Morgan Belle Pty Ltd v API Services (Vic) Pty Ltd - [2005] SASC 488

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

This is an application seeking leave to appeal to this Court from an arbitrator’s amended award and order on costs.
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.
Both parties provided the Court with written submissions and agreed that the determination of Morgan Belle’s application proceed on the papers. It was further agreed that if leave be granted, the appeal itself be heard instanter. The submissions put before the Court on leave fully addressed the issues that would be raised on the appeal if leave were to be granted.
Although the arbitral process led to an award of only $3,000.00, difficult questions of fact or law had to be resolved. The parties agreed to the arbitrators deciding the matter on the papers with a view to minimising expense.
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
Morgan Belle sought leave to appeal only in respect of the order that the parties bear the fees and expenses of the arbitrators equally. The following complaints were sought to be advanced:
-that there had been a denial of procedural fairness;
-that the arbitrators had erred as a matter of law in their approach to the issue of costs;
-that the arbitrators failed to exercise their discretion judicially; and
-that the arbitrators failed to provide adequate reasons for their order.
Before addressing the proposed grounds of appeal, it is appropriate to discuss the relevant statutory provisions of the Commercial Arbitration Act 1986 (SA) and the case law against which this application is to be determined.
Section 38 of the Commercial Arbitration Act
API Services submitted that these proceedings were governed by the Commercial Arbitration Act1984 (Vic). However, it was accepted that the terms of that Act and the South Australian Commercial Arbitration Act were identical in relevant respects. In these circumstances it is unnecessary to resolve the question as to which Act has application. It is appropriate and permissible to proceed on the basis that the South Australian statute governs these proceedings.
Applications for leave to appeal from a decision of an arbitrator are governed by the Commercial Arbitration Act 1986 (SA). Section 38 relevantly provides:
(1)Without prejudice to the right of appeal conferred by subsection (2), the Court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the award.
(2)Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.
(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.
(4)An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement--
(a)with the consent of all the other parties to the arbitration agreement;
or
(b) subject to section 40, with the leave of the Supreme Court.
(5)The Supreme Court shall not grant leave under subsection (4) (b) unless it considers that--
(a) having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement;
and
(b) there is--
(i) a manifest error of law on the face of the award;
or
(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.
These provisions require the court to determine whether, having regard to all of the circumstances, the determination of a question of law could substantially affect the rights of one or more parties to the arbitration agreement. These provisions also require determination of whether there is either a manifest error of law on the face of the award or 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.[1]
[1] See Eminent Forms Pty Ltd v Formosa & Anor [2005] SASC 282 at [16].
The intent of the Commercial Arbitration Act,[2] to treat arbitral awards as final, is manifested by the limited rights of appeal from arbitral awards.[3] The clear intent of section 38 of the Commercial Arbitration Act is to restrict a party’s right to review an arbitral award. Questions of fact are not to be re-examined except insofar as they give rise to questions of law. Moreover, questions of law will only give rise to a right to appeal in circumstances where the rights of one or more of the parties would be substantially affected by the determination of the question, or where manifest error is established. As Sheller JA observed in Promenade Investments Pty Ltd v NSW:[4]
The added requirements of manifest error of law on the face of the award or strong evidence that the arbitrator made an error of law and that the determination of the question may add substantially to the certainty of commercial law suggests that the draftsman was seeking to constrain the exercise of court control over arbitral awards in the manner described by the House of Lords in The Nema.
[2] Counsel for API Services pointed out that there is a continuing contest between the parties as to which Commercial Arbitration Act applies to the present case: the Commercial Arbitration Act 1984 (Vic) or the Commercial Arbitration Act 1986 (SA). However, it was acknowledged that the relevant provisions of each, namely section 38 of both Acts, are in the same terms in any event.
[3] See Giles v GRS Constructions Pty Ltd [2001] SASC 274 at [11], [13]–[16], [18]-[21] (Lander J); Pioneer Shipping Ltd v BTP Tioxide (The Nema) [1982] AC 724; Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327.
[4] Promenade Investments Pty Ltd v NSW (1992) 26 NSWLR 203 at 222.
