Varnsdorf Pty Ltd v Fletcher Construction Australia Ltd

[1998] VSC 206

SUPREME COURT OF VICTORIA

CAUSES JURISDICTION

Not Restricted

No. 8125 of 1998

VARNSDORF PTY LTD	Plaintiff
v
FLETCHER CONSTRUCTION	Defendants
AUSTRALIA LTD & ANOR

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JUDGE:	Mandie J
WHERE HELD:	Melbourne
DATE OF HEARING:	18 December 1998
DATE OF JUDGMENT:	18 December 1998
CASE MAY BE CITED AS:	Varnsdorf Pty Ltd v Fletcher Construction Australia Ltd & Anor
MEDIA NEUTRAL CITATION:	[1998] VSC 206

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ARBITRATION - application to consolidate two arbitrations - s.26 Commercial

Arbitration Act 1984 (Vic) - relevant considerations.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mrs S. Crennan QC	Freehill Hollingdale & Page
with Mr J. Gleeson
For the First Defendant	Mr J. Digby QC	Phillips Fox
Mr C. Connor Mr F. Tiernan Mr T. Shnookal
For the Second Defendant	Mr C. Harrison	Jerrard & Stuk

HIS HONOUR:

1. This is an application pursuant to s.26(1)(b) of the Commercial Arbitration Act 1984 for an order that two arbitration proceedings be consolidated. One statutory precondition to the Court's power to make such an order has been satisfied because Mr Brian Gallagher, who is the arbitrator in both arbitration proceedings, refused the plaintiff's application for such an order on 3 December 1998.

2. The plaintiff herein, Varnsdorf Pty Ltd, is involved with one arbitration proceeding with the first defendant, Fletcher Construction Australia Limited, which may be referred to as "the Fletcher arbitration". Varnsdorf has commenced a second arbitration proceeding against the second defendant herein, Command Energy Pty Ltd, which may be referred to as "the Command arbitration".

3. Varnsdorf is the owner of co-generation facilities at six Victorian hospitals in a project known as the VHCP. Fletcher is responsible for the design, construction, installation and commissioning of the VHCP. Command, in certain circumstances, is responsible for the operation of the VHCP.

4. A brief chronology of the Fletcher arbitration is as follows. Fletcher gave a notice of dispute under what is called the Construction Agreement in December 1994. The arbitrator was appointed in August 1995. A timetable set in late 1995 was suspended. In March 1997 a fresh timetable was set by the arbitrator. Substantial documents comprising points of claim by Fletcher, a defence and counterclaim by Varnsdorf and a reply and defence to counterclaim by Fletcher were delivered in the period May to September 1997. A series of substantial further and better particulars of their respective pleadings were exchanged by the parties between October 1997 and May 1998. The parties exchanged voluminous witness statements in the period July 1998 to November 1998. In September 1998, in the light of the novelty and the breadth of material in some of Fletcher's witness statements, the arbitrator ordered it to provide amended points of reply and defence to counterclaim to properly cover the factual issues then raised. On 18 September 1998 the arbitrator fixed a commencement date for the Fletcher arbitration of 24 November 1998. This trial date was aborted when Varnsdorf made a consolidation application on or about 6 November 1998 which was subsequently heard later that month. A new commencement date of 16 February 1999 has been fixed.

5. A court book has been prepared for the Fletcher arbitration comprising some 60,000 pages filling 223 lever arch folders. Legal fees have been incurred by Fletcher alone in connection with the Fletcher arbitration exceeding $2 million, including counsel's fees in the sum of $348,000 incurred for preparation to be ready for the November hearing date.

6. Fletcher's consolidated points of claim in the Fletcher arbitration pleaded an agreement made 31 December 1992 between Fletcher and Varnsdorf whereby Fletcher agreed for $62 million to design, construct, supply, install, commission and test the co-generation plant for six named hospitals. The consolidated points of claim comprised some 105 pages. Declarations are sought as to various dates, including handover dates and a variety of substantial pecuniary claims for liquidated amounts and for damages are made. The consolidated defence and counterclaim of Varnsdorf comprises some 115 pages, excluding the schedules. A declaration is sought that handover was not reached by the contract date or at all. Substantial "time damages" and other damages are claimed.

