Minister for Industrial Affairs v Civil Tech Pty Ltd (No 2) No. Scciv-02-765

MINISTER FOR INDUSTRIAL AFFAIRS v CIVIL TECH PTY LTD
[2003] SASC 393
Civil

PERRY J. This is an appeal by leave granted pursuant to s 38 of the Commercial Arbitration Act 1986 (“the Act”) against an award of an arbitrator.
Pursuant to a contract made between Civil Tech Pty Ltd (“Civil Tech”) and the Minister for Industrial Affairs (“the Minister”) dated 18 September 1990, Civil Tech undertook the construction and installation of certain underwater pipes through which sea water was to be pumped to and from the Marine Research Laboratory at West Beach. The contract sum exceeded $3.6 million.
After Civil Tech claimed to have completed the contract works, a number of disputes arose between the parties. In 1994, Civil Tech gave notice requiring all claims in issue between the parties to be referred to arbitration.
The arbitrator, Mr Barry Tozer, entered on the reference to arbitration on 1 February 1995.
He delivered two interim awards, on 26 November 1996 and 9 July 1999 respectively. Appeals to this Court by the Minister from those awards have been finally determined.[1]
[1] See actions numbered 2293 of 1996 and 882 of 1999.
After the determination of those appeals, the arbitration resumed on 12 March 2001. Following the completion of that hearing, the award the subject of the present appeal, described as a “final interim award” was delivered by the arbitrator on or about 27 May 2002.
On the application of the Minister within these proceedings, on 14 February 2003, pursuant to s 43 of the Act, I ordered that certain matters referred to in the final interim award be remitted to the arbitrator.[2] This was so that he might supply certain additional calculations explaining aspects of the assessment of the damages awarded to Civil Tech in the final interim award. He was also requested to prepare and deliver further reasons setting out the basis of Civil Tech’s entitlement to compound interest, and the basis of Civil Tech’s entitlement to have such interest calculated in accordance with the interest rates and formulae which had been provided to him in certain submissions of Civil Tech.
[2] See judgment No [2003] SASC 40.
In response to that order, on 23 April 2003 the arbitrator published a supplement to the final interim award.
Subsequently, he amended some of the figures which appear in that document and came forward with a document entitled “Amended Supplement to Final Interim Award” dated 14 May 2003 (“the supplement”).
The supplement incorporates a schedule detailing the calculation of the damages awarded to Civil, including the amounts credited by reference to ex gratia payments made by the Minister. No question now arises as to that aspect of the matter.
The supplement also incorporates reasons setting out the basis of Civil Tech’s entitlement to compound interest, and its entitlement to have such interest calculated in accordance with the interest rates and formulae provided in the submissions of Civil Tech.
It is as to that aspect of the supplement that the present appeal relates.
In his notice of appeal, the Minister sets out the following grounds:
“1.The Arbitrator erred in law in awarding to the Contractor an amount for monthly compound interest from the date the claim was submitted to the date of the Award (Award page 5 paragraph 7) in circumstances where:
1.1 the Arbitrator awarded compound interest as pre-award interest contrary to the provisions of section 31(4) of the Act;
1.2 in the alternative, insofar as the Arbitrator awarded compound interest as damages, there was no evidence to support such an award;
1.3 still further in the alternative, the Arbitrator failed to direct himself correctly or at all to the principles to be applied to the awarding of compound interest as damages.”
The Minister seeks orders that the allowance for compound interest which appears in the award be set aside, and that the matter be remitted to the arbitrator with a direction that interest on “such sum as may be due to the contractor be calculated as simple and not compound interest”.
The amended supplement to the final interim award
In the schedule to the supplement detailing the calculation of the damages awarded to Civil Tech, the arbitrator sets out his costings of a number of items leading to a total debit of $1,250,809.20. From that amount he deducted payments totalling $553,440, leaving a balance, which was the amount awarded to Civil Tech before the allowance of interest, namely $697,369.20. He conceded that his previous assessment of $749,651.86 should be corrected to that amount.
