Caneebie Engineering Services Pty Ltd v Drummond [2001] QSC 318

SUPREME COURT OF QUEENSLAND CITATION: Caneebie Engineering Services Pty Ltd v Drummond [2001] QSC 318 PARTIES: CANEEBIE ENGINEERING SERVICES PTY LTD ACN 090 108 373 (applicant/appellant) v DONALD NEVILLE DRUMMOND (respondent/respondent) FILE NO/S: S6626 of 2001 DIVISION: Trial Division PROCEEDING: Application for leave to appeal ORIGINATING COURT: Supreme Court, Brisbane DELIVERED ON: 30 August 2001 DELIVERED AT: Brisbane HEARING DATE: 13 August 2001 JUDGE: Philippides J ORDER: 1) That the applicant have leave to appeal against so much of the Award of the arbitrator dated 20 June 2001, which awarded $8,050.17 for costs associated with the repair of the vessel and $9,991.00 for lost income from down time; 2) That the appeal insofar as it relates to the Award of $8,050.17 and $9,991.00 aforesaid is upheld; 3) That the Award insofar as it concerned the award of $8,050.17 and $9,991.00 aforesaid be remitted to the arbitrator to be determined in accordance with the rules of natural justice; and 4) That the respondent pay the applicant’s costs of and incidental to this application to be assessed. CATCHWORDS: ARBITRATION – conduct of arbitration proceedings – Award - leave to appeal against final award – receipt of further evidence by arbitrator from one party without reference to other party – denial of natural justice The Commercial Arbitration Act 1990, s 38 Barrier Reef Port Casting Pty Ltd v Minister for Post and Telecommunication (1978) 19 ALR 425 Brinkley v Brinkley [1965] P 75 -- 1 of 8 -- 2 Bunge (Aust) Pty Ltd v Crest Mills Pty Ltd [1961] NSWLR 181 Dobson v Groves (1844) 14 LJQB 17 East Cheap Dried Fruit Co v NV Gebroeders Catz [1962] 1 Lloyd’s Rep 283 Fox v Wellfair Ltd [1981] 2 Lloyd’s Rep 514 Re Fuerst Bros & Co Ltd and R S Stephenson [1951] 1 Lloyd’s Rep 429 Re Pochi & Minister for Immigration and Ethnic Affairs (1979) 26 ALR 247 University of Ceylon v Sunando (1960) 1 WLR 223 W H Ireland & Co v C T Bowling & Co [1920] Lloyd’s Rep 220 W Ramsden & Co v Jacobs [1922] 1 KB 640 COUNSEL: E J Morzone for applicant/appellant M Sayers for respondent SOLICITORS: Jans Lawyers for applicant/appellant Wellner & Associates for respondent PHILIPPIDES J: Background [1] This is an application for leave pursuant to s 38 of the Commercial Arbitration Act 1990 (“the Act”) to appeal against a final award of the arbitrator, dated 26 June 2001 delivered in the arbitration between the parties. [2] Section 38 of the Act relevantly provides: “(1) ... (2) Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award. (3) On the determination of an appeal under subsection (2) the Supreme Court may by order – (a) confirm, vary or set aside the award; or (b) remit the award, together with the Supreme Court’s opinion on the question of law which was the subject of the appeal, to the arbitrator or umpire for reconsideration or, where a new arbitrator or umpire has been appointed, to that arbitrator or umpire for consideration; and where the award is remitted under paragraph (b) the arbitrator or umpire shall, unless the order otherwise directs, make the award within 3 months after the date of the order. -- 2 of 8 -- 3 (4) An appeal under subsection (2) may be brought by any of the parties to an arbitration agreement – (a) ... (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.” [3] The grounds of appeal are as follows: “(i) The arbitrator erred in law by allowing new or fresh evidence to be adduced by the respondent, and to be considered by him after receiving final submissions from the appellant, without affording the appellant any further opportunity to be heard; (ii) The arbitrator breached the rules of natural justice; (iii) The rights of the appellant have thereby been substantially affected.” [4] The arbitration involved a dispute between the parties concerning defective construction of a commercial fishing vessel on a design supplied by the respondent. The respondent claimed inter alia for the costs of repairs to the vessel and loss of income due to down time. [5] The applicant contends that the arbitrator took into account material that had not been tendered or adduced in evidence at any time during the arbitration process in relation to the costs of vibration repairs and the loss of income claim due to down time. [6] It appears that following the hearing of the arbitration, both parties were required to put in written submissions simultaneously. It also appears that the respondent, in addition to written submissions, submitted further evidence supporting his claim. It is uncontested that this further material was not provided to the applicant before the award was made. It appears that this