Sea Containers Limited v ICT Pty Limited

[2007] HCATrans 263

[2007] HCATrans 263

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S481 of 2006

B e t w e e n -

SEA CONTAINERS LIMITED

Applicant

and

ICT PTY LIMITED

Respondent

Application for special leave to appeal

GLEESON CJ
HEYDON J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 25 MAY 2007, AT 2.57 PM

Copyright in the High Court of Australia

MR A.W. STREET, SC:   May it please the Court, I appear for the applicant with my learned friend, MS. J.A. SOARS.  (instructed by Ebsworth & Ebsworth)

MR D.J. FAGAN, SC:   May it please the Court, I appear with my learned friend, MR E.A.J. HYDE, for the respondent.  (instructed by Deacons)

GLEESON CJ:   Yes, Mr Street.

MR STREET:   May it please the Court, there are essentially two issues.  The first is whether or not the inordinate delay was a denial of procedural fairness constituting an error of law in respect of which there should have been a grant of leave under section 38 of the Commercial Arbitration Act where it could not possibly have been concluded that it would not have affected the result.  The second relates to the proper construction of the guarantee clause and whether the design error in relation to the water jet compartments which were manufactured by the respondent with their excessive fluctuations and loads and vibration was an error in respect of which it fell within the guarantee clause under the contract and should have been the subject of ground 3 under section 38.  Your Honours, in relation to the issue of inordinate delay could I point out that the Court of Appeal fairly and squarely found that there was inordinate delay in the circumstances of this case in application book page 51, paragraph 25 in the first sentence.

That finding of inordinate delay gave rise to this consequence, in our respectful submission.  Unless it could be said that that denial of procedural fairness could not possibly have impacted on the outcome it, in essence, was an error of law in respect of which there should have been a grant of leave.  It was one which, we respectfully submit, was manifest on the award itself, it was an error in respect of which the delay was identified in some 19 months.

GLEESON CJ:   What was the unfairness that resulted from the delay here?

MR STREET:   The unfairness was the failure to be able to analyse the arguments that had been developed and analyse the evidence and to make both findings and analysis of the questions of law as well as in relation to the evidentiary matters and this is in an area where my client’s only right of appeal was on questions of law.  Your Honours, can I just identify the link in that regard.  One way in which one might readily see there was a failure to analyse the question of law concerning the design issue is that the majority do not in any way deal with the text in relation to The Law of Shipbuilding Contracts of Curtis to which the dissenting arbitrator addressed.

The analysis of the arguments relating to this question of the design clause and whether or not workmanship where the contract included design work – included design errors – was a matter in respect of which the analysis fell far short of the arguments that were presented.  So, it is not just an issue of one concerning facts, but, in any event, our ability to deal with facts in this area is simply not open.  The right to seek leave to appeal is confined, as your Honours appreciate, to errors of law.

We say that the question whether a denial of procedural fairness of this kind is itself an error of law within section 38 is a matter of importance. That itself was touched on by the Court of Appeal.  Then one comes to the question of whether or not the criteria of it being manifest on the award is made out.  Your Honours, in our respectful submission, it rapidly suggests error in terms of procedural fairness denial where one has some 19 months delay in the delivery of reasons.

Your Honours, so far as that delay is concerned, we also put that it is one which in any event would meet the strong evidence on an error of law test in relation to the procedural unfairness issue.  In this area of international arbitration and where one has uniform State legislation the questions thrown up as to the appropriate test to be applied in determining manifest error, in the present circumstances, is one which we say is a further reason that would warrant the inordinate delay in this case justifying a grant of special leave.

Your Honours, can I turn to the second issue, subject to one further matter.  Your Honours would appreciate that in the argument we have developed we identify that, in essence, what both the trial judge and the Court of Appeal did was to reverse what we say is the correct application of principle identified in NAIS by your Honours Justice Callinan and Justice Heydon and, in essence, giving effect to the same type of test as was identified in Stead v State Government Insurance Commission.  That really was to look at the question of whether the denial of natural justice could have possibly impacted on the result.  In this case it cannot be said that it did not. 

Can I test it this way, your Honours.  Let us assume rather than this inordinate delay there was a breach of the audi alteram partem rule, that is, that my client simply was not heard, because that is the effect of what occurred.  If one were to deal with that test in respect of denial of the right to be heard, it could not be said that the argument on evidence and the analysis of the issues that arise under these four contracts in respect of the design of these vessels could not possibly have had an impact.  In those circumstances we say the first issue of an inordinate delay justifies a grant of leave.

