VANDERVAERE v MILAN SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CLARKE, SHELLER JJA and SAMUELS AJA 11 May 1992, 11 September 1992 [1992] NSWCA 260 Building contract — arbitration — appeal from arbitrators decision — s38(5) Commercial Arbitration Act 1984 — failure of arbitrator to award interest on outstanding progress payments — whether an error in law — interest not claimed in pleadings. Held: no error on the face of the award — power to award interest adjectival — no specific procedure to be followed by arbitrator in applying the power — determination of the matter would not be likely to add substantially to the certainty of commercial law — extremely difficult to find an error of law in the approach of the arbitrator unless there was clear evidence of the detail of proceedings before the arbitrator. Clarke JA The respondent is a builder who on 2 March 1987 entered into an agreement with the appellants whereby he undertook to construct additions to their residence at 31 Cook Road, Lindfield, for the sum of $32,500. The agreement was in writing and provided for progress payments. During the course of construction disputes arose between the parties, the detail of which is presently unimportant, and on 10 November 1987 the respondent ceased work on the site leaving parts of the work uncompleted. The disputes were in due course referred to D B Maxwell, Esq sitting as a sole arbitrator. It is apparent from the award that the respondent made a number of claims, including a claim for an outstanding progress payment, but did not advert to interest payable in respect of his claims. It is also apparent from the award that the appellants counter-claimed and although there were a great number of separate items included within the counter-claim there was no mention of interest in that document either. Upon the conclusion of the arbitration the arbitrator handed down the award to which I have referred in which he made the following findings: (1) That the respondent was entitled under his claim to $6,836.83. That amount included $6,000 in respect of the outstanding progress payment certificate and $836.83 for various extras. (2) That the appellants were entitled under the counter-claim to the sum of $8,031. The Arbitrator then deducted the amount due to the respondent from that due to the appellants and awarded the latter the balance of $1,194.17. He also awarded the appellants interest upon the balance and the costs of the proceedings. It takes little imagination to realise that by this stage legal costs far exceeded the amount recovered and possibly also the amount actually in dispute. Not daunted by this fact the respondent sought leave to appeal from the award pursuant to s38 of the Commercial Arbitration Act 1984 on the ground that there was an error of law arising out of the award. Because the application had not been filed in time the respondent also sought an extension of time for seeking leave to appeal. The applications were heard by Rolfe J who allowed them both and in addition upheld the appeal. In his Honour's view there was an error of law arising 2 UNREPORTED JUDGMENTS out of the award which required correction. In addition his Honour was satisfied that the respondent had satisfied the necessary conditions under s38(5) for the grant of leave. Consequent upon the upholding of the appeal Rolfe J made an order in lieu of the order made by the arbitrator that the appellants pay the respondent $1500 and made fresh costs orders in respect both of the arbitration and the proceedings before him. The appellants then sought leave to appeal from the decision of Rolfe J which leave was duly granted by this Court. Because of the minuscule amounts of money involved the court made special orders to save the costs of the parties appearing before it on yet another occasion. Nonetheless by now the costs involved in the proceedings are astronomical compared with the amount in dispute. The error of Law upon which Rolfe J allowed the appeal was the failure of the arbitrator to allow interest on the progress payment. His Honour pointed out that under the contract the respondent had been entitled to that interest and accordingly held that the Arbitrator had erred in failing to add the appropriate amount of interest to the progress payment of $6,000. In their submissions counsel for the parties devoted much attention to the question whether his Honour had correctly concluded that the conditions expressed in s38(5) of the Commercial Arbitration Act 1984 had been satisfied. That subsection reads: "(5) The Supreme Court shall not grant leave under subs(4)(b) unless it 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." It is beyond doubt that the purpose behind the subsection was to reduce the ambit of judicial supervision and review of arbitral awards. In the present case real questions arise as to whether either s38(5)(a) or (b) was satisfied. It is convenient to act on the assumption that subs(a) was satisfied and to concentrate attention on subs(b). The first question which then arises was whether there was a manifest error of law on the face of the award. As I earlier pointed out there is no indication in the award that the respondent in his claim or the appellants in their counter-claim specifically claimed interest. Indeed the award would suggest to the contrary. If this is correct it is difficult to understand how it could be said that the failure to allow the claim which was not raised in the pleading constituted an error of law. Even if one treats a contract as having been incorporated in the award, and I am in considerable doubt about this, the position remains unaltered. The simple position is that no interest was claimed in the pleadings referred to in the award and there was therefore no failure by the arbitrator to deal with an amount claimed. In short, the face of the award revealed no error. Accordingly I am of opinion that there was no basis upon which it could have been concluded by his Honour that s38(5)(b)(i) had been satisfied. This was the primary ground upon which the learned Judge acted and in my opinion he was in error in so doing. URJ VANDERVAERE v MILAN (Clarke JA) 3 His Honour also expressed the opinion that even if he were wrong in this view it was clear that s38(5)(b)(ii) had been established. There is a difficulty with the reasoning process which led his Honour to that conclusion insofar as his Honour appears to have proceeded upon the basis that if the facts which led to his conclusion that there was a manifest error in law did not support that conclusion they at least demonstrated strong evidence of an error of law. I do not think that conclusion is supportable for the reason that I do not think one can discern either an error or strong evidence of an error from the terms of the award itself. It may be that his Honour had in mind evidence which was led before him to the effect that the respondent said at some stage during the arbitration that he wanted to claim interest under CL17(e) of the contract in respect of the progress payment. Nonetheless in my opinion the combination of that evidence, which was quite unspecific, together