New South Wales Supreme Court CITATION : Panmal Constructions Pty Limited (ACN 001 305 639) v Warringah Formwork Pty Limited (ACN 002 797 417) [2004] NSWSC 204 HEARING DATE(S) : 22/03/04 JUDGMENT DATE : 26 March 2004 JURISDICTION: Equity Division Technology and Construction List JUDGMENT OF : Einstein J DECISION : Leave to appeal granted; Appeal allowed. CATCHWORDS : Commercial Arbitration - Leave to Appeal from costs award - Principles Commercial Arbitration Act 1984 LEGISLATION CITED : Land and Environment Court Act 1979, Supreme Court Act 1970 Alpine Hardwood (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121 Black v Tomislav Lipova BHNF Maria Lipovac [1998] FCA 699 Fasold v Roberts (unreported, Federal Court of Australia, 11 September 1997); BC9704250 Horizons Corporation Pty Ltd v Lahey Constructions Pty Ltd, (unreported, Supreme Court of New South Wales, 27 November 1998); BC9807527 House v R (1936) 55 CLR 499 John S Hayes & Associates Pty Ltd v Kimberly-Clarke Australia Pty Ltd (1994) 52 FCR 201 McKensey v Hewitt [2002] NSWSC 145 Letterbox Holdings Pty Ltd v Kirkham [2003] NSWSC 177 LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74 MGICA (1992) Ltd v Kenny & Good Pty Ltd (No.2) (1996) 140 ALR 707 Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 CASES CITED : Mutual Community Ltd v Lorden Holdings Pty Ltd (unreported, Supreme Court of Victoria, 28 April 1993); BC9303878 Naomi Marble & Granite Pty Ltd v FAI General Insurance Company Ltd (unreported, Supreme Court of Queensland, 12 March 1998); BC9800777 Natoli v Walker (unreported, Supreme Court of New South Wales, Court of Appeal, 26 May 1994); BC9402554 Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No 2) [1999] NSWCA 1334 Norbis v Norbis (1986) 161 CLR 513 Oshlack v Richmond River Council (1998) 193 CLR 72 Pettitt v Dunkley [1971] 1 NSWLR 376 Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203 Quirk v Bawden (1992) 111 FLR 115 Skalkos v Assaf (No 2) [2002] NSWCA 236 The Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, Federal Court of Australia, 7 February 1996); BC9600133 WCW Pty Ltd v Charthill Ltd (unreported, Federal Court of Australia, 25 May 1992); BC203214 Wentworth v Rogers [2003] NSWSC 944 PARTIES : Panmal Constructions Pty Limited (ACN 001 305 639) (Plaintiff) Warringah Formwork Pty Limited (ACN 002 797 417) (Defendant) FILE NUMBER(S) : SC 55050/03 COUNSEL : Mr PWJ Gray SC, Mr RC Titterton (Plaintiff) Mr AG Jamieson (Defendant) SOLICITORS : Parry Carroll (Plaintiff) Wood Marshall Williams (Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST Einstein J Friday 26 March 2004 55050/03 Panmal Constructions Pty Limited v Warringah Formwork Pty Limited JUDGMENT The Proceedings The Application 1 There is before the Court an application for leave to appeal pursuant to s. 38(4)(b) of the Commercial Arbitration Act 1984 ("the Act") from the award of Arbitrator BA Frost dated 23 October 2003 ["the Award"]. The Arbitration 2 The arbitration arose out of a building dispute between the plaintiff (as builder) and the defendant (as formwork contractor) in respect of a development at 301-307 Penshurst Street, Willoughby. 3 The contract between the parties was dated 19 May 1999. The work was to be performed for a fixed price of $1,238,300. Work commenced in late 1999, and the dispute was referred to arbitration on 13 April 2000. The Award 4 The Award incorporates an interim Award dated 15 September 2003 ["the Interim Award"] (see paragraph 1.01 of the Award) in which the Arbitrator awarded the defendant a net amount of $4,727.14 (see Section 7 of the Interim Award). 5 The plaintiff's complaint is that the net amount in favour of the defendant, small as it was, was arrived at only by way of a number of arithmetical and other errors to which reference is made below. 3. In the Award, the Arbitrator allowed the defendant the whole of its costs (said to exceed $150,000) on a party/party basis (see paragraph 3.08 of the Award). The costs question 6 The plaintiff contends that in dealing with the question of costs, the Arbitrator also erroneously refused to take into account what is said to be the uncontested fact that the plaintiff had made a 'without prejudice' offer in October 2001, more than 12 months before the Arbitration hearing began, to settle the dispute by paying the defendant $15,000.00 (with each party to pay its own costs) (Award paragraph 3.05). The defendant before the Court conceded that such an offer had been made orally and in those terms. Relevant provisions of the Act/relevant principles 7 It is convenient to commence with a reference to the relevant provisions of the Act and to certain of the principles which obtain in that regard: Judicial Review · section 38 of the Act is in the following terms: "38. Judicial review of awards (1) Without prejudice to the right of appeal conferred by subsection (2), the Court shall not have jurisdiction to set aside or remit an award on the ground of error of fact or law on the face of the award. (2) Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award… (4) An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement: (a) with the consent of all the other parties to the arbitration agreement; or (b) subject to section 40, with the leave of the Supreme Court. (5) The Supreme Court shall not grant leave under subsection (4) (b) unless it considers that: (a) having regard to all the circumstances, the determination of the question of 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…" · the present application requires to be considered in the light of the legislative history leading to the 1990 amendments to section 38 (5), which has been carefully traced in a number of authorities: See in particular Promenade Investments Pty Ltd v State of New South Wales (1992) 26 NSWLR 203, at first instance before Rogers CJ Commercial Division 1991, 26 NSWLR 184, and in the Court of Appeal 1992, 26 NSWLR 203, particularly the judgment of Sheller JA with whose reasons for judgment Meagher JA agreed. See also Natoli v Walker (unreported, Supreme Court of New South Wales, Court of Appeal, 26 May 1994, Kirby P, Mahoney and Meagher JJA), BC9402554; Horizons Corporation Pty Ltd v Lahey Constructions Pty Ltd, unreported, Supreme Court of New South Wales, 27 November 1998; · the policy behind the amendment to the Act effected by section 38 (5) was to further limit intervention by the courts in the arbitration process, even beyond the restrictions on the grounds of leave to appeal imposed by the pre-1990 legislation. The policy behind the amendment was: "...to promote the finality of the arbitral awards even at the price of denying a party its usual entitlement to the determination of the dispute by a court of law i.e. the precise assignment of the party's legal rights after a detailed scrutiny of the relevant facts and application of the relevant law": Kirby P in Natoli v Walker , cited in Horizons Corporation in paragraph 19. · section 38 (5) constitutes thresholds which must be surmounted by an applicant before leave to appeal can be granted; a particular type of error of law must first be shown to exist, the effect of section 38 (5) (b) (i) is that an error of law in an award is no longer enough; it must be 'manifest'; · as Sheller JA pointed out in Promenade Investments, at 225-226, if an error of law of the statutory type is found to exist, the threshold is surmounted but the gate to appeal remains closed. In short, even if the requirements of section 38 (5) have been satisfied, the question still remains as to whether, as a matter of discretion, leave to appeal should be granted [Natoli v Walker per Mahoney JA, at pages 3-4]; · the policy behind, as well as the operation of, section 38 (5) of the Commercial Arbitration Act, has been considered in a number of reported and unreported decisions. Many of those cases address the question of whether there is a manifest error on the face of the award. In Promenade Investments, in the Court of Appeal, the leading case, Sheller JA observed at 226 D: "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 argument, that there is on the face of the award an error of law". · that judgment was strongly supported by Kirby P in Natoli. His Honour noted that it must be accepted that very considerable judicial restraint must be exercised where the criterion of 'manifest' obtains, and that it: "requires swift and easy persuasion and rapid recognition of the suggested error" and that "it should not require a great deal of argument. The precondition to curial intervention is the easy demonstration that the primary decision maker was 'clearly wrong'". Applications for leave to appeal 8 It is my understanding that although it is not necessarily an invariable practice never to be departed from, it is correct to say that where leave to appeal under sections 38 (4) and 38 (5) is required, the usual practice of the court is to hear the question of leave in advance and not at the same time as the hearing of the substantive appeal. At first instance in Promenade Investments, Rogers CJ Commercial Division, commented at 187 E: "It was intimated that the parties' desired to argue both the application for leave to appeal and the appeal at the same time. I declined to accede to this course because, in my view, it is entirely inimical to the purposes of the Commercial Arbitration Act 1984 ". 9 His Honour discussed the matter further, in particular at 188. In essence his Honour considered that it was necessary to bring an application for leave to appeal in advance because that was consistent with one of the major objectives of the Commercial Arbitration Act, namely, the minimisation of judicial supervision and review of arbitrations. Further, to hear substantive argument on the merits of an appeal before deciding whether or not to grant leave would leave more awards open for review than was desirable and would detract from the finality of arbitral awards. [See also 192 FF of the judgment] Discretion as to costs 10 The Arbitrator's discretion is essentially the same as a judge's discretion, which discretion must be exercised judicially, not arbitrarily or capriciously 11 Section 22 