Build It Carpentry and Joinery Pty Ltd v John King
[2021] ACTMC 1
•Friday 26 February 2021
MAGISTRATES COURT OF THE AUSTRALIAN CAPITAL TERRITORY
Case Title: | Build It Carpentry & Joinery Pty Ltd v John King & Anor |
Citation: | [2021] ACTMC 1 |
Hearing Date: | 4 September 2020 |
DecisionDate: | Friday 26 February 2021 |
Before: | Magistrate Morrison |
Decision: | See paragraphs [101] and [102] |
Catchwords: | CONTRACTS – BUILDING, ENGINEERING AND RELATED CONTRACTS – settlement of contractual disputes – referral of dispute to third party decision-maker – whether dispute notice was valid having regard to matters then in dispute CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – whether court can review third-party determination – whether decision of third party decision-maker was void for legal error – whether a legal error was made – whether determination was made in accordance with the contract |
Cases Cited: | Foote & Anor v Barton Property Partnership No 2 [2014] ACTSC 330 Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104 |
Parties: | Build It Carpentry & Joinery Pty Ltd (Plaintiff) John King (First Defendant) Robyn King (Second Defendant) |
Representation: | Counsel B Buckland (Plaintiff) R Arthur (Defendants) |
| Solicitors Mills Oakley (Plaintiff) Bradley Allen Love (Defendants) | |
File Number: | CS 264 of 2018 |
MAGISTRATE MORRISON:
This hearing proceeded on the basis that there is no material dispute between the parties on the facts. A joint tender bundle of some four volumes of documents was received in evidence by consent (Exhibit A).
By way of introductory summary:
(a) The plaintiff is a building company. The plaintiff and the defendants entered into a Master Builders Association Home Building Contract (‘the Contract’) in March 2014.
(b) Work was carried out by the plaintiff under the terms of the Contract and on the basis of what the plaintiff says were certain agreed variations to the Contract and additional works.
(c) A dispute arose between the plaintiff and the defendants about the payments required of the defendants under the Contract.
(d) The plaintiff purported to make a referral of what it said was the dispute to an independent third party decision-maker (‘the TPDM’) under clause 32 of the Contract.
(e) The defendants maintained at the time (and continued to maintain at hearing) that the referral to the TPDM was invalid, but nonetheless ‘took part in’ the TPDM referral process by providing evidence and making submissions.
(f) The TPDM determined that an amount of $76,951.50 was payable by the defendants to the plaintiff, and that the defendants were to pay 100% of the TPDM’s fees.
(g) The defendants have not paid $76,951.50 (nor costs) to the plaintiff.
Two arguments are raised by the defendants.
The first is that, whilst the defendants accept that a dispute had arisen between the parties about certain variations before the issue of the dispute notice, the defendants say that what was referred to in that notice (and what was subsequently referred to the TPDM for determination) went beyond the matters then in dispute. The defendants say that the referral is invalid as a result. (It is not clear to me whether the defendants’ argument is that the whole referral is invalid or only that part of it which purports to deal with matters beyond what they say can properly be referred. In the result nothing turns on that.)
The second argument is that the TPDM made an error of law in his construction of a part of the Contract under which he found the defendants to be liable to make payment for variations, and the effect of that error is to invalidate his determination.
I deal with each of the arguments in turn.
The defendants’ first argument
The first argument revolves around the meaning to be given to what appears in clauses 30, 31 and 32 of the Building Contract, and in particular, to the concept of a ‘Dispute’.
Clause 30 provides for the service of a notice if a dispute arises. It is in these terms:
a)If a dispute or difference (“Dispute”) arises, whether during or after the determination, abandonment or breach of this Contract, as to any matter arising out of or in connection with the Contract, either party must serve a written notice on the other party (“the Dispute Notice”).
b)Each party must attempt to settle the dispute personally or will nominate a person with authority to settle the dispute, who shall enter into discussions within two (2) weeks of service of the Dispute Notice.
c)If the dispute is not resolved within four (4) weeks of service of Dispute Notice, the parties may agree to deal with the Dispute under Clause 31 or either party may refer it for determination by an independent third party under Clause 32.
Clause 31 provides for what is described in its heading as an ‘Alternate Dispute Resolution Process’, and if the dispute is not thereby resolved, for it to be dealt with by way of determination by ‘an independent third party’ under clause 32.
There is no dispute that what took place purported to be a determination in accordance with clause 32 by virtue of a referral under clause 30(c).
