ASC AWD Shipbuilder Pty Ltd v Ottoway Engineering Pty Ltd [2017] SASCFC 150

SUPREME COURT OF SOUTH AUSTRALIA

(Full Court)

ASC AWD SHIPBUILDER PTY LTD v OTTOWAY ENGINEERING PTY LTD

[2017] SASCFC 150

Judgment of The Full Court

(The Honourable Chief Justice Kourakis, The Honourable Justice Stanley and The Honourable Justice Nicholson)

 

10 November 2017

ARBITRATION – THE AWARD – APPEAL OR JUDICIAL REVIEW – PROCEDURE – APPEALS AND LEAVE TO APPEAL – LEAVE TO APPEAL FROM DECISION OF ARBITRATOR – QUESTION OR ERROR OF LAW

CONTRACTS – BUILDING, ENGINEERING AND RELATED CONTRACTS – THE CONTRACT – CONSTRUCTION OF PARTICULAR CONTRACTS AND IMPLIED CONDITIONS – IMPLIED TERMS

CONTRACTS – GENERAL CONTRACTUAL PRINCIPLES – CONSTRUCTION AND INTERPRETATION OF CONTRACTS – IMPLIED TERMS – GENERALLY

In September 2009 the parties entered into a contract pursuant to which the respondent was to fabricate, assemble and supply pipework to the appellant. The contract included clause 25, an arbitration agreement, which provided that any dispute arising was to be referred to and finally resolved by arbitration in accordance with the IAMA Rules.

At the time the parties entered into the contract, section 38(2) of the Commercial Arbitration and Industrial Referral Agreements Act 1986 (SA) conferred on a party to an arbitration agreement a right to seek permission to appeal to the Supreme Court on any question of law arising out of an arbitral award, either with the consent of both parties or with the permission of the Court, unless the parties had agreed in writing to exclude such a right of appeal. At no point did the parties enter into an agreement to opt out of the statutory right of appeal.

After the parties entered into the contract, the 1986 Act was repealed by the enactment of the Commercial Arbitration Act 2011 (SA). The arbitration agreement fell to be governed by the 2011 Act. The effect of section 34A of the 2011 Act is that a right of appeal on a question of law arising out of an arbitral award will lie only if the parties agree that such an appeal may be made and the Court grants leave to appeal.

In 2016 a dispute arose and was referred to arbitration. The arbitrator made an award in favour of the appellant and dismissed the respondent’s cross-claim.

The respondent sought leave to appeal against the award on the ground that the arbitrator erred in law by not providing reasons or sufficient reasons for key findings. A Judge of the Supreme Court granted the respondent leave to appeal in May 2017. The Judge held that it was an implied term of the contract that there was to be a statutory right of appeal against the arbitral award on a question of law, as provided for by section 34A(1)(a) of the 2011 Act. The Judge found that, objectively assessed, it was the contractual intention of the parties at the time of entering into the contract that there was to be such a right of appeal and that each of the conditions identified in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council were satisfied in respect of such an implied term. Further, the Judge held that the statutory criteria for the grant of leave to appeal, as prescribed by section 34A of the 2011 Act, had been satisfied.

The appellant has appealed against the Judge’s order granting leave to appeal against the arbitral award. The appellant relies on two grounds. First, that the Judge erred in finding that it was an implied term of the contract that there was to be a statutory right to seek leave to appeal from the arbitral award; and second, that even if the respondent did enjoy a statutory right to seek leave to appeal, the Judge erred in finding that the mandatory criteria for leave had been satisfied.

Held per Nicholson J, (Kourakis CJ and Stanley J agreeing) allowing the appeal:

1.       The Judge erred in finding that it was an implied term of the parties’ contract that there was to be a statutory right to seek leave to appeal from the arbitral award. No statutory right to seek leave to appeal arose, whether by way of implied term or otherwise (per Kourakis CJ at [27], per Nicholson J at [35]).

2.       The term contended for by the respondent and found by the primary Judge is not so obvious as to go without saying (per Kourakis CJ at [12]-[15], per Nicholson J at [68]-[71]).

3.       It cannot be said that the implied term contended for by the respondent was necessary to give business efficacy to either the contract or the arbitration agreement (per Kourakis CJ at [16]-[17], per Nicholson J at [72], [77]-[81]).

