Plucis v Fryer

[1967] HCA 38

HIGH COURT OF AUSTRALIA

Barwick C.J., McTiernan, Kitto, Taylor and Owen JJ.

PLUCIS v. FRYER

(1967) 126 CLR 17

18 October 1967

Arbitration—Building Contract

Arbitration—Submission as condition precedent to action—Building contract—Progress certificate by architect—Action by builder—No notice of dispute given—Whether notice of dispute required to suspend builder's right of action—What constitutes a dispute. Building Contract—Remuneration—Progress certificate by architect—Finality—Submission to arbitration as condition precedent to action—Action by builder—No notice given of dispute—What constitutes a dispute—Building contract approved by Royal Australian Institute of Architects and Master Builders' Federation of Australia, 4th ed., cl. 26.

Decision

October 18.
THE COURT delivered the following written judgment : -
The applicant for special leave is a builder who contracted in writing with the respondent to build for him a block of flats. The contract was in a form approved by the Royal Australian Institute of Architects and the Master Builders' Federation of Australia and known as the 4th ed. of that approved form, with certain deletions none of which is presently material. It contained the following clauses upon which reliance has been placed by one or other of the parties in the litigation which has been carried on between them :

"25. (a) When the value, as computed by the Architect, of the work executed and of the materials and goods delivered upon the site for use in the Works and not included in any former certificates shall from time to time amount to the sum named in the Appendix to these Conditions as being the value of work for progress payment or to less at the Architect's reasonable discretion, the Builder shall subject to clause 21 (c) of these Conditions be entitled to receive within seven days of his written application for the same a certificate from the Architect stating the amount due to the Builder from the Proprietor, and shall on presenting any such certificate to the Proprietor be entitled to payment therefore within the period named in the Appendix. The Builder shall furnish a detailed statement of the amount claimed. (b) The amount so due shall, subject to clause 21 (c) of these Conditions, be the total value of the work properly executed and of the materials and goods delivered upon the site for use in the Works up to and including a date not more than seven days before the date of the said certificate, less the amount to be retained by the Proprietor (as hereinafter provided) and less any instalments previously paid under this clause. Provided that such certificate shall only include the value of the said materials and goods as and from such time as they are reasonably, properly and not prematurely brought upon the site and then only if adequately stored and/or protected against weather or accident. (c) . . . (d) . . . (e) . . . (f) Unless notice in writing of a dispute or difference shall have been given in accordance with Clause 26 herof before the final certificate has been issued or within fourteen days of its presentation by the Builder to the Proprietor provided that time shall not run against the Builder until he receives the certificate, the final certificate shall be conclusive evidence in any proceedings arising out of this Contract (whether by arbitration under Clause 26 hereof or otherwise) that the Works have been properly carried out and completed and properly and accurately measured and valued in accordance with the terms of this contract save insofar as it is proved in the said proceedings that any sum mentioned in the said certificate is erroneous by reason of : (i) fraud, dishonesty or fraudulent concealment relating to the Works or any part thereof or to any matter dealt with in the said certificat ; or

