Skinner v Harnas - [2007] SASC 122

SUPREME COURT OF SOUTH AUSTRALIA
(Applications Under Various Acts or Rules: Civil)
SKINNER & ANOR v HARNAS
[2007] SASC 122
Judgment of The Honourable Justice Gray
3 April 2007
CONTRACTS - BUILDING, ENGINEERING AND RELATED CONTRACTS - THE CONTRACT - CONSTRUCTION OF PARTICULAR CONTRACTS AND IMPLIED CONDITIONS - VARIATIONS
Application seeking leave to appeal from an arbitrator's award - construction contract stated that "the price of extra work shall be the actual cost to the Builder" - the builder performed extra work but did not adduce evidence proving his "actual cost" - arbitrator found that the builder was entitled to receive $15,777.85 for variations on the basis of evidence which proved the reasonable cost of the work undertaken - whether builder entitled to recover reasonable costs of work undertaken - Held: application refused - builder entitled to recover reasonable costs of work undertaken in the absence of evidence of his actual cost.
Commercial Arbitration Act 1986 (SA) s 38, referred to.
Giles v GRS Constructions Pty Ltd [2001] SASC 274; Pioneer Shipping Ltd v BTP Tioxide (The Nema) [1982] AC 274; Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327; Leighton Contractors Pty Ltd v South Australian Superannuation Fund Australian Superannuation Fund Investment Trust (1994) 63 SASR 444, considered.

SKINNER & ANOR v HARNAS
[2007] SASC 122
Civil
GRAY J

This is an application seeking leave to appeal to this Court from an arbitrator’s award.
Both parties provided the Court with written submissions and agreed that the determination of the application proceed on the papers. The submissions put before the Court fully addressed the issues that would be raised on the appeal if leave were to be granted. It was agreed that in the event of leave being granted, the appeal itself be heard instanter on the same papers.
Background
On 29 January 2003, the applicants, Shane Lyle Skinner and Bronwyn Tracy Skinner, entered into a domestic building contract (the “contract”) with the respondent, Adriaan Harnas. Under the contract, the respondent agreed to build a detached dwelling on land owned by the applicants for a contract price of $186,000. Clause 20 of the contract, together with item B2 of the schedule to the contract, provided that practical completion of the building was due on 6 June 2003.
On 28 June 2004, the applicants gave notice that, in accordance with clause 18.2 of the contract, the building works were defective and the respondent was obliged to complete the works. A second notice was given on 8 July 2004, and on 10 November 2004 the applicants terminated the contract by notice. They claimed damages for defective work. They also made a variation claim totalling $33,314.93.
The Arbitration
On 14 November 2005, the Master Builders Association of South Australia nominated Mr Sarah to arbitrate the dispute that had arisen between the applicants and the respondent.
The arbitrator delivered his Award on 18 August 2006. He awarded $72,783.96 to the applicants. This sum was calculated on the basis of $2,570.30 for variations, and $70,213.66 for damages for defective work.
The award of $2,570.30 to the applicants for variations was calculated by subtracting the amount that the arbitrator found that the respondent was entitled to receive for variations ($15,777.85) from the amount that the arbitrator found that the applicants were entitled to receive for variations ($18,348.15).
The arbitrator found that the respondent was entitled to receive $15,777.85 for variations on the following basis:
-Variation claim 1: The respondent claimed $4482 for damage to an electrical cable. The arbitrator, after considering the evidence, found that the damage was caused by the respondent’s own negligence, and so this claim failed.
-Variation claim 2: The respondent claimed $16,948 for changing the finish of the brickwork. The arbitrator awarded $9,719.93. The arbitrator arrived at this figure based on evidence provided by an expert called by the respondent to provide evidence of the reasonable costs of the variations.
-Variation claim 3 and 5(a): The respondent claimed $3300 for kitchen cupboards. The arbitrator preferred the applicants’ evidence and rejected the respondent’s claim.
-Variation claim 4: The respondent claimed $1200 for the substitution of doors for windows. The arbitrator awarded $759.42, which was the expert’s estimate of the cost of the extra work.
-Variation claim 5(b): The respondent claimed $1150 for the insulation of interior walls. The respondent later amended this claim to $638. The arbitrator awarded $554.40 based on the expert’s estimate of the cost of the work.
-Variation claim 5(c): The arbitrator awarded the respondent $517 for the installation of a spa, based on the expert’s estimate of the cost of the work.
-Variation claim 6: The respondent claimed $550 for a variation to the hot water service. The expert estimated that the extra work would have cost $651.20. The arbitrator awarded $550, being the full amount that he claimed.
