Sapphire (SA) Pty Ltd (trading as River City Grain) v Barry Smith Grains Pty Ltd (in liq)

[2011] NSWSC 1451

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:	Sapphire (SA) Pty Ltd (trading as River City Grain) v Barry Smith Grains Pty Ltd (in liq) [2011] NSWSC 1451
Hearing dates:	7 November 2011
Decision date:	28 November 2011
Jurisdiction:	Equity Division - Commercial List
Before:	Ward J
Decision:	Leave granted pursuant to s 38(4)(b) of the Commercial Arbitration Act 1984 (NSW) to plaintiff to appeal from the question of law identified as the fifth ground in the plaintiff's Commercial Arbitration List Statement. Leave to appeal on the remaining questions of law identified in that List Statement refused.
Catchwords:	COMMERCIAL ARBITRATION - whether leave to appeal to the Supreme Court should be granted on questions of law arising out of commercial arbitration award - whether threshold requirements pursuant to s 38(5) of the Commercial Arbitration Act 1984 (NSW) satisfied - whether the determination of the relevant questions of law could substantially affect the rights of one or more parties to the arbitration agreement - whether there is either a manifest error on the face of the award or strong evidence that the Tribunal made an error of law and, if so, the determination of that question may add or be likely to add substantially to the certainty of commercial law - if threshold requirements satisfied whether discretion should be exercised to grant leave - CIVIL PROCEDURE - consideration of Home Office v Harman implied undertaking in relation to use in the subject arbitration or these proceedings of documents obtained during the course of another arbitration - HELD - leave to appeal granted in relation to one question of law
Legislation Cited:	Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cth) Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	AG Australia Holdings Ltd v Burton [2002] NSWSC 170; (2002) 58 NSWLR 464 Ainsworth v Hanrahan (1991) 25 NSWLR 155 Akins v Abigroup Ltd (1998) 43 NSWLR 539 Australian Beverage Distributors Pty Limited v Evans & Tate (2006) 58 ACSR 22; [2006] NSWSC 560 Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Barry Smith Grains Pty Ltd (In liq) v Riordan Group Pty Limited [2010] NSWSC 1291 Bostik Australia Pty Limited v Liddiard (No 2) [2009] NSWCA 304 Bourns Inc v Raychem Corp [1999] 1 All ER 908 Bowen Investments Pty Limited v TAB Corp Holdings Limited (No 2) [2008] FCAFC 107 Bremner Handelsgesellschaft mbH v Westzucker GmbH (No. 2) [1981] 2 Lloyd's Rep 132-133 Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44 British and American Tobacco Services Ltd v Cowell (No 2) (2003) 8 VR 571 Central Queensland Cement Pty Ltd v Hardy [1989] 2 Qd R 509 Champsey Bhara & Co v Jivraj Balloo Spinning & Weaving Co Ltd [1923] AC 480 Commonwealth of Australia v Temwood Holdings Pty Ltd (2001) 25 WAR 31 Crest Homes plc v Marks [1987] AC 829 Cretazzo v Lombardi (1975) 13 SASR 4 Distillers Co (Biochemicals) Ltd v Times Newspapers Ltd [1975] QB 613; 1 All ER 41 Dodds Family Investments Pty Limited v Lane Industries Pty Limited (1993) 26 IPR 261 Doran Constructions Pty Ltd v Health Administration Corporation (NSW) (1994) 12 BCL 104 Elite Protective Personnel Pty Limited v Salmon [2007] NSWCA 322 Elite Protective Personnel Pty Ltd v Salmon (No 2) [2007] NSWCA 373 Esso Australia Resources Ltd v Plowman [1995] HCA 19; (1995) 183 CLR 10 Evans v Mclean (No2) (1985) 9 ACLR 796 Federal Commerce & Navigation Co Ltd v Tradax Export SA (The 'Maratha Envoy') [1978] 1 AC 1 Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 Forty Two International Pty Ltd v Barnes [2010] FCA 397 Gett v Tabet [2009] NSWCA 76; (2009) 254 ALR 504 Giacomo Costa Fu Andrea v British Italian Trading Co Ltd [1963] 1 QB 201 Gianfriddo v Garra Constructions Pty Ltd [1971] VR 289 Gold Coast Council v Canterbury Pipe Lines (Aust) Pty Ltd (1968) 41 ALJR 307 Gordian Runoff Ltd v Westport Insurance Corporation [2010] NSWCA 57; (2010) 267 ALR 74 Hadley v Baxendale (1854) 9 Exch 341; 156 ER 145 Hanneybel v Uniflex (Australia) Pty Ltd [2002] WASCA 349 Harbour City Real Estate v Cargill (No 3) [2009] FCA 669; (2009) 186 IR 260 Hardoon v Belilios [1901] AC 118 Hearne v Street [2008] HCA 36; (2008) 235 CLR 125 Hodge v TCN Channel 9 (No 2) [2006] NSWSC 1272 Home Office v Harman [1983] 1 AC 280 Hughes v Western Australian Cricket Association (1986) ATPR 40-748. James v Surf Road Nominees (No 2) [2005] NSWCA 296 Keynes v Rural Directions Pty Ltd [2010] FCAFC 100; (2010) 186 FCR 281 Laen Pty Ltd v At the Heads Pty Ltd & Ors [2011] VSC 315 Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534 Lavender View Regency Pty Ltd v North Sydney Council (No 2) [1999] NSWSC 775 Leallee v Commissioner of the NSW Department of Corrective Services [2009] NSWSC 518 Liberty Funding Pty Ltd v Phoenix Capital Ltd [2005] FCAFC 3; (2005) 218 ALR 283 LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd (No 2) [2002] NSWSC 72 Moage Ltd v Jagelman and Others [2002] NSWSC 953; (2002) 43 ACSR 173 Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] 2 VR 34 Natoli v Walker (1994) 217 ALR 201 Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360 Ohn v Walton (1995) 36 NSWLR 77 Oil Basins Limited v BHP Billiton Limited [2007] VSCA 255; (2007) 18 VR 346 Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 Owners Strata Plan No 64970 v Austruc Constructions Ltd (in liq) (No 5) [2010] NSWSC 568 Pacific General Securities Ltd v Soliman & Sons Pty Ltd [2006] NSWSC 724 Padkohe Pty Ltd v Fletcher [2006] NSWSC 1239 Pearl Marin Shipping A/B v Pietro Cingolani SAS, The General Valdes [1982] 1 Lloyd's Rep 170 Prime Finance Pty Ltd and Ors v Randall and Ors [2009] NSWSC 361 Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 Re a Debtor No 21 of 1950 [1951] Ch 612 Re Addstone Pty Ltd (In liq); Ex parte Macks (1998) 30 ACSR 156 Re Chief Commissioner of Stamp Duties v Buckle [1998] HCA 4; (1998) 192 CLR 226 Re Crest Realty Pty Ltd (No 2) (In liq) [1977] 1 NSWLR 664 Riddick v Thames Board Mills Ltd [1977] QB 881 Roache v News Group Newspapers [1992] TLR 551 RP Robson Constructions Pty Ltd v Williams (1989) 6 BCL 219 Sabah Yazgi v Permanent Custodian Ltd (No 2) [2007] NSWCA 306 Sahab Holdings Pty Ltd v Registrar-General and Anor [No 3] [2010] NSWSC 403 Seaton v Burnand [1900] AC 135 Sivritas v Sivritas (No. 2) [2008] VSC 580 Standard Commodities Pty Limited v Societe Socinter Department Centragel [2005] NSWSC 493; (2005) 54 ACSR 496 Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2010] NSWSC 1106 Timms v Clift [1998] 2 Qd R 100 Trade Practices Commission v Nicholas Enterprises Pty Limited (No 3) (1979) 28 ALR 201; 42 FLR 213 Turner v Hancock (1882) 20 Ch D 303 Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253 Uniline Australia Ltd (ACN 010 752 057) v Sbriggs Pty Ltd (ACN 007 415 518) and Another (No 2) [2009] FCA 920; (2009) 82 IPR 56 Vacuum Oil Company Pty Ltd v Wiltshire (1945) 72 CLR 319 at 324; [1946] ALR 50 Viscariello v Macks [2010] SASC 2 Wentworth v Wentworth (unreported, 21 February 1996) Westport Insurance Corporation & Ors v Gordian Runoff Ltd [2011] HCA 37; (2011) 281 ALR 593 Westport Insurance Corporation v Gordian Runoff Ltd [2009] NSWSC 245 Windsurfing International Incorporated v Petit (1987) AIPC 90-441
Texts Cited:	Cross on Evidence (online edn) Groves, 'The implied undertaking restricting the use of material obtained during legal proceedings' (2003) 23 Australian Bar Review 314 Handley, Estoppel by Conduct and Election Heydon and Leeming, Jacobs' Law of Trusts in Australia (7th edn) Ritchie's Uniform Civil Procedure (online edn)
Category:	Principal judgment
Parties:	Sapphire (SA) Pty Ltd (trading as River City Grain) (Plaintiff) Barry Smith Grains Pty Ltd (in liq) (First Defendant) David John Kerr and Peter William Marsden (in their capacities as joint and several liquidators of the first defendant and as receivers and managers of the property of the Barry Smith Family Trust and Barry Smith Family Trust No 2) (Second Defendant)
Representation:	Counsel J A Watson with Ms F T Roughley (Plaintiff) M T McCulloch SC (Defendants) Solicitors Eastern Bridge Pty Ltd (Plaintiff) Henry Davis York (Defendants)
File Number(s):	11/149286

Judgment

1. HER HONOUR : Before me for hearing on 7 November 2011 was an application by the plaintiff (Sapphire (SA) Pty Limited, trading as River City Grain), for leave to appeal from a final arbitration award published in its amended form on 9 May 2011 by an arbitration committee (to which I will refer as the Tribunal) constituted under the auspices of Grain Trade Australia Ltd (formerly known as the National Agricultural Commodities Marketing Association Ltd or NACMA), to which I will refer as the Authority. The Tribunal was comprised of three arbitrators from the Authority's panel of accredited arbitrators, none of whom is a lawyer but each of whom has experience in the grain trade industry.

1. Sapphire is seeking leave to appeal on certain questions of law arising out of that arbitral award, such leave being necessary pursuant to s 38 of the Commercial Arbitration Act 1984 (NSW). (I note that Sapphire already has on foot an appeal against the Amended Final Award for which it does not require leave, namely for denial of natural justice. I do not need to consider the basis of that appeal.)

1. Leave to appeal on questions of law may be granted under s 38(4)(b) of the Act only if Sapphire satisfies the threshold requirements set out in s 38(5) of the Act. (Even if it does satisfy those requirements, the grant of leave remains within the discretion of the Court.) Thus, Sapphire must establish, first, that there was an error of law that substantially affects the parties' rights and, secondly, either that there has been a manifest error of law on the face of the award or both that there is strong evidence of error and that the question is one which may or is likely to add substantially to the certainty of commercial law.

1. The dispute, as submitted to arbitration, involved futures contracts for the sale of grain by Sapphire to Barry Smith Grains Pty Ltd (BSG), which is now in liquidation (and to which the second defendants have been appointed as liquidators). BSG entered into the relevant contracts as trustee of the Barry Smith Family Trust (it also being trustee of the Barry Smith Family Trust No 2) and did so in each case through the services of a broker. (For the purposes of the hearing before me the respective contracts were referred to by the name of the broker through which the contract was entered.)

1. In issue before the Tribunal, broadly speaking, was the identification of the terms and conditions of those contracts and the consequences that followed from the operation of those terms and conditions in light of the subsequent insolvency of BSG. In particular, what was principally in issue was whether or not the contracts were subject to what are referred to as the NACMA Trade Rules (including Rule 17.6 of the NACMA Trade Rules which dealt with the situation where there was insolvency of a party to the contract), as opposed to, or as overriding, certain other rules applicable in the industry (namely, the NACMA Limited Standard Terms and Conditions), and, if so, how Rule 17.6 operated in the particular circumstances before the Tribunal. (I will refer to the respective rules as the Trade Rules and the Standard Terms.) There were also issues raised before the Tribunal as to the standing of the claimant and the evidentiary onus borne by the claimant.

