Minister for Industrial Affairs v Civil Tech P/L No. Scgrg-96-2293 Judgment No. S6564
[1998] SASC 6564
•26 February 1998
MINISTER FOR INDUSTRIAL AFFAIRS v CIVIL TECH PTY LTD
Full Court
Coram: Doyle CJ, Lander and Bleby JJ
Bleby J
The Proceedings
The parties to this appeal were parties to an arbitration agreement as defined in the Commercial Arbitration Act 1986 ("the Act"). The arbitration agreement was contained in a contract dated 18 September 1990 whereby the respondent agreed to carry out certain engineering works relating to the West Beach Research Laboratory Seawater Intake and associated works, more particularly described in the contract. The parties were in dispute as to the respondent’s entitlements under the contract. It was that dispute which became the subject of the arbitration. However, it was agreed by the parties at the conclusion of the respondent’s case before the arbitrator that there was a preliminary issue to be determined which, it seems to have been thought, if determined adversely to the respondent, would dispose of the whole matter. The arbitrator dealt with that preliminary matter, and made what was described as an interim award on 25 November 1996.
Section 38(2) of the Act provides that an appeal to the Supreme Court is limited to any question of law arising out of an award. Without the consent of all parties to the arbitration agreement, which was not forthcoming in this case, an appeal can only be brought from an award with the leave of the Supreme Court. Sub-section (5) of s38 reads:
"(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 -
a manifest error of law on the face of the award;
orstrong 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."
An application by the appellant for leave to appeal against the interim award was dismissed by a single Judge of this Court on 24 January 1997. The appellant sought leave from the Judge to appeal to the Full Court from that decision refusing leave to appeal. That application was rejected on 19 February 1997. The appellant then applied to the Full Court for leave to appeal from the decision of the single Judge refusing leave to appeal against the interim award of the arbitrator. On 13 August 1997 a differently constituted Full Court, by majority and sitting in private, granted leave to appeal to the Full Court against that decision. On the same day, this Court ruled that the application for leave to appeal then before the Full Court was competent (Minister for Industrial Affairs v Civil Tech Pty Ltd (Unreported, Full Court, 13 August 1997, Judgment No S6298). The appeal now before this Court is therefore an appeal against the refusal of a single Judge to grant leave to appeal under s38 of the Act.
The Facts
This summary of the facts is based almost entirely on the findings of fact recorded by the arbitrator in his interim award.
The contract was entered into on 18 September 1990. It involved the construction and installation under the seabed of pipes to a shore-based marine research laboratory through which pipes seawater was to be pumped to and from the laboratory. The contract sum was $3,632,513. Work began in October 1990, and was intended to be completed in the summer of 1990-1991 and before winter weather conditions would cause delays and make the job more difficult. The contract provided for completion of the offshore works and onshore connections to be completed by 28 March 1991. Further onshore works were to be carried out after that.
During the initial stages of the work, the respondent encountered man-made obstructions buried in the sand. These were substantial and had to be removed. This took some time. The first obstruction, a concrete boat launching ramp, was encountered during January 1991 and was removed, involving a number of days’ additional work and delay. The major obstruction was a steel pipeline, which also had to be removed. This was encountered on the weekend of 23-24 March 1991. Before any decision could be made about the removal of the steel pipe, diving inspections were undertaken to ascertain the extent of the obstruction. The respondent sought a direction and the issue of a variation for the removal of the obstructions. By letter dated 12 April 1991 the Project Manager of the appellant wrote to the respondent in the following terms:
"I refer to your previous correspondence and in particular the letters of the 4th and 5th April 1991 regarding the removal of obstructions encountered in the trench line of the proposed sea water pipelines.
With reference to clause 7 of the Preliminaries of the Contract, it was deemed that due allowance for any risks associated with the presence of latent site conditions was to be allowed for in your tender.
Notwithstanding the contractual requirement, it is doubtful that the presence and extent of the man made concrete structure (boat ramp) and the metal pipeline encountered, would have been ascertainable at the time of tender.
I am prepared, subject to the validity of the details of the extra costs incurred by you, related solely to the affect (sic) of the existence of the boat ramp and pipe on your progress to reimburse those agreed costs.
Time related costs will only be calculated in relation to the Contract Practical Completion date which is the 30th September 1991."
The reference to the practical completion date of 30 September 1991 was the contract date for practical completion of the whole works, including shore-based works.
In reliance upon that letter the respondent continued to remove the obstructions. This caused a significant delay. Removal of all obstructions was not completed until 18 April 1991. Delays in trenching and laying pipe were further compounded by a storm which occurred on 21 April 1991 when dredging was incomplete. The dredge was seriously damaged, and parts of the unfilled trench close to the shore were backfilled by the storm, requiring re-dredging. The project had encountered the winter of 1991. Pipe-laying was further delayed by inclement weather conditions during July and August. It was completed by the end of September 1991, but this in turn delayed commissioning of equipment. A certificate of practical completion of the whole works was issued on 22 July 1992.
