Decor Ceilings Pty Ltd v Cox Constructions Pty Ltd 545/04; Cox Constructions Pty Ltd v Decor Ceilings Pty Ltd 566/04 - [2004] SASC 243

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
DECOR CEILINGS PTY LTD v COX CONSTRUCTIONS PTY LTD 545/04; COX CONSTRUCTIONS PTY LTD v DECOR CEILINGS PTY LTD 566/04
Judgment of The Honourable Justice Anderson
18 August 2004
ARBITRATION - THE AWARD - APPEAL OR JUDICIAL REVIEW - PROCEDURE AND LEAVE TO APPEAL
Subcontractor, Decor Ceilings Pty Ltd, and contractor in dispute - dispute subject of arbitration - appeal against award of arbitrator - subcontractor claims breach of contract by contractor resulting in delay - appeal sought on grounds that delay claim should have been allowed in full and that contractor's "back charge" claim should have been disallowed - appeal against award of arbitrator - leave to appeal sought under s38 Commercial Arbitration Act 1986 (SA) - whether parties' rights substantially affected under s38(5)(a) - whether manifest error of law, or question likely to add to certainty of commercial law under s38(5)(b) - held: arbitrator misdirected himself as to legal tests regarding burden and standard of proof with respect to evidence led by the subcontractor therefore manifest error of law satisfying s38 - appeal allowed.
Contractor, Cox Constructions Pty Ltd, seeking leave to appeal against award of arbitrator - leave sought under s38 Commercial Arbitration Act 1986 (SA) - appeal sought on grounds of insufficient notices; question of documentation comprising subcontract and dispute over damages claim - interpretation of contractual provisions - whether parties' rights substantially affected under s38(5)(a) - whether manifest error of law, or question likely to add to certainty of commercial law under s38(5)(b) - held: no manifest error of law - appeal dismissed.
Whether reasons required to be given to parties in leave to appeal matter under s38 Commercial Arbitration Act 1986 (SA) - held: provision of adequate reasons to parties required as first engagement of judicial power.
Commercial Arbitration Act 1986 (SA) s38(5)(a) and (b); Corporations Act 2001 (Cth) s459E, referred to.
Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust (1994) 63 SASR 444; Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 184; Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203; Natoli v Walker (unreported, 26 May 1994, 40351 of 1993); Eltin Open Pit Operations Pty Ltd v Far North Civil Pty Ltd and Anor (2001) 215 LSJS 330; Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (2001) 207 CLR 72, applied.
Pioneer Concrete (SA) Pty Ltd v The Jennings Group Ltd (1991) 161 LSJS 332, distinguished.
Pioneer Shipping Limited v BTP Tioxide (The Nema) [1982] AC 724, discussed.
Qantas Airways Limited v Joseland and Gilling (1986) 6 NSWLR 327, considered.

DECOR CEILINGS PTY LTD v COX CONSTRUCTIONS PTY LTD 545/04; COX CONSTRUCTIONS PTY LTD v DECOR CEILINGS PTY LTD 566/04
[2004] SASC 243
ANDERSON J:
INTRODUCTION

In this matter both parties are seeking leave to appeal from an interim award made by an arbitrator pursuant to the provisions of the Commercial Arbitration Act 1986 (SA). The interim award was made on 12 May 2004.
BACKGROUND
Cox Constructions Pty Ltd (Cox) was the head contractor involved in a contract with the Minister for Government Enterprises which contract involved the construction of a training and development centre at Hindmarsh. The contract between Cox and the Minister was entered into on 18 December 1998.
In turn a Subcontract between Cox and Décor Ceilings Pty Ltd (Décor) was entered into on 31 March 1999. This Subcontract related to Décor’s provision of ceilings, partitions and wall linings for the project.
Disputes arose between Décor and Cox as a result of which the matter was arbitrated. Finally the arbitrator awarded Décor the sum of $102,883 together with interest to apply at the Supreme Court rate and the arbitrator adjourned the question of costs.
There were various disputes which arose during the course of construction, mainly relating to delays, the precise details of which are, for present purposes, not important. The delays ultimately have caused Décor to allege against Cox a breach of their duty of care in addition to breaches of contractual obligations.
As a result Décor calculated and presented a claim, one part of which was for some $202,803.90 by way of compensation for the loss and damage which they allege they suffered by reason of the additional hours required on the project and attributable to Cox’s default. The arbitrator rejected totally the claim for additional hours.
Décor also claimed that the arbitrator wrongly allowed a credit to Cox for a “back charge” in the sum of $9,360.