further material concerned two issues: (a) the cost of identifying the cause of severe vibrations from the engine which were causing structural damage and repairing same; (b) the lost income from down time when the vessel was unable to be used due to rectification work being carried out. -- 3 of 8 -- 4 [7] In June 2001, the arbitrator awarded inter alia that the applicant pay the respondent for: (a) costs of $8,050.17 incurred by the respondent, principally to a Mr Price, an engineer, in respect of the vibration problem; (b) lost income of $9,991.00 from down time when the vessel was unable to be used due to the work being carried out by Mr Price. [8] Counsel on behalf of the applicant submitted that the arbitrator owed a fundamental duty of fairness to give each of the parties the opportunity to know the case of the opponent and to present their own, and that each party “must be given the right to comment on and contradict the material offered by its opponent” which usually requires that all evidence and argument be presented in the presence of each party or their representatives.1 It was submitted on behalf of the applicant that the arbitrator ought to have provided copies of the further material said to constitute further evidence or given an opportunity to the applicant’s solicitors to seek the further material, even if such evidence had been obtained independently by him.2 [9] On behalf of the respondent it was conceded that, if the documents went beyond the parameters of oral evidence given in relation to the quantum of repairs, or if the documentation in relation to the down time was relied upon by the arbitrator in making the award concerning that issue, then a denial of “due process” would have occurred. However, it was submitted that the failing would be more one of process than lack of natural justice per se, there being no inherent right to cross-examine according to natural justice, but only a right to be heard.3 Further, it was submitted by counsel for the respondent that the documents did not go beyond the parameters of oral evidence in relation to the quantum of repairs, and that it did not appear that the further material concerning the down time issue was relied upon in the arbitrator’s findings in relation to that issue. The Vibration Repairs [10] At the hearing evidence was adduced from various witnesses called by both sides, including Mr Price and the respondent. There is no transcript of the arbitration hearing. [11] The further documentation relevant to the vibration problem, which was provided to the arbitrator after the conclusion of the arbitration hearing, but not to the applicant, is contained in Annexure L to the affidavit of Peter Anthony Jans and comprises three documents, namely: (a) an undated invoice from D A Price Marine Diesel Consultants for $4,355 for repair of the engine vibrations; (b) an invoice for $1,964 from Forgacs Slipway for inter alia labour involved in repairing the engine vibrations; 1 The applicant relied on WH Ireland & Co v C T Bowring & Co (1920) 2 L1 L Rep 220 at 221; W Ramsden & Co Ltd v Jacobs (1922) 1 KB 640; Varley v Spatt [1955] VLR 403; Bunge Australia Pty Ltd v Crestmills Pty Ltd [1961] NSWR 181. 2 See Slapjums v City of Knox (No 1) (1978) VR 325 at 341-2; Fox v P G Welfair Ltd (in liq) [1981] 2 Lloyd’s Rep 514 at 530. See also Halsbury’s Laws of Australia at para 25-460. 3 See University of Ceylon v Sunando (1960) 1 WLR 223; Barrier Reef Port Casting Pty Ltd v Minister for Post and Telecommunication (1978) 19 ALR 425 -- 4 of 8 -- 5 (c) an invoice from Commo’s Diesel Supplies for $1,980.79 for the supply of new hard engine mounts, which the respondent contended was said in evidence to be likely to help ameliorate the engine vibration issues. [12] The findings in relation to the vibration repairs are dealt with in paragraph 56 of the award where the arbitrator refers to “the following unchallenged amounts totalling $8,050.17”. The applicant in its affidavit contends that the “amounts” are calculated from the Annexure L aforesaid, of which the applicant was unaware and, accordingly, it was impossible for them to “challenge” the amounts claimed. [13] As the respondent submitted, it appears that the issue of the vibration problem was the subject of oral evidence from the respondent and other witnesses, including Mr Price himself, and that: (a) Mr Price gave an estimate that his fees would be in the vicinity of $4,000 for the relevant investigation and rectification work and that the total cost would include the price of supplying parts and obtaining the hard stand and other mariner services (most of these being costs actually incurred by or during the time of the hearing); (b) Mr