7. Prior to September 1998, Fletcher's points of claim contained only limited allegations that the owner had failed to ensure that Command had properly performed its obligations in a manner which did not interfere with Fletcher's performance. But in August 1998 the witness statements to which I have referred alerted Varnsdorf for the first time to a series of wider factual allegations concerning the conduct of Command, which led to its application for an order that Fletcher supply amended points of reply and defence to counterclaim. At the same time if the amendments were to be made, Varnsdorf foreshadowed the commencement of an arbitration against Command and the future question of consolidation of that arbitration with the Fletcher arbitration.

8. The amended points of reply and defence to counterclaim pleaded that if Fletcher's performance was deficient as alleged, Command had caused or contributed to a number of those deficiencies.

9. On 28 August 1998, Varnsdorf served a notice of dispute on Command pursuant to an agreement, the Operating Agreement, made between Varnsdorf and Command. The notice specifically relies upon the allegations referring to Command contained in Fletcher's witness statements and claims indemnity or contribution; breaches of the operating agreement are also alleged in the notice. The arbitrator accepted appointment on 5 November 1998 in the Command arbitration. As yet there are no pleadings.

10. The arbitrator refused to consolidate the two arbitrations, in short, for these reasons, inter alia:

    • Fletcher opposed consolidation - when it entered the agreement, s.26, as it then

    stood, required consent of all parties to consolidation;

    • a consolidation should not be forced upon Fletcher unless exceptional

    circumstances had arisen;

• he was not convinced that costs would be saved by consolidation;

• there could be conflicting fact findings with the two arbitrations, but that was only
one factor in substantial commercial disputes;

• there was no peculiar risk to Command's commercial reputation;

• the hearing would be delayed for six months, and this might result in prejudice to
Fletcher which could not be completely offset by an order for costs.

1. The relevant provisions of s.26 of the Commercial Arbitration Act 1984 provide as follows:

   "Consolidation of arbitration proceedings

   26(1) The following provisions of this subsection apply to arbitration proceedings all of which have the same arbitrator or umpire:

   (a)         the arbitrator or umpire may, on the application of a party in each of the arbitration proceedings, order --

(i)	those proceedings to be consolidated on such terms as the arbitrator or umpire thinks just;
(ii)	those proceedings to be heard at the same time, or one immediately after the other; or
(iii)	any of those proceedings to be stayed until after the determination of any of them;

(b)         if the arbitrator or umpire refuses or fails to make such an order, the Court may, on application by a party in any of the proceedings, make such an order as could have been made by the arbitrator or umpire.

...

(3)

An order or a provisional order may not be made under this section
unless it appears --

(a)	that some common question of law or fact arises in all of the arbitration proceedings;
(b)	that the rights to relief claimed in all of the proceedings are in respect of or arise out of the same transaction or series of transactions; or
(c)	that for some other reason it is desirable to make the order or provisional order.

(4)

When arbitration proceedings are to be consolidated under this section, the arbitrator or umpire for the consolidated proceedings shall be the person agreed on for the purpose by all the parties to the individual proceedings, but, failing any such agreement, the Court may appoint an arbitrator or umpire for the consolidated proceedings.

(5)

Any proceedings before an arbitrator or umpire for the purposes of this section shall be taken to be part of the arbitration proceedings concerned.

(6)

Arbitration proceedings may be commenced or continued, notwithstanding that an application to consolidate them is pending under subsection (1) or (2) and notwithstanding that a provisional order has been made in relation to them under subsection (2).

(7)

Subsections (1) and (2) apply in relation to arbitration proceedings whether or not all or any of the parties are common to some or all of the proceedings.

(8)

Nothing in subsection (1) or (2) prevents the parties to 2 or more arbitration proceedings from agreeing to consolidate those proceedings and taking such steps as are necessary to effect that consolidation."

1. The parties before me agreed that the Court's power under s.26(1)(b) was to be exercised de novo. Nevertheless, I should accord some respect to an experienced arbitrator's views, he being the person chosen by the parties to determine their disputes, and I have taken into account what the arbitrator has had to say. I must say that I do not agree with his reason that a consolidation should be not forced upon a party unless exceptional circumstances had arisen. It would appear that that is an inappropriate consideration, but as this is not an appeal from the arbitrator but a rehearing, I need say no more about the other matters, and I do take into account his reasons.

