UDR Equipment Pty Ltd v Afkos Industries Pty Ltd - [2000] WASC 57

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: UDR EQUIPMENT PTY LTD -v- AFKOS INDUSTRIES PTY LTD [2000] WASC 57

CORAM: STEYTLER J

HEARD: 25 JANUARY 2000

DELIVERED : 13 MARCH 2000

FILE NO/S: ARB 30 of 1999

BETWEEN: UDR EQUIPMENT PTY LTD
Applicant
AND
AFKOS INDUSTRIES PTY LTD
Respondent

Catchwords:

Arbitration - Application for leave to appeal from decision of arbitrator - Whether manifest error of law on face of award - Test to be applied - Application dismissed

Legislation:

Commercial Arbitration Act 1985 (WA), s 38(4)(b) and s 38(5)

Commercial Arbitration Act 1984 (NSW), s 38(5)

Commercial Arbitration Act 1990 (Qld), s 38(5)

Result:

Application for leave to appeal dismissed

Representation:

Counsel:

Applicant: Mr G R Hancy
Respondent: Mr C D Raymond

Solicitors:

Applicant: Phillips Fox
Respondent: Arthur Metaxas & Co

Case(s) referred to in judgment(s):

Commonwealth v Rian Financial Services & Developments Pty Ltd (1992) 36 FCR 101
Leighton Contractors Pty Ltd v Kilpatrick Green Pty Ltd [1992] 2 VR 505
Leung v Hungry Jack's Pty Ltd [1999] VSC 477
Natoli v Walker, unreported; CA SCt of NSW; Library No 40351 of 93; 26 May 1994
Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724
Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203
Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327
Tiki Village International Ltd, Re [1994] 2 Qd R 674
Thiess Contractors Pty Ltd v Water Corporation of Western Australia, unreported, SCt of WA (Parker J); Library No 970561; 28 October 1997

Case(s) also cited:

Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64
Commonwealth v Thiess Contractors Pty Ltd (1991) 4 WAR 425
Forsayth NL v Australasian Gold Mines NL (1992) 8 WAR 176
Haines v Bendall (1991) 172 CLR 60
Maralinga Pty Ltd v Major Enterprises Pty Ltd (1973) 128 CLR 336
Pukallus v Cameron (1982) 180 CLR 447
Roberts v Roberts (1992) 8 WAR 170
Robinson v Harman (1848) 1 Ex 840
Wing Luck Foods v Lay Choo Lim [1989] WAR 358