Cox on the other hand seeks leave to appeal on grounds relating to insufficient notices, a question as to what documents comprised the Subcontract and a dispute over a damages claim for a limited period relating to a certain works programme in which it is suggested there was a failure by Décor to adhere to the programme.
As I have indicated, both Décor and Cox are seeking leave to appeal and I will deal with those applications shortly.
PRINCIPLES ON LEAVE APPLICATION
The question of leave to appeal is covered by s.38 of the Commercial Arbitration Act as amended in 1992. The section and its history and the effect of the 1992 amendment is with respect fully set out in the decision of Debelle J in Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust (1994) 63 SASR 444.
The principles that emerge from that decision are that the court should only grant leave if either party establishes that there is either a manifest error of law on the face of the award or strong evidence that the arbitrator made an error of law and that the determination of the question may add or may be likely to add substantially to the certainty of commercial law – s.38(5)(b)(i) and (ii).
Before getting to the stage of considering either of the above alternatives, the court must be satisfied that 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 – s.38(5)(a).
Rogers J in Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 184 at 192 said, referring to Qantas Airways Limited v Joseland and Gilling (1986) 6 NSWLR 327:
“It is clear that the legislature intended to reject the broad discretionary approach prescribed by the judgment in Qantas”.
The statement of Rogers J set out above was agreed with in the appeal, by Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 at 221-223 as to the presumption that an arbitration award is final.
This is also dealt with by Kirby P in the New South Wales Court of Appeal in Natoli v Walker (unreported) 26 May 1994 Judgment No.40351 of 1993, where His Honour said (at 2):
“That Act amended s.38 of the Commercial Arbitration Act (1984) to confine most narrowly the cases in which appeals to the Supreme Court from an award of an arbitrator would be permitted. The policy behind the amendment, as explained in Promenade was to promote the finality of arbitral awards even at the price of denying a party its usual entitlement to the determination of the dispute by a court of law, ie, the precise assignment of the parties’ legal rights after a detailed scrutiny of the relevant facts and application of the relevant law”
The Promenade decision acknowledges, in turn, what have been known as the Nema guidelines from the decision of Lord Justice Diplock in Pioneer Shipping Limited v BTP Tioxide Ltd (The Nema) [1982] AC 724.
These principles as to finality have more recently been dealt with and applied by Lander J in Eltin Open Pit Operations Pty Ltd v Far North Civil Pty Ltd and Anor (2001) 215 LSJS 330. His Honour cited The Nema and Qantas for this proposition.
NEED FOR REASONS
In the Eltin decision, Lander J also commented on the appropriateness of reasons being given to the parties especially in a case that was fully argued and, as in this case, where there were lengthy written submissions in addition to the detailed oral argument.
Previously, Debelle J had observed in Leighton Contractors, the remarks of Cox J, in Pioneer Concrete(SA) Pty Ltd v The Jennings Group Ltd (1991) 161 LSJS 332 at 335 as to the function of the Chamber Judge hearing an application for leave to appeal. His Honour pointed out that those comments were made by Cox J prior to the 1992 amendments to s.38.
Lander J in Eltin said [at 67]:
“It may be that the dictum of Debelle J has to be reconsidered having regard to that recent statement of principle by the High Court.”
His Honour was referring to the reasons in Roy Morgan Research Centre Pty Ltd v Commissioner of State Revenue (2001) 207 CLR 72 where Gaudron, Gummow, Hayne and Callinan JJ said (at 83):
“As has been noted earlier, the primary judge gave no reasons for refusing leave. It may be thought that some support for that course may be derived from Coulter v The Queen (1988) 164 CLR 350 where it was said (at 359-360) that the discretion to grant or refuse an application for leave or special leave to appeal ‘can commonly be exercised without the provision of detailed or, sometimes, any reasons.’ But it is very important to notice two considerations. First, what was said in Coulter related to the refusal of leave or special leave to appeal to a court - a process which is invoked only where there has been at least one earlier judicial disposition of the matter attended by full reasons for judgment. An application for leave under s 148(1) is the first engagement of judicial power and is an engagement of judicial power in respect of a controversy which is framed differently from, and more narrowly than, whatever may have been the controversy in the Tribunal. It is, therefore, not to be supposed that the course of argument in, and decision by, the Tribunal, even if taken with the course of argument before a judge of the Trial Division, will ordinarily reveal to the applicant with any certainty why it is that leave to bring proceedings under s 148(1) is refused. Secondly, as was recognised in Coulter, it is usual to give short reasons for refusing leave or special leave to appeal. Not giving reasons is exceptional.”
