Miles v Palm Bridge Pty Ltd

[2001] WASC 42

MILES & ANOR -v- PALM BRIDGE PTY LTD [2001] WASC 42

Jurisdiction:	SUPREME COURT OF WESTERN AUSTRALIA	Citation No:	[2001] WASC 42
Case No:	ARB:14/2000	Heard:	16 JANUARY 2001
Coram:	HASLUCK J	Delivered:	20/02/01
No of pages:	22	Judgment Part:	1 of 1
Result:	Appeal allowed
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Parties:	FREDERICK LAURENCE MILES FAY LORRAINE MILES PALM BRIDGE PTY LTD
Catchwords:	Commercial arbitration Leave to appeal Costs of arbitration Arbitrator's discretion concerning award of costs Building contract for residential premises Identification of successful party in case involving claims and cross-claims Application of rule that successful party is the party who secures a judgment for the balance
Legislation:	Commercial Arbitration Act 1985, s 34, s 38
Case References:	Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6 Carpaolo Nominees Pty Ltd v Marrosan Nominees Pty Ltd (1997) 112 NTR 1 D Phillips Constructions (Vic) Pty Ltd v Mullavey [1980] VR 171 Garner v Rohanna Pty Ltd [1999] WASCA 178 John Hollywood Pty Ltd v Ng, unreported; SCt of WA (Acting Master Hawkins); Library No; 920239; 28 April 1992 Keywest Construction Group Pty Ltd v Footscray Holdings Pty Ltd, unreported; SCt of WA (Anderson J); Library No 930078; 23 February 1993 Leighton Contractors Ltd v Western Australian Government Railways Commission (1966) 115 CLR 575 LNC Harper Davidson Pty Ltd v Keywest Building Co Pty Ltd, unreported; SCt of WA (Kennedy J); Library No 7192; 13 July 1988 Oshlack v Richmond River Council (1998) 193 CLR 72 Rival Nominees Pty Ltd v Craig Davis Constructions Pty Ltd, unreported; FCt SCt of Vic; 26 June 1981 Scherer & Anor v Counting Instruments Ltd [1986] 1 WLR 615 Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253 Warley Pty Ltd v Adco Constructions Pty Ltd (1988) 8 BCL 300 Angelatos v Alternative Constructions Pty Ltd, unreported; FCt SCt of Vic; 30 November 1992 Berbett Pty Ltd v Hansa [1976] VR 385 BMD Constructions Pty Ltd v Golding Contractors Pty Ltd [2000] QSC 057 Commonwealth of Australia & Anor v Rian Financial Services and Developments Pty Ltd (1992) 36 FCR 101 Crewford Pty Ltd v Transit Australia Pty Ltd, unreported; SCCA Qld; 23 March 1999 Cummings v Lewis (1993) 41 FCR 559 Donald Campbell & Company Ltd v Pollak [1927] AC 732 Exxon Coal Australia Ltd v Chadtech Pty Ltd [1999] NSWSC 574 Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] NTSC 143 Godden v Alford [1960] WAR 235 Gold v Patman & Fotheringham Ltd [1958] 2 All ER 497 Kleerstyle Homes (A firm) v Dickson & Anor, unreported; SCt Qld (Williams J); 16 September 1997 MacKinnon v Peterson, unreported SCt of NSW (Cole J); 19 April 1989 MASAWA Australasia Pty Ltd v J Corp Pty Ltd & Anor [2000] WASC 5 Natoli v Walker, unreported; SCCA NSW; 26 May 1994 Nicholson v Little [1956] 2 All ER 699 Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203 Re Caf-Grains [1994] 2 Qd R 252 Re F A Pidgeon & Son Pty Ltd [1992] 2 Qd R 275 Re Tiki Village International Ltd [1994] 2 Qd R 674 Ritter v Godfrey [1920] KB 47 Smith v Leon Dupuy Dozer Hire Pty Ltd [2000] VSC 212 Thiess Contractors v Water Corporation of WA, unreported; SCt of WA (Parker J); Library No 970561; 28 October 1997 Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870 UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57 Wilkinson v Creer, unreported; SCt of NSW (Cole J); 3 July 1991

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA CITATION : MILES & ANOR -v- PALM BRIDGE PTY LTD [2001] WASC 42 CORAM : HASLUCK J HEARD : 16 JANUARY 2001 DELIVERED : 20 FEBRUARY 2001 FILE NO/S : ARB 14 of 2000 BETWEEN : FREDERICK LAURENCE MILES

FAY LORRAINE MILES
Applicants

AND

PALM BRIDGE PTY LTD
Respondent

Catchwords:

Commercial arbitration - Leave to appeal - Costs of arbitration - Arbitrator's discretion concerning award of costs - Building contract for residential premises - Identification of successful party in case involving claims and cross-claims - Application of rule that successful party is the party who secures a judgment for the balance

Legislation:

Commercial Arbitration Act 1985, s 34, s 38

Result:

Appeal allowed

(Page 2)

Representation:

Counsel:

Applicants : Mr R D Shaw
Respondent : Mr C B Edmonds & Mr J D Finlay

Solicitors:

Applicants : Phillips Fox
Respondent : J D Finlay & Co

Case(s) referred to in judgment(s):

Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6
Carpaolo Nominees Pty Ltd v Marrosan Nominees Pty Ltd (1997) 112 NTR 1
D Phillips Constructions (Vic) Pty Ltd v Mullavey [1980] VR 171
Garner v Rohanna Pty Ltd [1999] WASCA 178
John Hollywood Pty Ltd v Ng, unreported; SCt of WA (Acting Master Hawkins); Library No; 920239; 28 April 1992
Keywest Construction Group Pty Ltd v Footscray Holdings Pty Ltd, unreported; SCt of WA (Anderson J); Library No 930078; 23 February 1993
Leighton Contractors Ltd v Western Australian Government Railways Commission (1966) 115 CLR 575
LNC Harper Davidson Pty Ltd v Keywest Building Co Pty Ltd, unreported; SCt of WA (Kennedy J); Library No 7192; 13 July 1988
Oshlack v Richmond River Council (1998) 193 CLR 72
Rival Nominees Pty Ltd v Craig Davis Constructions Pty Ltd, unreported; FCt SCt of Vic; 26 June 1981
Scherer & Anor v Counting Instruments Ltd [1986] 1 WLR 615
Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253
Warley Pty Ltd v Adco Constructions Pty Ltd (1988) 8 BCL 300

Case(s) also cited:

Angelatos v Alternative Constructions Pty Ltd, unreported; FCt SCt of Vic; 30 November 1992
Berbett Pty Ltd v Hansa [1976] VR 385
BMD Constructions Pty Ltd v Golding Contractors Pty Ltd [2000] QSC 057


(Page 3)

Commonwealth of Australia & Anor v Rian Financial Services and Developments Pty Ltd (1992) 36 FCR 101
Crewford Pty Ltd v Transit Australia Pty Ltd, unreported; SCCA Qld; 23 March 1999
Cummings v Lewis (1993) 41 FCR 559
Donald Campbell & Company Ltd v Pollak [1927] AC 732
Exxon Coal Australia Ltd v Chadtech Pty Ltd [1999] NSWSC 574
Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] NTSC 143
Godden v Alford [1960] WAR 235
Gold v Patman & Fotheringham Ltd [1958] 2 All ER 497
Kleerstyle Homes (A firm) v Dickson & Anor, unreported; SCt Qld (Williams J); 16 September 1997
MacKinnon v Peterson, unreported SCt of NSW (Cole J); 19 April 1989
MASAWA Australasia Pty Ltd v J Corp Pty Ltd & Anor [2000] WASC 5
Natoli v Walker, unreported; SCCA NSW; 26 May 1994
Nicholson v Little [1956] 2 All ER 699
Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203
Re Caf-Grains [1994] 2 Qd R 252
Re F A Pidgeon & Son Pty Ltd [1992] 2 Qd R 275
Re Tiki Village International Ltd [1994] 2 Qd R 674
Ritter v Godfrey [1920] KB 47
Smith v Leon Dupuy Dozer Hire Pty Ltd [2000] VSC 212
Thiess Contractors v Water Corporation of WA, unreported; SCt of WA (Parker J); Library No 970561; 28 October 1997
Tramountana Armadora SA v Atlantic Shipping Co SA [1978] 2 All ER 870
UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57
Wilkinson v Creer, unreported; SCt of NSW (Cole J); 3 July 1991

(Page 4)

1 HASLUCK J: This is an application for leave to appeal brought pursuant to provisions of the Commercial Arbitration Act 1985 relating to that part of an Arbitrator's award whereby the costs of the respondent were to be paid by the applicant for leave to appeal and that the fees and expenses of the Arbitrator were to be paid by the applicants. Prior to the hearing, directions had been made by the Master in chambers that the application for leave to appeal and the appeal should be heard at the same time. Pursuant to those directions, the applicants filed a notice of appeal setting out the grounds of appeal and both parties were required to file written submissions.

2 The appeal book included not only the full text of the interim award of Arbitrator Standen dated 31 July 2000 and his final award dated 17 October 2000 (including certain corrections of the interim award of the same date), but also a copy of the building contract entered into between the parties and the pleadings presented to the Arbitrator, including a Scott Schedule annexed to the points of claim. These documents reveal that the respondent company, Palm Bridge Pty Ltd, is the owner of land known as 46 Branksome Gardens, City Beach. The applicants carry on business as a builder under the trading name Fred Miles Building Services.

3 By an agreement in writing dated 10 June 1998, the owner, Palm Bridge, entered into a contract with the builder, whereby the builder agreed to construct a residence on the land for the sum of $542,300. The building contract was in a standard form and made provision for the works to be executed in a proper and workmanlike manner in accordance with times prescribed by the contract. By its points of claim, the owner, Palm Bridge, contended that the works were not carried out in a workmanlike manner and as a consequence of the builder's failure or refusal to remedy a substantial breach, the contract was terminated on 3 December 1999. Palm Bridge claimed, in addition to the cost of rectifying certain work, loss of rental and other damages.

4 By its points of defence and counterclaim, the builder said that it commenced the works on or about 1 July 1998 and brought the same to practical completion on or about 28 September 1999. The builder said further that it was entitled to extensions of time beyond the date of practical completion and denied that there was any substantial breach of the contract. The builder said that Palm Bridge had paid the builder $455,075.86 under the building contract and, by its conduct in giving a notice of termination and retaking possession of the works, it had repudiated the building contract.

