Giles & Giles v G.R.S. Construction Pty Ltd & Anor No. Scciv-01-481

GILES & GILES V G.R.S. CONSTRUCTIONS PTY LTD & ANOR
[2002] SASC 92
Civil

LANDER J. These proceedings were commenced on inter partes summons on 9 March 2001.
The plaintiffs sought the following relief:
1That they be granted leave to appeal the interim award of the second defendant (the arbitrator) dated 23 February 2001 (the award) in the matter of Mr and Mrs Giles v Federation Homes (the dispute reference) pursuant to section 38 of the Commercial Arbitration Act 1986 (SA) - The Act.
2That the award be wholly set aside and/or varied on the grounds of manifest error of law on the face of the award and misconduct.
3That the plaintiffs be awarded the costs of the arbitration.
4That the plaintiffs be awarded the costs of incidental summons.
5Such further or other orders as this honourable Court deems fit.
The inter partes summons was accompanied by an affidavit of the plaintiffs’ solicitors which exhibited a number of documents most of which are not in dispute.
The plaintiffs are the registered proprietors of the land at 13 Sheaoak Drive, Mawson Lakes upon which, pursuant to a contract between the plaintiffs and the defendant dated 29 September 1999, the first defendant G.R.S. Constructions Pty Ltd erected a house.
A dispute arose between the plaintiffs and the first defendant and the second defendant was requested to arbitrate the dispute in accordance with the provisions of the contract which was a standard form Housing Industry Association contract.
The dispute between the plaintiffs and the first defendant related to the quality of the workmanship of the first defendant. The plaintiffs claimed that the first defendant was in breach of its obligations under the contract to carry out the work properly and skilfully.
The second defendant entered into the arbitration on 23 February 2001, and published an interim award in favour of the plaintiffs in the sum of $8,729.
The amount of the award was significantly less than that which the plaintiffs had sought. The plaintiffs being dissatisfied with the interim award brought these proceedings.
The first three paragraphs of the relief are not expressed to be but are alternative claims.
The claim of costs in the arbitration in paragraph 3 is not a matter for this Court. It is for the arbitrator to consider the question of costs of the arbitration in the first instance. The arbitrator has not made an award of costs pending the disposal of these proceedings. After judgment is given in these proceedings the parties should approach the arbitrator regarding costs.
I heard the application for leave to appeal in paragraph 1 separately from the applications for relief in paragraphs 2 and 3 of the summons. On 8 August 2000 I refused leave to appeal.
Consequently the only matter before me is whether or not the award should be wholly set aside and/or varied on the grounds of manifest error of law on the face of the award and misconduct.
In my opinion, the relief sought in paragraph 2 is too wide and the plaintiffs’ counsel recognised this. The plaintiffs’ counsel accepted that on this application he was obliged to confine himself to a claim that the arbitrator had been guilty of misconduct.
The question of manifest error of law was considered on the leave application.
Section 42 of the Act provides:
“42(1) Where -
(a)There has been misconduct on the part of an arbitrator or umpire or an arbitrator or umpire has misconducted the proceedings;
or
(b)the arbitration or award has been improperly procured
the court may, on the application of a party to the arbitration agreement, set the award aside either wholly or in part.”
Misconduct is defined in s 4 of the Act in the following terms:
“misconduct” includes corruption, fraud, partiality, bias and a breach of the rules of natural justice:”
Misconduct is a technical expression in arbitral proceedings. Although it may, it does not require any moral misconduct on the part of the arbitrator. A breach of the rules of national justice may amount to misconduct.
In Melbourne Harbour Trust Commissioners v Hancock (1927) 39 CLR 570 Isaacs J said at 587-588:
“The last question is whether there has been what is called “misconduct” on the part of the arbitrator. The word is here used only in its technical and often misleading sense. No one suggests, or could suggest, the smallest deviation from the strict path of honour. But the word “misconduct” as employed in this connection includes even a mistake in the procedure which has or may have unjustly prejudiced a party (see per Lord Watson in Adams v. Great North Scotland Railway Co. (1891) A.C. 31).”