At paragraph 216 of the arbitrator’s final interim award delivered in May 2002, the arbitrator stated:
“I accept the evidence of the contractor in relation to its entitlement to an amount for monthly compound interest to be calculated in accordance with the rates and formulae provided in the schedules [ex C124]. Further details on applicable rates are to be provided in submissions on interest and costs.”
In the supplement, the arbitrator sets out his reasons for determining that Civil Tech was entitled to monthly compound interest to be calculated on the basis referred to in paragraph 216 of the final interim award. His reasons were as follows:
“3.Mr Stidston (T613-615) gave evidence that the funds used by Civil Tech Pty Ltd to conduct its business since 1990 were obtained from two facilities provided by the National Australia Bank [Ex C119; doc A23]. Civil Tech Pty Ltd had an ‘Instalment Loan’, initially for $160,000.00 secured by mortgages over property owned by the directors. It also had an ‘Overdraft’ which was increased from $15,000.00 to $100,000.00 in mid-1992.
4.Mr Stidston (T862) stated that as at October 1993, Civil Tech Pty Ltd had liabilities in excess of $270,000.00. Interest on a monthly outstanding balance of about $160,000.00 was payable at ‘home loan’ rates. Interest at ‘overdraft’ rates was payable on the balance of about $110,000.00.
5.On this evidence, I find that on the balance of probabilities, any payments made to Civil Tech Pty Ltd would have been utilised, in the first instance, to reduce the overdraft and then to provide additional working capital for the company to conduct its business or to reduce the instalment loan.
6.Mr Stidston gave evidence (T613) that Civil Tech Pty Ltd had an outstanding bank guarantee relating to the subject project with an amount of about $108,000.00. he admitted (T862) that the annual interest cost payable on this facility was only 1 or 2 per cent.
7.I have noted, however, that this amount was part of the total security of $425,700.00 provided by Civil Tech Pty Ltd to National Australia Bank in respect of its loans. To the extent that funds were held in the form of bank guarantees, that money was not available as working capital or to reduce loans at higher rates of interest.
8.By letter dated 11/11/91, Civil Tech Pty Ltd [Ex C61] advised that it did not have the financial resources to complete the contract works due to the costs incurred due to delays to the offshore works.
9.Mr Stidston (T320-322) agreed that he had authorised his bank manager, Peter Harris, to talk to SACON about the financial position of Civil Tech Pty Ltd in early 1992. He was told by Peter Harris that telephone conversations had taken place with Mr Manning.
10.On this evidence, I have concluded that the Respondent was aware of the financial circumstances of the Claimant, Civil Tech Pty Ltd prior to the payment of the additional ‘ex gratia’ amounts in 1992.
11.The Respondent was also aware that the consequence of not making any further payments to Civil Tech Pty Ltd would, on the balance of probabilities, require additional borrowings to complete work under this contract and to undertake any other work.
12.In summary, I find that Civil Tech Pty Ltd was denied the benefit of money that became due under the agreement and has lost the opportunity to use those funds as working capital in the operation of its business, to reduce loans or to otherwise invest.
13.The respondent failed to make payments in breach of the terms of the agreement between the parties, both in respect of the direct costs of additional work occasioned by the man made obstructions and in respect of the delays beyond 30 September 1991 caused by those additional works.
14.In accordance with the principle recognised by the High Court of Australia in Hungerfords v Walker,[3] I have determined that financing costs should be awarded as interest at monthly compound interest rates similar to the terms of the loans being paid by Civil Tech Pty Ltd.”
[3] (1989) 84 ALR 119.
The grounds of appeal fall to be determined against that background.
I will deal with the grounds in turn.
Ground 1.1 - The arbitrator awarded compound interest as pre-award interest contrary to the provisions of s 31(4) of the Act
Section 31 of the Act, including its heading, is as follows:
“Interest up to making of award
31.(1) Unless a contrary intention is expressed in the arbitration agreement, but subject to subsection (4), where the arbitrator or umpire determines to make an award for the payment of money (whether on a claim for a liquidated or an unliquidated amount), the arbitrator or umpire shall have power to include in the sum for which the award is made interest at such rate as the arbitrator or umpire may direct (being a rate not exceeding the rate at which interest is payable on a judgment debt of the Supreme Court) on the whole or any part of the money for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.