Lane, an engineer employed by the respondent, gave an estimate that the cost of doing the same work would be in the vicinity of $7,000 plus the price of supplying parts; (c) Mr Price indicated that he was unable at the time to present documents/invoices in support of the price of supplying parts/the hard stand etc because he was still involved in working on the vessel right up to the time of the hearing, but that the documents would be supplied when available. [14] The respondent submitted that it is significant that the invoice for Mr Price’s services is in the vicinity of $4,000 as estimated by himself and that the invoice is significantly less than the cost estimate of the respondent’s own expert, Mr Lane. It was also said to be significant that the invoices from Forgacs and Commo’s are for liquidated amounts and that both were conceded by the applicant as a matter for it and by Mr Lane as necessary to the resolution of the engine vibrations and that these documents are invoices for costs actually incurred rather than estimates. Further, it was contended on behalf of the respondent that it is only if these documents were estimates that the applicant could realistically hope to challenge the quantum of those amounts, given the applicant’s own case and given that the evidence conceded the need for work and parts of this kind. It was submitted that this congruence between the oral evidence and the documents in Annexure L not only results in there not being a denial of natural justice, but, furthermore, that the threshold criteria in contested applications for leave, (that is that a different determination of the question of law could substantially affect the rights of the parties, s 38(5)(a) of the Act) are not met. The Down Time Issue [15] The respondent claimed loss of income as a result of the alleged defective construction of the vessel. The down time issue was also the subject of oral evidence. It appears that during oral evidence the respondent was cross-examined -- 5 of 8 -- 6 in relation to the down time issue and was specifically challenged in cross- examination about an inflated net figure for lost income that did not take into account all operating expenses. According to affidavit material filed on behalf of the applicant, which is not contradicted, the respondent, in giving evidence, was unable to provide particulars or material concerning business and operating expenses and the effect of the respondent’s evidence concerning the costs and expenses of operating his business was that, after properly accounting for all appropriate costs and expenses, there would be no net income and the business would, for the relevant period, have operated at a loss. [16] The further documentation in relation to the down time issue, which was provided after the conclusion of the arbitration hearing to the arbitrator, but not to the applicant, is contained in Annexure L to the affidavit of Peter Anthony Jans. It comprises a handwritten schedule of expenses for the whole of the respondent’s fishing business, including the operation of other vessels. The findings in relation to this issue are dealt with in paragraph 111 of the Award where the award of $9,991.00 is specified. Leave to Appeal [17] The arbitrator was clearly obliged to observe the rules of natural justice. It is fundamental to fair procedure that both sides should be heard: audi alteram partem. This rule requires that each party have an opportunity to present its case and to meet that of its opponent. The taking into consideration of evidence which a party to the proceedings has had no opportunity to see or hear strikes at the very root of the judicial process.4 The content of the right to a fair hearing will vary with the circumstances of the case. Thus the right to comment on and contradict material offered by one’s opponent does not necessarily entail a right to cross-examine on the material.5 [18] It is well established that the receipt of evidence by an arbitrator from one party in the absence of the other after the conclusion of the arbitration hearing, will generally offend the audi alteram partem rule and that an award so made will be liable to be set aside, unless it can be shown that the evidence would not have affected the award6. Thus in W H Ireland & Co v C T Bowling & Co7 it was said: “There is one principle that must be observed… and that is that the arbitrator… must not accept evidence which is put in or tendered by one side without the knowledge of the other side. That ...[is] a fundamental principle which must govern all arbitrations, however loosely they are conducted… .”