Jakov v ADIZES
[2007] WASC 46
•27 FEBRUARY 2007
JAKOV -v- ADIZES & ANOR [2007] WASC 46
| Link to Appeal : | [2009] WASCA 9 [2009] WASCA 9 |
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2007] WASC 46 | |
| Case No: | ARB:6/2006 | 9 FEBRUARY 2007 | |
| Coram: | TEMPLEMAN J | 26/02/07 | |
| 15 | Judgment Part: | 1 of 1 | |
| Result: | Leave to appeal granted in part and appeal allowed Part of award varied by reducing amount awarded to first respondent by $29 385 | ||
| B | |||
| PDF Version |
| Parties: | NIKOLA JAKOV ZAK ADIZES ADRIAN BOWMAN GOOLD |
Catchwords: | Arbitration Application for leave to appeal from award in dispute between builder and owner of a house Whether owner compensated in absence of loss Whether owner entitled to rely on development approval instead of contract as source of builder's obligations Whether award of interest based on findings Whether discretion to vary award for misconduct |
Legislation: | Commercial Arbitration Act 1985 (WA), s 22, s 29, s 38, s 42 Local Government (Miscellaneous Provisions) Act 1960 (WA), s 374 |
Case References: | Commonwealth of Australia v Cockatoo Dockyard Pty Ltd (1995) 36 NSWLR 662 UDR Equipment Pty Ltd v Afkos Industries Pty Ltd (2000) 22 WAR 221 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Applicant
AND
ZAK ADIZES
First Respondent
ADRIAN BOWMAN GOOLD
Second Respondent
Catchwords:
Arbitration - Application for leave to appeal from award in dispute between builder and owner of a house - Whether owner compensated in absence of loss - Whether owner entitled to rely on development approval instead of contract as source of builder's obligations - Whether award of interest based on findings - Whether discretion to vary award for misconduct
Legislation:
Commercial Arbitration Act 1985 (WA), s 22, s 29, s 38, s 42
Local Government (Miscellaneous Provisions) Act 1960 (WA), s 374
(Page 2)
Result:
Leave to appeal granted in part and appeal allowed
Part of award varied by reducing amount awarded to first respondent by $29,385
Category: B
Representation:
Counsel:
Applicant : Mr P J Marsh
First Respondent : Mr A P Hershowitz
Second Respondent : No appearance
Solicitors:
Applicant : Stoddart & Co
First Respondent : Karp Steedman Ross-Adjie
Second Respondent : No appearance
Case(s) referred to in judgment(s):
Commonwealth of Australia v Cockatoo Dockyard Pty Ltd (1995) 36 NSWLR 662
UDR Equipment Pty Ltd v Afkos Industries Pty Ltd (2000) 22 WAR 221
(Page 3)
1 TEMPLEMAN J: The applicant is a registered builder, who, on 6 February 2004, entered into a standard form cost-plus contract with the first respondent for the construction of a house in Subiaco.
2 Disputes arose between the parties and were referred to arbitration. The second respondent was appointed as the arbitrator. It will be convenient to refer to the parties respectively as "the builder", "the owner" and "the arbitrator".
3 The arbitrator delivered his award on 15 March 2006. He awarded $40,016.33 to the builder on his claim and $40,810.56 to the owner on his counterclaim, with no order as to costs.
4 The builder is dissatisfied with certain aspects of the award. He seeks leave to appeal pursuant to s 38(2) of the Commercial Arbitration Act 1985 (WA) ("the Act"). Alternatively, the builder seeks to have the award set aside, pursuant to s 42 of the Act, for misconduct on the part of the arbitrator.
5 Section 38(2) of the Act provides that, subject to s 38(4), an appeal shall lie to the Supreme Court on any question of law arising out of an award. However, by s 38(4) an appeal cannot be brought except with the consent of the parties or the leave of the Court.