of the Act provides: (1) Unless otherwise agreed in writing by the parties to the arbitration agreement, any question that arises for determination in the course of proceedings under the agreement shall be determined according to law. 12 Sub-section 34(1) of the Act provides: (1) Unless a contrary intention is expressed in the arbitration agreement, the costs of the arbitration (including the fees and expenses of the arbitrator or umpire) shall be in the discretion of the arbitrator or umpire, who may: (a) direct to and by whom and in what manner the whole or any part of those costs shall be paid, (b) tax or settle the amount of costs to be so paid or any part of those costs, and (c) award costs to be taxed or settled as between party and party or as between solicitor and client. 13 An arbitrator has, under s. 34(1) of the Act, a power virtually the same as that exercised by a Supreme Court judge under section 76 of the Supreme Court Act 1970: see McKensey v Hewitt [2002] NSWSC 145 (Young CJ in Eq) [at 34]. 14 As Justice Nicholas recently observed in Letterbox Holdings Pty Ltd v Kirkham [2003] NSWSC 177, 21 March 2003, unreported, [at 57]: S34(1) of the Act confers a broad discretion. It does not declare that costs automatically follow the event. The discretion must be exercised judicially in accordance with established principles and factors directly connected with the litigation (see generally Oshlack v Richmond River Council (1998) 193 CLR 72 at 96-98). 15 Costs need not "follow the event"; rather, costs are in the discretion of the arbitrator. 16 Section 76 of the Supreme Court Act provides that: Subject to this Act and the rules and subject to any other Act: (a) costs shall be in the discretion of the Court; the court shall have power to determine by whom and to what extent costs are to be paid… 17 SCR Part 52A rule 11 provides that: 11. If the court makes any order as to costs, the court shall, subject to this Part, order that the costs follow the event, except where it appears to the court that some other order should be made as to the whole or any part of the costs. [Emphasis added] 18 In Oshlack v Richmond River Council (1998) 193 CLR 72, the High Court considered the meaning of section 69 of the Land and Environment Court Act 1979, the terms of which are identical to section 76 of the Supreme Court Act. Gaudron and Gummow JJ held at [40] that: "There is no absolute rule with respect to the exercise of the power conferred by a provision such as s. 69 of the [Land and Environment] Court Act that, in the absence of disentitling conduct, a successful party is to be compensated by the unsuccessful party. Nor is there any rule that there is no jurisdiction to order a successful party to bear the costs of the unsuccessful party." 19 Their Honours, at [35], approved the earlier statement by Brennan J in Norbis v Norbis (1986) 161 CLR 513 at 537 in the following terms: "The width of a statutory discretion is determined by the statute; it cannot be narrowed by a legal rule devised by the court to control its exercise." 20 To similar effect was the statement of Kirby J at [134], speaking of the appropriate general approach to section 69 of the Land and Environment Court Act, "and provisions like it": " It is because the general purpose of an order for costs in favour of a successful party is to provide compensation in the form of a partial indemnity for the costs incurred that the ordinary principle observed in civil litigation . . . is that legal costs will usually be ordered in favour of the successful party. . . . But the compensatory principle cannot be treated as an absolute rule. Otherwise, the discretion conferred in unqualified terms would indeed be shackled and confined. To permit this would be incompatible with statutory language expressed in such terms. Therefore, although there are "rules" or ordinary principles which will guide the donee of power in the exercise of the discretion, they cannot extinguish the element of discretion. They must not be allowed to harden into rigid or inflexible requirements." Calderbank letters 21 Rolfe J in Multicon Engineering Pty Ltd v Federal Airports Corporation (1996) 138 ALR 425 said, inter alia: "In my opinion the proper approach to take to an offer of compromise, whether made under the rules or pursuant to a Calderbank letter, is that there should be a prima facie presumption in the event of the offer not being accepted and in the event of the recipient of the offer not receiving a result more favourable than the offer, that the party rejecting the offer should pay the costs of the other party on an indemnity basis from the date of the making of the offer. I proceed on the basis that the unreasonableness was the failure by the offeree to accept the offer, which unreasonableness is demonstrated, prima facie by the ultimate result. This approach is consistent with the decisions to which I have referred, the policy evidence by the Act and the Rules and the widely accepted philosophy that settlement should be encouraged. The relevant Rules provide that costs will be paid on the basis set out therein 'unless the court otherwise orders'. My understanding is that the court is required to proceed on the basis that it should make the order provided for by the Rules, unless the party rejecting the offer is able to establish good reason for having done so." 22 The approach taken by Rolfe J has been followed by Shepherdson J in Naomi Marble & Granite Pty Ltd v FAI General Insurance Company Ltd (Unreported, Supreme Court of Queensland, 12 March 1998, Shepherdson J); BC9800777. 