1. The second defendants (to whom I will refer as the Liquidators) were appointed provisional liquidators to BSG, and receivers and managers of the said trusts, on 26 September 2007. BSG was subsequently placed in liquidation (and the Liquidators were appointed as joint and several liquidators thereto) on 11 February 2008.

1. In the arbitration, orders were sought by the claimant (named in the contract for arbitration as BSG) for the payment of sums totalling $320,769.98, said to be due after what was referred to as the "close out" of three grain trading contracts (the Woodside, Mallon and Teague contracts) at the "Fair Market Price" as defined in the Trade Rules on the business day following notice was given to Sapphire of the appointment of provisional liquidators (that notice purporting to be made in accordance with the Trade Rules).

1. An Interim Award was published on 16 August 2010, in which much of the Tribunal's reasoning is to be found, followed by the publication of a Final Award (on 16 March 2011) and then the Amended Final Award of 9 May 2011 (in respect of which leave to appeal is now sought) correcting an error in the quantification of the award.

1. The outcome of the Amended Final Award was that Sapphire was required to pay to BSG the sum of $254,000 (plus interest and costs on a party/party basis). Since the institution of the current proceedings, agreement has been reached between the parties for a reduction in the amount payable under the Award, first, to allow for a relatively small amount conceded to have been wrongly awarded and then for a set-off, as against the amount owing under the Award, in the sum of $97,582.39 for grain that had already been delivered under the Mallon contract as at the relevant date (that set-off having been denied by the Tribunal but the Liquidators subsequently accepting that such a set-off was appropriate). Orders have been made by consent in chambers in relation to the set-off amount.

1. It is submitted by Counsel for Sapphire (Mr Watson) that the result of the Award is perverse in that it requires a party who received no performance under the contracts in question, and was not in breach, to pay a substantial sum to the party who was in breach of the agreements. It is said that therefore the Award is contrary to law. The particular errors of law in respect of which leave to appeal is sought are enumerated in the Commercial Arbitration List Statement as grounds of appeal (and have been reduced in number following agreement as to the Mallon set-off and the other smaller sum conceded by the Liquidators).

Issues

1. The following issues arise on the present application:

(i) whether the threshold requirements in s 38(5) of the Act for the grant of leave to appeal are satisfied, namely, that:

(a) the determination of the relevant questions of law could substantially affect the rights of one or more parties to the arbitration agreement; and

(b) there is either

(i) a manifest error on the face of the award or

(ii) strong evidence that the Tribunal made an error of law and, if so, that the determination of that question may add or be likely to add substantially to the certainty of commercial law; and

(ii) if the answer to (i) above is in the affirmative, whether as a matter of discretion leave to appeal should be granted.

Summary

1. For the reasons set out below, I have concluded as follows on the above issues:

(i) The threshold requirements for the grant of leave under s 38(5) of the Act are satisfied only in relation to the ground of appeal identified in the fifth ground pleaded in the Commercial List Arbitration Statement (as to the timing of the insolvency event and date for calculation of the fair market price on closing out the contracts). In relation to that ground, I am of the view that:

(a) the determination of that question of law could substantially affect the rights of Sapphire, as a party to the arbitration agreement, since it could have a significant impact on the outcome of any revised award; and

(b) first, there is a manifest error on the face of the award in the finding as to the date from which Fair Market Price was to be assessed and, secondly, there is strong evidence of error as to the construction of Rule 17.6 of the Trade Rules as to the consequences of what appears to have been a non-compliance by the insolvent party (BSG) with the requirement for notice of that event immediately or within two business days to the other (non-defaulting) party (Sapphire) and that the determination of that second question is one that may add or be likely to add substantially to the certainty of commercial law, having regard to the fact that the contracts are standard form contracts commonly used in the grain trade industry; and

(ii) as a matter of discretion leave to appeal should be granted in relation to the fifth ground identified in the plaintiff's Commercial Arbitration List Statement. (To the extent that such an appeal is successful and results in the setting aside or variation of the award, the costs of the arbitration would fall to be dealt with at that stage.)

Background Facts

1. Sapphire carries on business trading in the sale and purchase of grain in Australia. It enters into contracts with growers for the purchase of the grain, which it then on-sells to larger distributors of grain, such as BSG. Since it enters into such contracts prior to the grain being available for delivery, they are futures contracts.

1. In 2007, acting through different brokers, Sapphire entered into four contracts (as vendor) with BSG (as purchaser) for the sale of grain. Of those four contracts, for present purposes only two remain in issue (those being the Woodside contact and the Teague contract - so named, as noted above, after the brokers through which the contracts were entered). (The disputes as to the remaining two contracts were resolved by agreement prior to the hearing before me.)

1. The Woodside contract was entered into in March 2007. A Broker Confirmation (headed Contract Confirmation) was issued by Woodside to each of BSG and Sapphire, confirming that on 7 March 2007 "the Buyer and Seller agreed to transact this Contract subject to the following Terms and Conditions". Under the header to the confirmation note were the words "NACMA TRADE RULES AND ARBITRATION RULES APPLY". The Broker Confirmation specified various terms, including as to the commodity to be supplied, price, delivery/shipment period, payment terms and the like; and then stated that:

All Contract Terms and Conditions as set out above shall overrule the NACMA Standard Terms and Conditions with which they conflict to the extent of inconsistency. This Contract comprises the entire agreement between the Buyer and Seller with respect to the subject matter of this Contract.

1. The confirmation further noted that "This contract has been executed and this form serves as confirmation and should be signed and a copy returned to the buyer/seller immediately". (I interpose to note that the process of contract confirmation after issue of a broker's note, as thereby envisaged, accords with the explanation appearing on the Authority's website page of the basis on which the grain trade business is executed ("Grain contracts & dispute resolution - a grain producer's Q&A"), a copy of which information was part of Exhibit A in the proceedings before me.)

1. Mr Watson submits, and I accept the force of this submission, that the only meaning that can be given to the statement that conflicting Standard Terms are overruled to the extent of the inconsistency with the Contract Confirmation terms and conditions is that, absent some provision in the "Contract Terms and Conditions" inconsistent with the Standard Terms, the latter were to apply.

1. A Purchase Contract Confirmation was issued by BSG (the contract date being noted as 8 March 2007), an unsigned copy of which is contained in Exhibit A, and Sapphire then issued its own Contract Confirmation of Sale (a copy signed by Sapphire of that document also appearing at Exhibit A). Neither of those documents referred to the Trade Rules or to the Standard Terms.

1. The Teague contract was the subject of a Broker's note (headed 'Brokerage Contract') dated 7 September 2007 that similarly stated that the parties "Have this day entered into a contract on the following terms and conditions", again specifying details as to the commodity, price delivery period and the like, in which, relevantly, the following was stated:

Other conditions: Any terms where not in conflict with the foregoing shall be in accordance with the terms and conditions of the current NACMA Contract No 2.

1. The reference to NACMA Contract No 2 was said to be an incorporation of the NACMA Basis Track Contract published during the period 1 July 2007 to 30 June 2008, the terms of which expressly incorporated the Trade Rules "except to the extent the same are in conflict with the terms expressed herein" and which went on to provide that "In the event of any conflict between this contract and the Trade Rules, this contract will prevail". (In the arbitration, BSG admitted in its Response to Respondent's Reply that the reference to NACMA Contract No 2 incorporated the Trade Rules.)

1. BSG again issued its own Purchase Contract Confirmation (the copy in Exhibit A having been signed by both BSG and Sapphire) bearing the contract date 7 September 2007. This referred to Special Conditions "As per NACMA Contract for Grain & Oilseeds in bulk basis track Teague: 14646/73997" and, as I understand it, a pro forma copy of the Standard Terms was printed on the back of the confirmation (including the Default provision of those terms and conditions, the text of which I set out later in these reasons). (Mr Watson submits, therefore, that the Teague contract (by incorporating the Standard Terms) was not silent in respect of Default.)

1. The Liquidators were appointed as provisional liquidators to BSG on 26 September 2007. It is not disputed that, as at that date, both the Woodside and Teague contracts were wholly executory (the latter having only been entered into earlier that month). On 27 September 2007, Sapphire was served with notification of the occurrence of an "Insolvency Event" in respect of each of the Mallon, Woodside and Teague contracts, that notice being expressed to be given under Rule 17.6.2(a) of the Trade Rules. The letters stated:

Our appointment as Provisional Liquidators of BSG is an "Insolvency Event" under rule 17.6 of the NACMA Trade Rules. Accordingly, this letter is BSG's notification of an Insolvency Event as it is required to provide to you under rule 17.6.2(a).

1. Relevantly, in the context of the dispute between the parties as to the date of the first insolvency event for the purposes of the Rule 17.6 (assuming it to be applicable), on 25 September 2007 Mr Smith had sworn an affidavit (for use in proceedings in the Corporations List in which the appointment of a provisional liquidator was sought). In that affidavit, Mr Smith deposed to BSG's businesses having "effectively ceased trading" as at 19 September 2007 and the businesses having been in "caretaker mode" since at least June 2007 (para [54] in which he also deposed to more and more creditors emerging as the time for delivery of contracts expiries "and the contracts are closing out"). At [50], Mr Smith deposed to an immediate cash flow deficit arising on 18 September 2007 of $300,000 and, at [52]-[53], to consideration being given on and from 21 September 2007 to a proposal for a deed of company arrangement to be put to creditors or for entry into voluntary administration.

1. On 2 November 2007, Sapphire was served with letters notifying details of the "close out" of the respective contracts and enclosing tax invoices in the amounts said to be payable as a result of the close out of the contracts. In all payment to "Barry Smith Family Trust (Receivers and Managers Appointed)" of sums totalling $320,769.98 was demanded. Sapphire disputed liability for that sum and did not make payment of the invoiced amounts.

1. On 16 June 2008 a formal demand for that amount was issued and, when it was not met, application for arbitration of the dispute in relation to the Mallon, Woodside and Teague contracts was subsequently made by lawyers acting for the Liquidators on 26 September 2008. In that letter reference was made to industry practice that when a trader enters into liquidation or some other form of Insolvency Event under the Trade Rules the contracts that are still to be performed are "closed out" pursuant to rule 17.6 of the Trade Rules and that where the insolvent entity is "in the money" (by which I understand is meant that the prevailing market price for the grain is more favourable to the insolvent entity, as buyer or purchaser as the case may be, than that payable under the contract), then a claim is made by the insolvent entity and the counterparty must pay the amount by which the contract is in the money. The letter requesting arbitration noted that the solicitors who issued that letter (Henry Davis York) were acting for the persons who I have defined in these reasons as the Liquidators (noting their capacity as joint and several official liquidators of BSG and joint and several court appointed receivers and managers of the respective trusts). The dispute identified was a dispute between BSG and Sapphire. (This is of some relevance insofar as there was a standing issue later raised with the Tribunal.)

1. The contract for arbitration (signed on 29 April 2009) identifies the claimant as BSG (in liq) as trustee for the Barry Smith Family Trust, notwithstanding that the application for arbitration had been made apparently by the individuals who, as liquidators of BSG and receivers of the trust assets, were seemingly (in one capacity or the other) in a position to pursue the recovery of sums owing either to the company in its own right or representing trust assets. The contract for arbitration identifies the dispute as the "Dispute arising on or about 26 September 2008 pursuant to [the Woodside, Teague and Mallon contracts] for the sale of barley and wheat between the Claimant [BSG] and the Respondent" and goes on to state that "The disputes relate to the financial settlement of contracts between the parties".

1. Points of Claim were signed on 17 August 2009 for the "Claimant", again that entity being identified as BSG (in liquidation) though the claim as articulated therein expressly noted the appointment of the Liquidators as provisional liquidators of the company and receivers and managers of the trust. Points of Defence dated 29 January 2009 were forwarded to the claimant's solicitors on 1 February 2010. After a minor correction to the Defence, Points of Reply were served by the Claimant on 9 March 2010. The Respondent's Points of Reply were received on 6 April 2010 following which the Tribunal (referred to as the Arbitration Committee) was to consider the merits of each case. (No request for an oral hearing was apparently made.) Further replies by each of the Claimant and Respondent were then served.

