D & M (Australia) Pty Ltd v Crouch Developments Pty Ltd - [2010] WASC 130

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: D & M (AUSTRALIA) PTY LTD -v- CROUCH DEVELOPMENTS PTY LTD [2010] WASC 130

CORAM: BLAXELL J

HEARD: 18 NOVEMBER 2009

DELIVERED : 11 JUNE 2010

FILE NO/S: GDA 2 of 2009
ARB 8 of 2009

MATTER :Commercial Arbitration Act 1985 (WA)
Appeal against the interim award of Roger K F Davis given 7 May 2009 in an Arbitration

BETWEEN: D & M (AUSTRALIA) PTY LTD
Appellant
AND
CROUCH DEVELOPMENTS PTY LTD
First Respondent
ROGER K F DAVIS
Second Respondent

ON APPEAL FROM:
Jurisdiction              :  COMMERCIAL ARBITRATION
Coram  :Mr R K F Davis
Citation  :D & M (AUSTRALIA) PTY LTD and CROUCH

Catchwords:

Arbitration - Award of arbitrator - Application for leave to appeal on question of law - Whether various findings by arbitrator provide strong evidence of or amount to a manifest error of law

Arbitration - Application to set aside award for misconduct - Whether arbitrator breached rules of natural justice by determining an issue not pleaded - Factors governing the exercise of the discretion to set aside award

Legislation:

Commercial Arbitration Act 1985 (WA), s 38, s 42, 43

Result:

Application for leave to appeal dismissed - Application to set aside award for misconduct allowed in part - Matter remitted back to arbitrator for reconsideration of decisions as to costs

Category: B

Representation:

Counsel:

Appellant:     Mr S D Pentony
First Respondent           :     Mr B P Wheatley
Second Respondent       :     No appearance

Solicitors:

Appellant:     Lavan Legal
First Respondent           :     Mossensons
Second Respondent       :     No appearance

Case(s) referred to in judgment(s):

Anaconda Operations Pty Ltd v Fluor Australia Pty Ltd [2003] VSC 275
Banque Commercile v Akhil Holdings Ltd (1990) 169 CLR 279
Bovis Lend Lease Pty Ltd v W G E Pty Ltd [2002] NSWSC 939
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Dare v Pulham (1982) 148 CLR 658
Doran Constructions Pty Ltd v Health Administration Corp (1994) 12 BCL 59
Edible Oil v Jayant Oil (1982) Lloyds LR 95
Forsayth NL v Australasian Gold Mines NL (Unreported, WASC, Library No 920420, 18 August 1992)
Gas & Fuel Corporation of Victoria v Wood Hall Ltd [1978] VR 382
Imperial Leatherware v Macri (1991) 22 NSWLR 653
Kane Constructions Pty Ltd v Sopov [2005] VSC 237
King v Thomas McKenna Ltd [1991] 2 QB 480
Lamac Developments Pty Ltd v Devaugh [2003] 27 WAR 287
Mackay v Dick (1881) 6 AC 251
Melbourne Harbour Trust v Hancock (1927) 39 CLR 570
New Generation Enterprises Pty Ltd v WA Planning Commission [2007] WASCA 89
Oil Basins Ltd v BPH Billiton [2007] VCA 255
Peter Schwarz (Overseas) Pty Ltd v Morton [2003] VSC 144
Promenade Investments Pty Ltd v New South Wales (1991) 26 NSWLR 203
Qantas Airways Ltd v Joseland (1986) 6 NSWLR 327
Secured Income Real Estate (Aust) Ltd v St Martins Investments (1979) 144 CLR 596
Shirley Sloan Pty Ltd v Merril Holdings [2000] WASC 99
Thiess Contractors Pty Ltd v Water Corporation (Unreported, WASC, Library No 970561, 22 October 1997)
Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165
Turner Corporation Ltd v Austotel Pty Ltd (1994) 13 BCL 378
Ukrainian Association v Squire Constructions Pty Ltd [2004] WASC 4

BLAXELL J: This is an application for leave to appeal from the award of the second respondent arbitrator which determined a building dispute between the appellant (D & M) and the first respondent (Crouch). D & M also seeks to have the award set aside on the grounds of procedural irregularities said to amount to 'misconduct' by the arbitrator.
The dispute arose from an agreement between D & M (as proprietor) and Crouch (as builder) for the construction of 27 apartments at Mount Hawthorn. Although the agreement was in a standard form, it was complicated by the fact that a substantial proportion of the work was to be performed by D & M. In this regard, the agreement was made on the common assumption that D & M would import some of the construction materials from China, and also engage Chinese and local workers to install those materials. The building work proceeded in accordance with these arrangements, but prior to completion of construction D & M purported to terminate the contract for alleged breach by Crouch.
This resulted in a dispute between the parties which was referred to arbitration. In the arbitration proceedings Crouch claimed outstanding construction costs and damages for wrongful termination of the contract. D & M counterclaimed for alleged overpayments and damages for failure to bring the works to practical completion. The arbitrator's award upheld Crouch's claims, and awarded nominal damages. The award also dismissed D & M's counterclaims. These outcomes were largely based upon the finding that the contract had an implied term that the proprietor would supply materials and perform work in such a way as 'not to compromise or create any inconsistency' with the builder's performance of its obligations. However, this implied term had not been pleaded nor referred to in arguments by counsel.
In these circumstances D & M contends that it was denied procedural fairness. It also contends that the finding as to the implied term was a manifest error of law. Although there are other issues raised by D & M, it is substantially on the basis of these two contentions that the present applications are to be determined.