Progress claims were made by the respondent for the direct costs of the removal work, and for extensions of time based on the additional time taken to remove the obstructions. Some money was paid on account by the appellant, and a formal variation order in relation to the additional work was issued by the appellant on 28 May 1991.
By the end of June 1991 no agreement had been reached on the quantum of claims relating to the removal of the obstructions, although the appellant had informed the respondent that the appellant’s contingency budget was $210,000, and that the claim should be limited to that amount. Discussions took place, and on 18 July 1991 the appellant formally offered that sum in full and final settlement of the claim, subject to the respondent granting a release from further claims. Further discussions ensued, and on 23 July 1991 the respondent was told that the appellant would not accept any costs associated with delays resulting from the removal of the boat ramp and the associated man-made obstructions, and the appellant threatened to deduct amounts already paid for removal of the man-made obstructions against future progress payments unless the release was signed. Disagreement continued, and at a meeting of representatives held on 19 September 1991 the Project Manager of the appellant repeated the appellant’s former position that it was not liable to pay the costs of delay, but that if an account for direct costs were submitted, it would be considered.
The respondent wrote a letter on 10 October 1991 which included a "without prejudice" offer to settle the claim and to execute a release in an amount slightly less than it had previously proposed. On 11 November 1991 the respondent wrote to the appellant advising that it did not have the financial resources to undertake certain works required to complete the contract, and in order to relieve that problem it sought a review of the progress of the claim made in its letter of 10 October. Work at that stage was still being undertaken off-shore to complete the inlet/outlet tower works.
There was a meeting of representatives again on 6 December 1991. The representative of the appellant indicated that it would only reimburse the respondent for the costs claimed to date, and that that payment would be "ex gratia" and conditional on the signing of a letter of release. The respondent claimed that the matter should be dealt with in accordance with the terms of the contract. The respondent’s evidence was that Mr Manning, on behalf of the appellant, then said:
"If Civil Tech do not execute this release, we can cancel your contract and engage another contractor to complete the work."
The arbitrator accepted that this statement was made.
The appellant was given access to the respondent’s records in order to check the claim being made, and the report of a quantity surveyor to the appellant on 17 December 1991 indicated that the claimed costs were actually incurred, and that the cost of works still to be completed as a result, when added to the existing claim, would come to a total of $343,440. This did not include costs of delay in practical completion.
On 21 January 1992 the respondent formally sought an extension of time with costs for the delays due to "the consequential effect of loss of weather windows caused by the removal of the man-made objects..." as quantified in the letter of 10 October 1991. It sought an extension of time of a further 102 days up to 20 January 1992. This was said to be in substitution for the offer to settle previously made on 10 October 1991.
The respondent was in financial difficulties at this time. It caused inquiries to be made of the appellant as to when a further "ex gratia" payment might be made.
Further negotiations took place on 14 February 1992 in the form of a number of discussions and a letter from the appellant’s superintendent in the following terms:
"I refer to your letters of the 10th and 23rd October 1991 and 21st January 1992 concerning your claim for the removal of man-made obstructions encountered in the trench line of the proposed sea water pipeline, between chainage (metres) 144 and 300 its (sic) consequential delays, and to our discussions in relation to the matter.
The Principal will agree to pay to your company an exgratia payment of $343 440 in full and final settlement of the claim subject to you providing the Principal with a release, in the attached form, from all claims for all costs and extensions of time associated with the work.
The payment will be made as follows
. $150 000 after receipt of your letter of release in the approved form and an acceptable programme for completion of the Works
. $ 80 000 after completion of level modifications of the pipeline and jointing of pipeline at chainage 265
. $113 440 after Practical Completion of the Works.
Please arrange for the enclosed letter of release to be signed by a duly authorised officer of the company and return it to this office.
Without prejudice.
Yours faithfully"
Accompanying the letter was a proposed form of release as follows:
"14th February 1992
Mr K Mayes MP
Minister of Public Works
GPO Box 1072
ADELAIDE SA 5001
Dear Sir
WEST BEACH MARINE RESEARCH LABORATORY - SEA WATER INTAKE
CONTRACT NO 492-E-89
I refer to the letter of the Superintendent dated 14th February 1992.
Civil Tech Pty Ltd (‘Civil Tech’) hereby agrees to accept from the Minister of Public Works (‘the Minister’) as Principal of the above contract the exgratia payment of $343 440 in full and final settlement of all claims made and all claims which Civil Tech may be entitled or may become entitled to make for all costs, losses, expenses, claims, damages and extensions of time associated with the contract.
Civil Tech agrees that the said payment shall be made as follows
. $150 000 after receipt of your letter of release in the approved form and an acceptable programme for completion of the Works
. $ 80 000 after completion of level modifications of the pipeline and jointing of pipeline at chainage 265
. $113 440 after Practical Completion of the Works.
In consideration of the Minister’s agreement to make the said payments, and extensions of time already granted, Civil Tech hereby releases and discharges the Minister from all such claims for monies and extensions of time.
Signed this day of 1992.
For and on behalf of Civil Tech Pty Ltd
by its duly authorised representative.