1. The claim made by BSG was that Rule 17.6 of the Trade Rules was incorporated into each of the contracts; that notification of the Insolvency Event was given on 27 November 2007; and that, accordingly, on the next business day the contracts were to be "closed out" at which time it was "in the money" under each of the Woodside ($262,000), Mallon ($30,769.98) and Teague ($26,000) contracts; hence the total claim was for $320,769.98.

1. Sapphire concedes that it submitted to the arbitration, and that the present approach to arbitration is one of deference and finality, but contends that it only submitted to an arbitration in which questions arising in the course of the proceedings would be determined according to law, referring to s 22 of the Act, which provides as follows:

Section 22 Determination to be made according to law or as amiable compositeur or ex aequo et bono (See UNCITRAL Arbitration Rules Article 33, paragraph 2)

(1) Unless otherwise agreed in writing by the parties to the arbitration agreement, any question that arises for determination in the course of proceedings under the agreement shall be determined according to law.

(2) If the parties to an arbitration agreement so agree in writing, the arbitrator or umpire may determine any question that arises for determination in the course of proceedings under the agreement by reference to considerations of general justice and fairness.

1. Sapphire submits that the determination did not accord with the law (in the aspects referred to in its proposed grounds of appeal considered below). Sapphire contends that the Tribunal's approach to the questions arising for determination was flawed (in that it is said to have failed to conduct any proper analysis of the contracts, or the meaning of critical terms, and failed to apply well-established principles of contract construction) and therefore that the awards were infected by error of law.

1. On that point, it seems to me that the words "according to law" as used in s 22 (1) are treated as being in distinction from the concept of determination by reference to "considerations of general justice and fairness" referred to in the following sub-section and that what the former words point to is that the determination of the questions by the Tribunal will be dealt with by reference to the applicable legal principles. I do not accept that it necessarily follows that if the Tribunal incorrectly applies those principles or applies incorrect legal principles to the issues in question then the whole award is in some fashion vitiated. (In those circumstances the question will be whether leave should be granted to appeal from particular questions of law arising from the errors made by the Tribunal.)

NACMA Trade Rules and Standard Terms

1. Before turning to the Tribunal's published awards in relation to this dispute, I set out below the relevant terms of the respective Trade Rules and Standard Terms. I also note that the Authority's "Q&A" information to grain traders, available on its website, notes that NACMA was formed in 1991 with the aim of standardising grain standards and trade rules/contracts across the Australian grain industry and that "Over 95% of the Australian grain crop is stored in facilities operated by NACMA members, with 90% of the grain contracts executed in Australia each year referring to NACMA grain standards and/or trade rules..."

1. The Authority (or NACMA as it formerly was) has in place various standard terms of contract, which it is open to participants in the industry to adopt when entering into grain contracts. When considering what terms were applicable to the contracts in question in this case, the Tribunal had before it confirmations of contract issued by the seller's broker (referred to in Mr Watson's submissions as the Broker Confirmations); documents issued (by one or other of the contracting parties) which subsequently confirmed or varied the broker's standard terms (referred to by Mr Watson as the Contract Confirmations); the Standard Terms in publication as at March 2007; and the Trade Rules (both as at September 2005 and as at May 2007). By reference to the time at which the respective contracts were entered, the relevant Trade Rules potentially applicable to the Woodside contract were the September 2005 Trade Rules and for the Teague contract were the May 2007 Trade Rules. (The Trade Rules have subsequently been amended, in 2009, but not in any relevant respect as I understand it.)

• NACMA Trade Rules

1. The preface or introductory note to the Trade Rules notes that they have been formulated by the NACMA Commerce Committee and are proposed as reflecting trade practice, facilitating trade between NACMA Members. It is said in the Preamble to the Trade Rules which follows (repeating what is in the preface or introductory note by the Commerce Committee) that they "shall govern all disputes of a mercantile, financial or commercial character" connected with grain and other agricultural commodities arising between members and related counter-parties "and shall be the basis of arbitration on such controversies, unless otherwise and specifically agreed to at the time of trade, or some subsequent time". The Preamble to the Rules expressly confirms that:

All Members or Non Members of NACMA and related counter-parties are free to agree upon any contractual provisions that they deem appropriate. The NACMA Trade Rules apply only to the extent that the parties to a contract have not altered the terms of these Rules or the contract is silent as to a matter dealt with by the pertinent Rule.

1. The Rules provide, in effect, for the parties to communicate with each other so as to confirm the "original Terms of Trade" (1.2(1)) and that, when a trade is made through a broker, it is the duty of the broker to send a written contract confirmation; for the parties to check that confirmation and notify the other party of any difference in the specifications and that "In the absence, conflict, or default of such notice of Contract Confirmation, the document shall be fulfilled in accordance with the terms of the Contract Confirmation issued by the Broker" (Rule 1.2(3)). (A specimen Contract Confirmation accompanied the Rules.) Rule 1.3 provides that the specifications of a contract cannot be altered or amended without the expressed consent of both buyer and seller and that any alteration mutually agreed upon must be immediately confirmed in writing.

1. The contentious Rule in the present dispute is Rule 17. In most relevant (but not all) respects, Rule 17 of the respective versions of the Trade Rules, headed "Default", was the same.

1. Rule 17.1 deals with default by the Seller and Rule 17.2 deals with default by the Buyer. In each case, those Rules provide for notification to the other party where the Seller or Buyer finds itself in a position where it is or will be in default on fulfilment of the contract. The other party then has an option to elect to exercise one of the options therein set out (in summary. extension of the delivery or shipment period; re-purchase or re-sale of all or any part of the defaulted potion of the delivery or shipments; or cancellation of all or any part of the defaulted portion of the delivery or shipments "at Fair Market Price based on the close of the market the next business day"). Pausing there, it would seem the options made available to the non defaulting party under those Rules permit it, at its option, (but not the defaulting party) to take advantage of any favourable price available in the market (if it is then "in the money").

1. Rules 17.3 (Declaration of Default) and 17.4 (Failure to Perform) deal with particular circumstances (where the buyer refused to accept any bill of exchange or to perform its contracted obligations, in which case the seller is entitled to suspend deliveries or rescind the unexecuted portion of the contract; and provide that failure to perform in keeping with the terms and conditions of a contract is to be grounds for the refusal of such delivery or shipment in default but not for rescission of the entire contract).

1. Rule 17.5 (Consequences of Default) deal with the payment by the party in default to the non-defaulting party of an amount by way of liquidated damages (that being an amount equal to the undelivered contract quantity of the commodity multiplied by the difference between the contract price and the Fair Market Price of the commodity). In the 2007 Trade Rules, Rule 17.5 is expanded to include the following "For the avoidance of doubt, nothing in these Rules shall be construed as requiring a party not in default to make any payment of compensation or damages to the party in default".

1. Rule 17.6 (Default Due to Insolvency) is in two parts; the first, 17.6.1 being headed "Definition of Insolvency Event" and the second, 17.6.2, headed "Consequences of Insolvency Event". The definition of Insolvency Event includes: (d) (dealing with a resolution to appoint or the appointment of a controller, provisional liquidator or other analogous person), (g) (dealing with the suspension of payment of debts or ceasing or threatening to cease to carry on all or a material part of its business [this being suggested to have been an earlier Insolvency Event in the present case] or stating that it is unable to pay its debts or becoming otherwise insolvent (or being taken by applicable law, a if a court would be entitled or required to presume that it is, unable to pay its debts or otherwise insolvent), (j) (taking any step that could result in a person becoming and insolvent under administration), (k) taking any step toward entering into a compromise or arrangement with or assignment for the benefit of its members or creditors, or (l) any analogous event.

1. Rule 17.6.2 of the 2005 Trade Rules (relevant in considering the Woodside contract) is in the following terms:

a) If before the fulfilment [sic] of a contract the Buyer or Seller commits an Insolvency Event, the Buyer or Seller shall immediately notify the other party within two business days of the occurrence and shall be deemed to be in Default . [the italicised words do not appear in the 2007 Trade Rules, which is of relevance when considering the Teague contract]

b) In the absence of any express written agreement to the contrary, any contracts between the parties shall be closed out at Fair Market Price on the business day following the giving of the notice. If notice is not given as required, the other party, on learning of the occurrence of the Insolvency Event, shall have the option of declaring the contract closed out at either the Fair Market Price on the first business day after the date when such party first learnt of the occurrence of the act of insolvency or at Fair Market Price ruling on the first business day after the date of the Insolvency Event occurred.

1. Senior Counsel for BSG (Mr McCulloch SC) submits that, insofar as the relevant contracts created an obligation for Sapphire to sell and for BSG to buy grain at the agreed price and at an agreed date in the future, from a commercial perspective what Rule 17 does is to create a regime for risk management for both parties (on the basis that locking in the price on closing out the contract removes the risk of fluctuations in the market. It is thus submitted that Rule 17.6 assisted in creating certainty upon the happening of a foreseeable event, namely insolvency.

• NACMA Standard Terms and Conditions

1. The Standard Terms (appended to the brokers' confirmations in relation to the respective contracts) are separate from the Trade Rules. The former are to be found in a one page pro forma document which provides, relevantly, as follows:

TRADING RULES : This Contract is subject to the Trade Rules of the National Agricultural Commodity Marketing Association Ltd (NACMA) currently in effect, except to the extent the same are in conflict with the Terms and Conditions expressed herein , with such Rules forming an integral part of the Contract and of which both parties hereto shall be deemed to be cognisant. (my emphasis)

TIME : All stipulations set forth in the Terms of Trade as to "TIME" are of the essence.

...

DEFAULT : In the event of Default in fulfilment of Contract by either party, the other at their discretion shall have the right, after giving written notice ... to sell or purchase, as the case may be, against the Defaulter and the Defaulter shall make good the loss, if any, on such purchase or sale as set forth below:

If the Buyer or Seller suspend payments of debts, or convenes or holds a meeting of creditors, or commits an act of bankruptcy, or being a company shall have a receiver appointed, or hold a meeting for the purpose of considering a resolution that the company be wound up or go into liquidation, such Buyer or Seller shall be deemed to be in Default.

...

DISPUTES : Any party or parties who have entered into Terms of Trade subject to NACMA Trade Rules shall be entitled to refer any disputes arising out of such contract, and which cannot be resolved between the parties, to NACMA for Mediation or Arbitration

ARBITRATION : If any dispute arises out of or relates to this Contract or the breach, termination or subject matter thereof, the dispute shall be submitted to and settled by Arbitration in accordance with NACMA Arbitration Rules in the edition current at the date of the establishment of the Terms of Trade in the Contract, such rules forming an integral part of the Contract and of which both parties shall be deemed to be cognisant. ...

NOTE : The NACMA Trading Rules provide a more detailed explanation. Copies available on the NACMA website . (my emphasis)

• Parties' respective positions on the contractual provisions

1. It is submitted by Mr Watson that, in respect of the Woodside contract, the 2005 Trade Rules in their own terms (in the Preamble thereto) apply only to the extent that "the contract is silent as to a matter dealt with by the pertinent Rule" and that since the Woodside contract was not silent in respect of Default (since there was provision made therefor in the Standard Terms - those being incorporated by the reference in the Contract Confirmation to its terms overruling the Standard Terms to the extent of any inconsistency) Trade Rule 17 did not apply at all to the Woodside contract. Alternatively, it is said that it applied only to the extent that the parties had not altered the terms of the Trade Rules and that since the parties had altered the terms of those Rules by providing for 'Default' in the adoption of the Standard Terms then the same result follows - Rule 17 does not apply.

1. A further alternative argument is put that the operation of Rule 17.6 was excluded once BSG suspended payment of its debts or had a receiver appointed to its property or went into liquidation. The basis of that submission is that, as the Standard Terms expressly provided for Insolvency Events to be Events of Default and for the consequences of Default, and as the Standard Terms did not include any provision for payment by the non-defaulting party to the defaulting party, Rule 17.6 was excluded. It is also submitted that even if the Trade Rules had some work to do, they simply expanded the circumstances set out in Rule 17.6(1) to be events of default under Rule 17.6(2)(a) (the consequences of which are said to have been contained in the earlier Rules 17.1-17.5 - those Rules only contemplating a payment by a non-defaulting party).

