Formosa v Eminent Forms Pty Ltd - [2005] SASC 35

SUPREME COURT OF SOUTH AUSTRALIA
(Miscellaneous Appeal: Civil)
FORMOSA & ANOR v EMINENT FORMS PTY LTD
Judgment of The Honourable Justice Bleby
28 January 2005
ARBITRATION - COSTS
ARBITRATOR'S DISCRETION
Appeal pursuant to s 38 Commercial Arbitration Act 1986 against costs award of arbitrator – Building contract dispute – Section 34 Commercial Arbitration Act – Exercise of arbitrator’s discretion to award costs – Whether arbitrator unduly fettered his discretion – Manner in which discretion should be properly exercised – Arbitrator failed in exercise of discretion – Remitted to arbitrator to make award of costs according to law.
Commercial Arbitration Act 1986 (SA) s 34, s 38; Supreme Court Act 1935 (SA) s 40; Supreme Court Rules 1935 (SA) r 101.01, referred to.
Lewis v Haverfordwest Rural District Council [1953] 1 WLR 1486; Cretazzo v Lombardi (1975) 13 SASR 4; Leighton Contractors v Western Australian Government Railways Commission (1966) 115 CLR 575, applied.
Miles v Palm Bridge Pty Ltd [2001] WASC 42; Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6, discussed.

FORMOSA & ANOR v EMINENT FORMS PTY LTD
[2005] SASC 35
Miscellaneous Appeal
BLEBY J:
Background

This is an appeal pursuant to s 38 of the Commercial Arbitration Act 1986 against the award of an arbitrator concerning the costs of an interim award which he had previously made. The appeal comes by leave granted by a judge of this Court on 12 November 2004.
The arbitration has a complex and, it would appear, costly history. It arose out of a building contract for alterations to a house. The builder submitted to the owners a first progress claim said to be in accordance with the requirements of the contract. There was a dispute over the entitlement to that payment. The builder then gave notice terminating the contract. The owners issued a notice of dispute which commenced the arbitration process. Points of claim and counterclaim and their respective defences were lodged with the arbitrator.
By way of interim award the arbitrator rejected the builder’s claim for the first instalment and awarded damages to the owners in the sum of $22,164.
The builder appealed, by leave, to this Court: see Eminent Forms Pty Ltd v Formosa & Anor [2004] SASC 192. The appeal was heard by Besanko J. In his decision the Judge rejected all the builder’s complaints relating to the various components of the award of damages determined by the arbitrator in favour of the owners. However, the builder succeeded on an argument that stage 1 of the work was substantially performed. The Judge decided that the builder was entitled to recover the first progress payment minus an allowance for what the arbitrator had found had not been completed, less the damages incurred by the owners, as determined by the arbitrator, for the wrongful repudiation of the contract by the builder. The Judge also considered that the builder would have had a claim on a quantum meruit for the work done less the damages to which the owners were entitled, thus producing the same result.
That result was payment of a balance in favour of the builder in the sum of $12,398.50. After hearing further argument the Judge made an allowance for interest and heard argument as to costs. He said:
“The next issue is the question of costs of the appeal. Again I have had regard to the submissions of the parties. In my opinion, an important consideration on the question of the costs of the appeal is the fact that the appellant has achieved a measure of success on the appeal. It is obvious that the appellant had to pursue the appeal to convert an award against it to an award in its favour. However, it is not entitled, in my opinion, to all its costs of the appeal because it failed on some issues argued before me and it would seem, from the reasons of the arbitrator, because the substantial performance argument was not fully developed before the arbitrator. I put more weight on the first consideration, namely, that the appellant failed on some of the issues argued before me than the second. I would allow the appellant half its costs of the appeal.”
He remitted the question of costs of the arbitration to the arbitrator, considering that it would be inappropriate for him to deal with that question, as there might be a number of factors of which he was unaware which would be relevant to the decision as to costs. He said:
“No doubt the arbitrator will consider the question of costs in light of my reasons and the submissions of the parties”.