STEYTLER J: This is an application for leave to appeal against the decision of an arbitrator given in arbitration proceedings between the applicant and the respondent. By a prior order of the court the application for leave to appeal, if allowed, is to be taken as the hearing of the appeal itself.
The application is brought pursuant to s 38(4)(b) of the Commercial Arbitration Act 1985 (WA). By virtue of s 38(5) leave may not be granted under that section unless the court 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."
In this case the applicant contends that there are three manifest errors of law on the face of the award and that in each case the determination of the question of law could, having regard to all the circumstances, substantially affect its rights. It does not contend that the determination of any of the questions raised might add, or might be likely to add, substantially to the certainty of commercial law.
Before coming to the errors of law which are contended for I should say something about the background to the appeal.
The applicant and the respondent are parties to a contract in writing, described as a manufacturing agreement, which was executed by them in January 1997.
The applicant was a supplier of mining equipment including drill rods. However it did not itself have the facilities to manufacture drill rods and consequently approached the respondent (which designed and manufactured hydraulic cylinders and other engineering products) in order to see whether it would be prepared to manufacture drill rods on the applicant's behalf. The respondent had the machine shop, machine tools, basic infrastructure and expertise to do so although additional plant had to be designed and constructed (at considerable expense to the respondent) in order to enable it to manufacture the drill rods. The respondent agreed to incur this expense and to manufacture the rods.
The rods to be manufactured were described by the parties as "NO" and "HO" drill rods. The "N" and "H" signified the diameter of each rod and the "O" referred to the type of thread. The parties agreed that the applicant would supply the raw material to the respondent and that the respondent would then manufacture the rods in accordance with agreed specifications.
By July 1996, prior to the preparation of the written manufacturing agreement, the respondent had commenced production of the drill rods on behalf of the applicant. The venture appeared to be a great success with the applicant by then already being able to sell more rods than the respondent could produce.
At that time the rods were being produced by what was referred to as a "CNC" lathe which was used in two 10 hour shifts worked on each of five days of each working week. An average of 40 "NO" rods or 30 "HO" rods was produced during each 10 hour shift. Orders for the manufacture of the rods were made on an ad hoc basis. The respondent invoiced the applicant $40 for each "HO" road and $30 for each "NO" rod. Those prices were accepted as being "interim" prices only as the applicant had told the respondent that if it could demonstrate good grounds for an increase in price then the respondent might agree to it. The parties contemplated that a second lathe might be acquired in order to increase production.
At that time the respondent's accountant had calculated that if the respondent worked at 100 per cent efficiency using only the CNC lathe for 225 days of the year it could produce 18,080 drill rods in one year, the most efficient production method being the working of two 10 hour shifts on each working day of the week.
A second lathe was ultimately acquired and discussions ensued between the parties, during July and October 1996, in respect of the price of the drill rods manufactured by the respondent on behalf of the applicant.
The arbitrator, in his reasons for decision in respect of the dispute which ultimately arose between the parties, found that both parties were, at the time of their negotiations, bullish in their outlook with respect to the production and sale of the rods. He referred, in that respect, to a letter from the applicant to the respondent dated 21 October 1996 in which the applicant said, in part, that:
"While we only have one lathe operating, my belief is that the risk of needing to reduce capacity below a two shift, 10 hour schedule is practically nil. We are in the early stages of the marketing and sales of the product, and have only a small market share, with the considerable potential for vastly increased growth. Even if there was a downturn in the drilling industry, I am confident we would never go below your current schedule."
The "current schedule" there referred to was that involving two 10 hour shifts on each of five days a week using one lathe.
The second lathe was purchased at the applicant's cost. That was, the arbitrator found, because the respondent "had accepted a very high level of financial risk to that point". However the applicant did not want to proceed with the purchase of the second lathe (at an estimated cost of $213,000) until such time as a formal agreement had been executed by the parties. Consequently Mr Tom Gilpin, the applicant's managing director, and Mr Paul Afkos, the respondent's managing director, met in late November 1996 in an attempt to resolve outstanding issues. Mr Gilpin brought with him a draft of the manufacturing agreement and he and Mr Afkos went through it point by point.
The meeting culminated in the preparation of a document entitled "Notes for the Preparation of an Agreement" ("the notes"). That document was checked by each of Mr Gilpin and Mr Afkos and the two men agreed that it reflected what the arbitrator described as "the agreed outcome of their discussions".
The material terms of that document were as follows:
"PRICING
Applicable on quantities and to commence after the 2nd lathe commences production.
NO             HO
0           to    18,000     @        $31.37       $41.83
18001    to    27000      @        $23.46       $31.29
27001    to    36000      @        $21.48       $30.00
NOTES
*Upon commencement of second lathe production new pricing becomes [sic] into effect on quantities 18001 - 27000 price.
*Minimum quantity guarantee with the above prices: is 18000 pieces over 12 month period.
*Should 18000 pieces not be achieved during any 12 month period, pricing for all rods produced will revert to 0‑18000 pricing, with the necessary adjustment being made to invoices paid during the previous 12 month period. 27001 plus pricing will apply for all drill rods produced in excess of 27000 to 36000."
Each of Mr Gilpin and Mr Afkos also marked up his copy of the draft manufacturing agreement. Mr Gilpin's copy and the notes were faxed by Mr Gilpin to the applicant's Queensland office where further drafts of the manufacturing agreement were prepared.
The learned arbitrator accepted Mr Afkos' evidence that he assumed that later drafts of the manufacturing agreement "faithfully reflected what was agreed between himself and Mr Gilpin in the November 1996 meeting". However those drafts, and the agreement ultimately executed by the parties, did not provide for a "minimum quantity guarantee" in terms of the number of drill rods to be produced by the respondent each year. The respondent consequently applied to the arbitrator to have the agreement rectified so as to include such a guarantee.
Clause 4 of the first draft of the manufacturing agreement had provided as follows:
"4.1 UDR [the applicant] reserves the right to provide AI [the respondent] with reasonable notice of their [sic] requirement to reduce Maximum Productive Capacity from 10 hours to a minimum of 8 hours per shift or from 4 or 3 shifts to a minimum of 2 shifts from time to time.
4.2In the event that the capacity is reduced to a 2 shift operation then the AI CNC Lathe will be used and not the UDR Lathe, unless otherwise agreed by UDR."
The learned arbitrator found that Mr Afkos and Mr Gilpin agreed, during their November 1996 meeting, to delete these clauses and that Mr Afkos' draft of the agreement had an annotated note, immediately under the deleted clause, which read "However quantity will apply". The learned arbitrator said that that notation did not appear on Mr Gilpin's annotated draft but that he accepted Mr Afkos' evidence that he discussed with Mr Gilpin the issue of a minimum quantity which would apply despite the deletion of clauses 4.1 and 4.2. The learned arbitrator went on to make the following findings of fact:
"It is clear from Mr Gilpin's, Mr Hinz's [Mr Hinz was the applicant's general manager] and Mr Afkos' evidence that they accepted that a 2 ten hour shift operation 5 days a week would produce 18,000 (not just NO) pieces per annum for the purposes of the Manufacturing Agreement. I find that what Mr Gilpin and Mr Afkos were doing by deleting draft clauses 4.1 and 4.2 was to simplify them but without losing one of the matters that underscored those draft clauses, namely, that UDR could reduce production but not beyond 2 shifts of 10 hours each 5 days a week using one lathe.
The Notes for the Preparation of an Agreement provided for different levels of payment depending on the levels of production. 0 to 18,000 pieces per annum attracted a higher price for each drill rod. It was agreed that upon commencement of production using the second lathe, new pricing would come into effect on quantities of 18,001 to 27,000 pieces per annum. There was a further level of pricing from 27,001 to 36,000 pieces per annum.
It is clear to me that the matters covered in the first and third dot points of the Notes for the Preparation of an Agreement were reflected in the final agreement tendered but that the second dot point was omitted.
Much has been made by UDR of the words 'with the above prices' in the second dot point which reads 'minimum quantity guarantee with the above prices: is 18,000 pieces over 12 month period'. However, that phrase does not appear in Mr Gilpin's own 'Heads of Agreement' exhibit 'F' nor in Mr Afkos' marked up Manufacturing Agreement. My interpretation of those words, as they appear in the agreement and in the context of the previous correspondence and discussions between the parties, is that it is effectively a statement that the agreement reached on the basis of different levels of pricing per rod comes with a minimum quantity guarantee of 18,000 pieces over a 12 month period. To read it in the way UDR contends namely, that a penalty applies by way of higher prices per rod if the number of rods produced is less than 18,000 pieces over 12 months, would not distinguish that dot point at all from the third dot point. It is reasonable to infer that the parties intended the second and third dot points to cover different matters."
Later in the course of his reasons the learned arbitrator said, after considering Mr Gilpin's evidence, that:
"I am satisfied that when he went into the negotiations he was fully aware that Mr Afkos was looking for 18,000 rods per annum which was the basis of his pricing. He was also aware that Mr Afkos needed $540,000 per annum by way of an agreed return and he understood that that figure was based on 18,000 rods per annum from the one lathe two shift operation … . The 18,000 figure was a 'pegged turnover' which gave Mr Afkos a sufficient income … . He confirmed that going into the meeting it was UDR's position that if production fell it would be to a one lathe operation.
In dealing specifically with the change to clause 4.1 Mr Gilpin stated in his evidence:
'Well, it was, like a lot of that clause, we felt it too wordy. What we were trying to do was simplify the agreement. We knew well and truly at this point in time that the minimum of 2 shifts equated to 18,000 N rods, or maybe more, maybe slightly less. So it was purely a matter of simplifying that assurances [sic] here and putting it as a number.'
He later stated that he recalled the discussion as it was critical to reach an agreement with Mr Afkos which meant [that] either UDR … [was] in the business of producing drill rods or … [it was] not … .
Later, he was again asked to recall what was said about clause 4.1 and his answer was:
'Paul was -- as we went through this, we discussed each point if Paul wasn't comfortable, which was the main issue. That he didn't feel comfortable with the wording, or a number of things. His question to me on this was:
"Tom, what's the difference? I mean, I'd rather see that as a number -- a commitment and a number of pieces. We've got sales". --
To me if that simplified, if that's what Paul wanted to see, I changed the minimum of two shifts to 18,000 pieces.' "
However clause 4 of the manufacturing agreement, as it read when it was executed by the parties, provided only as follows:
"4. Adjustment to Capacity
4.1UDR reserves the right to provide AI with reasonable notice of their [sic] requirement to reduce or increase production capacity, from time to time.
4.2In the event that capacity is reduced to a two shift operation then the AI CNC Lathe will be used and not the UDR Lathe, unless otherwise agreed by UDR."
The arbitrator, in the light of his findings of fact to which I have referred, upheld the respondent's rectification claim and substituted for clause 4.1 the following clause which, he said, accorded with what had been agreed between the parties in November 1996 and reflected their continuing common intention at the time of contracting:
"4.1UDR reserves the right to provide AI with reasonable notice of their [sic] requirement from time to time:
(a)to increase production capacity;
(b)to reduce production capacity to not less than the maximum capacity of an AI CNC lathe working two 10 hour shifts five days a week in a 12 month period, which is deemed to be 18,000 UDR Drill Rods."
I should mention that the expression "UDR Drill Rod(s)" is defined by cl 1.1 of the manufacturing agreement as meaning "UDR HO and NO drill rod manufactured by AI in accordance with UDR Manufacturing Quality Procedures". "UDR Manufacturing and Quality Procedures" are in turn defined by cl 1.2 to mean "the Quality Manufacturing Procedures for UDR Drill Rod set out in Appendix 1".
I should also mention that, by cl 3.2 of the agreement (to which I will return later), the parties gave effect to the new pricing structure which had been set out in the notes.
The arbitrator next found that during the period 15 August 1997 to 14 August 1998 the applicant required the respondent to produce, and the respondent produced, only 11,139 ordinary NO rods and 3,396 ordinary HO rods (and also 629 short rods) in respect of which the applicant paid to the respondent the sum of $344,182.72. The applicant had paid for those rods at the price fixed for a quantity between 18,001 and 27,000 because the parties had agreed that this would be the commencing price with that price later being adjusted if the quantity ordered fell below 18,001 in a twelve month period (clauses 3.2, 3.4 and 3.6 of the manufacturing agreement). The arbitrator found that, because the total quantity of rods produced was "less than 18,000", the applicant should have paid to the respondent the sum of $491,485.11, "adopting the pricing for 0 ‑ 18,000 in the Manufacturing Agreement". That being so, the arbitrator found, the difference of $147,302.39 was payable to the respondent by the applicant.
The arbitrator went on to say that in addition, and as a consequence of the rectification order made by him, the applicant was liable to pay to the respondent the sum of $40,425.97 because of its failure "to meet the minimum quantity guarantee" for the period referred to. He calculated that sum in the following way:
"(a)minimum production volume                   18,000
(b)total number of rods produced during the
period 15 August 1997 to 14 August 1998:
NO and HO14,535 ..
Short NO and HO           629 ..        15,137... [sic]
(c)Short fall [sic] -  2,683... [sic]