The factual background

At all material times D & M was the owner of land at 84/90 Scarborough Beach Road, Mount Hawthorn on which it wished to develop a 27 unit apartment complex. The principal shareholders of D & M were two Chinese businessmen (the Tam brothers) who did not speak English. A 10% shareholder in the company was Mr Kevin Chen, a migration agent in Australia, who undertook all of the relevant negotiations on its behalf.
By January 2006, D & M had engaged a registered builder (Mr William Wong) for the development, but had also resolved to replace him with another builder. Accordingly, Mr Chen approached Mr Darrell Crouch and requested that his company (the first respondent) undertake the project on a cost plus basis.
During the negotiations that followed Mr Chen said that the Tam brothers wished to import materials for the project from China and bring to Australia seven Chinese workers who would install those materials. Mr Chen also said that D & M intended to rent a nearby warehouse for the purpose of storing the imported materials. Mr Crouch insisted that the materials imported would need to meet Australian standards as well local authority requirements, and Mr Chen assured him that this would be so. The parties also discussed a 'finishes scope schedule' prepared by Mr Chen which identified items to be imported and installed by D & M, (using both local and Chinese labour). Mr Crouch and Mr Chen did not at any stage discuss the time for completion of the development.
On 24 January 2006 Mr Crouch submitted a quotation for a cost plus contract with a fixed fee of $250,000. This fee was based on William Wong's estimate that the project would cost $2,333,894. Mr Chen accepted the quotation and on the same day asked that Mr Crouch immediately prepare a contract for execution. Mr Crouch did as asked and produced an MBA standard form costs plus contract with the 'finishes scope schedule' annexed.
Mr Crouch left blank in the document the space in the appendix which provided for the time allowed for completion. However, while the document was being signed Mr Chen asked that 52 weeks be inserted and said that this period was required for 'immigration reasons'. (The arbitrator specifically made no finding as to whether or not that was in fact the reason why Mr Chen wanted the period of 52 weeks inserted). Mr Chen also assured Mr Crouch that if completion was not achieved within 52 weeks there would be no repercussions for Crouch. Mr Crouch then inserted 52 weeks in the blank space as the time allowed for completion of the work. The contract was duly executed by both parties.
In light of the issues raised in the present proceedings it is relevant to note the following express terms of the contract between the parties:
5.The Builder shall commence the Works within ten (10) days of the issue of the Building Licence by the Local Authority concerned or the date upon which the Proprietor delivers to the Builder evidence of his title to the land as required by Clause 3 of these Conditions, whichever is the later. He shall complete the Works within the number of weeks stated in the Appendix hereto from the date of commencement.
…
11.Should the progress of the Works be delayed by any of the following causes:
(a)On account of authorised variations or extras;
(b)In consequence of any notice given by the Builder under Clause 12;
(c)By a suspension of the Works under Clause 12;
(d)By inclement weather;
(e)In consequence of proceedings being taken or threatened by, or disputes with adjoining or neighbouring owners or residents;
(f)By reason of any civil commotion, or combination of workmen or strikes or lock‑outs affecting any of the trades employed upon the Works or affecting the manufacture or supply of materials for the Works;
(g)By any other matter, cause or thing beyond the control of the Builder;
THEN in any such case the Builder shall within seven (7) days notify the Owner in writing of the same, and shall be entitled to a fair and reasonable extension of the time provided for completion of the Works. Any such notification shall state the cause and the extent of the delay. Should the Owner not dissent in writing from such notification within seven (7) days after the date when he shall be deemed to have received any such notification, the Date for Practical Completion of the Works shall be extended by the period claimed in the said notification.
…
13.If the Builder shall make default in any of the following respects, viz:
…
(b)If he fails to proceed with the Works with due diligence and in a competent manner;
…
AND if in the case of any such default as aforesaid that is capable of remedy he shall continue such default for ten (10) days after notice in writing specifying the same and stating the Proprietor's intention of determining the Builder's employment has been given to him THEN the Proprietor may without prejudice to any other rights or remedies by notice by registered mail determine the employment of the Builder.
…
17.(a) The Builder may, … at intervals of not less than each four (4) weeks, submit to the Proprietor a statement accompanied, if the Proprietor shall so require, by wages sheets, delivery dockets, invoices and other relevant data in the Builder's possession setting out the costs of labour and materials provided by the Builder and all other items claimed … in respect of the period covered by the statement and shall without due delay give the Proprietor all such further information as the Proprietor reasonably may require in relation to the statement.
(b)In the case of Statements during the progress of the Works the Proprietor shall, within ten (10) days after the receipt thereof and of any further information reasonably required by him pay to the Builder the amount thereof plus a proportion of the Builder's fee calculated on such amount at the rate stated in the Agreement.
Under the contract, D & M was to pay Crouch the 'actual cost' of the works together with a flat fee of $250,000. (In this regard Crouch was to be entitled to '0%' in the event of any additions or alterations to the works). Work on construction was to commence within 10 days of the issue of the building licence. The contract also provided for regular progress claims at intervals not less than every four weeks, with payments to be made within 10 days of submission of each claim and receipt of any further details that were reasonably required.
The building licence issued on 5 May 2006, and construction work commenced almost immediately with the erection of a prefabricated site office which had arrived in containers from China. From the beginning of the project it was supervised not only by Crouch, but also by Mr Chen and another supervisor engaged by D & M (Mr Fan) who could speak Chinese. As well as Crouch's subcontractors and employees there were Chinese workers on site (principally installing the materials imported from China), along with other local workers and tradesmen engaged and supervised by D & M. The Chinese workers did not speak English and could only be supervised through Mr Fan who was not very competent in this task. Crouch eventually demanded of D & M and achieved Mr Fan's removal from the site.
Many other problems emerged during construction including the poor quality and late arrival of the materials imported from China, as well as poor quality of the workmanship performed by those engaged by D & M (whether Chinese or local). These and other such problems caused significant delays, and in this regard the arbitrator found that:
D&M was primarily cost driven and appears to have believed from the outset that it could use its assets and contacts in China to achieve great savings and therefore great profits on this project. It intended to import cheap materials from China and have them installed with cheap labour. That objective was, unfortunately for D&M incompatible with the engagement of an Australian builder and with Australian building standards. The result was a chaotic worksite on which 2 almost disparate workforces were attempting to complete the same overall task. There was a great deal of wasted money and effort. From Crouch's perspective, it being a cost plus contract, D&M could, with some obvious qualifications, organise or disorganise the site as it wished, so long as it continued to pay for all costs and expenses incurred. In my opinion, the evidence establishes beyond doubt that the delays that occurred on this building site were, in the main at least, caused by the actions and omissions of D&M. (par 26.2 of Reasons)
D & M through Mr Chen also developed a strong antipathy towards Crouch's plumbing subcontractor, All State Plumbing. From October 2006 Mr Chen regularly demanded that the plumbing subcontractor be replaced but Mr Crouch resisted this because there were no contractual grounds for taking that step. Crouch did not want to be exposed to any action by All State Plumbing for wrongful termination of the subcontract and advised D & M that it was necessary to persevere with All State Plumbing.
Ultimately, this issue resulted in D & M terminating the contract with Crouch. By letter to Crouch dated 8 April 2008, D & M's solicitors demanded that All State Plumbing be immediately dismissed. Mr Crouch responded to the effect that there would be major repercussions and delays if All State Plumbing was dismissed given that 82% of their work was complete. That response prompted the following notice of default dated 11 April 2008:
Take notice that, pursuant to clause 13 of the Contract, you are in default in that:
1.You have failed to proceed with the works with due diligence and in a competent manner, and in particular:
1.1The completion of the works is long overdue;
1.2There is insufficient work being carried out to bring the works to completion and you are failing to take any or any appropriate action to cause the works to be brought to completion;
Unless you remedy your default, the Proprietor intends to terminate the Builder's employment under the contract at the expiration of 10 days from the date of this notice.
On 29 April 2008 D & M's solicitors issued a notice of termination citing a failure to remedy the default set out in its notice of 11 April 2008 and stating that by failing to remedy the default, Crouch had also repudiated the contract. The arbitrator nevertheless found as a fact that:
D&M terminated its contract with Crouch because Crouch until 28 April 2008 refused to terminate its subcontract with All State Plumbing and for no other reason. (par 25 of reasons)
The arbitrator also found that D & M was not contractually entitled to demand that Crouch terminate its subcontract with a subcontractor, and that 'Crouch's conditions for doing so nonetheless were legally and commercially reasonable'. Accordingly, the arbitrator held that there was no default which entitled D & M to terminate the contract (par 25 of reasons).
Between 31 March 2006 and 11 March 2008 Crouch made a total of 33 progress claims. The first 32 of these progress claims were paid by D & M in full. Claim number 33 was for the sum of $143,997.77, and Mr Chen instructed that $142,795.77 of that claim be paid 'because the costs were reasonably incurred'. Mr Chen's stated reason for rejecting subsequent progress claims was that the costs had not been reasonably incurred. The arbitrator inferred from this evidence that 'Mr Chen had instructed the previous claims to be paid in full on the same basis'. It was also the arbitrator's finding that:
D&M's refusal to pay on Crouch's invoices commenced at the time a dispute arose between the parties which led to D&M purporting to terminate the contract on 29 April 2008. The real reason for refusal to pay at that time was, quite obviously, the dispute, not any suggestion that the costs had not been reasonably incurred. (par 5 of reasons)

