Sunvara Pty Ltd v John Thomas Williams

[2001] NSWSC 358

CITATION:	Sunvara Pty Ltd v John Thomas Williams [2001] NSWSC 358
FILE NUMBER(S):	SC 55037/00; 55050/00
HEARING DATE(S):	6/04/01
JUDGMENT DATE:	6 April 2001
PARTIES :	Sunvara Pty Ltd (Plaintiff) John Thomas Williams (Defendant)
JUDGMENT OF:	Einstein J

COUNSEL :	Mr G McVay (Plaintiff) Mr R Beasley (Defenant)
SOLICITORS:	Paul Hines Solicitor ( Plaintiff) Mc Donald Johnson (Defendant)
CATCHWORDS:	Commercial Arbitration Act - Leave to appeal from interim award - discretion - error of law not manifest on the face of the award.
LEGISLATION CITED:	Commercial Arbitration Act 1984
CASES CITED:	Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 Doolan v Waltons Ltd 99 ALR 408 Downie v Hashman, Supreme Court of New South Wales unreported, 29 August 1995 Horizon Corporation Pty Limited v Lahey Construction Pty Limited (unreported, Supreme Court of New South Wales, 27 November 1993 Einstein J) Natoli v Walker unreported Court of Appeal, 26 May 1994 Promenade Investments Pty Limited v State of New South Wales (1991) 26 NSWLR 203 Ryan J Ducret v Choudary 76 ALR 183 at 19B Schenker & Co v Maplas Equipment (1990) VR 834 Thompson v J T Fossey Pty Ltd (No 2) 20 ALR 496
DECISION:	Leave to appeal on construction issue refused.

THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION - CONSTRUCTION LIST

EINSTEIN J

FRIDAY 6 APRIL 2001 ex tempore
Revised 3 May 2001

55037/00 - SUNVARA PTY LTD v JOHN THOMAS WILLIAMS
55050/00 - SUNVARA PTY LTD v JOHN THOMAS WILLIAMS

JUDGMENT

1 HIS HONOUR: There are before the Court for hearing applications in proceedings 55037/00 and 55050/00, in each case claims being made by the plaintiff for orders pursuant to s 38(4)(b) of the Commercial Arbitration Act 1984 for leave to appeal from interim awards made by Mr Martin D Chapman.

2    In proceedings 55037/00 the relevant interim award was made on 27 September 2000. In proceedings 55050/00 the second interim award in relation to the same arbitration was handed down on 6 December 2000.

3    The proceedings arise following the entering into by the defendant as purchaser and the plaintiff as vendor of a contract for sale of land over unit 5, 41 Walter Street, Belmont, dated 21 April 1998, the contract price in respect of which was $700,000.

4    The relevant contract is before the Court as exhibit A3. The schedule of finishes to the subject contract under the heading "Interior Finishes and Fittings" includes the item "Walls: internal walls: Masonry cement rendered and painted".

5    Special condition 1(c) of the contract reserved the right to the vendor:

"to change any manner of finish which is specified for the Property and the Common Property in the Schedule of Finishes to a finish of at least equivalent quality and provided that the quality of finish is at least equal to the quality of finishes as shown in any display exhibited to the purchaser prior to the execution of this Contract. The Vendor shall not be required to give any notice to the Purchaser in respect to any such change".

6    It is common ground that the subject building had not yet been completed and that the special conditions included in paragraph 1 under the heading "Construction", relevant obligations for the vendor to cause the building to be erected and the property and common property to be finished, and the items to be installed substantially as specified in the schedule of finishes annexed to the contract. [Special Condition 1(b)] Special Condition 1(b) was specifically subject to Special Condition 1(c) to which I have already referred.

7    The arbitration and the consequential proceedings for leave to appeal from the award, followed the vendor having changed the finish of the internal walls from painted cement render to painted plasterboard in most areas.

8    The awards handed down followed arbitration hearings. At the arbitration hearing on 6 September 2000 a joint report (Exhibit 2) was tendered which had been prepared by the relevant experts for the plaintiff and the defendant (Mr Brian Varnum and Mr Colin Wilkinson) following an order made by the arbitrator.