(Page 5)

5 In par 28 of the points of defence and counterclaim, the builder contended that the amount due from Palm Bridge included a progress claim of $65,000 and variations to the value of $63,417.57. A claim was also made for further loss said to have arisen as a result of the alleged repudiation.

6 Palm Bridge presented a reply and defence to counterclaim in which it denied that the works were brought to practical completion on or about 28 September 1999. It denied that the builder was entitled to any extension of time. Palm Bridge specifically denied par 26 to par 30 inclusive of the counterclaim and thereby denied that there was an amount due to the builder in respect of the progress claim and claim for variations mentioned earlier. Elsewhere in its pleading, however, it did make some comparatively minor concessions in regard to variations.

7 It appears, then, on the face of the pleadings, that the Arbitrator was obliged to address various matters in issue between the parties and that the resolution of these issues could have a bearing upon the financial claims on either side. In other words, it would not be until the arbitration had been completed that a final determination could be made as to whether a further amount, if any, was due to the builder.

8 By his final award dated 25 September 2000, the Arbitrator made some comparatively small corrections to figures appearing in his interim award. He went on to say that the effect of the corrections was that there was payable by Palm Bridge to the builder the amount of $97,733.63.

9 In s 6 of the interim award the Arbitrator gave careful consideration to the grounds relied on by Palm Bridge for its termination of the building contract. He concluded eventually at par 6.10 that the termination was not justified. Later, at par 14 of the interim award, the Arbitrator confirmed the finding he had made earlier that the owner's termination of the contract was not justified. He then addressed the question of whether the builder was entitled to its claim for payment on a quantum meruit basis or, in the alternative, to its claim for payment under the contract. He concluded that a quantum meruit assessment was not appropriate.

10 The Arbitrator then went on to say that payment under the contract was assessable under two categories, both of which were applicable in this dispute. The final contract sum as determined by him was $561,829.33 less payments already made. Damages payable by the builder to compensate the owner for the cost of making good defects amounted to $26,495. The total amount payable by the owner, Palm Bridge, to the

(Page 6)

builder was, therefore, $561,829.33, less $26,495 to produce a figure of $535,334.33. The Arbitrator noted that progress payments made by Palm Bridge amounted to $446,593.14. Thus, in his interim award, the concluded that there was an outstanding amount payable to the builder of $68,741.19.

11 By his corrections, the Arbitrator required that the calculation just mentioned be deleted so that the operative part of the award would read as follows:

"Progress payments to the respondent builder totalled $455,075.86. There is therefore an outstanding amount payable, arising from this award of $97,733.63."

12 In describing the reason for making this correction, the Arbitrator said that the amount of $466,593.14 described in the interim award as the total of progress payments was the figure shown as progress payment in Palm Bridge's submissions. The true amount was $455,075.86, according to the respondent builder's book of documents. The amount of $97,733.63 was the result of "flow-on effects" which the Arbitrator then detailed.

13 I note in passing that the figure of $455,075.86 which the Arbitrator eventually accepted as the true amount of progress payments was the figure specified by the respondent builder in its points of defence and counterclaim. This figure is significantly less than the prescribed contract price of $541,300 and it would therefore appear that it was only by participating in the arbitration and advancing a counterclaim that the builder was able to recover the sum of $97,733.63 eventually allowed to the builder. The final adjusted contract price was found by the Arbitrator to be the sum of $579,404.79.

14 The Arbitrator dealt with other matters in his final award, including costs. He referred to s 34 of the Commercial Arbitration Act which provides that unless a contrary intention is expressed in the arbitration agreement, the costs of the arbitration (including the fees and expenses of the Arbitrator) shall be in the discretion of the Arbitrator who may direct to and by whom and in what manner the whole or any part of those costs shall be paid.

15 I note in passing that by s 34(5) where a sum of money has been paid into the court in accordance with rules of court in satisfaction of a claim to which an arbitration agreement applies, the Arbitrator shall, in exercising the discretion as to costs, take into account both the fact that money was paid into the court and the amount of that payment. I understand that in

(Page 7)

the circumstances of the present case no payment into court or formal offer of compromise was made.

16 Against that background, the Arbitrator then said this:

"In the exercise of the discretion given to me in this Section of the Act I direct that the unsuccessful party shall pay to the successful party the successful party's costs as between party and party which unless otherwise agreed between the parties shall be taxed in the Supreme Court. I also direct that the unsuccessful party shall pay my costs and expenses.

C2 It is therefore necessary for me to determine which party is the successful party. In an arbitration where there is only one issue, determining who is the successful party is usually a simple matter. In an arbitration in which there are several issues, some overlapping, it is not so simple unless one party succeeds on all issues.

In this arbitration there were several issues. The final flow of money was necessarily from one of the parties to the other but it was not the case that the receiving party (in that sense) was the successful party in all issues or even in a majority of issues.

C3 It is the Claimant's position in this context that the Claimant was the successful party because it was the party that won on most of the issues. It is the Respondent's position that the Respondent was the successful party because it was the party who was 'substantially successful'. Both parties in their submissions on costs have provided me with authorities in support of their respective 'correct approaches'."