(2)Unless a contrary intention is expressed in the arbitration agreement, but subject to subjection (4), where-
(a)arbitration proceedings have been commenced for the recovery of a debt or liquidated damages;
and
(b)payment of the whole or part of the debt or damages is made during the currency of the proceedings and prior to or without an award being made in respect of the debt or damages,
the arbitrator or umpire may order that interest be paid at such rate as the arbitrator or umpire may direct (being a rate not exceeding the rate at which interest is payable on a judgment debt of the Supreme Court) on the whole or any part of the money paid for the whole or any part of the period between the date when the cause of action arose and the date of the payment.
(3)Without limiting subsection (2), arbitration proceedings shall, for the purposes of that subsection, be deemed to have been commenced if-
(a)a dispute to which the relevant arbitration agreement applies has arisen;
and
(b)a party to the agreement-
(i)has served on another party to the agreement a notice requiring that other party to appoint an arbitrator or to join or concur in or approve of the appointment of an arbitrator in relation to the dispute;
(ii)has served on another party to the agreement a notice requiring the other party to refer, or to concur in the reference of, the dispute to arbitration;
or
(iii)has taken any other step contemplated by the agreement or the law in force at the time the dispute arose, with a view to referring the dispute to arbitration or appointing, or securing the appointment of, an arbitrator in relation to the dispute.
(4)This section does not-
(a)authorize the awarding of interest upon interest;
(b)apply in relation to any amount upon which interest is payable as of right whether by virtue of an agreement or otherwise;
or
(c)affect the damages recoverable for the dishonour of a bill of exchange.”
The appellant relies in particular upon s 31(4)(a) which provides that s 31 does not “authorise the awarding of interest upon interest”.
At the outset it is important to note that given the manner in which that provision is expressed, it does not proscribe altogether the awarding of interest upon interest, or compound interest. It is simply that the section does not authorise such an award.
Furthermore, pursuant to s 31(4)(b), the section has no application to any amount “... upon which interest is payable as of right whether by virtue of an agreement or otherwise”.
It follows that if the arbitrator properly found an amount due by the appellant to the respondent, he could not award compound interest with respect to such an amount pursuant to any power given by the section. But the arbitrator’s power to award compound interest, either by reference to the agreement between the parties or at common law, is unaffected by the section.
In the result, no ground would be made out to impugn the award of compound interest made by the arbitrator, if, apart from s 31, he had the power to do so and properly exercised that power in the circumstances of the case.
It is a necessary part of the argument adduced by the appellant that s 31 is an exclusive code defining the limits within which an allowance for pre-award interest may be made.
But such a contention conflicts with the very terms of the section itself, more particularly s 31(4)(b).
I would regard the position in this respect as analogous to the construction which has been placed on the corresponding provision in the Supreme Court Act 1935.
Pursuant to s 30C of that Act, unless “good cause is shown to the contrary”, the court must on the application of the party in whose favour a judgment is pronounced, include in the judgment an award of interest in accordance with the provisions of that section.
Section 30C(4) provides that the section does not “authorise the award of interest upon interest”. But s 30C(4)(e) provides that the section does not “limit the operation of any other enactment or rule of law providing for the award of interest”.
In Hungerfords v Walker,[4] Mason CJ and Wilson J observed in their joint judgment:[5]
“Sub-section (4)(e) states that s 30c ‘does not limit the operation of any other enactment or rule of law providing for the award of interest’ (our emphasis). It would be a strange result if, in the face of this provision, the court were to hold that the enactment of s 30c precluded the award of damages for loss of the use of money, in accordance with the logical development of fundamental common law principle so as to accord with commercial reality, to a plaintiff deprived of the use of money paid away or withheld as the result of the defendant’s negligence of breach of contract. Where a legislative provision is designed to repair the failings of the common law and is not intended to be a comprehensive code, the existence of that provision is not a reason for this court refusing to give effect to the logical development of common law principle. It would be ironic if a legislative attempt to correct defects in the common law resulted in other flaws becoming ossified in the common law.”