.............................................................(signature)
.............................................................(name)
.............................................................(position)"
It will be noted that the letter from the appellant spoke of releasing the appellant from all claims for all costs and extensions of time "associated with the work" whereas the form of release spoke of such claims "associated with the contract".
The arbitrator found that during the course of the discussions a Mr Nottage, on behalf of the appellant, said:
"If you do not sign the letter of release, no further payments will be made to you and your contract will be terminated and we will have no alternative but to engage another contractor to complete the work." (Arbitrator’s Reasons paragraph 64)
On the same day the respondent, on its own letterhead, signed a letter in the form of the release requested by the appellant, the only change being the substitution of the words "this letter of release" for the words "your letter of release" in the draft submitted by the appellant. I will refer to this letter as the "discharge agreement".
The arbitrator made the following finding:
It is my conclusion from this evidence that threats to breach the contract were made by Mr Nottage on behalf of Mr Manning on 14th February 1992 to induce Civil Tech to sign the letter of release. Those threats reinforced those which had been made by Manning at the meeting at Civil Tech’s offices in December 1991.
I have concluded from this evidence that the threats made to Mr Stidston on that afternoon in particular contributed to his decision to sign the letter of release."
Payment was duly made in accordance with the terms of the discharge agreement. Although it does not appear from the arbitrator’s interim award, we were informed that the sum of $343,440 provided for in the discharge agreement was in addition to the payments already made in respect of the obstruction claims, those payments amounting to $210,000.
After the execution of the release, work continued under the contract during 1992, and a certificate of practical completion was issued on 22 July 1992. What happened after that is not entirely clear from the material before us, and is not referred to by the arbitrator. In an affidavit sworn in support of the application for leave to appeal (AB5-6) we were informed that by letter dated 20 July 1993 the respondent was advised that, due to several outstanding items, a final certificate would not be issued, although on the material before us it was not entirely clear what the consequences of that would be. The affidavit then referred to a letter dated 20 December 1993 whereby the respondent stated that "we hold you in breach of the settlement known as the ex-gratia" due to the non-issue of the final certificate. The respondent also stated that "we therefore consider that we are justified in submitting a claim for delay costs", and a claim for $262,184.84 was made. That claim subsequently rose to $836,341.60 in a letter dated 21 January 1994.
According to the arbitrator’s award, on 11 May 1994 the respondent submitted claims for various "unresolved matters" which included:
"(1) Extensions of Time and Time Related Costs relating to the removal of a boat ramp and subsequent delays, (2) Technical and Workmanship Issues and (3) a Claim for Additional Costs."
The quantification of these claims was then $2,925,534.60. By letter dated 22 June 1994 the appellant rejected the claims, and the procedures contained in clause 45 of the Contract relating to settlement of disputes were then put in train.
In its points of claim dated 22 February 1995, the respondent claimed 254 days extension of time and $3,260,274.43 for extensions of time costs, additional variations and finance charges (AB6 paragraph 12).
In his points of defence dated 28 July 1995 the appellant (inter alia) relied on the discharge agreement of 14 February 1992.
By its amended reply to the defence dated 15 July 1996 the respondent alleged that the letter of release did not settle the dispute between the parties nor did it finalise all additional claims arising out of the Contract, and challenged the validity of the letter on the following grounds:
the letter was not executed under seal
there was no accord and satisfaction, in that the letter made provision for moneys which were already due and payable under the provisions of the Contract.
the letter was signed under duress and as a result of undue influence and unconscionable behaviour on the part of the applicant, in that Stidston was told that if he did not accept payment and sign the letter of release, the Contract would be cancelled.
waiver and estoppel, in that the applicant made payments to the respondent, subsequent to and in addition to the payments referred to in the letter.
estoppel, in that the applicant did not refer to the letter when subsequently rejecting the respondent’s claims.
the letter constituted a breach of Contract.
(Summary taken from appellant’s affidavit at AB7)
The appellant’s rejoinder dated 10 December 1996 replied to those allegations of the respondent and also alleged that the respondent was estopped from claiming that the letter of release did not settle the dispute between the parties or finalise all additional claims arising out of the contract, and said that the respondent was estopped from challenging the validity of the letter on the following grounds:
The respondent had at no time either orally or in writing challenged, queried, corrected, clarified or qualified the content and interpretation of the letter prior to its Reply to Defence.
The respondent had at no time challenged the validity of the letter on the grounds alleged in its Reply to Defence or any grounds at all prior to its Reply to Defence.
The applicant paid the amounts referred to in the letter on the dates alleged, which dates were earlier than those specified in the letter, and to that extent acted to its detriment, and the contractor accepted the payments referred to in the letter. (Summary taken from appellant’s affidavit at AB9. See also arbitrator’s summary of Issues for Determination, paragraph 5, AB25.)
I shall refer to this plea compendiously as the "affirmation plea".
The hearing proceeded before the arbitrator for 19 days. The respondent presented the whole of its case, and at the conclusion of that case, it was agreed by the parties that the arbitrator should deal with what was described as "the preliminary issue of the document dated 14th February 1992". The arbitrator, in his award, identified the issues for determination as follows:
The issues for determination were whether the letter of 14th February 1992 was an agreement which was binding on the Contractor and whether it settled only the dispute between the parties relating to the man-made obstructions, or finalised all additional claims arising out of the Contract, or whether it was voidable on any of the grounds stated by the Claimant."
