Re Bond Corporation Pty Ltd, Thiess Contractors Pty Ltd (Cross-Claiment) v Thiess Contractors Pty Ltd; Ove Arup Pty Ltd; Arup Partners Pty Ltd; Ove Arup Consultants Pty Ltd and Bond Corporation (Cross-Respondent) [1988] FCA 3 (20 January 1988)

FEDERAL COURT OF AUSTRALIA

Re: BOND CORPORATION PTY LTD, THIESS CONTRACTORS PTY LTD (cross-claiment)
And: THIESS CONTRACTORS PTY LTD; OVE ARUP PTY LTD; ARUP PARTNERS PTY LTD; OVE
ARUP CONSULTANTS PTY LTD and BOND CORPORATION (cross-Respondent)
No. WAG114 of 1986
Practice and Procedure

COURT

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
French J.(1)

CATCHWORDS

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 QB 644

Neale v Richardson (1983) 1 All ER 753

Robins v Goddard (1905) 1 KB 294

HEARING

PERTH
20:1:1988

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

ORDER

The first respondent have leave to discontinue its cross-claim.

The order made on 24 February 1987 be varied so that the first respondent, its servants and agents be restrained 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 injunction.

Costs.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DECISION

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 it under a schedule of rates construction contract.

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.

3. 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' defence 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.

4. 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.

5. In support of its motion Thiess contends that its 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.

6. 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 including a formal instrument of agreement and General Conditions of Contract, AS2124/1981.

7. 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 it 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).

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
in 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).

8. 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.

9. 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 determination by the Superintendent and in the event of dissatisfaction with his determination, a reference to 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, if 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 is dissatisfied with the
determination given by the Superintendent, or
if 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 issue 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, either 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.

(c) Arbitration shall be effected -

(i) 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 is received by one party
from the other party,

(ii) 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."

10. Thiess argues that an arbitrator would be empowered to make determinations of a kind, which it says the Superintendent ought to have made under c1.23. It further contends that these are not determinations of a kind that the Court can make. In effect, c1.23 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 is required.

11. The Notice of Reference to Arbitration dated 12 September 1986 invoked c1.49.1(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."

12. The order made in these proceedings on 24 February 1987 affecting the proposed arbitration was in the following terms: -

"1. 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.

2. The First Respondent have liberty to apply to vary
or set aside this order on 48 hours' written
notice."

13. The restraint order was made in reliance, inter alia, upon certain factors set out in the Reasons for Decision as follows: -

"(1) The arbitration proceedings have not gone beyond
the point of the initial notice and appointment of
arbitrator.

(2) There is no real prejudice demonstrated by the
first respondent were it to prosecute its claim as
a cross-claim in this court.

(3) All disputes between all parties can be resolved in
these proceedings.

(4) 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.

(5) This is not a case in which the resolution of the
arbitration proceedings would lead to a resolution
of issues in this litigation."

14. 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 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.

15. 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 issue raised by the motion is whether or not the Court is in a position to resolve all matters in dispute between the parties. If it is, 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 it seeks.

16. It is submitted that the arbitrator is authorised by c1.49.1(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 c1.23. The arbitrator, it is 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 c1.23.1 which provides: -

"The Superintendent shall exercise in a reasonable and
equitable manner the powers conferred on him by the
Contract."

17. This is, it is said, a duty cognisable by a court of law. Though it imposes no contractual obligation on Ove Arup, its breach is 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 is 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 LJ 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."

18. Brown-Wilkinson LJ observed that in an action based on contract the court can only enforce the agreement and has no power to modify it in any way:-

"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 certificate 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)

19. 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 it. The
court could not (as an arbitrator could) substitute its
discretion for that of the architect." (667)

20. The Master of the Rolls, Sir John Donaldson, at 671, said that the function of the court is to determine facts and to enforce the contractual rights of the parties. The arbitrator under the contract in question however, had a double function:-

"He has first the right and the duty to review the
architect's decisions (in which I include certificates,
opinions, requirements and notices) and, if 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 is not."

21. In my opinion, the power given to the arbitrator in c1.49.1(b) to determine the "matter at issue" is wide enough to encompass substitution of his own determination for any disputed determination of the Superintendent. To that extent the powers he is given import the two functions identified by Donaldson MR in the Crouch case.

22. 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."

23. 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 defendant was entitled to set up the defence and counterclaim for the action. At 303 Stirling LJ said:-

"The arbitrator is 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."

24. To say that, is not to say that the court could exercise the arbitrator's substituted decision-making functions.

25. 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 it 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 conceivable that the court might be able by some appropriate exercise of its remedial powers or of a combination thereof, to arrive 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.

26. 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.

27. 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.