Your Honours, can I turn to the second issue which is that of the design error and very briefly take your Honours to the building contract.  It is expressly picked up by the terms of the awards so that it is on the face of the award picked up and incorporated.  It appears at page 87 of the application book. 

HEYDON J:   Before we go to that, the dissenting arbitrator said that the amount in question was relatively small and did not exceed the bank guarantee amount.  Does that mean if you won on this point, it would not actually lead anywhere?

MR STREET:   Your Honour, that is hotly contested.  At page 472 to 473 of the application book we have summarised the design quantum in relation to the subject matter of the claim.  All told, there is about £2 million, would now be £4 million, in relation to the claim that was being advanced.  The amounts involved just in relation to the design issues in respect of the four vessels, as your Honours can see, total almost £1.9 million, so that the various ways in which that arises have been identified.

Can I just hand up to your Honours the text to which the dissenting arbitrator referred, and I apologise it was not included in the supplementary material by error.  Your Honours will see that the relevant passage following Justice Donaldson ‑ ‑ ‑

GLEESON CJ:   The dissent is the statement on 447, is it?

MR STREET:   Yes.  The relevant decision to which he referred and the text, one has both a decision of Justice Donaldson that suggests in this area determining the meaning of a clause of this kind takes into account the nature of the obligations under the contract.  What was the work that the builder had to do?  In this case the work the builder had to do – and your Honours will see the relevant passages at 136 in Curtis, and I have highlighted it, that the work that had to be done under this contract included the design work and that was the matter I was simply going to take your Honours back to very briefly.

GLEESON CJ:   But he only dissented on one point, did he not?

MR STREET:   He did but that design point had a massive impact and one has then the other errors that we say would arise.  Your Honours, in relation to the warranty settlement agreement the Riva Settlement Agreement I will that, if I can, briefly.  I do have to address both of those in order for the design error to have impact but to the extent relevant we say the design issue is one of general importance.  It is thrown up in Curtis, it is thrown up by Justice Donaldson’s decision.  In this case the nature of the contract was one which required work of a kind that included, in essence, design work.

Can I just take your Honours very briefly to the contract to reveal how it rapidly suggest error in the construction that was adopted of clause 8.  When your Honours goes to page 87 one sees the construction contract in clause 1.01 in relation constructing and launching a “WAVE PIERCING CATAMARAN FERRY”.  One sees in relation to that obligation in clause 1.02 that there were certain performance criteria that it was to meet, things such as the, “Trial speed at 198 tonnes deadweight, 90% MCR”,
maximum continuous rating, in terms of performance.  It identifies, then, when one goes to clause 1.03 that it is to be built to particular class in order to ensure, obviously, appropriate standards in respect of its construction.  One sees then, having identified various class, matters relating to clause 2 dealing with the price.  Relevantly, in relation to the price, so far as concerns delivery, there was a clause dealing with the consequences in which the contract could be rescinded and that is found in clause 4.03 on page 97.

Your honours, in relation to the work being undertaken in terms of the description as found on page 88, that is, to have a vessel that could meet this performance criteria, that marries into almost exactly the same language referring to those drawings and plans as is found on page 106 in clause 14.01 where it identifies that those specifications and plans there referred to are “constituting the design of the Vessel” are the property of the builder.

There was a clause in this contract that identified subcontractors and the court found that INCAT Design was the subcontractor of the builder are contractually the responsibility of the builder.  That is found on page 108 at clause 16.02.  So one has the nature of the work, including design work.  When one then comes to clause 8.01 what one has is a provision which, in my respectful submission, where it refers to “faulty materials or workmanship”, the workmanship must include the workmanship of building the structure and design error.  In our respectful submission, the proposition to the contrary rapidly suggests itself as an error.  Rapidly suggesting itself as an error in that regard is, our respectful submission, sufficient to warrant the grant of leave under section 38. 

The alternative way we put it s a prima facie case.  To the extent that the trial judge sought to analyse the matter from the viewpoint of looking at the provisions dealing with testing the vessel and referred to a number of provisions in relation to the sea trials, they were to do with performance, performance trials in relation to speed, being able to maintain appropriate speed.  They do not assist in an analysis as to whether or not clause 8 should catch design error.  To the extent that the Court referred to matters relating to the responsibility of the overseer, Hart Fenton, being present, the overseer was necessary in order to certify payment.  Their role was one in respect of which the builder would only get paid once the overseer, Hart Fenton, certified particular amounts were due and payable.  It does not assist at all in detracting from a construction of responsibility for design error by the respondent.

Your Honours, that it was design error in relation to the impact of this vessel has been, I think, the subject of identification in our written submissions but you can see the error identified at application book page 240 in paragraph 1.8.  It identifies the nature of that design error and it is expanded on in application book page 350.  If one goes to 240 your Honours will see at paragraph 1.8:

From the time of delivery of the first vessel in June 1990, significant problems emerged as a result of deficiencies in the design and construction of the WPC ferries.

