in controversy between the parties". Secondly, the reasons given by the Arbitrator "fail, by omission, to expose the reasoning process and therefore give rise to material procedural unfairness": par [43].

6 McKechnie J was not persuaded, however, that it was appropriate to remove the Arbitrator. His Honour therefore made orders setting aside the award of 20 December 2001 and remitting the matter to the Arbitrator for reconsideration in the light of his Honour's reasons.

7 Pursuant to those orders, the Arbitrator held a "directions meeting" on 3 July 2002. In compliance with directions then given, the applicants delivered points of claim on 25 July. However, the first respondent ("the respondent") did not deliver its points of defence until over a year later, on 13 August 2003. A further directions hearing was held on 20 April 2004. There was a short hearing on 10 August 2004 and the parties delivered submissions on 10 and 14 September 2004.

8 On 24 September 2004, the Arbitrator delivered a second award. It is the subject of the present application. Again, the applicants contend that the Arbitrator misconducted himself and that the award should be set aside pursuant to s 42. (I now refer to provisions of the Act only by their section numbers.) The applicants also seek leave to appeal pursuant to s 38. There are three grounds, one of which provides the basis for the s 42 application.

9 Relevantly for present purposes, s 38 provides, in essence, that an appeal shall lie to the Supreme Court on any question of law arising out of an arbitration award: s 38(1) and (2). However, by s 38(4)(b), leave is required: and by s 38(5), leave shall not be given unless the Court 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 ... 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."

10 In this case, the applicants rely principally on s 38(5)(b)(i): they contend that there are manifest errors of law on the face of the award. That is, errors which are "apparent, evident or obvious on a preliminary basis", although not necessarily identifiable without the benefit of argument: GRO Kirkfield Ltd v First Trade Consulting Pty Ltd [2004] WASC 158 at [35].

11 Against that background, I turn to the grounds of appeal. I take each in turn:

"1(a) The Arbitrator erroneously construed of [sic] the terms of the contract between the Applicants and the First Respondent as found by him to give a contracted completion date of 28 November 2001. On the proper construction the contracted completion date is 20 September 2000."

12 The issue as to "the contracted completion date" fell to be determined in accordance with the pleadings on which the second arbitration was conducted. In their points of claim, the applicants relied on two agreements. The First Agreement was said to have been made between 14 and 19 September 1999. It was said to have been "partly oral, partly written, partly express and partly implied".

13 The express written terms were said to be contained in the specifications and in "a facsimile letter sent to (the Applicants) by the Respondent on 16 September 1999 ('the Fax')". This was said to contain an express term that:

"the works would be completed within 12 months from the date the Drawings stage began."

14 The express oral terms of the First Agreement were said to include: -

"(i) concrete slab for the Works would be laid by Christmas 1999, which would enable the slab to cure over the Christmas period preventing any delay in the Works.

(ii) the house would be completed within 12 months in accordance with the Fax.

(iii) the Works on the Property were to begin in December 1999 in order for the concrete pad to be cured over the Christmas break.

The following implied terms were said to have been included in the First Agreement: -

(i) the Respondent would act expeditiously to complete and amend drawing in accordance with (the Applicants') requests;

(ii) the Respondent would submit applications for planning approval and building licence to the Council expeditiously;

(iii) the Respondent was entitled to increase the Price for any variations made by (the Applicants) by an amount reflecting the increase in costs to the Respondent plus profit.

(iv) the plans annexed to any application for planning, approval or a building license would reflect (the Applicants') instructions.

(v) the Respondent would carry out the work in a professional and workmanlike manner."

15 The Second Agreement was said to have been made at a meeting on 22 November 1999. It was said to contain written, oral, express, and implied terms, and to incorporate the terms of the First Agreement.

16 The express written terms of the contract comprising the First and Second agreements were said to include the GST Clause for the HIA Building Contract and the HIA Lump Sum Building Contract ("LSBC").

17 The following express oral terms were said to have been included in 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 would have been completed.

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

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

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

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

18 In answer to a request by the respondent, the applicants provided detailed particulars about the oral components of the contract.

19 In the points of defence, the respondent denied all of the allegations summarised above and pleaded reliance on the written building contract. That was the lump sum building contract executed by the parties on 22 November 1999.