In the affidavit accompanying the originating proceeding the plaintiffs identified three aspects of misconduct:
1Failure to consider the plaintiff’s claim under the Building Work Contractors Act1995 (SA).
2Failure to consider a claim for misrepresentation.
3Failures in a number of ways to deal with the issue of the claim for damages for the diminution of the value of the property.
On this application the plaintiff’s counsel recognised that the first matter had been considered in the application for leave to appeal and rejected. The second matter plaintiff’s counsel recognised was a claim for another forum. It was the third matter which was pursued on this application.
In relation to that third matter the gravamen of the plaintiff’s claim was that the arbitrator had been guilty of misconduct in that he had breached the rules of natural justice.
It is necessary to recite the history of this matter for an understanding of these reasons.
The plaintiff and the first defendant entered into a contract which obliged the first defendant to erect a house at Sheaoak Drive, Mawson Lakes at a cost to the plaintiffs of $163,100.
Because of the provisions of the Building Work Contractors Act1995 (SA) various statutory warranties were implied into that contract. Those statutory warranties are comprised in s 32 of that Act.
In particular the first defendant warranted that the building work would be performed in a proper manner to accept trade standards and in accordance with the plans and specifications agreed to by the parties Building Work Contractors Act 1995 (SA) s 32(2)(a).
The construction commenced shortly after the execution of the contract and was completed by 30 March 2000.
It was the plaintiff’s evidence that they were not happy with the quality of the work performed by the first defendant and accordingly, in September 2000, made contact with the Housing Industry Association (HIA) in an endeavour to trigger the dispute resolution processes referred to in the contract.
The contract provided for a dispute resolution process. The contract allowed the resolution of disputes in three different ways; dispute reference; arbitration; and legal action. The contract also allowed for conciliation.
Clause 31 provided:
“31. Which Procedure Has Precedence?
31.1 Resolving disputes by legal action is usually costly and slow.
31.2 Arbitration is usually quicker, but can also be costly.
31.3 Dispute reference is usually quicker and less costly than arbitration.
31.4 Because of this, dispute reference ranks over arbitration, and both rank over legal action.
31.5 If one of them starts, then for 14 days another one that outranks it can be started over the same dispute.
31.6 If that happens, the one that outranks goes ahead, and the other one stops.
31.7 If it does not, ranking no longer matters, and that dispute must be decided by the procedure already started.”
The parties settled upon dispute resolution by dispute reference and the second defendant was appointed the referee by the HIA.
On 31 October 2000 a preliminary conference was held between the plaintiffs, Mr Swenson representing the first defendant and the second defendant at the home of the second defendant.
It is the plaintiff’s case that at that conference it was agreed that the plaintiff’s complaint related to defective and incomplete work and loss in value of the home arising from the failure on behalf of the first defendant to meet the quality and standards of a display home.
A number of other matters were agreed, particularly that the arbitrator would publish a reasoned written award
The arbitrator set a timetable for the procedure. The plaintiffs were obliged to produce a statement of claim by 24 November 2000. The plaintiffs would allow the first defendant access to the property and the first defendant was then obliged to provide its defence on or before 8 December 2000. A hearing would then be conducted on the site on 11 and 12 December 2000.
On 10 November 2000 the second defendant wrote to the plaintiffs and Mr Swenson on behalf of Federation Homes, enclosing a copy of the minutes of the preliminary conference. The parties were asked to sign the minute which would act as the dispute reference.
In that letter the second defendant wrote:
“I understand generally that the Owners claims will be for defective work and loss of value. The quantification of those types of claims does not normally require a detailed prior knowledge of the Builder’s relationships with its sub-contractors, or of the Builder’s supervisory performance, but of course these matters may well be relevant evidence. In any case, the Owners are not stuck with the original pleadings, and the Owners will be able to change the claims if new causes of action are revealed after the initial pleadings.”