23 A line of authority in the Federal Court supports the proposition that the mere refusal of a Calderbank offer does not of itself warrant an order for indemnity costs and the offeror needs to show that the conduct of the offeree was unreasonable. Cases in point are WCW Pty Ltd v Charthill Ltd (unreported, Federal Court, 25 May, 1992, Onley J), BC9203214; John S Hayes & Associates Pty Ltd v Kimberly-Clarke Australia Pty Ltd (1994) 52 FCR 201 (Hill J), Sanko Steamship Co Ltd v Sumitomo Australia Ltd (unreported, Federal Court of Australia, 7 February 1996, Sheppard J), BC9600133; MGICA (1992) Ltd v Kenny & Good Pty Ltd (No.2) (1996) 140 ALR 707 (Lingren J), and Fasold v Roberts (unreported, Federal Court of Australia, 11 September 1997, Sackville J); BC9704250. 24 In Black v Tomislav Lipova BHNF Maria Lipovac & Ors, (Unreported, Federal Court of Australia, 4 June 1998) Miles, Heerey & Madgwick JJ, having referred to the views put by Rolfe J in Multicon and to the above described line of authority in the Federal Court said [at p.46]: 'In reality there is not a substantial difference between the two views; both accept that the reasonableness of the conduct of the offeree, viewed in the light of the circumstances which existed when the offer was rejected, is relevant to the exercise of the discretion to award indemnifying costs. To the extent there is a difference we would prefer the by now well established line of authority in decisions of single judges of this court. However we would not, with respect, necessarily endorse the view of Sheppard J in Sanko that the conduct of the offeree has to be "plainly unreasonable". To adopt an especially high standard of unreasonableness would operate as a fetter in the discretion to award indemnity costs and diminish the effectiveness of the Calderbank offer as an incentive to settlement. There is in our view force in the comments of Byrne J in the Supreme Court of Victoria in Mutual Community Ltd v Lorden Holdings Pty Ltd (unreported, Supreme Court of Victoria, 28 April 1993, Byrne J); BC9303878 at 12-13 that "the policy of the Court is to encourage litigating parties to undertake genuine settlement negotiations and for that purpose, to face up to serious offers of settlement".' 25 Ultimately the principle settled by a number authorities [Nobrega v Trustees of the Roman Catholic Church for the Archdiocese of Sydney (No 2) BC9902730, [1999] NSWCA 1334; LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd BC200301670, [2003] NSWCA 74; Skalkos v Assaf (No 2) BC200204574, [2002] NSWCA 236; Black v Tomislav Lipova BHNF Maria Lipovac BC9802571; [1998] FCA 699; Alpine Hardwood (Aust) Pty Ltd v Hardys Pty Ltd (No 2) (2002) 190 ALR 121; and Quirk v Bawden (1992) 111 FLR 115] is that a Calderbank type of offer will not justify an indemnity costs order unless its rejection was unreasonable-which principle emphasises the width of the discretion and the unusual nature of an order for indemnity costs. 26 Costs are of course a matter in which the court has a discretion which is not unqualified and cannot be exercised capriciously but which discretion is ultimately exercised in the circumstances of the particular facts in contention in any given case. The suggested questions of law 27 The questions of law in respect of which the plaintiff seeks to leave to appeal are identified as follows: · whether the Arbitrator erred in his treatment of certain amounts; · whether the Arbitrator's discretion as to costs under s. 34 of the Act was exercised according to law. The plaintiff's submissions 28 The plaintiffs submitted that there were clear errors of law on the face of the Award which have a particular poignance insofar as the net amount which the Arbitrator ultimately held to be owing by the plaintiff to the defendant is concerned. 29 The matters in dispute on the application for leave to appeal lie in very short compass. 