(d)… 2,683.00 x $31.37 $84,165.71
[being the cost of an NO rod, which
costs less than an HO rod]
(e)Less variable costs $43,739.74
Total$40,425.97"

The arbitrator next turned to the respondent's claim for a declaration that the applicant had licensed a third party to manufacture drill rods in breach of cl 11.1 of the manufacturing agreement. That clause reads as follows:
"11. Exclusivity
11.1UDR acknowledge [sic] that it will not licence any other [sic] third party to manufacture UDR Drill Rod [sic] during the term of this Agreement."
He said that the major issue in relation to this claim was whether or not the licence which UDR admitted giving to a third party "was to manufacture 'UDR Drill Rod' within the meaning of that expression in cl 11.1".
He mentioned that the respondent (albeit that he should, I think, more properly have referred to the applicant) had contended that the defining features of the UDR drill rod were its raw material specification, its straightening specification and the heat treatment process used in manufacturing it. The applicant contended before the arbitrator that the rods to be produced (in Canada) by the third party in question (Universal Drill Rigs Inc, referred to by the arbitrator as "UDR Canada") were not "UDR Drill Rods" within the meaning of that expression in cl 11.1 when read with the definition in cl 1.1 (which I have quoted above) because those rods would be produced from a different material and would be subjected to a different heat treatment application. The applicant also contended that there was no evidence that UDR Canada would apply the same straightening process as was applied by the respondent in respect of the UDR drill rods. It said also that there were differences in thread dimensions and that the issue was "not simply whether the rods are interchangeable but whether they will operate effectively together in the field, especially if they have different bevel to bevel lengths".