In the minute which was signed by the parties and which acted as the dispute reference, clause 5 provided:
“5The parties described the nature of the dispute, with the Owners indicating claims for defective and incomplete work, and a loss of value of the residence arising from an alleged failure on the part of the Builder to meet the quality standards of the relevant display home. The Builder indicated that the claims would be contested and the Dispute Referee confirmed that the Award would not contain orders for specific performance in relation to remedial work (if any).”
Two things are perfectly clear from that letter and from the dispute reference itself. First, the dispute would be resolved by an award of compensation to the plaintiffs and not by an order for any remedial work. Secondly, the plaintiffs’ claim was for defective work and loss of value of the residence arising from alleged failures on the part of the first defendant.
It seems to me that both the first and second defendants were on notice at a very early stage as to the scope of the plaintiffs’ claim.
The original timetable set by the second defendant was not adhered to for reasons which are unimportant.
A new timetable was imposed on 30 November 2000:
“1The plaintiffs to lodge their Statement of Claim on or before December 8 2000.
2The Builder to lodge its Statement of Defence on or before … February 2 2001.
3The Owner to provide the Builder with access to the property at times to be agreed between January 15 2001 and February 2 2001.
4The Hearing is now set for February 5 and February 6 2001 on site.”
The plaintiffs lodged their points of claim on 6 December 2000. The plaintiffs’ statement of claim itemised their losses at $106,045.90, which included a claim of $84,582.40 for corrective work. The statement of claim identified with some particularity the alleged defective work.
The first defendant lodged its points of defence on Friday 2 February 2001. The hearing commenced on Monday 5 February 2001, the next business day.
No complaint was made by the plaintiffs about the shortness of time between the delivery of the defence and the hearing of the dispute reference. In my opinion, it would have been open for the plaintiffs to complain about the hearing commencing the next business day after receiving the defendants’ defence. That was plainly unreasonable and could have caused significant prejudice to the plaintiffs.
The defendant put in issue the plaintiffs’ claim and denied liability except to the extent of rectification of areas of work identified in a report of SA Building Consultants dated 26 January 2001 in the sum of $5,650.
The defendant also sought to recover its costs from the plaintiffs which it put as $8,835. I will say no more about its claim for costs.
It is important to note that the defendant did not assert in its defence that the work that the plaintiffs sought to have undertaken was unnecessary and that it was an unreasonable course to adopt.
There was no issue raised in the defence that put the plaintiffs on notice that their claim for a monetary sum for rectification work was unreasonable or that rectification was an unreasonable course of action.
Evidence was taken by the second defendant from a number of witnesses called on both sides.
On 23 February 2001 the second defendant delivered an interim award in which he awarded the plaintiffs $8,729 as compensation for remedial work.
He found that the first defendant had failed to complete the house to the standard of a display home and that with further work the house could be brought to a proper standard. However, in doing so he found that not all of the faults would be rectified.
The second defendant then referred to a decision of the High Court in Belgrove v Eldridge (1954) 90 CLR 613 in which the High Court said at 617:
“In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her. This loss cannot be measured by comparing the value of the building which has been erected with the value it would have borne if erected in accordance with the contract; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantial in accordance with the contract.”
The arbitrator then referred to a further dictum of the High Court at 618:
“The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.”
He concluded that the plaintiffs had been right to pursue a claim in damages measured by the cost of rectification, to provide an equivalent building substantially in accordance with the contract, rather than pursuing a claim for damages measured by comparing the value of the building which had been erected with the value it would have borne if erected in accordance with the contract.
However, he reached the conclusion that many of the claims pursued by the plaintiffs involved courses which were unreasonable.
He said:
“Further, I understand that this aspect of the law of damages, was refined in a case known as Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10 where the Supreme Court of the A.C.T. said that where defects could not reasonably be remedied because the cost of the work was out of proportion with the seriousness of the defect then the measure of damages was a loss in value of the building to the owners by reason of the defect. In relation to the Mawson Lakes residence the owners did not plead a loss in value, nor did the owners provide any evidence in the hearing concerning value, despite giving the builder notice, in a letter dated May 13 2000, that the alleged defects ‘would be easily detectable by a potential buyer’, and despite giving notice of a ‘loss of value’ claim in the Preliminary Conference. Of course, I could make an assessment, but, without evidence, that would involve technical misconduct on my part. It follows that, as a result of the lack of both a claim, and evidence, no award in relation to any loss in value of the building is available to the Owners.’ ”
He then went on to assess the loss at the figure which I have mentioned.