In his final award, the subject of this appeal, the arbitrator ordered the owners to pay to the builder its party and party costs of the reference and to reimburse the builder for its contribution to the costs of the award in the sum of $10,500.
The arbitrator’s reasons
The arbitrator correctly directed himself that s 34 of the Commercial Arbitration Act provided that costs are in the discretion of the arbitrator. He expressed his understanding to be that the discretion was to be exercised judicially, “that is, there must be judicial reasons for an arbitrator to depart from the common law rule”.
I pause at this stage to observe that there is no doubt that the discretion is unfettered, and that it must be exercised judicially. However, acting judicially does not mean that there must be judicial reasons for departing from a common law rule. Where the discretion is at large, there can be no “common law rule” from which to depart. Rather, the approach demanded is that described by Lord Goddard CJ in Lewis v Haverfordwest Rural District Council [1953] 1 WLR 1486 at 1487:
“Those words ‘judicially exercised’ are always somewhat difficult to apply, but they mean that the arbitrator must not act capriciously and must, if he is going to exercise his discretion, show a reason connected with the case and one which the court can see is a proper reason.”
I return to the arbitrator’s reasons. The arbitrator referred to the decision of Debelle J in this Court in Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6. He considered that that decision provided “the appropriate judicial framework” for determining claims for costs, and as expressing the current law in South Australia. He referred to the argument of the builder before him that the decision in Badge Constructions adopted a “longstanding rule” expressed by the author of the 10^th Edition of Hudson’s Building and Engineering Contracts (Sweet & Maxwell, 1970) in the following passage at p 870:
“It should be remembered that in building and engineering cases the issue between the parties is almost invariably financial, and that the machinery of the sealed offer is available to protect the position on costs. Though there may be many issues, in legal pleading terms, of claim, set-off, and counterclaim, the parties’ eyes will always have been fixed on the final balance owing one way or another. Whoever secures or avoids paying that balance in effect has won. Only in the case of wildly exaggerated claims, or separate and costly issues on which the successful party has failed and which it was wholly unreasonable for him to raise, can there be, it is submitted, any justification for departing from the rule that the party ultimately successful on a final balance of claim and counterclaim should be paid his costs. There are cases in other situations where separate orders for costs on claim and counterclaim are appropriate, but counterclaims on building and engineering contracts arise out of the same transaction and are equitable set-offs, and the basic commercial realities, in the vast majority of cases argue very strongly, it is submitted, for a single award of costs in favour of the party ultimately successful on balance, unless the balance is so small as to justify the view that a party responsible for initiating the litigation and obtaining such a balance can be regarded as having been effectively unsuccessful.” (Footnote omitted)
The arbitrator appears to have accepted a submission of the builder that there was nothing in the arbitration to support the view that the builder’s claims were “widely exaggerated” or “unreasonable” or that there was any evidence that the builder’s claims were deliberately inflated. The arbitrator concluded:
“If I were not constrained by the law as expressed in Badge Constructions, I would make a costs award in favour of the Owners, 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.”
The arbitrator seems to have been influenced in particular by that part of the passage quoted from the 10^th Edition of Hudson and apparently quoted with approval by Debelle J in Badge Constructions:
“Whoever secures or avoids paying that balance in effect has won. Only in the case of wildly exaggerated claims, or separate and costly issues on which the successful party has failed and which it was wholly unreasonable for him to raise, can there be, it is submitted, any justification for departing from the rule that the party ultimately successful on a final balance of claim and counterclaim should be paid his costs.”
He concluded that in this case there were neither exaggerated claims nor separate costly issues which it was unreasonable for the builder to raise and on which the builder failed, such as to take this case out of the rule that the party ultimately successful on a final balance should be paid his costs.
In my opinion, in so constraining himself, the arbitrator failed properly to exercise the discretion he was required to exercise under s 34(1) of the Commercial Arbitration Act 1986, and the exercise of his discretion miscarried.