The claims and counterclaims in the arbitration

At a preliminary conference with the arbitrator it was agreed that the issues between the parties would be fully pleaded and particularised. Nevertheless, over the course of the final hearing these issues 'crystallised significantly', and in the end the arbitration was determined by reference to a list of essential issues prepared by D & M's counsel.
In its amended points of claim Crouch claimed $377,662.88 being the balance outstanding in respect of the progress claims submitted under the contract. It also pleaded that D & M had repudiated the contract, which repudiation it accepted. It also claimed damages and a declaration that D & M's notice of termination dated 29 April 2008 was of no effect.
In its defence and counterclaim D & M pleaded that practical completion under the contract was due on 19 May 2007. As at 29 April 2008 the works were still a long way from practical completion and were not proceeding in a diligent and competent manner. Crouch did not progress the works in the period between the notice of default and the notice of termination, and this conduct constituted a repudiation of the contract. By reason of these matters D & M had terminated the contract on 29 April 2008.
D & M also counterclaimed for alleged overpayments made to Crouch and for damages for failure to complete the works in a proper and workmanlike manner within the stipulated timeframe. (By the end of the arbitration hearing the amounts claimed under these headings had reduced to $346,818.86, and $637,708.72 respectively).
In light of the issues raised in the present proceedings, it is relevant to note that Crouch's defence to the counterclaim included the following pleas:
11.Prior to 24 January 2006 and in order to induce the Claimant to enter into the contract, Kevin Chen on behalf of the Respondent, represented to Darrell Crouch on behalf of the Claimant, that:
(a)the Respondent would supply, fix and fit materials to be brought in from China; in accordance with Australian Standards and with the work to be carried out with reasonable competence, skill and care;
(b)the materials brought in from China would be stored in a warehouse close to the building site so they would not delay the progress of construction;
(c)the Respondent would bring in seven (7) qualified, competent tradesmen from China to work on the site to ensure fast progress of construction;
(d)a 12‑month completion date was required for the contract to assist with a migration application being made on behalf of the two (2) Chinese directors of the Respondent by Kevin Chen;
(e)should construction exceed 12 months, there would be no repercussions on the Claimant.
12.In reliance upon the representations referred to in paragraph 11 above, the Claimant entered into the contract referred to in paragraph 12 of the Amended Points of Counterclaim, which was not executed by the Respondent until a later date.
13.Further or alternatively, it was a term of the contract, by reason of the finishes scope schedule showing materials imported from China supplied to the Claimant prior to entry into the contract and the representations referred to in paragraph 11 above, that the Respondent would import and supply materials from China, which the Respondent's Chinese workmen would fit and install with reasonable care and skill.

The arbitrator's reasons for the award

In addition to the facts already outlined, the arbitrator made further factual findings that are relevant to the issues raised in the present proceedings. Firstly, with the exception of an amount of $2,235, all of the progress claims made by Crouch were for 'actual costs' reasonably incurred in the construction of the project (pars 10 and 11 of reasons). Secondly, various items of defective work identified by expert witnesses were the responsibility of D & M and not Crouch (pars 33 ‑ 35 of reasons). There were also further findings as to a number of specific alleged defects in workmanship which I will refer to in connection with grounds of appeal 6, 7 and 8 set out below.
With regard to the delays in construction I have already noted the arbitrator's finding that these were 'in the main at least, caused by the actions and omissions of D & M' (par 26.2 of reasons). This being so, the arbitrator also found that D & M could not complain that Crouch was running behind the time fixed by the contract for completion (par 27 of reasons).
The remaining findings by the arbitrator largely involved issues of mixed law and fact. In making these findings, the arbitrator did so by reference to the list of 'essential issues' as formulated by D & M's counsel. Perhaps the most significant of these issues was the following one:
Was it a term of the contract that the respondent would import and supply materials from China which the respondent's Chinese workmen would fit and install with reasonable care and skill? (par 15 of reasons).
The background to this issue was D & M's denial that at the time of contract it intended to bring workmen from China. Mr Chen's initial evidence was that this measure was forced on D & M post contract because of Crouch's failure to engage appropriate tradesmen. (However, in cross‑examination Mr Chen contradicted this evidence and conceded that it had always been D & M's intention to import seven workers for the project from China).
After reviewing the relevant facts, the arbitrator provided the following answer to the above question:
20.In my opinion those facts do not support a further finding that it was a term of the contract that D&M would import and supply materials from China which D&M's Chinese workmen would fit and install, with reasonable skill and care or otherwise. However, D&M's intention to do just that was clearly expressed and that intention formed part of the basis or assumption on which Crouch agreed to undertake the project and sign the contract. The intention was simply not included in the document. In those circumstances, and keeping in mind the cost plus nature of the contract, I believe a term must be implied into the contract, in addition to those submitted on behalf of D&M (at D&M, CS 19), as follows:
Any materials supplied or work performed by the Proprietor discretely will be supplied and performed in such a way as not to compromise or create any inconsistency with the Builder's performance of its obligations under the contract. ('the implied term')
Such a term would have the effect that if the Proprietor inhibits the Builder from performing the contract according to its terms then the Proprietor would have no recourse. In my opinion, the implied term meets each of the criteria for implying terms in contracts enunciated by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20 at 26, as subsequently endorsed by the High Court of Australia in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337, at 346 and numerous other cases. Without such a term the Proprietor would be in a position to recover for a breach of the contract on the part of the Builder for which it is itself responsible.
The next issue dealt with was the following:
Was the respondent entitled to terminate the contract by reason of the delay in the completion of the works and make a claim for damages suffered by reason of that delay, taking account of whether (there had been a waiver of the time requirement, the respondent was estopped from invoking the time requirement or the parties had agreed to an extension of time for completion)? (par 21 of reasons)
The arbitrator noted in relation to this issue that D & M relied upon the strict wording of the contract. It submitted that the contract required Crouch to complete the works within 52 weeks of commencement and that, by cl 11, the contract provided machinery by which an extension of time for completion could be sought and granted. As Crouch had not sought any such extension it was bound by the requirement to complete the works within 52 weeks.
The arbitrator gave extensive reasons for coming to the conclusion that D & M had not been entitled to terminate the contract and did not validly do so. Relevant to the issues raised in the present applications, these reasons included the fact that over the course of the project up until Crouch left the site, D & M had breached the implied term repeatedly and comprehensively. The delays to the progress of the works were principally the result of those breaches and Crouch had neither done anything nor failed to do anything which could be construed as a repudiation of the contract.
The arbitrator also noted that Crouch had repeatedly sent letters to D & M complaining about the delays that the latter had caused. In most of those letters Crouch had added a sentence to the effect that 'further delays in the work program are expected'. This being so:
28.2It could well be argued that Crouch was not in a position to make a formal application for an extension of time under clause 11 of the contract because the delays had not crystallised. It was not until the end of the job that Crouch would be in a position to quantify the extent of the delays caused by D&M's conduct.
The arbitrator found that in any event, D & M was not entitled to terminate the contract pursuant to its notice of default dated 11 April 2008. In this regard, the first limb of the notice (claiming that 'the completion of the works is long overdue') was not a qualifying default under cl 13; and even if it was a qualifying default it was not capable of remedy within ten days.
The arbitrator treated the second limb of the notice of default (that 'there is insufficient work being carried out to bring the works to completion and you are failing to take any or any appropriate action to cause the works to be brought to completion') as an alleged failure by Crouch falling within cl 13(b) of the contract. Clause 13(b) allowed service of a notice of default if Crouch had failed to proceed with the works with due diligence and in a competent manner. However, the arbitrator found that there was no such failure, and it followed that D & M's purported termination of the contract by the notice dated 29 April 2008 was invalid and of no effect. The purported termination amounted to a repudiation of the contract by D & M.
In light of these findings the arbitrator found it unnecessary to consider in detail the issues of waiver or estoppel. Nevertheless, he was of the view that 'it is probable that pleas of both waiver and estoppel would, on the facts as I have found them, be available to Crouch' (par 29 of reasons).

