Pavlovich v Lydon - [2004] WASC 278

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: PAVLOVICH -v- LYDON [2004] WASC 278

CORAM: JOHNSON J

HEARD: 25 NOVEMBER 2003

DELIVERED : 22 DECEMBER 2004

FILE NO/S: ARB 12 of 2003

MATTER :Commercial Arbitration Act 1985

BETWEEN: DANNY PAVLOVICH
Applicant
AND
THOMAS ANTONY LYDON
Respondent

Catchwords:

Commercial Arbitration Act - Application for leave to appeal Arbitrator's award - Turns on own facts

Legislation:

Commercial Arbitration Act, s 38

Result:

Application dismissed

Category: B

Representation:

Counsel:

Applicant: Mr A J Prentice
Respondent: Ms N M Breach

Solicitors:

Applicant: Mossensons
Respondent: Phillips Fox

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

Lamac Developments Pty Ltd v Devaugh Pty Ltd [2002] WASCA 245
McDonald v Dennys Lascelles Ltd (1932-3) 48 CLR 457
Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203

Case(s) also cited:

Commonwealth v Rian Financial Services & Developments Pty Ltd (1991) 105 FLR 239
De Francesch Builders Pty Ltd v Riley [2000] WASC 301
Driver v The War Service Homes Commissioner (No 1) [1924] VLR 515
Larkin v Parole Board (1987) 10 NSWLR 57
Mahony v Industrial Registrar of New South Wales (1986) 8 NSWLR 1
Miles v Palm Bridge Pty Ltd [2001] WASC 42
Natoli v Walker, unreported; CA of NSW; 40351 of 1993; 26 May 1994
Pioneer Shipping v BTP Tioxide Ltd (The Nema) [1982] AC 724
Qantas Airways Ltd v Joseland Gilling (1986) 6 NSWLR 327
Re Caf-Grains [1994] 2 Qd R 252
Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253
UDR Equipment Pty Ltd v Afkos Industries Pty Ltd [2000] WASC 57
Update Constructions Pty Ltd v Rozelle Child Care Centre Ltd (1990) 20 NSWLR 251
Warley Pty Ltd v Adco Constructions Pty Ltd (1988) 5 BCL 141
White Constructions (NT) Pty Ltd v Mutton (1988) 91 FLR 419