9    In the joint report Mr Wilkinson had expressed the view that:

"….plasterboard is a softer lining than cement render and has considerably less impact resistance...as a consequence of the above, plasterboard is a considerably less durable surface and requires more maintenance than cement render...cement render is perceived in the marketplace to be of higher quality than plasterboard."

10    The above view expressed in the joint report by Mr Wilkinson was consistent with the view he had expressed in his report of 2 August 2000 (Exhibit 3) in which he had expressed the opinion that:

"Gyprock walls are not of equivalent quality to cement rendered walls...rendered masonry walls have a higher impact resistance than gyprock walls and as such are much less prone to impact damage."

11    Mr Wilkinson had also been of the view:

"rendered masonry walls can be scrubbed down, disinfected and cleaned much more readily than gyprock walls."

12    Mr Varnum had agreed with Mr Wilkinson that rendered masonry walls have a higher impact resistance and are less prone to impact damage than plasterboard. He did not disagree that rendered masonry walls can be scrubbed down, disinfected and cleaned more readily than plasterboard.

13    The Court has been taken to the relevant provisions of the arbitrator's findings in the two awards. Both counsel have conceded that the Court should determine the applications for leave in the present proceedings upon the basis, as indeed was affirmed by the arbitrator in para 1.02 of the second interim award, that the two awards are to be read in conjunction with one another and as setting out the arbitrator's reasons for the making of the awards.

14    Whilst the whole of the reasoning within the two awards requires to be carefully examined for the purpose of determining the first issue raised before the Court, of particular importance is s6 to be found in the first award. In that section the arbitrator said as follows:

‘6 The Issues of Equivalent Quality
6.01 The question is whether or not painted plasterboard wall finishes can be substituted for painted cement rendered wall finishes within the meaning of 1(c) of the Special conditions.
6.02 In Special condition 1(b) the Property, which I take to be Unit 5, to be finished substantially as specified in the Schedule of Finishes, subject to Special Condition 1(c).
6.03 Under 1(c) the Respondent may change the finishes providing that at least an equivalent quality is achieved. I accept that Williams did not visit any display exhibited by the Respondent prior to the execution of the contract.
6.04 As the Respondent changed the finishes it has to show that plasterboard is of equivalent quality to cement render.
6.05 The Macquarie Dictionary gives the meaning of “equivalent” as an adjective as “equal in value, measure, force, effect, significance etc” and of “quality” as “a characteristic, property or attribute and secondly, character or nature as belonging to or distinguishing a thing.”
6.06 Franki J in Thompson v J T Fossey Pty Ltd (No 2) 20 ALR 496 at 501 referred to the Shorter English Dictionary in which the meaning in relation to “things” as “an attribute, property, special feature. The nature, kind or character (of something)”.
6.07 In Doolan v Waltons Ltd 99 ALR 408, Lockhart J held that the word “quality” in s53(a) of the Trade Practices Act 1974 should be construed in the sense of an attribute, property or special feature. The foregoing definition of the word “quality” held in the foregoing cases were approved by Ryan J Ducret v Choudary 76 ALR 183 at 19B. I also follow and adopt the foregoing meanings in this matter.
6.08 As to equivalence of perceived quality in value Wilkinson and Varnum differ by two points in their assessment, however I take it from the former’s view stated in his summary that he is of the belief that cement render gives a better quality finish, a value judgment as distinct from a market value assessment. I do not accept that he is authoritative on “value” in market terms, nor is Varnum as he admits in the Joint Report. In this aspect of “value” I am considering the monetary value as far as the property value is concerned.
6.09 From the foregoing I conclude that there is no difference between the two finishes as to their value to the property in monetary terms.
6.10 As far as appearance is concerned, cement render has a textured finish and plasterboard has a smooth finish. As to impact resistance, both experts agree that render is harder than plasterboard and I prefer Wilkinson’s view that cement render is easier to maintain. Mr Varnum says that plasterboard [is] easier to repair, however having a surface and material which is not as impact resistant. It is evident that it is more susceptible to damage and therefore does not possess an equivalent attribute.
6.11 Plasterboard does not have the same properties as cement render. The former is composed of a paper finish on gypsum and the latter of cement and sand.
6.11 In respect of the equivalence of quality of the two finishes in terms of their other characteristics, properties and attributes, I find that painted plasterboard is less than the quality of painted cement render in some respects, and the requirement is that the substitute be of at least equivalent quality.
6.12 I do not take “at least [equivalent] quality” to mean that some qualities can be less and some greater so that they balance out overall as was put to me by the Respondent. I take it to mean not less than any qualities of the material specified, but some qualities of the substituted finish may be of better quality.
6.13 As I have found that plasterboard is not of at least equivalent quality to cement render, I find that the Respondent breached the provisions of Special Condition 1(c) of the Contract.’