The male plaintiff, in the first affidavit sworn by him, has stated:
“At no stage prior to the delivery of the interim award did Sarah make it known that he was of the view that many of the claims for which we were seeking compensation were unreasonable having regard to the nature and seriousness of the defect and that in the absence of a defect in the points of claim and in the absence of evidence as to loss of value that we would be denied compensation for those claims.”
He has said further:
“Sarah has limited his award to a claim for breach of contract and to an award of damages arising from breach of contract and has failed to give consideration of any award with respect to the Building Work Contractors Act, misrepresentations and/or misleading deceptive conduct. Had Sarah enabled us to present evidence on the loss of value of the home we would have been in a position to adduce evidence that the house is worth at least $45,000 less by reason of the defects. We have an expert report to this effect.”
It is the plaintiffs’ contention that the breach of natural justice was the failure by the second defendant to warn the plaintiffs that he was of the opinion that many of their claims were unreasonable and that in those circumstances the true measure of their damages would be determined by reference to difference in value.
Mr Swenson has sworn an affidavit in answer to the plaintiffs’ first affidavit. He states that the plaintiffs did, at a preliminary conference, make mention of an “alleged loss of value”. However he states that he has no recollection of any mention of any loss of value being made by the plaintiffs during the course of the hearing.
The male plaintiff filed a further affidavit, deposing to the course of the proceedings before the second defendant. He also exhibited a copy of a report from Mr Iain Mead of Delfin Realty Pty Ltd which he obtained in late November 2000 in which Mr Mead offered the following opinion:
“From the above information it can be seen that your property should sit in the price range of $320-340,000. However, with some noticeable defects which are not usually found in a property like yours and with the current trend for people to have a building inspection report prior to purchasing; it is likely that the sale price of your home could be in the range of $260-280,000.”
Mr Giles was cross-examined in relation to that affidavit. Mr Giles admitted that he received that appraisal from Mr Mead and an appraisal from Toop and Toop prior to writing a letter to the first defendant on 24 November 2000. He agreed that he did not provide copies of those reports to the first defendant at that time.
He further agreed that at that time he was aware that, on his case, the defects in the erection in the house would give rise to a loss of value in the house.
On the evidence before me I can make the following findings:
1At some time during the preliminary conference the plaintiffs indicated to the second defendant that it was their claim that the defective workmanship of the first defendant meant that the house was of a lesser value.
2That at the preliminary conference the plaintiffs made known to both the first defendant and the second defendant that their claim included a claim for loss of value.
3That the dispute reference included a claim for loss of value.
4That the plaintiffs obtained evidence in relation to that loss of value prior to the lodging of their statement of claim.
5That that evidence was not provided to either the first or second defendant at any time prior to the hearing or the publication of the award.
6At no time prior to the hearing did the defendant assert that the plaintiffs’ claims were unreasonable or that rectification was an unreasonable course of action.
7That at no time prior to the hearing or during the hearing were the plaintiffs advised that their claim for compensation for the defective work might fail because their claim included unreasonable demands.
8At no time prior to the hearing or at the hearing, before the second defendant, were the plaintiffs made aware that there was a risk of the substantial part of their claim failing.
9At no time were the plaintiffs made aware that they should tender, by way of an alternative case, evidence of loss of value.

The question to be decided then is in those circumstances whether the plaintiffs have been denied natural justice.
In considering that matter it is useful to return to the provisions of the contract.
Clause 34 of the dispute reference provides inter alia:
“34.9The dispute reference will go ahead speedily and without formality.
34.10The referee will properly consider the dispute and will decide based on justice and fairness.