The authorities relied on by the Arbitrator
Although the arbitrator was obviously influenced by that part of the passage from Hudson which I have repeated, I do not consider that that represents the law in this State, nor the law concerning the exercise of an arbitrator’s discretion under s 34 of the Commercial Arbitration Act. As will be seen, I am comforted in that view by the decision of Hasluck J of the Supreme Court of Western Australia in Miles v Palm Bridge Pty Ltd [2001] WASC 42.
The passage concerned is not repeated in the 11^th Edition of Hudson (1995). The whole of the passage was quoted with apparent approval by Debelle J in Badge Constructions. However, it must also be read in the context of what was decided in that case and in the context of the remainder of his Honour’s judgment. In that case the arbitrator awarded the builder $40,940 plus interest amounting to $920. He also allowed the greater part of the cross-claim made by the owner, determining that the owner’s cross-claim amounted to $12,594. After setting off the cross-claim against the builder’s claim, he made an interim order of $29,266 in favour of the builder. He later determined that each party should bear its own costs of the arbitration and should share equally the costs of the interim award and the costs award. The builder complained that the costs award should be set aside because the effect of the award, once its costs were paid, was that the builder would recover little notwithstanding that it succeeded on a major part of its claim. I might add that that is a situation which, regrettably, confronts litigants from time to time. It will seldom be a reason in itself for not making an otherwise appropriate order for costs.
Debelle J, at [10], quoted with apparent approval an extract from Berry et al, Legal Costs – South Australia (Butterworths) as follows:
“Where there is both a claim and a counter-claim the order for costs should be framed so as to give a just result: Chell Engineering Ltd v Unit Tool and Engineering Co Ltd [1950] 1 All ER 378; Childs v Blacker [1954] 2 All ER 243. In the ordinary course if both the claim and the counter-claim succeed the plaintiff and the defendant are each entitled to the costs incurred on their claim and counter-claim respectively: Provincial Bill Posting Co v Low Moor Iron Co [1909] 2 KB 344. In taxing such costs the claim is treated as if it stood alone and the costs are awarded for maintaining it. As to the counter-claim the only amounts awarded are for the increased costs occasioned by it: Medway Oil and Storage Co Ltd v Continental Contractors Ltd [1929] AC 88; Smith v Madden (1946) 73 CLR 129; Millican v Tucker [1981] 1 All ER at 1083. Where neither party is wholly successful the court in its discretion may order one party to have a percentage of its costs only: Foti v Banque Nationale de Paris (1989) 149 LSJS 401. Where the counter-claim is really in the nature of a defence or set-off, the court may give the defendant the costs, or where the plaintiff obtains a balance judgment, the court may give the plaintiff costs on the scale appropriate to the amount of balance judgment.” Lowe v Holme (1883) 10 QBD 286; Childs v Blacker [1954] 2 All ER 243; Hanak v Green [1958] 2 QB 9.”
It should be noted that the last sentence in the passage quoted is only apposite to a jurisdiction where there is a graded scale of costs recoverable according to the amount of the judgment recovered. It will not be relevant to most cases arising under the Commercial Arbitration Act where a single scale of costs applies.
However, importantly, Debelle J continued at [11]:
“The overriding principle is that the order for costs is fair and just in all the circumstances. The arbitrator has a broad discretion to ensure such a result. Thus, it will be appropriate when considering what award should be made as to costs to have regard to the conduct of the parties. So, a party may not be entitled to costs if he has advanced an inflated claim or counter-claim with the apparent purpose of frightening the other party by the fear of the costs of proceedings to drop the claim or accept less than the claim: Archital Luxfer Ltd v Henry Boot Construction Ltd [1981] 1 Lloyds Rep. 642.”
I respectfully agree with that statement of the law. However, the matters to which Debelle J said it was proper to have regard are not exhaustive. They were merely given by way of example. The error from the passage from the 10^th Edition of Hudson relied on by the arbitrator is the assertion that only in the circumstances stated can there be any departure from the general rule that the party ultimately successful on the net balance awarded should be paid his costs.