JOHNSON J: This is the return of an application for leave to appeal an award of an arbitrator. The present applicant was the respondent in the arbitration and the present respondent was the claimant. To avoid confusion, I will refer to the applicant as Pavlovich and the respondent as Lydon. The application is brought under s 38 of the Commercial Arbitration Act1985 ("the Act"). Section 38 is in the following terms:
"38.Judicial review of awards
(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 3 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.
(6)The Supreme Court may make any leave which it grants under subsection (4)(b) subject to the applicant complying with any conditions it considers appropriate.
(7)Where the award of an arbitrator or umpire is varied on an appeal under subsection (2), the award as varied shall have effect (except for the purposes of this section) as if it were the award of the arbitrator or umpire."
It can be seen that there are limited circumstances in which an appeal lies from a decision of an arbitrator. It is Pavlovich's case that he satisfies the requirements of s 38(5). Counsel submitted that Pavlovich satisfied both limbs of subs (5)(b) of the Act. However, in my view, even on the most favourable view of Pavlovich's case, this is not an application which could fall within s 5(b)(ii). That means Pavlovich must satisfy two criteria for leave to be granted. First, he must show a manifest error of law on the face of the award. Second, he must show that the error of law substantially affected his rights in the arbitration. To put the test in that way reverses the order found in s 38(5). But in dealing with an application, it is difficult to see how any other approach could be adopted. What is imposed is a twin test and both parts of the test must be satisfied if leave is to be granted.
The general approach to s 38(5) was considered recently by the Full Court in Lamac Developments Pty Ltd v Devaugh Pty Ltd [2002] WASCA 245. Both Murray J (at [60]) and Mathews AJ cited with approval what was said by Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 at 222:
"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." (Emphasis added)
The relevant facts can be summarised as follows. Pavlovich is the owner of certain property in Maylands. By written contract dated 26 March 2001, Pavlovich contracted Lydon, a registered builder, to build a house on the property ("the contract"). The contract was in the form of a Lump Sum Building Contract Form 8A issued by the Housing Industry Association Ltd. Under the contract the price for the construction of the dwelling was $273,679.30. That figure included GST and the builder's margin. The contract provided for Pavlovich to make progress payments at various stages. A deposit of $17,745.00 was to be paid, followed by five payments, each of $51,174.86. In the event, Pavlovich paid the deposit and four payments of $51,174.86. For reasons which I will explain, the final payment of $51,174.86 was not made. In the Arbitrator's final award under the heading "CLAIMS, PARTIES, REPRESENTATIVES" the Arbitrator states:
"The Claims
The parties' claims as pleaded are:
(i)The Claimant's [Lydon's] claim for a declaration that the Claimant [Lydon] has properly terminated the building contract and is thereby released from any further obligation under the building contract
and
(ii)the Respondent's [Pavlovich's] counterclaim for:
a.Costs to finalise the works in the sum of $137,940 in excess of that already paid to the Claimant
b.Recovery for the loss of rent in the sum of $12,530
c.Professional fees towards business advice in an amount of $916.30,
Or in the alternative, the Respondent [Pavlovich] claims:
e.damages in an amount equal to the costs of the Claimant avoided as a result of the early termination of the contract being reduced by the final payment due under the contract of $51,174.86
f.The Respondent also claims for interest on damages awarded."
(The underlining is the Arbitrator's.)
The Arbitrator details the facts and events proved in evidence and his findings. He then deals with the issue of termination of the contract and concludes:
"I weighed all of the above considerations against the strict wording of the HIA contract which states (my emphasis):
14.Events allowing Builder to Terminate
(d)any deliberate and substantial … interference with the Works …
The persistence of Pavlovich to have Verini (an agent of Pavlovich) continue with the works and in defiance of the Notice of Termination demonstrates deliberate and substantial interference both in the mind of Lydon at that time and in my interpretation based on the facts presented.
In my judgment, there was sufficient evidence to establish that the action of the builder in serving the Notice of Default was correct and contractually proper." (Again, the underlining and emphasis is the Arbitrator's.)
In dealing with the issue of the termination of the contract, it would appear that the Arbitrator has confused the notice of termination and the notice of default. To make sense of this finding, it is necessary to assume that the reference to the notice of termination in the penultimate paragraph ought be a reference to a notice of default. Equally, the reference to notice of default in the final paragraph ought to be a reference to the notice of termination. In my view that is a slip by the Arbitrator which has no real bearing on his conclusion and would not amount to an error of law on the face of the record.