Kirby P considered the meaning of “manifest error on the face of the award” in Natoli v Walker[5] and made the following observations:[6]
Obviously, there is a difficulty in the word “manifest”. What may be “manifest” to one judicial officer may fail to persuade another. The criterion cannot be the swiftness of mind of the sharpest intellect. Nor can it be the perception of one whose whole career has been devoted to examining and reflecting upon building contracts. An objective, not a subjective, test for what is “manifest” is contemplated. But the word will not go away. Against the background of its history in this context it requires swift and easy persuasion and rapid recognition of the suggested error. Otherwise, Parliament has taken the decision that it is better for the community as a whole that the parties should be held to their arbitral award. The price of lengthy exploration and reconsideration may prove warranted in a particular case. But, in the administration of justice as a whole, it is not. Expressed in economic terms, the marginal utility of the variations which will be achieved in particular cases is outweighed by the marginal cost of the delays, frustrations, uncertainties, inconvenience and legal and other expenses thereby necessitated. This will seem a harsh decision to those who can show error in an arbitrator's award. It will seem particularly harsh where an error of law can be shown. It may even seem intolerable where an arguable, but not “manifest”, error of law is demonstrated. But that is the choice which Parliament has deliberately taken. Judges must be faithful to that choice. They must obey it, even where their inclinations suggest that a detailed and painstaking review of the facts and the law might ultimately persuade them that the arbitrator has erred.
[5] Natoli v Walker (1994) 217 ALR 201.
[6] Natoli v Walker (1004) 217 ALR 201 at 215; See also Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust (unreported, SASC, Full Court, S5006, 24 April 1995) at [11]-[13], [24].
In order for Morgan Belle to meet the requirements of section 38 of the Commercial Arbitration Act and obtain leave to appeal the costs award, it must establish an obvious or apparent error on the face of the award. This requirement was discussed by the High Court in Leighton Contractorsv Western Australian Government Railways Commission[7] and by this Court in Badge ConstructionsPty Ltd v Penbury Coast[8] and Formosa v Eminent Forms Pty Ltd.[9]
[7] Leighton Contractors Ltd v Western Australian Government Railways Commission (1966) 115 CLR 575.
[8] Badge Constructions Pty Ltd v Penbury Coast [1999] SASC 6.
[9] Formosa v Eminent Forms Pty Ltd (2005) 91 SASR 6.
An arbitrator’s discretion to award costs is unfettered, and it cannot be exercised capriciously. Generally speaking, costs will follow the event. To award otherwise would suggest, in many cases, that the arbitrators had acted capriciously. However, circumstances may arise which arbitrators consider justify a departure from this general rule. Even if the successful party is defined as including a person who becomes entitled to a balance judgment after a series of contested claims and counterclaims, it does not follow that a proper exercise of the discretion will result in an award of costs and disbursements in his favour, or that it will require special or exceptional circumstances to depart from what might be perceived as a general rule.[10]
[10] Formosa v Eminent Forms Pty Ltd (2005) 91 SASR 6 at [23]-[24].
Arbitrator’s Discretion to Award Costs
The power of an arbitrator to make an award for costs following arbitration is conferred by section 34(1) of the Commercial Arbitration Act. That section provides:
Unless a contrary intention is expressed in the arbitration agreement, the costs of the arbitration (including the fees and expenses of the arbitrator or umpire) shall be in the discretion of the arbitrator or umpire, who may--
(a) direct to and by whom and in what manner the whole or any part of those costs shall be paid;
(b)tax or settle the amount of costs to be so paid or any part of those costs;
and
(c) award costs to be taxed or settled as between party and party or as between solicitor and client.
When awarding costs, an arbitrator has a broad and unfettered discretion curtailed only by the fact that it must be exercised judicially.[11]
[11] Cretazzo v Lombardi (1975) 13 SASR 4 at 11 (Bray CJ).
In Leighton Contractors, the High Court observed:[12]
The error of law which the appellant submits is apparent upon the face of the award is that the arbitrator without reason failed to award costs to a successful claimant. … All that can be gleaned from the award and its accompanying documents is that the appellant failed entirely as to several of its points of claim, and was only partially successful in all but one of the remainder of them. In one it succeeded substantially for the amount of its claim. But the extent to which time and effort may have been expended in resisting claims upon which the claimant failed wholly or partially cannot be discerned from these documents.