It is not necessary to set out all of clause 32. The relevant provisions for present purposes are as follows:
a)A party may only refer a Dispute for determination under this Clause if a Dispute Notice has been issued and the party has complied with the provisions of Clause 30 and (if applicable) Clause 31.
b)The determination of the dispute will be undertaken in the following manner:
i)a “Decision-Maker” will be nominated by an Authorised Nominating Authority at the request of either party;
ii)the procedural rules and timetable will be as follows:
(aa)all claims and responses must be in writing and no personal representation may be made to the Decision-Maker unless the Decision-Maker elects otherwise;
(bb)within ten (10) Days of the nomination of the Decision-Maker by an Authorised Nominating Authority and the acceptance by the Decision-Maker to determine the matter, the party referring the claim to the Authorised Nominating Authority (the “Claimant”) will serve on the other party (the “Respondent”) and lodge with the Decision-Maker the details and proof of the claim (the “Claim”);
(cc)a Claim is not limited to the terms contained in the Dispute Notice;
(dd)within ten (10) Days of the service of the Claim on the Respondent, the Respondent must serve on the Claimant and lodge with the Decision-Maker any defence to the claim or cross-claim and proof thereof (the “Response”):
(ee)within five (5) Days of the service of the Response on the Claimant, the Claimant may serve on the Respondent and lodge with the Decision-Maker a reply to the Response (the “Claimant’s Response”);
…
For the record I note that, in accordance with common drafting practice, capital first letters are used when the terms ‘Dispute’ and ‘Dispute Notice’ are first defined. The word ‘dispute’ appears subsequently without use of the capital – see, for example, clause 30(c) and the opening of clause 32(b). The inconsistency appears to be the result of oversight in the standard contract. The parties accepted that where the word dispute (without a capital) appears it was intended to refer to the defined term. The use of bold print to refer to defined terms also appears to have been inconsistently applied in the standard contract.
The defendants’ first argument was clarified by Mr Arthur in submissions to be not that the dispute referred to the TPDM went beyond what was referred to in the dispute notice, but rather that the dispute notice referred to matters beyond what was in dispute at the time it was given. In other words, there had to be a ‘pre-existing dispute’ about a matter referred to a TPDM for adjudication before a dispute notice was given, and that in the present case, there was no pre-existing dispute about all of the matters ultimately made the subject of the claim at the time the dispute notice was given.
Given the definition of ‘dispute’ in clause 30, Mr Arthur’s reference to a ‘pre-existing dispute‘ is probably more correctly expressed as a matter of a ‘dispute or difference which has arisen’.
I note that the argument just referred to is different to that raised by the defendants before the TPDM. The defendants did not argue before the TPDM that the referral was invalid because there was no pre-existing dispute about the matters made the subject of the claim at the time the dispute notice was given.
What was put to the TPDM was that the dispute referred to him for adjudication went beyond that referred to in the dispute notice. (See paragraph 11 et seq of the defendants’ submissions to the TPDM.) The TPDM dismissed that argument.
The defendants did not pursue before me their argument that the referral was invalid because the claim went beyond what was referred to in the dispute notice, although in submissions in support of his argument about context relevant to the construction pressed for by the defendants Mr Arthur maintained that was the case.
The defendants’ argument is as I have said that there must be a ‘pre-existing dispute’ about a matter before a dispute notice can be served. Thereafter the defendants’ argument continues:
So you cannot serve a dispute notice until there has been in existence a dispute or difference about a matter, and that’s critical because that expression, ‘the matter’, appears throughout the succeeding clauses, and the scheme that we propound is that you start with a dispute or difference about a matter. One party says, ‘Right, I want to formalise this. Here’s my dispute notice about that matter’.[1]
[1] Transcript of proceedings, 4 September 2020, 24.
At this point in the argument I pressed Mr Arthur on what he said that the Contract required form part of a dispute notice. He responded by accepting what I perceived as his argument – namely that the notice must stipulate the matter in respect of which a dispute or difference has arisen.
In response to an invitation from me, Mr Buckland submitted that the Contract required the notice to refer to ‘the matters which that party wishes to be the subject of the dispute resolution procedure as articulated in 31, 32’.[2]
[2] Transcript of proceedings, 4 September 2020, 25.
The parties accept that the construction of the Contract is to be determined objectively having regard to text, context and purpose in accordance with the principles set out in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; 256 CLR 104.
It is notable that the definition of dispute is broad. At its lowest, there need only be a ‘difference’ arising about a contract matter to constitute a dispute.
The Contract itself is silent as to what a dispute notice is required to contain.
That is perhaps unsurprising. In most cases it will be obvious what is in dispute. In the context of a building contract there may be very many matters in dispute varying greatly in their materiality. Given the immediate purpose of the notice is simply to commence prompt discussions to settle the dispute directly between the parties, any requirement for formality and/or particularity is likely to be counter-productive.
In addition, whilst most commonly a dispute or difference might arise about something done or not done under the Contract at a point in time which has passed, it may be that a dispute or difference arises about something presently being done or indeed yet to be done. For example, an owner may discover that a builder intends to adopt a particular approach (with which the owner does not agree) to some aspect of the works yet to be performed by the builder. Such a dispute or difference would clearly be about a matter arising out of or in connection with the Contract, although it is difficult to see how it could fit within the defendants’ concept of a ‘pre-existing dispute’.
