Morgan Belle Pty Ltd v API Services (Vic) Pty Ltd

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SUPREME COURT OF SOUTH AUSTRALIA

(Miscellaneous Appeal: Civil)

MORGAN BELLE PTY LTD v API SERVICES (VIC) PTY LTD

Judgment of The Honourable Justice Gray

22 December 2005

ARBITRATION - COSTS - ARBITRATOR'S FEES

ARBITRATION - CONDUCT OF THE ARBITRATION PROCEEDINGS - POWERS, DUTIES AND DISCRETION OF ARBITRATOR - DUTY TO OBSERVE RULES OF NATURAL JUSTICE

Application for leave to appeal against award of costs by arbitrators – consideration of whether parties were denied procedural fairness – discussion of adequacy of arbitrators reasons – leave to appeal granted – appeal heard instanter - appeal allowed – matter remitted to arbitrators for reconsideration of issue of costs.

Commercial Arbitration Act 1986 (SA) s 34, s 38, referred to.
Eminent Forms Pty Ltd v Formosa & Anor [2005] SASC 282 ; Giles v GRS Constructions Pty Ltd [2001] SASC 274 ; Pioneer Shipping Ltd v BTP Tioxide (The Nema) [1982] AC 724; Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327; Promenade Investments Pty Ltd v NSW (1992) 26 NSWLR 203; Natoli v Walker (1994) 217 ALR 201; Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust (unreported, SASC, Full Court, S5006, 24 April 1995) ; Leighton Contractors Ltd v Western Australian Government Railways Commission (1966) 115 CLR 575; Badge Constructions Pty Ltd v Penbury Coast [1999] SASC 6; Formosa v Eminent Forms Pty Ltd (2005) 91 SASR 6; Cretazzo v Lombardi (1975) 13 SASR 4 ; House v The King (1936) 55 CLR 499 ; Taylor v Pace Developments (1991) BCC 406; Wiseman v Borneman [1971] AC 297; Russell v Duke of Norfolk [1949] 1 All ER 109; Mobil Oil Australia PtyLtd v Federal Commissioner of Taxation (1963) 113 CLR 475; R v Mackellar; Ex parte Ratu (1977) 137 CLR 461; Kioa v West (1985) 159 CLR 550; Annetts v McCann (1990) 170 CLR 596; Salemi v MacKellar (No 2) (1977) 137 CLR 396; Applicant VEAL of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs [2005] HCA 72; Stead v SGIC (1986) 161 CLR 141; Re Australian Railways Union; Ex parte Public Transport Commission (1993) 67 ALJR 904; Wiechmann v Lovering (1992) 59 SASR 203; Pettitt v Dunkley (1971) 1 NSWLR 356; Papps v Police (2000) 77 SASR 210; Turbitt v Police [2005] SASC 303, considered.

MORGAN BELLE PTY LTD v API SERVICES (VIC) PTY LTD
[2005] SASC 488

Miscellaneous Appeal:  Civil

GRAY J

  1. This is an application seeking leave to appeal to this Court from an arbitrator’s amended award and order on costs. 

  2. The matter initially proceeded before this Court on the ex parte application of Morgan Belle Pty Ltd.  However, at the direction of the Court, the respondent, API Services Pty Ltd, was notified of the application and given the opportunity to make submissions. 

  3. Both parties provided the Court with written submissions and agreed that the determination of Morgan Belle’s application proceed on the…

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Details
Case
[2005] SASC 488
Decision Date

CaseChat Overview and Summary

In the case of Morgan Belle Pty Ltd v API Services (Vic) Pty Ltd, the dispute between the parties centred on an agreement dated 8 February 1996, where Morgan Belle authorised API Services to sell and use certain training programs. API Services later sought to terminate the agreement, leading to a claim by Morgan Belle for breach of contract and damages. The matter was referred to arbitration, where Morgan Belle was partially successful but only received a modest award of $3,000. The primary issue in this appeal was whether the arbitrators' handling of the costs award denied procedural fairness to the parties. Specifically, Morgan Belle argued that it was not given an opportunity to review and respond to API Services' submissions on costs, which the arbitrators did not exchange between the parties before making their decision.

The court addressed whether the arbitrators made an error in not allowing the parties to respond to each other's written submissions on costs, which would have ensured procedural fairness. The court found that the arbitrators did indeed commit an error by not permitting the parties to reply to each other's submissions, thereby denying them procedural fairness. This procedural flaw was significant enough to warrant the setting aside of the costs award and remitting the matter back to the arbitrators. The court reasoned that procedural fairness is essential for maintaining confidence in the arbitral process and that any departure from it could undermine the integrity of the decision-making process. Consequently, the appeal was allowed, and the award on costs was set aside. The matter was remitted to the arbitrators for reconsideration, ensuring that both parties have the opportunity to respond to each other's submissions on costs.