The appellant submits that the discretion to award or not to award costs must be exercised judicially according to well settled principles. Unless there be reasons of a recognized kind for providing otherwise, a successful litigant, according to such principles, should have his costs … But none the less, where, as here, there are a number of claims upon some of which the claimant succeeds wholly or partially and upon some of which he fails altogether, it may well be a judicial exercise of the discretion to order each party to bear its own costs throughout. It cannot be said that in such a case the claimant must be given his costs or some part of them. It may be in general he would. But, if he is given costs, it is the result of the exercise of a discretion and not by rule of law. In short, the face of the award does not suggest, let alone demonstrate, a total lack of circumstance in the conduct or result of the arbitration upon or in respect of which the arbitrator could properly exercise his discretion by awarding each party to pay its own costs. In our opinion, it is not made to appear from the award that there was no tenable reason for the arbitrator to depart from the course of awarding costs to the successful party. No doubt there must be such a reason for making the award as to costs which the arbitrator made in this case. …
[12] Leighton Contractors (1966) 115 CLR 575 at 578-579.

When determining whether good cause exists to depart from the general rule that costs follow the event, an arbitrator must consider the individual circumstances of the case, including: the number and nature of issues argued; the time occupied on particular issues; and which party was successful and on what issues.
In Leighton Contractors, the High Court observed that in considering whether or not an arbitrator has made an error of law, a court of appeal is confined to an examination of the award and its accompanying documents. A court making such a determination is not entitled to look at the record of the proceedings before the arbitrator.[13]
[13] Leighton Contractors (1966) 115 CLR 575 at 578-580.
Whilst the arbitrator’s discretion to award costs is broad, it is not immune from review. An exercise of judicial or quasi-judicial discretion must not be capricious or arbitrary and must be exercised according to law. However, courts engaged in review of the exercise of discretion will be slow to interfere in the absence of identifiable error or evidence of an improper basis or misunderstanding of fact or law.[14]
[14] House v The King (1936) 55 CLR 499 at 504-505.
As emphasised by this Court in Badge Constructions, the overriding principle when making an order for costs is that the order made is just and fair in the circumstances. As Debelle J observed:[15]
The overriding principle is that the order for costs is fair and just in all the circumstances. The arbitrator has a broad discretion to ensure such a result. Thus, it will be appropriate when considering what award should be made as to costs to have regard to the conduct of the parties. So, a party may not be entitled to costs if he has advanced an inflated claim or counter-claim with the apparent purpose of frightening the other party by the fear of the costs of proceedings to drop the claim or accept less than the claim.
[15] Badge Constructions [1999] SASC 6 at [11].
In general, the party successful in obtaining compensation will be awarded costs, unless good cause is shown to depart from that general position. It is well established that in certain circumstances it may be reasonable to require a litigant who has succeeded only upon a portion of his or her claim to bear the expense of litigating the other portion or portions. Circumstances may also arise where a successful party who has failed on certain issues may not only be deprived of the costs in those issues but may be ordered to pay the other party’s costs as well.[16]
[16] Badge Constructions [1999] SASC 6 at [8].
In Badge Constructions, Debelle J found that there existed no exceptional circumstances or good cause to justify departure from the common law rule. It was held that the arbitrator erred in failing to apply the well-settled common law principles.
In Taylor v Pace Developments,[17] Lloyd LJ warned against laying down rigid principles or guidelines for the award of costs, finding that the only immutable rule in relation to costs is that there are no immutable rules.[18]
[17] Taylor v Pace Developments (1991) BCC 406.
[18] Taylor v Pace Developments (1991) BCC 406 at 408.
However, in Formosa v Eminent Forms Pty Ltd,[19] this Court held that common law rules provide for a consistency in the exercise of the discretion to award costs, namely that costs will generally follow the event unless good cause has been shown to the contrary.
The Issues for Review
[19] Formosa v Eminent Forms Pty Ltd (2005) 91 SASR 6 at [8]–[14].