After defining the concept of a ‘dispute’ in clause 30(a), the later provisions of clause 30 refer to ‘the dispute’. The use of the definite article (‘the dispute’) indicates that what is intended is a reference to the dispute as referred to earlier in the clause.
Clause 31 sets out one option for dealing with a dispute. It was not what was invoked in this case but is relevant for context. It opens by saying (31(a)):
a)Within one (1) week after an agreement under sub-clause 30(c) to deal with a Dispute under this Clause, the parties will decide upon:
i)The mode of further proceedings, such as negotiation, mediation, conciliation, mini-trial or independent expert appraisal;
ii)Procedural rules and a timetable for the proceedings;
iii)The selection and compensation of a neutral adviser, mediator or independent expert.
And clause 31(b) goes on to say:
b)‘If a Dispute is not resolved within four (4) weeks of an agreement under sub-clause 30(c) to deal with a Dispute under this clause, the matter shall be referred for determination by an independent third party under clause 32.’
In both cases the reference to dispute is preceded by the indefinite article (‘a Dispute’ as opposed to ‘the Dispute’).
Notably clause 31(b) makes reference to referral of ‘the matter’ for determination under clause 32 and not referral of either ‘a dispute’ or ‘the dispute’.
Clause 32 opens by reference to ‘a Dispute’ in these terms:
a)A party may only refer a Dispute for determination under this Clause if a Dispute Notice has been issued and the party has complied with the provisions of Clause 30 and (if applicable) Clause 31.’
before immediately following with a reference to ‘the dispute’ in these terms:
b)The determination of the dispute will be undertaken in the following manner:…
The reason for the different approach in clauses 30, 31 and 32 to the subject of the referral (‘dispute’ as opposed to ‘matter’) is not apparent to me and was not the subject of submissions.
I am unable to discern any principled approach to the subject matter of clauses 30, 31 and 32 to which the use of the definite article in some places and the indefinite in others can be rationally attributed with consistency.
The defendants’ submissions direct attention to what the defendants say is the purpose of the provisions in consideration. The defendants say the purpose is to ensure that
the matter moves as quickly as possible, but equally as non-prejudicially as possible to either of the parties, and that necessitates that each of the parties at each stage needs to know what is in dispute, what is the matter about which this process is being engaged in because otherwise, at the end of the day, there is nothing but a quagmire of possible matters which may or may not be adequately addressed, or have - a party had the - had a good opportunity to address in an ever-spiralling range of dispute.[3]
[3] Transcript of proceedings, 4 September 2020, 30.
The submission continues:
The whole tenor of these provisions is speed, and if it is possible that at each point in the process, as the requirements for dealing within a time period contract, gets shorter, that the parties can just bring up more and more issues for the first time, that's not, with respect, commercially sensible, and is not in the terms of Mount Bruce Mining and is a matter where …
it’s a matter for reasonable business people, commercial people.[4]
[4] Transcript of proceedings, 4 September 2020, 55.
The Defence submission also raises context by reference to clauses 30 and 31:
Now, the identification might not need to be with crystal clarity, but it needs to be an identification which allows the party who is responding to understand what it is that is being raised or being identified. The difference, the dispute about a matter is the dispute that continues through each of the subsequent clauses and sub-clauses of 30, 31, and 32. With uniform terminology, until we get to clause 32(b)(2)(bb), and I’ll come to that in a moment.
So it starts with a particular matter that has been identified. The parties are required to attempt to resolve that dispute, or agree to some means of dealing with it, and if none of that can be done within a stipulated period of time, then it is open to open to either party to skip paragraph 31 and move straight to paragraph 32. But again, within 30, 31 and 32, necessarily must be read together. As Mr Buckland in his submissions reminds us, text, context and scope and purpose of the contract is at the core of interpretation. It is not permissible to read parts of a contract without reference to the whole.’
So that the dispute that is referred to in 31 as to a particular matter must be the same dispute. That is referred to in paragraph 31 because paragraph 31 says within one week after an agreement under sub-clause 30(c), and that’s a reference to agree to deal with the dispute which bears the same meaning as previously, either party may refer that dispute and engage 31 or go straight to 32, and 31(b) says if a dispute is not resolved within four weeks of an agreement, the matter shall be referred, and that is a reference back to the matter arising out of or in connection with the contract referred to in clause 30(a).[5]
[5] Transcript of proceedings, 4 September 2020, 53.
I accept that the purpose of the processes outlined in clauses 30, 31 and 32 is the prompt resolution of disputes. I accept what I understand to be the submission about the process being non-prejudicial to the parties. To those purposes might be added an intent for the processes to be simple and efficient, consistently with what is required by the terms of the Contract and other purposes.