The grounds of appeal

D & M seeks leave to appeal from the arbitrator's award on the following grounds:
1.The arbitrator erred in law in implying the term referred to in paragraph 20 of the Reasons for Interim Award dated 7 May 2009 (Reasons). No such term should be implied because it does not meet the BP Refinery (Westernport) Pty Ltd v Shire of Hastings criteria for implying terms into contracts and/or clause 11 of the contract deals with the matters the subject of the implied term in any event.
2.In finding that the Appellant delayed the First Respondent in the completion of the work the subject of the contract, and by virtue thereof, further finding that the Appellant could not succeed in its claim for damages for breach of the time to complete provision of the contract as a result, the arbitrator erred in law in that he failed to have any, alternatively, any adequate, regard to the terms of clause 11 of the contract specifying a regime or code dealing with extensions of time to the date for practical completion of the works and/or the First Respondent's failure to seek and/or claim any extension of time to the date for practical completion of the works;
3.The arbitrator erred in law in that there was no evidence, alternatively no sufficient evidence, that any act or omission of the Appellant impacted the critical path to the completion of the works the subject of the contract so as to cause or contribute to the ultimate failure of the First Respondent to bring the works to practical completion within the contractually specified time period.
4.The arbitrator erred in law in finding (paragraph 25 Reasons) that there was no default on the part of the First Respondent entitling the Appellant to terminate the contract and/or in finding (paragraph 27 Reasons) that the First Respondent had not repudiated the contract, when, at the time the Appellant terminated the contract, the First Respondent had exceeded the time to complete provision of the contract by nearly one year;
…
6.The arbitrator erred in law in dismissing the Appellant's claim for the costs of replacing the incorrectly sized water pipes in that, despite finding to the contrary (paragraph 36.1 Reasons), there was unchallenged evidence as to the need to replace the installed pipes and there was evidence as to the actual costs incurred by the Appellant to install the correctly sized pipes.
7.The arbitrator erred in law in dismissing the Appellant's claim for the costs of replacing the water meters in that, despite finding to the contrary (paragraph 36.4 Reasons), there was unchallenged evidence as to the need to replace the water meters and there was evidence as to the actual costs incurred by the Appellant to install proper water meters.
8.The arbitrator erred in law in finding that the failure by the First Respondent to have installed acoustic lagging to the water pipes in the ceiling was work in progress as opposed to faulty or unsatisfactory work, in that he failed to have any, alternatively any adequate, regard to the fact that the ceiling had been installed, thereby covering up the pipes, without the acoustic lagging having been installed at all.
9.The arbitrator erred in law in finding that the First Respondent had proved its claims to payment under the contract without proving that the costs it claimed (being the costs it incurred in carrying out the work the subject of the contract plus its margin) were reasonable. In that aspect, the Appellant specifically refers to paragraph 12.1 of its Further Re‑Amended Points of Defence and Counterclaim.

The principles governing the grant of leave to appeal

The Commercial Arbitration Act 1985 (WA) is part of uniform legislation throughout Australia which regulates arbitrations. The clear policy of the Act is to achieve speedy, economic and informal relief to parties to arbitration agreements, with only limited scope for intervention by the courts: (New Generation Enterprises Pty Ltd v WA Planning Commission [2007] WASCA 89; Lamac Developments Pty Ltd v Devaugh [2003] 27 WAR 287 [110]). This policy is reflected in s 38(1) which provides that the court has no jurisdiction to set aside or remit an award on the ground of error of fact or law, other than on an appeal under s 38(2).
The right of appeal under s 38(2) is restricted to any question of law arising out of an award. This right is further limited by s 38(4) which provides that an appeal can only be brought with the consent of all other parties or, alternatively, with the leave of the Supreme Court. Section 38(5) goes on to provide that:
The Supreme Court shall not grant leave under subsection (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.
Accordingly, this court's discretion to grant leave only arises when an appellant meets the threshold requirements of s 38(5)(a) combined with either of s 38(5)(b)(i) or s 38(5)(b)(ii). When the discretion does arise, it is unfettered, and is to be exercised after considering all of the circumstances of the case (Qantas Airways Ltd v Joseland (1986) 6 NSWLR 327, 333; Forsayth NL v Australasian Gold Mines NL (Unreported, WASC, Library No 920420, 18 August 1992) (Ipp J); Thiess Contractors Pty Ltd v Water Corporation (Unreported, WASC, Library No 970561, 22 October 1997) (Parker J).
As to the requirement that there be an error of law, there can be no such error in respect of a factual finding if there was evidence to support that finding (Ukrainian Association v Squire Constructions Pty Ltd [2004] WASC 4 [11]). This is so even if the finding is based on reasoning which is demonstrably unsound (New Generation Enterprises [3]). Nevertheless, a failure to provide proper and adequate reasons for decision can amount to an error of law (Oil Basins Ltd v BPH Billiton [2007] VCA 255 [62] ‑ [65]).
For an error of law to be 'manifest' it must be more than arguable. There must be powerful reasons for concluding on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law (Promenade Investments Pty Ltd v New South Wales (1991) 26 NSWLR 203, 226; New Generation Enterprises [4]).
In the absence of a manifest error of law, an appellant needs to establish strong evidence of such an error and also show that the determination of the question may be likely to add substantially to the certainty of commercial law. Such a question of law is one of wider and greater importance than (for example) the construction of a one off clause in a particular agreement (Promenade Investments, 226).