20 As the Arbitrator noted in his award, evidence was given at the hearing on 10 August 2004 by both applicants. No witnesses were called for the respondent.

21 In par 4 of his award, the Arbitrator referred to two facsimiles dated 16 September 1999 from the respondent to the applicants "listing proposed progress payment schedule and overview for timing purposes". The second facsimile, transmitted three minutes after the first, merely corrected the progress payment percentages. The Arbitrator admitted the facsimiles into evidence as exhibits C-1 and C-2. He said:

"Both exhibits show from commencement of drawings to practical completion as 12 months."

"8 My award of December 2001 was based on the contract documents as outlined in the award. However, it did not address the oral agreement made between the parties prior to the signing of the HIA Lump Sum Contract with regard to time taken from the commencement of drawings to practical completion as 12 months. For the HIA contract to correspond with the oral agreements C-1 and C-2 the time to complete works as per Item 9 of the schedule of particulars should have been the amount of working days to achieve practical completion on September 20 2000.

9 Exhibits C-1 & C-2 state that 3 months is required for drawings and council approval, which leaves 9 months for construction to practical completion, therefore, the time to complete the works as per item 9 of the schedule should have been 39 calendar weeks or 195 working days.

Council approval was not received until January 28 2000. Clause 7(a)(iv) of the contract states 'the builder shall commence works by the time specified in item 9 of the schedule provided the builder has received approval to the Construction Documents from all relevant authorities.'

The City of Belmont issued the Building Licence on January 29 2000. Adding 21 working days computes to a start date on site of February 19 2000.

Add 195 working days, i.e. 39 calendar weeks November 28 2000

Add 7 weeks for variations (as agreed), amended contract

My previous award determined a time over run of 9.6 weeks, I now determine the time over run to be 21 weeks."

23 The reference to "Item 9 of the schedule of particulars" is to the schedule to the HIA contract in which "time to complete works" is to be stated in working days, in accordance with cl 7.

24 That clause requires the builder to commence the relevant works "by the time specified in item 9 of the schedule"; and to complete the works "within the time specified in item 9 of the schedule".

25 In each case, these are the numbers of working days from the execution of the contract: 22 November 1999.

26 The applicants contend that par 8 of the award manifests an error of law. They say that because the Arbitrator accepted (as he apparently did) that there was an oral agreement reflected in exhibits C-1 and C-2 that practical completion should be achieved within 12 months from the commencement of drawings, the Arbitrator should not have attempted to make "the HIA contract to correspond with the oral agreements".

27 I do not accept this submission. As appears from the applicants' points of claim set out above, they did not rely only on an oral agreement. Their case was that the contract (comprising the First and Second Agreement) contained written and oral terms which were both express and implied. The written terms included the HIA lump sum building contract.

28 It is true that the applicants pleaded an express oral term that the contract was "a mere formality as the terms of the contract had already been agreed by the parties". However, it was a matter for the Arbitrator to determine whether or not he accepted that to be the case (assuming, of course, that the applicants gave evidence to that effect).

29 In other words, the Arbitrator was not bound to accept that the HIA contract was "a mere formality". And if he did not accept that contention, it was necessary for him to construe the contract in the light of the preceding oral agreement reflected in the facsimiles which were exhibits C-1 and C-2.

30 That, I think, is what the Arbitrator did. In my view, it is clear enough that par 8 of the award discloses a summary of the process of construction in which the Arbitrator engaged. I am not persuaded, therefore, that the award manifests error.

31 In any event, I do not think it open to the applicants to challenge this aspect of the Arbitrator's decision, having regard to the principle in Government of Kelantan v Duff Development Co Ltd [1923] AC 395 at 409:

"No doubt an award may be set aside for an error of law appearing on the face of it; and no doubt a question of construction is (generally speaking) a question of law. But where a question of construction is the very thing referred for arbitration, then the decision of the arbitrator upon that point cannot be set aside by the court only because the court would itself have come to a different conclusion. If it appears by the award that the arbitrator has proceeded illegally - for instance, that he has decided on evidence which in law was not admissible or on principles of construction which the law does not countenance, then there is error in law which may be ground for setting aside the award; but the mere dissent of the court from the arbitrator's conclusion on construction is not enough for that purpose."