Given that the Arbitrator has referred to the building contract and to cl 14 thereof, it is appropriate to look at the actual wording of that clause. Clause 14 is titled "EVENTS ALLOWING BUILDER TO TERMINATE". Clause 14(d) is in terms set out by the Arbitrator. It is clear, reading the Arbitrator's reasons, that he has carefully considered the evidence and he has concluded that there was "deliberate and substantial prevention of or interference with the Works" by the owner. With respect, I can see nothing on the face of the award which would suggest that such a conclusion was not open to the Arbitrator. Still less can it be said that the Arbitrator's finding is a manifest error of law on the face of the award. Pavlovich has not satisfied the requirements of s 38(5)(b)(i) of the Act, at least in relation to termination of the contract.
The remaining issue for the Arbitrator was Pavlovich's alternative claim for damages resulting from Lydon's termination of the contract. It is significant to the resolution of this application to note that the Arbitrator's summary inaccurately states Pavlovich's claim as pleaded. It is convenient at this point to refer to the points of claim relied on by Lydon and Pavlovich's points of defence and counterclaim. These two documents set out the nature of the factual dispute between the parties. After referring to the parties and the written contract, the points of claim contain the following :
"5.The Claimant commenced the Works on or about 15 August 2001.
6.In or about January 2002, in breach of the terms of the contract pleaded at paragraph 4 above:
6.1The Respondent by his representative Claude Vernini interfered with the works by attending site and subcontractor meetings and giving directions to trades without the permission of the Claimant;
6.2The Respondent insisted that the Claimant carry out major variations to the works, and on his declining to do so, insisted on having his own contractors carry out such variation work.
6.3On about 21 January 2002, the Respondent by his representative Claude Verini, verbally instructed the Claimant to stop work;
6.4By letter dated 22 January 2002 the Respondent instructed the Claimant to stop work;
6.5The Respondent engaged his own contractors to cut out a window in bedroom 2 and in doing so, in contravention of the direction given by the Claimant, moved a structural roof beam and timbers, and further refused to obtain structural engineer's certification of the roof beam and timbers.
7.By notice of default dated 23 January 2002 ('Notice of Default'), served on the Respondent by letter of the same date and again by letter dated 1 February 2002, the Claimant notified the Respondent that the Respondent was in default of the Contract in that the Respondent had:
7.1'interfered with the progress of the works in that the person nominated by [the respondent] as [his] representative and [the Respondent] … told [the Claimant] to cease all work on site';
7.2'interfered with the progress of works in that the contractors engaged directly by [him had] cut out a window in bedroom 2 and in doing so [had] moved a structural roof beam and timbers'.
8.The Notice of Default required the Respondent to remedy the default within 10 days, which the Respondent failed to do.
9.By notice dated 20 February 2002, served on the Respondent by letter of the same date, the Claimant terminated the Contract.
10.The Respondent has failed and refused to accept that the claimant has properly terminated the building contract and that the Claimant has been released from any further obligation under the building contract."
Based upon those points of claim, Lydon sought a declaration that the contract had been properly terminated and "that the claimant [Lydon] has been released from any further obligation under the building contract". It is important to note that Lydon made no money claim against Pavlovich. All he sought was a declaration. According to counsel for the applicant, Lydon became the claimant in the arbitration by order of a District Court Registrar. Pavlovich brought an action for damages in the District Court but, because of the arbitration clause in the contract, those proceedings were stayed while the matter was referred to arbitration. For some reason not immediately apparent to either party, the Registrar ordered Lydon to be the claimant in the arbitration, notwithstanding that he had not initiated the action and made no monetary claim against Pavlovich. This information was not disputed by counsel for the Respondent in this application so I accept it as an accurate explanation of how the arbitration was commenced and why Lydon sought only a declaration by way of relief.
Pavlovich's points of defence and counterclaim admit that the contract comprised the HIA Lump Sum Building Contract dated 26 March 2001 and admit pars 4 and 5 of the points of claim. There is an issue raised by par 2 of the points of defence as to whether or not the addenda to the specification and the quotation issued by Lydon dated 24 January 2001 and the drawings dated November 2000 provided by Pavlovich form part of the contract. However, for present purposes that dispute is not relevant. The points of defence then continue:
"3.Paragraphs 4 and 5 of the Points of Claim are admitted.
4.The Respondent generally denies paragraph 6 of the Points of Claim, but admits:
4.1That, in relation to clause 6.1, Claude Verini attended site and sub‑contractor meetings and gave directions to trades, but says that the same was done with the permission of the Claimant;
4.2That, in relation to clause 6.2, the Claimant agreed to allow the Respondent to carry out variations, and the Claimant agreed to allow the Respondent to have his own contractors carry out such work;
4.3Clauses 6.3 and 6.4; and
4.4That, in relation to clause 6.5, a window in bedroom 2 was cut out by the Respondent's contractors, and that a structural roof beam was moved. However, the Respondent says further that the Claimant had agreed to the same, and that it had not been a condition of the Claimant's said agreement that the Respondent would obtain structural engineer's certification.
5.The Respondent admits that a notice in terms of the notice described in clause 7 of the Points of Claim (the 'Notice of Default') was served on the Respondent by the Claimant on or about 1 February, 2002, but otherwise denies that paragraph.
6.The Respondent admits that the Notice of Default purported to require the Claimant to remedy the alleged default within 10 days, but otherwise denies paragraph 8 of the Points of Claim.
7.The Respondent admits that a notice in terms of the notice described in clause 9 of the Points of Claim (the 'Termination Notice') was served on the Respondent by the Claimant on or about 20 February, 2002, but otherwise denies that paragraph, and specifically denies that the Claimant was entitled to so terminate the Contract.
8.The Respondent admits paragraph 10 of the Points of Claim.
9.The Respondent denies that the Claimant is entitled to the relief claimed or to any relief at all.
10.To the extent that the Claimant may be found to be entitled to any relief, the Respondent will seek to set off against any sum awarded therefor, the sum hereinafter set out in the Counterclaim in extinction or diminution thereof.
POINTS OF COUNTERCLAIM
11.The Respondent repeats paragraphs 1 to 10 of the Defence above.
12.On or about 21 May, 2002, the Respondent by its solicitors wrote to the Solicitors for the Claimant, advising that the Respondent intended to treat the Termination Notice as a repudiation of the contract.
13.As at 21 May, 2002 the construction of the house had not been completed.
14.As at 21 May, 2002 the Respondent had made all but the final payment as provided for in item 7 of the Schedule of Particulars to the contract.
15.At all times since 21 May, 2002 the Respondent has attempted to mitigate its loss, and complete the construction of the house.
16.The Respondent has incurred additional costs in having the construction of the house completed with other builders.
17.As a result the Respondent has suffered loss and damage.
Particulars of Loss and Damage
17.1The Respondent has had to engage other builders to finalise the constructions of the house, at a cost of approximately $137,940.00 in addition to having paid already paid the full contractual price to the Claimant.
17.2The Respondent has had to pay rent for the period 1 March, 2002 through until the time the house is ready to be occupied, which is to be estimated to be 5 March, 2003. The total rents are likely to be $12,530.00.
17.3The Respondent has had to engage James Brae & Brodrick, Business Advisers, to assist him in calculating his expenses in relation to the further construction of the house, at a likely cost of approximately $916.30."
Four observations may be made about Pavlovich's points of defence. First, by pars 7 and 8, Pavlovich joins issue with Lydon as to whether or not the contract was properly terminated by Lydon. This is clearly the central issue between the parties. Second, par 10 of the points of defence is difficult to understand. As I have mentioned, Lydon, in his points of claim sought nothing more than a declaration. How any amount awarded in the counterclaim could be set off against a declaration is unclear. It would seem that the person who drafted the points of defence inadvertently included a standard form of pleading for a set‑off, notwithstanding that the claimant had not claimed any monetary relief against which any sum awarded in the counterclaim could be set‑off. Thirdly, it is to be noted that pars 11 through to 17 set up a counterclaim based upon a plea that the notice of termination was not properly issued. Pavlovich decided to treat the notice of termination as a repudiation of the contract by Lydon and accepted that repudiation. Any damages claimed flowed directly from the alleged improper repudiation by Lydon. In other words, for this aspect of the counterclaim to succeed, it was necessary for the Arbitrator to accept that the termination notice issued by Lydon was not properly issued. Fourthly, it is difficult to see just what is claimed by par 19 of Pavlovich's points of defence. Whilst the claim is for damages, the paragraph is silent as to the basis upon which the claim for damages is made. It is put as an alternative so it is reasonable to assume that it relates to something other than the claim for damages for breach of contract pleaded in par 17. Although it is not completely clear, it would appear that the claim is in the alternative to the counterclaim based on Lydon's breach of contract. On that interpretation it does not require a finding that the contract was unlawfully terminated. If I am wrong in that conclusion, then the claim would fail in any event because of the Arbitrator's finding that the contract was lawfully terminated by Lydon.