After referring to the definition of "UDR Drill Rod(s)" and "UDR Manufacturing and Quality Procedures" the arbitrator mentioned that Appendix 1 of the manufacturing agreement dealt only with UDR NO drill rods and that the quality control procedures there referred to dealt with raw materials, straightening tolerance, inspecting straightness, heat treatment, hardness testing and machining of drill rods. He then went on to consider the evidence of the witnesses. He accepted, in this respect, the evidence of Dr Cheng, an expert called on behalf of the respondent, who had said that:
"While there are numerical differences in the tolerances between the Australian and Canadian drawings, they appear to be more in line with different manufacturing approaches, rather than an intention to design a different product.
The mid‑tolerance differences between the two drawings do not appear to result in the stand off exceeding the specified limits in the Australian drawings. Therefore, the drill rods manufactured in the Australian drawings are expected to … [be] interchangeable with those manufactured in the Canadian drawings."
The arbitrator went on to say of Dr Cheng that:
"In his evidence in chief he explained that the differences were not significant. He thought that there were so many dimensions that were so similar or the same that if somebody started from scratch to design a different drill rod it is unlikely that there would be so many dimensions that were so closely related. His evidence was for all intents and purposes … [that] the designs were the same."
The arbitrator concluded that the rods manufactured by UDR Canada were manufactured by it pursuant to a licence given by the applicant in breach of cl 11.1 of the manufacturing agreement. He said, in that respect, the following:
"It was considered by Mr Afkos, and is part of UDR's case, that one of the defining characteristics of the UDR Drill Rod is the heat treatment process. That process is that hardness is between 32 to 35 Rockwell, pin end hardness is to commence from the very end to 6 inches in length and the box end hardness is to commence 2 inches from the end and two [sic] 6 inches in length.
Most of the requirements in Appendix 1 are exactly what that appendix is designed to deal with, namely, quality control. Various manufacturing steps and procedures are set out which deal with a broad range of manufacturing activities to produce the UDR NO Drill Rods.
It is also not disputed that the raw material, ie steel required to produce the UDR NO and HO Drill Rods is grade 1541. According to the evidence from the UDR witnesses, the proposed raw material to be used in the Canadian drill rod plant is of grade 1043 which is a less expensive and a softer grade than 1541.
There is an obvious problem in applying the definition in clause 1.1 of the Manufacturing Agreement of 'UDR Drill Rod' to clause 11.1. The definition defines the UDR Drill Rod as a drill rod manufactured by AI but clause 11.1 contemplates manufacture by a third party.
On the proper interpretation of the Manufacturing Agreement, the definitions are only to apply where the context does not otherwise require. In this case, the context requires that the term 'UDR Drill Rod' in clause 11.1 has a different meaning to the definition.
Furthermore, because the grade of raw material is not specified in the Manufacturing Agreement, the Manufacturing Agreement is therefore wide enough to cover the manufacturing of drill rods of a different grade to that which AI has been required to date to turn into drill rods. In other words, the Manufacturing Agreement could contemplate manufacturing raw material of grade 1043 for instance.
However, Appendix 1, insofar as it refers to heat treatment, contemplates steel of grade 1541. This is apparent from the evidence of a number of witnesses including Mr Afkos and Mr Watkins that the heat treatment application will depend upon the nature of the raw material. I accept Mr Afkos' evidence that the heat treatment that applied to the raw material with which AI was provided (grade 1541) under the Manufacturing Agreement required the heat treatment application stated in Appendix 1. That application was developed from information provided by the consultant, Mr Laczko. I find that the same heat treatment of the box end would not be required for the softer material intended to be used by UDR Canada and I infer this from the evidence of Mr Watkins and Mr Afkos. I also accept Mr Afkos' evidence that the hardness of the ends derives from the heat treatment and that is, at least to some extent, a matter of the preference of the client.
Once it is appreciated that the heat treatment procedures in Appendix 1 are governed by the type of raw material or option of the client but that the type of raw material can change under the Manufacturing Agreement, then it would not be consistent with that flexibility to interpret 'UDR Drill Rod' in clause 11.1 as being so narrowly defined as a UDR HO and NO Drill Rod manufactured strictly in accordance with the UDR Manufacturing Quality Procedures.
The commercial purpose of clause 11.1 is to grant AI exclusivity in the manufacture of UDR HO and NO Drill Rods. At the time of the entering into the Manufacturing Agreement, that drill rod had been drawn in an as constructed format (Exhibit C1 and C2). That clause should not be interpreted in such a way that it could be avoided if there was a minor change to the dimensions or tolerances of those drawings such that the new product was not exactly the same. Such an interpretation would not be reasonable nor in keeping with the purpose of the clause and it would be too easy to circumvent it. A more flexible and common sense commercial approach to the interpretation of clause 11.1 is required.
Likewise, it would too easily defeat the purpose of clause 11.1 if the heat treatment procedure in Appendix 1, was elevated to the point of a specification which, if strictly applied, would allow the purpose of the clause to be circumvented.
Accordingly, for the purposes of clause 11.1 of the Manufacturing Agreement, I do not regard the heat treatment procedure as a defining feature where different raw material is used. Accordingly, I do not accept that the heat treatment of both the pin end and the box end as contemplated in the manner described by Mr Watkins is material to the question of whether or not clause 11.1 is being breached.
Although there is evidence of a straightening process and a straightening plant applying to the Canadian drill rod plant, it is true that there is no detailed evidence of the straightening process. Again, I hold that the straightening tolerance and inspection procedures of Appendix 1 should be similarly flexibly applied. In any case, the straightening tolerance of the UDR NO and HO Drill Rods is not one of its defining features.
Accordingly, on the proper interpretation of clause 11.1, 'UDR Drill Rod' means the UDR HO and NO drill rod the subject of the UDR as constructed drawings."
Having set out this background I will return to the three "manifest errors of law" contended for by the applicant. These are set out in pars 3, 4 and 5 of the applicant's notice of motion by way of appeal. Those paragraphs read as follows:
"3.The Arbitrator erred in law in that (for the appellant's alleged breach of the Manufacturing Agreement arising from non‑production of 18,000 drill rods in a 12 month period):
3.1under the respondent's claim for damages for breach of the rectified Manufacturing Agreement ('the minimum quantity guarantee claim') he failed to assess damages using the price per drill rod that was payable for production by the respondent of at least 18,000 drill rods;
3.2he awarded damages under the respondent's alternative claim for payment of a higher price per drill rod ('the differential production volume claim') in addition to the award of damages under the minimum quantity guarantee claim.
4.The Arbitrator erred in law in ordering rectification of the Manufacturing Agreement by inserting into … it a clause:
4.1that was not consistent with and did not reflect what the Arbitrator found was the agreement of the parties that was expressed in a written document entitled 'Notes for Preparation of Agreement';
4.2that was not consistent with the clauses of the Manufacturing Agreement that reflected the agreement in the Notes for Preparation of Agreement;
4.3that the parties had in substance deliberately omitted from the Manufacturing Agreement.
5.The Arbitrator erred in law in holding that for the purposes of the Manufacturing Agreement 'UDR Drill Rod' means the 'UDR HO [and] NO Drill Rod the subject of the UDR as constructed drawings'."
Before considering the merits of these three grounds of appeal I should say something about the test to be applied under s 38(5) of the Act:
It is apparent, from that provision, that the court may not grant leave under s 38(4)(b) unless it considers that the determination of the question of law raised by the appeal could, in all the circumstances, substantially affect the rights of one or more of the parties to the arbitration agreement and that there is either a manifest error of law on the face of the award or 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.
That has not always been the law in this State. Until s 38(5) was amended by the Commercial Arbitration Amendment Act 1997 (WA) the court was required only, as a prerequisite to the grant of leave under s 38(4)(b), to be satisfied as regards the first limb of s 38(5) as that provision now stands, namely that the determination of the question of law concerned could, in all the circumstances, substantially affect the rights of one or more of the parties to the arbitration agreement. However the equivalent provision in like legislation in some other States has taken the form which s 38(5) of our Act now takes since prior to 1997. So, in New South Wales, s 38(5) of the Commercial Arbitration Act 1984 (NSW) was amended to give it its present form by the Commercial Arbitration (Amendment) Act 1990 (NSW) and in Queensland a like provision seems to have been in force since 1990 (see s 38(5) of the Commercial Arbitration Act 1990 (Qld)).
It follows of course that cases decided on the former provisions of s 38(5) of our Act as, for example, Thiess Contractors Pty Ltd v Water Corporation of Western Australia, unreported, SCt of WA (Parker J); Library No 970561; 28 October 1997 (to which I was referred in this application), are now of limited assistance. Greater assistance might be derived from cases decided on the equivalent (to our now s 38(5)) provisions in other States.