6 There is no such consent in the present case, so that s 38(5) applies. It provides that the Court is not to grant leave unless it considers that in 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 there is a manifest error of law on the face of the award or strong evidence of an error of law by the arbitrator and that the determination of the question may add (or be likely to add) substantially to the certainty of commercial law.
7 In the present case, the builder contends that because of the amounts of money involved, his rights have been affected substantially by the alleged errors in the award.
8 At the hearing of the application, argument was directed mainly to the builder's principal submission, that there are manifest errors of law on the face of the award. The builder seeks leave to appeal on five grounds arising from the alleged errors, and then, in the appeal, to have the errors corrected and the award varied accordingly. I deal first with this part of the application.
(Page 4)
Is there a manifest error on the face of the award?
9 It is now well settled that an error will be "manifest" if it can be discerned from the award itself, even though the exposure of the error may require adversarial argument: see UDR Equipment Pty Ltd v Afkos Industries Pty Ltd (2000) 22 WAR 221 at [46] - [51], and the authorities there cited.
Grounds 1 and 2
10 These grounds, which are related, arise out of the way in which the arbitrator dealt with the builder's claim for his 10 per cent margin over cost; and with the owner's counterclaim arising from the builder's alleged failure to supervise the works.
11 In order to understand these grounds, to which I shall refer below, it is necessary to consider the arbitrator's approach to the dispute.
12 In the award, the arbitrator summarised the builder's claim and the owner's counterclaim: pars 1 and 2. He then found that the total cost of the project was $328,365.95, so that the 10 per cent margin claimed by the builder was $32,836.50: par 5.
13 The arbitrator then set out the "Sequence of events during contract period from date contract signed to Commencement on site and completion": par 6.
14 In so doing, the arbitrator referred to the builder's evidence that he had supervised the works "up to roof carpentry", but that he had not continued to supervise thereafter, because the owner stopped making progress payments "due to lack of invoices being produced by [the builder] to substantiate requested progress payments". The arbitrator then said:
"The owner proceeded to control the works to completion." (pars 6.6 - 7)
15 Although the arbitrator did not say so, I infer that he accepted the builder's evidence and the owner's explanation.
16 The arbitrator then referred to those provisions in the General Conditions of the contract which defined the builder's obligations: par 7. These included conditions 1(a), (b) and (c). Condition 1(a) required the builder to carry out the works shown on the contract drawings and described in the specification "in a workmanlike manner".
(Page 5)
17 The arbitrator next summarised the "Generally accepted method of building a cost plus job": par 8. This included obtaining of quotes from subcontractors and the preparation of cost estimates by the builder, for submission to the owner for his approval. The arbitrator referred to condition 17(a) of the General Conditions, which provides for the rendering of four-weekly progress claims, supported by the documents justifying the claims and such other information as the owner might reasonably require.
18 The arbitrator said evidence had been given at the hearing that the builder had not complied with the General Conditions 1(a), (b), (c) and 17(a): par 8.6. I infer that the arbitrator accepted this evidence.
19 The arbitrator went on to determine the builder's claim. He awarded a 10 per cent margin on the value of the invoices totalling $85,600.30 paid by the builder: an amount of $8,560.03. With the addition of GST, the amount awarded was $9416.
20 The arbitrator then said:
"The claim for 10% of the invoices paid by the [owner] is disallowed on the basis of proved inadequate supervision of the works by the [builder]": par 10.3.
21 The builder relies on the fact that there is nothing in the contract which imposes on him any obligation to supervise. The arbitrator made no express reference in the award to any such requirement.
22 However, the fact that the builder said he had supervised the works "up to roof carpentry" suggests that he had undertaken to do so.
23 The builder's margin is not paid solely for supervision. It is intended to cover other costs as well. These would normally include the provision of plant and tools, the administrative costs associated with purchasing materials and procuring labour, and other overhead costs relating to the builder's business. The builder would be entitled to his margin, even if the invoices were paid by the owner in the first instance.