Denial of Procedural Fairness
Counsel for Morgan Belle submitted that Morgan Belle had been denied procedural fairness by the arbitrators. Having noted that, “it was not clear whether the parties had exchanged submissions”, it was said that the arbitrators ought to have confirmed the factual position and then allowed both parties the opportunity to address the arbitrators in relation to the other party’s submissions. Counsel contended that the failure to afford Morgan Belle that opportunity constituted a breach of the requirement of procedural fairness.
Counsel for API Services challenged Morgan Belle’s claim that it had been denied procedural fairness. It was said that Morgan Belle had failed to establish that if it had been given the opportunity to reply it would have done so and that such a reply would have led to some different, more favourable costs award. Further, it was pointed out that the arbitrators did not accept API Services’ submissions on costs in their entirety.
The requirement of procedural fairness must depend on the circumstances of the case, the nature of the inquiry, the rules under which the tribunal is acting, the subject matter that is being dealt with, and so forth. As Lord Reid observed in Wiseman v Borneman: [20]
Natural justice requires that the procedure before any tribunal which is acting judicially shall be fair in all the circumstances.
[20] Wiseman v Borneman [1971] AC 297 at 308. See also Russell v Duke of Norfolk [1949] 1 All ER 109 at 118 (Tucker LJ); Mobil Oil Australia PtyLtd v Federal Commissioner of Taxation (1963) 113 CLR 475 at 504 (Kitto J); R v Mackellar; Ex parte Ratu (1977) 137 CLR 461 at 476.
The Commercial Arbitration Act provides a statutory regime with respect to arbitrations. The principles of procedural fairness apply to proceedings before arbitrators. Section 19 addresses the giving of evidence; section 20 allows the representation by parties through legal representation. These sections indicate a legislative intent that procedural fairness should be accorded by arbitrators to the parties to the arbitral process.
There is nothing in the CommercialArbitration Act indicative of a legislative intent that principles of procedural fairness should not be applied. However, what will amount to procedural fairness in the particular case may well vary depending on the nature of the arbitral process and the procedures adopted and agreed to by the parties. The limited rights of review discussed earlier in these reasons also support the position that procedural fairness should be accorded.
The Commercial Arbitration Act confers powers. There is a corresponding duty of procedural fairness that arises particularly where the power involved is one which may destroy, defeat or prejudice a person’s rights, interests or expectations.[21]
[21] Annetts v McCann (1990) 170 CLR 596 at 598.
It is the fundamental rule of procedural fairness that when an order may be made that deprives a person of some right or interest or the legitimate expectation of a benefit, that person is entitled to know the case to be made against him or her and to be given the opportunity of replying to that case.[22]
[22] Kioa v West (1985) 159 CLR 550 at 582.
As earlier observed, what is required to comply with procedural fairness will vary according to the nature of the decision-making body, the consequences of the decision and the statutory framework in which the proceedings take place. The statutory power must be exercised in accordance with procedures that are fair to the individual and to the interests and purpose, which the statute seeks to advance.[23]
[23] Salemi v MacKellar (No 2) (1977) 137 CLR 396 at 451.
Pursuant to the Commercial Arbitration Act, the arbitrators’ power to conduct the arbitration was conditioned upon their observance of the requirements of procedural fairness. As procedural fairness is directed to the obligation to give parties a fair hearing, it is necessary to consider what procedural fairness required the arbitrators to do in the course of conducting their arbitration and making their award.
In the present proceedings, following the handing down of the initial arbitral award, both parties submitted written submissions concerning costs. The written submissions were detailed. Morgan Belle sought solicitor and client costs and claimed its contribution to the arbiter’s fees in full as a disbursement. API Services opposed any order for costs in favour of Morgan Belle and sought an order for costs in its favour on a party-party basis.
Neither party forwarded a copy of their written submission to the other. This is perhaps an indication of the lack of genuine co-operation existing between these parties. The arbitrators, as their award on costs shows, contemplated that neither party had seen the written submission of the other. However, the arbitrators proceeded to make their award without clarifying whether either party wished to reply and, if a party did, to allow that opportunity.
