Eminent Forms Pty Ltd v Formosa
[2005] SASC 282
•29 July 2005
SUPREME COURT OF SOUTH AUSTRALIA
(Miscellaneous Appeal: Application)
EMINENT FORMS PTY LTD v FORMOSA & ANOR
Judgment of The Honourable Justice Gray
29 July 2005
ARBITRATION - COSTS - GENERALLY
Ex parte application for leave to appeal pursuant to section 38 of the Commercial Arbitration Act 1986 (SA) against costs award of arbitrator - building contract dispute - consideration of section 34 of the Commercial Arbitration Act - consideration of arbitrator's discretion to award costs - no error of law or fact demonstrated - requirements for leave pursuant to section 38 not fulfilled - held: application refused.
Commercial Arbitration Act 1986 (SA) s 34, s 38, referred to.
Eminent Forms Pty Ltd v Formosa & Anor [2004] SASC 192; Formosa & Anor v Eminent Forms Pty Ltd (2005) 91 SASR 6; Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6, considered.
EMINENT FORMS PTY LTD v FORMOSA & ANOR
[2005] SASC 282GRAY J.
This is an ex parte application for leave to appeal against a costs order of an arbitrator. The applicant seeks leave to appeal pursuant to section 38 of the Commercial Arbitration Act 1986 (SA).
Background
The applicant is a builder who entered into a building contract with the respondents on 23 October 2002 for the purposes of making alterations and additions to the respondents’ home. The contract sum was $125,694.00. Pursuant to the contract, the applicant was to be paid the contract price by progress payments at the completion of various stages of work. During February 2003, the applicant sought payment of the first progress payment. The respondents denied the obligation to pay on the basis that the stage 1 works were not completed. The respondents requested that the applicant place the works on hold until the issue of the progress payment had been resolved. The applicant issued a notice of termination, asserting breaches by the respondents. The respondents claimed that the purported termination constituted an unlawful repudiation.
The respondents served notice of dispute pursuant to an arbitration clause in the building contract. The dispute was referred to an arbitrator on 2 April 2003. An interim award was published on 17 November 2003 in favour of the respondents in the sum of $22,164.00. No allowance was made for the work undertaken by the applicant.
The applicant was granted leave to appeal in respect to the interim award. The appeal was heard by a Judge of this Court on 26 February 2004. On 1 July 2004 the appeal was allowed and the interim award set aside. The Judge observed:[1]
[1] Eminent Forms Pty Ltd v Formosa & Anor [2004] SASC 192 at [45], [60]-[62], [77] – [79].
It is convenient to state my conclusions to this point. It was a term of the Contract that the respondents pay the appellant the sum of $31,423.50 on completion of the Stage 1 work. The application of two slurry coats of xypex to the cellar walls was part of the Stage 1 work and that was not done by the appellant. The appellant was not entitled to the first progress payment. As at 24th January 2003 the respondents were not in breach of cl 10 of the Contract. I did not understand the appellant to dispute that if I reached these conclusions, there was no proper basis for its notice of termination which constituted a repudiation of the Contract which was accepted by the respondents.
…
… The amount of the first progress payment was $31,423.50 and the arbitrator found that the cost to apply the two slurry coats of xypex was $2,340.00. The appellant was not refusing to carry out the work, but rather was saying that it was not required to do it at that stage. It is true that the appellant’s mistaken assertion that he was not required to apply two slurry coats of xypex to the cellar walls as part of the Stage 1 work led it to claim the first progress payment and that the respondents correctly denied that they were liable to make the first progress payment. That denial by the respondents and other alleged breaches of the Contract by the respondents which were without substance formed the basis of the appellant’s notice of termination which was a repudiation of the Contract. However, in my opinion it is not appropriate in the circumstances of this case to look at the ultimate repudiation of the Contract by the appellant in considering the doctrine of substantial performance. In considering whether the appellant’s breach went to the root of the Contract, the act to be considered is the appellant’s failure to complete the Stage 1 work in that it did not apply two slurry coats of xypex to the cellar walls. That conduct did not go to the root of the Contract.