4.       It is not necessary in the circumstances to form a concluded view as to whether the leave requirements in section 34A(3) of the 2011 Act have been met (per Nicholson J at [84]).

5.       Observations concerning the extent to which the leave requirements in section 34A(3) of the 2011 Act are apposite with respect to a ground of appeal complaining only of inadequate reasons by the arbitrator per Nicholson J at [85]-[98].

6.       The order of the primary Judge granting the respondent leave to appeal against the arbitration award is vacated. The respondent’s application for leave to appeal against the arbitration award is dismissed (per Nicholson J at [99]).

Commercial Arbitration and Industrial Referral Agreements Act 1986 (SA) s 38, s 40; Commercial Arbitration Act 2011 (SA) s 34A, referred to.
Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10; BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266; Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337; Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited [2015] UKSC 72, discussed.
Grocon Constructors (Vic) Pty Ltd v APN DF2 Project 2 Pty Ltd [2015] VSCA 190; Principal Properties Pty Ltd v Brisbane Broncos Leagues Club Ltd (No 2) [2016] QSC 252; Ashjal Pty Ltd v Elders Toepfer Grain Pty Ltd [2012] NSWSC 545, considered.

 

ASC AWD SHIPBUILDER PTY LTD v OTTOWAY ENGINEERING PTY LTD
[2017] SASCFC 150

Full Court:  Kourakis CJ, Stanley and Nicholson JJ

 

KOURAKIS CJ.

 

  1. I gratefully adopt the history of the dispute resolution process in which the parties engaged and the legislative history appearing in the judgment of Nicholson J.  I would allow the appeal for essentially the same reasons as those given by Nicholson J.  However because my point of entry and the matters I wish to emphasise vary slightly I, perhaps unnecessarily, provide my own reasons.

    Contractual Implied Terms – The Principles

  2. In Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (Codelfa) the High Court adopted, for the purposes of the construction of contracts, the conditions for the implication of a term summarised by the majority of the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council:

    (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

  3. In Marks and Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Limited (Marks) Lord Neuberger essayed some elaboration of that checklist:

    [15]         As Lady Hale pointed out in Geys v Société Générale para 55, there are two types of contractual implied term. The first, with which this case is concerned, is a term which is implied into a particular contract, in the light of the express terms, commercial common sense, and the facts known to both parties at the time the contract was made. The second type of implied terms arises because, unless such a term is expressly excluded, the law (sometimes by statute, sometimes through the common law) effectively imposes certain terms into certain classes of relationship.

    [16]         There have, of course, been many judicial observations as to the nature of the requirements which have to be satisfied before a term can be implied into a detailed commercial contract. They include three classic statements, which have been frequently quoted in law books and judgments. In The Moorcock Bowen LJ observed that in all the cases where a term had been implied, “it will be found that … the law is raising an implication from the presumed intention of the parties with the object of giving the transaction such efficacy as both parties must have intended that at all events it should have”. In Reigate v Union Manufacturing Co (Ramsbottom) Ltd Scrutton LJ said that “[a] term can only be implied if it is necessary in the business sense to give efficacy to the contract”. He added that a term would only be implied if “it is such a term that it can confidently be said that if at the time the contract was being negotiated” the parties had been asked what would happen in a certain event, they would both have replied “‘Of course, so and so will happen; we did not trouble to say that; it is too clear’”. And in Shirlaw v Southern Foundries MacKinnon LJ observed that, “[p]rima facie that which in any contract is left to be implied and need not be expressed is something so obvious that it goes without saying”. Reflecting what Scrutton LJ had said 20 years earlier, MacKinnon LJ also famously added that a term would only be implied “if, while the parties were making their bargain, an officious bystander were to suggest some express provision for it in their agreement, they would testily suppress him with a common ‘Oh, of course!’”.