One of these is Promenade Investments Pty Ltd v New South Wales (1992) 26 NSWLR 203. In that case Sheller JA (with whom Meagher JA was in agreement), after setting out something of the history of the legislation in New South Wales and considering what had been said by the then Attorney‑General of that State in the Second Reading Speech with respect to the amendment, concluded (at 222) that:
"The added requirements of manifest error of law on the face of the award or strong evidence that the arbitrator made an error of law and that the determination of the question may add substantially to the certainty of commercial law suggest that the draftsman was seeking to constrain the exercise of court control over arbitral awards in the manner described by the House of Lords in The Nema."
I should interpose that the case of The Nema (Pioneer Shipping Ltd v BTP Tioxide Ltd [1982] AC 724) was decided in respect of legislation (s 1(4) of the Arbitration Act 1979 (UK)) which was in substantially the same terms as s 38(5) of the Commercial Arbitration Act prior to its amendment. Lord Diplock there said, with the concurrence of the other members of the House of Lords, at 740, that:
"Except when all parties to the reference consent, the first part of section 1(4) placed an absolute bar upon the grant of leave to appeal unless the determination of the disputed point of law would substantially affect the rights of one or more parties to the reference; and this, be it noted, even though the point might have arisen under a standard form contract and be of outstanding importance to the trade generally. I find it impossible to infer from the inclusion of a power to impose conditions in the latter part of the same subsection a parliamentary intention that whenever that absolute bar did not operate leave to appeal should [italics in original] be granted, albeit that it might be made subject to conditions."
As has been pointed out by Sheller JA (at 218) Lord Diplock went on to say (at 742 ‑ 743):
"Where, as in the instant case, a question of law involved is the construction of a 'one‑off' clause, the application of which to the particular facts of the case is an issue in the arbitration, leave should not normally be given unless it is apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument, that the meaning ascribed to the clause by the arbitrator is obviously wrong. But if on such perusal it appears to the judge that it is possible that argument might persuade him, despite first impression to the contrary, that the arbitrator might be right, he should not grant leave; the parties should be left to accept, for better or for worse, the decision of the tribunal that they had chosen to decide the matter in the first instance. … "
Lord Diplock said also (ibid) that:
"For reasons already sufficiently discussed, rather less strict criteria are in my view appropriate where questions of construction of contracts in standard terms are concerned. That there should be as high a degree of legal certainty as it is practicable to obtain as to how such terms apply upon the occurrence of events of a kind that it is not unlikely may reproduce themselves in similar transactions between other parties engaged in the same trade, is a public interest that is recognised by the Act particularly in section 4. So, if the decision of the question of construction in the circumstances of the particular case would add significantly to the clarity and certainty of English commercial law it would be proper to give leave in a case sufficiently substantial to escape the ban imposed by the first part of section 1(4) bearing in mind always that a superabundance of citable judicial decisions arising out of slightly different facts is calculated to hinder rather than to promote clarity in settled principles of commercial law. But leave should not be given even in such a case, unless the judge considered that a strong prima facie case had been made out that the arbitrator had been wrong in his construction; and when the events to which the standard clause fell to be applied in the particular arbitration were themselves 'one‑off' events, stricter criteria should be applied on the same lines as those that I have suggested as appropriate to 'one‑off' clauses."
In this State the court has, prior to the amendment of s 38(5), questioned how much weight should be given to the so‑called "Nema guidelines". By way of example Parker J, in Thiess Contractors Pty Ltd, above at 7, has said that:
"The better view is … that while the Nema guidelines may properly be taken into account in determining whether leave to appeal should be given, those guidelines are no more than relevant and important aides to be considered along with the other circumstances of the case in the exercise of what is an unfettered discretion whether or not to grant leave. Hence, I would not regard the question of leave to be determined principally or necessarily by factors suggested by the Nema guidelines such as whether the decision was obviously wrong or whether there was a strong prima facie case of error. Rather the discretion is to be exercised after considering all the circumstances of the case. This approach appears to accord with the views expressed in Qantas Airways Ltd v Joseland (supra) at 333, Leighton Contractors Pty Ltd v Kilpatrick Green Pty Ltd [1992] 2 VR 505, Fastspan Buildings v J & A Lovretta, unreported; SCt of WA (Seaman J); Library No 8031; 12 January 1990 and Forsayth NL v Australasian Gold Mines NL, unreported; SCt of WA (Ipp J); Library No 920420; 18 August 1992."
I should mention that the case of Qantas Airways Ltd v Joseland & Gilling (1986) 6 NSWLR 327, referred to by Parker J, was decided prior to the amendment of the New South Wales Act and that the case of Leighton Contractors Pty Ltd v Kilpatrick Green Pty Ltd [1992] 2 VR 505, also referred to by his Honour, seems likewise to have been decided under the former legislation.
Sheller JA went on to say, in Promenade (at 222):
"A manifest error of law on the face of the award may be an error which would be apparent to the judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument. A determination which adds substantially to the certainty of commercial law may be a determination of a question of the construction of a contract in standard terms rather than the construction of a one‑off clause. In such a situation, strong evidence that the arbitrator made an error of law may equate with a strong prima facie case that the arbitrator had been wrong in his construction.
In his judgment, Rogers CJ Comm D … [in the court below] referred to the February 1988 report of the Working Group requested by the Standing Committee of Attorneys‑General to review the operation of the uniform arbitration legislation. This group recommended that:
'Section 38(5) be expanded to specify the circumstances in which a court may exercise its discretion under s 38(4) to grant an application for leave to appeal. In particular, s 38(5) should incorporate the guidelines enunciated in The Nema and other relevant authorities with the effect that leave may only be given if an error of law is apparent on the face of an award without hearing argument.'
His Honour concluded … I think, with respect, correctly, that the legislature intended to reject the broad discretionary approach prescribed by the judgment in Qantas."
Sheller JA also considered, in Promenade (at 225 ‑ 226), the meaning of the words "manifest error". He said:
" 'Manifest error' is an expression sometimes used in reference to reasons given by judges or the approach taken by juries: see, eg, s 107(c)(iii) of the Supreme Court Act 1970 and the judgments of Kirby P in Azzopardi v Tasman UEB Industries Ltd (at 151) and Otis Elevators Pty Ltd v Zitis (1986) 5 NSWLR 171 at 181. It is used to indicate something evident or obvious rather than arguable: see generally per McHugh JA in Larkin v Parole Board (1987) NSWLR 57 at 70 ‑ 71. Nothing more is to be learnt from the language used but of course the discretion of the court as to whether or not it will grant leave remains and regard must be had to the requirement of subs (5)(a). The matters referred to by Lord Diplock in The Nema remain important factors in determining whether leave should be given.
However I have difficulty in defining the significance of an error of law by reference to whether it is apparent to a judge upon a mere perusal of the reasoned award itself without the benefit of adversarial argument. I understand the views expressed that decisions on questions of law should be left to the arbitrator with minimal interference by the courts unless the arbitrator may be establishing an erroneous precedent on a matter of law which may affect other cases between other parties as for example where the question concerns the construction of a contract in standard terms. But the paragraph requires a determination as to whether or not there is a manifest error on the face of the award and I do not see why a judge should be required to do that without adversarial argument. If the judge concludes after argument that there is not such an error of law an application based on this ground fails. If there is such an error of law, a question arises as to whether as a matter of discretion leave should be granted … .
There is nothing, in my opinion, in the language of the subsection or in any other material, to which consideration can appropriately be given pursuant to the terms of the Interpretation Act which would allow the judge to proceed to determine the application without hearing argument. However as McHugh JA pointed out 'manifest', in the context of the subsection, which contemplates the grant of leave before an appeal can be pursued, connotes an error of law that is more than arguable. There should, in my opinion, before leave is granted be powerful reasons for considering on a preliminary basis, without any prolonged adversarial argument, that there is on the face of the award an error of law.
Assuming that there is not a manifest error of law on the face of the award it may be argued that there is strong evidence that the arbitrator 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 requirement that the question be one the determination of which may add substantially to the certainty of commercial law indicates that it should be one of wider and greater importance than, for example, the construction of a one‑off clause in the context of a particular agreement between the parties."