The same conclusion follows from the application of the second approach. The nature of the defects and the proportion between the cost of rectifying them ($2,340.00) and the first progress payment ($31,423.50) leads to the conclusion that the Stage 1 works were substantially performed.
In my opinion, the appellant was entitled to recover the first progress payment minus an allowance for the application of xypex. At the same time, the respondents were entitled to damages for the subsequent wrongful repudiation of the Contract by the appellant.
…
There is a question as to whether leave to appeal should be granted in relation to this complaint, and I would have to say that the answer to that question is fairly described as borderline. However, having regard to the approach taken in Angela Kinnane v Zee Homes Pty Ltd (above), I am prepared to grant leave.
The appeal must be allowed and the award made by the arbitrator must be set aside. The appellant is entitled to claim from the respondents the first progress payment ($31,423.50) minus the cost of applying two slurry coats of xypex ($2,340.00) giving a total of $29,083.50.
The respondents are entitled to recover from the appellant the cost to make good other defective works ($6,291.00), the various sundry items ($894.00) and the compensation for inconvenience and stress ($9,500.00) giving a total of $16,685.00. This leaves a balance in favour of the appellant of $12,398.50.
The Judge dealt with the costs of the appeal. Both parties then applied for an order for the costs of the arbitration, including reimbursement of their contribution towards the arbiters fees. The matter was remitted to the arbitrator for determination. The parties filed written submissions and an oral hearing was held on 30 August 2004.
On 22 September 2004 a final award was published by the arbitrator, ordering the respondents to pay the applicant’s costs of the reference to the arbitrator on a party/party basis. It was further ordered that the respondents were to reimburse the applicant for its contribution to the costs of the award. In the course of his reasons, the arbitrator observed:
It was the [respondents’] position that there were circumstances that took the Eminent Forms Formosa dispute “out of the ordinary”, justifying a costs order in favour of the [respondents]. In particular, the [respondents] said that they were successful in relation to all of the substantial issues brought to the arbitration, including the [applicant’s] wrongful termination of the contract, and the [respondents’] entitlement to damages flowing from that wrongful determination, as well as an entitlement to be reimbursed for defective work. I agree with that proposition, and it is a matter of fact that at least 90% of the total time involved in the Hearing was taken up with issues where the [applicant] was unsuccessful, and it is also a matter of fact that findings in the Interim Award in relation to wrongful determination, and damages in favour of the [respondents], were not disturbed in the appeal process. If I were not constrained by the law as expressed in Badge Constructions, I would make a costs award in favour of the [respondents], on the basis that costs should follow the “event”, with the “event” being defined as unlawful termination and consequential damages. However, the exceptions to the Hudson rule identified in Badge Constructions do not deal with the particular circumstances of this dispute, and it is my obligation to observe the current law. Whether or not these particular circumstances are sufficiently “out of the ordinary” to allow a departure from the Hudson prescription is properly a matter for the Supreme Court, and it may be that the competing positions of the parties will be resolved in an appeal from this Final Award.
…
I note that Para 10 of Badge Constructions requires the costs award to be “fair and just in all of the circumstances”. To be just, the award must be lawful, and that is the basis of my award. Concerning fairness, that of course is much more a subjective issue, and while I am sure that the [respondents] will say that this award is unfair, because the [respondents] won all of the substantive arguments in the Hearing, equally the [applicant] would say that a costs award in favour of the [respondents] would be unfair, because it won a balance judgment in its favour.
For the reasons stated, I am obliged by the current law in South Australia to order the [respondents] to reimburse the [applicant] for its costs of the reference, and to pay the [applicant] its contribution towards the costs of the award.