[4] (1988) 84 ALR 119.
[5] Ibid 132.
By parity of reasoning, s 31 of the Commercial Arbitration Act cannot properly be regarded as a comprehensive code dealing with the award of interest. It should not be construed so as to restrict the power of an arbitrator to award interest, including compound interest, as part of an award, if such a course is justified either by reference to the agreement between the parties giving rise to the debt or liability or at common law.
Here, the arbitrator in no way attempted to base the award of interest upon any provision in the Act, or on any term of the agreement between the parties. Rather, he held that it was proper to award compound interest “in accordance with the principle recognised by the High Court of Australia in Hungerfords v Walker” (supra) (supplement, par 14).
It follows that this ground of appeal is not made out.
It is convenient to deal with the remaining grounds together.
1.2 in the alternative, insofar as the Arbitrator awarded compound interest as damages, there was no evidence to support such an award
1.3 still further in the alternative, the Arbitrator failed to direct himself correctly or at all to the principles to be applied to the awarding of compound interest as damages
The relevant principles are identified in the decision of the High Court in Hungerfords v Walker (supra). In the course of their joint judgment (with which Brennan and Deane JJ were in general agreement), Mason CJ and Wilson J observed, after discussing the traditional reluctance of the common law to recognise an entitlement to interest and the contrasting approach in admiralty:[6]
“Although the admiralty model has obvious attractions, the common law has steadfastly declined over a very long time to adopt the admiralty approach in awarding compensation for late payment of damages in the general run of cases. But we see no reason for allowing the reluctance of the common law to extend to cases where the defendant’s breach of contract or negligence has caused the plaintiff to pay away or the defendant to withhold money and, as a result, the plaintiff has been deprived of the use of the money so paid away or withheld. The recovery of compensation for the loss may be ascribed to the operation of the second limb in Hadley v Baxendale.[7] However, we would prefer to put it on the footing that it is a foreseeable loss, necessarily within the contemplation of the parties, which is directly related to the defendant’s breach of contract or tort.
On this footing the Full Court was correct in awarding damages for the added cost of funding the business with borrowed money as a result of the loss of the use of money overpaid in tax. The award of interest was of necessity compound interest, Simple interest would not reflect accurately the extent of the respondents’ loss.” (emphasis added)
Elsewhere they said:[8]
“In principle he should be awarded the compensation which would restore him to the position he would have been in but for the defendant’s breach of contract or negligence. Judged from a commercial viewpoint, the plaintiff sustains an economic loss if his damages are not paid promptly, just as he sustains such a loss when his debt is not paid on the due date. The loss may arise in the form of the investment cost of being deprived of money which could have been invested at interest or used to reduce an existing indebtedness. Or the loss may arise in the form of the borrowing cost, ie, interest payable on borrowed money or interest foregone because an existing investment is realised or reduced.
The requirement of foreseeability is no obstacle to the award of damages, calculated by reference to the appropriate interest rates, for loss of the use of money. Opportunity cost, more so than incurred expense, is a plainly foreseeable loss because, according to common understanding, it represents the market price of obtaining money. But, even in the case of incurred expense, it is at least strongly arguable that a plaintiff’s loss or damage represented by this expense is not too remote on the score of foreseeability. In truth, it is an expense which represents loss or damage flowing naturally and directly from the defendant’s wrongful act or omission, particularly when that act or omission results in the withholding of money from a plaintiff or causes the plaintiff to pay away money.” (emphasis added)
[6] Ibid 133.
[7] (1854) 9 Ex 341; 156 ER 145.
[8] Ibid 128-9.
The passages which I have italicised make it plain that Hungerfords v Walker stands for the proposition that the award of interest at common law for the late payment of moneys due pursuant to a contract, including the late payment of damages, is recoverable by reason of the operation of the first limb rather than the second limb in Hadley v Baxendale. This is because the loss associated with money paid away or withheld will ordinarily be “a foreseeable loss, necessarily within the contemplation of the parties, .... directly related to the defendant’s breach of contract or tort”.