1. Mr Watson emphasises that neither the Standard Terms nor Rule 17 expressly provides for an "innocent" party to be obliged to pay a sum of money to a party in default (whether for or because of that default, pursuant to sub-Rule 17.6, on close out of the contract, or otherwise).

1. In relation to the Teague contract, again Mr Watson submits that the reference to the Standard Terms (in BSG's Purchase Contract Confirmation), which in turn made provision for Default, meant that the contract was not silent as to default and did operate to alter the Trade Rules, Rule 17.6 therefore being inapplicable to the Teague Contract. Alternatively, reliance is placed by Mr Watson on the applicable September 2007 Trade Rules under which Rule 17.5 stated:

For the avoidance of doubt, nothing in these Rules shall be construed as requiring a party not in default to make any payment of compensation or damages to the party in default

a provision that Mr Watson submits should have disposed of any claim for payment by Sapphire to BSG (which was then in default) under the Teague Contract.

1. Thus, Sapphire contended in the arbitration that the Broker Confirmation (and, in the case of Teague, the Broker Confirmation as varied in the Contract Confirmations) contained the relevant contractual terms and excluded the provisions for "Default" contained in the respective versions of the Trade Rules (namely Rule 17). BSG, for its part, relied upon Rule 17.6 of the relevant Trade Rules as applicable and as entitling it, on the proper construction of that Rule, to the moneys claimed by way of a 'close out' of the relevant contracts. (In relation to the invocation of Rule 17.5 in the case of the Teague contract, BSG submits that payment under Rule 17.6 on close out of a contract is not "payment of compensation or damages".)

Arbitration

1. The dispute was referred to arbitration and, as noted, the Tribunal was comprised of three non-lawyers. Mr McCulloch notes that no challenge was made to the jurisdiction of the arbitration committee and submits that the Tribunal (having regard to the manner of its composition) represented an experienced panel of industry-based persons (with, it is said, significant background experience in the use and application of the Trade Rules such that it can be assumed that the members of the committee were best suited to reach a decision which conformed with industry expectations).

1. The arbitration was conducted under the terms of the NACMA Dispute Resolution Rules, under which the rules of evidence do not apply. Nevertheless, as emphasised by Mr Watson, the arbitration was, under s 22 of the Act, to be determined in accordance with law.

1. Mr McCulloch notes that Sapphire maintained before the Tribunal various defences: that Rule 17.6 of the Trade Rules had not been incorporated into the respective contracts (and hence those provisions did not apply to a defaulting party in the position of BSG); that even if Rule 17.6 did apply there had been a prior Insolvency Event which had not been notified as required under Trade Rule 17.6; that the Fair Market Price on which BSG had calculated the amount of its claim was excessive and not substantiated; that BSG did not have the legal capacity to make the claim; and that Sapphire had validly rescinded the Mallon contract on 24 September 2007 and was entitled to set off an amount of $97,582.39 in respect of a delivery of grain under that contract prior to the rescission of that contract (this last now being the subject of agreement between the parties). (What was not, seemingly, raised by Sapphire was the contention that, as a matter of construction and irrespective of what was the first insolvency event, Rule 17.6 even if applicable, and even if the notice required under sub-rule (2) had been properly given, did not operate to entitle BSG to payment of the sum claimed.)

1. On 16 August 2010, the Tribunal published its interim award in which it noted that it was common in the industry for parties to create their own contract confirmation documents (at p 2) and that "Both parties appear to concede and accept (with one possible exception) that the brokers' note contracts are the prevailing contracts". It further noted that Sapphire had raised an earlier insolvency event relying upon an affidavit of a third party sworn on 11 June 2009 (in which the deponent related a conversation with Mr Smith of BSG in which the latter had said on 24 September 2007 that "I am putting myself into voluntary liquidation").

1. In summary, the Tribunal described the question at issue in the arbitration as being "the timing and consequences of insolvency of the Claimant". It found that the Claimant (BSG) had the necessary capacity to bring the claims; that the respective contracts each incorporated the Trade Rules and specifically Rule 17.6; that the Mallon contract had been properly rescinded on 24 September 2007; that the relevant insolvency event occurred on 27 September 2007 when Sapphire was given notice of insolvency, rendering 28 September 2007 as the relevant date for determining fair market price; that BSG was entitled to receive payments equivalent to the Fair Market Price as defined for the contract tonnage deliverable as at 27 September 2007 under the Woodside and Teague contracts, to be assessed for value as at 28 September 2007; and that Sapphire was not entitled to set-off against sums due to BSG those amounts invoiced by it to BSG in respect of the Mallon and one other contract.

1. The Tribunal was not, however, satisfied as to the evidence that had been provided by BSG as to Fair Market Price and directed that written evidence be provided (from at least 2 sources) as to the Fair Market Price on which BSG had calculated the amounts of its claim and for submissions to be served in response to such evidence.

1. Following consideration of those further submissions, the Tribunal signed a Final Award on 16 March 2011 in which it addressed the further evidence that had been produced in relation to the question of fair market price (still not being satisfied as to the supporting evidence put forward by BSG). It expressed the opinion that "clearly the grain had a fair market price" and that its task was to "discover" the Fair Market Price based on the best evidence that the parties (including Sapphire). It noted that Sapphire had adduced evidence of price as an alternate submission to its submissions that the finding should be that the grain had a nil value (in the absence of reliable evidence from BSG).

1. That Final Award was subsequently corrected by the Tribunal (acceding to an application by Sapphire, opposed by BSG) by an Amended Final Award issued on 9 May 2011, recognising that there had been an error in awarding damages in respect of the Mallon contract that the Tribunal had already determined was rescinded (and correcting the award on the basis that this was an obvious oversight), though not revising its position on the set-off claimed under that contract.

1. Under the terms of the Amended Final Award, subsequently reduced as agreed between the parties, the amount payable by Sapphire is $156,417.61 plus interest and costs (and there was evidence that the costs, at least on a solicitor and client basis, were not insubstantial).

Errors of Law alleged to have been made

1. Sapphire has identified a number of errors of law on which it seeks leave to appeal, not all of which (such as the error in relation to the Mallon contract) are now pressed. Those that are still pressed are as follows:

(i) as to the identification of the applicable contract terms (it being submitted that the Tribunal erred as a matter of law in concluding that each of the Woodside and Teague contracts incorporated the Trade Rules);

(ii) as to the construction of Rule 17.6 (in holding that it applied to require a non-defaulting party to pay a substantial sum of money to a defaulting party);

(iii) as to the finding that 27 September 2007 was the date of insolvency (and/or that 28 September 2007 was the date on which fair market price was to be assessed);

(iv) in not applying the correct onus of proof (but, rather, in finding that its task was to "discover" the Fair market Price of the contract commodity on the best evidence available before it);

(v) in not holding that the proceedings were not validly constituted (the relevant party to the arbitration agreement being BSG not the Liquidators in whom any claim under the contracts had by then vested); and

(vi) in awarding the costs of the whole of the arbitral proceedings to BSG (an error said to be consequential on the findings ultimately made in relation to the above errors of law).

Applicable Principles

1. Before turning to each of the errors of law in respect of which Sapphire seeks leave to appeal, I consider below the applicable legal principles in relation to the issues to be determined.

• Substantial effect on rights of one or more of the parties

1. As noted above, the first of the threshold requirements to be satisfied (before any question of discretion arises) is that there be a determination that could substantially affect the rights of one or more of the parties. The meaning of that phrase has not tended to cause any real difficulty. Where there has been more contention, at least part of which has now been resolved by the High Court, is as to the first of the two alternate limbs to the second requirement that must be satisfied - namely, that there be manifest error on the face of the award.

• Manifest error

1. The meaning of manifest error has recently been considered by the High Court in Westport Insurance Corporation & Ors v Gordian Runoff Ltd [2011] HCA 37; (2011) 281 ALR 593. In the Court of Appeal ( Gordian Runoff Ltd v Westport Insurance Corporation [2010] NSWCA 57 at [116]) it had been held that the proper approach to the question of "manifest error" for the purposes of s38(5)(b)(i) was that taken from the reasons of Kirby P and Mahoney JA in Natoli v Walker (1994) 217 ALR 201 at 212-215 and 233, respectively, and from the reasons of Sheller JA in Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 at 225-226, that being articulated as:

The error must be more than arguable; it must be evident or obvious; there must be powerful reasons leaving little or no doubt on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law.

1. The Court of Appeal had there distinguished between the phrase "manifest error" and the similarly worded phrase (used in a different context) with what it considered to be a quite different meaning "plainly or clearly wrong" (as those words were discussed in Gett v Tabet [2009] NSWCA 76; (2009) 254 ALR 504 at 558-567).

1. In the High Court, French CJ, Gummow, Crennan and Bell JJ (Kiefel J agreeing) concluded that the phrase "a manifest error of law on the face of the award" in s 38(5)(b)(i) of the Act requires that the existence of an error of law be manifest on the face of the award, including the reasons given by the arbitrator, in the sense of an error apparent to that understanding by the reader of the award (disapproving Natoli v Walker ).

1. The plurality said (at [42]):

Paragraph (b)(i) of s 38(5) may be awkwardly expressed, but the words "a manifest error of law on the face of the award" comprise a phrase which is to be read and understood as expressing the one idea. An error of law either exists or does not exist; there is no twilight zone between the two possibilities. But what is required here is that the existence of error be manifest on the face of the award, including the reasons given by the arbitrator, in the sense of apparent to that understanding by the reader of the award. If that error is manifest and its determination could substantially affect the rights of at least one of the parties, as specified in para (a) of s 38(5), then the Supreme Court may go on to decide to grant or refuse leave in the exercise of the power conferred by s 38(4)(b).

noting at [43] - [44] that:

If there be no such manifest error on the face of the award but there is presented to the Supreme Court on the leave application "strong evidence" that an error of law was made, and its determination may add, or be likely to add, substantially to the certainty of commercial law (para (b)(ii) of s 38(5)) and also may substantially affect the rights of at least one of the parties (para (a) of s 38(5)), then leave may be granted.

If either s 38(5)(b)(i) or (ii) has been engaged to enliven the power to grant leave, then, upon the grant of leave, a "question of law arising out of an award" is presented to provide the subject matter of the appeal which lies to the Supreme Court under s 38(2).

1. As to the expression "manifest error", their Honours said:

Much difficulty in the operation of these provisions has been occasioned by the majority decision of the New South Wales Court of Appeal in Natoli v Walker (Kirby P and Mahoney JA; Meagher JA dissenting). The majority appear to have treated the use of "manifest" in para (b)(i) of s 38(5) not as directed to what is presented upon the face of the award but as requiring the error of law itself to have a particular quality or character so as to include within para (b)(i) facile errors and to exclude those of complexity. This would exclude from para (b)(i), for example, an error in the construction of a complex law such as s 18B of the Insurance Act. Yet, as para (b)(ii) indicates, the policy of the statute is not to leave entirely to the operation of the arbitration agreement questions of law the determination of which may be likely to add to the certainty of commercial law. In an age when much commercial activity is regulated by statute, such questions are likely to be matters of statutory interpretation. It would be incongruous to favour judicial determination merely of egregious error apparent on the face of the award.

...

Natoli should not be accepted in this court as correctly construing s 38(5)(b)(i) of the Arbitration Act. The character or quality of the error of law falls for consideration, if relied upon, at the next stage, namely when the Supreme Court is considering under s 38(4)(b) whether to grant leave.

1. Kiefel J (at [163]) said:

I agree with French CJ, Gummow, Crennan and Bell JJ that manifest error of law requires that the error appear on the face of the award, which includes the reasons for it, and that the error be apparent to the understanding of the reader. Such is the case here. It does not require that the error be of a particular quality or that errors involving complex questions be disqualified.