On 21 October 2004, by ex parte summons, the respondents sought leave to appeal against the arbitrator’s final award. Leave was granted on 12 November 2004. The appeal was heard by a Judge of this Court. The Judge found that the arbitrator correctly directed himself that, pursuant to section 34 of the Commercial Arbitration Act, costs are in the discretion of the arbitrator and that discretion must be exercised judicially. However, it was observed that acting judicially does not necessarily warrant a departure from a common law rule. It was noted that the exceptions to the general rule espoused in Hudson’s Building and Engineering Contracts[2] and approved in Badge Constructions Pty Ltd v Penbury Coast Pty Ltd[3] are not exhaustive. It was said that the arbitrator erred in concluding that only in the circumstances stated in Hudson could there be any departure from the general rule that the party ultimately successful on the net balance awarded should recover costs.[4] The Judge found that the arbitrator had failed to properly exercise the discretion he was required to exercise pursuant to section 34(1) of the Commercial Arbitration Act.
[2] Hudson’s Building and Engineering Contracts (10th edn, 1970) at 870.
[3] [1999] SASC 6.
[4] Formosa & Anor v Eminent Forms Pty Ltd (2005) 91 SASR 6 at [19].
The Judge observed:[5]
[5] (2005) 91 SASR 6 at [22]-[24].
Section 34(1) of the Commercial Arbitration Act provides that the award of costs is within the discretion of the arbitrator. The Act imposes no fetters on the exercise on that discretion. The same applies to the award of costs in this Court: s 40 Supreme Court Act 1935; Rule 101.01, Supreme Court Rules. When speaking of the exercise of that discretion, Bray CJ, with whom Zelling and Jacobs JJ agreed said, in Cretazzo v Lombardi (1975) 13 SASR 4 at 11:
"Time and again attempts have been made to fetter that general discretion by the imposition of judge- made rules. Time and again those fetters have been released by appellate courts. I think the guiding principle still stands as it left the House of Lords in the famous case of Donald Campbell & Co v Pollak [1927] AC 732 that the general discretion is absolute and unfettered except that it must be exercised judicially not arbitrarily or capriciously and that it cannot be exercised on grounds unconnected with the litigation."
The discretion is unfettered, and it cannot be exercised capriciously. This gives rise to what may appear to be a rule of general application but which, in reality, demonstrates only a consistency in the exercise of the discretion, namely that costs generally will follow the event, or will be awarded to the party who can be said to have succeeded in the litigation. To do otherwise, in most cases, would be to act capriciously. However, there will be cases where it is appropriate to do otherwise. As Bray CJ said, ibid at 12:
"A successful party who has failed on certain issues may well not only be deprived of his own costs of those issues but ordered in addition to pay his opponent’s costs of them and in this context "issue" does not mean a precise issue in the technical pleading sense but any disputed question of fact or in my view of law: Foster v Farquhar [1893] 1 QB 564 per Bowen LJ as he then was at p 570. In fact in that case the plaintiff who succeeded to a substantial extent was deprived of his costs and ordered to pay the defendant’s costs in relation to certain specific disputed items of special damage on which he failed. Moreover it has been held by the House of Lords that the support of an extravagant claim by fraudulent acts or evidence may be good cause for depriving a successful plaintiff of his costs: Huxley v West London Extension Railway Company (1889) 14 App Cas 26.
In this case the grounds on which the learned Judge acted were obviously connected with the litigation. Nor do I think it could be said apart from the specific question to which I am about to turn that he did not exercise his discretion judicially. It is nothing to the point that many judges would have exercised it differently or that many judges sitting at first instance have exercised it differently in comparable circumstances; see for example Lipman v George Pulman & Sons Ltd (1904) 91 LT 132; Birmingham and District Land Co Ltd v London and North-Western Railway Co (1887) 57 LT 185."
