PRACTICE AND PROCEDURE - construction contract - powers of arbitrator - power to modify contractual rights - inability of court to do so =- injunction restraining respondent from proceeding with arbitration varied. Northern Regional Health Authority v Derek Crouch Construction Co. Ltd [1984] 1 OB 644 Neale v Richardson [1983] 1 All ER 753 Robins v Goddard [1905] 1 KB 294 BOND CORPORATION PTY LTD v THIESS CONTRACTORS PTY LTD and OVE ARUP PTY LTD, ARUP PARTNERS PTY LTD, and OVE ARUP CONSULTANTS PTY LTD THIESS CONTRACTORS PTY LTD v BOND CORPORATION PTY LTD NO. WAG 114 of 1986 FRENCH J. bes eal 4 TSANIYE FEDERAL COURT AUSTRALIA. CF PRINCIPAL REGISTRY PERTH 20 January 1988 Meee inert See aD ore ; ae L F t IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION NO. WAG 114 OF 1986 BETWEE N: BOND CORPORATION PTY LTD Applicant and THIESS CONTRACTORS PTY LTD First Respondent and OVE ARUP PTY LTD, ARUP PARTNERS PTY LTD AND OVE ARUP CONSULTANTS PTY LTD Second Respondents AND BETWEEN: THIESS CONTRACTORS PTY LTD Cross-Claimant and BOND CORPORATION PTY LTD Cross-Respondent MINUTE OF ORDER JUDGE MAKING ORDER: FRENCH J. DATE OF ORDER: 20 January 1988 WHERE MADE: PERTH THE COURT ORDERS THAT:- 1. The first respondent have leave to discontinue its cross-claim. 2. The order made on 24 February 1987 be varied so that the first respondent, its servants and agents be restrained 2. until judgment be given in the applicant's action herein or until earlier order from prosecuting beyond the completion of all preliminary or interlocutory matters an arbitration between the first respondent and the applicant in accordance with the notice of reference to arbitration served by the first respondent on 12 September 1986. There will be liberty to any party to apply to further vary or discharge this unjunction. Costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. ae eee Ke ee ee ta moe ree er - poe ee weg ee sr ecty sgicryctrere Sem wo otmpen maar sae pot me ee eee IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY eee BETWEEN: AND BETWEEN: CORAM: FRENCH J. 20 January 1988 NO. WAG 114 OF 1986 BOND CORPORATION PTY LIMITED Applicant and THIESS CONTRACTORS PTY LTD First Respondent and OVE ARUP PTY LTD ARUP PARTNERS PTY LTD and OVE ARUP CONSULTANTS PTY LTD Second Respondents THIESS CONTRACTORS PTY LTD Cross-Claimant and BOND CORPORATION PTY LTD Cross-Respondent REASONS FOR JUDGMENT A question has arisen in this case as to the power of the Court to fully resolve a dispute in which an engineer seeks to invoke contractual machinery for the determination of variations in sums otherwise payable to construction contract. it under a schedule of rates 2. The proceedings were commenced on 24 November 1986. They concern a dispute arising out of claims of time and cost overruns and underpayments in connection with the provision of road and associated earthworks for a redevelopment subdivision at Millendon, near Perth. Cognate arbitration proceedings were instituted by Thiess by Notice of Reference served on Bond on 12 September 1986. On 24 February 1987 Thiess was restrained by order of this Court on the application of Bond, from further prosecuting the arbitration. At that time no defences had been filed. On 17 March the Court ordered, on motion by Ove Arup, that certain paragraphs of the statement of claim be struck out and that Bond have leave to file an amended statement of claim by 30 March 1987. The matter proceeded on directions until 1 October when, on a motion by Bond, orders were made to strike out a portion of Thiess' de"ence and cross-claim and Ove Arup's defence. Bond was ordered to provide certain particulars and a motion by Thiess for a separate trial on the issue of quantum was dismissed. Thiess, by motion filed on 28 October 1987, moved for leave to discontinue its cross-claim and to lift the restraint with respect to the prosecution of its arbitration with Bond. Alternatively, it seeks a modification of the restraint to enable it to complete all interlocutory matters in the arbitration. hore e le r ' 3. In support of its motion Thiess contends that uts dispute with Bond involves issues which can only be resolved by the exercise of contractual powers conferred upon the engineer, Ove Arup, or in lieu thereof, by an arbitrator appointed under the terms of the contract. Its dispute cannot fully be resolved in this Court, for the Court, it is said, lacks the "power" conferred upon the arbitrator by the terms of the contract. By the cross-claim Thiess pleaded a Schedule of Rates Contract whereby it agreed with Bond to undertake and carry out earthworks, roadworks and stormwater drainage works to create approximately 170 divisional lots at Brigadoon Stage 1, Millendon (para.5). The contract comprised a number of documents uncluding a formal instrument of agreement and General Conditions of Contract, AS2124/1981. The cross-claim was explored in some detail in my reasons for decision on the strike out motion, which were published on 1 October 1987. It is sufficient for present purposes to summarise its content by reference to the contentions in 1t that Bond was liable to Thiess as follows:- 1. Pursuant to clause 40 of the General Conditions - payment for variations to the works which were of such number, nature and consequences that the Schedule of Rates became inapplicable to them. (paras. 