Giles v GRS Constructions Pty Ltd

GILES V GRS CONSTRUCTIONS PTY LTD ACN 008 174 614 TRADING AS “FEDERATION HOMES”
[2001] SASC 274

LANDER J. This is an application for leave to appeal from an interim award made by an arbitrator on 23 February 2001.
These proceedings have been brought on inter partes summons. The plaintiffs are the registered proprietors and occupiers of a home at 13 Sheaoak Drive, Mawson Lakes. The first defendant, GRS Constructions Pty Ltd (t/a Federation Homes) is a building contractor. The second defendant is the arbitrator. The proceedings seek the following relief:
“1That the Plaintiffs 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 s 38 of the Commercial Arbitration Act 1986.
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 have the costs of the Arbitration.
4That the Plaintiffs have the costs of and incidental to this Summons.
5Such further other orders as this Honourable Court deems fit.”
It can be seen that paragraph 1 of the inter partes summons seeks leave to appeal. Paragraph 2 seeks to have the award set aside on alternative grounds.
Ordinarily an application for leave to appeal is brought on an ex parte summons which is heard by a Judge in chambers: r 94.01A.
However in this case the plaintiffs not only seek leave to appeal but also seek to have the award set aside on the grounds stated in paragraph 2.
The first ground in paragraph 2 may support an application for leave to appeal under s 38 of the Commercial Arbitration Act 1986 (SA) (the Act). The second ground, i.e. misconduct, is a ground to set aside the award under s 42 or to remove an arbitrator under s 44 of the Act.
In this case I think the plaintiffs seek alternative remedies. First they seek leave to appeal under s 38 of the Act. Secondly, and in the alternative, they seek to have the award set aside on the ground of misconduct on the part of the arbitrator pursuant to s 42 of the Act.
The proceedings were served on the defendants both of whom have entered an appearance. On this application for leave to appeal the second defendant has advised the Court that he will abide the decision of the Court. The first defendant opposes the application for leave to appeal.
The parties agreed that the matter should proceed upon the basis that I will determine the question of leave independently of the plaintiffs’ proceedings under s 42 of the Act.
On this application I am therefore only concerned with an application for leave to appeal under s 38 of the Act.
The intent of the Commercial Arbitration Act is to treat an arbitral award as final: Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724; Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327. To that end there are limited rights of appeal from arbitral awards. Those rights are given by s 38 of the Act. There are also limited powers to refer questions of law to the Supreme Court: s 39. Even these limited rights and powers may be excluded by agreement: s 40.
Section 38 provides:
“38(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.
(3)On the determination of an appeal under subsection (2) the Supreme Court may, by order -
(a)confirm, vary or set aside the award; or
(b)remit the award, together with the Supreme Court’s opinion on the question of law which was the subject of the appeal, to the arbitrator or umpire for reconsideration or, where a new arbitrator or umpire has been appointed, to that arbitrator or umpire for consideration,
and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make the award within three months after the date of the order.
(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.
(6)The Supreme Court may make any leave which it grants under subsection (4)(b) subject to the applicant complying with any conditions it considers appropriate.
(7)Where the award of an arbitrator or umpire is varied on an appeal under subsection (2) the award as varied shall have effect (except for the purposes of this section) as if it were the award of the arbitrator or umpire.”
No appeal lies on the ground of an error of fact. An appeal does lie to the Supreme Court on any question of law, with the consent of all of the other parties to the arbitration agreement, or, subject to s 40, with the leave of the Supreme Court. The section raises the difference between a question of fact and a question of law. Determining the line between the two questions is not without difficulty: Collector of Customs v AGFA – Gevaert Ltd (1996) 186 CLR 389; Azzopardi v Tasman UEB Industries Ltd (1985) 4 NSWLR 139; Federal Commissioner of Taxation v Raptis (1989) 19 ALD 726.
Section 40 refers to exclusion agreements to which I have already referred.
Therefore, apart from arbitration agreements which contain exclusion agreements, an appeal lies from an arbitral award, only on a question of law arising out of the award, and with the consent of all of the other parties to the arbitration agreement or with the leave of the Supreme Court.
Section 38(5) provides the criteria which must be satisfied before the Supreme Court may grant leave to appeal.
The Court cannot grant leave to appeal under s 38 unless the following matters are satisfied:
1 The question is one of law arising out of the award: s 38(2);
2Having regard to all of the circumstances the Court considers the determination of that question of law could substantially affect the rights of one or more parties to the arbitration agreement: s 38(5)(a) and;
3there is a manifest error of law on the face of the award: s 38(5)(b)(i) or;
4there is 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: s 38(5)(b)(ii).