15    The arbitrator found that there was no difference between the two features in monetary terms. He, however, found that cement render has a textured finish whereas plasterboard has a smooth finish. He agreed with both experts that cement render is harder than plasterboard and he preferred the view of Mr Wilkinson that cement render was easier to maintain (see paragraphs 6.09 and 6.10).

16    He also found that plasterboard did not have the same "properties" as cement render in that plasterboard is composed of paper finished on gypsum whereas render is composed of cement and sand (see paragraph 6.11).

17    In considering whether plasterboard was an "equivalent quality" to cement render, within the meaning of special condition 1(c) of the contract, the arbitrator referred to the Macquarie Dictionary meaning of "equivalent" being:

"equal in value, measure, force, effect, significance, etc."

and of "quality" being:

"a characteristic, property, or attribute, and secondly, character or nature as belonging to or distinguishing a thing.”

18    The arbitrator also considered the meaning of the word "quality" as defined in the two Federal Court decisions referred to by counsel for the plaintiff during the arbitration.

19    Both counsel, as I have understood them, have accepted the proper approach to be taken by a Court or quasi judicial tribunal or arbitrator when a contract is to be construed. The principle is that a contract is to be construed in the light of the surrounding circumstances existing and known to the parties when the contract was made. This includes the genesis of the transaction, the objective framework of facts within which the contract came into existence, and the commercial purpose of the parties, in the objective sense of what reasonable parties would have in mind in their situation. The nature of the document and the contract in which the words appear is, of course, always of relevant consideration in terms of the proper construction of a contract.

20    The principles and citation of Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 are generally to be found conveniently collected by McGarvie J in Schenker & Co v Maplas Equipment (1990) VR 834 at 837.

21    In consequence both counsel have accepted that in construing special condition 1(c) the Court and a tribunal in construing a document seek to ascertain what reasonable persons in the positions of the parties to the subject contract, would have regarded the clause as meaning if they had applied their minds to it at the time of contracting. [Schenker at 840.20].

22    The plaintiff's submission is that the arbitrator did not approach the task of construing the special condition in accordance with the principles set out above and that in consequence the arbitrator has made a manifest error of law on the face of his award.

23    In terms of the proper construction of the relevant clause 1(c) the plaintiff's submissions have been as follows:

’12 The contract was to purchase a luxury unit for $700,000 on the shores of Lake Macquarie. The building was not completed at the time of contract and the special conditions 1(a) - 1(d) reflect the fact that the building was in the course of construction at the time of the contract.
13. The objective facts known to both parties was [sic] that the plaintiff had the right to change the finishes without notice to the defendant. The personal preferences for a particular finish of the defendant were thus irrelevant. What the plaintiff promised the defendant was to maintain the quality of the finishes in the unit not any particular finish.
14. It is submitted that reasonable people in the positions of the plaintiff and the defendant in this case, if they had applied their minds to it, would have regarded the special condition 1(c) as requiring the plaintiff to use finishes of a quality which would be expected of a unit for the price of $700,000 so as to protect the investment that the purchaser was making. Put another way, the finishes to be provided by the plaintiff were to be equivalent to the quality in the schedule of finishes so that the defendant would get the same value for his money as he would have got if the finishes were as per schedule.
15. In the context of the defendant agreeing to pay a fixed price for a unit that the defendant knew may change in so far as finishes were concerned, the parties were concerned to ensure that the value the defendant was getting for his $700,000 was not depreciated by the plaintiff using a lesser quality of finish which would reduce the market value of the unit.
16. The Arbitrator specifically found in paragraph 609 that there was no difference between the two finishes as to their value to the property in monetary terms. It is submitted that this was precisely what the parties had in mind and as recorded in special condition 1(c). The preference of the defendant based on aesthetics or his personal whim was not to be taken into account. That is because no notice had to be given to him of changes in the finishes. The objective matter which the parties were keen to protect was the value of the defendant’s investment.
17. The approach by the Arbitrator could result in a finish being provided which had all of the attributes equally with the finishes set out in the schedule but overall made the unit less valuable because in monetary terms that unit would fetch less than $700,000 on the market.’