(ii) any defect (including any omission) in the Works which reasonable inspection or examination at any reasonable time during the course of the execution of the Works or before the issue of the said certificate would not have disclosed ; or (iii) any accidental inclusion or exclusion of any work material or figure in any computation or any mathematical error in any computation. (g) Save as aforesaid no certificate of the Architect shall of itself be conclusive evidence that any works or materials to which it relates are in accordance with this contract. (h) . . . (i) If the Proprietor shall refuse or neglect to pay the amount of any certificate given by the Architect under this clause for a period of ten days after the same shall have been presented to him by the Builder, the Builder shall be entitled to interest on the sum to which he has become entitled, at the percentage rate per annum stated in the Appendix from the date of such certificate until the date of payment. 26. Subject to the provisions of clause 27 hereof in case any dispute or difference shall arise between the Proprietor, or the Architect on his behalf, and the Builder, either during the progress of the Works or after the determination, abandonment or breach of the contract, as to the construction of the contract or as to any matter or thing of whatsoever nature arising thereunder or in connection therewith (including but not limited to any matter or thing left by this Contract to the decision, discretion, ascertainment or valuation of the Architect or the withholding by the Architect of any certificate to which the Builder may claim to be entitled, or the proper amount of any certificate whether issued or withheld, or the measurement and valuation mentioned in clause 9 of these Conditions, or the rights and liabilities of the parties under clauses 19 or 20 of these Conditions) then either party shall give to the other notice in writing of such dispute or difference and at the expiration of seven days unless it shall have been otherwise settled such dispute or difference shall be and is hereby submitted to arbitration in one of the following manners : (Then follow the nominations of arbitrators) The award made by the said Arbitrator, Arbitrators or Umpire, as the case may be, shall be final and binding on both Builder and Proprietor, and neither party shall be entitled to commence or maintain any action upon any such dispute or difference until such matter shall have been referred or determined as hereinbefore provided, and then only for the amount of relief to which the Arbitrator, Arbitrators or Umpire by his or their award finds either party is entitled, and the costs of the submission, reference and award shall be in the discretion of the said Arbitrator, Arbitrators or Umpire, as the case may be. . . . 27. Any question regarding the quality of any work executed or material supplied by the Builder shall be left to the sole discretion of the Architect PROVIDED that in any case where the Architect shall object that the quality of any work or materials supplied by the Builder is not in accordance with this contract and shall in writing require the removal and/or re-execution of any such materials or work or the amending and making good of any alleged defects the Builder shall be bound to carry out any such requirement but shall nevertheless be entitled, provided that prior to carrying out any such requirements he shall give to the Architect written notice of intention so to do, to refer to arbitration under the provisions of clause 26 hereof the question whether he shall be allowed payment for such removal, re-execution, amendment or making good, as for variation under this contract." (at p22)

2. After several progress certificates had been issued to the applicant by the architect and paid by the respondent, a further progress certificate in the sum of 1480 pounds.12s.6d. was issued by the architect and served upon the respondent. The amount was not paid by the respondent to the applicant. However, after requests were made to the architect by the respondent's solicitor for certain information as to some of the computations made by the architect (presumably in connexion with the progress certificate), the respondent's solicitor wrote to the applicant a letter in the following terms :

"Mr. Fryer has handed me your letter of the 2nd inst. with instructions to reply to it. I would be greatly obliged if you would advise the name of the officer of the Master Builders' Association who advised you that 'you are legally entitled to the money'. This matter is not without complications. You mention a contract but to what contract do you refer? Have you a written contract duly signed by my client? If so would you let me have a copy of it. Once your contract with my client has been clearly established it seems that my client will be obliged to deduct from the price fixed therby the cost of making good various items of faulty workmanship and sundry other adjustments and pay you the balance if any in due course. As stated previously my client is ready and willing to pay

just as soon as the precise sum owing if any is determined."< (at p22)

3. Thereafter the applicant sued the respondent for the amount of the progress certificate. The respondent disputed in the action the existence of a building contract with the applicant and sought also to set-off against the applicant's claim an amount for what we shall compendiously call faulty workmanship in the building. That amount exceeded the amount of the applicant's claim in the action. The respondent also sought to recover that sum by way of counter-claim as well as a sum by way of penalty for late completion. (at p22)

4. The existence of the contract between the parties was established in a preliminary hearing in the action (1966) WAR 197 . Before the primary judge who thereafter heard the action the respondent sought to amend his defence so as to allege that the applicant's claim was as to a matter in dispute which fell within cl. 26 of the contract and that therefore the applicant was unable to sue in respect of that dispute until it had been referred to arbitration and an award made. Leave to amend was given to the respondent subject to a condition as to the payment of costs which was unacceptable to the applicant. Consequently, he did not amend. Evidence was thereafter sought to be tendered by him to establish the faultiness of work performed in the building by the applicant. The primary judge rejected this evidence as irrelevant. In the result, judgment was entered for the applicant for the amount of the progress certificate. (at p23)

5. On appeal, the Full Court of the Supreme Court held that the respondent's set-off and counter-claim had been properly held to be inadmissible in the action and the evidence sought to be tendered by the respondent to have been rightly rejected (1967) WAR 161 . However, the Court held that prior to the issue of the writ in the action a dispute existed between the parties "as to whether the 'applicant' is entitled to receive payment of the amount shown in 'the' progress certificate and that such dispute was a dispute within the terms of cl. 26." The Court also found that the applicant before the action brought was aware of the fact that the respondent disputed his right to the amount of the progress certificate. (at p23)