24 In the present case, by denying the builder a margin on invoices paid by the owner, the arbitrator must be taken to have concluded that the contract had been terminated by breach. The breach may have been the builder's failure to continue to supervise the works, assuming he had undertaken to do so. Alternatively, the breach may have been the failure of the builder to submit properly documented progress claims.
(Page 6)
25 In either case, the builder would have been left with what was in substance a quantum meruit claim: which is what the arbitrator allowed him. The builder would also have been left with a liability for defects in the works he had organised and paid for.
26 The allegedly defective works were the subject of the owner's counterclaim, which the arbitrator summarised: par 11. However, included in the counterclaim was a claim for:
"Loss of [owner's] earning potential by virtue of having himself to supervise the works $45,000
Cost of supervision August 2004 - May 2005 (inc) 600 hrs @ $75/hr."
27 In dealing with that claim, the arbitrator noted in par 14.17 that the payment form relating to the Building & Construction Industry Training Fund Levy "indicates the value of construction work as $210,000". The arbitrator therefore assumed that the value of the work which would have been carried out by the builder would have approximated to this amount.
28 I pause to note that the builder does not challenge this assumption. However, the arbitrator found that in fact, the total cost of the project was $328,366, "therefore work above $210,000 would have been undertaken by the [owner] being non structural and finishing work".
29 On the basis that the value of the works was expected to be $210,000, the builder's margin would have been $21,000, plus $2100 for GST, a total of $23,100.
30 As I have noted above, the arbitrator had held earlier in his award that the builder was entitled to a 10 per cent margin on the invoices for which he had paid: an amount of $9416, including GST.
31 Apparently on the basis that the owner had paid for the balance of the work up to $210,000, the arbitrator then awarded the owner the 10 per cent margin on that balance. In other words, on the assumption that the margin would have been $23,100, the arbitrator awarded $9416 to the builder and $13,684 to the owner.
32 This part of the award is the subject of the first two proposed grounds of appeal. They are as follows:
"1 The Second Respondent erred in law in his overall method of assessment by awarding damages against the
- Appellant for both alleged failure in 'supervision' and the correction of faulty work when he should have simply awarded the First Respondent damages for faulty work (and consequential loss) in reduction of the full fee due to the Appellant under the contract.
- 2 The Second Respondent erred in law by awarding to the First Respondent damages of $13684 in respect of 'supervision' and thus awarding double compensation in respect of this claim."
33 Ground 1 is based on the premise that the builder was entitled to "the full fee … under the contract". However, on the facts found by the arbitrator, the builder was not entitled to the full fee. Those facts, do, I think, justify an award to the builder of only $9416, from which it was appropriate to deduct damages for defective work.
34 Even if there was an error of law in the arbitrator's approach to this issue, I would not exercise my discretion to give leave to appeal on ground 1. That course would require the issue to be re-arbitrated, at further cost to the parties, but with a high probability of the same result.
35 I turn to consider ground 2.
36 The effect of the award of $13,684 to the owner, is to require the builder to pay the owner that amount, by way of damages for breach of contract. In general terms, the correct measure of such damages is that required to place the party who is not in breach, in the position he would have been in, had the contract been performed.
37 In the present case, the arbitrator assumed that if the contract had been performed, the builder would have earned a margin of $23,100.
38 If the owner had contracted with another builder to complete the works outstanding when he took over the project, it may be assumed that he would have had to pay the second builder a margin of $13,684. However, the owner would have been no worse off: he would not have been obliged to pay that amount to the first builder. It follows, that by awarding $13,684 to the owner, the arbitrator was compensating him for a loss he had not suffered.
39 It might be said that because the contract had not been formally terminated, the builder was entitled to the full margin of $23,100. However, it is to be inferred from the award that the arbitrator found the
(Page 8)
- builder's breach to be such that the owner was entitled to employ someone else to finish the works, or do so himself. The builder would be liable to compensate the owner for the costs he incurred. But the damages would be paid in reduction of $23,100, not $9416.
40 I therefore conclude that the arbitrator has erred in a way which is manifest on the face of the award by awarding the owner an amount of $13,684 by way of compensation to which he was not entitled.