11-19) 2. Pursuant to clause 23 - on the basis that the variations were directions within the meaning of clause 23 of the General Conditions - for loss and expense beyond that provided for elsewhere in the contract (paras. 20-22). 4. 3. Pursuant to clause 23 = by reason of delays on the part of Ove Arup in providing notice of variations - for loss and expense not provided for elsewhere un the contract (paras. 23-26). 4. Pursuant to clause 23 - by reason of directed deviations from the works programme ~- for loss and expense not provided for elsewhere in the contract. This basis for liability is pleaded in the alternative to a plea basing liability on clause 34.3, which clause survived the strike out motion (paras. 35-42). 5. Pursuant to clause 23 - by reason of delay on the part of Ove Arup in granting a suspension of the works under clause 35.2 of the contract - for loss and expense not provided for elsewhere in the contract (paras. 43-47). 6. Pursuant to clause 35.4 and alternatively clause 23 - the suspension being due to Ove Arup's action - extra costs incurred as a result of the suspension (paras. 48~51). 7. Pursuant to clause 23 and alternatively clause 36.4 and alternatively at common law —- by reason of delays in Thiess' completion of the works and its entitlement to a 33 week extension ~- loss and expense (paras. 52-55). As appears from the preceding, the cross-claim asserted liabilities in large part relying upon clause 23 of the General Conditions of Contract. But no entitlement to payment arises under that clause until the Superintendent, Ove Arup, has determined the amount of loss and expense and given notice in writing thereof to Bond and Thiess. No such determination was pleaded. Clause 49 of the General Conditions provides for the resolution of disputes or differences arising out of the contract by a two tier decision-making process, first involving a Stated wens wns meet rote. 5. determination by the Superintendent and in the event dissatisfaction with his determination, a reference arbitration. The text of the clause is as follows:- 49.1 Procedure for Settlement of Disputes. Notwithstanding the succeeding provisions of this clause, the Contractor shall, 1£ the work under the Contract has not been completed, and subject as otherwise provided for in the Contract continue without delay to perform and execute such work and in so doing shall comply with all directions given by the Superintendent pursuant to the Contract. All disputes or differences arising out of the Contract or concerning the performance or the non-performance by either party of his obligations under the Contract, whether before or after the completion of the Works, shall be determined as follows: (a) One or both of the parties shall notify the Superintendent in writing that a dispute under this clause has arisen and shall within fourteen days of such notification submit the matter at issue in writing with detailed particulars to the Superintendent for determination and the Superintendent shall, within fourteen days after receipt thereof, give his determination to both parties to the Contract. (b) If either party 1s dissatisfied with the determination given by the Superintendent, or 1f he fails to give his determination, pursuant to (a) of this clause, the dissatisfied party may not later than twenty-eight days after the Superintendent is required to give his determination give notice in writing to the other party requiring that the matter at 1ssue be referred to arbitration and specifying with detailed particulars the matter at issue and thereupon the matter at issue shall be determined by arbitration. If, however, e1ther party does not within the said period of twenty-eight days give such a notice to the other party requiring that the matter at issue be referred to arbitration the determination given by the Superintendent pursuant to (a) in this clause shall not be subject to arbitration. of to 6. (c) Arbitration shall be effected - (1) by a single arbitrator mutually agreed upon in writing between the Principal and the Contractor; or failing such agreement upon such an arbitrator within one month after the notice in writing aforesaid 1s received by one party from the other party, (11) by a single arbitrator nominated in writing by the President of the professional body nominated in the Annexure