    [21]         In my judgment, the judicial observations so far considered represent a clear, consistent and principled approach. It could be dangerous to reformulate the principles, but I would add six comments on the summary given by Lord Simon in BP Refinery as extended by Sir Thomas Bingham in Philips and exemplified in The APJ Priti. First, in Equitable Life Assurance Society v Hyman Lord Steyn rightly observed that the implication of a term was “not critically dependent on proof of an actual intention of the parties” when negotiating the contract. If one approaches the question by reference to what the parties would have agreed, one is not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied into a detailed commercial contract merely because it appears fair or merely because one considers that the parties would have agreed it if it had been suggested to them. Those are necessary but not sufficient grounds for including a term. However, and thirdly, it is questionable whether Lord Simon’s first requirement, reasonableness and equitableness, will usually, if ever, add anything: if a term satisfies the other requirements, it is hard to think that it would not be reasonable and equitable. Fourthly, as Lord Hoffmann I think suggested in Attorney General of Belize v Belize Telecom Ltd although Lord Simon’s requirements are otherwise cumulative, I would accept that business necessity and obviousness, his second and third requirements, can be alternatives in the sense that only one of them needs to be satisfied, although I suspect that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approaches the issue by reference to the officious bystander, it is “vital to formulate the question to be posed by [him] with the utmost care”, to quote from Lewison, The Interpretation of Contracts 5th ed (2011), para 6.09. Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon’s second requirement is, as suggested by Lord Sumption in argument, that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

    (citations omitted)

  4. I would emphasise the observations that ‘fairness’, and what the parties themselves might have agreed if they had adverted to the subject matter of the implied term, are not sufficient conditions for the implication.  A term will not be implied merely to add judicial embellishment to an indurate commercial contract.  A term is implied only when the contract would otherwise lose its commercial efficacy.
  5. In short, a court will only imply a term into a contract when it is necessary to give the express terms of the contract business efficacy or, to adopt Lord Neuberger’s phrase, commercial or practical coherence.  There is no significant distinction between the two expressions because ultimately they are shorthand expressions for an evaluative exercise.  Nonetheless, it is clear that it may be necessary to imply a term even though it is possible to comply with, or give effect to, the letter of the express contract terms without implying any further term.  When a contingency eventuates which was not provided for and radically disrupts the practical commercial operation of the express terms, a term may be implied which provides for the contingency consistently with the commercial purpose of the agreement.
  6. Of course it is, by definition, necessary in the case of a proposed implied term to have regard to extrinsic evidence.  In Codelfa Mason J (as he then was) summarised the general proposition as to the use of extrinsic evidence, for either the interpretation of an express term or the implication of a new term, in the construction of a contract as follows:

    The true rule is that evidence of surrounding circumstances is admissible to assist in the interpretation of the contract if the language is ambiguous or susceptible of more than one meaning. But it is not admissible to contradict the language of the contract when it has a plain meaning. Generally speaking facts existing when the contract was made will not be receivable as part of the surrounding circumstances as an aid to construction, unless they were known to both parties, although, as we have seen, if the facts are notorious knowledge of them will be presumed.

    It is here that a difficulty arises with respect to the evidence of prior negotiations. Obviously the prior negotiations will tend to establish objective background facts which were known to both parties and the subject matter of the contract. To the extent to which they have this tendency they are admissible. But in so far as they consist of statements and actions of the parties which are reflective of their actual intentions and expectations they are not receivable. The point is that such statements and actions reveal the terms of the contract which the parties intended or hoped to make. They are superseded by, and merged in, the contract itself. The object of the parol evidence rule is to exclude them, the prior oral agreement of the parties being inadmissible in aid of construction, though admissible in an action for rectification.

  7. Later, Mason J commented on the exceptional situation in which evidence of the parties’ actual intention not to include in their contract a term which one of them later contends should be implied as their presumed intention may be admissible:

    There may perhaps be one situation in which evidence of the actual intention of the parties should be allowed to prevail over their presumed intention. If it transpires that the parties have refused to include in the contract a provision which would give effect to the presumed intention of persons in their position it may be proper to receive evidence of that refusal. After all, the court is interpreting the contract which the parties have made and in that exercise the court takes into account what reasonable men in that situation would have intended to convey by the words chosen. But is it right to carry that exercise to the point of placing on the words of the contract a meaning which the parties have united in rejecting? It is possible that evidence of mutual intention, if amounting to concurrence, is receivable so as to negative an inference sought to be drawn from surrounding circumstances. See Heimann.

    (citation omitted)

  8. The exceptional situation postulated in that passage might also be dealt with as one of rectification to expressly include in the contract a term, actually agreed by the parties, that there will be no departure from, or modification of, the express terms of the contract, even in the event of the fruition of certain disruptive contingencies.
  9. Mason J explained the connection between the construction of express contractual terms and the implication of terms as follows:

    The importance of this evolution of the law as it affects the construction of contracts is that it centres upon the presumed, rather than the actual, intention of the parties. Once it is accepted that in the construction of the contract account is taken of the presumed intention of the parties it naturally follows that account should also be taken of their presumed intention when the court is called upon to decide whether a term is to be implied. The existence of the remedy of rectification and the purpose which it serves makes it obvious that the actual intention of the parties cannot constitute the basis of an implied term.