Leave therefore cannot be granted unless the applicant can make out the matters in paragraphs 1 and 2 and either of the matters in paragraphs 3 or 4.
The clear intent of the section is to markedly restrict a party’s right to call upon this Court to review an arbitral award . The questions of fact are not to be re-examined except insofar as they give rise to a question of law.
Questions of law are not to be adjudicated upon by the Court unless the determination of those questions could substantially affect the rights of one or more parties to the arbitration agreement. The Court is therefore precluded from reconsidering esoteric points of law which would not substantially affect the rights of one or more of the parties.
Assuming the matter raised is a question of law which would substantially affect the rights of one or more of the parties, the party seeking a review of that question of law will not be entitled to leave unless there is a manifest error in relation to that question of law on the face of the award. Alternatively, if no manifest error on the face of the award exists, strong evidence that the arbitrator made an error of law and that the determination may add to the certainty of the commercial law.
In Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203 at 222 Sheller JA (with whom Meagher JA agreed) said:
“The added requirements of 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 substantially to the certainty of commercial law suggests that the draftsman was seeking to constrain the exercise of court control over arbitral awards in the manner described by the House of Lords in The Nema.”
A manifest error of law on the face of the award is exactly that. It is not an arguable error of law. The error is obvious enough that it does not call for lengthy debate or as Sheller JA noted in Promenade Investments Pty Ltd v New South Wales (supra) at 226 “any prolonged adversarial argument”. If the applicant cannot make out a manifest error of law on the face of the award then leave will only be granted if the error of law, of which there is strong evidence, is likely to add substantially to the certainty of the commercial law.
Clearly enough strong evidence that there has been an error of law must mean that the impugned decision is not manifestly wrong. However the decision must be more than arguably wrong. It must be such that there is strong evidence of an error of law or, as Lord Diplock suggested in Pioneer Shipping Ltd v B.T.A. Tioxide Ltd (The Nema) (supra), a strong prima facie case has been made out. But reliance upon strong evidence of an error of law carries with it the onus of establishing that a decision of the Court on that question, correcting that error of law, may add or may be likely to add to the certainty of the commercial law.
A one off situation is unlikely to add substantially to the certainty of the commercial law. It is therefore necessary that the applicant make out that the error of law which is sought to be identified is likely to assist parties generally in their commercial dealings.
On 29 September 1999 the plaintiffs and the defendant entered into a standard form Housing Industry Association contract for the construction of a residence at Sheoak Drive, Mawson Lakes.
A dispute arose between the parties and the second defendant was requested to arbitrate the dispute in accordance with the provisions of the contract.
On 23 February 2001 the arbitrator issued an interim award in favour of the plaintiffs in the sum of $8729.00 and ordered that sum be paid within 21 days of the date of that award.
The dispute between the parties was as to the quality of the workmanship of the defendant. The plaintiffs alleged that the first defendant had breached a term of the contract which required that the work be done “properly and skilfully”.
First the plaintiffs alleged a breach of cl 2.2 of the contract in failing to carry out the work properly and skilfully. Secondly they alleged that the terms of the contract incorporated the warranties given by s 31 of the Building Work Contractors Act 1995 (SA). Thirdly, it was alleged that the first defendant had failed to meet the same standard of work and materials as those exhibited in the first defendant’s display home at Flagstaff Hill.
The arbitrator concluded at page 19 that he had no jurisdiction in relation to the Building Work Contractors Act. He said:
“However, I have no jurisdiction in relation to the Building Work Contractors Act, and, if the Owners wanted to pursue the Builder in relation to the Act, then it had to complain to the Office of Business and Consumer Affairs with sufficient force to cause Consumer Affairs to proceed against the Builder under Section 32 of the Act, which warrants that the building work will be proper and workmanlike, and Section 37 which deals with remedies.”
At the same time, the arbitrator determined that the claim by the plaintiffs of a breach by the first defendant, of cl 2.2 of the contract and the breach of representation made by the first defendant, that quality standards would be to the standard of the display home, were clearly within his jurisdiction and were matters for consideration as to damages.
Effectively, therefore, the arbitrator took on board the first and third complaints of the plaintiffs but refused jurisdiction in respect to the second.
In due course, as I have said, the arbitrator found that the plaintiffs were entitled to an award in the sum to which I have referred.
The grounds of appeal for which leave is sought are:
“1The Arbitrator erred in law in finding that he did not have jurisdiction to consider the Appellants claim pursuant to the Building Work Contractors Act 1995.
2The Arbitrator erred in law in finding that his only role was to assess the damages by reference to the law of contract, when he was also obliged to assess damages by reference to the law of misrepresentation.