The merits of grounds 1, 2, 3 and 4 of the appeal

Ground 1 challenges the arbitrator's finding that there was an implied term of the contract. D & M contends that there was an error of law because the implied term as found did not comply with the well‑known criteria for implying terms in contracts as enunciated in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 52 ALJR 20, 26. In this regard it is said that the implied term was unnecessary to give business efficacy to the contract (given the express provisions of cl 11), and that it also contradicted cl 11.
Quite obviously, this contention assumes that the implied term as found covers the same ground as cl 11, but this is an assumption which requires further examination. Clause 11 provides a mechanism by which the builder can obtain an extension of time for practical completion in circumstances including delays caused by any 'matter, cause or thing beyond the control of the builder'. D & M submits that delays caused by the owner would fall into this category, and accordingly there is no need to resort to an implied term for the builder to avoid liability for delay in such circumstances.
The weakness in this submission is that the content of cl 11 is much narrower in scope than the implied term as found. For the contract to have business efficacy it was not enough that the builder merely have ability to extend time in the event of delays caused by the owner. There was also the need for the builder to have recourse for any damages suffered as a result of owner‑caused delays. Furthermore, the contract remuneration was a flat fee of $250,000, and the longer the period that the builder was required to supervise the works, the less was the value of that remuneration. (It was perhaps this last factor that the arbitrator was referring to when stating that a term must be implied 'keeping in mind the cost plus nature of the contract').
In arriving at the implied term as found the arbitrator relied not only on the costs plus nature of the contract but also on his findings as to the underlying factual framework within which the contract was made. He found that D & M's intention to import materials and have its own workmen install them was clearly expressed, and 'formed part of the basis or assumption on which Crouch agreed to undertake the project and sign the contract'. These findings arose from the evidence as to the antecedent negotiations between the parties.
Notwithstanding the parole evidence rule, it was entirely appropriate for the arbitrator to have regard to the antecedent negotiations when determining the existence of the implied term. It is well established that the objective framework of facts within which a contract comes into existence, including the presumed intent and common understanding of the parties as manifested during antecedent negotiations, are relevant to that issue: (Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 347 ‑ 354). In Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd (2004) 219 CLR 165, the High Court held:
It is not the subjective beliefs or understandings of the parties about their rights and liabilities that govern their contractual relations. What matters is what each party by words and conduct would have led a reasonable person in the position of the other party to believe. References to the common intention of the parties to a contract are to be understood as referring to what a reasonable person would understand by the language in which the parties have expressed their agreement. The meaning of the terms of a contractual document is to be determined by what a reasonable person would have understood them to mean. That, normally, requires consideration not only of the text, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction. [40]
Although the above passage from Toll concerned the proper construction of a term of a contract, the same principles apply to the implication of a term. In the present instance it was the common intention of the parties and one of their purposes and objects that D & M would perform a substantial proportion of the construction work. However, the contract contained no express provision to this effect and there were only oblique references (in the 'finishes scope schedule') to the fact that D & M would be importing materials from China.
In these circumstances, an implied term to the effect as found was clearly necessary to achieve business efficacy for the contract. This was because (Codelfa):
[T]he evidence revealed a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption. (354)
The reality is that the parties adopted a standard form of contract which was inappropriate to their needs given their common assumption. Without the implied term there was no way of regulating the relationship between the two separate workforces which were to be jointly responsible for the construction work.
Furthermore, the implied term as found simply expresses in negative (and more specific) form the universal obligation implied in every contract that each party should do all that is reasonably necessary to secure performance of the contract. This general duty of cooperation is well recognised, and does not depend on the criteria in BP Refinery. In Secured Income Real Estate (Aust) Ltd v St Martins Investments (1979) 144 CLR 596, 607, Mason J approved the following formulation by Lord Blackburn in Mackay v Dick (1881) 6 AC 251:
[A]s a general rule ... where in a written contract it appears that both parties have agreed that something shall be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect. (263)

It follows that the scope for operation of cl 11 was necessarily constrained by the common assumptions underlying the contract including the factual findings as to the circumstances in which the period of 52 weeks was inserted into the agreement. When regard is had to this context it is clear that the mechanism in cl 11 for extension of the date for practical completion did not prevent the implication of the term as found.
For these reasons I am not satisfied that the matters raised in ground 1 establish strong evidence of an error of law, or that there was a manifest error of law on the face of the award. Accordingly, there is no basis for granting leave to appeal in respect of ground 1.
Ground 2 of the appeal is in fairly convoluted terms. It asserts an error of law common to each of the findings that D & M had delayed completion of the work by Crouch, and that D & M was not entitled to recover damages for Crouch's failure to meet the date for practical completion. That error of law is said to be the arbitrator's failure to have regard to cl 11 of the contract and to Crouch's ability to obtain extensions of time under that clause. This assertion relies on the authority of Turner Corporation Ltd v Austotel Pty Ltd (1994) 13 BCL 378 where Cole J stated (at 384 ‑ 385):
If the builder, having a right to claim an extension of time, fails to do so, it cannot claim that the act of prevention which would have entitled it to an extension of the time for Practical Completion resulted in its inability to complete by that time. A party to a contact cannot rely upon preventing conduct of the party where it failed to exercise a contractual right which would have negated the effect of that preventing conduct.
Turner was a case where the builder sought an extension of time in order to avoid liability for liquidated damages (for failure to complete by the date for practical completion). In the present case, there was no such claim by Crouch, and its entitlement to relief did not depend upon an extension of time under cl 11.
Furthermore, the arbitrator's finding that D & M had delayed Crouch was based upon the facts of what actually occurred rather than upon any application of the mechanism for extension of time under the contract. The decision that D & M could not succeed in its claim for damages was based on the finding that it was not entitled to terminate the contract and had not validly done so. The reasons for this latter finding included the defects in the notice of default, D & M's failure to prove that Crouch had not proceeded with the works with due diligence and in a competent manner, and the fact that D & M itself was primarily responsible for the delays. Accordingly, there is no merit in ground 2.
The third ground of appeal concerns the arbitrator's finding that D & M was primarily responsible for the delays to the project. It is said that the arbitrator erred in law with this finding because there was no evidence of any act or omission by D & M which 'impacted the critical path to the completion of the works, … so as to cause or contribute to the ultimate failure of (Crouch) to bring the works to practical completion within the contractually specified time period'.
Here again, ground 3 assumes that it was necessary for the arbitrator to determine the issue of delay strictly in accordance with the express provisions allowing for an extension of time under cl 11. Consistent with this assumption, D & M relies upon the authority of another extension of time case: Kane Constructions Pty Ltd v Sopov [2005] VSC 237 where Warren CJ at [675] held that the onus is on the builder:
… to present a drawing by drawing, beam by beam, column by column, gutter by gutter, factual analysis to show how a particular event had the effect of delaying other identified work.
This is a valid approach to determining the causes of delay in the usual case where the builder is seeking an extension of time for building works for which it was solely responsible. In the present case (as already noted in relation to ground 2) Crouch's claims were not dependent upon it establishing any entitlement to an extension of time under cl 11. Similarly, the dismissal of D & M's counterclaims did not turn on this issue. Furthermore, in the particular circumstances of the present case where the builder did not have sole control of the works, I consider that a 'critical path' analysis of the causes of delay would be impractical and inappropriate. It follows, in my view, that ground 3 must fail.
Ground 4 contends that there was an error of law in the findings that there was no default by Crouch entitling D & M to terminate the contract, and that Crouch had not repudiated the contract. The error of law is said to arise from the fact that at the time of purported termination, Crouch had exceeded the time for practical completion by nearly one year.
With regard to the first of these findings, ground 4 specifically refers to par 25 of the reasons for decision where the arbitrator found that D & M issued the notice of termination on 28 April 2008 because Crouch refused to terminate its subcontract with All State Plumbing. Paragraph 25 went on to state:
Since I take the view that D&M was not contractually entitled to demand that Crouch terminate its subcontract with a subcontractor and that Crouch's conditions for doing so nonetheless were legally and commercially reasonable, it follows that I must find that there was no default entitling D&M to terminate the contract.
To my mind, the fact that the works had been delayed for nearly a year cannot have any bearing on this finding. D & M's written submissions do not elaborate on the contention in ground 4 and I am unable to discern any error of law in the arbitrator's findings in par 25 of his reasons for decision.
Ground 4 also makes specific reference to par 27 of the reasons where the arbitrator found (inter alia) that 'Crouch had neither done anything nor failed to do anything that could properly be construed as a repudiation of the contract'. I understand ground 4 to assert that this finding was an error of law because Crouch had repudiated the contract by failing to complete construction nearly one year after the date for practical completion. Accordingly, it is said that the mere fact of that delay in itself constituted repudiation.
However, this assertion ignores all of the particular findings by the arbitrator attributing the causes of delay to D & M. In this regard, the arbitrator (in par 26 of his reasons) accepted the evidence of particular witnesses (including D & M's supervisor Mr Bill Anderson) as to the following:
•the creation by D&M of what amounted to a parallel workforce, separately supervised through Mr Chen and, first, Mr Fan and, later, Mr Bill Anderson;
•the extent to which D&M interfered with Crouch's performance of the work generally;
•the poor quality of the materials imported from China;
•the poor quality of the workmanship performed by those engaged by D&M, both Chinese and locally engaged;
•the level of time‑wasting interference by Mr Chen and Mr Fan with Crouch's supervision of its own workforce;
•the delays caused by the late arrival of materials from China;
•the time taken to deal with the haphazardly loaded containers;
•the unsuitability of many of the materials imported and the time taken to arrange and install replacements;
•the time taken to rectify the poor, and sometimes appalling, workmanship of those engaged by D&M; and
•the excessive time taken by D&M to respond to requests for instructions.
These are all factual findings which cannot be disturbed on appeal. The delay in construction that occurred in these circumstances is incapable of being characterised as a repudiation by Crouch. Apart from the twelve month delay in completing construction there was no evidence of any particular act or omission by Crouch which could conceivably amount to repudiation. It follows that ground 4 of the appeal must fail.

