State Constructions Pty Ltd v Baulderstone Hornibrook Engineering Pty Ltd and ANOR. No. SCGRG 96/1580 Judgment No. 6090 Number of Pages 9 Arbitration

[1997] SASC 6090

IN THE SUPREME COURT OF SOUTH AUSTRALIA

MATHESON J

Arbitration - conduct of arbitration proceedings - whether arbitrator guilty of misconduct in the course of arbitrating building dispute - whether his conduct at a conference to discuss plaintiff's amended statement of claim gave rise to a reasonable apprehension of bias - whether in delaying his decision on the amended statement of claim for seven months he was guilty to misconduct - whether following as nearly as reasonably practicable the procedures and practices of the Court in reaching his decision constitutes misconduct - claim dismissed. Commercial Arbitration Act 1986 , referred to. Webb v The Queen (1994) 181 CLR 41; Giustiniano Nominees Pty Ltd v The Minister for Works and Others Butterworths Unrep Jt No BC9507058 10 November 1995; Boncorp Pty Ltd v Thames Water Acer/Pacific Pty Ltd and Another (1996) 12 BCL 139; Hudsons Building and Engineering Contracts 11th ed Vol 2 pp1674-1676; South Australian Superannuation Fund Investment Trust v Leighton Constractors Pty Ltd (1990) 55 SASR 327, applied.

ADELAIDE, 17-19 February 1997 (hearing), 27 March 1997 (decision)

#DATE 27:3:1997

#ADD 28:4:1997

Plaintiff State Constructions Pty Ltd:

Counsel: Mr R F Floreani with him Mr S A Ryan

Solicitors: Floreani Coates & Co

Defendant Baulderstone Hornibrook Engineering Pty Ltd:

Counsel: Mr N W Morcombe QC with him Mr J M Wilkinson

Solicitors: Cowell Clarken

Defendant Graham R Easton: No Attendance

Order: claim dismissed.

MATHESON J

1. The first defendant entered into a contract with Kimberly-Clark Australia Pty Ltd to construct the Tantanoola Pulp Mill, ("the Main Contract Works"). The plaintiff was a subcontractor of the first defendant, and entered into two separate contracts with it to carry out part of the Main Contract Works, namely (I quote from par 4 of the Points of Claim): "Contract 726

This subcontract was entered into on or about the 15th day of October 1991 ... for the purpose of carrying out those subcontract works known as Screening and Rejects Piping and Equipment installation ('the Subcontract works under Contract 726') in accordance with the drawings and specifications attached to the contract and forming part of the Main Contract Works ...

Contract 727

This Subcontract was entered into on or about the 19th day of October 1991 ... for the purpose of carrying out those subcontract works known as Digester area Piping Mechanical and Structural Work ('the Subcontract works under Contract 727') in accordance with the drawings and specifications attached to the contract and forming part of the Main Contract Works ..."

2. The plaintiff made claims under the said contracts, and differences arose between it and the first defendant in relation thereto which ultimately became the subject of two Notices of Dispute dated 14 August 1992. The disputes were unresolved and were submitted to arbitration. On or about 16 September 1992 the second defendant was appointed the arbitrator. I will refer to the second defendant hereafter as "the arbitrator". He subsequently conducted a number of preliminary hearings dealing with issues relating to pleadings.

3. The plaintiff lodged its first Statement of Claim on 26 January 1993. It has subsequently been amended a number of times. A Third Amended Statement of Claim was lodged on 14 December 1994. That was discussed at a conference conducted by the arbitrator at the offices of Cowell Clarke, the solicitors for the first defendant, on 28 April 1995. I will be discussing what happened at this conference. The plaintiff lodged its Fourth Amended Statement of Claim with the arbitrator on 4 July 1995. On 4 October 1985 the arbitrator held a further conference to consider the Fourth Amended Statement of Claim. At its conclusion, he said "I will let you know of my decision in about a week's time". His decision was not delivered until 20 May 1996. No reason was given for the delay.

4. Pursuant to s44 of the Commercial Arbitration Act, 1986 ("the Act"), the plaintiff now applies for an order removing the arbitrator for misconduct. Misconduct is defined in s4 of the Act to include: "corruption, fraud, partiality, bias and a breach of the rules of natural justice."

5. In its Points of Claim, the plaintiff has given the following particulars of misconduct: "21.1That the conduct of the Second Defendant [at the conference on 28 April 1995] ... gives rise to a reasonable apprehension of bias against the Plaintiff and constitutes misconduct on the part of the Second Defendant.