Ground 3
41 This ground arises out of the award to the owner of $10,784, being the estimated cost of widening the garage entrance from 4.8 metres to 5.0 metres.
42 As I have noted above, General Condition (1)(a) of the contract required the builder to carry out the works shown in the contract drawings. These are the plans approved by the appropriate authority: in this case, the City of Subiaco.
43 The arbitrator noted in the opening part of his award that the plans had been approved by the City of Subiaco. In par 13.15, he referred to the planning approval dated 1 April 2004, in which it was stated that the "minimum opening width" of the garage was to be 5.0 metres.
44 The arbitrator then noted that the opening had been measured on site at 4.8 metres. He said the builder had given evidence that this was to a standard door size, whereas a 5.0 metre door "would be extra cost due to individual manufacture".
45 The arbitrator referred to a City of Subiaco worksheet which stated:
"May 4, 2004, applicant lodged revised plans showing … increased garage opening."
- However, he went on to say that the approved plans had not been altered to incorporate the amendment, and there was no evidence that the City of Subiaco required the opening to be altered to 5.0 metres. The arbitrator continued:
"The claim by the Proprietor is for loss of value to the building due to reduced manoeuvrability caused by the narrower opening. The original claim was for $3600.00 which may be insufficient to carry out the work. The figure of $11,694.00 is high so I determine Currie & Browns costing as per Exhibit
- (R-15) excluding preliminaries, overheads & margin of $8177 plus GST is approved".
- Thus the amount awarded was $8,994.70, including GST.
46 The builder seeks to appeal against that award on the following grounds:
"3 The Second Respondent erred in law:
a) By awarding damages in respect of the widening of the garage door (presumably on the basis they were built in breach of the contract) when there is no evidence to show that, and no relevant finding of fact.
(b) By acting in excess of his jurisdiction to award more than was claimed."
48 The builder contends that this part of the award manifests error because it is apparent from the award that there were no approved plans showing a garage opening of 5.0 metres. His contractual obligation was to build in accordance with the approved plans, which showed an opening of 4.8 metres, albeit not as a dimension: the width was obtained from the plan by scaling.
49 The builder relies on s 374 of the Local Government (Miscellaneous Provisions) Act 1960 (WA), which makes it an offence for any person to build until he has submitted the relevant plan to the local government, and received approval, by the issue of a building licence.
50 I accept that unless the approval condition of a 5.0 metre garage opening was reflected in the building licence (either as a condition or by amendment to the approved plans) the builder was under no obligation to build an opening of that width. Indeed, it would have been unlawful to do so. I do not accept the owner's submission that the builder's contractual obligation was to build in accordance with the development approval. This submission is based on General Condition 6 of the contract. It provides:
(Page 10)
- "(a) The Builder shall comply with and give all notices required by any Act of Parliament or by any regulation or by-law of any local authority or of any public service company or authority which has any jurisdiction with regard to the Works or with whose systems the same are or will be connected.
(b) The Builder before making any variation from the Contract Drawings or Specification necessary for such compliance shall give to the Proprietor written notice specifying and giving the reason for such variation and applying for instructions in reference thereto.
(c) If the Builder, within five (5) days of having applied for the same does not receive such instructions he shall proceed with the work conforming to the provision regulation or by-law in question and any variation thereby necessitated shall be deemed to be a variation under Clause 8 of these Conditions."
51 In my view, General Condition 6 has no application to this issue. That is because I do not regard a planning approval as a "notice", or a "regulation or by-law" within the meaning of that provision.
52 As I have noted above, the arbitrator found that the approved plans had not been amended. That being so, the award manifests error because it allows a claim for damages when there has been no breach of contract.
Ground 4
53 The owner claimed for an amount of $3628 to compensate him for "Interest accrued on borrowings due to delays caused by the [builder] in breach of contract".
54 The arbitrator dealt with this claim in par 15 of his award. He found that the building licence was available for collection from 23 April 2004, but that the builder did not collect it until 9 July, some 78 days later.
