Nouvelle Homes t/as Wilson & Hart v Hatch - [2009] WASC 63

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: NOUVELLE HOMES T/as WILSON & HART -v- HATCH [2009] WASC 63

CORAM: McKECHNIE J

HEARD: 13 MARCH 2009

DELIVERED : 20 MARCH 2009

FILE NO/S: GDA 16 of 2008

MATTER :Commercial Arbitration Act 1985 (WA)
Appeal against the award of Adrian B Goold given 5 December 2008 in an Arbitration

BETWEEN: NOUVELLE HOMES T/as WILSON & HART
Appellant
AND
SUSAN HATCH
First Respondent
ADRIAN GOOLD
Second Respondent

ON APPEAL FROM:
Jurisdiction              :  COMMERCIAL ARBITRATION
Coram  :Mr A B Goold
Citation  :NOUVELLE HOMES PTY LTD t/as WILSON & HART and HATCH

Catchwords:

Commercial arbitration - Award for costs - Evidence - 'Without prejudice' communication - Whether can be used

Legislation:

Commercial Arbitration Act 1985 (WA)

Result:

Leave to appeal granted
Appeal allowed
Matter remitted to arbitrator

Category: B

Representation:

Counsel:

Appellant:     Mr I R Freeman
First Respondent           :     Mr J C Hammond
Second Respondent      :     No appearance

Solicitors:

Appellant:     Lavan Legal
First Respondent           :     Hammond Worthington
Second Respondent      :     No appearance

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

Amev Finance v Artes Studios Thoroghbreds (1988) 13 NSWLR 486
Cutts v Head (1984) Ch 290
Lamac Developments Pty Ltd v Devaugh Pty Ltd (2002) 27 WAR 287; [2002] WASCA 245
Ofulue v Bossert [2009] UKHL 16; (2008) All ER(D) 236
Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203
Rush & Tompkins v Greater London Council (1989) 1 AC 1280
Unilever Plc v Procter & Gamble Co [2000] 1 WLR 2436

McKECHNIE J: The short point at issue in this dispute over the costs of an arbitration is whether 'without prejudice' communications can be taken into account by the arbitrator. The answer is no.
Nouvelle Homes Pty Ltd was contracted by Ms Hatch to construct a two storey brick and tile residence at Jindalee. Disputes arose between the parties and in consequence an arbitrator was appointed and the claim went to arbitration. The arbitrator handed down an interim award on 10 October 2008. The final award reflected a flow of money to the builder. The interim award did not deal with the question of costs.
In the final award dated 5 December 2008 the arbitrator amended the interim award and dealt with costs as follows:
2.2Legal Costs
The Claimant Builder claims the sum of $21,840.00.
The Respondent Owner claims the sum of $34,323.69.
2.3The Claimant Builder claims that it should receive its costs unless there are special circumstances that would indicate that a contrary result is warranted.
The Builder further claims:
The Builder's claim was substantially successful.
The arbitration was conducted expeditiously.
The Owner has never made a formal offer of compromise or payment into Court.
The Owners offer of $35,000 dated August 21, 2007 falls short of the amount awarded.
2.4The Respondent Owner claims it is entitled to costs on an indemnity basis from September 7, 2007 being the date the offer of settlement was made.
2.5Determination and reasons:
2.5.1The offer of settlement of $35,000 dated August 21, 2007 was subsequently increased to $51,845.00 on August 31, 2007 and again on September 7, 2007 through the Owner's solicitors for $51,845.00. The September 7 offer was a walk away settlement, save and except of course for statutory obligations.
2.5.2The sum of $51,845.00 is greater than the sum awarded of $46,301.00.
2.5.3If the offer of settlement of $51,845.00 made on September 7, 2007 had been accepted by the Claimant Builder, the Arbitration cost of $10,346.00 would not have occurred together with the legal costs of both Parties.
2.5.4The Owner has been considerably disadvantaged due to poor quality work carried out by the Builder which is evidenced by correspondence in the discovered documents, Builders Registration Board directions and site visits by Arbitrator.
2.5.5Section 34(6) of the Commercial Arbitration Act 1985 (amended 1997) states:
'(6) Where in accordance with rules of court an offer of compromise has been made in relation to a claim to which an arbitration agreement applies, the arbitrator or umpire shall, in exercising the discretion as to costs conferred on the arbitrator or umpire by subsection (1), take account both the fact that the offer was made and the terms of the offer.'
I therefore determine that the Respondent Owner is entitled to its legal costs incurred from September 7, 2007 to date of Final Award on a Party and Party basis and to be taxed by the Taxing Master of the Supreme Court.
I also determine that the Claimant Builder pay the Respondent Owners arbitration costs of $5173.00.
The offer of settlement referred to in 2.5.1, 2.5.2 and 2.5.3 was a 'without prejudice' offer.
The builder seeks leave to appeal on the sole ground:
That the arbitrator made an error of law in relying on a without prejudice offer from the respondent to award costs against the claimant.
On 15 January 2009 Acting Master Chapman made programming orders and ordered that the application for leave to appeal and appeal be heard together.