The arbitrators should have inquired as to whether the parties had had an opportunity to read and consider their opponent’s submissions. This inquiry could have been easily addressed. Telephone enquiries would have resolved any uncertainty. The failure to so inquire resulted in a denial of procedural fairness to both parties. The written submissions prepared by both parties contained information that was credible, relevant and significant to the question to be determined by the arbitrators. In such circumstances, procedural fairness required that the arbitrators afford both parties the opportunity to read and respond to what the other party asserted. To this extent, the recent observations of the High Court in Applicant VEAL of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs[24] are apposite:[25]
[F]airness requires that the person whose interests are likely to be affected by a decision should be given an opportunity to deal with the adverse information. As has later been rightly said, “the necessity to disclose such material in order to accord procedural fairness is not based on answering a causal question as to whether the material did in fact play a part in influencing the decision”. … The relevant inquiry is: what procedures should have been followed? The relevant inquiry is neither what decision should the decision-maker have made, nor what reasons did the decision-maker give for the conclusion reached.
[24] Applicant VEAL of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs [2005] HCA 72.
[25] Applicant VEAL of 2002 v Minister for Immigration and Multicultural and Indigenous Affairs [2005] HCA 72 at [19].
Bearing in mind the limited rights of review, affording the opportunity of reply was all the more important. This was particularly so given that API Services sought an order for costs in its favour. Morgan Belle had not addressed this point in its written submissions. Although, in the event, no order was made in favour of API Services, it illustrates the importance of allowing the opportunity to respond.
In Stead v SGIC,[26] the High Court discussed the consequences of a departure from the rules of natural justice and observed:[27]
[N]ot every departure from the rules of natural justice at a trial will entitle the aggrieved party to a new trial. By way of illustration, if all that happened at a trial was that a party was denied the opportunity of making submissions on a question of law, when, in the opinion of the appellate court, the question of law must clearly be answered unfavourably to the aggrieved party, it would be futile to order a new trial.
Where, however, the denial of natural justice affects the entitlement of a party to make submissions on an issue of fact, especially when the issue is whether the evidence of a particular witness should be accepted, it is more difficult for a court of appeal to conclude that compliance with the requirements of natural justice could have made no difference.
As already observed, the written submissions relating to costs prepared by both parties contained information that was credible, relevant and significant. The history of these arbitral proceedings and the submissions advanced on this application for leave to appeal suggest that Morgan Belle would have utilised the opportunity to be heard by the arbitrators on the submissions put against them had they been afforded such an opportunity. It is probable that API Services would also have made submissions in reply.
[26] Stead v SGIC (1986) 161 CLR 141.
[27] Stead v SGIC (1986) 161 CLR 141 at 145.
There were at least five areas that, on the face of the submissions, were at issue between the parties on the matter of costs:
-the quantum of the applicant’s claim at the time of the conclusion of discovery and at the time of the final submissions;
-whether it was appropriate for the arbitrators to confine themselves to the Rules of Court in determining the question of costs; and
-if so, which Rules of Court were applicable;
-the power of the arbitrators to award indemnity costs, particularly in circumstances where the issue had previously been raised by the arbitrators;
-the claim for costs by the respondent.
As earlier observed, the High Court in VEAL identified the relevant inquiry as: what procedures should have been followed. The relevant enquiry is neither what decision should the decision-maker have made, nor what reasons did the decision-maker give for the conclusion reached. The question of fairness is not answered by “a causal question” as to whether the material did in fact play a part in influencing the decision.
In these circumstances, it is not possible to conclude that the arbitrators’ decision would have been unaffected by further submissions from the parties as to these issues. Therefore, it is appropriate that this matter be remitted for further consideration.
The arbitrators’ reasons failed to disclose why they took the unusual step of making no award at all in respect of the expense of the arbitrators. Neither party in its submissions had discussed the possibility of Morgan Belle receiving a proportion of its legal costs but yet no order in regard to the disbursement in respect of the arbitrators’ expenses. No notice was given by the arbitrators that they were proposing what might be considered to be an unusual order. Their reasons failed to disclose the basis for such an order.