I am not persuaded that the purposive and contextual arguments put by the defendants unequivocally support the construction pressed for by them.
If the defence argument is accepted, it follows that a party wishing to give a dispute notice would be required to establish the existence of a dispute or difference about the matter in question in advance of the giving of the dispute notice. Mr Arthur did not say precisely how that might be achieved and it is by no means readily apparent. Clearly the invocation of the provisions cannot rest upon the parties being required to agree that there is a dispute or difference between them. One party may communicate to the other a difference about a contract matter one day or perhaps one hour before the giving of a dispute notice. On the basis of the construction pressed for by the defendants, a notice reiterating that difference would be valid, but to communicate the dispute or difference in the notice itself without the prior communication would not be.
In addition, an argument might arise about the particularity with which the pre-existing dispute or difference had been identified before the delivery of the dispute notice.
Clause 30 itself imposes no obligation to identify or particularise a pre-existing dispute and such a construction is not justified having regard to the relatively low-level process which is first triggered by the notice – that is the requirement to have discussions attempting to settle the dispute.
I do not accept that the construction pressed for by the defendants would best achieve a purpose of speedy resolution of disputes. On the contrary it may equally result in delay by way of requiring a party to restart the dispute resolution process by giving particulars of each dispute or difference followed by perhaps multiple dispute notices if several disputes or differences arise over time.
Nor do I accept the implied argument that anything other than the construction pressed for by the defendants would prejudice a party. As I understand the submission the potential prejudice is said to arise from a party potentially not being fully apprised of what is asserted to constitute the dispute or difference before the dispute resolution procedures are invoked. There are several reasons for rejecting that submission.
The first is that, in practical terms and in the context of a building contract it is likely that both parties will be acutely aware of what are matters of dispute or difference between them.
Next, the giving of the dispute notice triggers in the first instance only the obligation for personal discussions to attempt to settle the dispute. Any uncertainty about what precisely constitutes the dispute or difference can conveniently form part of those discussions.
Even in the unlikely event that, following discussions, a party felt itself not fully apprised of what is asserted to constitute the dispute or difference, the more formal processes set out in clause 32 by way of the service of a Claim, Response and Claimant’s Response mirror an exchange of pleadings and would avoid any prejudice arising.
In the further unlikely event that a party felt itself prejudiced by the lack of opportunity to resolve the dispute before a referral under clause 32 (because it was not fully apprised of what constituted the dispute or difference), the TPDM has the power to make a costs order.
I digress here to record that I reject the construction pressed on me by the defendants about the restricted meaning to be given to clause 32(b)(cc), which says, ‘[a] claim is not limited to the terms contained in the Dispute Notice’.
Mr Arthur’s submission was that the clause carries the following meaning:
The claim can be restated in other terms, in other ways it can be made more precise or it can be made more clear. You can do all sorts of things. You’re not limited to what you said in the dispute notice, except as to the subject matter of that expression.[6]
[6] Transcript of proceedings, 4 September 2020, 56.
He subsequently agreed with my summary of his submission in these terms – ‘what it means is that it can’t extend to a different subject matter’.[7]
[7] Transcript of proceedings, 4 September 2020, 56.
The submission must be rejected. The words must be given their ordinary meaning. I do not accept that the use of the word ‘terms’ in the sentence has any limiting effect. Considerations of context and purpose do not support giving the words used in that sub-clause anything other than their ordinary meaning.
It follows that a party may, as part of a referral to the TPDM under clause 32, include as part of its claim matters in addition to and going beyond what was contained in its dispute notice.
Returning to the defendants’ argument about the dispute notice, in circumstances where the Contract expressly provides that a claim is not limited to the terms of a dispute notice, the implied argument about potential prejudice because a party is not fully apprised of what constituted the dispute or difference giving rise to the original dispute notice must be rejected.
I reject the argument that, on its proper construction, the Contract required the dispute notice to constitute only matters which were the subject of a pre-existing dispute.
It follows that I reject the argument that the referral to the TPDM was invalid because the dispute notice comprised matters which did not constitute a pre-existing dispute.
There is also a second basis for rejecting the argument that the referral was invalid because of the contents of the dispute notice.
It is that, even if I am wrong about the proper construction of what the Contract requires of the dispute notice, I am not persuaded on the evidence that the dispute notice in this case included matters of dispute or difference which had not previously been raised with the defendants.
I note that the defendants did not argue before the TPDM that the dispute notice included any matters of dispute or difference of which they were previously unaware. No explanation was offered for defendants not having done so.
It is apparent from the contents of the joint tender bundle that there were extensive and wide-ranging exchanges between the parties and their representatives about difficulties with the Contract.