and if no such annexure entry is made by the National President of the Institute of Arbitrators Australia, such nominee not being an employee of the Principal or of the Contractor or having had any association with the Works; or if the President fails or refuses so to nominate such a person within one month after having been requested by either party to make such a nomination, (iii)by an arbitrator appointed in accordance with the provisions of the laws relating to arbitration in force in the State or Territory named in the Annexure hereto. (d) A reference to arbitration under this Clause 49 shall be deemed to be a reference to arbitration within the meaning of the laws relating to arbitration in force in the State or Territory named in the Annexure hereto and the arbitration proceedings shall be conducted in that State or Territory. The arbitrator shall have all the powers conferred by those laws and it shall be competent for him to enter upon the reference without any further or more Formal submission than is contained in this clause. The arbitrator shall also have the power to award interest. 49.2 Payments During Arbitration. Any payment due or payable by the Principal shall not be withheld on account of the arbitration proceedings unless' so authorized by the Contractor or required by the arbitrator." owner es SUES OTT eee STINE SET rar erie ye Sree dee werner ag nee 7. Thiess argues that an arbitrator would be empowered to make determinations of a kind, which it says the Superintendent ought to have made under cl.23. It further contends that these are not determinations of a kind that the Court can make. [In effect, cl.23 is said to provide a machinery for completing the definition of the contractual relationship by reference to the decision of a third party in circumstances where such definition 1s required. The Notice of Reference to Arbitration dated 12 September 1986 invoked cl.49.1(b) of the General Conditions and identified the matters at issue as being:- ",..in respect of the Contractor's claims for - (a) payment of a reasonable sum or upon a quantum meruit for work (including variations) carried out by the Contractor; and/or (b) payment pursuant to the Contract for work (including variations) carried out by the Contractor; and/or (c) payment of other monies pursuant to the Contract; and/or (d) damages; and (e) payment of interest and the Superintendent's rejection thereof. Detailed particulars are contained in the five (5) volumes enclosed with this notice." The order made in these proceedings on 24 February 1987 affecting the proposed arbitration was in the following terms:- ' i} i "TL, upon certain factors set out in the Reasons for follows:- (2) (3) (4) (5) 8. The First Respondent its servants or agents be restrained until further order from prosecuting an arbitration between the First Respondent and the Applicant in accordance with the Notice = of Reference to Arbitration served by the First Respondent on 12 September 1986. The First Respondent have liberty to apply to vary or set aside this order on 48 hours' written notice." The restraint order was made in reliance, unter The arbitration proceedings have not gone beyond the point of the initial notice and appointment of arbitrator. There is no real prejudice demonstrated by the first respondent were it to prosecute its claim as a cross-claim in this court. All disputes between all parties can be resolved in these proceedings. There are overlapping issues as between' the proceedings in this court and the dispute referred to arbitration which would lead to inconsistent findings of fact and law as between the two tribunals. This is not a case in which the resolution of the arbitration proceedings would lead to a resolution of issues in this litigation." alia, Decision as When the motion for the injunction was argued before me on 15 and 16 January 1987, Thiess did not then make any point that any aspect of the dispute referred to arbitration would not be cognisable in this court. That point, as counsel for Bond has said, is first taken on this motion, some 8 months after the 9. restraint was imposed. It is a point which could have been taken prior to the filing of the cross-claim and the extensive debate that ensued on the strike out motion. In spite of all that, there is no consideration of prejudice to Bond or Ove Arup which would justify a refusal to entertain and deal with Thiess' motion on its merits. The critical 1ssue raised by the motion 1s whether or not the Court is in a position to resolve all matters in dispute between the parties. If 1t us, then nothing has changed since the restraint was imposed. If it is not, then it would be unfair to deny Thiess access to the only dispute resolution facility which can make the determinations 1t seeks. It 1s submitted that the arbitrator 1s authorised