21.2That the conduct of the Second Defendant in delaying his decision on the Fourth Amended Statement of Claim by a period in excess of six months after having undertaken to deliver his determination 'in about a week's time' from the 4th day of October 1995 constitutes misconduct by the Second Defendant.

21.3That the conduct of the Second Defendant in rejecting the Plaintiff's Fourth Amended Statement of Claim and earlier Statements of Claim were all determinations based on the view that the Plaintiff's Statement of Claim in an arbitration proceeding 'should follow as nearly as reasonably practical the procedures and practices of the Court' and accordingly constitutes misconduct by the Second Defendant."

6. I propose to deal first with the allegation of bias.

7. There is no dispute that the relevant law in Australia is now conveniently set out in the case of Webb v The Queen (1994) 181 CLR 41. At p47 in a joint judgment Mason CJ and McHugh J said: "When it is alleged that a judge has been or might be actuated by bias, this Court has held that the proper test is whether fair-minded people might reasonably apprehend or suspect that the judge has prejudged or might prejudge the case. The Court has applied the same test to a Commissioner of the Australian Industrial Relations Commission and to a member of the Australian Broadcasting Tribunal. The Court has specifically rejected the real likelihood of bias test. The principle behind the reasonable apprehension or suspicion test is that it is of 'fundamental importance that justice should not only be done, but should manifestly and undoubtedly be seen to be done'." (See also per Brennan J (as he then was) at p57, per Deane J at p66-68 and Toohey J at p87.)

8. I also refer to Giustiniano Nominees Pty Ltd v The Minister for Works and Ors Butterworths Unrep Jt No BC9507058, a decision of the Full Court of the Supreme Court of Western Australia dated 10 November 1995 where the court made an order for the removal of an arbitrator. In a judgment with which Kennedy ACJ and Rowland J agreed, Ipp J said at pp10-11: "In the present case, however, the issue does not involve an apprehension of bias based on a prior relationship. The apprehension of bias said to arise in this case concerns the connection between the first respondent and the arbitrator while the arbitration was actually being conducted and was under way. In this regard the observations of McInerney J in Reg v Magistrates' Court at Lilydale; Ex parte Ciccone [1973] VR 122 at 127 (approved in Re JRL; Ex parte CJL at 346 by Gibbs CJ) are pertinent. His Honour said: 'The sound instinct of the legal profession - judges and practitioners alike - has always been that, save in the most exceptional cases, there should be no communication or association between the judge and one of the parties (or the legal advisers or witnesses of such a party), otherwise than in the presence of or with the previous knowledge and consent of the other party.

Once the case is under way, or about to get under way, the judicial officer keeps aloof from the parties (and from their legal advisers and witnesses) and neither he nor they should so act as to expose the judicial officer to a suspicion of having had communications with one party behind the back of or without the previous knowledge and consent of the other party. For if something is done which affords a reasonable basis for such suspicion, confidence in the impartiality of the judicial officer is undermined.'"

9. The allegation of bias here arises out of what allegedly happened, and what allegedly was said, at the conference on 28 April 1995 at the offices of Cowell Clarke, supra. The conference was held in the board room of the offices of Cowell Clarke by agreement between the parties. Mr Floreani, counsel for the plaintiff, said that with hindsight it is not a very wise think to have conferences before an arbitrator in the offices of the solicitor for a party involved. I agree. The following persons attended: Mr Alf Morgan, a Director of the plaintiff, Mr David Lewis, counsel for the plaintiff, Mr Terence Mather, the plaintiff's consulting engineer, Mr John Wilkinson, counsel for the first defendant, Mr Jon Clarke, solicitor for the first defendant, and the arbitrator.

10. The conference commenced at 10 am. The topic was the Third Amended Statement of Claim of the Plaintiff. At about 1 pm the arbitrator suggested that the conference should adjourn for lunch. Mr Lewis asked whether he could leave his papers on the table in the board room. Mr Wilkinson said that they (referring to Mr Clarke and himself) had another conference in relation to another arbitration in that room with the arbitrator during the luncheon adjournment. The arbitrator looked at Mr Clarke and asked if there was another room that they could hold that conference in. Mr Clarke replied that there was not. Mr Clarke asked Mr Lewis to move his papers to one side. His recollection was that he put them on the floor. Mr Morgan left the room, followed by Messrs Mather and Lewis, then by Messrs Clarke and Wilkinson. The arbitrator remained behind. One or other of Messrs Morgan, Mather and Lewis asked where they could get some lunch, and Mr Clarke suggested they go to the Manna Café nearby, and that is what they did.