It is accepted that what purports to constitute the dispute notice is a letter sent by email from the solicitors for the plaintiff to the solicitors for the defendants dated 15 June 2017. Including the annexure it comprises some five pages and appears at pages 62 to 66 inclusive of volume three of the joint tender bundle.
The pleadings did not particularise the matters which the defendants say formed part of the claim referred to the TPDM which were not ‘pre-existing disputes’ referred to in the dispute notice.
Nor did Mr Arthur do so in submissions, beyond a statement referring to the amount of $82,000 and saying that ‘the additional amount had never previously been in dispute’.[8]
[8] Transcript of proceedings, 4 September 2020, 13.
I was left with the impression that Mr Buckland was somewhat caught by surprise by the different argument raised about the contents of the dispute notice but, in the end result, no application for an adjournment was made and he made submissions to meet the argument as put.
The letter of 15 June 2017 describes itself as a ‘Dispute Notice issued pursuant to clause 30 of the home building contract’. It does not use the formal or legalistic language sometimes associated with notices given pursuant to express contract terms. Putting aside for a moment what might have been contained in the redacted part of it, it might be said that it does not purport to expressly give the defendants formal notice of anything. No submission was made (sensibly) that it was ineffective for that reason.
As already noted, clause 30 of the Contract, in effect, defines a dispute as ‘a dispute or difference … [arising] … as to any matter arising out of or in connection with the Contract…’.
Bearing that definition in mind, the letter comprising the dispute notice can be seen to relevantly refer to the following:
(a) A representation by the defendants, asserted by the plaintiff to be incorrect, that the defendants owned rights to certain plans provided to the plaintiff;
(b) What are described as allegations made by the defendants ‘regarding the liquidated damages claim’;
(c) What is described as a delay by the defendants in the submission of materials ‘to achieve the Certificate of practical completion’;
(d) What is described as an allegation (by the defendants) about the date for practical completion and an assertion that the defendants claim for liquidated damages is unfounded;
(e) Several specific items (totalling $21,500.00) referred to as ‘allegedly paid for’ by the defendants;
(f) In response to the items just referred to, a range of assertions including that certain things supplied by the defendants were defective and had been replaced with items supplied by the plaintiff, certain costs had not been included in the ‘Contract quotation’, certain work forming part of the Contract had been ‘replaced’ with different work at the request of the defendants, and that the costs of the private certifier resulted from a requirement to lodge two separate development applications;
(g) A range of assertions and allegations about ‘variation works’, upon which it is not necessary to elaborate for present purposes beyond saying that the letter asserts that ‘the total cost of additional works undertaken [by the plaintiff] at [the defendants’] direction (including variation works) is $82, 198.38’ and encloses what is described as an ‘Extra cost to contract chart’;
(h) That additional costs were incurred in the construction of the house, described as ‘separate to those included as variations and detailed in the Budget Overrun Chart’, and an assertion that those additional costs ‘are as a result of the changes and amendments to plan works requested by your clients post commencement of building works, and include changes to plumbing, excavation and electrical works (associated with the installation of underground electrical supply to the premises), tiling works, as well as energy rating upgrades, extension of the house, what was described as an amendment to a wall, and installation of a water tank.’ Importantly, this part of the letter which comprises the dispute notice goes on to say ‘[t]he additional cost of works were not, as suggested by you, a result of incorrect pricing of works by [the plaintiff]’ (emphasis added);
(i) That the plaintiff entered into an agreement for payment of an amount of $40,000.00 ‘in respect of all (agreed) variation works, and for additional costs for work over and above the quoted contract works’. (I was informed without objection that this agreement had not been complied with); and
(j) That the actual costs incurred which exceed the contract sum are $82,198.38, which figure does not include builders margin or interest.
As an aside it can be seen from the above that the material suggests some compromise between the parties may have been reached before the referral to the TPDM. It was not put in submissions that any such agreement estopped the referral or otherwise prevented or affected the parties’ rights and obligations as argued before me. It is not pressed that anything in the nature of a compromise between the plaintiff and the defendants prevented the plaintiff from pursuing its claim before the TPDM or this court.
Contrary to the submission made on the defendants’ behalf, the letter comprising the notice of dispute, at least in its redacted form as put into evidence, does not make a claim or demand for payment of any fixed amount or attributable to any particular aspect of the plaintiff’s claim. It does however refer to many matters arising out of or in connection with the Contract, and not only the variations which are conceded by the defendants to be the subject of a ‘pre-existing dispute’.
It is clear from the language used in the letter comprising the dispute notice that it describes matters of dispute or difference. In addition, it is apparent from the language used as well as its overall tenor that the matters raised in it have been the subject of previous exchanges between the parties.
Having regard to all of the above, even if the Contract required of the dispute notice that it refer only to what the defendants describe as pre-existing disputes (or differences), I am not persuaded in this case that it does otherwise.