by cl1.49.1(b) to determine "the matter at issue". In this case, the matter at issue includes the alleged failure on the part of Ove Arup to make appropriate determinations under cl.23. The arbitrator, 1t 1s said, has a power to substitute his view for that of the Superintendent under the contract and to make appropriate determinations or decisions. Bond argues that the question reduces to one of whether Ove Arup has acted in accordance with the strictures of cl.23.1 which provides:- "The Superintendent shall exercise in a reasonable and equitable manner the powers conferred on him by the Contract." pan wae: 10. This is, 1t is said, a duty cognisable by a court of law. Though it imposes no contractual obligation on Ove Arup, its breach 1s a breach by Bond. There is little reported case law on the question of the extent of the respective powers of court and arbitrator in a case such as the present. The only English authority directly on point 1s the decision of the Court of Appeal in Northern Regional Health Authority v Derek Crouch Construction Co. Ltd [1984] 1 QB 644. There the relevant contract empowered the arbitrator to "open up, review and revise any certificate, opinion, decision, requirement or notice" given by the building owner's architect. Appealing against the refusal by an official referee to grant injunctions restraining arbitration the building owner contended that it was an implied term of the building contract that if the parties should litigate rather than arbitrate, the court would have the same powers as the arbitrator. The Court of Appeal rejected this argument. Dunn Ld at 664 said:- "In my judgment it is not necessary to imply the term suggested in clause 35. The contract gives the architect wide discretionary powers as to the supervision, evaluation and progress of the works. The parties have agreed that disputes as to anything left to the discretion of the architect should be referred to arbitration, and clause 35 gives wide powers to the arbitrator to review the exercise of the architect's discretion and to substitute his own views for those of the architect. Where parties have agreed on machinery of that kind for the resolution of disputes, it is not for the court to intervene and replace its own process for the contractual machinery agreed by the parties." Brown-Wilkinson LJ observed that in an action based on contract the court can only enforce the agreement and has no power to modify 1t in any way:- r f ' ' a t ' i 'L ll. "Therefore, if the parties have agreed on a specified machinery for establishing their obligations, the court cannot substitute a different machinery. So, in this contract the parties have agreed that certain rights and obligations are to be determined by the certificate or Opinion of the architect. In an action questioning the validity of an architect's certificates or opinion given or expressed under clauses 22 or 23 of the main contract, in my judgment the court's jurisdiction would be limited to deciding whether or not the certiricate or opinion was legally invalid because given, for example, in bad faith or in excess of his powers. In no circumstances would the court have power to revise such certificate or opinion solely on the ground that the court would have reached a different conclusion since so to do would be to interfere with the agreement of the parties." (667) His Honour identified two functions of the arbitrator, the first to determine disputes on legal rights, the other to modify contractual rights by substituting his own discretion for that of the architect:- "Therefore as a matter of principle I reach' the conclusion that if this matter were to be litigated in the High Court (whether before the official referee or a judge) the court would not have power to open up, review and revise certificates or opinions as it thought fit since so to do would be to modify the contractual obligations of the parties. The limit of the court's jurisdiction would be to declare inoperative any certificate or opinion given by the architect if the architect had no power to give such certificate or opinion or had otherwise erred in law in giving 1t. The court could not (as an arbitrator could) substitute its discretion for that of the architect." (667) The Master of the Rolls, Sir John Donaldson, at 671, said that the function of the court 1s to determine facts and to enforce the contractual rights of the parties. The arbitrator under the contract in question however, had a double function:- ee Oe ee eg oe - 12. "He has first the right and the duty to review the architect's decisions (in which I include certificates, opinions, requirements and notices) and, 1f appropriate, substitute his own. Second, he has to declare the rights of the parties on the basis of the situation produced by his own revising activity. The Latter is truly