The terms of the arbitrator’s interim award were as follows:
It is my finding that the letter of 14th February 1992 was an agreement executed by Mr Stidston on behalf of Civil Tech Pty. Ltd. as a duly authorised representative of the company and was binding on the Contractor unless it was voidable on other grounds.
I find that this agreement of 14th February 1992 was voidable on the grounds of economic duress and unconscionability.
I find that this agreement of 14th February was voidable as there was no accord and satisfaction.
The agreement of 14th February 1992 did not settle the Contractor’s claims as pleaded nor finalise all additional claims arising out of the Contract.
The letter of 14th February 1992 was an agreement outside the Contract and was not a breach of the Contract."
The reference in paragraph 3 to there being no accord and satisfaction needs some explanation in the light of the reasons given by the arbitrator. It seems to have been an expression not fully understood by the arbitrator. By reference to those reasons, the arbitrator seems to have made the following findings:
There was no accord and satisfaction or substitution of rights of the parties under the 12 April 1991 agreement with those under the discharge agreement (Reasons paragraph 95). There was therefore no valid discharge of the 12 April 1991 agreement (Reasons paragraph 92), and there was no consideration offered for the discharge agreement (Reasons paragraph 94).
The discharge agreement was voidable by virtue of a common mistake (Reasons paragraphs 96 and 97).
The discharge agreement was voidable on the ground of misrepresentation (Reasons paragraph 97).
The arbitrator made no findings of facts relating to the affirmation plea, and appears not to have addressed his mind to it.
Application to the Single Judge
The application for leave to appeal stated a number of intended grounds of appeal challenging each of the paragraphs numbered 2 to 5 inclusive above on a variety of grounds, and alleging an error of law (inter alia) in failing to find that the respondent had accepted, acquiesced in or affirmed the discharge agreement.
The single judge refused leave to appeal. In some brief extempore reasons he considered that the appellant had not demonstrated any manifest error of law on the face of the award. He said (AB77): "At best, the applicant is able to point only to some confusion in the use of legal terms. That confusion does not affect the ultimate validity of the decision". He held that the question he had to determine was whether the ultimate conclusion the arbitrator reached was one which demonstrates a manifest error of law. He also found that there did not exist "strong evidence of errors of a kind which, if determined on appeal, would add substantially to the certainty of the commercial law". He considered that the issues in the arbitration did not involve new questions, nor did they involve questions which require other than the application of settled principle. He dismissed the application and ordered that the appellant pay the respondent’s costs of the application.
The Appeal to the Full Court
The grounds of appeal to this Court against the refusal to grant leave to appeal do not suggest that the learned single judge misdirected himself as to the questions which had to be considered under s38 of the Act. Indeed, there can be no question but that His Honour did pose the right questions. Rather, they challenged His Honour’s finding that each of the alleged errors made by the arbitrator did not qualify as grounds on which leave could be given under s38.
Whilst there is no specific ground alleging that the failure of the arbitrator to advert to the affirmation plea was an error of law, it is alleged (Ground 4.2, AB111-112) that "there is strong evidence that the arbitrator made errors of law and that the determination of the questions may add, or may be likely to add, substantially to the certainty of commercial law, ... in particular, the circumstances in which economic duress and/or unconscionable conduct will be found to give rise to the setting aside of an agreement entered into as between the parties, where... the alleged victim has thereafter acquiesced in and affirmed the agreement, and has made no complaint for a period of four years".
While it could have been pleaded with greater clarity, I take that to amount to a plea to the effect that the learned judge should have found that there was an error of law of the requisite type on the part of the arbitrator in not acceding to or even considering the appellant’s affirmation plea. At least, that is how it was argued by counsel on this appeal.
The requirements for leave
It was common ground that the determination of the questions of law raised by the intended appeal could substantially affect the rights of the parties to the agreement. Accordingly, the condition contained in s38(5)(a) of the Act was fulfilled.
The appellant had to establish either that there was a manifest error of law on the face of the award or that there was strong evidence that the arbitrator 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 (s38(5)(b) of the Act).
As to manifest error of law on the face of the award, Sheller JA said of that expression in Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 203 at 225:
"The expression ‘error of law on the face of the award’ is one of a type well-known to courts. The award having been examined the question is whether there is apparent (and such is the denotation of the word ‘manifest’) an error of law. ‘Manifest error’ is an expression sometimes used in reference to reasons given by judges or the approach taken by juries: see, eg. s107(c)(iii) of the Supreme Court Act 1970 and the judgments of Kirby P in Azzopardi v Tasman UEB Industries Ltd (at 151) and Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 171 at 181. It is used to indicate something evident or obvious rather than arguable: see generally per McHugh JA in Larkin v Parole Board (1987) 10 NSWLR 57 at 70-71."