The defendants’ second argument
I turn to the second of the defendants’ arguments.
It is that the award determined by the TPDM relies upon a construction of clause 17 of the Contract (which deals with variations) which is wrong at law. As such, according to the submission, the determination has not been made according to law and is invalid.
The defendants accept that the variation argument was a ‘pre-existing dispute’.
What the defendants say is the proper construction of clause 17 was an argument put to the TPDM but not accepted by him.
What the defendants seek therefore is, in effect, to reagitate an argument which was unsuccessful before the TPDM.
The legal principles which apply to consideration of what the defendants seek are conveniently set out in the following extract from the decision of Mossop J’s Foote & Anor v Barton Property Partnership No 2 [2014] ACTSC 330:
[62] There was no dispute as to the principles to be applied to the review of an expert determination. They are set out in the reasons of McHugh JA in Legal & General Life of Australia v A Hudson P/L (1985) 1 NSWLR 314 at 335-336 and subsequent decisions. Expert determination is a process established by contract where an independent expert decides an issue or issues that exist between parties. The authority for the process is derived from the contract between the parties. The contract will often declare the outcome of the expert determination process to be final, binding and conclusive between the parties. In the present case it is said to be “final and binding”: cl 12.4. The expert determination process is usually intended to provide an informal, effective and speedy means of resolving disputes between parties to a contract. It is of particular benefit when the dispute is of a technical or specialised character.
[63] Because it is open, subject to statute and questions of public policy, to parties to bind themselves to a dispute resolution process, courts will recognise and give effect to decisions of experts in the same way that they recognise and give effect to contracts. Because of the source of power for the expert determination process, where an expert has made a determination under a contract, the question for a court is not whether the determination is correct but instead whether the expert determination was made in accordance with the contract. This means that there is potential for an expert determination to be clearly wrong but still be in accordance with the contract.
[64] As a consequence, where there is a contest over whether or not an expert determination under a contract is binding, an error on the part of the expert will only be relevant if it discloses that the determination was not reached in accordance with the contract. The correct approach will be to identify from the contract what were the relevant requirements for a binding expert determination and to decide whether they have been met. If they have been met then the determination will be binding notwithstanding that an error may be identified in the determination. If they have not been met then the determination will not be binding because of that fact.
[65] Two other points can usefully be made about expert determinations. First, where a contract does not require any particular process to be followed by an expert then the process to be followed is in the discretion of the expert, including the extent to which, if at all, the parties are permitted to make submissions: Badgin Nominees Pty Ltd v Oneida Limited [1998] VSC 188 at [77]; McGrath v McGrath [2012] NSWSC 578 at [12]; 500 Burwood Highway Pty Ltd v Australian Unity Limited [2012] VSC 596 at [168]; Glenvill Projects Pty Ltd & Ors v North North Melbourne Pty Ltd & Ors [2013] VSC 717 at [50]. Second, subject to the terms of the contract, actual bias, lack of honesty or good faith will vitiate an expert determination because a requirement for the expert to act honestly and in good faith will be implied into the contract: Legal and General Life at 335; McGrath v McGrath at [12].
In the present case clause 32(b)(ii)(ll) of the Contract provides that the determination of the TPDM ‘shall be final and binding upon the parties …’. The parties accepted that the principles to which I have referred apply to the determination of the argument under consideration.
The defendants’ argument in this case is conveniently summed up in the following submission by Mr Arthur:
‘MR ARTHUR: And the construction of a contract or the proper construction or the correct construction of a contract is a matter of objective fact. There is only one correct construction of a contract. It is not open for there to be a number of interpretations of contracts on which we can all agree to disagree. At the end of the day, the contract is what it says, and that is as determined by a court.
So that if the construction that I put to you in terms of the necessity for there to be a cost variation notice issued by the builder before the builder is entitled to make a claim for that amount, then that’s a matter which must be followed if the builder is able to claim.
The reason I say must, and there are in the authorities two ways in which this is put, in relation to the expression ‘final and binding’, the authorities say that that’s a matter which the court - withdraw that. The fact that it is said to be final and binding, the determination, is no more than a stipulation that it’s the contract that you must look to and it’s the contract which is final and binding.
HIS HONOUR: It’s final and binding provided it’s been done in accordance with the agreed provision of the contract.
MR ARTHUR: That's so, your Honour, and there are examples in the cases’[9]
[9] Transcript of proceedings, 4 September 2020, 58.
I paraphrase the argument as being that a determination which is based upon an incorrect interpretation of a contract provision is not a determination ‘in accordance with the Contract’ and is, as a result, invalid.
I was referred to several authorities said to support the defendants’ argument.
As I remarked during the course of submissions, I was surprised that none of the authorities to which I was referred were directly on point. The relevance of all of them relied upon the application of deductive reasoning.