I agree with Lander J that it seems therefore that not giving reasons should now be regarded by this court as exceptional as distinct from the opposite viewpoint expressed in earlier decisions.
Because of the history of this matter and the fact that there are still outstanding matters, including an application for a stay and a further application by way of statutory demand pursuant to s.459 E of the Corporations Act 2001 (Cth), I have decided that these reasons should be given in any event to assist the parties especially because I am refusing leave for one party.
I will now deal with the respective applications by the parties for leave to appeal.
DÉCOR APPLICATION FOR LEAVE [NO.545/2004]
I will deal firstly with the application by Décor. The proposed notice of appeal filed by Décor seeks leave to appeal under five headings. The first three of which are alternatives to each other and relate to the reasonableness of Décor’s claim for additional labour costs and the last two of which are, again, alternative to each other and relate to a credit allowed to Cox by the arbitrator for a “back charge” for labour supplied to Cox by another contractor.
I have had regard to the provisions of s.38 of the Commercial Arbitration Act and in particular s.38(5). In relation to Décor’s suggested ground of appeal number one, I have formed the view that it does not come within the criteria set out in sub-paras(a) and (b) of s.38(5). It is a factual matter relating to the conduct of the arbitration and whether something was or was not put in issue in the arbitration. The arbitrator was the person who could and did deal with it and in my view it does not qualify under either limb of s.38.
In relation to ground two, I have formed the view that it is a matter that qualifies for leave in that both s.38(5)(a) and s.38(5)(b)(i) applies. I think it is also likely that s.38(5)(b)(ii) would also apply. I believe the arbitrator has mis-directed himself in considering the legal tests by confusing the question of the burden of proof, with the question of the standard of proof and the quality of the evidence required. They are quite distinct concepts. In my view it is clearly arguable on an appeal, that the arbitrator was wrong in disallowing the substantial claim of $202,803.90 because he apparently believed that he required corroboration by independent evidence of the evidence of Mr Erbsland.
The arbitrator instructed himself as to the legal tests when considering the additional hours claim. He said in his reasons (at 72):
“The Subcontractor had to show, first, that it could reasonably have expected to perform the sub contract works within the labour hours allowed in its tender, secondly, that the Contractor breached the relevant terms of the contract causing the Subcontractor to expend more labour hours than it allowed in its tender, thirdly, that the actual hours expended exceeded the tender allowance, and, finally, that the breaches of contract were the only “causally significant factor” explaining the labour hours overrun”
He found that the second, third and fourth tests were met but that the first test as to the accuracy of the tender allowances “was not proved in the arbitration”. He clearly meant proved by some independent source.
Décor had called a witness, Mr Erbsland, who gave evidence both as to his expertise to make necessary estimates and also as to the accuracy of the estimates. Mr Erbsland’s evidence was not challenged in cross-examination. Cox argued that the onus of proof for the accuracy of the estimate lay with Décor. Whilst that is in one sense correct, it seems to me that it confused, unnecessarily, the arbitrator’s consideration of the evidence as illustrated by his statement (at 73):
“I have a layman’s understanding of the law in relation to these matters, and it is my understanding that arbitrators should not make assessments where proper proof could have been, but was not, provided. In an appeal against my award in Sabemo v AIW, Justice Mullighan, in the South Australian Supreme Court said that my actions in making an assessment in the absence of proper proof of costs constituted technical misconduct, and the award was set aside. In these circumstances I accept the submission of the Contractor and I find that the Subcontractor failed to prove the accuracy of its labour estimates, meaning that its claim for additional hours must fail.”
Without wanting to go into the question of Mr Erbsland’s evidence in any detail, it is clear from other parts of the arbitrator’s reasons, that he did accept the fact that Mr Erbsland was in a position to give the type of evidence which he gave. (See discussions in his reasons at 11 and 12 and also again at 79 as examples.) There are many other such references in the reasons which illustrate that the arbitrator accepted Mr Erbsland as being experienced in estimating. Mr Erbsland kept a detailed diary, which was also referred to extensively in the reasons. This included entries which meant that Mr Erbsland was in a position to provide evidence as to the hours involved. This was evidence which could have been used to establish whether Décor had proved its case on the balance of probabilities.
In other words the claim, on the face of it, may have been disallowed simply because there was no corroboration of Mr Erbsland’s evidence. Mr Erbsland’s evidence had to be assessed for what it was. It may well be that it was sufficient in the absence of any challenge to it to satisfy the first test proposed by the arbitrator.