I agree that the error must be evident or obvious rather than arguable, provided that it is also understood that it may require argument to identify the evident or obvious error. Sheller JA went on to say, at p226:
"There should, in my opinion, before leave is granted be powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law."
So far as the second alternative requirement is concerned, namely strong evidence that the arbitrator made an error of law and that the determination of the question may add, or be likely to add, substantially to the certainty of commercial law, Promenade Investments Pty Ltd v State of New South Wales (supra) also gives some guidance. Sheller JA had earlier referred to a number of passages from the judgment of Lord Diplock in Pioneer Shipping Ltd v BTP Tioxide Ltd (The Nema) [1982] AC 724. Those passages related to s1 of the Arbitration Act 1979 (UK) which was in substantially the same terms as s38 of the Act prior to its amendment in 1992 before paragraph (b) was inserted in subsection (5). Lord Diplock had spoken of the construction of contracts in standard terms. He said (at p742-743):
"Where, as in the instant case, a question of law involved is the construction of a ‘one-off’ clause the application of which to the particular facts of the case is an issue in the arbitration, leave should not normally be given unless it is apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously wrong. But if on such perusal it appears to the judge that it is possible that argument might persuade him, despite first impression to the contrary, that the arbitrator might be right, he should not grant leave; the parties should be left to accept, for better or for worse, the decision of the tribunal that they had chosen to decide the matter in the first instance...
[R]ather less strict criteria are in my view appropriate where questions of construction of contracts in standard terms are concerned. That there should be as high a degree of legal certainty as it is practicable to obtain as to how such terms apply upon the occurrence of events of a kind that it is not unlikely may reproduce themselves in similar transactions between other parties engaged in the same trade, is a public interest that is recognised by the Act particularly in section 4. So, if the decision of the question of construction in the circumstances of the particular case would add significantly to the clarity and certainty of English commercial law it would be proper to give leave in a case sufficiently substantial to escape the ban imposed by the first part of section 1(4) bearing in mind always that a superabundance of citable judicial decisions arising out of slightly different facts is calculated to hinder rather than to promote clarity in settled principles of commercial law. But leave should not be given even in such a case, unless the judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction; and when the events to which the standard clause fell to be applied in the particular arbitration were themselves ‘one-off’ events, stricter criteria should be applied on the same lines as those that I have suggested as appropriate to ‘one-off’ clauses."
Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (supra) at 226 referred to that passage and said:
"The requirement that the question be one the determination of which may add substantially to the certainty of commercial law indicates that it should be one of wider and greater importance than, for example, the construction of a one-off clause in the context of a particular agreement between the parties. One can discern here the sort of limitation which Lord Diplock had in mind. The expression ‘commercial law’ should be given no narrow construction. The expression ‘strong evidence that the arbitrator... made an error of law’ suggests first what might otherwise be called on the leave application a strong prima facie case and second an error of law not manifest on the face of the award and demonstrable by evidence. The amendment may have been intended to redress in part the balance which Smart J in Warley Pty Ltd v Adco Constructions Pty Ltd (1988) 5 BCL 141 (at 147) described as not wholly satisfying or sensible and to enable not merely the respondent to support the award by reference to extrinsic material but the applicant to seek leave to reverse it by reference to such material."
I am happy to adopt the approach suggested by Sheller JA in relation to paragraph (b)(ii).
Nature of the award
When considering these questions it is important at the outset to remember that the arbitrator was determining a preliminary issue by way of interim award. He found that the respondent was not bound by the discharge agreement for a number of quite separate reasons. In the absence of the affirmation plea, any one of those reasons, if justified, would support the award. Therefore, in relation to any one of those reasons, if there is no manifest error of law on the face of the award, or if there is even strong evidence that there was an error, but the determination of the question is not likely to add substantially to the certainty of commercial law, then (absent the affirmation plea) the application for leave to appeal would properly be refused. In other words, merely because one error of law of the requisite type may be able to be identified, it does not follow that leave to appeal should be granted.
An example of such an error, which I would regard as being manifest on the face of the award, is in relation to the arbitrator’s findings concerning the letter of 12 April 1991. At various points in his reasons he described that as an "offer" (paragraphs 10, 36 and 43), an "undertaking" (paragraph 37) and an "agreement" (paragraphs 42, 76, 78, 90, 92 and 100). There seems little doubt that he regarded it in law as a binding agreement, as one of his reasons for holding that the respondent was not bound by the discharge agreement was that there was no consideration for that agreement, the parties already being bound by the agreement of 12 April 1991. However, the arbitrator found that the 12 April 1991 agreement was an agreement "outside the contract". At various points he considered that the respondent "had no redress under the dispute provisions of the contract" (paragraph 42), there was "no alternative commercial remedy as the initial agreement and the subsequent release were made by the (appellant) outside the terms of the contract between the parties" (paragraph 83), "there was no practical alternative remedy (for breach of the 12 April 1991 agreement)", "the contractor could not rely on the dispute procedures under the contract" (paragraph 87(4)) and "as the threats... were made in relation to an agreement outside the terms of the contract, there has been no breach of the contract by the principal".