17 The Arbitrator then referred to certain decided cases and seemed to accept that, prima facie, where the "final flow of money" was in favour of one party, that party would be allowed the costs upon the basis that costs should follow the event unless something to the contrary appears on the face of the record. He seemed to acknowledge that there was a final flow of money in favour of the builder, but was, nonetheless, of the view, in the circumstances of the present case, that there was "something to the contrary on the face of the record". In other words, there were features of the case warranting a departure from the general rule in that, after a close analysis of various matters in issue, it was apparent that many of the contentions of the owner, Palm Bridge, were justified.
(Page 8)

18 A question arises, however, as to whether, in the course of undertaking a conscientious review of the various issues with a view to determining which party had "won" or "lost" on that issue, a degree of ambiguity began to colour the Arbitrator's reasoning.

19 On one view of the matter, the reasoning of the Arbitrator was consistent throughout. He was conscious of a general rule that a successful party should recover his costs and that the identity of the successful party could be established by looking at the final flow of money. Nonetheless, in a special case, the Arbitrator could, in the exercise of the discretion allowed to him, depart from that rule for good and sufficient reasons and such reasons existed in the present case because the owner, Palm Bridge, had won many of the issues.

20 On the other hand, there are some indications that the Arbitrator, in the course of undertaking his review, eventually determined that, on balance, the owner, Palm Bridge, was the successful party, having succeeded on most of the important issues, with the result that the owner, Palm Bridge, should be awarded the costs as the successful party overall.

21 Towards the end of his ruling on the question of costs, the Arbitrator said this:

"C.21 'Costs follow the event' : I have referred above, in paragraph 3.4 and others to the proposition that 'costs follow the event' means that costs follow the final flow of money. That is certainly the Respondent's view, made clear by its reference to Hudson's Building and Engineering Contracts, 10th edition, page 870, where in elaboration of 'the usual rule that costs should follow the event' it is added : 'the party ultimately successful on a final balance of claim and counterclaim should be paid his costs'.

A different view of 'costs follow the event' is found in John Holland Pty Ltd v. Ng,in which is quoted a number of propositions in Scherer and Anor v Counting Instruments Ltdin which no 1 reads


The normal rule is that costs follow the event. That party who turns out to have unjustifiably either brought another party before the court, or given another party cause to have recourse to the court to obtain his rights is required to recompense that other party in costs.

(Page 9)

C2.22 These two views of 'costs follow the event' are both clearly relevant in this arbitration but they do not match. Thus the question arises, which should prevail over the other?

My summarising of the outcomes issue by issue above tells me that


(i) The Claimant was not unjustified in bringing the Respondent to the arbitration, and

(ii) The Respondent did give the Claimant cause to have recourse to arbitration to obtain its rights


notwithstanding that the Respondent was the party to whom the final money flowed. I find as a consequence that the Respondent should not expect the Claimant to pay its costs in addition to paying the money I have directed to be paid under the interim award. I do not accept that 'Whoever secures or avoids paying the balance in effect has won' is in this arbitration an appropriate guide to payment of costs."

22 The Arbitrator then referred briefly to the possibility of each party being required to pay their own costs. He said that having determined that the owner, Palm Bridge, was not unjustified in bringing the builder to the arbitration and that the builder gave Palm Bridge cause to have recourse to arbitration to obtain its rights, and having noted in his issue by issue summary of wins and losses that the owner, Palm Bridge, won most of the issues in which there was a winner, he did not see how a ruling that the owner, Palm Bridge, should pay its own costs could possibly be justified. He added, "In other words, there is no scope in the exercise of my discretion for me to decide that each party should pay its own costs."

23 The Arbitrator then referred back to his earlier formulation of the central issue at his par C2 wherein he concluded that it was necessary for him "to determine which party is the successful party". He proceeded to hold that the owner, Palm Bridge, was "the successful party for the purposes of Part C.2 above."

24 It emerges, then, in the final analysis, that the Arbitrator purported to apply the so-called general rule that costs must be allowed to the successful party. It seems, however, that, in effect, he resolved that in this case the successful party should be identified not by reference to any precept concerning the "final flow of money", because this was not thought to be appropriate to the circumstances of the case before him, but

(Page 10)

rather by undertaking a review of the wins and losses in regard to various issues. It seems also that his review was affected to some extent by his understanding as to whether a party was justified in bringing an issue to arbitration, or whether a party had given the opposing party cause to have recourse to arbitration to obtain its rights.

25 The builder's notice of appeal in respect of the application for leave to appeal before me contains grounds of appeal in these terms:

"1. The Arbitrator erred in law in failing to apply the rule that the party ultimately successful on a final balance of claim and counterclaim in an arbitration over building works should be awarded its costs.

2. The Arbitrator erred in law in determining the question of costs by whether he considered the Respondent (Claimant) was justified in bringing the Applicant (Respondent) to arbitration and having recourse to arbitration."

26 Section 38(1) of the Commercial Arbitration Act provides that without prejudice to the right of appeal conferred by subs (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. By s 38(2), an appeal shall lie to the Supreme Court on any question of law arising out of an award, but this right of appeal is expressly made subject to s 38(4)(b), which requires that an appeal may be brought with the leave of the Supreme Court. The criteria in that regard are set out in s 38(5), which reads as follows:

"(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

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(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."