The issues

•Did the arbitrator make an error of law?
•If so, should the Supreme Court grant leave under the Commercial Arbitration Act 1985 (WA) s 38(5)?
•If the court grants leave, should it allow the appeal and vary the award or remit for reconsideration?

Did the arbitrator make an error of law?

Following the interim award it appears that the arbitrator sought submissions on costs. The builder's submissions claimed that costs should follow the event and:
4.3 the owner has never made a formal offer of compromise or payment into Court;
4.4the owner's offer of $35,000 as appears at page 115 of the Book of Papers falls short of the amount awarded.
This was a 'cute' submission by the builder because it well knew about the 'without prejudice' offer. While there was not a formal offer the builder knew that there had been an offer of settlement.
Although not included in the papers, the owner must have responded with reliance on the 'without prejudice' offer because in further submissions dated 10 November 1998 the builder argued that the owner was not entitled to rely on this offer and quoted the authority of Amev Finance v Artes Studios Thoroghbreds (1988) 13 NSWLR 486, [7].
Communications that are marked 'without prejudice' are privileged communications; that is, their contents cannot be divulged in proceedings. The purpose is, as the name suggests, to allow parties to explore the possibility of settlement of disputes between them and deal frankly with the other party to the extent of making admissions without prejudice to their rights of proceeding with the dispute should negotiations fail. The privilege may be waived but no such question arises in this case. In Amev Finance v Artes Studios Thoroughbreds Pty Ltd (1988) 13 NSWLR 486 Hodgson J said:
On behalf of the defendant, certain without prejudice letters have been tendered with a view to showing that an offer had been made to the plaintiff in excess of the amount recovered by the plaintiff. It is submitted that in circumstances where there was a fund in court from which the plaintiff could have satisfied any consent judgment, this matter is highly relevant to the question of costs. However, as conceded by the defendant, in the case of Walker v Wilshire (1889) 23 QBD 335 is to the effect that without prejudice offers of settlement are not admissible even on the question of costs.
In recent times there has been a qualification to that rule which is referred to in the cases of Cutts v Head (1984) Ch 290 and Messiter v Hutchinson (1987) 10 NSWLR 525.
According to those cases, if a letter is written without prejudice, making an offer of settlement, but asserting that the party making the offer will seek to rely on the letter on the question of costs, then that letter may be admitted on the question of costs. (487)
The reference by Hodgson J to Cutts v Head (1984) Ch 290 is apposite. In Cutts v Head the without prejudice offer was expressed to be subject to the reservation of the right to bring the letters to the notice of the judge on the issue of costs. In a judgment which has been quoted with approval subsequently, Oliver LJ discerned two parts to the without prejudice rule. The first rests on public policy:
It is that parties should be encouraged so far as possible to settle their disputes without resort to litigation and should not be discouraged by the knowledge that anything that is said in the course of such negotiations (and that includes, of course, as much the failure to reply to an offer as an actual reply) may be used to their prejudice in the course of the proceeding. (306)
The second part is when the trial of the issues in the action is at an end and the matter of costs comes to be argued, the rule on public policy can have no further application for there are no further issues of fact to be determined on which admissions could be relevant. Oliver LJ held:
[A]n implied agreement imported from the marking of a letter 'without prejudice' that it shall not be referred to at all. (307)
The public policy rule enunciated by Oliver LJ was expressly adopted by Lord Griffiths in Rush & Tompkins v Greater London Council (1989) 1 AC 1280 at 1299, in turn referred to by Robert Walker LJ in Unilever Plc v Procter & Gamble Co [2000] 1 WLR 2436 at 2441.
In Ofulue v Bossert [2009] UKHL 16; (2008) All ER(D) 236 the House of Lords, in a case handed down the same day as this application was heard, revisited without prejudice communications. Lord Hope of Craighead said:
Sometimes letters get headed "without privilege" in the most absurd circumstances, as Ormrod J observed in Tomlin v Standard Telephones & Cables Ltd [1969] 1 WLR 1378, 1384. But where the letters are not headed 'without prejudice' unnecessarily or meaninglessly, as he went on to say at p 1385, the court should be very slow to lift the umbrella unless the case for doing so is absolutely plain. The principle which the court should follow was that expressed by Sir John Romilly MR in Jones v Foxall (1852) 15 Beav 388, 396. If converting offers of compromise into admissions of acts prejudicial to the person making them were to be permitted no attempt to compromise a dispute could ever be made. The basis for the rule has been explained more fully by Oliver LJ in Cutts v Head [1984] Ch 290, Lord Griffiths in Rush & Tomkins Ltd v Greater London Council [1989] AC 1280 and Robert Walker LJ in Unilever plc v The Procter & Gamble Co [2000] 1 WLR 2436. With the benefit of those explanations it may be re-stated in these terms. Where a letter is written 'without prejudice' during negotiations with a view to a compromise, the protection that these words claim will be given to it unless the other party can show that there is a good reason for not doing so. (2)
Lord Neuberger of Abbotsbury said:
Before considering these arguments, it is worth quoting a passage from Robert Walker LJ's invaluable judgment in Unilever [2000] 1 WLR 2436, which, in my opinion, makes a point which should always be borne in mind by any judge considering a contention that a statement made in without prejudice negotiations should be exempted from the rule. After considering a number of authorities, Robert Walker LJ said at pp 2448H‑2449B that the cases which he had been considering:
make clear that the without prejudice rule is founded partly in public policy and partly in the agreement of the parties. They show that the protection of admissions against interest is the most important practical effect of the rule. But to dissect out identifiable admissions and withhold protection from the rest of without prejudice communications (except for a special reason) would not only create huge practical difficulties but would be contrary to the underlying objective of giving protection to the parties … to speak freely about all issues in the litigation … . Parties cannot speak freely at a without prejudice meeting if they must constantly monitor every sentence, with lawyers … sitting at their shoulders as minders'.
This approach is entirely consistent with the approach of your Lordships' House in Rush & Tompkins [1989] AC 1280, and with that of the courts in the nineteenth century, mentioned by my noble and learned friend Lord Walker of Gestingthorpe in para 57of his opinion, which I have had the benefit of seeing in draft. (89)
To summarise the law, subject to exceptions, which are not presently relevant, 'without prejudice' communications are inadmissible in later proceedings relevant to the subject matter. Where the basis of the rule is not public policy because the litigation has been decided or resolved, the inadmissibility rests upon the expressed or implied agreement of the parties and therefore may be modified by a reservation as to the question of costs.
In the present case the communications might have been so modified but were not. The owner's 'without prejudice' letters should not have been put before the arbitrator. Having been put before the arbitrator, the arbitrator should not have taken them into account. Although the award of costs is discretionary, a legal error has caused the discretion to miscarry.