with the terms of the award do not provide strong evidence of an error of law. I would, therefore, disagree with his Honour that the appellant had satisfied the terms of s38(5)(b)(ii). Of course the court is not confined to the terms of the award when considering whether an applicant for leave to appeal has satisfied s38(5)(b)(ii). That subsection imposes two conditions upon the grant of leave. First, strong evidence of an error of law and, secondly, the likelihood that the determination of the question whether there was legal error will or may add substantially to the certainty of the commercial law. It was this subsection which was primarily relied upon by the respondent, it being said that there was strong evidence of an error discernible from the whole of the record. That error was the failure by the arbitrator to add interest to the sum of $6,000 before carrying out the balancing exercise in order to determine the amount of the award. In this respect it was submitted that as the respondent was entitled to interest on the progress payment under the terms of the contract it was incumbent on the arbitrator to deal with the respondent's claim in full before proceeding to exercise his power to award interest under s31 of the Commercial Arbitration Act 1984 which enabled the awarding of interest only in respect of money which the arbitrator has determined to award a party. For my part I am unable to accept that an arbitrator is obliged to follow the procedure suggested by the submission. Nor do I think, as his Honour did, that a failure to follow that procedure constitutes an error of law. The power to award interest which is invested in the courts (see, for instance, s94 of the Supreme Court Act) and arbitrators is an adjectival one which enables the tribunal, be it court or arbitrator, to do more complete justice between the parties than would otherwise have been possible (Pheeney v Doolan (1977) 1 NSWLR 601 at 613). It is not designed to compensate the party for loss arising out of a cause of action but to provide compensation for the circumstance that money has been outstanding to a party for a period of time. It is, of course, trite that the power should be exercised in a manner that achieves substantial justice between the parties. Save for observing that under s31 of the Commercial Arbitration Act 1984 there is no power to award interest upon interest there would not seem to me to be any specific procedure which should be followed by an arbitrator when a claimant succeeds in its claim and its opponent succeeds in a counter claim. In cases in which that occurs (and where there is no contractual entitlement to interest) it would be open to an arbitrator, as it seems to me, to award each party interest on the amount it successfully claimed and then balance one figure against 4 UNREPORTED JUDGMENTS the other. Alternatively, the arbitrator may deduct the amount allowed to one party from the amount allowed to the other and award interest on the balance. The adoption of one approach rather than the other would not, in my view, involve error of law. Is it different where one party is entitled to interest upon part of the amount awarded pursuant to the contract between the parties? I think not. It would, in my view, have been open to the arbitrator to allow the respondent interest under s31 of the Commercial Arbitration Act 1984 in respect of part of the amount the respondent was held entitled to and interest under the contract in respect of the progress payment. Likewise interest could have been awarded to the appellants under the Act on the amounts to which they were found to be entitled. In those circumstances the ultimate amount awarded would reflect the balance between the two claims. Such an approach would not, in my opinion, have involved error of law. The arbitrator did not adopt that approach but the manner of his assessment led to an identical, or substantially identical, result. Indeed bearing in mind that interest awarded under s94 of the Supreme Court Act (which provides the maximum allowable under s31(1) of the Commercial Arbitration Act 1984) at all relevant times was no less than the contractual rate of interest it may be that the arbitrator's approach led to a smaller award for the appellants than might have resulted from the adoption of the other approach. In these circumstances I do not agree that the arbitrator erred in law. I would, in any event, reach the same conclusion even if I had concluded that there was strong evidence of an error of law because I do not think it was open to his Honour to conclude in the circumstances of this case that the determination of the question would add, or be likely to add, substantially to the certainty of commercial law. Accordingly, I do not think it was open to his Honour to grant leave to the respondent to appeal. I would add the observation that the manner in which the Arbitrator dealt with the subject matter of interest depended very much on the way the arbitration was conducted with the consequence that unless there was clear evidence before the court as to the detail of the proceedings before the Arbitrator it would be a matter of extreme difficulty to conclude that he had adopted an approach which demonstrated error of law. In my opinion Rolfe J was wrong to grant leave to the respondent and the appeal to this Court should be allowed. I would propose that the appeal be allowed and the judgment of Rolfe J be set aside; and in lieu thereof order that leave to appeal from the decision of the Arbitrator be refused with costs. The respondent should pay the appellant's costs of the appeal to this Court and have a certificate under the Suitors Fund Act in respect of those costs. Sheller JA I agree with the orders proposed by Clarke JA and the reasons he gives. Samuels AJA I am in general agreement with what Clarke JA has written. I wouldmyself allow the appeal primarily because there is nothing to establish, assuming (against my own inclination) that there was strong evidence that the arbitrator made an error of law, that determination of the question might satisfy the final requirements of s38(5)(b)(ii). The appellants concede - see, for example, their written submissions in reply at 3 - that the respondent made an oral claim for interest, that is, presumably, for interest under the contract, during the course of the arbitration. Assuming that the URJ VANDERVAERE v MILAN (Samuels AJA) 5 arbitrator rejected that claim, and was wrong in law to do so, he might have done so on grounds whose identification and correction would do nothing at all to add "to the certainty of commercial law." I agree with the orders which Clarke JA has proposed. The appeal is allowed and the judgment of Rolfe J is set aside; and in lieu thereof order that leave to appeal from the decision of the Arbitrator be refused with costs. The respondent should pay the appellant's costs of the appeal to this Court and have a certificate under the Suitors Fund Act in respect of those costs. Counsel: Appellant - M A BRADFORD Respondent - G VAN DER VLAG Solicitors: Appellant - FORSTERS, Manly Respondent - MARIA MICO, Chatswood