My own research (or more accurately that of my Associate) uncovered the decision of Hammerschlag J in Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576 which is more directly on point.
In Lainson the parties had entered into a building contract and a supplementary deed, which contained a dispute resolution provision providing for expert referral. The rules applying to the expert referral included that the expert’s determination was final and binding between the parties. A dispute arose. One party (Lainson) terminated the Contract. Notices of dispute were exchanged and the dispute referred to an expert. The expert determined that the purported determination by Lainson was invalid because its power to do so was subject to an implied duty to act reasonably and in good faith, and that it had breached that duty.
In the argument before Hammerschlag J, Lainson raised two arguments. Both were premised upon an argument that the expert was wrong, as a matter of law, in finding the implied duty to act reasonably and in good faith.
The first argument is that the expert was obliged to determine the dispute ‘according to law’ which expression requires him not to make any mistake of law which affected the result. It is the same argument pressed before me by the defendants in this case.
The second argument was that the Court had a power to interfere because the expert had, on the face of the record, made a mistake of law. No equivalent argument has been run before me in this case, and it was an argument which was unsuccessful before Hammerschlag J in any event.
It is convenient to set out at length some parts of the reasons in Lainson, because they go to some of the matters raised in exchanges with counsel during the hearing.
[43] The question is: what did the Contract require the Expert to do in requiring him to determine the dispute ‘according to law’? This is a matter of construction.
[44] The meaning of the words used is to be determined objectively. That is, by what a reasonable person would have understood them to mean. It requires attention to the language used by the parties, the commercial circumstances which the document addresses, the purpose of the transaction and the objects which it was intended to secure. The whole of the instrument has to be considered. Preference is given to a construction supplying a congruent operation to the various components of the whole and which does not make commercial nonsense or work commercial inconvenience: see, Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350-352; Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522 at 29; International Air Transport Association v Ansett Australia Holdings Ltd (2008) 234 CLR 151 at 160; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at 657; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at 117.
[45] Sometimes, where an expert determiner makes a mistake, the dividing line between the expert having gone outside the ambit of what the contract required, on the one hand, and making a mistake or reaching a wrong result after doing what the contract required, on the other, is not bright. That is not this case.
[46] Lainson argues that the words ‘according to law’, used in Rule 5.1, mean by the correct application of only legally correct principles. Or, put another way, in a manner free from legal error affecting the result.
[47] This argument must be rejected.
[48] The meaning of the words ‘according to law’ contended for by Lainson is akin that it traditionally has when a Court or Tribunal overturns an inferior Court or Tribunal for having made a mistake of law and remits the matter for hearing in accordance with the law as stated by the superior body: see, for example, Plaintiff S297/2013 Minister for Immigration and Border Protection (2015) 255 CLR 231 at 247. In this sense, it is used in the context of where an inferior body must, to discharge its functions validly, apply the substantive law of the land.
[49] In the context in which they appear here, however, the words ‘according to law’ mean in the manner which the law requires a person in the position of the Expert to go about the mandated task, so as to give it contractual efficacy; for example, honestly, without bias or collusion, and while not intoxicated. There is no suggestion that the Expert acted in any way not ‘according to law’ in this sense. Significantly, the words appear in that part of the Rules headed ‘The Procedure’.
[50] The construction contended for by Lainson works commercial inconvenience. Its acceptance would have the consequence that the Determination is, in effect, subject to appeal on any and every question of law determined or legal precept relied on by the Expert, which, if determined or seen differently, would lead to a different result. A mistake of law could include misapplication of the law of evidence. A party seeking to sustain the Determination might raise, in a manner similar to the way it would raise by way of a Notice of Contention in an appeal, alternative bases in law upon which the Expert could have reached the result. The construction would burden the Expert with an obligation to try the Dispute as if he were acting as a court of law.
[51] Lainson’s construction would give a far wider right of review of the Determination than there would be if it was an arbitral award. Rule 5.2 makes it clear that the parties did not intend the Contract to provide for arbitration. Also, as mentioned earlier, they substituted the words ‘expert determination’ for the word ‘arbitrator’ in cl 42 of the Contract.
[52] I consider it unlikely that reasonable persons in the position of the parties would have understood the words of the Contract to bear the meaning contended for by Lainson. It is inimical to two of the principal commercial objects that expert determination is intended to secure, namely, celerity and finality.
[53] It is to be observed that Rule 5.5 provides that any dispute arising between the parties in respect of any matter concerning the Rules or the Process, (including the Expert’s jurisdiction) shall be submitted to and determined by the Expert. This would include the present controversy as to the reach of Rule 5.1, and is further indication of the contractual intention of the parties that the Expert be the final arbiter.[10]
[10] Lainson Holdings Pty Ltd v Duffy Kennedy Pty Ltd [2019] NSWSC 576, [43]-[53].