Debelle J continued, after referring to the passage from Hudson, at [13]:
“Given the particular issues which arise when determining costs where both the claim and counter-claim arise out of a building contract and both claim and counter-claim are successful, it might be putting the principle too high to assert that exceptional circumstances are required to justify a departure from the general principles noted above. It is not necessary to decide that issue here. But it can at least be said that there must be good cause for departing from the general principles.”
His Honour went on to hold that there was no good reason in the circumstances of that case to depart from the general rule identified in Hudson. The matter was remitted to the arbitrator for a determination of the builder’s costs according to law.
The exercise of a discretion
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 Judged 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.”

The High Court recognised that within the limitations of what was disclosed on the record, it could not be demonstrated that there was not some reason justifying the arbitrator’s decision refusing to award costs to the party securing the final flow of money.
A little reflection will demonstrate, by way of example, how that situation could arise. Two parties may agree to submit their dispute to arbitration. The builder has only one claim, namely that he be paid the money due under the contract which he claims he has completed. The owner may dispute that and may claim the costs of a variety of rectification works for allegedly defective workmanship. The matter is submitted to arbitration. A conference occurs before the hearing at which it is agreed that the builder performed the work under the contract and is entitled to the balance due subject only to possible offsets for the claims of the owner. The arbitrator is told that the liability to the builder is acknowledged. The sum is agreed, and the arbitrator is asked to take that into account when fixing the amount due to the owner (if any) for the alleged defective work. The arbitration proceeds. It would be surprising if, in those circumstances, the costs of the arbitration fell to be determined according to whether the amount awarded to the owner fell above or below the agreed amount to which the builder was entitled and according to the net amount awarded by the arbitrator, when the whole of the arbitration was devoted to the liability of the builder for the alleged defective work. The arbitrator would be obliged to consider, in the exercise of his discretion in those circumstances, even if the amount awarded to the owner was less than the amount owed to the builder, whether the prima facie rule that costs follow the event should be displaced because of the success of the owner in the matters which became the subject of the arbitration.
I accept that as a general rule a party who secures a judgment for the balance, after arbitration, of a series of contested claims and counterclaims will generally be regarded as the successful party. Generally, it may be appropriate to make an award in his favour, but not necessarily of the full amount to which the “winner” might otherwise be entitled if it were a contest on a single issue.
Hasluck J in Miles v Palm Bridge Pty Ltd [2001] WASC 42 examined a number of authorities dealing particularly with costs of building disputes. At the conclusion of that examination he said, at [51]:
“It emerges from this review of the authorities that in circumstances where the Arbitrator has been dealing with various claims and cross-claims under a building contract, the general rule is that the successful party is the party who secures a judgment for the balance, that is to say, the party to whom there is a final flow of money. The party identified as the successful party upon that basis will generally be awarded the whole of the costs, unless there are special circumstances which justify a ruling to the contrary. If the Arbitrator acknowledges the general rule in favour of the successful party, but is then able to identify special circumstances to the contrary referable to the conduct of the dispute, or the outcome, and his reasoning in that regard appears on the face of the award, then a Court will not normally interfere with the exercise of his discretion. It follows that, in my view, Hudson (supra) puts it too strongly in suggesting that the successful party will only be deprived of his costs where he has failed in respect of wildly exaggerated claims or separate and costly issues. It will be sufficient if special circumstances or grounds are identified which justify an amelioration of the basic rule.”
The reference to Hudson was a reference to the passage from the 10^th Edition quoted above.
Hasluck J continued at [60]:
“In the circumstances of the present case, in order to exercise his discretion judicially, [the Arbitrator] was obliged to identify the successful party having regard to the principle just mentioned, namely, that in the context of claims and cross-claims the successful party will generally be the party securing the final flow of money. In this case, the party fulfilling that description was the builder.