It follows that it is not incumbent upon a plaintiff seeking to recover damages for such a loss to prove knowledge on the part of both parties to the contract of special circumstances likely to give rise to the particular loss in the event of a breach. That would only be the situation if damages under this head were recoverable under the second rather than the first limb in Hadley v Baxendale.
The view which I take is that the import of the decision in Hungerfords v Walker is consistent with the view taken in other authorities: see, for example, Galloway Metals Pty Ltd v Comalco Aluminium Ltd[9] where, after referring to the joint judgment of Mason CJ and Wilson J in Hungerfords, Heerey J comments:
“The essence of their Honours’ judgment is to put the plaintiff’s right to damages on the more general basis of the first limb of Hadley v Baxendale rather than, as the Full Court [at first instance in Hungerfords] had done, on the second.”[10]
[9] (1993) 114 ALR 118.
[10] See also Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 per Giles J at 363-364.
Of course, the fact that the damages on this head are recoverable under the first limb rather than the second limb in Hadley v Baxendale, does not relieve the plaintiff (or in this case the appellant) from proving that such a loss was in fact suffered and the extent of it.
As it was put by King CJ in Pooraka Holdings Pty Ltd v Participation Nominees Pty Ltd and Ors:[11]
“It is obvious that non-payment of amounts due under the contract of sale would deprive the respondent of the opportunity of putting those amounts to profitable use. If the respondent in fact suffered loss in consequence of being deprived of that opportunity, such loss would have to be regarded as within the reasonable contemplation of the parties. The onus was on the respondent to prove that such loss was sustained and the extent of any such loss.”
[11] (1991) 58 SASR 184 at 196.
In this case, the arbitrator specifically found that the respondent was aware of the financial circumstances of Civil Tech and was also aware that the consequence of not making further payments to Civil Tech would, on the balance of probabilities, cause Civil Tech to incur additional borrowings to complete the contract works.
It was not necessary for the arbitrator to make those findings in order to award damages for loss of use of the money. Recovery under the first limb in Hadley v Baxendale does not depend on any special knowledge on the part of the contracting parties.
For this reason, while Mr O’Sullivan was quite correct to point out that the knowledge of the appellant as to the likelihood that Civil Tech would incur additional borrowings to complete the contract works, post-dated the formation of the contract, that circumstance is no answer to the respondent’s claim for damages for loss of use of the money.
I have already set out above the relevant findings made by the arbitrator in the supplement. Those findings identify a number of items of evidence upon the basis of which he made the award of damages on this head.
The question is not whether any award was justified on the basis of that evidence. This being an appeal on a question of law only, the relevant question is whether or not the appellant has satisfied the court that there was no evidence upon which this part of the award could be supported.
Clearly, there was such evidence.
That conclusion disposes of ground 1.2.
As for ground 1.3, as I have said, the arbitrator unnecessarily referred to the knowledge of the defendant of the financial circumstances of the respondent.
But in his calculation of the damages for loss of use of the money, there was no incorrect application of relevant principles.
In the result, I hold that there was neither a manifest error of law on the face of the award (taking the award to be the two interim awards, the final interim award and the amended supplement to the final interim award), and neither is there “strong evidence” that the arbitrator made an error of law within the meaning of s 38(5)(b) of the Act.
In those circumstances, the proper order is for me to rescind leave to appeal and to dismiss the appeal.
I so order.
JUDGMENT CITATIONS
LISTED IN ORDER OF APPEARANCE IN JUDGMENT
1.   See actions numbered 2293 of 1996 and 882 of 1999.
2. See judgment No [2003] SASC 40.
3. (1989) 84 ALR 119.
4. (1988) 84 ALR 119.
5.    Ibid 132.
6.    Ibid 133.
7. (1854) 9 Ex 341; 156 ER 145.
8.    Ibid 128-9.
9. (1993) 114 ALR 118.
10.    See also Hobartville Stud Pty Ltd v Union Insurance Co Ltd (1991) 25 NSWLR 358 per Giles J at 363-364.
11. (1991) 58 SASR 184 at 196.

[2003] SASC 393

22 December 2003