11. I am satisfied that the other people involved in the 1 pm conference were waiting in the reception area when Messrs Morgan, Lewis and Mather walked to the lift. They included Messrs Simpson and Burnett from Minter Ellison, Mr Milton from Australian National and Messrs Gregory and Paul from Morrison Knudsen. Mr Wilkinson went to get some papers that he needed for the 1 pm conference, and when he got back everyone who had been in the reception area, including Mr Clarke and the arbitrator, were in the board room. That conference lasted until 1.35 pm. Everybody then left the board room. The arbitrator went to another office within Cowell Clarke's offices that he was using. Messrs Morgan, Mather and Lewis were in the reception area when those who had been in the board room came out and walked past them. Messrs Wilkinson and Clarke left and went to the Manna Café to get some lunch. When they got back to the board room, Messrs Morgan, Mather and Lewis were already there. They waited until about 2 pm when the arbitrator returned, and Mr Morgan said that he knew something about the arbitration between Morrison Knudsen and Australian National. The adjourned conference then continued for about 1.5 hours.

12. As the conference was about to conclude, Mr Wilkinson said to the arbitrator "I want to raise the matter as to where we stand with respect to your fees and the amount held in the security deposit". The arbitrator said words to the effect that he had intended to raise that matter. He said that the funds which had been lodged were not yet exhausted, but that the security deposit needed to be topped up by a further $5,000 from each party. He ordered that this be lodged by 26 May, 1995.

13. What I have just said are my findings as to what was said and done at the conference. It must be obvious from these findings, that, generally speaking, I prefer the evidence of Messrs Wilkinson and Clarke to that of Messrs Lewis and Morgan. I note that Mr Mather was not called. He has been in Indonesia since late January. The parties, and presumably Mr Mather, have known of the date fixed for the hearing since about October 1996. Specifically, I reject any suggestion that Mr Wilkinson said anything to mislead Messrs Lewis and Morgan as to what was going to happen or as to what did happen between 1 pm and 2 pm, and I reject any suggestion that Mr Wilkinson spoke to the arbitrator about his fees in the absence of Messrs Lewis and Morgan.

14. The plaintiff has failed to prove that the conduct of the arbitrator has been or might have been actuated by bias or gave rise to a reasonable apprehension of bias against. I reject the claim in par 21.1 of the Points of Claim. In those circumstances, I do not need to consider the plea of waiver.

15. I consider now the plaintiff's argument that the arbitrator's delay in giving his determination on the Fourth Amended Statement of Claim for a period in excess of six months amounted to misconduct. Let me repeat what I said during counsel's address that I do not think that the fact that the arbitrator said at the conclusion of the conference that he would deliver his determination "in about a week's time" really advances the plaintiff's argument in all the circumstances of this case.

16. Counsel referred to Boncorp Pty Ltd v Thames Water Asia/Pacific Pty Ltd and Anor (1996) 12 BCL 139. In that case the material before the arbitrator consisted of over eighty-four exhibits, which included fifteen lever arch folders of an agreed bundle of documents. In addition there were lengthy written submissions presented by both parties. In total, the hearing of the arbitration took twenty-one days. The transcript of the hearing exceeded two thousand pages. About eight and half months later the arbitrator issued a ninety-four page interim award.

17. At p140, Byrne J in the Supreme Court of Victoria said: "The thrust of Boncorp's complaint was that the long delay in publishing the award, the reasons given for that delay and the terms of the award itself lead to the inference that the arbitrator misconducted himself inasmuch as he did not decide the dispute on its merits but, rather, by resorting to the simple approach of finding for one side without a proper consideration of the issues. In short, he did not bring to his task a fair and unprejudiced mind."

18. At p142 his Honour concluded: "The period of time which has elapsed from the completion of the hearing and the publication of the award is doubtless a matter for regret. Doubtless, also, it made the award writing task of the arbitrator so much more difficult. But I do not consider that the legitimate interests of either party were prejudiced as a result. I conclude that the fact of delay and the terms of the award do not lead to the kind of inference for which Boncorp contended."

19. It is true, as Mr Floreani, counsel for the plaintiff, pointed out, that that case was concerned with the delay in publishing an award whereas in the case at bar the delay related to a ruling on a pleading. However, the pleading in question extended over 100 pages and included elaborate and complex schedules. The Christmas holiday period intervened. The arbitrator went overseas for some weeks. I am not in the least surprised that the arbitrator took some time to reach his decision. Although the time was longer than it should have been, I do not think in all the circumstances that it amounted to misconduct. I reach that view more confidently having regard to the very significant delays of the plaintiff in complying with earlier directions and orders of the arbitrator which were highlighted by the solicitors for the first defendant in a document headed "Delays by State with Points of Claim", and handed to me during the hearing. During one preliminary telephone conference on 22 June 1995, the arbitrator noted his concern as to the "inordinate and inexcusable delay" by the plaintiff in preparing its claim, and reminded the parties of the provisions of ss18(1) and 46 of the Act.