24    The plaintiffs have submitted that it is plain from in particular the words in paras 6.11 and 6.12 of the first interim award that the arbitrator simply did not pose for himself the correct test to which I have referred in terms of seeking to ascertain what reasonable persons in the positions of the parties to the contract in this case had they applied their minds to it at the time of contracting, would have regarded the subject clause as meaning.. The proposition for which the plaintiffs contend is that the arbitrator simply construed Special Condition 1(c) himself, by reference to dictionary definitions, and without regard to the question of what reasonable persons had they applied their minds to the clause at the time of contracting would have regarded the clause as meaningful.

25    The defendant's submissions in terms of the construction issue included the following:

’13. The Arbitrator’s findings of fact concerning the differing qualities between cement render and plasterboard cannot be challenged. It is submitted that his approach to the construction of Special Condition 1(c) of the contract is also clearly correct. The Arbitrator was dealing with a discrete and specific part of the contract concerning finishes. The contractual promise was that the internal walls of the unit were to be cement render. The plaintiff was only entitled to change that finish if a finish of equivalent quality was used.
14. The plaintiff suggests in its submissions that any finish can be changed provided the defendant “would get the same value for his money as he would have got if the finishes were as per the schedule” (paragraph 14). It is submitted that this is a quite inappropriate interpretation to place on the contractual terms. A change in finish may or may not have an influence on the value of the unit. This is not the critical criteria. The criteria is whether the finish used is of equivalent quality to the finish promised in the Schedule of Finishes. Plasterboard is lesser in quality in some respects to cement render. It simply cannot be said that it is of “equivalent quality” to cement render on any sensible interpretation of the contract. On the plaintiff’s suggested interpretation of Special Condition 1(c), finishes of much lesser quality could be substituted by the plaintiff for those in the schedule provided they didn’t diminish the overall value of the unit. In such circumstances the plaintiff would have it that there has been no breach of the contract.
15. Special Condition 1(c) is directed to the specific finishes of the unit. It is the quality of the finish that is decisive. To change a particular finish, one of the equivalent quality must be used. The fact that the value of the unit may not have been diminished by a change of the particular finish does not determine whether the finish used is “of at least equivalent quality” to that in the schedule.
16. Upon no sensible construction of the words “of at least equivalent quality” in Special Condition 1(c) of the contract can it be said that plasterboard is of at least equivalent quality to cement render. Plasterboard has clear and apparent differing attributes and properties to cement render. It is clearly less than the quality of painted cement render in certain respects and is aesthetically different.’

26    It seems clear enough from a careful reading of the awards that the arbitrator took into consideration and paid close attention to the joint report and particularly paid close attention to the list of properties which had been examined and are generally set out in para 2.10 of the first interim award.

27    Both counsel have accepted that there is an obvious typographic error in the first interim award and that the application presently before the Court should be determined on the basis that the first line of para 6.12 of the first interim award should commence as follows:

"I do not take 'at least equivalent quality' to mean..."

I proceed upon that basis.

28    It seems that the critical paragraphs in the relevant section of the first interim award are paras 6.11 and 6.12 to which I have already referred.

29    It seems clear that the arbitrator found that painted plasterboard "is less than the quality of cement render in some respects" and was not of at least equivalent quality to cement render. Amongst the differences between cement render and plasterboard found by the arbitrator were:

(i) that cement render has higher impact resistance than plasterboard;

(ii) is easier to clean and maintain than plasterboard;

(iii) is harder than plasterboard.