27 The owner, Palm Bridge, as the respondent to the application for leave to appeal recognises that the costs of the arbitration will be substantial and accepts that the ultimate determination of the order for costs could substantially affect the rights of the parties. Having regard to that concession and the circumstances of the case whereby it is apparent to me that the costs will indeed be substantial and could substantially nullify the benefit of the sum awarded on the merits of the action, I am satisfied that the threshold requirement under s 38(5)(a) of the Commercial Arbitration Act has been satisfied.

28 Counsel for the owner, Palm Bridge, submitted in regard to the criteria in s 38(5)(b) that there was no manifest error of law arising from the award on the face of the award. He emphasised that any discussion concerning an error of that description should be confined to the terms of the award itself. This view is consistent with the language of the statutory provision and I intend to proceed accordingly.

29 Counsel for the owner, Palm Bridge, went on to submit, in regard to s 38(5)(b)(ii), that there was not strong evidence that the Arbitrator made an error of law in his award and, further, the determination of the question would not be likely to add substantially to the certainty of commercial law because the Arbitrator's determination was based upon the outcome of his determination of specific issues and his reasons in relation to the conduct of the parties.

30 Counsel for Palm Bridge argued further that s 38 in its current form reflected an intention to limit judicial interference in the arbitral process and the Court should take account of this purpose in applying the criteria and dealing with the present application for leave to appeal. He submitted further that there must first be found in the award some legal proposition which is the basis of the award and which is erroneous. The exercise by the Arbitrator of a discretion will not generally give rise to an appeal on a question of law: Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253 at 258; Warley Pty Ltd v Adco Constructions Pty Ltd (1988) 8 BCL 300 at 312.

31 Counsel for Palm Bridge submitted that a "manifest error" must be an apparent error of law that is evident or obvious on a preliminary basis

(Page 12)

without prolonged adversarial argument. A conclusion which was fairly arguable would not evidence an error. He went on to submit that as a matter of policy, appeals as to costs only are to be discouraged and the Court will be slow to interfere with a judicial discretion in a matter relating to costs: Garner v Rohanna Pty Ltd [1999] WASCA 178 at par 15.

32 Counsel for the builder submitted that leave to appeal should be granted because there was a manifest error of law in that the Arbitrator applied the wrong test in determining the issue as to costs. The Arbitrator's ruling had implications for other arbitrations in which claims and cross-claims and a variety of issues were under consideration and therefore a determination as to how costs should be awarded in such circumstances would add substantially to the certainty of commercial law in regard to controversies of this kind.

33 I will return to these issues and the question of whether leave to appeal should be granted in due course.

34 I have already noted that directions were given whereby the appeal is to be considered in conjunction with the application for leave to appeal. Before turning to the grounds of appeal, it will be useful to look at some of the decided cases bearing upon the issues addressed by the Arbitrator in his award and the matters raised by the parties in their submissions.

35 In Oshlack v Richmond River Council (1998) 193 CLR 72, the High Court had occasion to consider a provision under the Land and Environment Court Act 1979 (NSW), whereby costs were in the discretion of the Court. Kirby J noted, at 120, that the common law did not provide for costs, although equity from an early date asserted power to order a defeated party to pay costs. It was by statute that English law afforded to the common law courts the power to award costs. Notwithstanding the width of the statutory language by which the discretion was conferred, it came to be said in civil trials that a successful party, in the absence of special circumstances, had a reasonable expectation of obtaining an order for costs in its favour unless, for some reason connected with the case, a different order was specially warranted. Any departure from this expectation would require that there should be material upon which the adverse discretion could be properly exercised.

36 McHugh J also noted, at 95, that in modern times the statutory language typically confers on the Court a broad discretion to award costs, rather than declaring that costs automatically follow the event.

(Page 13)

Nonetheless, although the statutory discretion is broadly stated, it is not unqualified. It clearly cannot be exercised capriciously. Importantly, the discretion must be exercised judicially in accordance with established principle and factors directly connected with the litigation. In this manner, the law has gradually developed principles to guide the proper exercise of the discretion and, in some cases, to highlight extraneous considerations which, if taken into account, will cause the exercise of the discretion to miscarry.

37 It is apparent from the discussion in the Oshlack case and in the cases mentioned below that the manner in which a statutory discretion as to costs is exercised brings into play issues of statutory interpretation and the application of various principles derived from the previously decided cases. Accordingly, in the circumstances of the present case, I have little hesitation in concluding that if an Arbitrator proceeds in a manner that does not conform to the requirements of the relevant statutory provision and the decided cases, then this can be characterised as an error of law. In the circumstances of the present case, however, the crucial question is whether the Arbitrator did fall into error and whether any such error is manifested on the face of the award.

38 This brings me to the question of how the discretion should be exercised. There are no specific criteria set out in s 34 of the Commercial Arbitration Act concerning the award of costs, but the presence of s 34(5) concerning payments into court is one specific factor which is clearly intended to have a bearing upon the exercise of the discretion. I must also take account of the principles emerging from the decided cases in this area of the law, and in the texts bearing upon this issue.