6. The Court was of opinion, as we read its judgment, that upon its proper construction, no action could be commenced by either party upon a dispute or difference which fell within cl. 26 once that dispute or difference existed but only upon an award made in an arbitration under cl. 26 upon such dispute or difference. Distinguishing the provisions of the instant contract from those of the contract construed in John Grant &Sons Ltd v. Trocadero Building and Investment Co. Ltd. (1938) 60 CLR 1 , the Full Court said (1967) WAR, at p 166 :

By contrast, in the present case either party may proceed to arbitration and it appears to me that in reality cl. 26 is intended to be self-operative. It is true that notice is required but the notice appears to be designed solely to allow a week for a settlement to be reached before the reference becomes operative : unless within that week the dispute is settled the dispute 'shall be and is hereby submitted to arbitration'."

We shall later indicate what we take these sentences to mean. (at p24)

7. The applicant's principal ground for seeking special leave to appeal is that the Full Court was in error in finding that a dispute within cl. 26 existed before the action was brought. His counsel submitted that the Full Court had held that a mere refusal to pay an unchallenged progress certificate was such a dispute. But we do not so read the reasons of the Full Court. Indeed, such a finding would have been in flat contradiction of the decision of this Court in John Grant &Sons Ltd. v. Trocadero Building and Investment Co. Ltd. (1938) 60 CLR 1 . For, in our opinion, one of the matters decided by the majority of the Court in that case was that "the grant of a progress certificate and of a final certificate completes the title to an actionable right and unless the proprietor disputes the validity of the certificate on grounds involving the construction of the contract or the justness of the amount certified, that right is . . . unaffected by the arbitration clause" (1938) 60 CLR, at p 32 . (at p24)

8. The Full Court, it seems to us, regarded the letter which we have quoted and the oral evidence of the applicant as establishing the existence of a dispute as to the validity of the progress certificate or at any rate of the justness of its amount. In the passage from its judgment which we have quoted (1967) WAR, at p 166 , the Full Court, putting on one side the pleadings in their confused state and so as to give effect to the rights of the parties, construed cl. 26 of the contract. It decided that upon its proper construction it inhibited litigation of a dispute falling under the clause once it came into existence as a dispute or difference. It held, as we read that passage of the judgment, that this function of the clause was self-operating and not dependent upon the giving of any notice by either side. The Court did not hold, as we understand the language it used, that the clause automatically referred the dispute to arbitration before any notice of the dispute was given but it emphasized that the giving of that notice was not in the case of cl. 26 a condition precedent to the operation of the clause in suspending or inhibiting the exercise of the builder's right of action upon the progress certificate. The Full Court evidently drew this conclusion in particular from its construction of the words of the second paragraph of cl. 26 beginning with "neither party shall be entitled . . etc." in which it read the words "any such dispute" as referring to a dispute which fell within the description of the opening words of cl. 26. It evidently rejected the view that the words "any such dispute" referred only to a dispute which not only fell within the clause but which has been the subject of a notice given to the other party. In our opinion, the Full Court was plainly right in so holding. Not only, in our opinion, was its reading of the clause the natural sense of the words employed but it was consonant with the evident purpose of the clause, which, in our opinion, was expressly designed to prevent the litigation of the disputes it described once they had arisen. It effects this by preventing the commencement or the maintenance of any action upon that dispute from its inception until the reference to arbitration is completed and then allows of action only upon the award made in the arbitration. Further, the language of the clause seems to have been chosen to obviate the result of the construction of somewhat different words in John Grant &Sons Ltd. v. Trocadero Building and Investment Co. Ltd. (1938) 60 CLR 1 . (at p25)