an arbitrator's Function. The former 1s not." In my opinion, the power given to the arbitrator in cl.49.1{(b) to determine the "matter at issue" 1s wide enough to encompass substitution of his own determination for any disputed determination of the Superintendent. To that extent the powers he zs given import the two functions identified by Donaldson MR in the Crouch case. The decision in Neale v Richardson [1938] 1 All ER 753 was cited but is, I think, distinguishable from the present case on the same basis that Sir John Donaldson MR distinguished it in Crouch. In Neale v Richardson the issue of a final certificate was a condition precedent to payment and the architect refused to issue it. The court held that as the architect declined to act and no arbitrator was appointed, it was able to determine the rights of the parties without regard to the absence of the certificate. As the Master of the Rolls said in Crouch at 671:- "This seems to me to be very different from deciding that the court can substitute itself for the architect or exercise the powers of an arbitrator under a clause such as the J.C.T. clause. The court in Neale v Richardson [1938] 1 All ER 753 was merely performing its normal function, uninhibited by the absence of the certificate." iz f Tyre cae cee oe wot 13. Robins v Goddard [1905] 1 KB 294, was a case in which a contractor sued a building owner to recover sums due on certificates by the architect. The defendant said by way of defence and counterclaim that the work and materials supplied were defective and unsuitable. At trial the certificates were held to be conclusive, but on appeal it was held that the arbitration clause destroyed the finality of the certificates and that consequently the Gefendant was entitled to set up the defence and counterclaim for the action. At 303 Stirling LJ said:- "The arbitrator 1s to have power (with certain exceptions not including the certificates in question) to open up, review, and revise, among other things, any certificate, and to treat the matter before him as if no certificate had been' given. These certificates, therefore, were not intended to be absolutely binding and conclusive. No doubt on an application made at the proper time the dispute might have been referred to arbitration; but it has not been referred. and the Matter remained open for decision under the ordinary jurisdiction of the Courts, and the defendant was entitled to his ordinary legal remedies and to have his case heard." To say that, is not to say that the court could exercise the arbitrator's substituted decision-making functions. It might well be possible for Thiess to raise a cross-claim based upon a failure by Ove Arup, attributable to Bond, to exercise "in a reasonable and equitable manner" the powers conferred on 1t by the contract. That course however, may not offer the same direct substitutive remedial power as is available to the arbitrator. I say "may not" because it is ' br ' '> ' ' ' few ep eve e 14, conceivable that the court might be able by some appropriate exercise of its remedial powers or of a combination thereof, to rrive at a similar result. It remains to be demonstrated that the court could do so. In the circumstances and given the significance of cl. 23 determinations to Thiess' cross-claim I think the best course for the present is to allow it to proceed at least through all interlocutory stages necessary to prepare for the hearing of the arbitration. The matters at issue as disclosed in the Notice of Reference are wide in their terms and as Framed they are capable of encompassing issues able to be resolved by the court. No doubt in the course of the interlocutory proceedings in the arbitration, the issues will be better defined than they are at present. The parties may come back to the court in that regard if it is thought that some confinement of the matters to be raised before the arbitrator is appropriate to avoid unnecessary overlap between the arbitral and the judicial proceedings. I propose therefore to order that Thiess have leave to discontinue its cross-claim and to vary the injunction in order that it may proceed through the necessary interlocutory stages in connection with the arbitration. co oncte wwe ane 15. I certify that the preceding fourteen (14) pages are a true copy ef the Reasons for Judgment of His Honour Justice French. Associate: Moveols Wee pate: LO Gun) \A8 Counsel for the Applicant and Cross-Respondent: Mr P. Tottle Solicitors for the Applicant and Cross-Respondent: Robinson Cox Counsel for the First Respondent and Cross-Claimant: Mr P. Clifford Solicitors for the First Respondent and Cross-Claimant: Freehill Hollingdale & Page Counsel for the Second Respondents: Mr L. James Solicitors for the Second Respondents: Kott Gunning Date of Hearing: 28 October 1987 Date of Judgment: 20 January 1988