3The Arbitrator erred in law in, having found that the Appellants’ home is not of a standard commensurate with a Federation Homes Display Home and having found that some of the remedial work was unreasonable having regard to the nature of the defects, he failed to award the Appellants compensation for loss of value of their home by reason of their defects.”
The first ground of appeal raises the arbitrator’s refusal to exercise jurisdiction. In my opinion the refusal of the arbitrator to exercise jurisdiction in relation to the warranties given by s 31 of the Building Work Contractors Act evidences a manifest error of law on the face of the award. Section 32 of the Building Work Contractors Act provides:
“(1)This section applies to a contract entered into on or after 22 January 1987.
(2)The following warranties on the part of the building work contractor are implied in every domestic building work contract:
(a)a warranty that the building work will be performed in a proper manner to accepted trade standards and in accordance with the plans and specifications agreed to by the parties;
(b)a warranty that all materials to be supplied by the contractor for use in the building work will be good an proper;
(c)a warranty that the building work will be performed in accordance with all statutory requirements;
(d)if the contract does not stipulate a period within which the building work must be completed - a warranty that the building work will be performed with reasonable diligence;
(e)if the building work consists of the construction of a house - a warranty that the house will be reasonably fit for human habitation;
(f)if the building owner has expressly made known to the contractor, or an employee or agent of the contractor, the particular purpose for which the building work is required, or the result that the building owner desires the building work to achieve, so as to show that the building owner relies on the contractor’s skill and judgment - a warranty that the building work and any materials used in performing the building work will be reasonably fit for that purpose or of such a nature and quality that they might reasonably be expected to achieve that result.
(3)(Not relevant)
(4)(Not relevant)
(5)Proceedings for breach of a statutory warranty must be commenced within five years after completion of the building work to which the first proceedings relate.
(6)(Not relevant)
(7)(Not relevant)”
Clearly enough s 32 incorporates statutory warranties in all domestic building work contracts. The matter complained of in this arbitration was a domestic building work contract. It was entered into after 22 January 1987. The warranties therefore form part of the contract. Section 32 provides for civil remedies and a statutory cause of action against a builder in respect of any breach of a statutory warranty: s 32(5).
The arbitrator was wrong to conclude that if the owners wanted to pursue the builder in relation to the Act then it had to complain to the Office of Business and Consumer Affairs.
Because those statutory warranties form part of the contract the arbitrator had jurisdiction to determine the matter.
It is clear that the terms are incorporated in the contract not only by reference to the Building Work Contractors Act itself but also by reference to the building contract. Clause 2.3 of the building contract provides that the builder will do the work as required by the engineer ‘and by any statute’.
Mr Nicholas Anderson, who appeared for the builder, did not argue that the warranties given in s 32 of the Act were not incorporated in the contract. Indeed he accepted that there was a manifest error on the face of the award in that regard. He argued, however, that leave should be refused because the first limb of s 38(5)(a) was not made out in that the question of law did not substantially affect the plaintiffs’ rights. He pointed to clauses 2.2 and 2.4 of the building contract which provide:
“2.2 We will do it properly and skilfully.
2.4 We will use good and proper materials.”
He argued that those contractual terms mirrored the statutory warranties given by s 32. He submitted that in those circumstances leave should be refused.
I think Mr Anderson’s argument is correct. I think clauses 2.2 and 2.4 do mirror s 32(2)(a) and s 32(2)(b). There is no doubt that the arbitrator considered the plaintiffs’ claim in respect of clauses 2.2 and 2.4. In those circumstances even though he denied himself jurisdiction in relation to the matters under s 32 of the Act he did consider the plaintiffs’ claim under those contractual provisions.
The other statutory warranties given in s 32 were not a matter of dispute between the parties. In that regard the manifest error of law does not substantially affect the rights of the plaintiffs. In those circumstances I agree with the Mr Anderson’s argument that leave should be refused in respect of the arbitrator’s failure to assume jurisdiction in relation to the statutory warranties given under s 32 of the Building Work Contractors Act.
The second proposed ground of appeal relates to the assessment of the plaintiffs’ damages. That was abandoned during the application for leave, counsel recognising that it was a claim in tort which had not been submitted to the arbitrator.
The third ground for which leave is sought relates to proof of loss.