More recently, in Natoli v Walker, unreported; CA SCt of NSW; Library No 40351 of 93; 26 May 1994 (referred to in Jacobs, M, "Commercial Arbitration Law and Practice" The Law Book Company Ltd, Sydney, 1990, par 35.625) Kirby P (at 21 ‑ 23) has said that the limitation imposed by the amended s 38(5) was one "which has been deliberately enacted by the Parliament of … [New South Wales]" and one which "is part of uniform commercial arbitration legislation enforced in other jurisdictions of this country". His Honour said that the limitation was imposed because it was considered, inter alia, that the approach previously adopted by the courts was unduly disturbing of the use and finality of arbitral awards. His Honour said that the clear preference of parliaments throughout Australia "has been for the more robust and narrow approach favoured by the House of Lords" in The Nema.
That this was the preference of the Parliament of Western Australia is, I think, apparent from the second reading speech made in respect of the amending legislation as published in Hansard on 13 November 1997. The Minister for Health (who moved that the Commercial Arbitration Amendment Bill be read a second time) said, in words reminiscent of what was said by Lord Diplock in The Nema (at 743):
"One of the major objectives of this uniform legislation is to minimise judicial supervision and review. 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."
Kirby P, in Natoli, also noted that Promenade, which, he said, gave effect to the statutory amendment in New South Wales, has been followed by other courts in Australia as, for example, in Commonwealth v Rian Financial Services & Developments Pty Ltd (1992) 36 FCR 101.
Promenade has since been applied in other cases as, for example, Leung v Hungry Jack's Pty Ltd [1999] VSC 477, par 15 and Re Tiki Village International Ltd [1994] 2 Qd R 674 at 677.
It consequently seems to me that this Court, too, should adopt what has been said in Promenade in considering s 38(5) of the Act.
That brings me, finally, to the question whether a sufficient basis has been shown for the granting of leave to appeal with respect to one or more of the grounds of appeal and, if so, whether the appeal should be allowed. I have already mentioned that in each case the applicant relies solely upon s 38(5)(a) and (b)(i) of the Act, contending that there is a manifest error of law on the face of the award and that the determination of the question of law concerned could substantially affect its rights.
I will deal with the first and second grounds of appeal together. The second ground alleges an error of law on the part of the arbitrator in ordering rectification of the manufacturing agreement in terms amending cl 4.1 thereof so as to insert, in effect, a minimum quantity guarantee of 18,000 UDR drill rods and the first challenges his assessment of damages for breach of the clause as rectified.
Essentially the applicant's contentions in respect of these two grounds come down to three propositions.
The first is that cl 4.1(b) of the manufacturing agreement as rectified by the arbitrator is inconsistent with what the arbitrator found to be the true agreement of the parties as reflected in the notes.
The second, which overlaps the first, is that the arbitrator erred in awarding damages for breach of cl 4.1(b) of the management agreement as rectified in addition to requiring the applicant to pay the higher price for the drill rods as a result of the fact that less than 18,001 were ordered when, on the proper construction of the management agreement, the payment of the higher price was to be the only consequence of ordering less than 18,000 drill rods.
The third is that, even if damages were payable by the applicant arising out of its failure to order at least 18,000 drill rods, the arbitrator erred in calculating those damages upon the assumption that, had there been no breach, precisely 18,000 rods would have been ordered at the price fixed for the 0 ‑ 18,000 range.
Counsel for the applicant contended in support of the first two propositions that, on the proper construction of the notes, there was no "minimum quantity guarantee". Rather, he submitted, the second bullet point in those notes was merely a link between the first and the third and the effect of what was agreed, as reflected in that document, was that, once the second lathe came into operation, the new prices would apply, the applicant would pay for rods upon the assumption that between 18,001 and 27,000 would be ordered, the minimum quantity which would justify that price range was to be 18,001 rods and, if that quantity was not achieved in a 12 month period, the price of the rods would be adjusted to that fixed in the case of an acquisition of a total of 18,000 rods or less.
I am not persuaded that there was any manifest error on the part of the arbitrator in rejecting that construction of the "true" agreement which he found to have been made and in preferring the construction to which he gave effect.
It should, firstly, be said that, in deciding what was the true agreement of the parties, the arbitrator did not restrict himself merely to the notes. He also took into account, without objection, the discussions between Mr Afkos and Mr Gilpin to which he referred and prior correspondence between the parties. He found, as regards the discussions and correspondence, that Mr Gilpin knew, at the time, that Mr Afkos needed "an agreed return" of $540,000 per annum and that this "was based on [the production of] 18,000 rods per annum". He also referred to the evidence of Mr Gilpin to the effect that Mr Afkos told him that he would "rather see … a commitment and a number of pieces" and that he consequently "changed the minimum of two shifts to 18,000 pieces". It is not suggested that the learned arbitrator erred in taking this evidence into account in making his findings of fact as regards the rectification claim.
Moreover it seems to me, as it did to the arbitrator, that the construction of the notes advanced by the applicant leaves no function to be performed by the words appearing after the second bullet point in those notes. If those words meant no more than what is contended for by the applicant then they were unnecessary. They would, upon the applicant's reading of them, have added nothing to what was conveyed by the words appearing after the third bullet point.
In these circumstances it seems to me that it was open to the arbitrator to conclude, as he did, that the true agreement of the parties was that the applicant was obliged to order not less than 18,000 rods over a 12 month period and that if, for any reason, less than this amount was produced over that period (and, as I shall later mention, the shortfall might not necessarily be ascribable to a breach of the management agreement on the part of the applicant) the price for the rods produced would, save where the agreement provided otherwise, be that set for a quantity of between 0 ‑ 18,000.
The consequence of the arbitrator's findings is that the agreement as rectified fixes (by cl 3.2) a pricing structure, provides (by cl 3.4) in effect that the prices initially charged would be based upon an assumption that a quantity of between 18,001 and 27,000 rods would be ordered over a 12 month period, provides (by cl 3.6) what is to happen as regards pricing if production falls below 18,000 rods in a 12 month period and provides (by cl 4.1) what may or may not be required by the applicant as regards increases or reductions in production. I will, for the sake of convenience, set out those clauses and cl 3.7 (which completes the picture) in full (the parties being in agreement that each of these clauses should be treated as forming part of the arbitrator's reasons):
"3.2The Drill Rod Price payable by UDR to AI which will come into effect from the time the UDR Lathe commences operations is:
Production Volume           Drill Rod Price for each
  drill rod
  NO        HO
0 to 18,000 UDR Drill Rods          $31.37    $41.83
18,001 to 27,000 UDR Drill Rods   $23.46    $31.29
27,001 to 36,000 UDR Drill Rods   $21.48    $30.00
…
3.4For the purposes of clause 3.2 the Drill Rod Price which is deemed to apply will be the Drill Rod Price applicable to Production Volume in the range of 18,001 to 27,000 UDR Drill Rods
…
3.6In the event that Production Volume is less than 18,000 UDR Drill Rods in each twelve month pricing period, then UDR will calculate the amount which should have been paid to AI based on Production Volume in the range of 0 to 18,000 UDR Drill Rods and will pay to AI the difference in the next payment to AI, subject always to the lesser Production Volume not being, in the reasonable opinion of UDR, as a result of manufacturing inefficiencies of AI or the breakdown of the Drill Rod Plant, UDR Lathe or Additional Plant
3.7The Drill Rod Price for a Production Volume of 27,001 to 36,000 UDR Drill Rods applies to the excess above 27,000 UDR Drill Rods only
…
4.1UDR reserves the right to provide AI with reasonable notice of their requirement from time to time:
(a)to increase production capacity;
(b)to reduce production capacity to not less than the maximum capacity of an AI CNC Lathe working two 10 hour shifts five days a week in a 12 month period, which is deemed to be 18,000 UDR Drill Rods."
While it might be debated whether cl 4.1 of the management agreement as rectified by the learned arbitrator was the best means of giving effect to what he found (as a matter of fact) to have been the true agreement of the parties I am not persuaded that his choice of words discloses any manifest error of law in that respect.
There is, in my opinion, no inconsistency between that clause and the notes.