39 In Hudson: Building and Engineering Contracts (10th ed) at 870, one finds the passage adverted to by the Arbitrator in the present case in the course of his reasoning in the final award. The passage reads as follows:

"Arbitrators approaching their duties in a judicial spirit should therefore, not hesitate to state their reasons for their orders as to costs if asked to do so by either party, or if they intend to depart from the usual rule that costs should follow the event.

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

(Page 14)

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."

40 This passage was cited with approval by Debelle J in Badge Constructions Pty Ltd v Penbury Coast Pty Ltd [1999] SASC 6 at 12.

41 In the course of his judgment, Debelle J approved the rule that where there are cost claims, the successful party "is the party who secures a judgment for the balance". He went on to say at par 13 that given the particular issues which arise when determining costs where both the claim and counterclaim arise out of a building contract and both claim and counterclaim 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 in Hudson. He went on to say that it was not necessary to decide that issue in respect of the case before him, but it could at least be said "that there must be a good cause for departing from the general principle".

42 In LNC Harper Davidson Pty Ltd v Keywest Building Co Pty Ltd, unreported; SCt of WA (Kennedy J); Library No 7192; 13 July 1988, there were various components to the claim and cross-claim. His Honour noted that by s 34(1) of the Commercial Arbitration Act (WA), the costs of the arbitration are in the discretion of the Arbitrator. He went on to say that, nevertheless, "the undoubted general rule is that, in the absence of special circumstances, a successful party in an arbitration should recover his costs, and that it is necessary to show some ground connected with the

(Page 15)

case for exercising a discretion by refusing an order in his favour. He went on to cite with approval the passage from Hudson mentioned earlier and then concluded that the normal approach was to determine whether there was sufficient explanation in the substantive part of the award which justifies the Arbitrator's approach to the award of costs. The Court will not intervene if there is. On the facts of that case, he concluded that the appellant was the successful party because, although the Arbitrator expressed the opinion that the appellant had in principle lost his claim, the reality of the matter was that the appellant's claim had been upheld to the extent of $23,817.35 and that, in addition, it had been awarded interest. He was of the opinion that the appellant, being relevantly the successful party, and there being nothing before him to support an order entirely depriving the appellant of its costs, and ordering it to pay the whole of the costs of the respondent, the appropriate course was to set aside the award in regard to costs and to remit the award to the Arbitrator to enable him to reconsider the question of costs in the light of the judgment.

43 In Keywest Construction Group Pty Ltd v Footscray Holdings Pty Ltd, unreported; SCt of WA (Anderson J); Library No 930078; 23 February 1993, Anderson J said at 6 that the party who has been successful on a balance of claims and cross-claims will generally be awarded the whole of the costs. Any severity in the operation of that rule as against the other party is overcome, at least theoretically, by the provisions contained in the rules in regard to offers of compromise and (in the case of arbitration) payment into court.

44 Sharkey and Dorter: Commercial Arbitration, at 260, deals with the sufficiency of reasons for departing from the general rule. Just what will be regarded as a sufficient reason for departing from the general rule as to costs in any particular arbitration will naturally depend upon the circumstances of the case. However, the party attacking an award as to costs will have a very heavy onus to discharge if the Arbitrator, when departing from the general rule, makes clear in the award his awareness of the established practice and sets out the reasons for the departure from that practice. See D Phillips Constructions (Vic) Pty Ltd v Mullavey [1980] VR 171.

45 The learned authors go on to say that the courts have, nevertheless, been prepared on occasion to view particular reasons given by an Arbitrator as insufficient to justify that Arbitrator's departure from the general rule.

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46 In Rival Nominees Pty Ltd v Craig Davis Constructions Pty Ltd, unreported; FCt SCt of Vic; 26 June 1981, being one of the cases mentioned in the award in the present case, Starke ACJ noted, at 12, that the issue of a notice of dispute in an arbitration should be regarded as a neutral fact. He placed some emphasis upon the fact that the respondent in that case could not get final payment without going to arbitration and that the final flow of money was in favour of the respondent. It followed, in his view, that unless something to the contrary appeared on the face of the record, the normal or prima facie rule should apply; viz, that the costs should follow the event.

47 In Leighton Contractors Ltd v Western Australian Government Railways Commission (1966) 115 CLR 575, the appellant claimed the sum of $516,066, comprising 10 points of claim. As to three of these claims, it failed entirely, as to one, it succeeded substantially and, as to the balance, it was partially successful. The amount awarded in favour of the appellant was $152,200. By his award, for which he gave no reasons, the Arbitrator directed that each party should bear its own costs. The High Court held that the award upon its face did not suggest 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 directing each party to bear its own costs, and accordingly an appeal against the Arbitrator's award as to costs should be dismissed.

48 This brings me to the case of Carpaolo Nominees Pty Ltd v Marrosan Nominees Pty Ltd (1997) 112 NTR 1. In that case, the Arbitrator published an award fixing the "fair value" of units in a unit trust at $72,923 per unit, this being more than the figure contended for by the applicant purchasers and less than the figure of $220,000 specified in the respondent vendor's transfer notice. The applicants considered that the respondent should have been ordered to pay all their costs, rather than 30 per cent of their costs as ordered by the Arbitrator and sought leave to appeal. Leave to appeal was refused on the grounds that the applicants had not been able to establish a manifest error of law on the face of the award in the exercise by the Arbitrator of his discretion as to costs. Neither did the applicants establish the alternative threshold criterion, namely, that there be "strong evidence" that the determination of the question on appeal may add, or may be likely to add, substantially to the certainty of commercial law.