In Re Australian Railways Union; Ex parte Public Transport Commission,[28] The High Court was asked to consider whether, where it was within the contemplation of the parties that the Commission should make only an interim award, the Commission’s decision to make a final award without warning or affording the parties the opportunity to make further submissions on this point, amounted to a failure to afford procedural fairness. The Court concluded:[29]
True it is that the Commission raised with the parties the question of a final award, but the suggestion was rejected by [the parties] and was apparently abandoned by the Commission. The Commission left the matter upon the basis that
“we have before us now completed submissions from all parties, as we understand them, as to whether or not we should make and interim award in relation to apprentices.”
In those circumstances it cannot, in our view, be said that [the parties]…were given a reasonable opportunity to put whatever case they may have wished to put in opposition to the course eventually taken by the Commission. Before making the final award, the Commission ought to have alerted the parties to the possibility that it might do so, in order to afford them a reasonable opportunity to put whatever case they might have wished to put in the circumstances.
[28] Re Australian Railways Union; Ex parte Public Transport Commission (1993) 67 ALJR 904.
[29] Re Australian Railways Union; Ex parte Public Transport Commission (1993) 67 ALJR 904 at 909.
Similar comments were made by Olsson J (with whom Mulligan J agreed) in Wiechmann v Lovering[30] in the context of an appeal against a dismissal of a claim for judicial review:[31]
It must be said that this determination was made without any prior indication to the appellant or WorkCover Corporation that the Review Officer had in contemplation the possibility of a finding of the type actually made, nor did anyone urge upon her that she should make such a determination. [It] followed that the evidence adduced was in no sense directed towards that type of possible conclusion. The whole focus of the proceedings before the Review Officer was on the very different issue as to whether, given the ongoing presence of a continuing degree of compensable disability, the amount of the reduction determined by the WorkCover Corporation in relation to actual capacity for work was appropriate.
It is fair to say, that, had the advisors of the appellant had in contemplation the possibility of an outcome such as that actually embodied in the determination of the Review Officer, there is little doubt that the evidence called and the mode of conduct of the appellant’s case would have been very different.
In effect, the conduct of the Review Officer was such as effectively to deny the appellant an opportunity of meeting any question as to his continuing right to compensation. The focus of the review was entirely directed towards the more limited issue above adverted to. The approach of the Review Officer has necessarily and effectively operated to deny natural justice to him.
[30] Wiechmann v Lovering (1992) 59 SASR 203.
[31] Wiechmann v Lovering (1992) 59 SASR 203 at 207-208.
These authorities stand for the general principle that a tribunal will breach procedural fairness if it makes a determination of a type which none of the parties to the dispute had contemplated and to which evidence and argument was not directed.
Given the modest sums involved in the arbitral process, it is understandable perhaps that the arbitrators were tempted to take the shortcut of resolving the costs without satisfying themselves that the parties had had the opportunity of each responding to the other’s submissions. Plainly, the arbitrators from their reasons were on notice that that opportunity may not have been afforded. The difficulty with a “shortcut” is that it leaves a risk of perception of injustice and unfairness. That perception has arisen in this case.
On this application for leave and the appeal if leave be granted, the parties made full submissions in regard to other complaints. It is convenient to address some of those complaints.
Adequacy of Reasons
Counsel for Morgan Belle submitted that the arbitrators failed to give adequate reasons for their exercise of discretion. It was contended that their reasons failed to refer to the applicable common law principles. It was said that they do not disclose why the general common law position was departed from. Further, counsel contended that there exists an inherent inconsistency between the award for costs to be paid by API Services to Morgan Belle for its legal representation in the amount of $1,200 and the order that Morgan Belle bear entirely its own costs of arbitrators’ expenses, being a disbursement expense of the proceedings.
The requirement for the provision of reasons is met when reasons are adequate to allow an appellate court to perform its function and when the requirements of procedural fairness are discharged.[32] The reasons prepared by the arbitrators are not sufficient to permit an understanding of the reasoning underpinning their award of costs, and in particular the decision to order that the parties bear the fees and expenses of the arbitrators equally.
[32] Pettitt v Dunkley (1971) 1 NSWLR 356; Papps v Police (2000) 77 SASR 210 at [34]-[35]. See also Turbitt v Police [2005] SASC 303.
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.