• Adequacy of reasons

1. So far as the adequacy of reasons for the award is concerned, the plurality accepted that, when properly understood, the judgment of Donaldson LJ in Bremner Handelsgesellschaft mbH v Westzucker GmbH (No. 2) [1981] 2 Lloyd's Rep 132-133 at [25] correctly represented the law (as had been the view of the Court of Appeal in Gordian at [222] per Allsop P:

All that is necessary is that the arbitrators should set out what, on their view of the evidence, did or did not happen and should explain succinctly why, in the light of what happened, they have reached their decision and what that decision is. That is all that is meant by a 'reasoned award'.

correctly represented the law. To the extent that Oil Basins Limited v BHP Billiton Limited [2007] VSCA 255; (2007) 18VR346 at 364-365 [51] might have embodied a different and more stringent test, the plurality in Westport said that when properly understood the words "judicial standard", where they appeared in the judgment were an "unfortunate gloss", on the terms of the relevant provision in the Victorian legislation ( Westport at [63-54]).

1. Mr McCulloch notes that the level and complexity of the reasons required will vary according to the type of arbitration and the nature of the determination to be made ( Westport at [53]); and that both Oil Basins and Westport concerned the construction of legislation which required the arbitrators (who included experienced former judges), to "explain succinctly why various integers in ... [the] statutory provision were satisfied" ( Westport at [55]), which it is submitted is not the case here.

1. Reliance was placed by Mr McCulloch on [53] of the plurality's judgment, with which Kiefel J. expressly agreed at [170]:

More to the point were observations in Oil Basins to the effect what is required to satisfy that provision will depend on the nature of the dispute and the particular circumstances of the case. Their Honours (in Oil Basins) illustrated the point by saying:

"If a dispute turns on a single short issue of fact, and it is apparent that the arbitrator has been chosen for his or her expertise in the trade or calling with which the dispute is concerned, a court might well not expect anything more than a rudimentary identification of the issues, evidence and reasoning from the evidence of the facts and from the facts to the conclusion."

• On the face of the award

1. Their Honours in Westport were not called upon to address what was meant by "on the face of the award" beyond that it comprised both the award itself and the reasons given by the arbitrator for the award. In the present instance, this is relevant insofar as Sapphire seeks to point to other materials as evincing one or more of the errors identified by it (such as the material attached to the submissions made by it to the Tribunal).

1. The question as to whether an applicant, when applying for leave to appeal on the basis of manifest error on the face of the award, is limited to the material contained in the award (and reasons for the award), or whether the Court can have regard to primary or secondary facts before the arbitration tribunal is one that has received both judicial and academic attention.

1. The traditional interpretation of the phrase was that the court was restricted to reviewing the award itself (and hence no extrinsic material could be considered) in order to determine whether an error of law existed on its face. Thus, in Gold Coast Council v Canterbury Pipe Lines (1968) 41 ALJR 307, Windeyer J stated (at 314) that:

an error on the face of the award is not to be discovered by looking behind its back. It is not permissible to treat the limited jurisdiction by which a court ensures that an arbitration is conducted in accordance with law as if it were the equivalent of an appeal from an arbitrator's decision.

1. In Doran Constructions Pty Ltd v Health Administration Corporation (NSW) (1994) 12 BCL 104 Rolfe J (though finding that there had been a manifest error of law (by reason of a finding based on the principles of res judicata and/or issue estoppel) nevertheless found that it was not on the face of the award since it was necessary to go beyond the award to determine that issue.

1. The difficulty that seems to arise in some of the cases is where there is doubt as to the intention of the arbitration tribunal as to whether particular material forms part of the award. Thus, Sellers LJ in Giacomo Costa Fu Andrea v British Italian Trading Co Ltd [1963] 1 QB 201 at 219 (later cited by Windeyer J in Tuta Products Pty Ltd v Hutcherson Bros Pty Ltd (1972) 127 CLR 253 at 258; 46 ALJR 549 at 258) noted that "The difficulty is in its application - not, I think, as to whether any particular document has been expressly incorporated in an award but whether it has, in the circumstances, to be regarded as the intention of the tribunal which made the award to include the document in question as part of its award and its reasoning".

1. So, for example, in Pearl Marin Shipping A/B v Pietro Cingolani SAS, The General Valdes [1981] 1 Lloyd's Rep 170, where the arbitrator set out his findings in a document headed "Award" and set out his "Reasons for Award" in a separate document (sent without a covering letter), which was not stapled or attached to any of the other documents, Neill J held that the "reasons" document did not form part of the award. The mere fact that a document containing reasons was delivered at the same time as the formal award did not of itself have the consequence that the document containing the reasons was to be regarded as part of the award. The critical question was whether the arbitrator had intended the document with reasons to be incorporated into the award.

1. In the Tuta Products case , Barwick CJ cited with approval the statement by Lord Dunedin in Champsey Bhara & Co v Jivraj Balloo Spinning & Weaving Co Ltd [1923] AC 480 at 487 that:

An error in law on the face of the award means, in their Lordships' view, that you can find in the award or a document actually incorporated thereto, as for instance a note appended by the arbitrator stating the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous.

1. In Gianfriddo v Garra Constructions Pty Ltd [1971] VR 289 at 290-291, Smith J summarised the principles in relation to the implied incorporation of documents into an award as follows:

1. A mere recital or narrative statement in the award that a specified contract was entered into will not be sufficient to incorporate it in the award: Blaiber & Co Ltd v Leopold Newborne (London) Ltd [1953] 2 Lloyd's Rep 427 at p 430; Nils Heime Akt v G Merel & Co Ltd [1959] 2 Lloyd's Rep 292 at p 293; James Laing, Son & Co (M/C) Ltd v Eastcheap Dried Fruit Co [1961] 2 Lloyd's Rep 277; Giancomo Costa Fu Andrea v British Italian Trading Co Ltd [1963] 1 QB 201 at p 219; [1962] 2 All ER 53. Nor will a mere recital or narrative statement that an act has been done for reasons stated in a specified document be sufficient to incorporate that document; Champsey Bhara & Co v Jivraj Balloo Spinning & Weaving Co Ltd [1923] AC 480.

2. Even if the words relied upon are in the portion of the award which expresses the decision or direction by the arbitrator on the matter referred to him, they will be insufficient to incorporate the provisions of a contract if they merely state in general terms that there has been a breach of contract, or that because of a specified act or event the contract is void or has been discharged; see the Blaiber case , supra, at p 429, and the Giacomo Costa case , supra, at (QB) pp 217 and 219.

3. If, however, the decision or direction given is expressed in terms which are to such a degree referential that, without reading a document referred to, it is not possible to understand what has been decided or directed, or not possible to give effect to the decision or direction, then the document should be treated as incorporated in the award; see the Champsey Bhara case , supra, at (AC) p 487; Hitchins v British Coal Refinery Processes Ltd [1936] 2 All ER 191, at p 194, and the Giacomo Costa case , supra, at (QB) p 210.

4. Again if the decision or direction is expressed to be based upon the wording of a specified clause of a contract the clause is incorporated; compare the Blaiber case , supra, at p 429. And the same is true if there is a finding either that an act was properly done under, or properly done having regard to the provisions of, a specified cause, or that it constituted a breach of a specified clause; see Absalom (FR) Ltd v Great Western (London) Garden Village Society Ltd [1933] AC 592, at p 612; [1933] All ER Rep 616, and cll 3 and 4 of the award in that case; Arcos Ltd v London & Northern Trading Co Ltd (1932) 44 Lloyd's Rep 6; (1933) 45 Lloyd's Rep 297, at pp 300, 301 (SC).

5. How matters stand where the decision or direction is expressed to be based, not upon the wording or effect of any specified clause, but upon the wording or effect of the contract as a whole, or of the provisions of the contract relating to a particular subject-matter, is debatable; but the weight of authority supports the view that in such circumstances the contract, or the relevant part of it, is incorporated. See, on the one hand, the Giacomo Costa case , supra, at (QB) pp 216, 217; and see, on the other hand, the test propounded in the same case at p 219, and see Landauer v Asser [1905] 2 KB 184, and the observations thereon in the Champsey Bhara case , supra. Compare also Aktiebclaget Legis v V Berg & Sons Ltd [1964] 1 Lloyd's Rep 203, at p 211.

1. In RP Robson Constructions Pty Ltd v Williams (1989) 6 BCL 219 at 221 Giles J (as his Honour then was) expressed the test not in terms of incorporation into the award but as to the ascertainment of what amounted to the arbitrator's reasons for the award. There, reference to the submissions that had been made by Counsel and considered by the arbitrator in his reasons for making the award were able to be reviewed for the purpose of considering whether there was manifest error on the face of the award.

1. In the present case, the Tribunal's reasons identified at the start that submissions had been received from the parties (thereby referring to and listing the quasi-pleadings - claim, defence, points of reply and responses by each of the parties). The Tribunal noted that it had considered those submissions. A statement that submissions (whether in the form of quasi-pleadings or not) have been received and considered does not, in my view, evidence an intention to incorporate them as part of the reasoning of the award or, to use Giles J's terminology, to indicate that these documents form part of the reasoning of the Tribunal. It seems to me that this is a formal recital of what has been received and reviewed. If one were conducting an appeal from a decision based on the material before the Tribunal then those documents would be relevant. However, as I understand the authorities referred to above, the mere reference to such material does not mean that it forms part of the award for the purposes of determining whether there is manifest error on the face of the award (though reference thereto, or to other primary or secondary materials before the Tribunal may otherwise be permissible in determining whether there is strong evidence of error).

1. Other than in relation to the determination of the fair market price, the only reasoning of the Tribunal is to be found in the Interim Award. That contained (in sections with corresponding headings) an introduction; a recitation of the facts; a brief description of the claimant's case (described as relatively straightforward); a description of the respondent's defence (with three separate headings: the Trade Rules; Timing of the Insolvency Event; and Other matters); a section on fair market price; and then the Tribunal's findings; followed by the Interim Award (which commences with the words "Having considered the Submissions and for the reasons stated above...".

1. However, insofar as the Tribunal, in its reasons, refers to the "incorporation provisions" of the Woodside and Teague Contracts as part of its reasoning, it seems to me that those parts of the contracts at least must be treated as part of the reasons of the award and hence reference may be made to those when determining whether there has been manifest error on the face of the award.

1. In those circumstances, errors divined from material not referred to in the award (such as the seemingly contradictory evidence of Mr Smith in relation to the timing of the insolvency event) would not in my opinion be errors on the face of the award and hence leave to appeal therefrom could only be granted under the second of the two alternate limbs for the second requirement (the strong evidence of error/likelihood to add to the certainty of commercial law ground).

1. I accept, however, that the extrinsic material was admissible, subject to relevance (and in the case of some of the material, such as the reference in the Productivity Inquiry to disputes of an unidentified nature in relation to the grain trade contracts, also subject to weight), when looking to the question whether there is strong evidence of an error of law and, if so, the likelihood that determination of that issue may add or be likely to add substantially to the certainty of commercial law.

1. Finally, by way of the general principles to be applied on the present application, I note that as to the second of the two alternative limbs to the second requirement that must be satisfied (namely that there is strong evidence of an error of law) there is no requirement in s 38(5)(b)(ii) the error be "on the face of the award". Hence reference can be made to extraneous materials. However, what is required is that in such a case, the error be of a particular quality in the sense that the determination of that issue may or will be likely substantially to assist in the certainty of commercial law.

1. Turning then to the particular issues on which the Tribunal is said to have erred and the manner in which it is said that any error occurred, those issues (and BSG's response to those issues) are as follows:

(i) Identification of terms of contracts

1. In issue before the Tribunal, as noted in the Interim Award, was the question whether Rule 17.6 of the Trade Rules was incorporated into any of the contracts. The Tribunal noted in the Interim Award that, in relation to the Woodside contract, Sapphire said that the contract incorporated the Trade Rules but also the Standard Terms and that Sapphire had contended that the latter were different in material respects. As to the Teague contract, the Tribunal noted that it incorporated the terms of the NACMA "Track" contract which in turn incorporated the Trade Rules but that Sapphire said that the parties had agreed to vary that contract by producing a subsequent contract document on "the Barry Smith form" (the Tribunal noting that that contract on its face contained as a 'Special Condition' the incorporation of the NACMA track contract).