In my opinion, this reflects a misunderstanding of the nature of the agreement reached in April 1991. It can only have been by way of variation to the principal contract, otherwise the arbitration could not have proceeded at all. The settlement of disputes provisions of clause 45 of the contract relates to "all disputes or differences arising out of the contract or concerning the performance or the non-performance by either party of his obligations under the contract". The arbitrator was therefore mistaken in holding that the respondent had no remedy and that the appellant, to the extent that it was refusing to be bound by the April 1991 agreement, was not in breach of the contract. However, that can have no material effect on the outcome of the interim award. For the purpose of holding that the discharge agreement was not binding, it did not matter whether the arbitrator considered the April 1991 agreement to be a separate agreement or an agreement by way of variation from the main contract. The identified error of law could not affect the outcome, and would not be one which would justify the granting of leave to appeal.
The appellant argued that the award was infected by errors of law of the requisite type in relation to each of the grounds, as I have explained them, on which the arbitrator held that the discharge agreement was not binding. One of those grounds, namely lack of consideration for the discharge agreement and its associated findings in relation to the 12 April 1991 agreement, if valid, would have rendered the discharge agreement void. That ground would not be affected in any way by the affirmation plea, and so if there were no error of law of the requisite type, that ground would in itself justify the award.
All the other grounds, if valid, would merely render the agreement voidable at the option of the respondent. There may have been, at one time, a category of common mistake which would render a contract void, but that seems unlikely to have survived, at least in Australia: Taylor v Johnson (1983) 151 CLR 422. Thus, all the remaining grounds would rely on equitable principles for the avoidance or setting aside of the contract, and are grounds which would be liable to be defeated if the affirmation plea were successful.
I turn then to consider the question of lack of consideration, because if that ground is free from errors of law of the requisite type, the award can be upheld without considering any of the other grounds.
Consideration
The 12 April 1991 agreement required satisfaction by the appellant of "the validity of the details of the extra costs incurred" by the respondent, and also required that time related costs would only be calculated in relation to the Contract Practical Completion date (30 September 1991). At the time when the discharge agreement was entered into, whilst details of the extra costs had been investigated and reported on by the appellant’s quantity surveyor, they had not been agreed. As at 17 December 1991 (the date of the quantity surveyor’s report) they had not all been incurred, and one of the items at least (completion of level modifications of the pipeline and jointing of the pipeline at chainage 265) had not been completed at the time of the discharge agreement. Furthermore, the contract completion date had not been ascertained.
It was therefore open to the respondent to forego what further rights it claimed to have had under the 12 April 1991 agreement in consideration of the payment agreed to be made. There was consideration for the discharge agreement, and to hold otherwise constituted a manifest error of law on the face of the award. The arbitrator’s award could not therefore have been upheld on that ground.
Of the other grounds on which the arbitrator found that the discharge agreement was not binding on the respondent, I need consider only one. That relates to the question of unconscionability. The reason that I need only consider this one is because if, as I find, there was no error of law by the arbitrator, this finding alone, subject to considering the affirmation plea, would be sufficient to justify the award.
Unconscionability
The arbitrator found, in essence, that the respondent had been induced by the unconscionable conduct of the appellant to enter into the release dated 14 February 1992. In short, that unconscionable conduct consisted of a retraction from the agreement made on 12 April 1991 on the faith of which the respondent had proceeded to clear the obstructions, and the threats to terminate the contract unless the release were given, at a time when, as the appellant well knew, the respondent was financially extremely vulnerable. Furthermore, the release insisted on was to discharge the appellant from all outstanding claims, not merely those relating to the direct costs of and delays relaying to the removal of the obstructions.
As Mahoney JA observed in Antonovic v Volker (1986) 7 NSWLR 151 at 165, the principle of unconscionability is better described than defined. The authors of Carter and Harland: "Contract Law in Australia" (3rd Edition) at p500 view it as a component of the court’s general jurisdiction to grant relief in cases of equitable fraud. It is therefore not a principle which lends itself to detailed specification. However, substantial guidance can be obtained from what the High Court said of the topic in Commercial Bank of Australia v Amadio (1983) 151 CLR 447. Although Gibbs CJ decided the matter on the basis of a misrepresentation, he said at p459:
"A transaction will be unconscientious within the meaning of the relevant equitable principles only if the party seeking to enforce the transaction has taken unfair advantage of his own superior bargaining power, or of the position of disadvantage in which the other party was placed. The principle of equity applies ‘whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands’: Blomley v. Ryan (1956) 99 CLR 362 at p415, per Kitto J., and see at pp405-406, per Fullagar J."
At p461 Mason J said:
"[R]elief on the ground of ‘unconscionable conduct’ is usually taken to refer to the class of case in which a party makes unconscientious use of his superior position or bargaining power to the detriment of a party who suffers from some special disability or is placed in some special situation of disadvantage,...
Relief on the ground of unconscionable conduct will be granted when unconscientious advantage is taken of an innocent party whose will is overborne so that it is not independent and voluntary, just as it will be granted when such advantage is taken of an innocent party who, though not deprived of an independent and voluntary will, is unable to make a worthwhile judgment as to what is in his best interest.