As the final payment of $51,174.86 had not been paid by Pavlovich, par 19 offers a credit, in effect, for the payment while claiming an amount equal to the costs that the Claimant avoided incurring as a result of the termination of the contract. In other words, if the evidence showed that to complete the contract Lydon would have had to spend in excess of the final payment, then Pavlovich would be entitled to the amount of the excess as damages. It might be observed in passing that this is an unusual formulation of a claim for damages in that it does not allow Pavlovich to be repaid any amount paid in excess of the work actually performed by Lydon. Neither does it allow Pavlovich to be reimbursed for the cost of finalising the work which was to be performed pursuant to the contract.
It is appropriate to pause at this point and consider the respective rights of the parties once a determination is made that a party, in this case Lydon, the builder, has properly terminated the contract. Clause 13 of the contract is headed "EARLY TERMINATION OF CONTRACT". It is in the following terms:
"(a)In addition to their respective rights and remedies hereinbefore contained or in equity the Builder may terminate this Contract in any of the events mentioned in Clause 14 hereof and the Owner may terminate this Contract in any of the events mentioned in Clause 15 hereof.
(b)Except as provided herein neither party shall be at liberty to terminate this Contract or exercise or enforce any other right or remedy in relation hereto whether pursuant to this contract or at law or in equity without first giving to the other party a notice in writing specifying the matter complained of and requesting that other party to remedy it within TEN (10) days of the service of such notice. If such notice is given and the other party fails within such period to remedy the matter complained of then the party giving such notice may terminate this contract forthwith.
(c)On such termination, subject to any agreement to the contrary or to any determination made pursuant to Clause 16 the Builder shall be entitled to be paid forthwith for all work done and materials used or procured by him and properly chargeable to that date. The amount to be paid shall be determined on the basis that all work done and materials provided and procured as aforesaid and all costs incurred by the Builder shall be deemed to be variations in cost and shall be calculated in accordance with the provisions of Clause 10 but proper allowance shall be made for all payments on account of the Contract Price already made by the Owner to the Builder. The Builder may claim interest at the rate specified in Item 8 of the Schedule hereto on the outstanding balance of monies found to be due and payable from and after the expiration of FIVE (5) days from the date of such termination of contract until payment of balance of monies is received by the Builder."
There is no issue between the parties that a default notice was issued under cl 13(b) and the Arbitrator found that Lydon was entitled to terminate the contract under cl 14(d). That then activates cl 13(c). But cl 13(c) does not give any rights to the owner. It speaks only of the rights and entitlements of the builder. It does not address the situation where the builder properly terminates the contract but he has been paid more than his entitlement by the owner; that is to say, he has been paid for more work than he has carried out. Presumably, the owner has a claim in equity for the difference between the amount paid and the value of the work performed: McDonald v Dennys Lascelles Ltd (1932-3) 48 CLR 457 at478. Or perhaps such a claim may exist at large and could be referred to arbitration as cl 13(c) anticipates any entitlement under that clause being subject to determination by an arbitrator under cl 16: However, that is simply not the way in which the claim for damages was pleaded by Pavlovich in his points of defence and counterclaim.
Having concluded that the contract was validly terminated by Lydon, the Arbitrator went on, under the heading "DAMAGES, PAYMENTS" and said:
"Having concluded that the termination was proper, parts a ‑ c inclusive of the Respondent Owner's counter claim falls away, but I was still obliged to establish whether damages ought to flow, one way or another, as a result of the alternative plea (d)."
In fact, there is no alternative plea (d), but rather an alternative plea (e) mentioned in the award. Again this is a slip which is of no consequence.
In any event, the Arbitrator went on to review, to some limited extent, the evidence and he concluded:
"Without putting too fine a point on the actual sums (as it would almost impossible (sic) to determine with any precision, I find that approximately $52,000 was yet to be expended by the Claimant to complete his contractual obligations.
To simplify matters, and to accord with the Points of Claim (wherein no amount of payment is sought) I determine the final payment as unpaid is equivalent to the value of the work yet to be completed by the Claimant Builder. Accordingly there shall be no flow of monies." (Again, the emphasis is the Arbitrator's.)
It must be acknowledged that the Arbitrator's treatment of the evidence is cursory and it is difficult to ascertain what evidence he has relied upon in reaching his conclusion. Nonetheless, the award indicates that he has given consideration to the documentary evidence and to the oral evidence led during the course of the hearing. He has also clearly brought his experience to bear. Bearing in mind that the Arbitrator is not a lawyer and cannot be expected to deal with issues in the same way as they might be dealt with by someone with legal training, I am not satisfied that there is a manifest error of law on the face of the award with respect to the value of the work yet to be completed by Lydon.
The written submissions filed on behalf of Lydon contain the following statement:
"In fact, the arbitrator properly determined that if the applicant had overpaid the respondent, then the applicant was entitled to a refund. The fact that the refund was nil, is a question of fact."
With respect, I do not accept that the Arbitrator approached the award of damages on the basis of refunding any overpayment, nor that Pavlovich's claim called for him to adopt such an approach. As I have indicated, Pavlovich's plea in the alternative was for damages equal to the difference between the cost to Lydon of completing the contract and the amount of the final payment. The Arbitrator did indeed determine the difference between the cost to Lydon of completion and the amount of the final payment and concluded that there was no difference and, hence, no entitlement to damages.
The error identified by counsel for Pavlovich is that the Arbitrator has relied on the cost to Lydon of completing the work rather than the cost of having the work completed. The latter cost would necessarily include a builder's margin and GST. Again, that approach would be appropriate if the Arbitrator was called upon to determine the cost of having the work completed by another. But that part of the claim was predicated on a finding that Lydon had improperly terminated the contract. The alternative plea required only the determination of the cost Lydon avoided incurring as a result of the termination of the contract. As I have indicated, I am not satisfied that there is a manifest error of law on the face of the award with respect to the value of the work yet to be completed by Lydon.
For these reasons, I would dismiss the application for leave to appeal. Pavlovich ought pay the costs of Lydon, including reserved costs.