On my reading of the award, it seems to me that there is a manifest error of law and that in any event there is strong evidence that the arbitrator made an error of law and, from the confusion existing in the mind of the arbitrator, it is not a difficult step to say that the determination of the question may add, or may be likely to add substantially to the certainty of commercial law in this area. It is, after all, a fundamental concept to distinguish between the burden of proof and whether that burden has been discharged by the production of acceptable and sufficient, and in this case unchallenged, evidence. I would therefore grant leave on ground two.
It is not necessary, in view of my attitude to the proposed ground of appeal two, to deal with proposed ground three which is only an alternative.
In relation to proposed ground four which has been referred to as the “back charge claim”, it is clear from reading the award that it is linked sufficiently to the additional labour cost claim, and therefore I would also grant leave on this ground.
Once again, I do not consider ground five because it is an alternative to ground four.
In summary, therefore, I would give Décor leave to appeal on grounds two and four.
COX APPLICATION FOR LEAVE [NO. 566/2004]
I now turn to the application for leave to appeal by Cox. Three grounds of appeal are urged by Cox. The first relates to the question of notices given to Cox by Decor and the sufficiency of those notices under clauses 35.5 and 36 of the contract. This in turn involves the interpretation of various clauses of the contract.
The arbitrator dealt with argument regarding Cox’s allegation that Décor failed to meet the notice requirements. The arbitrator, however, having noted that there was a failure to meet the obligation under the clauses dealing with notices, found that Décor had not pursued its claim in that fashion but, rather, based its claim on allegations of breach of contract – see reasons (at 60).
It is quite clear that this is the way the arbitrator proceeded from reviewing his reasons (at 76).
It is not possible for me to say, in this instance, that there is a manifest error of law on the face of the award. The claim by Décor for delay costs and additional hours was pursued as a breach of contract and not pursuant to the clauses mentioned above. In my view there is no manifest error of law nor is there strong evidence that the arbitrator made an error of law. Therefore I would not grant leave to appeal on this ground.
In addition, the other clause raised in argument, namely, clause 46 is dealt with in the findings of the arbitrator, in his reasons (at 68.9-69.2)
The arbitrator said:
“In this matter I find for the Subcontractor, and I find that its claims are not to be disqualified because of the express terms of clause 46. I find that neither the Contractor’s Position Paper nor the cross-examination of Mr Hembling gave proper notice that the Contractor was relying on the terms of clause 46 to reject the Subcontractor’s claim, meaning that the Subcontractor was not given the opportunity to lead evidence as to the ‘first day’ that it could have ‘reasonably become aware of the breaches of contract’ and the ‘first day’ that it could have ‘reasonably become aware of its entitlement to make a claim”.
These findings are not challenged in the appeal.
The second ground relates to suggested errors of law in the finding made by the arbitrator as to what documents comprised the Subcontract. Once again I do not find that there is a manifest error of law. Clauses 35.5 and 36 are relevant again and as I have indicated earlier, damages were not awarded on the basis of these clauses. In my view there is neither manifest error of law nor strong evidence of an error of law in the terms of s.38(5)(b)(ii) and I would not give leave on this ground. Commercial certainty therefore does not come into it, but if it had, I would have thought the law well settled in relation to how a court goes about determining what documents make up a contract.

In relation to the third suggested ground of appeal, namely that the arbitrator erred as a matter of law and fact in finding that Cox’s damages claim failed for a closed period after about late December 1999, my view is that this is purely a question of fact as found by the arbitrator in his reasons (at 57 and 58), namely:
“Concerning on-site activities in the New Year 2000, I confirm that the Contractor, in a series of Schedule 9 programs, set completion dates for the Subcontractor in mid March and mid April 2000, and I confirm that these dates were not met by Décor Ceilings. However, that does not mean that the Contractor has access to a delay claim against the Subcontractor in this period and, in particular, it was the Contractor’s earlier breaches of contract that forced the Subcontractor to work in a period when it was severely constrained by labour shortages, inclement weather and industrial problems. I find as a matter of fact that between 4 January and 2 May 2000 the Subcontractor used its best endeavours to proceed with “due expedition and without delay”, and that the fact that it was unable to meet scheduled completion dates was not to the Subcontractor’s account.”
It certainly does not, on the face of it, involve a manifest error of law and likewise does not indicate to me that there is strong evidence that the arbitrator made an error of law. I would therefore also decline to grant leave on ground three.
It follows therefore that I would not grant leave on any of the grounds put forward by Cox. I will hear the parties on the question of costs.