30    The arbitrator in the second interim award further referred also to the hollow sound when plasterboard walls are tapped and to the different aesthetic appearance of plasterboard compared to cement render [see paragraph 1.7 of the second interim award].

31    As already indicated, Mr McVay of counsel who appears for the plaintiff submitted that a proper reading of the award demonstrates that the arbitrator approached the task of construing the special condition by simply applying dictionary definitions to relevant words as opposed to approaching the matter as the authorities suggest is necessary by looking to ascertain what reasonable persons in the position of the parties, had they applied their minds to it at the time of contracting, would have regarded the clause as meaningful.

32    Whilst Mr McVay submitted that the arbitrator had inappropriately placed undue significance upon the careful examination of each of the properties of the different materials set out in para 2.10 of the interim award number 1, I do not accept that submission as of substance.

33    The essential burden of the plaintiff's submissions, as I understood it, has been the short proposition that the proper construction of the special condition requires to be driven by a central and dominating focus upon whether or not the substitution of a change to the finishes would result or would not result in the purchaser obtaining the same value for the purchaser's money as the purchaser would have obtained had the finishes been as per the finishes schedule.

34    I do not accept this submission which is the central submission for which the plaintiffs contended, as one of substance. It is the special condition and the wording of the special condition construed in the light of the surrounding circumstances existing and known to the parties when the contract was made [including the genesis of the transaction, the objective framework of the facts within which the contract came into existence and the commercial purpose of the parties, in the objective sense of what reasonable persons would have in mind in their situation] to which the Court must look in determining the proper construction of the clause. That was the approach which it was necessary for the arbitrator to take.

35    The dominant criterion is that which the special condition identifies. That criterion identifies the question of whether or not the substituted finish or manner of finish is of "at least equivalent quality" to the quality of finishes specified for items in the relevant schedule of finishes.

36    On my reading of the awards the arbitrator found in respect of the “equivalence of quality” issue which arose in respect of the two finishes, that painted plasterboard is less than the quality of painted cement render in some respects. The question is one of a value judgment taking into account the several parameters which, to my observation on a reading of the awards, the arbitrator took into account.

37    The arbitrator does, however, appear as I read the awards, to have been particularly influenced by the finding that cement render in terms of susceptibility to damage, is more impact resistant. The finding was that plasterboard has a surface and material which is not as impact resistant as is cement render and which is more susceptible to damage.

38    Ultimately, the arbitrator’s decision appears to have turned upon his view that "at least [equivalent] quality" was not taken to mean that some qualities could be less and some could be greater so that they balanced out overall - this having been the submission addressed to the arbitrator by the plaintiffs. The arbitrator's holding was that the words "at least [equivalent] quality" meant "not less than any qualities of material specified but [that] some qualities of the substituted finish may be of better quality".

39    Ultimately having carefully examined the written submissions of both parties and having heard the oral submissions of both parties, I have come to the clear conclusion that the plaintiff's submissions are not of substance.

40    It is necessary further to pay close attention to the terms of the subject sections under cover of which the applications for leave to appeal are made.

41    Section 38(5) of the Act provides:

‘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 a law concerned could substantially affect the rights of one or more of the 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.”

42    The questions of what is an error of law on the face of the award and of what is a manifest error of law were examined in Promenade Investments Pty Limited v State of New South Wales (1991) 26 NSWLR 203 and in Natoli v Walker unreported Court of Appeal, 26 May 1994.

43    The principles dealing with an application of the type presently before the Court were dealt with in Horizon Corporation Pty Limited v Lahey Construction Pty Limited (unreported, Supreme Court of New South Wales, 27 November 1993 Einstein J). It is unnecessary to repeat those statements of principle which are adopted. In particular the expression "error of law in the face of the award" is used in the Act to indicate something evident or obvious rather than arguable. The word "manifest" requires swift and easy persuasion and rapid recognition of a suggested error.

44    I am not satisfied that the plaintiffs have demonstrated a manifest error of law on the face of the award in terms of the submissions which have been referred to above and the attack upon the award which has been referred to above.