2. I should say that Command supports Varnsdorf's application but says that it will require no less than eight months to be ready for a hearing of the consolidated arbitrations, although that has now been revised and it has been suggested that a much lesser period would be necessary, perhaps if its participation was limited to the existing issues at any rate.

3. The first thing that I must be satisfied about in order that the Court could make any order at all is that one of the matters set out in subsection (3) of s.26 has been shown to exist, because that provides that an order may not be made unless it appears that there is some common question of law or fact in all of the arbitration proceedings, or that rights to relief claimed in all of the proceedings are in respect of or arise out of the same transaction or series of transactions, or that for some other reason it is desirable to make the order.

4. I am satisfied that common questions of law or fact do arise in the two arbitration proceedings. It is true that on the one hand I have a set of fully developed pleadings, and on the other hand there is only a notice of dispute, but it is clear from the terms of that notice of dispute that it is concerned with factual matters which arise and arise only from the points of amended defence to counterclaim of Fletcher.

5. It is clear that the question whether Varnsdorf, through Command, has prevented Fletcher complying with a number of central provisions of the construction agreement is a question of fact or involves many questions of fact which arise in both of the arbitration proceedings.

6. There was debate before me as to whether that question was linked to the vital question which arises from Fletcher's point of view, namely, the question of Handover, and I have not reached any concluded view about that as a matter of law, but it seems to me as a matter of practicality and as a matter of forensic reality, the facts which are relevant to the matters raised in the Command arbitration are also relevant to the question of Handover because the matters of fitness for purpose of the plant is going to arise in different guises under all these categories of matters. So whether there is a precise legal linkage is probably beside the point. There are clearly substantial questions of fact common in the arbitration proceedings. I think it is unnecessary to determine whether subparagraphs (b) and (c) of s.26(3) are also satisfied because I am clearly of the view that subparagraph (a) of section 26(3) is satisfied.

7. The question then becomes whether in the Court's discretion an order for consolidation should be made, and if so on what terms. There are some very powerful factors put forward on behalf of Fletcher which militate against the granting of a consolidation order if that order were to result in any significant delay in the commencement of the hearing of the arbitration. Moneys had been withheld from Fletcher, or drawn down under a number of financial documents, and the longer this arbitration is delayed, the longer Fletcher will be, if it is successful, held out of its money. Substantial costs of preparation have been incurred, which inevitably will be wasted to some extent. One can imagine that the time which was required to work up an arbitration such as this could well involve significant work which needs to be repeated if there was any substantial delay or adjournment.

8. I think, in short, that it would be a scandalous waste of committed resources if this arbitration were to be put off after all the effort that has already gone into getting it ready for a hearing date. The court books are ready; the witness statements have been exchanged, and these are all powerful reasons for not making any order which would prevent the commencement of the arbitration on the date fixed in February by the arbitrator.

9. The only factors which lead me to think that some consolidation order should nevertheless be made, if prejudice to Fletcher can be avoided, are the matters which arise from the policy underlying s.26 in the first place, and that is, among other things, to avoid duplication of costs and also to prevent or avoid inconsistent findings.

10. It has long been a problem with arbitration proceedings that they could not be consolidated, and s.26 as now amended provides a cure for that. There is a considerable risk of injustice to both Varnsdorf and Command, and particularly Command, if it is unable to participate to some extent in this Fletcher arbitration. There is a risk that it will be affected by adverse findings. There is a problem which will face the arbitrator if he makes such findings, indeed in continuing with the second arbitration. I would have had no difficulty in making a full consolidation order if these arbitration proceedings were both about to commence, rather than one being fully ready for hearing and the other being at a stage of notice of dispute.

11. I think, however, there is a way, which I have already foreshadowed to counsel, a way of achieving protection for Command under this section without prejudicing Fletcher, and that is to consolidate the proceedings on terms that the second arbitration proceeding be not heard until after the Fletcher arbitration; that the pleadings not be consolidated and that Command be entitled to appear in the Fletcher arbitration by its legal representatives to make submissions and to cross-examine witnesses, and also that it have access to discovered documents of all parties and on the further condition that all of the parties be bound as between each of them by the findings of fact made by the arbitrator.

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