Grounds 6, 7 and 8 of the appeal

Grounds 6 and 7 are in similar terms and relate to particular items of defective work (being incorrectly sized water pipes, and defective water meters). It is said that the arbitrator erred in law in dismissing D & M's claims for the costs of rectifying these items given the unchallenged evidence as to the need for, and the costs of, rectification.
Ground 8 relates to Crouch's failure to install acoustic lagging to water pipes in ceilings. It is said that the arbitrator erred in law in finding that this item was work in progress (at the time of purported termination of the contract) as opposed to faulty or unsatisfactory work.
In each instance the arbitrator made a finding to the effect that D & M could not recover the costs of remedying or completing the work because it had improperly terminated the contract. This termination had occurred in circumstances where, if the contract had continued, Crouch would have been in a position to require All State Plumbing to rectify the particular items at no cost to D & M.
I cannot fault this reasoning by the arbitrator, and in my view, grounds 6, 7 and 8 must fail.

Ground 9 of appeal

Ground 9 contends that the arbitrator erred in law in finding that Crouch had proved its claims to payments under the contract when there was no proof that the costs claimed were 'reasonable'. In this regard it was not in issue that there was an implied term of the contract that the costs claimed by Crouch should be reasonably, properly and validly incurred. Accordingly, the real issue raised by ground 9 is whether there was evidence to prove that the costs awarded to Crouch were 'reasonably incurred'.
It is relevant to note that the contract did not make any provision for certification of construction costs by an architect. Instead, the mechanism for payment under cl 17 was that Crouch was to submit monthly progress claims accompanied by invoices and such other data as D & M required. Crouch was also obliged to provide any further information that D & M reasonably required in relation to the costs claimed. Within 10 days of receipt of the claim and of any further information D & M was required to make payment.
The costs that Crouch could claim were the 'actual costs' of the works as set out in clause 15. Clause 15 specified in considerable detail 24 separate items which were included in 'the actual costs of the works', and five items which were not included. The included items were described in terms of the amounts actually incurred by Crouch in connection with the works.
It is common ground that Crouch made progress claims totalling $3,665,658.89 of which $3,263,978.10 was paid by D & M. Up until 11 March 2008 D & M met all claims without querying their validity or requesting any further information on the same. The first rejection of any amount claimed was in respect of claim number 33 for $143,997.77 (of which $142,795.77 was paid). D & M gave no reason at the time for refusing to pay the balance of that claim or for rejecting all subsequent claims.
It was only in the course of the arbitration that D & M asserted that the costs claimed by Crouch had not been reasonably incurred. (It did so on the basis of evidence from a quantity surveyor which I will refer to shortly). D & M's refusal to pay Crouch's invoices commenced at the time of the dispute concerning the plumbing subcontractor, and it was the arbitrator's finding that the real reason for refusal was that dispute, and not because of any suggestion that the costs were unreasonably incurred (par 5 of reasons for decision).
After the arbitration commenced, D & M engaged the services of a quantity surveyor (Mr Rafferty) to examine all progress claims in the course of the contract and to report whether the amounts claimed were 'reasonable for the work undertaken'. Mr Rafferty then prepared a report stating that Crouch had been overpaid a total of $1,309,701.27. This report became the basis of D & M's counterclaim.
After Crouch provided a detailed response to Mr Rafferty's report the sum that D & M asserted had been overpaid was reduced from $1,309,701.27 to $697,019.96. In light of this reduction the arbitrator found that there was 'considerable doubt on one or more of Mr Rafferty's instructions, methodology or approach on his original assessment' (reasons par 6).
Of the residual $697,019.96 allegedly overpaid, Mr Rafferty had rejected invoices totalling $684,220.94 simply because they did not record that they were for work done at the D & M site. Mr Rafferty had no other basis for rejecting those invoices, and during cross‑examination revealed that he was unaware that the D & M site was the only site being worked on by Crouch at all material times (reasons par 9).
There was ample evidence (from Crouch's bookkeeper Ms Higgins) to show that Crouch had had administrative procedures in place to ensure that all amounts claimed from D & M related to the D & M project. D & M did not challenge any individual invoice, or put to any of Crouch's witnesses that any particular amount had been improperly claimed. The arbitrator determined that (apart from $2,235) all amounts had been validly claimed, and he came to this decision for the following reasons:
10.Counsel for D&M is correct in his submission that it is for the claimant to prove it is entitled to payment. He is not, in my view, correct applying West Boat Builders Pty Ltd v Cull Holdings Pty Ltd [1999] WASCA 72 as authority for a submission that the claimant must prove the reasonableness of all the work carried out. In the West Boat Builders case the plaintiff needed to prove that it had itself carried out the work for which it was claiming. Here there is a cost plus contract which requires the Proprietor to pay all costs reasonably incurred. In my opinion, without descending to absurdity, the Builder can do no more than produce the invoices he has himself been required to pay. The proof Crouch produces here is as follows:
10.1Claims up to, and largely including, progress claim 33 were paid by a very cost conscious project manager/overseer in the person of Kevin Chen, as having been reasonably incurred. While his principals were tardy making payment on occasions, there is no evidence that he ever queried a claim prior to progress claim 33. Unlike most standard form lump sum contracts, this cost plus contract does not provide that payments made are on account only.
10.2Evidence from Ms Higgins and Steven Crouch that, to their knowledge, following their office and site procedures, all the invoices in fact related to the D&M site.
10.3All the invoices must be for the D&M site because there was no other at the time.
This evidence for Crouch is uncontradicted. I also infer from the fact that the rejections started almost precisely when the contractual relationship between the parties soured, for reasons I will consider below, that they were not based on a proper assessment of the claims. For example, there is no evidence of Mr Chen having sought additional information in relation to the claims as he was entitled to do under clause 17(b) of the contract, if he was not satisfied with the evidence provided. As I have noted, he gave no reasons for his rejections.
11.D&M is essentially putting Crouch to proof of its progress claims under these heads. In my opinion, the evidence is sufficient to establish an entitlement to payment.
As to the remaining invoices (totalling $12,994.02) the arbitrator noted that D & M had not put any specific issues or allegations with respect to the sums claimed to Crouch's witnesses. In the face of the evidence adduced for Crouch, the arbitrator considered that D & M had not raised 'sufficient doubt as to the propriety of the claims to justify rejection'.
The evidence from Crouch's witnesses was broadly to the effect that all amounts (other than $2,235 mistakenly claimed) had been reasonably, properly and validly incurred on the D & M project. The issue raised by ground 9 is whether the arbitrator was in the position to accept that evidence without further and more detailed proof that each and every amount had been reasonably incurred. Obviously, such further proof would have required an immense amount of evidence from a great many witnesses.
For a number of reasons I consider that the arbitrator correctly found that the evidence was sufficient to establish Crouch's entitlement to payment. Firstly, the contractual entitlement was to the 'actual' cost of the works. The contract also provided a mechanism which enabled D & M to check the validity of each claim. Furthermore, D & M jointly possessed the site with Crouch for the purposes of carrying out construction, and was in the position to know what work had been done. In these circumstances the fact that D & M met all claims up until March 2008 without raising any query strongly corroborated the validity and reasonableness of those claims.
When D & M commenced to reject claims it did so without any requests for further information, without any form of assessment, and for a reason unconnected to the question of whether or not they had been reasonably incurred. D & M then engaged a quantity surveyor to scrutinize each and every invoice the subject of all of Crouch's progress claims. The fact that the quantity surveyor was unable to find reasons for rejecting invoices (other than reasons which turned out to be spurious) provided potent evidence that each had been reasonably incurred. Furthermore, D & M had not raised any other challenge to any particular invoice.
For these reasons I am not satisfied that there is strong evidence of an error of law, or a manifest error of law on the face of the award in respect of the arbitrator's findings that Crouch was entitled to payment of its claims.