45    It seems to me that the arbitrator, although he may not have specifically referred to the approach necessary to be taken in construing a contract which requires the Court to seek to ascertain what reasonable persons in the positions of the plaintiff and the defendant here had they applied their minds to the matter at the time of contracting, would have regarded the clause as meaning, may very well have had precisely that test in his mind at the time of handing down the award. It perhaps should be recorded that the award is absent reasons in that regard. However, even if the arbitrator had not approached the matter with that legal test in mind, it seems to me that the proper approach to the question of construction, being a question of principle, it is in the Court's discretion inappropriate to grant leave on the sole basis that the arbitrator has not expressly identified that as the test he applied.

46    I refer here inter alia to s 38(5)(a) of the Act and to the ambit of the Court's undoubted discretion to grant or withhold leave to appeal from an award, which discretion has been often referred to and was specifically referred to by Hunter J in Downie v Hashman, Supreme Court of New South Wales unreported, 29 August 1995. In that decision Hunter J said:

‘In applications such as this it is never untimely in my opinion to give a gentle reminder of the objective of the legislation under which this application is made as expressed in the second reading speech of the then Attorney General in the following terms:
“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 “ (New South Wales Parliamentary debates, 22 November 1990, 10376 at 10378)
Expression was given to this objective in Promenade Investments Pty Ltd v State of New South Wales (1991) 26 NSWLR 203 which, as noted in Natoli v Walker (Court of Appeal, 26 May 1994, unreported), has been followed by other courts in Australia. Attractive though the underlying question of law in the award may be to a lawyer, it is not one which in my opinion falls into the category described in s38(5)(b)(ii). Of that subsection Sheller JA. In Promenade said:
“The expression “commercial law” should be given no narrow construction. The expression “strong evidence that the arbitrator…….made an error of law” suggests first what might otherwise be called on the leave application a strong prima facie case and second an error of law not manifest on the face of the award and demonstrable by evidence.”’

47    On my findings to the extent that any question of law is involved in the construction of special condition 1(c) it cannot be said that there has been established a manifest error of law on the face of the award; nor that a determination by the Court of the question before the arbitrator will add substantially to the certainty of commercial law. There is no error so obvious or perceptible on the face of the arbitrator's award to be manifest without the benefit of adversarial argument.

48    For those reasons the plaintiff's submissions in terms of the assertion that the arbitrator fell into error by applying the wrong construction to special condition 1(c) are rejected.

49    Leave to appeal is therefore not to be granted in terms of the first leg of the attack grounded upon the construction issue.

50    During the course of address agreement was reached in terms of the proper approach to the Court dealing with the second matter, the subject of submissions going to the plaintiff's submission dealing with the arbitrator's approach to deciding the damages question. The second award was concerned with the damages to which the defendant was held entitled by reason of the arbitrator's finding that the plaintiff was in breach of special condition 1(c).

51    The arbitrator found that the painted plasterboard finish was to be removed and replaced with the painted cement render as specified in the schedule at a cost of $54,450. The plaintiffs seek to litigate the question of the correctness of the arbitrator's approach.

52    The plaintiffs submit that the arbitrator's approach to deciding the question of whether the appropriate damages award was the cost of making the work conform to the contract, was to compare the cost of rectification, namely $54,450, with the purchase price of $700,000, and to hold that as this was only 8 per cent of the contract price, it was not so out of proportion to the contract price as to be an unreasonable course to adopt [paragraphs 3.2 and 3.3]. The plaintiffs wish to assert that this was an incorrect approach in law and seek leave to appeal in terms of this issue.

53    The parties accepted that the Court would hand down a judgment on the construction issue first and would then adjourn for further hearing on a future date, the matters raised by the damages issue. In those circumstances all that remains is for the Court to give directions as to when that matter will be the subject of further submission and argument.

54    Costs are reserved.

I certify that paragraphs 1 -54
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on 6 April ex tempore
and revised on 3 May 2001

___________________
Susan Piggott
Associate

3 May 2001

Last Modified: 05/28/2001