Plural.  Can I take your Honours then to 350, paragraph 16.4.  There it says:

The cause of the “defects” which gave rise to the abovementioned repair work has been the subject of much evidence.  There has been testimony from a number of witnesses has and it appears to be common ground that non‑uniform water flow through the water jet propulsion system –

that includes the water jet compartments manufactured by the builder –

created fluctuating loads and significant levels of vibration in the water jet compartments.

Water jet compartments, your Honours, are materially different from the water jets themselves.  The water jet compartments were built by the respondent.  Those fluctuating loads and vibrations essentially shook these four ferries to pieces.  The guarantee clause is one in respect of which upon discovery of similar problems on an earlier vessel one did not have to give further notification.  The Tribunal in their analysis of  the facts somehow found that there were not similar problems despite it being the very same areas that were the subject of problem on all four vessels. 

Your Honours, to the extent relevant, we respectfully submit that this is a case where in relation to that design error it is one that did meet a test of rapidly suggesting error when one looks at that construction of clause 8 and it is one which on the alternative analysis of strong evidence meets a prima facie case of error of law warranting a grant of intervention.  As to whether it would add to commercial certainty in respect of the prima facie case of strong evidence of error test, clearly this Court dealing with that issue would impact in that regard – and  it is an issue sufficiently in the commercial arena as revealed by the reference to the text in Clarke and Curtis, as well as Justice Donaldson’s decision.

Your Honours, so far as the impact of the design error is concerned and picking up what your Honour Justice Heydon had raised, we say that there are two further errors that we have to travel through in order for that to have an impact, the warranty settlement agreement.  Can I deal with that very briefly.  There, in essence, the Court of Appeal found that there was representation, in essence, made by the agent of authority on behalf of the principal.  It flies in the face of proper principle for the agent to be able to make such a representation.

Secondly, the warranty settlement agreement was an agreement signed by the managing director, Mr Clifford, of the respondent.  Mr Clifford preferred the well of the court.  He never gave evidence.  To find reliance in relation to the so-called warranty settlement agreement to which there were findings that the applicant was not a party was simply not open.  The findings that it was not a party were made both by the trial judge and by the Court of Appeal in relation to the warranty settlement agreement.  In those circumstances, it was not open to find, in our submission, that it had work to do excluding liability in respect of vessel 025.  In any event, it only concerns vessel 025.  Vessel 025 concerns only some £500,000.  There is still a substantial case in respect of the remaining claim in respect of all four vessels for other areas. 

Your Honours, turning then, if I can, to the only other error which we have to travel through in relation to the design error warranting a grant of special leave is the Riva settlement agreement.  Can I just remind your Honours in relation to clause 8 of the construction contract that what it provided was for a separate warranty to be obtained from those who make or manufacture other parts.  In other words, what the builder did not take on was an obligation in relation to design errors for products or material he did not actually manufacture.  That appears on page 101, clause 8.02.

The Riva settlement agreement was in essence one concerning the water jets, water jets manufactured by Riva.  The leap that was made by the Tribunal and a leap made, we say, infected as it was by this inordinate delay, but the leap, nevertheless, was that that should be read as including the water jet compartments constructed by the respondent.  Despite language – and I will just take your Honours to the language which appears on page 226, about line 30, in the relevant agreement where the words are inserted:

without prejudice to all other matters between us either in contract or in tort, other than for those parts already supplied by Riva –

So, your Honours, in our respectful submission, the water jet agreement that was then advanced as the next issue does not give rise to any ground for failing to grant leave in respect of the design issue.  In summary, your Honours, in our respectful submission, there is every reason to instil confidence in the Australian arbitration system by requiring a grant of special leave in this case where the inordinate delay has, in our respectful submission, caused a procedural denial of fairness involving the horrific consequence of a £4 million claim now being otherwise shut out.

The same principles arise, in our respectful submission, in relation to the error in relation to the design issue.  Your Honours, further, the issue as to the proper test of the uniform legislation in respect of the grant of leave under the Commercial Arbitration Act is a matter of itself that would warrant a grant of special leave.  If the Court pleases.

GLEESON CJ:   We do not need to hear you, Mr Fagan.

This case does not raise an issue suitable to a grant of special leave to appeal and, furthermore, we are not persuaded that the interests of justice require a grant of special leave.  The application is dismissed with costs.

We will adjourn for a short time to reconstitute.

AT 3.17 PM THE MATTER WAS CONCLUDED