-Variation claim 7: The respondent claimed $2000 for extra electrical work. The arbitrator accepted the applicants’ evidence that they had paid for all of the electrical work, and rejected the respondent’s claim.
-Variation claim 8: The respondent claimed money for sisalation and insulation in the walls and roof. The arbitrator rejected this claim on the basis that the contract documents and building specifications make it clear that this was to be included in the contract price.
-Variation claim 9: The respondent claimed $1500 for the cost of changing from gyprocked reveals to meranti. The arbitrator awarded the full amount claimed.
-Variation claim 10: The respondent claimed $247.50 for alterations to the dining and living room doors. The arbitrator awarded the full amount claimed.
-Variation claim 11: The respondent claimed $3000 for painting two rooms. The arbitrator accepted the applicants’ submissions and rejected the claim.
-Variation claim 12: The respondent claimed money for ceilings to verandahs and the carport. The arbitrator rejected the respondent’s claim that this was not included in the scope of the contract.
-Variation claim 13: The respondent claimed $1930 for variations to footings. The arbitrator awarded the full amount claimed.
The applicants sought to challenge the arbitrator’s finding that the respondent was entitled to receive $15,777.85 for variations. The applicants contended that the respondent was not entitled to anything for variations, and so the total amount that the applicants were awarded should be increased by $15,777.85 to a total of $88,561.81.
Criteria for Granting Leave to Appeal
Applications for leave to appeal from a decision of an arbitrator are governed by the Commercial Arbitration Act 1986 (SA). Section 38 relevantly provides:
(1)Without prejudice to the right of appeal conferred by subsection (2), the Court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the award.
(2)Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.
(3)On the determination of an appeal under subsection (2) the Supreme Court may, by order--
(a)confirm, vary or set aside the award;
or
(b)remit the award, together with the Supreme Court's opinion on the question of law which was the subject of the appeal, to the arbitrator or umpire for reconsideration or, where a new arbitrator or umpire has been appointed, to that arbitrator or umpire for consideration,
and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make the award within three months after the date of the order.
(4)An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement--
(a)with the consent of all the other parties to the arbitration agreement;
or
(b)subject to section 40, with the leave of the Supreme Court.
(5)The Supreme Court shall not grant leave under subsection (4) (b) unless it considers that--
(a)     having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of one or more parties to the arbitration agreement;
and
(b)     there is--
(i)     a manifest error of law on the face of the award;
or
(ii) strong evidence that the arbitrator or umpire made an error of law and that the determination of the question may add, or may be likely to add, substantially to the certainty of commercial law.
The intent of the Commercial Arbitration Act to treat arbitral awards as final is revealed by the limited right of appeal from arbitral awards.[1] The clear purpose of section 38 of the Commercial Arbitration Act is to restrict a party’s right to review an arbitral award. Questions of fact are not to be re-examined except insofar as they give rise to questions of law. Moreover, questions of law will not give rise to a right to appeal unless the rights of one or more of the parties would be substantially affected by the determination of the question. As Debelle J observed in Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust:[2]
The application for leave must satisfy both pars (a) and (b) of s 38(5). The fact that (a) is included serves to emphasise that the court will not hear appeals, even on a question of law, unless they are of substantial importance to the parties. Thus, a party might be able to point to an obvious flaw in the reasoning of the arbitrator but that flaw might not affect the ultimate conclusion. Section 38(5)(a) requires the applicant to satisfy the court that the rights of the parties could be substantially affected by the error. If it appears that the flaw could not substantially affect the ultimate conclusion, leave should not be granted.
[1] See Giles v GRS Constructions Pty Ltd [2001] SASC 274 at [11], [13]–[16], [18]-[21] (Lander J); Pioneer Shipping Ltd v BTP Tioxide (The Nema) [1982] AC 724; Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327.
[2] Leighton Contractors Pty Ltd v South Australian Superannuation Fund Investment Trust (1994) 63 SASR 444 at 448.
The Issue for Review
The applicants submitted that the arbitrator made a manifest error of law that was apparent on the face of the award, and that this error of law substantially affected the rights of one or more of the parties to the arbitration agreement.
The error of law which the applicants assert that the arbitrator made relates to the arbitrator’s finding that the respondent was entitled to $15,777.85 for variations. Clause 8 of the contract relevantly provides:
8.     VARIATIONS
8.1     This Contract may be varied by changes to the Work.
8.2     These changes can be either for extra work or by leaving out part of the Work.
8.3     The Builder may refuse to do any extra work unless the changes asked for by the Owner are first put in writing.
8.4     If extra work is needed to comply with Acts, By-Laws and/or Regulations, the Builder must ask the Owner in writing for approval to go ahead, providing full details cost and the reason for the variation.