The decision is Lainson can be distinguished in certain respects.
The first is that, so far I can see, the Contract in this case does not include any express obligation on the TPDM to determine the dispute ‘according to law’. No submissions were made about the significance, if any, attaching to the absence of those words in the relevant contract provision. Given the authorities relied upon by both parties it appears that both parties proceeded on the not unreasonable assumption that such an obligation applied in any event. This point of difference does not detract from the persuasiveness of the decision in Lainson.
The second is what is said in paragraph 53 of Lainson as set out above. By way of background, the expert in Lainson was appointed pursuant to certain rules applied by the former Institute of Arbitrators and Mediators. Rule 5.1 is the rule requiring that the dispute be determined according to law. Rule 5.5 empowered the expert to also determine any dispute between the parties ‘in respect of any matter concerning these Rules or the Process (including the Expert’s jurisdiction)’. No directly equivalent provision appears in the Contract in this case. The relevant rule is, in any event, referred to somewhat in passing by Hammerschlag J only as ‘a further indication of the contractual intention of the parties that the Expert be the final arbiter’. Again this point of difference does not detract from the persuasiveness of the decision in Lainson.
Despite the points of difference referred to, I respectfully agree with Hammerschlag J on the application of the relevant legal principles in cases, such as the present, where what is asserted is an error of law in the construction of a contract by a third party expert, and I adopt his Honour’s reasoning, mutatis mutandis, for doing so.
It follows that I reject the defendants’ argument that the referral is void because of error on the part of the TPDM.
That conclusion means that any consideration of the argument on the proper construction of the variation provisions (clause 17) of the Contract will not affect the outcome of these proceedings. Nevertheless, for the sake of completeness I will deal with the arguments raised.
The variations argument was raised before the TPDM. He dealt with it at paragraphs 17 to 25 of his reasons. His conclusion was, in effect, that whilst clause 17(c) contemplated the service of a variation notice, doing so was not a necessary pre-condition to recovery of recompense for the variation work under clause 17(e) and 17(f).
The submissions on behalf of the plaintiff before me describe clause 17(c) as a ‘default pricing scheme’, and dealt at some length with the obligation on the defendants (as owners) to prepare a variation notice where they had required a variation. Whilst the submissions before me elaborate on what obligations exist on the part of the defendants in relation to variations, they are not inconsistent with the conclusion reached by the TPDM about the effect of clauses 17(e) and 17(f).
I agree with the conclusion reached by the TPDM and his reasons for doing so and I adopt them.
It follows that, had I been satisfied that the determination must be set aside I would have in any event reached the same conclusion as the TPDM in relation to the construction of clause 17 of the Contract.
Conclusion
In its claim, the plaintiff seeks judgment against the defendants in the amount of $82,039.00 – a figure which includes the TPDM’s costs of $5,087.50. By way of a variation to its claim, the plaintiff also seeks ‘interest in accordance with Clause A15 of the Contract and the expert’s determination at 20% per annum from 31 August 2018 or, in the alternative, interest in accordance with Schedule 2 of the Court Procedures Rules 2006 from 31 August 2018’.
The rate of interest is very high by current standards and I would not make an order to that effect if I had a discretion to decline to do so, but I have no such discretion. The Contract expressly provides for interest at that rate, and the TPDM’s decision expressly reflects the Contract’s terms. I have calculated interest at the 20% rate on the amount of the claim, excluding the costs of the TPDM. I have allowed interest on the costs of the TPDM at the Schedule 2 rates.
Having said that, the rights of the parties under the Contract merge in the judgment delivered today such that the rate will not automatically apply to monies payable under the judgment after today. Rather, the applicable rate in Schedule 2 to the Court Procedure Rules 2006 will apply after 28 days. That rate is currently 6.1%. In those circumstances it is appropriate to calculate and fix the amount payable for interest under the Contract up to today’s date and I have done so.
I therefore give judgment for the plaintiff against the defendants in an amount of $121,124.70, calculated as follows:
Amount of claim (excluding TPDM costs) $76,951.50 Interest at 20% per annum for the period 31 August 2018 to 26 February 2021 (910 days at $42.16 per day) $38,365.60 TPDM costs $5,087.50 Interest on TPDM costs for period of 3 May 2018 to 26 February 2021 (1,031 days at the rates provided for in Schedule 2) $721.13 TOTAL $121,124.70
I heard no argument as to costs. In the circumstances I make the following orders:
(a)the defendants are to pay the plaintiff’s costs; but
(b)order (a) does not take effect if either party contacts my Associate within 14 days to re-list the matter to seek some other costs order.
| I certify that the preceding one hundred and two [102] numbered paragraphs are a true copy of the Reasons for Decision of his Honour Magistrate Morrison Associate: Samuel Cass Date: 26 February 2021 |
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