9. The applicant's counsel submitted a contrary construction of the clause. He insisted that the whole operation of the clause, both in inhibiting litigation and in effecting a reference to arbitration, is contingent upon a notice of the dispute being given : and in this connexion called attention to the identity of the language of the second paragraph of cl. 26 with the language of the corresponding part of cl. 42 of the contract construed in John Grant &Sons Ltd. v. Trocadero Building and Investment Co. Ltd. (1938) 60 CLR 1 . But the majority of the Court in that case construed cl. 42 as dependent for its entire operation upon the giving of notice by the dissatisfied party desiring the reference of the dispute to arbitration. Consequently, the existence of the dispute, so the majority held, did not automatically preclude any right of action to settle it. That conclusion was derived exclusively, as we think, from the particular words of cl. 42 which gave the right to require arbitration only to the dissatisfied party who, as the majority thought, could only be the party creating the dispute. To suspend the other party's right of action on the progress certificate by the mere creation of the dispute was unthinkable so the majority thought, if no right to require arbitration as the alternative was given to that other party. The critical consequence for the majority of confining to the dissatisfied party the right to require arbitration can be seen in the following passages which we quote from the judgment of Dixon J., as he then was.

"But it cannot be supposed that the rights of the satisfied party remain for ever unenforceable unless the dissatisfied party chooses to arbitrate. The clause does not, as many provisions do, allow either party to proceed to arbitration. It draws a distinction between the party aggrieved and the opposite party, a distinction which is not meaningless but, in my opinion, conforms to the general intention of the clause. For I think it intends that it shall be left to the party aggrieved to invoke the arbitration clause with all its consequences. Unless the dissatisfied party does so, the certificate of the architect stands." (1938) 60 CLR, at pp33, 34 (at p26)

10. The contrast between cl. 26 and cl. 42 in this respect could not be more marked. What his Honour then wrote could not be written of the language of cl. 26. Thus, although the language of the second paragraph of cl. 26 had its counterpart in cl. 42, because of the construction the majority placed upon other parts of cl. 42, that language produced a different operation. Although not said expressly, the majority in John Grant &Sons Ltd. v. Trocadero Building and Investment Co. Ltd. (1938) 60 CLR 1 apparently held that the words "any such dispute" in the latter part of cl. 42 did refer only to a dispute which the dissatisfied party had notified as one he desired to refer to arbitration. But its ability to do so derived from reasoning founded upon the dissatisfied party's exclusive right to require arbitration and the consequent inability of the other party to do so. There is nothing in the present contract to warrant such a construction. In our opinion, "such dispute" wherever occurring in cl. 26 refers merely to a dispute of the described kind which has arisen. To hold otherwise would be to confine the operation of the second paragraph of cl. 26 to the period of currency of the seven day notice. That is a result which, in our opinion, would defeat the purpose of the clause for, as we have remarked earlier, the evident purpose of the parties was to prevent the litigation of all disputes within the contract, and to substitute inevitably arbitration as the sole means of their resolution. But, of course, the enforcement of an undisputed certificate, progress or final, is left to the ordinary courts. (at p26)

11. The Court has had the benefit of a full argument as to the construction of the contract : consequently, we have expressed more fully than we otherwise might on an application for special leave our reasons for thinking the Full Court was clearly right in its interpretation of the contract. (at p26)

12. On that footing, the only ground upon which special leave is sought is that the Full Court was in error in deciding that there was a dispute as to the validity of the progress certificate. Whilst the decision of this question is fraught with consequence for the parties, almost exclusively however in relation to the costs of their litigation, we do not think any doubt which may attend the propriety of that decision is sufficient to warrant the grant of special leave. And, in any case, as a result of the Full Court's decision the parties are remitted to whatever rights they had immediately before the commencement of the action. But two things ought to be said in that connection. First, the existence of the dispute before the action was brought is not essential : cl. 26 seeks both to prevent the commencement and the maintenance of an action upon the dispute. Thus the material available to the Supreme Court on the issue whether an appropriate dispute existed was not limited to the letter to which we have referred and the oral evidence as to the applicant's knowledge before action. Secondly, the dispute may exist though it may be plain enough that in point of fact it is certain to be resolved against the party raising it. The applicant's counsel pointed to the terms of cl. 27 and the fact that the ground of the respondent's dispute as to the correctness of the certificate related to the quality of the work. But whether or not that complaint constituted the exclusive ground of the respondent's challenge to the certificate, it must be for the arbitrator in resolving the dispute to apply cl. 27 if, in the event, it be relevant. (at p27)

13. Consequently, understanding the judgment of the Full Court upon the construction of the contract in the sense we have mentioned, we would refuse special leave. (at p27)

Orders

Special leave to appeal refused with costs.