30 The first matter concerns the treatment by the Arbitrator of particular variations as the subject of dispute within the ambit of the arbitration agreement when, on the plaintiffs case, those items [save for minor amounts in respect of the same], were never in dispute. I refer here to variations 7 and 9. In this regard the matter lies as follows: · part of Warringah's claim was for alleged variations. Two of those variations were variations 7 and 9; · the claim in respect of variation 7 was for $5,140.00. Of that amount, only $970 was in dispute. That is, Panmal acknowledged at all material times that it owed to the defendant $4,170.00 in respect of variation 7; · the claim in respect of variation 9 was for a balance of $1,885.00. Of that amount, only $510 was in dispute. That is, Panmal acknowledged at all material times that it owed to the defendant $1,375.00 in respect of variation 9; · those two amounts, $4,170.00 and $1,375.00, total $5,545.00 (the "excluded amount"). Those amounts, so the plaintiff asserts, were not the subject of the arbitration; · the plaintiff's contention is that the only amounts which were the subject of the arbitration, so far as variations 7 and 9 were concerned, were $970 in respect of Variation 7 and a further $510 in respect of Variation 9; · the Arbitrator, in the Interim Award, rejected Warringah's claims in respect of those two amounts (Interim Award, paras 3.03.03 and 3.03.05). The plaintiff contends that in other words, in respect of variations 7 and 9, so far as there was a contest in the Arbitration, Panmal was successful and Warringah was unsuccessful; · the complaint is that even so, the Arbitrator, in the Interim Award, purported to "allow", as amounts recoverable by Warringah, the excluded amount, ie the amounts which were not in dispute in respect of variations 7 and 9, namely $4,180.00 [which should have been $4,170.00] and $1,375.00 respectively (Interim Award, paras 3.03.03 and 3.03.05), a total of $5,555.00. 31 In my view the plaintiff has made good each of these propositions. Whilst the Court has been taken to the pleadings before the Arbitrator and to the submissions before the Arbitrator it suffices for present purposes to note only the following portion of the plaintiffs submissions to the Arbitrator: · the table [PX 2 at 31] in which the plaintiff identified as disputed variations only the sum of $970 and $510 in respect of items 7 and 9 respectively; · paragraph 15 which was in the following terms: "WF's confusion over precisely which variations are in dispute appears to stem from WF's confusion over what the reference to $19,103.93 in its Amended Points of Claim means. The reference to $19,103.93 is a reference to those variations which are not in dispute to the extent of $19,103.93. The figure of $19,103.93 comprises two components: a) Variations which have been claimed and paid (not in dispute at all ); and b) Two variations in respect of which Panmal has offered to pay less than the amount claimed (these variations are in dispute only to the extent of the difference between amount claimed and amount offered). These two variations are variations 7 (storm water tank-single sided formwork) and 9 (hob in courtyard). c) With respect to variation 7, WF has claimed $5,140. Panmal has offered $4,170. The difference, $970, is one of the "Disputed Variations" (see above and paragraph 2.5 of Amended Points of Claim). d) With respect to variation 9, WF has claimed $2,386. Panmal has paid $500 and offered $1,375 for the balance. Again, it is only the difference, $510 (being $2,385 claimed, less $500 paid less $1,375 offered), which is one of the Disputed Variations (see above)." 32 It is not necessary to recite the pleadings. Whilst it is true that there is a somewhat difficult to follow paragraph to be found in the plaintiffs points of defence and points of cross claim [2.8], a fair reading of what occurred before the Arbitrator is that the plaintiff at all material times maintained that it was only the $970 and the $510 amounts which were in dispute in relation to these items. 33 This then throws up a manifest error of law on the face of the award. The Arbitrator has treated as amounts being claimed and the subject of dispute in the matter of the arbitration, items which were neither claimed nor disputed. 34 The second matter concerns the plaintiff's submissions relating to variation 3. This was identified in the plaintiff's amended points of claim as a disputed variation. 35 Both parties addressed submissions to the Arbitrator on this issue. 36 The gravamen of the plaintiff's complaint is the submission that the Arbitrator made a further error in that he accepted the plaintiff's evidence in relation to variation 3 ("changes to beams") but mistakenly awarded the wrong amount. 37 The proposition is that the actual amount the Arbitrator should have allowed is the amount shown in Exhibit R37, being $7,219. Instead, the Arbitrator is said to have relied on a superseded Exhibit R4 and allowed $4,539 by mistake: see Award Item No. 3.03.01. 38 The arbitrator's reasoning in the interim award was in the following terms [at PX1 page 39]: "3.03.01 Variation No 3 Changes to Beams $3,417.55 Warringah's claim $3,417.55 Ex. C3 BRH however after considering the Panmal evidence of Mr Koo R37 HYK 75 and EX. R4 and transcript at 79.11 to .47 where Mr Ronson conceded Warringah had made an error claiming 57 M2 of the formwork instead of 5.7M2. Further in the transcript at 102.42 to 124.37 Mr Ronson was evasive and had difficulty in justifying his figures detailed in Ex. C4 BRH therefore I accept the evidence of the Respondent in Ex. R4 as being the best available." 