. [19] In the present case, the applicant should have been accorded the opportunity to comment on the further material concerning the loss of income. On behalf of the 4 Brinkley v Brinkley [1965] P 75 at 78 5 Re Pochi & Minister for Immigration and Ethnic Affairs (1979) 26 ALR 247 at 256-7. 6 See Fox v Wellfair Ltd [1981] 2 Lloyd’s Rep 514 at 528; see also Dobson v Groves (1844) 14 LJQB 17; In re Fuerst Bros & Co Ltd and RS Stephenson [1951] 1 Lloyd’s Rep 429 at 432; W Ramsden & Co v Jacobs [1922] 1 KB 640; Bunge (Aust) Pty Ltd v Crest Mills Pty Ltd [1961] NSWLR 181 at 188; East Cheap Dried Fruit Co v NV Gebroeders Catz [1962] 1 Lloyd’s Rep 283 at 284 7 [1920] Lloyd’s Rep 220 -- 6 of 8 -- 7 respondent it was conceded that had the arbitrator relied upon annexure L then a manifest error of law may have occurred: see s 38(5)(b)(i) of the Act. However, it was submitted that the figures supplied in that document bore no mathematical relation to the figures relied on by the arbitrator in assessing the loss of income due to down time issue and referred to by the arbitrator in his award. It was thereby submitted that the arbitrator did not rely on the figures in the document in making his determination. So that even if there was a denial of natural justice, it could not be said to be one that could substantially affect the rights of the applicant. In my opinion, the respondent’s submission proceeds on an erroneous premise. [20] It does not follow that, because the arbitrator’s award cannot be said to have been reached solely from the document in Annexure L, that document can be excluded from having been relied upon by the arbitrator in arriving at any of the figures for the down time award. The exact nature of the evidence used by the arbitrator in reaching his award is not entirely clear and there is no justification for concluding that he completely disregarded the additional material on that issue. To seek to inquire into the matter further would be to enter into speculation. In the circumstances, I consider that the failure to allow the applicant an opportunity to be heard on the further material could be said to substantially affect the rights of the applicant. [21] In relation to the further material provided in relation to the repairs in respect of the vibration problem, although there was some oral evidence on the matter, the applicant should have also been given the opportunity to comment on the further material concerning the vibration repairs. Notwithstanding that the further documentation was in line with the general estimates concerning Mr Price’s work and that the remainder of the invoices in question concerned costs actually incurred by Forgacs and Commo’s, the applicant should have been afforded the opportunity to vet those documents for any discrepancies and the opportunity to comment on them. I do not see the fact that they concerned actual costs incurred as opposed to estimates as making any difference. [22] Accordingly, I consider that a question of law concerning the failure to accord natural justice arises in relation both to the issue of the receipt of further material in relation to the award of $8,050.17 and the award of $9,991 and was such that it could be said to substantially affect the rights of the applicant. The Appeal [23] I consider that there has been an error of law arising out of the reception of the further materials without affording the applicant the opportunity to be heard on that material. [24] As to the question of whether the award should be remitted or set aside, there is always a discretion to be exercised in accordance with the facts of the particular case. I consider that the appropriate order in this case is that the Award in respect of the rectification of the vibration problem and the loss of profits from the down time should be remitted to the arbitrator to be dealt with so as to afford the applicant natural justice by giving it the opportunity to be heard on that material. In so ordering I do not consider it appropriate to specify what will be required in order to afford the applicant the opportunity to be heard on the further material. -- 7 of 8 -- 8 [25] Accordingly, I order that: 1. The applicant have leave to appeal against so much of the Award of the arbitrator dated 20 June 2001, which awarded $8,050.17 for costs associated with the repair of the vessel and $9,991.00 for lost income from down time; 2. The appeal insofar as it relates to the Award of $8,050.17 and $9,991.00 aforesaid is upheld; 3. The Award insofar as it concerned the award of $8,050.17 and $9,991.00 aforesaid be remitted to the arbitrator to be determined in accordance with the rules of natural justice; and 4. The respondent pay the applicant’s costs of and incidental to this application to be assessed. -- 8 of 8 --