32 The principle was approved and applied by the High Court in NSW Rutile Mining Company Pty Ltd v Hartford Fire Insurance Company (1972) 46 ALJR 391 at 392 - 393.

33 I do not think the principle has been abrogated by the Commercial Arbitration Act 1985. The Act preserved the right of appeal arising from a manifest error of law in an arbitration award. Despite that, the Kelantan principle was applied by Master Adams in Consolidated Constructions Pty Ltd v Australian Airlines Ltd, unreported; SCt of WA (Adams M); Library No 930191; 16 April 1993.

34 I therefore consider that there is no substance to ground 1.

"(b)(i) the Arbitrator failed to determine the pleaded issue in relation to the Applicants' claim for a refund of some of the money paid by them to the First Respondent on account of GST on the contracted work when he applied the proportion of the GST falling to each party, as found by him, to the amount claimed by the Applicants ($12,375.00) rather than the full amount of GST on the contracted work ($25,314.00)."

36 The "pleaded issue" in relation to GST arose from pars 19 of the points of claim and par 16 of the points of defence. In the former, the applicants pleaded a representation made on behalf of the respondent in the course of negotiations, that the building works would be completed by 20 September 2000; and that the respondent "would only invoice [the applicants] GST for 10 per cent to 15 per cent of the works".

38 The Goods and Services Tax ("GST") came into force on 1 July 2000. The applicants' liability to pay GST arose from the "GST clause" referred to above which is an annexure to the HIA Building Contract. In substance, the clause provided that a builder who complied with certain conditions was entitled to be reimbursed by the proprietor for GST payable after 1 July 2000.

39 The Arbitrator dealt with this issue in the following way in par 11 of his award:

"GST payable to Claimant Proprietors:

Amount claimed 12281

The contract should have achieved practical completion on January 17 2001 as per calculation in item 9.

GST to be paid by Proprietors July 1 2000 to January 17 2001 57.76% 201 days

GST to be paid by Builder January 18 2001 to June 13 2001 42.24% 147 days

Total period GST applicable 348 days

The amount claimed by the Builder for GST was $12375. I have used that figure to determine the liability of each party.

Payable by Proprietor 57.76% of $12375 7148

Payable by Builder 42.24% of $12375 5227

$12375

GST awarded to Claimant Proprietors 5227

Less amount previous awarded 2351

Amount awarded to Proprietors $2876"

40 The "amount claimed" of $12,281 appears to have been an error. The applicants actually claimed $12,375. That is to say, the applicants contended that they should not have to pay that amount out of the total GST payable, all of which was claimed against them. The Arbitrator attributed $25,863 to GST in the absence of an exact figure: see par 16.2.9 of the first award.

41 Counsel for the applicants submitted that the reference to the amount of $12,375 being claimed by "the builder" was also an error. In my view, it was not: the respondent (builder) claimed that amount because the applicants refused to pay it.

42 In my view, the applicants are correct in their contention that the percentages calculated by the Arbitrator should not have been applied to the amount in issue, but to the whole amount of the GST payable in respect of the works: ie to the GST payable from 1 July 2000 until the actual completion date, 13 June 2001. That is the approach taken by the Arbitrator: and this ground of appeal does not challenge the appropriateness of his approach.

43 The respondent contends that there is no evidence that the full amount of GST was $25,314. The applicants sought to overcome this difficulty by an affidavit of Mr Villani handed up during the course of the hearing.

44 Counsel for the respondent objected to my receiving the affidavit at such a late stage, when he had no opportunity to check the figures it contained. In my view, the objection was justified. Further, because this ground is based on an error on the face of the award, I do not think it appropriate to receive evidence in relation to it. I will return the affidavit to counsel.

45 But whether the total amount of GST was $25,863 or $25,314, the application of the Arbitrator's percentages to either of those figures would produce a result less favourable to the applicants than they achieved in the second award. The Arbitrator held that the amounts of GST payable by the applicants and the respondent should have been $7148 and $5227 respectively. But if the percentages had been applied to the total amount of GST, the parties' liabilities would have been (on the Arbitrator's figures) $14,939 for the applicants and $10,925 for the respondent.