39 The plaintiff's proposition fails to do justice to the possibility, which cannot be discounted, that the Arbitrator, who clearly looked at all exhibits including Exhibit R 37 and the evidence to which he refers, may simply have formed the conclusion that the anterior Exhibit R4 was the best available evidence put forward. There is nothing here which satisfies the description "manifest error of law on the face of the award". If error there was, it is not a manifest error within the meaning of the above-described authorities. Costs 40 Section 34(6) of the Act provides: " Where in accordance with rules of court an offer of compromise has been made in relation to a claim to which an arbitration agreement applies, the arbitrator or umpire shall, in exercising the discretion as to costs conferred on the arbitrator or umpire by subsection (1), take into account both the fact that the offer was made and the terms of the offer. " 41 This section of the Award in question reads as follows: "COSTS 3.01 I accept and agree that the Arbitrator's power to award costs arises pursuant to Section 34 of the Commercial Arbitration Act 1984, Amended 1990. 3.02 I accept and adopt the general rule that cost should follow the event. 3.03 I reject the submission of the Respondent relating to the Calderbank Principle as I do not consider the Panmal letter of 3rd July 2000 was an "offer" in terms of Section 34(6) of the Commercial Arbitration Act 1984, Amended 1990, the Calderbank Principle, as and [sic] it was a letter continuing the argument over amounts claimed and allowed. It was not a sealed offer nor was one presented to the Arbitration nor was it a without prejudice offer in fact the word "offer" was not included in the letter, and in fact the letter concludes by listing further unquantified credits Panmal would be claiming.. 3.04 I reject the argument of the Respondent that an Award of only $4,727.14 to the Claimant, when a statutory demand of $111,800.31 and points of claim of $114,244.94 had been made, was so trivial an award to be disregarded as a relevant "event" for the purposes of costs. This is rejected as the amended points of claim dated 5th November 2001 was for an amount of $88,019.69 and this must be considered against a counter claim of $106,273.00. Therefore against this background I do not consider the eventual sum awarded trivial. 3.05 The Respondents submission refers to a " without prejudice " offer by the Respondent on 24th October 2001 to settle the Arbitration by payment to the Claimant a sum of $15,000.00. I presume the "conclave" referred to as the 24th October 2001 was the conclave of 19th October 2001 and this offer was not minuted, not made in my presence nor was it mentioned in the Heads of Agreement that emanated from that conclave. The Arbitration was never made aware of any "without prejudice" offer. 3.06 In the absence of special circumstances a successful party should receive his cost, and I consider the Claimant to have been successful." [Exhibit PX 1 pages 60-61] 42 The third matter concerns a suggested error in terms of the Arbitrator's discretion as to costs having miscarried in such a severe fashion as to amount to an error of law. The plaintiff contends that there was and is no proper basis for the discretionary costs award made by the Arbitrator. The submission is that the award is manifestly unreasonable and unwarranted and should be set aside. 43 The contention is that if the Award in respect of costs were to stand, the result would be that the plaintiff would have to pay costs and fees in a combined amount of over $150,000, in circumstances where, even on the Arbitrator's erroneous arithmetical calculations, the Award in favour of the defendant was only $4,727.14. The plaintiffs proposition is that such a result is palpably neither "fair" nor "just": see Wentworth v Rogers [2003] NSWSC 944, Howie J, Supreme Court of NSW, 27 October 2003, unreported) [at 38]. 44 Further it is put that on any reasonable and non-capricious approach, the result of the Arbitration was a resolution of the competing claims of the parties which reflected substantial lack of success for both parties so as virtually to cancel each other out. 45 The submission is that what is described as the complete unreasonableness of the costs award is further highlighted and exacerbated once the Arbitrator's errors of calculation are corrected: the true net result, on the Arbitrator's own findings, is a narrow net "victory", on the issues for determination in the arbitration, for the plaintiff, not the defendant. 46 The proposition for which the plaintiff contends is that the Arbitrator plainly refused to take into account in exercising the discretion which he had in terms of the determination as to costs, the without prejudice offer by the plaintiff made on 24 October 2001. As already indicated, before this Court the defendant conceded that such an offer had indeed be made. The offer was made more than a year before the arbitration hearing began - to settle the matter on the basis that the plaintiff pay to the defendant $15,000.00, with each party paying its own costs. 