    However, it is equally obvious that in making the inquiry whether a term is to be implied the court is no more confined than it is when it construes the contract. For the implication of a term is an illustration of the process of construction, though differing from the more orthodox ascertainment of the meaning of a contractual provision.

  10. In Attorney General of Belize v Belize Telecom Ltd, (Belize) Lord Hoffmann made some observations which, on one reading, reject the distinction drawn by Mason J and suggest that the implication of a term is simply an aspect of the orthodox interpretation of a contract:

    [17]         The question of implication arises when the instrument does not expressly provide for what is to happen when some event occurs.  The most usual inference in such a case is that nothing is to happen.  If the parties had intended something to happen, the instrument would have said so.  Otherwise, the express provisions of the instrument are to continue to operate undisturbed.  If the event has caused loss to one or other of the parties, the loss lies where it falls.

    [18]         In some cases, however, the reasonable addressee would understand the instrument to mean something else.  He would consider that the only meaning consistent with the other provisions of the instrument, read against the relevant background, is that something is to happen. The event in question is to affect the rights of the parties. The instrument may not have expressly said so, but this is what it must mean. In such a case, it is said that the court implies a term as to what will happen if the event in question occurs.  But the implication of the term is not an addition to the instrument.  It only spells out what the instrument means.

  11. Lord Hoffmann’s reasons in Belize attracted some controversy but in Marks, Lord Neuberger restated the orthodox position:

    [26]         I accept that both (i) construing the words which the parties have used in their contract and (ii) implying terms into the contract, involve determining the scope and meaning of the contract. However, Lord Hoffmann’s analysis in Belize Telecom could obscure the fact that construing the words used and implying additional words are different processes governed by different rules.

    [27]         Of course, it is fair to say that the factors to be taken into account on an issue of construction, namely the words used in the contract, the surrounding circumstances known to both parties at the time of the contract, commercial common sense, and the reasonable reader or reasonable parties, are also taken into account on an issue of implication. However, that does not mean that the exercise of implication should be properly classified as part of the exercise of interpretation, let alone that it should be carried out at the same time as interpretation. When one is implying a term or a phrase, one is not construing words, as the words to be implied are ex hypothesi not there to be construed; and to speak of construing the contract as a whole, including the implied terms, is not helpful, not least because it begs the question as to what construction actually means in this context.

    [28]         In most, possibly all, disputes about whether a term should be implied into a contract, it is only after the process of construing the express words is complete that the issue of an implied term falls to be considered. Until one has decided what the parties have expressly agreed, it is difficult to see how one can set about deciding whether a term should be implied and if so what term. This appeal is just such a case. Further, given that it is a cardinal rule that no term can be implied into a contract if it contradicts an express term, it would seem logically to follow that, until the express terms of a contract have been construed, it is, at least normally, not sensibly possible to decide whether a further term should be implied. …

    [29]         In any event, the process of implication involves a rather different exercise from that of construction. As Sir Thomas Bingham trenchantly explained in Philips at p 481:

    “The courts’ usual role in contractual interpretation is, by resolving ambiguities or reconciling apparent inconsistencies, to attribute the true meaning to the language in which the parties themselves have expressed their contract. The implication of contract terms involves a different and altogether more ambitious undertaking: the interpolation of terms to deal with matters for which, ex hypothesi, the parties themselves have made no provision. It is because the implication of terms is so potentially intrusive that the law imposes strict constraints on the exercise of this extraordinary power.”