Should the Supreme Court grant leave under the Commercial Arbitration Act 1985 (WA) s 38(5)?

I turn to the exercise of powers under s 38(5).
(a)[T]he determination could substantially affect the rights of one or more parties to the arbitration agreement; and
The parties had an unhappy relationship before the eventual award was determined in the order of $50,000. I am informed that the costs on either side are, give or take a little, roughly half of that amount and so the determination of the issue will substantially affect the parties.
(b)(i)a manifest error of law on the face of the award; or
In Lamac Developments Pty Ltd v Devaugh Pty Ltd (2002) 27 WAR 287; [2002] WASCA 245 reference was made to Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203 and in particular the judgment of Sheller JA which was cited with approval:
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 suggest 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. A manifest error of law on the face of the award may be an error which would be apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument. A determination which adds substantially to the certainty of commercial law may be a determination of a question of the construction of a contract in standard terms rather than the construction of a one-off clause. In such a situation, strong evidence that the arbitrator made an error of law may equate with a strong prima facie case that the arbitrator had been wrong in his construction. (222)
The error made by the arbitrator fits the description by Sheller JA of a manifest error of law. When pressed, counsel for the owner conceded that the reliance upon the 'without prejudice' communication was an error of law. As the cases to which I have referred demonstrate, this concession is inevitable.
That is enough to trigger a grant of leave to appeal but, in any event, I consider that s 38(5)(b)(ii) also applies. Although it might have been thought that the principle is well settled, the example of this case shows that even a very experienced arbitrator may be unaware of it. It is a principle of general application and the issue may recur.

If the court grants leave, should it allow the appeal and vary the award or remit for reconsideration?

I grant leave to appeal and I allow the appeal on the ground sought. The question then arises as to what to do. The builder argues that costs should follow the event as determined by the flow of money. The owner points out the offer to settle was not the only reason for the exercise of the arbitrator's discretion as to costs. This is so - the final 2.5.4. However, although the arbitrator exercised his discretion on two stated bases, one of which was an error of law and one of which was not, I am unable to be satisfied that he would have necessarily decided in favour of the owner had he not made the error of law. Nor do I have sufficient information to vary the award by making an order of costs.
I will exercise power under s 38(3)(b) and remit the award to the arbitrator for reconsideration limited to the question of what costs order should be made, together with my opinion that the arbitrator made an error of law in taking into account the 'without prejudice' communication seeking to settle the action.