8.5     If possible, the price for the extra work shall be given to the Owner by the Builder before the extra work is started otherwise as soon as possible after it is available to the Builder and GST.
8.6     If a price is not agreed before the extra work is started, the Builder may proceed with the extra work requested or required and the price of the extra work shall be the actual cost to the Builder together with a percentage as stated in item D1 of the Schedule and GST.
8.7     The Builder may claim payment of the price for any extra work requested with the next progress claim following the completion of the extra work.
8.8     If the changes requested involve less work by leaving out part of the agreed works, the cost will be deducted from the Price. The Builder will be entitled to keep an allowance for overhead and profit as set out in Item D2 of the Schedule.
8.9     The Builder may ask the Owner to provide the Lender’s written approval for any large variations to the Work and may refuse to do any extra work until the written approval is given.
The parties did not agree on a price for the variations before the extra work was commenced. Accordingly, Clause 8.6 of the contract provided that in such a cases the price of the extra work “shall be the actual cost to the Builder together with a percentage …”. The “percentage” listed in Schedule D of the contract was “not applicable”.
At arbitration, with respect to the claimed variations, the respondent did not present any evidence of the actual cost of the work. The arbitrator observed:
The builder in his final address spent some time on the subject of the “actual cost to the builder”. He refuted the owners proposition that unless the builder can prove his actual cost he is not entitled to claim for or be paid for variations to the works.
…
The owners say that if the builder is unable to prove the actual cost of each variation, then he not [sic] entitled to payment at all and I reject that proposition.
…
I accept the builders argument that he is entitled to be paid for quantum meruit under the principle of unjust enrichment.
The applicants submitted that this was a manifest error of law on the grounds that where a contract makes an express provision concerning the basis upon which a variation is to be assessed, the builder cannot ignore the contract provisions and seek to recover on a restitutionary basis. On the applicants’ case, the respondent failed to prove the actual cost of the extra work that he performed and, as a result, failed to prove a necessary element to establish a contractual entitlement. The applicants contended that the respondent therefore did not establish any entitlement to payment for variations. The applicants further submitted that this error substantially affected their rights, as it reduced the quantum of the award in their favour from $88,561.81 to $72,783.96. The error resulted in the arbitrator finding an entitlement in favour of the respondent when, on the applicants’ case, he had not established any entitlement.
The agreement that the parties entered into was entitled “Domestic Building Plain English Contract: House”, and was prepared by the Master Builders Association. The contract defines “Price” as “the total amount of money payable for the work including variations”. “Variation” is defined as “a change to the work that was originally agreed to. This will often involve a change to the Price”. The contract also provides that “the owner agrees to … pay for any variations that may arise”.
Clause 8 of the contract is entitled “Variations”, and is set out earlier in these reasons. Viewed as a whole, it was the clear intent of the contract that the respondent may proceed with variations even if a price had not been agreed upon, and that the applicants would pay for those variations.
The arbitrator made findings that, with respect to claims 2, 4, 5(b), 5(c), 6, 9, 10 and 13, the respondent undertook variations for which he was entitled to be paid. The applicants have not challenged the arbitrator’s findings that the respondent undertook work on variations for the benefit of the applicants, but have argued that clause 8 of the contract should be construed in such a way so that the respondent does not gain any entitlement to be paid for the variation work unless he can prove his “actual cost”.
The applicants’ submission should be rejected. It was the intent of the contract that the respondent could undertake variations without prior agreement with the applicants on the price of those variations, and that in such cases the respondent would be paid his actual cost. If he could not produce evidence to prove his actual cost, nothing in the contract precluded the arbitrator from relying on expert evidence to determine the reasonable cost of the works as undertaken. It accorded with the intention of the contract that the builder be paid the cost for variations undertaken.
The reference to “actual cost” in the contract should, in any event, be moderated to mean reasonable cost. The respondent could not recover for unnecessary or extremely inefficient labour, even if it did comprise his “actual cost”. Given that clause 8 of the contract should be taken to refer to the reasonable cost of the respondent. No injustice was occasioned by the arbitrator acting on expert evidence as to the reasonable cost of the variations.
Conclusion
This application raises no point of principle – it calls for the interpretation of a particular contract. The arbitrator has made findings that the respondent undertook additional work to the benefit of the applicants. If the respondent were not to be paid for these variations, the applicants would receive a windfall. Moreover, no hardship will be suffered as a result of the arbitral award standing. Nothing precluded the arbitrator from relying upon expert evidence to determine estimates of the actual cost of the variations.
The application is refused.