1. The Tribunal stated that it did not find compelling the arguments of Sapphire (by this, seemingly, referring to the arguments that the Woodside contract, by incorporating the Standard Terms, and the Teague contract, by the variation contained in the Barry Smith form, did not incorporate that Rule 17.6 was not incorporated into the contracts). It said:

...Both the Woodside and Teague Contracts clearly incorporate the NACMA Trade Rules (the latter by virtue of the incorporation of the Track Contract). To the extent that the Woodside contract incorporates the NACMA Standard Terms and Conditions, we note that those standard terms themselves provide that the "NACMA Trading [sic] Rules provide a more detailed explanation" which suggest to us an intention at least that the Trade Rules and Standard terms be construed consistently, to the extent possible

1. (Mr Watson points out that the Tribunal did not there identify whether the intention so found (i.e. an intention "at least that the Trade Rules and Standard Terms be construed consistently, to the extent possible") was of the parties or of the drafter of the Trade Rules. That said, I would have read this as a finding that, by incorporating the Standard Terms which themselves made reference to the Trade Rules, the parties should by the terms of their contract be taken to have had such an intention.)

1. It is submitted by Mr Watson that the substance of the Tribunal's reasoning in this regard is to be found in the paragraph in which the Tribunal noted that the position was "perhaps less clear" in the case of the Mallon contract (which had incorporated the "NACMA trading terms and conditions"). In that paragraph, the Tribunal said that to the extent that this (i.e. the statement to be found in the Mallon contract) was ambiguous, then found that there was an intent to incorporate the Trade Rules and went on to say (in a passage on which Mr Watson places weight):

... That is the starting point . If the parties then wished to depart from those Rules entirely or in any material respect, they would in our view need to do so clearly and unambiguously. In our opinion they have not done so and we find that the 3 contracts evidenced by the broker's notes incorporate and are governed by the NACMA Trade Rules, and relevantly Rule 17.6. (emphasis as placed on this by Mr Watson)

1. Mr Watson submits that it is clear that the Tribunal approached all three contracts from the starting point that the Trade Rules should be applied and that, for the parties to depart from those rules, they must do so "clearly and unambiguously" (leading to the finding that the Trade Rules were incorporated in all three of the contracts and that the contracts were governed by the Trade Rules). He submits that this was the wrong approach, noting that the contracts were made through a broker, with Contract Confirmations that either attached or incorporated the Standard Terms. Mr Watson submits therefore that the Trade Rules should have been considered last, not first, referring to the following statement in the Standard Terms:

This Contract is subject to the Trade Rules of the National Agricultural Marketing Association Ltd., (NACMA) currently in effect, except to the extent the same are in conflict with the Terms and Conditions expressed herein , with such Rules forming an integral part of the Contract and of which both parties hereto shall be deemed to be cognisant (my emphasis)

and to the statements in the NACMA Trade Rules to the effect that they:

... apply only to the extent that the parties to a contract have not altered the terms of these Rules or the contract is silent as to a matter dealt with by the pertinent Rule

1. It is submitted by Mr Watson that the Tribunal ought to have approached the question by first analysing the contract documents to establish whether, and to what extent, any particular NACMA Trade Rule might apply (noting that, to the extent that the contract documents incorporated the Trade Rules the latter "were the servants, not the masters, of the contractual arrangements"). (It is then submitted that this approach infected the whole of the Tribunal's analysis of the questions for determination according to law.)

1. Mr Watson points to Sapphire's Reply submissions to the Tribunal of 9 April 2010 (Exhibit A at tab 7), in which there is an analysis of the respective contract documents to show the incorporation into the Woodside contract of the Standard Terms and the provision contained therein to the effect that they are to override the Trade Rules to the extent of any inconsistency and the incorporation into the Teague contract (by the Contract confirmation) again of the Standard Terms with the relevant provision.

1. Mr McCulloch submits that the plaintiff's submissions do not disclose an error of law that is more than arguable on this ground. He points to the submissions that BSG made as to the incorporation of the Trade Rules in the contracts (as set out in paragraph 1 of the Points of Reply dated 9 March 2010 and paragraph 2 of the Response to the Respondent's Reply dated 18 May 2010 provided to the Tribunal).

1. In summary, BSG submitted that the relevant brokers' notes contained the only terms of the contracts in issue (referring to NACMA Trade Rule 1.2.3 in this regard). Trade Rule 1.2.3 provides:

When a trade is made through a Broker, it shall be the duty of the Broker to send a written Contract Confirmation to each of the principals, not later than the close of business the day following the date of the trade. Upon receipt of the Contract Confirmation, the parties there to shall carefully check the specifications and, upon finding any differences, shall immediately notify the other party to the Contract Confirmation, and confirm in writing. In the absence, conflict or default of such notice of Contract Confirmation, the document shall be fulfilled in accordance with the terms of the Contract Confirmation issued by the Broker.

1. It is noted by Mr McCulloch that in NACMA Arbitration Award no. 13, the Arbitration Committee there acknowledged that "Trade Rule 1.2.3 gives effect to a common trade usage, namely that in the event of conflict, the broker's note prevails" and submitted that the award in that Arbitration was directly comparable with the present case in which there was a conflict between a provision of the contract confirmation issued by a party and the broker's note which, relevantly, incorporated the NACMA Trade Rules (the broker's incorporation of the Trade Rules there being held to prevail). Mr McCulloch notes that the Tribunal was also referred to NACMA Arbitration Appeal Award no. 32, where the broker's note was found to constitute the primary evidence of the terms of the contract between the parties. It was submitted that the decision of the Tribunal in the present case was entirely consistent with other Arbitration Committees operating in the same industry and under the same rules.

1. Mr McCulloch submits that the terms of the agreement between the parties were embodied in the Broker Notes (and the contract confirmations subsequently issued by the parties constitute no more than acknowledgements or receipt documents); that all of the Broker Notes incorporated the NACMA Trade Rules as at the respective dates of the Notes, "save insofar as they conflict with the terms of the Note"; and that none of the terms printed on the Notes included provision for insolvency or default. Thus it is said that NACMA Trade Rule 17.6 formed part of the agreement between the parties.

1. Alternatively, it is submitted that if either or both of the Standard Terms were incorporated into the contracts they did not operate to displace the application of Rule 17.6, which deals specifically and extensively with "Default due to Insolvency". Mr McCulloch submitted that the general "default" provisions contained within the trading terms refer to very narrow circumstances (and do not encompass the circumstances of applicable in this case where BSG had not convened or held a meeting of its creditors; committed an act of bankruptcy; had a receiver appointed to it; nor convened a meeting for the purpose of considering a resolution that the company be wound up or go into liquidation).

1. Mr McCulloch thus submitted that Rule 17.6 contemplates a much broader range of "Insolvency Events" and imposes obligations and creates rights and entitlements in the event of the occurrence of those "Events"; that the "Default" provisions in the Standard Terms are not exclusive; and that NACMA Rule 17.6 remains in full force and effect.

• Construction of Rule 17.6

1. I accept that there is nothing contained in the reasoning of the Tribunal (at least so far as that appears in the Interim Award) as to the basis on which it construed Rule 17.6 in its application to the facts before it (other than the inference to be drawn from the fact of the award itself). The Tribunal appears to have proceeded on the basis that the Trade Rules (and Rule 17.6) were incorporated in the respective contracts and therefore (once the date of insolvency was determined) this had the result that a payment was due under the contracts. Mr Watson submits that in failing to give reasons for that conclusion, the Tribunal fell into error and this is manifest on the face of the award.

1. As to error of law, Mr Watson submits (and I agree) that the interpretation of a written agreement between private parties is a question of law. In Westport , Heydon J at [82] said:

If the issue whether leave to appeal would have been granted to debate the construction point is material, it should be noted that the construction point involves questions of law. It involves a question of law in the mundane sense that the interpretation of a, written agreement between private parties is a question of law. But beyond that mundane question of law there may be two specific but important errors of law. The arbitrators may have erred in their use of the phrase "common understanding and intention of the parties". That suggests that they erred in searching for the subjective intentions of the parties. That is an extremely important matter, not always well understood. It is very well established in this Court, and indeed in other ultimate appellate courts, that the question is not what contracting parties subjectively intended, believed or understood. The question is, subject to special common law or equitable rules usually based on error or disadvantage, what each party by words or conduct would have led a reasonable person in the position of the other party to believe. A departure from these principles by arbitrators is a serious matter. They are not principles merely reflective of some quaint minor guide to construction. They go to central substantive conceptions of the law of contract in the Anglo-Australian common law. A second respect in which the arbitrators may have erred is their seeming reliance on post-contractual events as a guide to contractual interpretation. Some see that as more controversial, but it is a very important question of law.

1. Before me, it was contended, in effect, that on the proper interpretation of Rule 17.6 (read with the provisions in the balance of Rule 17), it operated to deem parties in default (on insolvency or in the other circumstances or events defined as insolvency events) but there was no obligation to make a payment under Rule 17.6 on insolvency and that there was therefore a manifest error by the Tribunal in the construction of the contracts.

1. Mr McCulloch says that those issues were not raised before the Tribunal and should not be permitted now to be raised. In response to this, Mr Watson refers to Martin v Hogan [1917] 24 CLR 234 at p 256 where Isaacs and Rich JJ, dissenting in the overall result, addressed the question whether a point of law not taken below could be raised on appeal and referred with apparent approval to the Privy Council authority in Connecticut Fire Insurance Co v Kavanagh [1892] AC 473 where Lord Watson said "When a question of law is raised for the first time in a Court of last resort, upon the construction of a document, or upon facts either admitted or proved beyond controversy, it is not only competent but expedient, in the interests of justice, to entertain the plea". Reference was also made to Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438, where the High Court noted that the circumstances in which an appellate court will entertain a point not raised in the court below were well established and cited Kavanagh , noting that where a point is not taken in the court below and evidence could there have been given which by any possibility could have prevented the point from succeeding, it cannot be taken afterwards. Mr Watson submits that there is no evidence that could have been raised on the construction issue that is now sought to be put. (However, it seems to me that there is every possibility that had this construction point been raised with the Tribunal there could have been evidence as to common practice in the industry to counteract the arguments sought to be placed by Sapphire on the unreasonableness of the Rule.) I am not satisfied that this is a case in which such a principle arises, particularly where it would have the effect of operating contrary to the policy of finality of arbitral awards.

1. In the Points of Defence that were served in the arbitration the section dealing with the effect of "default" pursuant to the terms of the notices of contract confirmation was dealt with and Sapphire submitted that statements contained in the notices of contract confirmation as to the consequences of insolvency were inconsistent with Rules 17.6(1) and (2) ("which in some circumstances may be interpreted as entitling a defaulting party to make a claim on a non-defaulting party"). (The significance of inconsistency being that in accordance with the Preamble, Rule 17.6 did not apply as the contracts were not silent on the consequences of insolvency.) In Sapphire's Reply, it then address the proper interpretation of Rule 17.6 by reference to the submission that it did not operate at all unless the insolvent party had given notice of the first insolvency event or alternatively provides the non-insolvent party (on learning of an earlier insolvency event than that notified) at its election to opt to close out the contract at the date flowing the earlier insolvency event.

1. The submissions now made as to the construction of Rule 17.6 according to law, as outlined earlier, seem to me to go beyond the matters put before the Tribunal. Hence it seems to me that it cannot be suggested that the failure to address those matters in the Tribunal's reasons amounted to a manifest error of law (the timing of insolvency issue being dealt with not as a question of construction in the manner contended for in (ii) but, rather, as the ground in (iii) below).

1. Therefore, while that failure to provide a statement of the reasons for the making of the award, as required by s 29(1)(c) may itself in some circumstances amount to a manifest error of law on the face of the award within the meaning of s38(5)(b)(i) (see Westport at [36] per French CJ, Gummow, Crennan & Bell JJ), I am not satisfied that in this instance a failure by the Tribunal to explain why it was that it considered Rule 17.6 led to the conclusion it reached would amount to an error of law.