47 In so far as questions have been raised on the application presently before the Court concerning the lack of formality attaching to the 24 October 2001 without prejudice offer, it is to be noted that in Letterbox Holdings Pty Ltd v Kirkham [2003] NSWSC 177 (Supreme Court of New South Wales, 21 March 2003, Nicholas J observed [at 57]: "S34(1) of the Act confers a broad discretion. It does not declare that costs automatically follow the event. The discretion must be exercised judicially in accordance with established principles and factors directly connected with the litigation." (see generally Oshlack v Richmond River Council (1998) 193 CLR 72 at 96-98). 48 The plaintiff conceded before the Court that no point was taken as to the form of the offer. 49 In my view it is quite clear that given the very small net amount which the Arbitrator ultimately awarded the defendant, the amount of the plaintiff's offer [having regard to the point of time at which it was made], was properly a factor which should have been taken into account in deciding what costs order should be made. The matter becomes even clearer when one takes into account the error earlier referred to in terms of the treatment [as amounts being claimed and the subject of dispute in the matter of the arbitration], of items which were neither claimed nor disputed. Such treatment tips the balance in favour of the plaintiff's side of the record. But even if it did not, the plaintiff's offer should have been taken into account and was not. 50 The arbitrator appears to have approached the whole costs question upon the basis that there is a "general rule that costs should follow the event". 51 In Oshlack, McHugh J, with whose reasons for judgment Brennan CJ was in general agreement, after dealing with the statutory discretion conferring on the Court a broad discretion as to award costs, said at 101: "The Discretion Must be Exercised Judicially Although the statutory discretion is broadly stated, it is not unqualified. It clearly cannot be exercised capriciously. Importantly, the discretion must be exercised judicially in accordance with established principle and factors directly connected with the litigation. In this manner, the law has gradually developed principles to guide the proper exercise of the discretion and, in some cases, to highlight extraneous consideration which, if taken into account, will cause the exercise of the discretion to miscarry. Consistent with the aim of justice, the law could not have developed otherwise . . . by far the most important factor which Court has viewed as guiding the exercise of the costs discretion is the result of the litigation. A successful litigant is generally entitled to an award of costs. . . . The combined force of the sentiments recognised above by Mason CJ, regarding the need for consistency in order to avoid injustice, and by Devlin J, regarding the most significant factor affecting the costs discretion, provides the jurisprudential basis for the important principle commonly referred to as the 'usual order as to costs'. The Usual Order as to Costs The expression the 'usual order as to costs' embodies the important principle that, subject to certain limited exceptions, a successful party in litigation is entitled to an award of costs in its favour. The principle is grounded in reasons of fairness and policy and operates whether the successful party is the plaintiff or the defendant. Costs are not awarded to punish an unsuccessful party. The primary purpose of an award of costs is to indemnify the successful party. If the litigation had not been brought or defended, by the unsuccessful party the successful party would not have incurred the expense which it did. As between the parties, fairness dictates that the unsuccessful party typically bears the liability for the costs of the unsuccessful litigation." 52 It may be that the Arbitrator in stating that he accepted and adopted the general rule that costs should follow the event, was doing no more than to indicate that as a general rule of thumb and in the manner explained by McHugh J in Oshlack, a successful party will be entitled to an award of costs. The difficulty here reposes in the sparsity of words used by the Arbitrator and in particular in that he further expressed the principle as that a successful party should receive his costs in the absence of special circumstances. 53 The plaintiff has submitted that the words used by the Arbitrator indicate that he did not see himself as having a relevant discretion. 