It goes almost without saying that it is impossible to describe definitively all the situations in which relief will be granted on the ground of unconscionable conduct. As Fullagar J said in Blomley v Ryan (1956) 99 CLR 362, at p405:
‘The circumstances adversely affecting a party, which may induce a court of equity either to refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic seems to be that they have the effect of placing one party at a serious disadvantage vis-à-vis the other.’
Likewise Kitto J, at p415, spoke of it as a ‘a well-known head of equity’ which -
‘... applies whenever one party to a transaction is at a special disadvantage in dealing with the other party because illness, ignorance, inexperience, impaired faculties, financial need or other circumstances affect his ability to conserve his own interests, and the other party unconscientiously takes advantage of the opportunity thus placed in his hands’.
It is not to be thought that relief will be granted only in the particular situations mentioned by their Honours. It is made plain enough, especially by Fullagar J, that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition of (sic) circumstance is placed at a special disadvantage vis-à-vis another and unfair or unconscientious advantage is then taken of the opportunity thereby created."
Deane J, with whom Wilson J agreed, said at p474:
"The jurisdiction is long established as extending generally to circumstances in which (i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality between them and (ii) that disability was sufficiently evident to the stronger party to make it prima facie unfair or ‘unconscientious’ that he procure, or accept, the weaker party’s assent to the impugned transaction in the circumstances in which he procured or accepted it. Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable..."
In my opinion it was open to the arbitrator to find that the respondent was lulled into a false sense of security by the 12 April 1991 agreement and by the variation order given in May and a part payment apparently made in pursuance of that agreement. There was no need to challenge the stated position of the appellant in that letter. It was open to him to find that there was an apparent change of heart by the appellant, which may, as a matter of law, have been in breach of the contract as varied, and that the appellant attempted to force a settlement at a time when the respondent was in no economic position to challenge the appellant’s stated position but instead was threatened with termination of the contract. In those circumstances it was also open to the arbitrator to find that the respondent was in a special situation of disadvantage such as to justify the setting aside of the 14 February 1992 discharge agreement on the grounds of unconscionability.
In that regard, I can detect neither manifest error of law on the face of the award, nor any evidence extrinsic to the award that the arbitrator made any error of law. However, if I am wrong in the latter, the determination of the question is unlikely to add substantially to the certainty of commercial law, as the question of unconscionability would, in this case, be no more than the application of a rather broad equitable principle to the particular facts of this case. The decision would be unlikely to be of assistance in any other fact situation.
The Affirmation Plea
Having held that the discharge agreement could be set aside on that ground, or indeed on any of the other grounds, the arbitrator was obliged to consider the affirmation plea, for if it succeeded, that effectively eliminated any remedy that the respondent might have had based on unconscionability or on any of the other grounds. A proper consideration of that plea would have entailed making appropriate findings of fact and applying the relevant principles of law to them.
However, the arbitrator does not appear to have addressed the question at all, and yet it was clearly an issue raised on the pleadings before him, and one which was very relevant to the issues to be decided on the interim award.
The arbitrator, in his award, under the heading "Issues for Determination" in paragraph 5 had summarised the appellant’s affirmation plea, but made neither findings of fact relevant to it nor any decision on the plea. As an arbitrator he was obliged to do so. His failure to do so was not only an error of law, but a miscarriage of the arbitration and a failure to exercise his jurisdiction. It was a manifest error on the face of the award, and in respect of an issue that had to be determined if the question of the binding nature of the discharge agreement was to be ruled upon.
Of course, I cannot say what the arbitrator’s answer would have been if he had properly considered the question. I need only go as far as to say that the failure, or error of law, is sufficient to cast doubt on the arbitrator’s interim award.
Conclusion
It follows that in my opinion leave to appeal should have been granted. However, I am also of the opinion that it could only have been granted in respect of that one ground.
Prior to its amendment in 1992, s38(5) of the Act read as follows:
"(5) The Supreme Court -
(a) shall not grant leave under subsection (4)(b) unless it considers that, having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more of the parties to the arbitration agreement;
and
(b) may make any leave which it grants under subsection (4)(b) conditional upon the applicant for that leave complying with such conditions as it considers appropriate."
The 1992 amendment to the present form indicated a significantly more stringent approach to the granting of leave to appeal. Those who chose to have their dispute resolved by commercial arbitration were only to have their awards upset by judicial intervention in very limited circumstances. I refer to and respectfully adopt what Debelle J said of that evident policy in Leighton Contractors Pty Ltd v SA Superannuation Investment Trust (Unreported, 11 November 1994, Judgment No S4846) at pp3-4:
"The Act discloses a policy that, generally speaking, an arbitral award of this kind is final. As Cox J noted in Pioneer Concrete (SA) Pty Ltd v Jennings Group Ltd (1991) 161 LSJS 332 at 333, the commercial convenience of such a policy is obvious. That policy was evident before the Act was amended in 1992. It was then necessary to obtain leave to appeal and, in order to obtain leave, the applicant had to demonstrate that an error of law existed...