1. I find that there was not a manifest error of law on the face of the award as to the construction of Rule 17.6.

1. As to the question of whether there is strong evidence of an error of law in the construction of Rule 17.6 going to the manner in which it was to operate if it formed part of the relevant contracts (other than as to the timing of insolvency which I consider below), the strongest argument it seems to me is that in relation to the Teague contract - namely, that payment of an amount on close out of the contract due to the insolvency of BSG is contrary to the proviso to Rule 17.5 in the 2007 version of the Rules which provided that "nothing in these Rules shall be construed as requiring the party not in default to make any payment of compensation or damages to the party in default". (I note the submission by Mr McCulloch that a close out payment is not a payment of compensation or damages per se but it seems to me that there is a reasonable argument that this proviso (not limited in its content to rule 17.5, since it refers to "nothing in these Rules) would operate to preclude a payment of the kind the subject of the award being ordered against a party not in breach and not deemed by insolvency to be in breach.) Nevertheless, again, if not taken to the argument in this regard, there is an issue as to whether the Tribunal can be said to have erred as a matter of law in determining the claim as it did.

1. Whether there is strong evidence of error depends upon what view is taken of construction of Rule 17.6 in the context of Rule 17.5. It seems to me that it is open to conclude that there was an error in not having regard to the interaction between the respective provisions but if alternative constructions are available (as seems to me to be the case) then I am not satisfied that there is strong evidence of error. Had I been of that view then I would have considered that it is an issue the determination of which would be likely to add to the certainty of commercial law (again on the basis that this relates to the construction of a standard form grain contract in common use in the grain trade industry). However, as a matter of discretion I would not have granted leave in circumstances where the quantum of the award referable to this contract was relatively small (Woodside being the contract comprising the bulk of the award) and having regard to the fact that this issue does not appear to have been drawn (at least directly) to the attention of the Tribunal.

• Timing of date of insolvency/date for determination of fair market price

1. This was the issue on which much focus was placed in the reply submissions by Sapphire before the Tribunal.

1. In relation to this issue, the Tribunal noted that Sapphire relied upon a statement made by Mr Smith to a third party to the effect that he intended to put his business into voluntary liquidation and that Sapphire said that this amounted to a statement that BSG was "threatening to cease to carry on all or a material part of its business, stating that it is unable to pay its debts" (for the purposes of Rule 17.6(g)(i)). In its award the Tribunal said that the sole evidence of this alleged insolvency event was the affidavit evidence of the third party (which, it said, BSG "urges us, with some force, not to read"). The force which the Tribunal saw in this submission seemed to be that to disclose this affidavit in this manner would depart from the general rule of confidentiality and privacy which applies to arbitral proceedings.

1. Having regard to the evidence before the Tribunal it was clearly incorrect to assert that this was the sole evidence of an earlier insolvency event. Moreover, having regard to the material to which I was taken it seems to me that there is strong evidence that there was an error of law inherent in the finding that the first (or the relevant) insolvency event was on 27 September 2007 (and hence the conclusion by the Tribunal that the relevant date for establishing the fair market price was the following day). It seems to me that there is a manifest error in the construction of Rule 17.6 the contracts as permitting the date of receipt of notice by the non-defaulting party of the insolvency event to be treated as the date of that insolvency event (for the purposes of Rule 17.6(1). (I do not accept that this is a question of fact since the relevant finding is whether, for the purposes of the construction of Rule 17.6, the facts as established before the Tribunal fell within the definition of Insolvency Event within the contracts and then the subsequent finding is as to what is the contractual consequence of a failure to give notice of the Insolvency Event within the time specified for the giving of such a notice.)

1. As to the submission made to the Tribunal that it should not read Mr B's statutory declaration, it does not seem that there was any ruling on this (and the Tribunal was not bound by the rules of evidence in any event). I have considered earlier (in the ruling on the admission of that evidence in the proceedings before me) that there was a reasonable basis on which Sapphire should now be permitted to read that evidence (notwithstanding the general rule of confidentiality and privacy to which the Tribunal referred) in circumstances where it would seem to suggest that Mr Smith (and BSG through Mr Smith) was taking inconsistent positions before this Court and in the arbitration as to the date of the occurrence of events that would seem to fall within the definition of Insolvency Event. However, since the Tribunal seems not to have rejected this material in any event, it seems unnecessary to consider that issue further.

1. The Tribunal reached its conclusion as to the date for establishing the fair market price for the purposes of Rule 17.6, so far as that is apparent from the reasons in its award, not on the basis of the construction of the contracts (as was put to it in the written submissions) or on the basis of any market practice in this regard (as to which it appear there was no evidence before it), but on the basis of the perceived uncertainty that such a result would cause, leading it to prefer a construction that set the relevant date for the assessment of fair market price as the day after the actual notice was given (irrespective of whether it accepted that there was an earlier Insolvency Event or not). It stated:

However, even if we accept that an insolvency event occurred on 24 September 2007 of which the Respondent [Sapphire] was not given notice until (it says) almost 2 years later, the Respondent was clearly given notice of insolvency on 27 September 2007 rendering 28 September 2007 as the relevant date for fixing the "fair market price". The alternative construction would be that notice on 27 September 2007 was a nullity and the Respondent had the option of fixing the fair market price on either 25 September 2008 or 29 July 2009 being the day after actually becoming aware. Such a result and construction would cause great uncertainty and cannot be preferred.

1. It seems to me that the construction adopted by the Tribunal of Rule 17.6(2)(b) ignores the obligation in Rule 17.6(1) on the part of the party in BSG's position to give notice within two business days of the occurrence of an Insolvency Event and the clear words of Rule 17.6(2)(b) as to what was the consequence of there being no notice within that time:

In the absence of any express written agreement to the contrary, any contracts between the parties shall be closed out at Fair Market Price on the business day following the giving of the notice. If notice is not given as required, the other party, on learning of the occurrence of the Insolvency Event, shall have the option of declaring the contract closed out at either the Fair Market Price on the first business day after the date when such party first learnt of the occurrence of the act of insolvency or at Fair Market Price ruling on the first business say after the date of the Insolvency Event occurred . (my emphasis)

1. I am satisfied that this is a manifest error on the face of the award (by reference to no more than the reasons in the award and the wording of Rule 17.6(2)(b). Had it amounted to no more than strong evidence of error for the purposes of s 38(5)(b)(ii), then the question would be whether the determination of this issue was likely to add "substantially" to the certainty of commercial law. In my view, a determination as to the contractual consequences of a failure to give the notice as required by clause 17.6 would be clarified by such a determination and having regard to the common usage of the standard form contract within the grain trade industry, I would have concluded that this requirement was satisfied.

• Onus

1. I am not satisfied that there was a manifest error of law in the application of the onus of proof by the Tribunal. Rather, I think the statements relied upon in the award seem likely to be a product of the informality or non-legal description of what was being done by the Tribunal. True it is that a party in the position of the claimant would bear the onus of proof on issues such as the establishment of what was the fair market price. However, the Tribunal in reaching a decision on that issue was able to take into account the whole of the evidence put before it (including that put by Sapphire in support of its alternative submission on this issue). Nor am I satisfied that there is strong evidence of error.

• Standing

1. As to the question of standing, the position of BSG (as put to the Tribunal) was that on the office of the corporate trustee (BSG) being determined by liquidation, the trustee will continue to hold the trust assets as a constructive trustee (citing Re Crest Realty Pty Ltd (No 2) (In liq) [1977] 1 NSWLR 664). I accept that the reasons of the Tribunal display some confusion as to the party with standing to bring the claim the subject of the arbitration. I have noted above the two paragraphs in which the Tribunal dealt with this issue.

1. If by the statement that "we are satisfied that the Claimant has the necessary capacity to pursue this claim", it was being suggested that BSG (an insolvent company) had capacity itself (by its directors, for example) to bring the claim then this must be incorrect. If that statement was intended to convey that although the named claimant was a company in liquidation (BSG), the party bringing the proceedings was in truth the persons who had been appointed not only as liquidators of the company but receivers and managers of the trust assets, then it might suggest that the Tribunal was accepting that there was a degree of imprecision in this regard but that it did not affect the arbitral proceedings. The application for arbitration itself indicated that the application was being made by those two individuals in their capacity as liquidators and receivers whereas the Points of Claim are in the name of BSG but plead that the claim is brought by BSG as trustee of the trusts.

1. By letter dated 18 January 2010 from Henry Davis York, acting for the individual liquidators/receivers and being the solicitors on the record for the claimant in the arbitration, it was asserted that the arbitration had been commenced by BSG "in its trustee capacity, upon instruction from Peter Marsden and David Kerr as receivers and managers of Trust 1 and Trust 2 (Receivers), in order to recover the amount owed to the Trusts by the Respondent" and confirmed that any benefit would accrue as claimed to each of the trusts and any liability for costs of the arbitration would be incurred by BSG in its capacity as trustee of those trusts. (I interpose to note that if those costs were reasonably and properly incurred then BSG would have a right of reimbursement or indemnity out of the trust assets for those costs). Sapphire's position is that it was exposed to arbitration proceedings in which the claimant had no assets to satisfy any adverse orders and the persons who stood to benefit from the proceedings were not bound in the proceedings.

1. It is alleged in the summons that the Tribunal failed to give proper consideration to the concerns of Sapphire that it was being pursued by a corporate shell for benefits to accrue to others and not to the creditors in the liquidation. Certainly, the manner in which this issue was addressed in the reasons suggests that the Tribunal considered the claimant to be an entity other than Messrs Marsden and Kerr (the receivers of the trusts and liquidators of the company). That is consistent with its acceptance of the explanation by the solicitors acting for the claimant.

1. I am not persuaded that there is a manifest error on the face of the record nor am I persuaded that there is strong evidence of error in this regard. Had I been persuaded of the latter I would not have held that this was an issue the determination of which was likely substantially to assist in the certainty of commercial law. Nor would I have considered that any discretion should be exercised to permit an appeal on this point. The costs position of Sapphire is protected by the confirmation given by the 18 January 2010 letter; the arbitration when commenced put on record the status of BSG and the position of the individuals in question; and nothing turns on who might obtain the ultimate benefit of the award (i.e. the creditors of BSG or, as is said to be the case, the beneficiaries of the relevant trust(s)).

• Costs

1. Finally, in relation to costs, those orders fall within the discretion of the Tribunal and I am not persuaded that there was any error of law in relation to the manner in which that discretion was exercised. Insofar as this issue is raised in order to deal with the prospect that on appeal the award may be set aside or revised, I consider that costs of the arbitration would fall to be dealt with by the Court on appeal without the need for any leave to be granted on this application.

Import of determination of issues on the certainty of commercial law

1. As to the question whether determination of the various issues may add substantially to the certainty of commercial law, it is noted by Mr Watson that this application concerns, amongst other things, the proper relationship between the Standard Terms, the Trade Rules, Broker Confirmations and parties' Contract Confirmations; the proper approach to be taken to the construction of contracts utilising those Standard Terms and Trade Rules; and the proper approach to and construction of Rule 17 (and, in particular, Rule 17.6 of the Trade Rules).

1. Mr Watson notes that the Standard Terms applicable today (reissued in April 2009) are relevantly in the same terms as those applicable to the contracts the subject of the Tribunal's award and that the Trade Rules (reissued in March 2009) also remain in the same terms as to matters such as when those Trade Rules are intended to apply, how they operate in respect of the Standard Terms, Broker Confirmations and Contract Confirmations, and in relation to Rule 17 generally. The 2009 NACMA Trade Rules are said to be in the same terms as the 2007 Trade Rules in respect of the full wording of Rules 17.5 and 17.6.

1. Thirdly, Mr Watson points to the fact that the Authority's reach in the industry is large, noting that the Authority has described itself in the following terms:

Grain Trade Australia Ltd, formerly the National Agricultural Commodities Marketing Association (NACMA) was formed in 1991 with the aim to standardize grain trade standards and/or trade rules/contracts across the Australian grain industry. Over 95% of the Australian grain crop is stored in facilities operated by GTA members, with 90% of grain contracts executed in Australia each year referring to GTA grain standards and/or trade rules. GTA has over 300 member organisations from farming organisations to large national and international storage/trading companies.