Counsel for the applicant contended in this last respect that the learned arbitrator, in rectifying cl 4.1 of the management agreement as he did, in effect reinstated what the parties had deliberately omitted and thereby fell into error. It is true that cl 4.1 of the first draft of the manufacturing agreement had provided that the applicant reserved to itself the right to provide the respondent with reasonable notice of its requirement to reduce maximum productive capacity to a minimum of eight hours per shift or from four or three shifts to a minimum of two shifts from time to time. It is also true that the parties agreed to delete this clause. However the learned arbitrator found, and this finding (of fact) was open to him on the evidence to which I have referred, that this was done only upon the basis that the deleted clause would be replaced by one which reflected, inter alia, a guarantee that the applicant would order from the respondent not less than 18,000 drill rods over a 12 month period.
Next, counsel for the applicant submitted that the learned arbitrator's acceptance of Mr Afkos' evidence that he assumed that later drafts of the manufacturing agreement faithfully reflected what he and Mr Gilpin had earlier agreed was inconsistent with a finding that those drafts did not accurately reflect the true agreement of the parties. However this submission, with respect, misunderstands the arbitrator's reasons. It is, I think, apparent from those reasons that the arbitrator accepted that Mr Afkos had conveyed, by his evidence, that he had mistakenly made the assumption referred to, without checking it. So much is plain from the arbitrator's reasons as a whole.
Finally, in this respect, counsel for the applicant contended that cl 4.1(b) of the management agreement as rectified is incompatible with cl 3.6 thereof. He submitted that if the applicant was required to order not less than 18,000 drill rods there was no point in the inclusion of cl 3.6 of the agreement which provided for what was to happen in that eventuality, unless that clause is construed as providing for the only consequence of a failure to order less than 18,000 drill rods.
However the learned arbitrator construed cl 4.1 of the manufacturing agreement as allowing for a price to be fixed in the 0 ‑ 18,000 range in circumstances in which, he said, "there is reduced average production due to neutral events such as force majeure".
It seems to me that it was open to the learned arbitrator to construe the manufacturing agreement in that way. The construction at which he arrived gives effect to each of cls 3.2, 3.4, 3.6 and 4.1(b). Moreover, while cl 3.6 does provide that that clause is not to operate in circumstances in which the lesser production volume is a consequence of manufacturing inefficiencies on the part of the respondent, or the breakdown of the lathe or plant, that still leaves open the prospect that there might be other causes for the shortfall in production than those identified or breach of contract on the part of the applicant as, for example, industrial action or a fire.
The manufacturing agreement as rectified by the arbitrator does not read entirely happily. It might also be thought to produce a somewhat surprising result. However the learned arbitrator has found, as a matter of fact, that the true agreement between the parties was such that the respondent could not be required to produce fewer than 18,000 drill rods or, perhaps more accurately, that the applicant would not order fewer than that number of rods, and the agreement as rectified does, even if not in an ideal form, give effect to the true agreement as found in a workable way.
It consequently seems to me that there was no manifest error of law on the part of the arbitrator in any of the respects complained of.
That brings me, next, to the applicant's contention that, even if the arbitrator was right in his finding as regards the true agreement of the parties and his rectification of the manufacturing agreement, he erred in law in the manner in which he approached the assessment of the respondent's claim for damages for breach of the agreement as rectified.
It will be plain from what I have said above that the arbitrator, having found that fewer than 18,000 drill rods had been ordered, calculated the price payable for the 15,137 rods that he said were ordered by the applicant by reference to the 0 ‑ 18,000 price range and then, in respect of the shortfall, calculated the amount of the respondent's lost profit by reference to that price range also.
There can, I think, be no contest as to the proposition that, if only 15,137 drill rods were ordered in the 12 month period in question, the price to be paid for those rods fell into the 0 to 18,000 category. That, the arbitrator found, gave rise to a total price of $491,485.11 in circumstances in which the applicant had, as he also found, paid only $344,182.72. The respondent was, upon that basis, plainly entitled to the difference of $147,302.39.
However the applicant contends that the arbitrator erred in calculating the respondent's lost profit, being its damages for breach of the manufacturing agreement as rectified, by reference to this scale. Its counsel contends, in a nutshell, that the respondent was entitled to be placed in the situation in which it would have been had the contract been performed and that it is inconceivable that the applicant would, in that event, have ordered precisely 18,000 drill rods when, by ordering one extra rod, it could achieve a significantly lower price for all rods ordered. That being so, it contends, the arbitrator should have proceeded upon the assumption that, had the applicant performed the contract, it would have ordered 18,001 drill rods.
However the fact is that while the applicant could have ordered 18,001 drill rods it did not do so and its breach of the manufacturing agreement was comprised by its failure to order the minimum of 18,000 rods set by that agreement. In those circumstances, it seems to me, it was open to the learned arbitrator to calculate the respondent's damages by reference to the profit which it would have realised had the minimum quantity of 18,000 drill rods been ordered and not some greater quantity. In doing so he was merely giving effect to the contractual scheme as he found it to be.
It consequently seems to me that no manifest error of law has been pointed to in this respect.
I should add that counsel for the applicant pointed to the fact that, while cl 3.2 of the manufacturing agreement sets the higher price for a quantity anywhere from 0 to 18,000 rods inclusive, cl 3.6 assumes that the higher charge will be paid only if fewer than 18,000 rods were ordered in a 12 month period. That, he submitted, was recognised by the learned arbitrator at page 44 of his reasons where he said that one of the provisions of the manufacturing agreement "which … was unaffected … was that there would be higher prices if the number of rods at the end of the year was less than 18,000". That being so, he said, the arbitrator should have found that the price payable for the minimum order of 18,000 rods was the lower price fixed for the middle range of the three ranges set out in cl 3.2.
However the fact that cl 3.6 refers to a situation in which fewer than 18,000 rods are ordered does not alter the effect of cl 3.2 which is that an order of the minimum quantity of 18,000 (fixed by cl 4.1(b)) is to attract the higher price. Moreover it is plain from the arbitrator's reasons, taken as a whole, that he accepted this to be so notwithstanding his reference, seemingly inadvertent, to the fact that the higher prices would apply "if the number of rods at the end of the year was less than 18,000". I am consequently of the opinion that the learned arbitrator made no manifest error of law in this respect either.
I should also add, for the sake of completeness, that the arbitrator's calculations disclose a number of mathematical errors. If, as he said, 11,139 ordinary HO rods and 3,396 ordinary NO rods were produced, together with 629 short NO and HO rods, during the 12 month period this produces a total of 15,164 rods (and not, as the arbitrator said, 15,137 rods) and, consequently, a shortfall of 2,836 rods (and not, as the arbitrator said, 2,683 rods). If 2,836 is multiplied by $31.37 this produces a total of $88,965.32 (and not the figure of $84,165.71 found by the arbitrator) from which should be deducted the variable costs associated with the manufacture of an additional 2,836 rods. However no point was sought to be raised by anyone with respect to these errors.
That brings me to the third and last of the grounds of appeal. The applicant contends, by this ground, that the learned arbitrator erred in law in his construction of the meaning of the phrase "UDR Drill Rod" where it appears in cl 11.1 of the manufacturing agreement. Its counsel submitted that that expression should have been given the narrow meaning found in cl 1.1 and not the broader meaning given to it by the arbitrator being "the UDR HO and NO drill rod the subject of the UDR as constructed drawings … ".
It will be apparent from what I have already said that the expression is defined by cl 1.1 to mean "UDR HO and NO drill rod manufactured by AI in accordance with UDR Manufacturing Quality Procedures" which procedures, in turn, are defined by cl 1.2 to mean "the Quality Manufacturing Procedures for UDR Drill Rod set out in Appendix 1".
Counsel for the applicant submitted that it was common ground between the parties that the heat treatment process referred to by the arbitrator was a defining characteristic of the rods manufactured by the respondent. That process only applied to the superior quality of steel used in the drill rods manufactured by the respondent. Steel of that quality was not used in the rods manufactured in Canada. Consequently, he submitted, the learned arbitrator should have found that the rods manufactured in Canada were of a different kind and quality to those manufactured by the respondent and that they did not fall within the definition provided by cl 1.1 of the manufacturing agreement.