46 Assuming the total amount of GST to be $25,863 (the Arbitrator's figure), the applicants accepted liability for $13,488. In fact, their liability should have been $14,939. In these circumstances, I do not think it appropriate, to disturb this part of the award.

47 The third ground of appeal relates to costs, the subject of par 13 of the award. The Arbitrator dealt with costs as follows:

"Costs

Initial claims and counter claims:

Builder 25,863.40

Proprietors 25,863.40 plus 6747.20 32,610.60

Amounts awarded:

Builder - first award 14,112.40

Less second award - rent 2850 and GST 2876 5726.00 $8386.40

Proprietors - first award 11,751.00

Plus second award 5726.00

$17477.00

The final flow of money is to the Builder. $14,112.40 was awarded to the Builder in the first award and was reduced to $8636.40 in this award. Costs normally follow the event, however, I determine that each party are responsible for their own costs and the arbitration cost is shared equally."

48 The applicants seek to appeal that aspect of the decision on the following ground:

"(c) The Arbitrator ordered that each party to the Arbitration should bear their own costs. His discretion in awarding costs miscarried because:

(i) the starting point for his consideration was the 'final flow of money' which in the circumstances of this arbitration is not the correct starting point;

(ii) the Arbitrator incorrectly assumed that the First Respondent's claim was in dispute and subject to the arbitration when in fact the First Respondent's claim was admitted subject to allowance for the Applicant's claims; and

(iii) the Arbitrator failed to take into account the following relevant considerations:

(A) the First Respondent's claim for payment of $25,863.00 was not in dispute and no significant time was spent on that;

(B) on 20 August 2001 the Applicants paid $20,864.00 in to the Arbitrator's trust fund on account of the First Respondent's claim;

(C) the value of the remedial work ordered to be carried out by the First Respondent was not counted;

And took into account the following irrelevant consideration;

(D) Respondents claim for costs in the amount of $2,992.00 was included in the Arbitrator's comparison of the relative success of the Parties."

49 An award of costs involves the exercise of a discretion which does not normally give rise to a question of law: Lamac Developments Pty Ltd v Devaugh Pty Ltd [2001] WASC 298 at [98]. However, the discretion must be exercised on a proper basis. Failure to do so does involve an error of law.

50 I do not accept the applicants' submission that the respondent's claim was not in dispute. It is true that the applicants accepted that if they were wrong in their various contentions, the whole of the amount claimed by the respondent would be payable. That, I think, is clear from the way in which the arbitration was fought: the applicants' points of claim were, in essence, a defence to the claim of $25,863 made against them by the respondent with the addition of a claim for rent due to late completion.

51 However, the respondent was obliged to become involved in an arbitration in order to pursue its claim. It succeeded to an extent of $8636.40: an amount which should have been greater had the GST issue been resolved properly.

52 The applicants contend that this was not a case in which the parties made various claims against each other, resulting in a final balance being payable: cf Keywest Construction Group Pty Ltd v Footscray Holdings Pty Ltd trading as Premier Commercial Ceilings, unreported; SCt of WA (Anderson J); Library No 930078; 3 February 1993. That is only partially correct: their claim for rent at least, was in the nature of a counterclaim.

53 In any event, it does not follow that the Arbitrator erred in referring to "the final flow of money". That was, after all, the result of setting off the applicants' various claims against the amount claimed by the respondent.

54 In saying that "costs normally follow the event", the Arbitrator was, I think, signalling that it would normally have been appropriate to award costs to the respondent as a partially successful party. By ordering the parties to bear their own costs, the Arbitrator was exercising his discretion in favour of the applicants: not against them.

55 I do not regard the applicants' payment of $20,864.00 as relevant to the question of costs. It was, I think, a payment required as a demonstration of the applicants' good faith. It did not involve any admission of liability.

56 Nor do I regard the value of the remedial work or the costs of $2992 as having a significant impact on the question of costs.

57 I am not persuaded therefore, that the award of costs manifests error. Nor do I think there is "strong evidence" of error by the Arbitrator. If I am wrong in that view, I do not think the costs issue raises a point the determination of which might add, or is likely to add, substantially, to the certainty of commercial law.

58 I therefore conclude that the application should be dismissed.