It would then be open to the Arbitrator in the exercise of his discretion to determine whether there were special circumstances referable to the way in which the dispute was conducted and to the outcome which might justify a displacement or amelioration of the prima facie position that the builder was entitled to the costs. It was at this stage that it might have been appropriate for the Arbitrator to determine whether the builder’s lack of success in regard to a number of significant issues required that there be some amelioration of the prima facie entitlement. If the special circumstances were identified on the face of the award persuasively and with particularity, then it is doubtful, having regard to the decision of the High Court in Leighton Contractors v Western Australian Government Railways Commission (1966) 115 CLR 575 and the reasoning of Kearney J in Carpaolo Nominees Pty Ltd v Marrosan Nominees Pty Ltd (1997) 112 NTR 1 whether the Supreme Court would be prepared to interfere with or quash the award. As it turned out, however, because of the view taken by the Arbitrator of the Scherer proposition, I consider that the builder was placed at a disadvantage in that the Arbitrator did not give proper weight to the builder’s prima facie entitlement to an exercise of the discretion in his favour.”
With respect to Hasluck J, I do not regard the reference to “special circumstances” as being particularly helpful. It may be regarded as another attempt to fetter the discretion criticised so forcefully by this Court in Cretazzo v Lombardi (supra). Good cause is all that is needed to justify the decision. In the case of an arbitration of claims and counterclaims with a net result in favour of one party, the closeness of the result may be greater justification for a diminishing portion of the “successful” party’s costs, even to the point where it may be appropriate that each party bear its own costs. It may be that both parties will have had significant victories which must be taken into account in the exercise of the discretion.
It was a judgment of that type that Besanko J was required to make in determining the costs of the previous appeal in this matter before him. The builder could be said to have been the successful party, in that the net flow of money was to the builder. But the builder lost on a number of issues before the Judge which justified the exercise of the Judge’s discretion to award something less than the full costs of the appeal.
One hesitates to identify the relevant circumstances that the arbitrator should have brought to account in this case. Relevant factors would include an assessment of the number and nature of issues argued before him, the time they occupied and who was successful on those issues, whether the arbitrator’s decision was challenged and the extent to which it was upheld by this Court, whether and to what extent the matter on which the builder succeeded in this Court was argued before the arbitrator, whether the costs of those issues have been addressed by the order of this Court, whether offers may have been made in the course of the arbitration which rendered the continuation of the proceedings on that particular point unreasonable and other factors relating to the conduct of the parties. This list is not intended to and cannot be exhaustive but is merely meant to indicate some of the matters which might be relevant in determining whether there should be a departure from what may be regarded as the usual rule. Having said that, it will seldom be that the decision can be reduced to a complex mathematical exercise. Sometimes the exercise of the discretion will require the wielding of a reasonably broad axe. But provided that there are good and cogent reasons for exercising the discretion in a particular way, being reasons related to the conduct or result of the proceedings and which are not capricious, then the discretion will have been properly exercised and is unlikely to be interfered with.
Conclusion
It follows from what I have said that there was a failure on the part of the arbitrator properly to exercise his discretion in awarding costs to the builder. The appeal must therefore be allowed and the arbitrator’s award of costs set aside.
The question remains whether I should substitute for that award the exercise of my own discretion, or whether I should remit the matter to the arbitrator for him to make an award.
Many issues were argued on the arbitration. The arbitration appears to have occupied a number of days and the arbitrator’s reasons for his interim award occupy many pages. I cannot be aware of all the relevant matters which might bear on the proper exercise of the discretion to award costs to a particular party and whether that should be the whole or a proportion of the costs to which the party might be entitled upon taxation. Only the arbitrator is cognisant of all the relevant facts and is best equipped to exercise the discretion in this case.
I am conscious of the time and probable costs that have been involved in this arbitration and the litigation which has followed. I am reluctant to require the parties to incur any more costs than are necessary. However, I do not consider that I am in a position to decide the question. The question of costs has already been argued before the arbitrator. There may need to be some further supplementary argument, but it should be minimal. In the circumstances, it is appropriate that I should remit the matter to the arbitrator to make an award of costs according to law.