55 The arbitrator found the reason for the delay was that until 1 July 2004, the builder did not obtain the Home Indemnity Insurance which he was required to produce in order to be able to collect the building licence. The arbitrator therefore awarded the owner an amount equivalent to 78 days' interest under the "RAMS Mortgage".
(Page 11)
56 In par 6.5 of the award, the arbitrator referred to General Condition 5 of the contract which "states that the builder shall commence the works within 10 days of the issue of the Building Licence". The arbitrator said that this determined the commencement date to be Friday, 23 July 2004. (That is 10 working days after 9 July, when the licence was collected.)
57 The builder contends that General Condition 5 is the only contractual provision relevant to the commencement of the works: and that in any event, the owner has not demonstrated any actual loss resulting from the delay. The grounds of appeal relating to this part of the award are as follows:
"4 The Second Respondent erred in law:
a) By misconstruing Clause 5 of the building contract to refer to the time of approval of the building licence rather than the time of issue of the building licence;
b) By assuming that delay in the issue of the building licence or in the commencement of work caused the Respondent to incur additional interest payments when there was no evidence to show that and no relevant finding of fact."
59 It was conceded by counsel for the builder that it would be appropriate to imply into the contract a term that the licence should be collected within a reasonable time. However, it seems that the owner did not base his claim on an implied term: there was no finding that he had done so.
60 Further, there was no finding that the owner would not have had to pay interest on the RAMS Mortgage in June and July 2004, if the licence had been issued to the builder in April. Nor is there any finding that the borrowing period was extended by 78 days as a result of the delay.
61 I therefore consider that the award to the owner of $3628, being 78 days' interest, reflects an error of law on the face of the award.
(Page 12)
Ground 5
62 The arbitrator found that the owner had suffered the loss of two hot water units which were stolen from the site. The arbitrator found also that an amount of $1,289.31 had been paid by way of a premium for contract works insurance with Vero Insurance Ltd. The finding was that:
"Residential Construction Warranty Insurance was issued to [the builder] on July 7, 2004 Certificate No. RCW71532837."
63 The arbitrator found that the loss of the hot water units could have been claimed on the policy. He awarded the owner the value of the premium.
64 The builder's grounds of appeal relating to this part of the award are as follows:
"5 The Second Respondent erred in law:
a) By acting in excess of his jurisdiction to award the First Respondent the value of the insurance premium on a basis that was not pleaded;
b) By determining to award the insurance premium to the Respondent notwithstanding the finding that the Appellant did have the relevant insurance contrary to the pleaded basis of the claim (that the Appellant had not obtained insurance).
c) By incorrectly construing Clause 10 of the contract to require that the Appellant obtain insurance or indemnify the Respondent in respect of theft of the Respondent's goods from the site."
66 Ground (c) cannot be made out by reference to the award. That is because the award makes no reference to cl 10 of the contract. It is not possible, therefore, to determine from the award itself whether the arbitrator made the error of construction as contended by the builder.
67 There does appear to be an error of law in that the appropriate measure of damages for the theft of an item from the site would normally be the cost of replacing that item. I understood it to have been agreed between counsel that the cost of the hot water units and the insurance
(Page 13)
- premium were approximately equal. That may explain the arbitrator's approach. However, no complaint is made in these grounds of appeal that the arbitrator adopted an incorrect measure of damages.
68 There is therefore no error of law manifest on the face of the award in relation to this part of the award.
69 I therefore conclude that in relation to grounds 2, 3 and 4, the builder has demonstrated that there are manifest errors of law on the face of the award which have resulted in the owner being over-compensated by $28,096. In my view, having regard to the amounts in issue in the arbitration, this amount has substantially affected the builder's rights.
70 In all the circumstances, I consider that it would be appropriate to grant leave to the builder to appeal, and to determine the appeal by varying the award to delete the amounts awarded to the owner by reason of the errors referred to above.