The application to set aside for misconduct

D & M applies under s 42(1)(a) of the Act for the award to be set aside, and under s 43 for the matter to be remitted to the arbitrator for reconsideration. This application is made on the following grounds:
4.The Second Respondent engaged in misconduct and/or misconducted the proceedings within the meaning of those terms in section 42 of the Act in that, in paragraph 20 of his Reasons for Interim Award dated 7 May 2009 (Reasons), the Second Respondent implied a term into the contract between the Applicant and the First Respondent, the Applicant's breach of which formed the basis for making the Interim Award, when:
4.1that was not an issue identified by the pleadings; and/or
4.2the parties had no opportunity to make any submissions about it prior to the making of the Interim Award, or at all.
5.The Second Respondent engaged in misconduct and/or misconducted the proceedings within the meaning of those terms in section 42 of the Act in that, in paragraph 29 of the Reasons, the Second Respondent failed to decide the issues for determination in that:
5.1the Applicant alleged (paragraph 29 of its Further Re‑Amended Defence and Counterclaim) that the First Respondent had breached the contract by failing to bring the works to practical completion within the contractually specified time period;
5.2in response thereto the First Respondent denied the allegation and pleaded:
5.2.1that the Applicant had waived the condition that the First Respondent would complete the works within the contractually specified time period (paragraph 6 Amended Reply and Defence to Counterclaim);
5.2.2that it would be unconscionable for the Applicant to maintain the completion date referred to in the contract so that the Applicant was estopped from asserting a breach of that term (paragraph 7 Amended Reply and Defence to Counterclaim); and
5.2.3a new agreement as to the date upon which the First Respondent was required to complete the works was to be implied from the conduct of the Applicant and the First Respondent so that the date for completion was extended until further notice (paragraph 8 Amended Reply and Defence to Counterclaim);
5.3the Second Respondent determined the issues in the proceedings with reference to the implication of the term referred to in ground 4 above when he ought to have determined the issues in the proceedings with reference to the issues identified in the pleadings as noted in grounds 5.1 and 5.2 above.
6.The Second Respondent engaged in misconduct and/or misconducted the proceedings within the meaning of those terms in section 42 of the Act in that he failed to give adequate reasons and/or failed to disclose the process of reasoning or analysis leading to:
6.1the findings in paragraph 26.2; and
6.2how it was that any of the matters the subject of those findings actually caused a delay to the First Respondent completing the works the subject of the contract.
[It should be noted there are no grounds 1, 2 and 3].