The 1992 amendment was made as part of a scheme to achieve uniformity in arbitration in Australia. It was an acknowledged objective of the legislation to restrict the supervision and review by the courts of arbitral procedures and awards: Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 184, at 187. The amendment had the effect of requiring courts to take a different approach to applications for leave to appeal from the approach that had obtained before the amendment. The history of the court’s control of arbitral awards and the background to the amendments made as part of the uniform scheme in the early 1990’s is set out in the reasons for judgment of Sheller JA, delivering the judgment of the Court of Appeal in New South Wales in Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 203, at 216-223, a decision which approved the reasoning of Rogers CJ at first instance in 26 NSWLR 184. Those reasons have since been followed and applied by a differently constituted Court of Appeal in New South Wales in Natoli v Walker (unreported, 26th May 1994), where the background of the amendments made to s38 is summarised again by Kirby P., and by the Supreme Court of the Australian Capital Territory in Commonwealth v Rian Financial Services and Developments Pty Ltd (1992) 36 FCR 101. I respectfully agree with and adopt the reasons of Sheller JA.
In Pioneer Concrete (SA) Pty Ltd v Jennings Group Ltd (1991) 161 LSJS 332, Cox J had to deal with s38 before it was amended. I think the amendments to s38 require a stricter approach to the question of leave than he outlined in that decision. I add that it is common ground that I should follow and apply Promenade Investments in interpreting the meaning and effect of s38(5)."
Even before the 1992 amendment, and certainly after, the strongest implication from the terms of s38 is that if leave to appeal is given, the appeal is restricted to the question or questions of law which justified the granting of leave. Otherwise, there would be little point in restricting so significantly the categories of error of law that would justify the granting of leave. An ability to raise any question of law on the appeal outside the error or errors of law identified as justifying the granting of leave would be quite inconsistent with that policy manifest in the Act.
I would therefore allow the appeal and set aside the orders of the single Judge. I would substitute an order granting to the appellant leave to appeal to the Supreme Court restricted to the ground that the arbitrator failed to consider in his interim award what I have identified as the affirmation plea of the appellant in the arbitration.
Consequences of this Order
Normally, upon the making of such an order, the appeal itself would come on for hearing before a single Judge of this Court. Given the nature of the error of law I have identified, it is inevitable, in my view, that the appeal must be allowed. The powers of the Court on the hearing of the appeal are set out in s38(3):
"(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."
Subject to any further argument that may be put, it seems to me that the only course reasonably open to the Court on the hearing of the appeal would be to set aside the interim award and remit the award, together with the Court’s opinion on the question of law, to the arbitrator for reconsideration. That opinion of the Court could only be that the arbitrator erred as a matter of law in not considering and determining the appellant’s affirmation plea. It would be improper to express any view as to what the outcome of that consideration should be, and the Court has insufficient information on which it could reach any view on the matters, even if it were able to.
In those circumstances I think it would be appropriate, and in the interests of avoiding further delay and cost, that we should hear the parties further as to whether we should forthwith allow the appeal and proceed in the manner suggested. I would also wish to hear the parties on the question of costs.
If the course suggested were to occur, it would be up to the arbitrator, after hearing further from the parties, to determine how he should proceed and whether he should hear any further evidence or submissions from the parties.
Finally, I should add one further comment. The question arose during the argument as to whether the appellant still maintained, as he had before the arbitrator, that the discharge agreement settled all additional claims arising out of the contract, or only the dispute relating to the man-made obstructions. That was later clarified in a memorandum from counsel to the Court that the appellant "now accepts the arbitrator’s interpretation of the Letter for all purposes, including the leave application, any subsequent appeal and the ongoing arbitration".
It appears that the appellant’s view of that interpretation is that "the letter of release was related to all claims that had been made and extensions of time that had grown from the man-made obstructions". That was a quotation from the evidence of one of the appellant’s witnesses given before the arbitrator. (Arbitrator’s Reasons paragraph 96.) That is not quite how the arbitrator recorded his understanding in paragraph 4 of the interim award. However, that formulation may be influenced by the other parts of his award which may now have to be set aside. So it appears that there may well be an ongoing disagreement as to the meaning and effect of the discharge agreement, assuming it to be binding on the parties.
In any event, if the interpretation of the discharge agreement apparently favoured by the appellant is correct, it also appears from the exchanges of counsel that there is an undoubted disagreement as to whether the respondent’s claims had "grown from" the man-made obstructions, or whether they are additional claims arising out of the contract. It therefore seems that even if the preliminary issues relating to the binding nature or otherwise of the discharge agreement, intended to be determined by the interim award, were to be determined in favour of the appellant, there still remain substantial issues for determination by the arbitrator.
One must wonder about the wisdom of attempting to isolate for preliminary determination the issues which formed the subject of the interim award, and which have now given rise to three applications to this Court, one appeal and one objection to competency, and has involved two hearings before a single Judge and two substantial hearings before the Full Court, all of which proceedings appear to have done little to resolve the real issues apparently between the parties.
Doyle CJ
I agree with Bleby J, and there is nothing that I wish to add to his reasons.
Lander J
I also agree.
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