54 In any event I am satisfied that the decision in respect of costs is vitiated by a manifest error of law on the face of the Award when one takes into account the combination of problems underpinning the approach taken by the Arbitrator. The cumulative effect of what is shown to have occurred is that: · the arbitrator erred in terms of the treatment, as amounts being claimed and the subject of dispute in the matter of the arbitration, items which were neither claimed nor disputed; · the arbitrator erred in refusing to take into account the $15,000 offer earlier referred to; · the arbitrator erred in apparently treating as a general rule, the proposition that costs require to follow the event, whereas this is no more than a general statement of an important parameter of the general discretion to award costs, there being any number of other considerations which may in a given case required to be weighed; · the Arbitrator did not rely upon, or even refer to, any aspect of the proceedings as influencing the exercise of his discretion on costs, other than his erroneous arithmetical calculations of the net result; · the arbitrator failed to give any weight whatever to the fact that standing back from whole of the Arbitration where there was both a claim and a counter claim, the parties should properly have been regarded as each successful in roughly the same amount so that it could not be said that either was the successful party. Indeed, once the various errors made by the Arbitrator are taken into account, and it is clear that to the extent that either side had marginally more success than the other, it was actually the plaintiff which did so. 55 As to section 38(5)(a), the determination of the two questions of law concerned will substantially affect the rights of both the parties. The amount payable by the plaintiff to the defendant pursuant to the costs award, if it is left undisturbed, will be in excess of $150,000. That is a substantial amount in itself, and dwarfs the substantive amount erroneously awarded by the Arbitrator to the defendant. The substantiality of the amount is a relevant factor in determining whether the requirement in s. 38(5)(a) is met: Horizons Corporation Pty Ltd v Lahey Constructions Pty Ltd, Einstein J, Supreme Court of New South Wales, unreported, 27 November 1998; BC9807527, [at 23]. 56 As to s. 38(5)(b)(i), the errors of law are manifest, in the requisite sense of "evident or obvious rather than arguable": see Promenade Investments Pty Ltd v State of NSW (1992) 26 NSWLR 203 at 225 per Sheller JA. 57 In the particular circumstances and as the plaintiff has submitted, this is an example of the situation described in House v R (1936) 55 CLR 499 where [at 505]: "… it may not appear how the [arbitrator] has reached the result embodied in his order, but … upon the facts it is unreasonable or plainly unjust …[and] the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the [arbitrator]" 58 In my view the failure to give sufficient reasons for the making of the subject costs order either constitutes an error of law: Pettitt v Dunkley [1971] 1 NSWLR 376 at 382, 385, 389; Apps 11 NSWLR 350 or here, constitutes strong evidence that the arbitrator made an error of law there being also evidence that the determination of the question may add or be likely to add substantially to the certainty of commercial law-here the question of the extent to which reasons given under the Commercial Arbitration Act for a costs award require to be given. 59 In addition, if recourse be needed to section 38(5)(b)(ii), the determination of the question is indeed likely to substantially add to the certainty of commercial law. It will provide clear guidance to arbitrators as to the critical importance of exercising their discretion as to costs in a principled, rational way, so as to arrive at a fair and just result as between the parties" (cf Howie J in Wentworth, see 38 above) rather than arbitrarily, or without reason. 60 In the circumstances, the Arbitrator's discretion has miscarried, the result being manifestly unreasonable and plainly unjust. The Appeal 61 During the course of the hearing of the application for leave to appeal both parties urged the Court to regard this case as falling outside of the usual approach where the actual appeal is fixed for hearing following the handing down of judgment on the application for leave to appeal. Neither party wished to call any other evidence or to produce any other evidence in this regard. To my mind the Court should accede to this application in the rather unusual circumstances which here obtain. 62 For the reasons given above leave to appeal is granted. The appeal is allowed for the same reasons. 63 The proper exercise of the Court's discretion on the appeal is to discharge the costs award and to note that each party should bear its own costs of the Arbitration. That is because there was no evidence at all sought to be tendered by either party before the Court in terms of the transcript of evidence below. Nor did either party do otherwise than to address in very short terms on the proper orders to be made. Effectively the Court approaches the matter upon the basis that in substance the Arbitration involved claims and counterclaims where each of the parties was ultimately successful against the other in an amount roughly equivalent. There was no clear victor. There was no clear successful party. 64 The parties are to bring in short minutes of order. I certify that paragraphs 1-64 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 26 March 2004 ___________________ Susan Piggott Associate 26 March 2004 Last Modified: 04/08/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.