Section 31 of the Building Work Contractors Act gives a further statutory warranty in respect of exhibition houses. It provides:
“(1)If a house is, or has been, made available for inspection by the public with a view to inducing persons to enter into contracts with a building work contractor for the construction of similar houses -
(a)the contractor must, on request by a person inspecting the house, make copies of the plans and specifications of the house available for inspection by the person; and
(b)a contract entered into with the contractor by a person who, to the knowledge of the contractor, inspected the house and sought the construction of a similar house is to be taken to contain a warranty that the house to be constructed by the contractor will be constructed according to the same plans and specifications and to the same standards of work and materials as those of the house inspected by the person (except to the extent that the contract specifically provides for any departure from those plans, specifications and standards).
(2)A building work contractor who fails to comply with the requirements of subsection (1)(a) is guilty of an offence.
Maximum penalty: $5,000
Expiation fee: $160.”

In my opinion s 31 incorporates into a domestic building work contract the warranty given in s 31(1)(b). That will allow the owner to bring a claim in damages if the warranty is breached.
Again the arbitrator denied jurisdiction in relation to the statutory warranty which was given under s 31(1)(b). However he approached the arbitration on the following basis at page 19:
“Secondly, the Owners’ allege breach of Clause 2.2 of the Contract, and breach of representations made by the Builder that quality standards will be to the standard of the Display Home. These matters are clearly within my jurisdiction, and, to the extent that breach of these conditions by the Builder has damaged the Owners, it is my role to assess the damages by reference to the law that deals with damages arising from breach of contract.”
In my opinion, whilst the arbitrator should have proceeded upon the basis that s 31(1)(b) imposed a statutory warranty upon the builder and thereby gave rise to a claim for damages in respect of its breach, the plaintiffs were not disadvantaged because he proceeded to assess the plaintiffs’ loss by reference to quality standards applicable to a display home.
The proposed ground in paragraph three arises out of the arbitrator’s treatment of the plaintiffs’ damages. First he said that the relevant law in relation to respective building work provided that the measure of damages is arrived at by placing the innocent party (so far as money can bring that about) in the same position as that party would have occupied, had the contract been performed according to its terms. The applicant makes no complaint in that regard.
The arbitrator then made reference to Bellgrove 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.”
And 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 then concluded that the plaintiffs had been correct to pursue damages measured by the cost of rectification to provide an equivalent building, which is substantially in accordance with the contract, rather than 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.
No complaint is made of that reasoning.
He then considered whether the qualification referred to in the passage from Belgrove v Eldridge (supra) should be applied. In other words he applied his mind as to whether the rectification of those defects was in the circumstances of this matter a reasonable course to adopt.
He found, as a matter of fact, that many of the claims pursued by the plaintiffs involved rectification work which was unreasonable.
It followed, so he found, that the plaintiffs were not entitled to damages for rectification work which was not reasonable.
Having made that finding he then addressed an alternative method of assessment of damages and referred to a decision of Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10, in which it was decided that where work had been done defectively but could not be remedied because the costs would be unreasonable, the measure of damages was the diminution in the value of the building caused by the defective work.
He then observed that the plaintiffs had not pleaded a loss of that kind nor had they provided any evidence of any diminution in value of the property the subject of the arbitral dispute.
He therefore concluded that without any evidence he was unable to assess any damages upon that head.
The third proposed ground of appeal complains of the failure by the arbitrator to award the plaintiffs’ compensation for loss of value of their home by reason of the defects.
It was submitted by Mr Jenner, the plaintiffs’ counsel, on this application that the arbitrator ought to have first decided whether there were defects and secondly, whether the proposed remedial work was reasonable.
It was argued that if he found the work was defective, but the remedial work was unreasonable, then the plaintiff should have been allowed an adjournment to obtain evidence as to the difference in value of the house property without the defects being remedied.
Of course the submission made is slightly different from the proposed ground of appeal. The proposed ground of appeal complains of a failure to award compensation for the loss of value of the home. The failure to award that loss was due to the absence of evidence.
In my opinion there was no manifest error on the face of the award in respect of this proposed ground of appeal. In my opinion the arbitrator has identified the correct principles of law. He has made the appropriate findings in relation to the reasonableness or otherwise of the rectification work. There is no error of law in that regard.
He has declined to award damages because of the absence of evidence to support an award based upon diminution in value. In my opinion there was such an absence and he was entitled to proceed upon that basis. If there is any complaint about the arbitrator’s conduct it might be in failing to put the plaintiffs upon notice of the need to call evidence, if he was to conclude that the rectification work was unreasonable.
However, that, in my opinion, might be a matter that the plaintiffs would want to raise under s 42.
On this application I have only to consider whether there is a manifest error on the face of the award or whether there is strong evidence of an error of law.
In my opinion, neither of these matters have been made out.
For those reasons leave to appeal is refused.

[2001] SASC 274

8 August 2001