49 Kearney J noted at 5 that an Arbitrator's general discretion as to costs is unfettered, but it must be exercised judicially according to well-settled principles, one of which is that a successful party is entitled to be awarded

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his costs, special reasons being necessary if he is to be deprived of them. He noted also that the difficulty addressed by the Arbitrator in that case was to determine who was the successful party. He applied that principle, ultimately, by considering who was successful on the issues and concluded that as the parties had mixed success on various issues, it could not be said that the Arbitrator had acted incorrectly in applying the rules that costs should follow the event. It followed that the Court was unable to find that there was a manifest error law on the face of the award. Leave to appeal could not be granted under the commercial certainty threshold test because there was no evidence before the Court that the provisions concerning transfer of units in the subject unit trust were used in similar deeds.

50 Counsel for the owner, Palm Bridge, in the present case placed some reliance upon this case in submitting that the Arbitrator in the present case was not necessarily in error in concluding that the successful party could be determined by a review of the various issues. In my view, however, I must exercise caution in seeking to apply the approach approved in Carpaolo to the circumstances of the present case. That was a case in which the controversy between the parties concerned the ascertainment or fixing of a precise figure. Such a case must be distinguished from building arbitration cases such as the present in which there are a variety of claims and cross-claims to be determined, with a view to arriving at a figure which represents the final flow of money to one party or the other. I note also that Carpaolo is of little assistance to me in regard to the commercial certainty threshold issue, because there was no evidence before the Court in that case as to whether the ruling would apply to trust deeds generally. In the present case, however, there can be little doubt that the controversy between the owner and builder, involving claims and counterclaims, is of a familiar kind, with the result that a ruling upon the manner in which the discretion as to costs should be exercised may be taken as a guide in other, similar cases.

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

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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.

52 This brings me to the two cases mentioned by the Arbitrator in the present case towards the end of his reasoning, namely, John Hollywood Pty Ltd v Ng, unreported; SCt of WA (Acting Master Hawkins); Library No; 920239; 28 April 1992 and Scherer & Anor v Counting Instruments Ltd [1986] 1 WLR 615 at 621.

53 The Arbitrator noted correctly that in the former case Acting Master Hawkins had approved a number of propositions in Scherer, the first of which reads as follows:

"The normal rule is that costs follow the event. That party who turns out to have unjustifiably either brought another party before the court, or given another party cause to have recourse to the court to obtain his rights is required to recompense that other party in costs."

54 When this proposition is read in the context of surrounding discussion in Scherer's case, the two sentences comprising the Scherer proposition seem to be simply an expression of the conventional view that costs will normally follow the event in the sense of being awarded to the successful party. To my mind, the second sentence of the proposition can be regarded simply as an illustration of the normal rule, that is to say, if a party raises some flimsy defence to a claim with the result that the claimant is obliged to proceed to arbitration in order to recover the amount due, then the party with the flimsy defence can be said to have given the claimant cause to have recourse to the court to obtain his rights and it is therefore appropriate and just that the claimant should recover his costs. Likewise, a party with a flimsy claim can be said to have unjustifiably brought the other party before the Court and this, too, is an illustration of the underlying rationale for the normal rule that the successful party should obtain his costs.

55 It seems, however, that the Arbitrator saw this proposition as representing "a different view" as to the manner in which an Arbitrator

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should proceed to identify the successful party to an arbitration. It is apparent from his reasoning at par C.21 and C.22 of the award (quoted earlier) that he was aware of the general rule that where claims and cross-claims are under consideration, the final flow of money will usually serve to identify the successful party because, to paraphrase Hudson (supra), the parties will always be looking to the final balance owing one way or another. The Arbitrator then seems to assume that the Scherer proposition represents "a different view" to the conventional view reflected in Hudson, with the result that he is obliged to determine which view should prevail over the other.

56 It follows from my earlier observations, however, that at this point the Arbitrator was acting under a misconception because, properly construed, as I indicated a moment ago, the Scherer proposition should not be characterised as "a different view" of the rule that costs follow the event. The Scherer proposition is, in fact, consistent with the view reflected in Hudson (supra). The second sentence comprising the Scherer view is simply providing illustrations which support the rationale underlying the normal rule that costs follow the event. The second sentence in Scherer should not be regarded as introducing a new or "different" version of the rule.

57 The Arbitrator's misconception does seem to have led him into error because it is quite clear from his reasoning at par C.21 and C.22 that he regards his interpretation of the Scherer proposition, with considerable reliance being placed upon the second sentence of that proposition, as providing a basis for determining the identity of the successful party by reference to a balancing of the issues rather than by reference to the final flow of money or state of account between the parties at the conclusion of the arbitration. This is evident from par C.25 of the award where he concludes that "the claimant is the successful party for the purposes of Part C.2 above."