The principles relating to misconduct

Section 42(1)(a) confers a discretion on the court to set aside an award (either wholly or in part) where there is misconduct by the arbitrator. Section 4 defines 'misconduct' as including 'corruption, fraud, partiality, bias and a breach of the rules of natural justice'. This is not an exhaustive definition and 'misconduct' in its technical sense can extend to any procedural irregularity which has or may have unjustly prejudiced a party (Melbourne Harbour Trust v Hancock (1927) 39 CLR 570, 588; Doran Constructions Pty Ltd v Health Administration Corp (1994) 12 BCL 59, 62).
In this regard, the parties are entitled to expect that arbitration will be conducted without mishap or understanding, and that subject to the wide discretion enjoyed by the arbitrator, the procedure adopted will be fair and appropriate (King v Thomas McKenna Ltd [1991] 2 QB 480, 491). Accordingly, 'misconduct' does not amount to much more than a mishandling of the arbitration as is likely to amount to some substantial miscarriage of justice (Doran Constructions, 63; Oil Basins [76]).
It is fundamental to the conception of fairness that a party should not be bound by an arbitrator's decision without being informed of the basis on which it is made (Oil Basins [56]). There is also the statutory requirement in s 29(1) that the arbitrator provide a statement of reasons for the award. This requires a statement of the relevant facts together with an explanation why each issue of fact was resolved in the way it was. It is also necessary that the arbitrator state his or her conclusion on each question of law (or of mixed law and fact) and explain how that conclusion was reached (Oil Basins [51]).
The extent to which an arbitrator must go in meeting these requirements will depend on the nature of the decision and on the particular circumstances of the case. If the dispute involves simple issues of fact a rudimentary identification of the issues, evidence and reasoning might be all that is required (Oil Basins [57]). The arbitrator's reasoning must nevertheless address the central contentions advanced by the parties, and deal with every 'submission worthy of serious consideration' (Peter Schwarz (Overseas) Pty Ltd v Morton [2003] VSC 144 [34]).
In a more complex arbitration involving an intellectual exchange with detailed submissions and analysis, the arbitrator's reasons should provide an intelligible explanation of why one set of evidence has been preferred over the other; why substantial submissions have been accepted or rejected; and ultimately, why one case is preferred over the other (Oil Basins [57]). Any failure by an arbitrator to deal with relevant evidence or substantial submissions is a mishandling of the arbitration which can amount to 'misconduct' within the meaning of s 42 (Oil Basins [76]).
However, the court should not approach the work of commercial arbitrators with a view to finding fault. Arbitration is to be encouraged, and arbitrators are largely free to express their reasons as they see fit. Nor should the court demand a higher standard of reasoning from legally trained arbitrators than from arbitrators who are not so trained. It is the nature of the particular dispute which sets the required standard for reasons, not the nature of the arbitrator (Oil Basins [59]).
Another aspect of the requirement for fairness is that an arbitrator should not decide a case against a party on the basis of a point which was neither raised as an issue nor argued. It will be technical misconduct if an arbitrator so decides a case without first warning the parties that the point is one on which the outcome might turn, and providing them with the opportunity of dealing with it (Anaconda Operations Pty Ltd v Fluor Australia Pty Ltd [2003] VSC 275 [64]; Shirley Sloan Pty Ltd v Merril Holdings [2000] WASC 99 [29]). This is particularly so when the issues to be decided have been defined by pleadings and particulars. Apart from cases where the parties disregard the pleadings and fight a case on issues chosen at the hearing, the outcome should be decided on the pleadings (Dare v Pulham (1982) 148 CLR 658, 664; Banque Commercile v Akhil Holdings Ltd (1990) 169 CLR 279, 287).
This does not mean that every failure to put the parties on notice of a point which might be decided constitutes misconduct (Edible Oil v Jayant Oil (1982) Lloyds LR 95, 97; Doran at 63). In Theiss at 38 Parker J held that an arbitrator's finding on a deciding point without notice was not misconduct because it fell within the scope of the fundamental issues dividing the parties which had been well ventilated.
In the event that misconduct is established, the court is not limited to the exercise of the discretion under s 42. Whether or not that discretion is exercised, the court also has a discretion under s 43 to remit the matter to the arbitrator for reconsideration (Bovis Lend Lease Pty Ltd v W G E Pty Ltd [2002] NSWSC 939 [9]). It is a serious step to set aside an award, and it is a remedy of last resort. Accordingly, if it is possible to save the award by a remittal for further consideration under s 43, the court will ordinarily adopt that course (Oil Basins [80]). For this reason, it is not unusual for there to be a remittal for reconsideration where there is some procedural mishap or misunderstanding (Imperial Leatherware v Macri (1991) 22 NSWLR 653, 669; Bovis Lend Lease [10]). Nevertheless, remittal under s 43 should not be used as a backdoor method of circumventing the statutory restrictions on the court's powers of intervention (Bovis Lend Lease [9]).
In cases of technical misconduct, the exercise of the discretion to set aside or remit the award will usually turn on the seriousness of the procedural irregularity. In Gas & Fuel Corporation of Victoria v Wood Hall Ltd [1978] VR 382 Marks J held at 392:
The more difficult question, however, is whether the extent of that irregularity is such as to justify interference by this court either by way of setting aside the award or remitting the award. The determination of that issue, as it seems to me, depends upon whether the court is satisfied that there may have been - not must have been - or that this irregularity may have caused - not must have caused - a substantial miscarriage of justice that would be sufficient to justify setting aside or remitting of the award, unless those resisting the setting aside or remission could show that no other award could properly have been made than that which was in fact made, notwithstanding the irregularity.

Whether there was technical misconduct

It is appropriate that grounds 4 and 5 of the misconduct application be considered together. This is because the arbitrator's decision that it was unnecessary to determine the pleaded issues referred to in ground 5 was based on his determination of the unpleaded issue referred to in ground 4.
In my view, there is considerable merit to the complaint in ground 4. The arbitration proceeded on the basis that the issues to be determined had been fully pleaded and particularised. Although in the end the parties agreed on a list of issues requiring determination, that list had its basis in the pleadings, and (relevant to the implied term as found) simply replicated par 13 of Crouch's defence to the counterclaim.
D & M was not given notice that there might be a finding of an implied term not pleaded by Crouch, nor given the opportunity to present submissions in respect of that issue. The finding as to the implied term was not a minor aspect of the arbitrator's reasons, but a critical finding on which a substantial proportion of the dispute largely turned.
It follows that the finding of the implied term in these circumstances was a procedural irregularity which unfairly prejudiced D & M. In my view, it was a procedural irregularity of sufficient substance to amount to technical misconduct. It is also my view that the misconduct alleged in ground 5 is effectively subsumed by the misconduct the subject of ground 4 (given that the failure to determine the pleaded issues resulted from the finding as to the implied term).
Ground 6 alleges misconduct in failing to give adequate reasons and/or to disclose the process of reasoning or analysis leading to particular findings. These are the factual findings in par 26.2 of the arbitrator's reasons as to particular acts and omissions by D & M which caused delay.
The arbitrator was entitled to accept such evidence as he considered to be credible and reliable. In par 26.2 of his reasons he accepted the evidence of particular witnesses, and then made findings which were a summary of all of that evidence. In my view, this was a sufficient statement of the reasons why each particular issue of fact the subject of that evidence was resolved in the way it was. The combination of those findings also provided a full explanation for the ultimate finding that the delays that occurred on the building site were 'in the main at least, caused by the actions and omissions of D & M'. Accordingly, I do not consider that there was any failure to give adequate reasons as contended in ground 6.

Whether there should be a setting aside and/or remittal of the award

Given my finding that there was technical misconduct by the arbitrator, I must now decide whether I should exercise either or both of my discretions to set aside the award under s 42, or to remit it for further reconsideration under s 43. The essential question is whether D & M has suffered a substantial miscarriage of justice which is sufficient to justify either of those steps.
In my view, the predominant consideration in this regard is that D & M has now had the opportunity to fully argue the correctness of the arbitrator's finding as to the implied term. This issue has been fully ventilated in the present proceedings, and I have determined that as a matter of law the arbitrator's finding was correct. Accordingly, it can be assumed that the arbitrator would have come to the same finding if he had afforded D & M the opportunity of making submissions, and that no other award could properly have been made.
In these circumstances it would be pointless to set aside the substantive award and remit the matter back to the arbitrator for reconsideration. To my mind, to the extent that there is any miscarriage of justice it can only lie in the realm of costs. In this regard, if the arbitration had proceeded as it should, it would have been necessary for Crouch to amend its pleadings to accommodate the implied term as found. In those circumstances, D & M could have reasonably argued that such an amendment should not be allowed without some costs consequences.
These considerations lead me to the conclusion that the appropriate exercise of my discretions under s 42 and s 43 is to set aside the award only as to costs, and to remit this aspect of the matter back to the arbitrator for reconsideration.

Conclusions

The application for leave to appeal from the arbitrator's award will be dismissed.
The application to set aside the award for misconduct will be allowed in part. The decisions the subject of paragraphs 1 and 2 of the arbitrator's final award dated 1 June 2009 will be set aside, and remitted back to him for reconsideration in accordance with these reasons for decision.