Even if the successful party is defined as including a person who becomes entitled to a balance judgment after a series of contested claims and counterclaims, it does not follow that a proper exercise of the discretion will result in an award of costs in his favour, or that it will require special or exceptional circumstances to depart from what might be perceived as a general rule. Leighton Contractors v Western Australian Government Railways Commission (1966) 115 CLR 575 was a case where the appellant claimed the sum of $516,066 comprising ten points of claim. As to three of those claims it failed entirely. As to one, it succeeded substantially, and as to the balance it was partially successful. The amount awarded to the contractor was $152,200. The arbitrator directed that each party should bear its own costs. The contractor contended that the arbitrator had misconducted himself in that he had, without reason, failed to award costs to the successful claimant. Under the legislation then prevailing the contractor had to demonstrate an error of law apparent on the face of the award. The Court was not entitled to look at the record of the proceedings before the arbitrator. In their joint judgment, Barwick CJ, McTiernan and Owen JJ said, at 579:
"(W)here as here there are a number of claims upon some of which the claimant succeeds wholly or partially and upon some of which he fails altogether it may well be a judicial exercise of the discretion to order each party to bear its own costs throughout. It cannot be said that in such a case the claimant must be given his costs or some part of them. It may be in general he would. But if he is given costs it is the result of the exercise of a discretion and not by rule of law. In short the face of the award does not suggest let alone demonstrate a total lack of circumstance in the conduct or result of the arbitration upon or in respect of which the arbitrator could properly exercise his discretion by awarding each party to pay its own costs. In our opinion it is not made to appear from the award that there was no tenable reason for the arbitrator to depart from the course of awarding costs to the successful party."
On 28 January 2005 the appeal was allowed and the final award set aside. The Judge found that as the arbitrator was cognisant of all the relevant facts, he was best equipped to exercise the discretion in determination of cost, and remitted the matter to the arbitrator to be determined according to law.
The re-hearing before the arbitrator as to the question of costs proceeded by way of written submissions. On 14 April 2005 the arbitrator published a second final award ordering the applicant to pay its own costs of the reference, the interim award, and the first and second final awards. The applicant was further ordered to reimburse the respondents 90% of their costs of the reference, on a party/party basis, and 90% of the respondents’ contribution towards the costs of the interim award and the first and second final awards. In his reasons, the arbitrator concluded:
In this particular arbitration, I find that there are a number of “good and cogent reasons” to make a substantial award for costs in favour of the [respondents], despite the fact that, on appeal, the flow of money was in favour of the [applicant].
First, it is a matter of fact, as stated in the First Final Award, that the [respondents] were successful in almost all of the matters contested in the arbitration. …
The arbitrator went on to list a number of factors in support of the finding that the respondents were successful on almost all issues at the initial hearing. Having reviewed the detail of the interim award and the judgment of the appeal Judge, the arbitrator confirmed his statement in the first final award that the respondents were successful on all substantial issues brought to arbitration and were entitled to the bulk of their costs, despite the fact that the balance payment, on appeal, was in favour of the applicant. It was said that this was a reason to depart from the general rule espoused in Hudson.
The arbitrator went on to observe that the issues before the Judge of this Court in relation to the appeal against the interim order were not issues fully developed in the arbitration and that the Judge made findings on principles of law that were not brought to the arbitration in any way. The arbitrator observed:
The final reasons for using my discretion to depart from the general rule in this particular arbitration concerns the difficulty the [respondents] faced in framing any formal offer, when it did not know, until the publication of [the Judge of this Court’s] judgment, the legal bases of the [applicant’s] ultimate success in securing a balance payment. The [respondents] did not know, in the arbitration, that it was the [applicant’s] case that it was entitled to reimbursement under the doctrine of substantial completion, even if its termination was found to be unlawful, and the [respondents] would have had to make a sealed offer without that knowledge. Similarly, the [respondents] did not know that it was the [applicant’s ] case that it was entitled to a restitution payment in circumstances where the [respondents] were claiming reimbursement for defective work, and if they had known, that would be an important factor in making a formal offer.
..
There are two final matters. First, in its submissions the [applicant] said that it was entitled to its costs because, in an arithmetical analysis, it could show that it achieved a higher percentage of its original pleaded claim that the [respondents’] percentage of its original pleaded counterclaim. The [respondents] challenged the arithmetic, but I do not have to form any preference, finding that an analysis of success or failure by this arithmetical approach has no relevance in the discretion in this particular case. Secondly, the [applicant] said that if the valuation of the work to complete the contract had been dealt with in the arbitration, rather than by consent between the parties, then the [applicant] would have achieved significant success, in the Hearing on that particular issue. In my view this proposition is speculative, and it would be wrong to allow it to affect this costs award.