20. I now consider the plaintiff's allegation of misconduct in par 21.3 of its Points of Claim.

21. In a letter to the respective solicitors dated 8 May 1995, the arbitrator advised that he had determined that: "(a)the Amended Statement of Claim was defective, incomprehensible in parts and not in a proper form;

(b)the Respondent was therefore unable to ascertain from the Amended Statement of Claim, the causes of action relied on, and the issues between the parties; and

(c)I was not prepared to allow the matter to proceed until the Claimant undertook a fundamental revision of its Statement of Claim, in order to satisfy the basic pleading requirements."

22. The arbitrator directed, inter alia, that "a further Amended Statement of Claim (particularised)" be served on or before 26 May 1995. It was not in fact served until 4 July1995. It was the plaintiff's Fourth Amended Statement of Claim.

23. In his Determination dated 20 May 1996, the arbitrator struck out various parts of the plaintiff's Fourth Amended Statement of Claim, and in the course of doing so he said, inter alia: "I acknowledge that as a general proposition, that there is no hard and fast rule as to form, and I note that in jurisdictions other than South Australia there is considerable flexibility permitted in arbitration pleadings. In particular I note the comments of Rogers J in Imperial Leatherware Co. Pty. Ltd. v Macri and Marcellino Pty. Ltd. (1991) 22 NSWLR 653 in this regard.

9. Nevertheless, my understanding is that the law in South Australia in relation to pleadings in arbitrations is set down in SASFIT v. Leighton Contractors Pty. Ltd. (1990) 55 SASR 327. The requirement is, in summary, that the pleadings in cases such as this should follow as nearly as reasonably practical the procedures and practices of the Court. Accordingly, the Claimant's pleading is bound by that requirement and I have reviewed the Statement of Claim and made this determination on that basis, i.e. by applying Rule 46 of the SA Supreme Court Rules. In so far as these rules constrain the Claimant in the form of its pleadings, I have no discretion to direct otherwise."

24. Mr Floreani referred me to the 11th Edition of Hudson's Building and Engineering Contracts Vol 2, and I propose to quote a lengthy passage therefrom at pp1674-1676, partly because it refers to both the cases cited by the arbitrator in the passage just cited, and partly because it refers to the 10th edition of the work: "The tenth edition of this book contained two major passages where it was suggested that, in view of the considerable complexity of most modern construction contract disputes, arbitrators should, as a matter of natural justice, normally apply the same principles and require the same degree of particularisation of the parties' written cases as in the case of litigation in the Courts, and that the pleadings rules as to particularisation themselves represented no more than a refined application of the principles of natural justice. This view has recently received support in the Full Court of South Australia.

ILLUSTRATION

Owners in South Australia received six binders of written material in response to an order by arbitrators for delivery of Points of Claim. The owners argued that the documents were not remotely like Points of Claim; that they could not understand them so as to prepare the Points of Defence, which had also been ordered, or to prepare their own case; and they applied for an order that properly prepared Points of Claim be served. The arbitrators refused the application, saying that they understood most of the material. The owners then applied to the Court for an order directing the arbitrators to require delivery of properly pleaded Points of Claim. The contractors objected that by virtue of section 14 of the South Australian Commercial Arbitration Act 1986 (which provided that arbitrators might conduct proceedings as they thought fit) the Court had no jurisdiction to consider the arbitrators' pre-trial procedures, and the Master upheld that objection. Held, by the Full Court (Bollen J. dissenting), that section 14 was expressly made subject to the remainder of the Act, and in particular to section 22 (which provided that questions in the course of proceedings should be determined according to law); to section 4 (which provided that breach of natural justice was to be misconduct); and to sections 43 and 47 (which provided for remitting matters to arbitrators, and conferred power on the Court to make interlocutory orders). Accordingly the case should be referred back to the Master for him to examine the Points of Claim which had been filed and, if in his opinion they were not appropriate, to remit them to the arbitrators for reconsideration of their ruling: South Australian Superannuation Fund Investment Trust v. Leighton Contractors Ltd. (1990) 55 SASR 327.