Was there misconduct on the part of the arbitrator?
71 It is well settled that the term "misconduct" is used in this context in a technical sense. It may not involve any moral turpitude on the part of the arbitrator. In essence, "misconduct":
"may amount to little more than a mishandling of the arbitration likely to occasion an injustice"
- Commonwealth of Australia v Cockatoo Dockyard Pty Ltd (1995) 36 NSWLR 662 at 673 per Kirby P, where the authorities are reviewed.
72 Section 42 of the Act provides that where there has been misconduct on the part of an arbitrator, the Court may set the award aside either wholly or in part.
73 The builder contends that there has been misconduct on the part of the arbitrator. He relies on the following grounds:
"1a the Second Respondent has failed to make findings of fact necessary to support his award;
Alternatively;
1b The Second Respondent has provided defective reasons for his decision in that those reasons do not disclose findings of fact necessary to his award (if they were made) and those reasons do not disclose the Second
- Respondent's consideration of the evidence in making those findings.
- 2 The Second Respondent has applied methods of assessing damages which are contrary to legal principle and for which there is no evidence.
3 The Second Respondent has relied upon a document that was not tendered at the arbitration and was provided to him after the conclusion of the hearing."
- It is not necessary to refer to ground 3. This was not pursued at the hearing on the basis that there was no evidence to support it.
74 The builder did not provide particulars of these grounds. However, in his submissions relating to ground 1a, he relied on those parts of the grounds relating to the manifest errors of law in which there is a reference to a failure to make findings of fact. These are grounds 3 and 4.
75 In relation to those grounds, I have concluded that there were errors of law manifest on the face of the award. That being so, it is not necessary to go any further.
76 In relation to ground 1b, the builder relies on s 29(1)(c) of the Act, which required the arbitrator to give reasons for his award.
77 In relation to manifest error grounds 2, 3 and 4, the arbitrator's reasons are clear enough, in my view: but they disclose errors of law. That being so, again, it is not necessary to go any further.
78 In relation to manifest error ground 1, I accept that the reasons are not as clear as they should have been. However, as noted above, I consider that the findings of fact made by the arbitrator are such as to justify the award of only $9416 to the builder. That being so, I would not exercise my discretion to vary that part of the award.
79 As to ground 2 above, the only impugned part of the award which discloses an incorrect method of assessing damages but which would not be set aside on the ground of manifest error is that relating to the theft of the water heaters.
80 As I have noted above, that is because no complaint was made in ground 5 that an incorrect approach had been taken by the arbitrator.
(Page 15)
81 However, that complaint is made in this ground. As I have noted above, the correct measure of damages would be the value of the stolen units, about which the arbitrator has made no finding.
82 (In the course of argument, it emerged that the insurance policy did not, in any event, provide cover for theft. Strictly, I think, it was not open to the builder to rely on that evidence having regard to the way his grounds of appeal have been formulated. However, it is not necessary to consider this aspect of the matter further, having regard to my conclusion that the arbitrator adopted the wrong measure of damages in any event.)
83 The reference to arbitration was made on the basis that s 22(1) of the Act would apply. That is, any question that arose for determination in the course of the proceedings was to be determined according to law.
84 It follows, that any error of law made by the arbitrator represents a departure from that requirement and therefore constitutes misconduct, in the technical sense.
85 For the reasons set out above, I consider that there has been misconduct by the arbitrator. However, except in relation to ground 5, it is not necessary to exercise the discretion under s 42(2) to set aside any parts of the impugned award. That is because I have allowed the appeals in relation to those grounds.
86 In relation to ground 5, I will exercise the discretion to set aside the award of $1289 to the owner.
87 The net result of the proceedings is, therefore, that the award is varied by deleting the following elements:
• $13,684 in relation to supervision;
• $10,784 in relation to the garage door opening;
• $3628 in relation to interest;
- and the award of $1289 is set aside pursuant to s 42.
88 The net result is to reduce by $29,385 the amount awarded to the owner.
4
2