Orders

Orders of the court

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Background

Background to the litigation

One of the principal complaints of Morgan Belle is that procedural fairness was denied when the arbitrators addressed the issue of costs. Morgan Belle complained that it was not given an opportunity to review and respond to API Services’ submissions on costs. Later in these reasons I have concluded that procedural fairness was denied and that, notwithstanding that only a modest sum is involved, the matter should be remitted to the arbitrators for their further determination once each party has had the opportunity of replying to the other’s submissions as to costs.Background On 8 February 1996, Morgan Belle entered into an agreement with API Services, authorising API Services to sell and use certain training programs on terms and conditions set out in the agreement. During the course of the agreement, API Services advised Morgan Belle that it wished to terminate the agreement. Morgan Belle sought to terminate on the basis that API Services pay $7,500 as a final licence fee and return the training materials to Morgan Belle. The materials were returned to Morgan Belle over a 12-month period following further requests. Morgan Belle claimed that API Services had acted in breach of contract and in May 1999 sought a payment of $10,000 inclusive of costs by way of damages. API Services denied liability. On 26 May 1999, solicitors for Morgan Belle offered to settle for $10,000 inclusive of costs and interest. The matter did not resolve. Morgan Belle sought to arbitrate pursuant to the terms of the agreement and advised that it wished to jointly appoint an arbitrator. API Services responded that it would not participate in any arbitration or submit to the jurisdiction of any arbitrator appointed by Morgan Belle. On 10 April 2001, Morgan Belle’s solicitor notified API Services that Morgan Belle intended to appoint a South Australian legal practitioner to arbitrate. On 4 May 2001, API Services notified Morgan Belle that they intended to appoint a Victorian legal practitioner as their arbitrator. On 14 January 2002, the arbitrators wrote to the parties jointly. The dispute proceeded to arbitration on the papers. In February 2002, during the preparation stages of the arbitral proceedings, API Services offered to settle the dispute for the all-inclusive amount of $2,000. Morgan Belle rejected this offer. In the arbitration, Morgan Belle raised a number of issues but succeeded on only one. The claim initially advanced by Morgan Belle sought an award of $45,000. However, during the course of the arbitration Morgan Belle apparently reduced its claim to seek an award of an amount between $12,000 and $15,000. Ultimately, an award of $3,000 was made in favour of Morgan Belle. Major issues were resolved in favour of API Services. On 21 April 2005, the arbitrators published their award and invited the parties to make submissions as to costs. The parties forwarded their submissions to the arbitrators but neither provided a copy to the other party. On 4 May 2005, the arbitrators delivered their award on costs in the following terms:The arbitrators have received submissions on costs respectively dated 2 May 2005 from [Morgan Belle’s solicitors], and 3 May 2005 from [API Services’ solicitors].The parties have not made it clear whether or not they have exchanged their submissions on costs to each other.However, the arbitrators take the view that in light of the findings in the primary award and the amounts involved, it is inappropriate to invite a further round of correspondence and submissions in connection with costs. …The short view the arbitrators have formed in connection with costs is that there is some merit in the submissions made by each side.On the one hand, [Morgan Belle] has been obliged to commence arbitral proceedings, and it is clear from the early correspondence that [API Services] did not cooperate in relation to the matter. [Morgan Belle] has been partially successful, and [API Services] has not drawn the arbitrators’ attention to any Calderbank offer which might have offered [API Services] protection in relation to the question of costs.On the other hand, it is evident that [Morgan Belle] has had limited success only. It is fair to say, as [API Services] has submitted, that [Morgan Belle] has failed to secure an award of substantial damages.Section 34(1) [Commercial Arbitration Act 1986 (SA)] provides that the costs of the arbitration shall be in the discretion of the Arbitrators. This provision is similar to provisions which commonly appear in legislation and Rules of Court dealing with the question of costs. The authorities make it clear that there is only one immutable rule in relation to costs, and that is that there are no immutable rules: Solowij v Parish of St Michael(No. 2) [2003] SASC 48.The extent of the arbitrator’s discretion in matters of this kind is well exemplified by authorities such as Cretazzo v Lombardi (1975) 13 SASR 4.The arbitrators are also mindful of the fact that the parties have provided security deposits for the fees of the arbitrators in the sum of $7,000 by each party. Those fees have been and will be consumed such that after payment of the final fees of both arbitrators, there will remain a small balance only of $60.62 in Messers Wisewoulds Trust Account, as both arbitrators have indicated that they will limit their further charges in respect of the Award and the Order for Costs to an inclusive sum of $2,000 each.Having regard to all of those matters, and having regard to the desirability of providing the parties with finality as costs effectively as can be achieved the arbitrators make the following order in relation to costs: -1. The parties will bear the fees and expenses of the arbitrators equally.2.[API Services] is to pay Morgan Belle] the sum of $1,200 by way of costs, being an amount of costs taxed or settled by the Arbitrators pursuant to Section 34(1)(b) of the Commercial Arbitration Act.Proposed Grounds of Appeal

Evidence

Evidence Before The Court

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Decision

Reasons for decision

In the circumstances of the present case, Morgan Belle has established manifest error on the face of the costs award. The manifest error is that the arbitrators proceeded without according to each party the opportunity to respond to the other’s written submissions on costs. The award on its face disclosed that the arbitrators were on notice that the submissions may not have been exchanged.Conclusion The obligation for arbitrators to accord parties before them procedural fairness is critical to the confidence that the commercial community has in the arbitral process. If arbitrators proceed with a lack of procedural fairness, then confidence in the decision reached will be eroded and doubt as to the integrity of the whole process will arise. In these circumstances it is appropriate to grant leave to appeal. I consider that having regard to all the circumstances the determination of the question of procedural fairness could potentially affect the rights of one or more of the parties to the arbitration agreement and that there is manifest error on the face of the award. The arbitrators made an error of law in the processes that they followed. As earlier observed, by failing to permit either party the opportunity to respond to the written submissions prepared by the other party on the issue of costs, the arbitrators have denied the parties procedural fairness. In these circumstances, it is appropriate that the matter be remitted to the arbitrators to be dealt with in accordance with the principles of procedural fairness. Leave to appeal is granted. The appeal is allowed. The award as to costs is set aside. The matter is remitted to the arbitrators to reconsider costs once each party has been afforded the opportunity to reply to the submissions of the other. The parties will be able to consider and if thought appropriate address the possibility that the arbitrators will order that each party pay their proportion of the arbitrators’ expenses.

Ratio Decidendi

Legal Principle Established

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