Put differently, counsel for the applicant contended that the clear meaning of the words used in the manufacturing agreement, and their evident purpose, was that the applicant could not licence others to make rods having the same defining characteristics and quality as those made by the respondent but that it could licence others to make rods with different defining characteristics and of a different quality. He submitted that there was simply no warrant for ignoring the definition provided by the manufacturing agreement itself.
However it seems to me that the construction put upon cl 11 of the agreement by the arbitrator is one which was reasonably open to him.
It is apparent that the definition in cl 1.1 of the manufacturing agreement was not intended to be applied literally to cl 11 of that agreement. That that is so appears, without more, as the arbitrator mentioned, from the fact that the definition refers to drill rod "manufactured by AI" and that expression could plainly not be imported into cl 11.
Moreover, the evident purpose of cl 11 is that of protecting the respondent, which had made a substantial investment in plant, from having its investment jeopardised by the applicant licensing some other party to manufacture rods which the respondent would otherwise have manufactured. In those circumstances it would matter little to the respondent whether the substitute rods were or were not made of the same quality steel (and the arbitrator found that the type of raw material to be used by the respondent could change under the terms of the manufacturing agreement) and consequently were or were not subjected to the same heat process. Either way it would lose sales. It was, in my opinion, open to the arbitrator to have regard to what he referred to as the commercial purpose of the clause and to say (as, in effect, he did) that the parties could not have intended that it could be circumvented merely by making minor alterations to the dimensions or tolerances of the rods (and, as the arbitrator pointed out, Appendix 1 of the agreement applies only to the NO rods) and that it was consequently apparent that, on the proper construction of the agreement, the definitions were only to apply when the context did not otherwise require.
There is not, and could not be, any challenge to the arbitrator's finding of fact, based upon the evidence of Dr Cheng, that the design of the rod manufactured by UDR Canada was "for all intents and purposes" the same as that manufactured by the respondent.
In all of the circumstances, and having regard also for the other matters referred to by the arbitrator, it seems to me that the construction arrived at by him was, as I have said, one which was reasonably open to him and consequently one which discloses no manifest error of law.
I would consequently refuse the application for leave to appeal.