In summary, it is my opinion that there are good reasons for departing from the general rule, that the reasons are linked to the arbitration, and that the costs award that I have made in favour of the [respondents] “is fair and just in all of the circumstances”.
Application for Leave
The applicant seeks leave to appeal the arbitrator’s second final award. The right to appeal an award made by an arbitrator to a single Judge of this Court is provided in section 38 of the Commercial Arbitration Act as follows:
(1)Without prejudice to the right of appeal conferred by subsection (2), the Court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the award.
(2)Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.
Subsections (4) and (5) outline the requirements that must be met in order for leave to be granted:
(4)An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement--
(a) with the consent of all the other parties to the arbitration agreement;
or
(b) subject to section 40, with the leave of the Supreme Court.
(5)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.
Subsection (6) provides this Court with additional power to grant leave subject to the applicant complying with any conditions considered to be appropriate.
These provisions require the court to determine whether, having regard to all the circumstances, the determination of a question of law could substantially affect the rights of one or more parties to the arbitration agreement; or whether 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.
Issues on Appeal
The applicant submits that there has been a miscarriage of the exercise of the discretion by the arbitrator. It was said that the arbitrator failed to take into account material considerations and overlooked the significance of a material factor. Counsel contended that the arbitrator failed to give adequate consideration to the issue of the cost to complete the building works.
The applicant further seeks to appeal on the ground that the arbitrator omitted what was described as the first progress claim from the list of issues cited as supporting his decision to depart from the general rule. It was said that on this claim, the builder was successful.
It was submitted by counsel for the applicant that, having regard to the complaints described above, the arbitrator did not act judicially but rather in a manner described as capricious and amounting to an error of law.
As earlier emphasised, section 34(1) of the Commercial Arbitration Act provides that an award of costs is in the discretion of the arbitrator. That discretion is unfettered. The arbitrator proceeded to exercise his discretion and award costs in the terms now complained of. The arbitrator took the view that the applicant had been unsuccessful in regard to the vast majority of issues addressed in the arbitration and that the respondents had been successful. In those circumstances he exercised his discretion to award no costs to the applicant in respect of the applicant’s costs and to order that the applicant pay the vast majority of the respondents’ costs and the costs of the arbitration. The submissions advanced in the application for leave do not identify an error of principle in the approach of the arbitrator. In so far that it is suggested that the arbitrator failed to have regard to material matters, nothing has been advanced that identifies with particularity anything material in that respect.
The applicant has failed to establish any arguable error of fact or law on the face of the award. The applicant has not identified any question of law arising out of the award. In particular, it has not been demonstrated that it is arguable that there is any error of law by the arbitrator that could substantially affect the rights of the parties to the arbitration agreement. No strong evidence has been advanced to suggest that the arbitrator made an error of law and that the determination of the question may add, or be likely to add, substantially to the certainty of commercial law.
The proper approach to the issue of costs was fully canvassed by Bleby J in the decision earlier referred to.[6]
[6] (2005) 91 SASR 6.
Conclusion
It is of some concern that this matter, involving what might be said to be a relatively modest sum, has been before an arbitrator on at least three occasions and before this Court also on three occasions. There appears to be a pressing need for the issue to be finally resolved.
In the present case, having regard to all the circumstances, the applicant has failed to demonstrate a manifest error of law on the face of the award or strong evidence that the arbitrator made an error of law. The applicant has not demonstrated that the determination of any question of law could substantially affect the rights of one of the parties. Strong evidence has not been identified that the arbitrator made an error of law and the determination of the question may add, or may be likely to add substantially to the certainty of commercial law. As a result, the requirements necessary for a grant of leave to appeal as set out in section 38(5) of the Commercial Arbitration Act have not been fulfilled.
The application is refused.
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