[Note: In regard to its interpretation of the Act and the question of jurisdiction, this judgment has been heavily criticised by Rogers C.J. in New South Wales Imperial Leatherware Ltd. v. Macri and Marcellino Ltd (1991) 22 NSWLR 653, on the ground that, in the light of recent legislation in Australia and of the Nema and other cases in England, and of a corresponding new Australian legislative attitude to arbitration, the Court now had no supervisory power to intervene in matters of procedural injustice. However, it is submitted that, properly understood, White J.'s judgment was expressly based upon a potential breach of the principles of natural justice, in the special context of a complex construction dispute, which the Full Court considered it was free to investigate, and that this does not seem to have been appreciated in Rogers C.J.'s judgment. The importance of the case in other jurisdictions, it is suggested, lies in its valuable substantive discussion of the proper degree of particularisation required in the arbitration of a typical complex construction dispute and of the requirements of natural justice in such a case, whatever the position about statutory remedies may have been under later Australian legislation.]

Thus, giving the judgment of the majority, White J. in the above case said: 'Counsel for the builder conceded from the Bar table that procedural justice requires that arbitrators should, in long complex arbitrations, follow as nearly as reasonably practicable the pre-trial pleading, discovery and another procedures of the Court. This concession was correctly made in my opinion. It has long been universally recognised in the authorities and in the textbooks, at least in relation to arbitrations under prior Acts in the other States and the United Kingdom, that arbitrators should, in appropriate cases, set a programme at the outset for the exchange of Points of Claim and Points of Defence (and Counterclaim), followed by discovery and inspection ... [authorities cited]

The same obligations apply to both pre-trial and trial procedures, as to the great importance of arbitrators requiring full compliance with pre-trial pleadings: see Hudson. At all stages of long, expensive arbitration proceedings, including the pleading stage, the dictates of procedural justice require full notice to the other party of the case being made out against it and a full opportunity to prepare for and answer that case.

These arbitrators recognised these principles and they ordered at the start the exchange of pleadings in the form of Points of Claim and Points of Defence; they also set a time-table for the pleadings and for discovery and inspection and the like. To my mind, the use of the words 'Points of Claim' and of 'Statement of Claim' makes no difference.

By their conduct the arbitrators properly recognised that, whatever might be the situation in smaller less formal arbitrations, the exigencies of this major arbitration (involving a dispute over $10m for work done and forecasts of a long hearing lasting from 6 to 12 months together with a vast amount of oral, documentary and technical evidence as to complex issues) require that they ought to follow as closely as reasonably practicable the pleading practice of the Supreme Court. It is not suggested that every aspect of every pleading rule should be followed to the letter, only the substance and spirit of those rules.' (1990) 55 SASR 327, 329-330. (Emphasis supplied.)"

25. It is convenient for me to say here that although I am not sure whether I agree with everything that White J said in SASFIT, I consider myself bound by his statement, apparently concurred in by Mohr J, that the pleadings in cases such as this "ought to follow as closely as reasonably practicable the pleading practice of the Supreme Court." (My emphasis.) I stress, however, that his Honour added: "It is not suggested that every aspect of every pleading rule should be followed to the letter, only the substance and spirit of those rules." I regard that addition as important. In stating that "in so far as [the Supreme Court Rules] constrain the claimant in the form of its pleadings, I have no discretion to direct otherwise" I think the arbitrator may have taken his Honour's remarks further than he intended. His Honour clearly did not mean that the Rules had to be followed slavishly. However, I reject the submission that in so doing the arbitrator was guilty of misconduct.

26. Anyone with any experience in drafting pleadings in complex building disputes arising out of complex building contracts knows how difficult a task it can be and how difficult, even oppressive, it often is to comply with requests to supply adequate particulars. That explains in part why it is difficult for me to rule on the specific complaints made by the arbitrator about the Fourth Amended Statement of Claim. It really demands an intimate knowledge of the contracts, and sitting round a table with counsel and minutely examining each plea. The arbitrator is obviously a well qualified and experienced one. In his determination of 20 May 1996, subject to the minor criticism I have already expressed, his approach has impressed me as workmanlike. Indeed, Mr Floreani did really not challenge its specifics. It is clear that it is a substantial improvement on its predecessors, and the arbitrator said: "In any event, the previous major deficiencies with the nature and form of the Claimant's Statement of Claim appear to have been largely resolved in the 4 July 1995 version. The further issues for me to consider here relate primarily to whether causes of action have been properly identified, and to questions of whether proper particulars have been provided."

27. It is obvious that a prodigious amount of work by the representatives of the plaintiff has gone into the preparation of Schedule B, but I have reached the conclusion that the plaintiff has not yet provided adequate particulars. In short, I agree with what the arbitrator has said about the claims based on clauses 8.6, 34.3(a) and (b), and 36.4 and about the claims in pars 42, 44-53, 89 and 90. I have reached the conclusion that the plaintiff will have to remedy those defects.

28. The plaintiff's claims will be dismissed.