1. It is submitted that, insofar as the approach of the Tribunal was to treat the Trade Rules as standard terms, it is an important function of a court to provide participants in the industry with legal certainty at the negotiation stage as to what it is that they are agreeing to do (Mr Watson referring to the Tradax case at p 8 per Lord Diplock).

1. It is further submitted that since the Trade Rules require (by default) that parties refer their disputes to arbitration applying the NACMA Dispute Resolution Rules, and that (by reference to the Authority's panel of arbitrators) the arbitrators are generally not legally qualified, a determination of the questions of law raised in the proposed appeal is very likely to add to commercial certainty by providing a guide or assistance to tribunal members in present and future disputes.

1. It is also submitted (though the evidence on which this was based was challenged by Mr McCulloch) that the operation of the contractual terms relating to parties' insolvency is recognised as being controversial within the industry, and that disputes relating to the consequences of insolvency of traders have been identified as being prevalent within the industry (reference being made to the evidence of Mr Geoff Farnsworth (director of the Authority, member of the Commerce Committee, and solicitor retained by the Authority in respect of arbitrations) given to the Productivity Commission Inquiry.

1. Mr McCulloch submits that the questions of law raised by the proposed appeal are not ones whose determination "may add, or be likely to add, substantially to the certainty of commercial law" on the basis that those questions of law are unique to the issues between the parties. Insofar as reference is made to the principles relating to the construction of contracts, he submits that these are not in doubt and there is thus no question of general importance which arises for determination. He submits (and I agree) that even if the Court were of the view that the arbitrators were in error, that is not sufficient to satisfy s 38(5)(d); what is necessary is that there be a question relating to commercial law generally, not just to the rights of the parties inter se .

1. Where there is strong evidence of error on an issue of construction of clauses in a standard form agreement (not a one-off determination on the facts of the particular case), the construction of such a clause, even if its use is not as wide as suggested, would in my view have potential significance beyond that of the present case and, depending on the particular issue, is one which would be likely substantially to add to the certainty of commercial law.

(ii) Discretionary issues

1. I approach the question of discretion cognisant of the weight, evident from the legislation, placed on the exercise of judicial restraint in interference with or intervention in arbitral decisions which otherwise would be final and binding. I accept that there should be only limited curial intervention.

1. In Promenade Investments , after considering the language used in the expression "manifest error", Sheller JA went on to say, at 225:

Nothing more is to be learnt from the language used but of course the discretion of the court as to whether or not it will grant leave remains and regard must be had to the requirement of subs (5)(a). The matters referred to by Lord Diplock in The Nema remain important factors in determining whether leave should be given. [His Lordship there having raised the reluctance to grant leave for a one-off question]

1. As to the discretion, in Promenade Investments, at 221, Sheller JA said:

In his second reading speech the then Attorney-General said that one of the major objectives of this uniform legislation was to minimise judicial supervision and review ( New South Wales Parliamentary Debates, 22 November 1990, 10376 at 10378):

"If arbitration is to be encouraged as a settlement procedure and not as a dry run before litigation, a more restrictive criterion for the granting of leave is desirable and the parties should be left to accept the decision of the arbitrator whom they have chosen to decide the matter in the first place."

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.

1. The role of arbitrations in dispute resolution, which informs the purpose and intent of the Act, was articulated by Allsop P in Gordian Runoff at [216]:

The underlying difference between arbitration and court litigation should be borne in mind at alt times: see in particular the article by Lord Bingham "Reasons and Reasons for Reasons: Differences Between a Court Judgment and an Arbitration Award" op cit. Though courts and arbitration panels both resolve disputes, they represent fundamentally different mechanisms of doing so. The court is an arm of the state; its judgment is an act of state authority, subject generally in a common law context to the right of appeal available to parties. The arbitration award is the result of a private consensual mechanism intended to be shorn of the costs, complexities and technicalities often cited (rightly or wrongly, it matters not) as the indicia and disadvantages of curial decision making.

1. It is submitted by Mr Watson that the questions arising in this arbitration were ones to be determined according to law and that, in circumstances where the arbitrators comprising the Tribunal were not highly qualified lawyers it could not fairly be said that Sapphire had treated the arbitration as some 'dry run' for litigation (that being the real vice and mischief to which it is submitted that s 38 is directed). That said, the suggestion that Sapphire should be permitted now to raise construction arguments and points of law not raised at the arbitration (though open to have been so raised) is redolent of an attempt to re-litigate the issues that were before the Tribunal.

1. Mr McCulloch submits that to the extent that Sapphire has relied on a large amount of evidence that, apart from the contract itself, is said to be irrelevant and indicative of why arbitrations should be the subject of leave in only the most exceptional of cases. It was submitted that much of the material before the Tribunal was well known in the industry and therefore did not require detailed explanation and reference. Mr McCulloch noted that the Trade Rules and the application of them by the Authority and its predecessor, NACMA, have been considered on previous occasions by the Court. Reference was made to Barry Smith Grains Pty Ltd (In liq) v Riordan Group Pty Limited [2010] NSWSC 1291 at [40] where Hammerschlag J said:

... arbitration awards are frequently, as here, made by non-lawyers. They should not be scrutinized with an overcritical or pedantic eye and should be read with common sense and without undue legality: JH Rayner (Mincing Lane) Ltd v Shaer Trading Co . [1982] 1 Lloyd's Rep 632 at 636; Industriebeteiligungs & Handefsgesellschaft v Malaysian International Shipping Corporation Bemad (The "Bunga Melawis") [1991] 2 Lloyd's Rep 271 at 277; D Rhidian Thomas, The Law and Practice Relating top Appeals from Arbitration Awards (1994) Lloyd's of London Press Ltd.

It is also to be borne in minds that the arbitrators were by reason of Art 25 of the NACMA Dispute Resolution Rules not bound to apply the strict rules of evidence.

1. Mr McCulloch notes that the importance of the leave process as a filter for appropriate cases and the level of abstraction to which the Court entertaining the leave application may descend were emphasised in the following passages in Gordian (in the Court of Appeal) at [127]-[128]:

What therefore has to be shown, as a first step, is that there was strong evidence, in the sense of a strong prima facie case, that the arbitrators were wrong in law. Only if this exists does one move on to the additional consideration as to whether the determination of the question (of law) may or may be likely to add substantially to the certainty of commercial law. The Court needs to be careful not to downgrade the statutory requirement of "strong evidence", that is a strong prima facie case of legal error, because of the "interesting" or important legal question involved. The remit of arbitrators includes the making of errors; that is an inevitable part of any process of dispute resolution. Arbitrators may deal with "interesting" or important questions. How and what errors are to be corrected depends on the statute in question. Here, it must be shown that there is a strong prima facie case that the arbitrators were wrong on a question of law.

An assessment of this question at the procedural level of a leave application requires the demonstration by arguments appropriate to a leave application of a strong prima facie case of legal error. The restriction of argument to a form appropriate to a leave application is not restricted to "manifest error". It might be obvious that in that context argument would necessarily be short. It might also be that a strong prima facie case of error requires the display of something more than obvious error. Nevertheless, it is the evidence of a prima facie case of error that is required to be strong. The longer the debate that is required to demonstrate the asserted error, the likely more contestable is the argument. The procedural context is again important. The strength of any argument and the strength of the prima facie case of error is not assessed after full concurrent argument on appeal. It is to be assessed by reference to argument suitable to a leave application in which the task is to assess the strength of the case for error, not decide the case for error.

1. Sapphire points to what was said in Westport at [19] per French CJ, Gummow, Crennan & Bell JJ:

... the making of an award in arbitration proceedings is more than the performance of private contractual arrangements between the parties which yields an outcome which rests purely in contract. They also suggest the importance which the provision of reasons by arbitrators has for the operation of the statutory regime. That statutory regime involves the exercise of public authority, whether by force of the statute itself or by enlistment of the jurisdiction of the Supreme Court. It also, as explained later in these reasons, displays a legislative concern that the jurisdiction of the courts to develop commercial law not be restricted by the complete insulation of private commercial arbitration.

and that ss 38(4)(a) and 38(4)(b) were said by the plurality at [27] to:

... create a new head of justiciable subject matter and confer jurisdiction on the Supreme Court to determine whether to grant leave, and, if this is given, to entertain the 'appeal'. The subject matter of this 'appeal' is confined to questions of law; the scheme of the legislation is to hold the parties to their agreement to accept factual findings by the arbitrators.

1. Mr Watson submits that any contention that the court should defer to arbitrators with "purported" expertise, or that the court should stay its hand on the grounds that the arbitrators were intended to rely on their own knowledge and expertise should be treated cautiously, (noting that such proposition was rejected by Heydon J in Westport (that being a case where the arbitrators were to make their award on grounds of "general justice and fairness" pursuant to s 22(2) of the Act (Heydon J, [87]-[91]) whereas in the present case, the arbitrators were required to make their award under s22(1) "according to law". Sapphire submits that there is no basis on the true construction of the Act for deferring to arbitrators on questions of law.

1. I am conscious of the exhortation in the authorities for judicial restraint in this kind of application having regard to the principles underlying the legislative recognition of the finality of arbitral awards. It seems to me likely that the arbitrators with experience in this area, while not having legal qualifications, would be likely to have a good understanding of how contracts with close out provisions of this kind are generally taken to operate in the grain trade industry. Further, at least in relation to the onus and standing points, these issues seem more technical than of substantive effect on the outcome of the Tribunal's decision and I would have had little hesitation in exercising the discretion against the grant of leave had the cause for exercising that discretion arisen in relation to those points.

1. Where there is more at stake in a financial context for the parties and the issue is of potential significance as a matter of interpretation of a standard form contract used generally in the industry I think those are factors weighing towards the exercise of discretion in favour of leave being granted. Moreover, although conscious of the undesirability of arbitration awards being subjected to layer upon layer of judicial review, I note that to some extent such a process may be inevitable in any event having regard to the appeal already on foot for which no leave is necessary.

1. I have considered that, balancing those matters, leave should be given in relation to the error of law identified in (iii), namely the fifth ground in the Commercial Arbitration List Statement. In those circumstances, if it be necessary for such leave in order to do so, leave should also be granted to BSG, as it foreshadowed it would wish to do, to raise the matters it seeks to raise by way of a notice of contention in the appeal.

Conclusion

1. For the reasons set out above I am of the view that there was a manifest error of law on the face of the award in relation to the conclusion that the relevant insolvency event occurred on 27 September 2007 (that being the date on which notice of the appointment of the provisional liquidators was given, not the date of their actual appointment nor the earlier dates on which other events that seem to fall within the definition of Insolvency Event appear to have occurred) and the conclusion that 28 September 2007 was therefore the application date for the assessment of Fair Market Price for the purposes of the close out of the Woodside and Teague contracts. The import of such a finding is one that substantially affects the rights of Sapphire, since it determines the price at which the contracts are to be closed out, if at all, and the volatility of the prices over the period means that this was likely to have had a significant financial effect on the outcome of the award. I am satisfied that it is an appropriate case in which to exercise discussion to grant leave to appeal on that issue. I will so order. Insofar as BSG requires leave to raise by way of contention the arguments it seeks to advance on that issue, then such leave should also be granted.

Orders

1. I make the following orders:

1. That leave to appeal be granted pursuant to s 38(4)(b) of the Commercial Arbitration Act 1984 (NSW) on the question of law more particularly described as the "fifth ground" in the plaintiff's Commercial Arbitration List Statement arising out of arbitration award GTA Arbitration No 89 published as an Interim Award on 16 August 2010 and as a Final Award on 16 March 2011.

2. That the defendants have leave to raise by way of notice of contention in the appeal matters by which it is contended that the Tribunal's conclusion on the ground the subject of Sapphire's appeal was correct.

1. I will hear Counsel on the question of costs.

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Amendments

19 June 2012 - Typographical error

Amended paragraphs: 272

Decision last updated: 19 June 2012