58 The Arbitrator does not purport to be enunciating a new principle. Nonetheless, his reasoning is ultimately to this effect: in an arbitration pursuant to a building contract where various claims and cross-claims are in issue, the successful party, being the party normally entitled to recover costs upon the basis that costs follow the event, will not be the party to whom there is a final flow of money, but will be the party who has acted reasonably in not bringing the other party to the arbitration or giving the other party cause to have recourse to arbitration and who has succeeded in respect of most of the significant issues.

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59 I have already noted that, according to Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (supra), for a Court to be satisfied that there is an error of law on the face of the award, one has to be able to identify some legal proposition which is the basis of the award and which is erroneous. To my mind, the ruling made by the Arbitrator as it emerges from a consideration of his reasoning at par C.21 and par C.22 is inconsistent with the principles emerging from my earlier review of the decided cases and can be characterised as erroneous. As I have already indicated, the previously decided cases suggest that in the context of an arbitration under a building contract where claims and cross-claims are in issue, the party who has been successful on a balance of claims and cross-claims and secured the final flow of money will generally be awarded the whole of the costs.

60 In my view, the Arbitrator misconceived the task before him. In the circumstances of the present case, in order to exercise his discretion judicially, he 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.

61 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's case (supra), and the reasoning of Kearney J in Carpaolo (supra), 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.

62 It follows that in my view there was a manifest error of law on the face of the award. The consequence is that I am prepared to allow the builder leave to appeal pursuant to s 38(5)(b)(i) of the Commercial

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Arbitration Act. Once a manifest error of law on the face of the award has been identified for the purpose of granting leave to appeal, it follows, in my view, in the circumstances of the present case, that the builder is entitled to relief on the appeal itself.

63 The orders sought by the builder in his notice of appeal are that the award be varied to read:

"1. The costs of the Applicant (Respondent) shall be paid by the Respondent (Claimant) and unless otherwise agreed shall be taxed in the Supreme Court as between party and party; and

2. In respect to the fees and expenses of the Arbitrator that these should be paid by the Respondent (Claimant)."

64 The alternative course would be to set aside that portion of the award concerning costs and to remit the award to the Arbitrator to enable him to reconsider the question of costs in the light of this judgment. That was the course adopted by Kennedy J in the LNC Harper Davidson case, but that seems to have been essentially because there was nothing before the Judge on that occasion to explain how the Arbitrator purported to exercise his jurisdiction to award costs.

65 In the present case, however, the Arbitrator has undertaken a very detailed review of the various matters and issues bearing upon the award of costs and the appeal book contains other materials which permit me to test the validity of his reasoning.

66 After a careful review of the Arbitrator's reasoning and the related materials, I am not persuaded that the matter should be remitted to the Arbitrator. I will not embark upon an exhaustive study of the many issues addressed by the Arbitrator in the course of his review of the matters in issue. It is significant, however, as I noted earlier, that after a review of the various grounds which were said by Palm Bridge to justify its purported termination of the contract, the Arbitrator did not find in favour of Palm Bridge in respect of any of the grounds. This illustrates the difficulty in a case of this kind of determining the successful party by looking at the outcome of specific issues. It indicates also that there was much to be said on the builder's side. The owner's claim for loss of rental and many of its claims concerning variations and defective workmanship were not allowed. The Arbitrator noted at par C.9 of his final award that of the 60 workmanship issues in dispute, 30 were "won" by each party, although the owner was the "winner" in financial terms. This summation

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does not suggest that the builder was acting unreasonably in putting the owner to proof of its claims. The Arbitrator accepted at par C.13 that as to variations, the builder "won" more issues than the owner, both in numbers and in valuations.

67 In the circumstances of the present case, I consider that the builder is entitled to the costs of the award upon the basis that the builder, pursuant to the principles mentioned earlier, should be regarded as the successful party. It does not appear from the Arbitrator's review of the issues that the builder was instrumental in advancing extravagant claims. It is true that the builder did not succeed in respect of a number of contentious issues, but it is also apparent that he was obliged to proceed to arbitration in order to recover moneys alleged to be due to him and some of which were subsequently found to be due to him.

68 Against this background, I consider that the matter falls within the rationale expressed in Hudson (supra) whereby the parties in the case of a building dispute of this kind are ultimately looking to the final balance owing one way or another. In the present case, the flow of money is to the builder. Accordingly, I do not consider that there are sufficient special circumstances to justify a displacement or amelioration of the rule whereby the party who has been successful on a balance of claims and cross-claims will generally be awarded the whole of the costs.

69 For the sake of completeness, I add this. If I be wrong in the view I have expressed as to whether there is a manifest error of law on the face of the award, a further question then arises as to whether the builder is entitled to obtain leave to appeal pursuant to s 38(5)(b)(ii). That provision requires that there be 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. In my view, leave to appeal should be granted on this ground also. It follows from earlier discussion that, in my view, the Arbitrator made an error law in his application of the relevant principles. Building disputes of this kind in which there is a variety of claims and cross-claims to be considered are a frequent occurrence and I therefore consider that a ruling upon the approach adopted by the Arbitrator may add, or may be likely to add, substantially to the certainty of commercial law in this area. If leave to appeal is granted upon this basis, it follows from my earlier observations that, in my view, the grounds of appeal relied on have been established with the result that the appeal should be allowed.

70 I will hear from the parties as to the precise orders to be made.