34.11…
34.12…
34.13…
34.14You and we can engage lawyers to advise, but they cannot be present at hearings or conferences.”
The dispute reference expressly provided that the arbitrator would decide the reference based on justice and fairness. If he did not decide the reference based on justice and fairness he would be guilty of misconduct.
In the proceedings the second defendant had to accord both parties procedural fairness otherwise he would be denying them natural justice and thereby be guilty of misconduct pursuant to s 4 of the Act. Both parties were entitled to know the case or defence being put in advance of the hearing, so that they could lead evidence in support of their case or in contradiction of the case advanced against them.
Because of the procedure adopted which required the parties to file points of defence the plaintiffs were entitled to assume unless warned, that the defendant had confined itself to answering the plaintiffs’ claim by reference to the matters contained in the points of defence.
Of course the second defendant would not have confined the parties to the matters raised in their respective points of claim and defence if the parties had in fact advanced further claims or further defences. If those further claims or further defences could have been addressed by the opposing party without prejudice to that party then clearly enough the arbitrator would have allowed those other matters to be raised.
What he had to ensure was procedural fairness. Procedural fairness would be accorded to parties, in circumstances such as this, if they are given fair notice of the opposing party’s claim or defence. Procedural fairness would also be accorded if the plaintiffs had been given notice and thus given time to respond to that notice and allowed to call evidence in relation to the matters contained in the notice.
Clearly enough, as s 4 of the Act provides, procedural unfairness can amount to misconduct. However not all procedural unfairness would amount to misconduct: Edible Oil Products (Malaysia) B.H.D. v Jayant Oil Mills Private Ltd & Others [1982] 2 Lloyds Rep 95 at 97.
In Interbulk Ltd v Aiden Shipping Co Ltd (1984) 2 Lloyds Rep 66 at 75 Goff LJ said:
“In truth, we are simply talking about fairness. It is not fair to decide a case against a party on an issue which has never been raised in the case without drawing the point to his attention so that he may have an opportunity of dealing with it, either by calling further evidence or by addressing argument on the facts or the law to the tribunal.”
In the same case Ackner LJ said at 76:
“If an arbitrator considers that the parties or their experts have missed the real point - a dangerous assumption to make, … - then it is not only a matter of obvious prudence, but the arbitrator is obliged, in common fairness or, as is sometimes described, as a matter of natural justice, to put the point to them so that they may have an opportunity of dealing with it.”
The question in this case is whether or not the arbitrator has been guilty of misconduct in failing to require the defendant to put the plaintiff on notice that the plaintiffs’ claims were unreasonable or in failing himself to put the plaintiffs on notice of that matter.
There is no doubt that the arbitrator has failed to require the defendant to put the plaintiffs on notice and has failed himself to put the plaintiffs on notice that he believed that the plaintiffs’ claim should fail because the rectification work was unreasonable cause of action.
In this case there has been a substantial deviation from procedural fairness. The issue which was decided adversely to the plaintiffs was not raised as a defence by the defendant, and it was not brought to the plaintiffs’ attention and it deprived the plaintiffs of leading evidence that was available to them which would have allowed the arbitrator to assess damages at a significantly higher sum than the sum that was arrived at.
In my opinion, the arbitrator has failed to accord the plaintiffs natural justice. The defendant did not raise, by way of defence, that the plaintiffs’ claims for rectification were unreasonable. The plaintiffs were never put on notice that they should put their claim in the alternative, by reference to loss of value. They thereby lost the opportunity of presenting evidence which was available to them.
In my opinion the plaintiffs have established that the second defendant has been guilty of misconduct. In those circumstances the plaintiffs are entitled to the relief sought. Section 42 of the Act allows the Court to set aside the award either wholly or in part.
The plaintiffs seek an order that the award be wholly set aside and in the circumstances of this case that seems to be appropriate. There will be an order that the award published by the arbitrator on 23 February 2001 is set aside.
I shall hear the parties as to costs.

[2002] SASC 92

19 March 2002