    Application to the Fabrication Contract

  1. The Judge expressed the term which he would imply as one which provided that each party was to have a right of appeal under the statute from time to time governing arbitration against any arbitration award made pursuant to cl 25.6 on the contract.  An alternative expression of the term articulated by the Judge, was that the parties would have ‘the statutory right of appeal against an arbitration award’.
  2. There are a number of difficulties with the implication of a provision in those terms.  First, the parties to a private contract cannot confer a jurisdiction on a court.  The parties can only bind themselves with respect to their conduct in exercising, or refraining from exercising a statutory power, right or privilege relating to appeals.  Of course this objection to the form of the terms articulated by the Judge may be met by restating the implied term as one that the successful party will do whatever is reasonably necessary to facilitate an appeal by the losing party against an award made in the successful party’s favour.  However, so expressed the term no longer looks so obvious, at least from the successful party’s perspective, as to go without saying.
  3. Further difficulties arise.  It is necessary to consider whether the implied term is to be limited to future statutory provisions which provide a limited appeal on the ground of an error of law, as was the case with s 38 of the Commercial Arbitration Act 1986 (SA) (the 1986 Act), or whether it extends to other forms of appeal which might be provided for by legislation.  For example, would the implied term require a party to consent to an application brought for permission to appeal if the only form of appeal available is a rehearing on fact and law.   It is difficult to presume such an intention because, to a large extent, an appeal by way of rehearing would undermine the widely perceived benefits of submitting a dispute to arbitration.  However, that possibility raises scope for disputation over the content of the implied term, which makes the parties’ response to either formulation less obvious again.
  4. Consideration of another alternative appeal regime illustrates how fraught it is to imply a term which anticipates future statutory appeal regimes. Suppose that the future statutory regime only allows an appeal on a question of law if both parties consent, and that on that consent being given, a court’s permission is not required. That is in effect the appeal facility allowed by s 38(4)(a) of the 1986 Act. However, the parties did not by their contract agree to bind themselves to give consent for the purposes of s 38(4)(a) of the 1986 Act. If s 38(4)(b) which provides that the Court may grant permission in lieu of the parties consent were repealed, only an appeal by consent pursuant to s 38(4)(a) would be left. In these circumstances how could a term be implied which requires the parties to give their consent to an appeal pursuant to s 38(4)(a) when they did not bind themselves to give that consent prior to the repeal of s 38(4)(b).
  5. Quite apart from the difficulty in formulating the content of the implied term, the foundation for its implication is not strong.  In this case, by cl 25.6 of their agreement, the parties agreed to have disputes and controversies determined by an arbitral award.  Contracts require a dispute resolution process.  At the time of contracting, the 1986 Act governed the arbitral process to which the parties agreed to submit their controversies.  The 1986 Act provided for appeals on questions of law by consent or by permission of the court.  However, an agreement to submit a dispute to arbitration can be effective, and can operate consistently and coherently, without any provision for review by a court.  So much is clear from the 1986 Act which allowed the parties to agree to exclude any right of appeal.  The business efficacy of an agreement to submit disputes to arbitration without any right of review is made even clearer by the Commercial Arbitration Act 2011 (SA) (the 2011 Act). By the 2011 Act, even where there is consent, permission to appeal will only be granted in very limited circumstances. If there is no consent from both parties there will be no appeal. It cannot be contended then that it is generally necessary for business efficacy that there be an appeal on a question of law from arbitral awards resolving disputes over a commercial contract.
  6. Is it, nonetheless, necessary to imply the term to give this particular contract commercial efficacy, given that it was made at a time when there was a statutory power to seek permission to appeal on a question of law without the consent of the other party? The parties made no express provision on the issue of an appeal from an arbitral award. All that can be discerned from the express terms of the contract is that the parties did not agree to exclude the operation of the appeal provisions of the 1986 Act pursuant to s 40 of that Act. The wider business context of their contract is neutral on the question of implying an obligation of the kind contended for.
  7. In Marks Lord Neuberger explained the difficulty in identifying whether an omission resulted from oversight or deliberate decision as follows:

    [19]         In Philips Electronique Grand Public SA v British Sky Broadcasting Ltd Sir Thomas Bingham MR set out Lord Simon’s formulation, and described it as a summary which “distil[led] the essence of much learning on implied terms” but whose “simplicity could be almost misleading”. Sir Thomas then explained that it was “difficult to infer with confidence what the parties must have intended when they have entered into a lengthy and carefully-drafted contract but have omitted to make provision for the matter in issue”, because “it may well be doubtful whether the omission was the result of the parties’ oversight or of their deliberate decision”, or indeed the parties might suspect that “they are unlikely to agree on what is to happen in a certain … eventuality” and “may well choose to leave the matter uncovered in their contract in the hope that the eventuality will not occur”. Sir Thomas went on to say this at p 482:

    “The question of whether a term should be implied, and if so what, almost inevitably arises after a crisis has been reached in the performance of the contract. So the court comes to the task of implication with the benefit of hindsight, and it is tempting for the court then to fashion a term which will reflect the merits of the situation as they then appear. Tempting, but wrong. [He then quoted the observations of Scrutton LJ in Reigate, and continued] [I]t is not enough to show that had the parties foreseen the eventuality which in fact occurred they would have wished to make provision for it, unless it can also be shown either that there was only one contractual solution or that one of several possible solutions would without doubt have been preferred …”

    (citations omitted)

  8. The implication of a term requires, as Lord Neuberger observed in the passage reproduced in [3] above, a value judgment to be made.  That judgment is fraught because it requires a differentiation between those contingencies which have not been expressly provided for because the contractual intention was to let the risk lie where it falls, and those contingencies which it can be presumed the parties intended to deal with in a particular way.  Determining which is the case and, if the latter, the content of the term must proceed from the express terms of the contract, their business context and the contractual purpose they manifest.  As Mason J observed in Codelfa, the implication of a term is in one sense even a greater step to take than to hold that an unforeseen contingency has frustrated a contract because the court, by implying the term, determines the parties’ rights and obligations.
  9. The failure to reach an agreement on an exclusion of the rights of appeal under the 1986 Act gives no reason to presume that the parties intended each would facilitate an appeal against an award brought by the other if the facility of a unilateral application for permission to appeal was abrogated and replaced with an application for permission brought with the consent of the other party.  ASC accepted that there is no basis from which to imply that the parties had agreed to give their consent to an appeal pursuant to s 38(4)(a) of the 1986 Act.  It is difficult to justify the implication of a term to facilitate an application for permission to appeal in the event that the legislative regime was changed to require the consent of both parties.
  10. It is one thing to recognise that the obvious effect of the contract’s silence on the question of appeals against awards was that either party was at liberty to seek permission to appeal if the statute so allowed and quite another to leap from that to a presumption that the parties intended to preserve that power for each other by contractually binding themselves to assist the other to appeal against an award made in their favour.  It may appeal to one person’s sense of fairness that there be such a term, but the removal of judicial review might be welcomed by another for its greater efficiency.
  11. There is no reason to presume that, objectively assessed, the parties made a deliberate choice that they would not opt out of a right of appeal. That the parties omitted a clause excluding the operation of the 1986 Act is consistent with an agreement not to make any provision excluding or affecting the operation of any statute from time to time governing appeals from arbitral awards. Alternatively, they may have decided to reserve to themselves the option of consenting, or not, to an appeal when and if the occasion arose. Finally, the parties may not have been of the same view on the question. One party may have wanted to exclude an appeal pursuant to s 40 and the other not. The making of the agreement with a clause submitting disputes to arbitration does not carry with it any implication or indicate as to what the parties intended should the 1986 Act be amended.
  12. The justification for the implication of the term contended for must be found in the express terms of the contract, its manifest purpose and the matrix in which it was made.  There is nothing about those factors which irresistibly leads to such a presumed intention.
  13. The possibilities I have canvassed do not delve into the subjective states of mind of the parties for the purpose of construing or implying a term consistently with that intention.  On the contrary, ASC is burdened with establishing the presumed intention from the mere absence of an express term making any provision with respect to appeals.  It must show that it can be presumed the term for which it contends can be implied from the mere absence of any provision regulating statutory appeals against arbitral awards.  Explanations for the omission other than the presumed intention for which it contends must therefore be considered before a conclusion can be reached as to whether the proposed answer to the hypothetical question is so obvious it goes without saying.
  14. I would not characterise the application of different appeal regimes to awards made settling disputes under the fabrication contract as capricious.  Importantly remedies by way of appeal are procedural rights which are secondary to the primary obligations undertaken by the parties.  More fundamentally, to characterise the application of different appeal rights as capricious is question begging in that it presumes that parties to a contract of this kind could not have intended to allow the statutory regime from time to time in force to operate on its own terms.
  15. I am not persuaded that the parties would have responded that they had agreed to preserve the facility to make an application for permission to appeal from all awards made pursuant to cl 25 if it had been pointed out to them that legislative change during or after the operation of their agreement might mean that one arbitration might be appealed unilaterally with permission whereas an application for permission to appeal another might require consent.
  16. A term of the kind contended for cannot be implied.

    Ground 2

  17. For the reasons given by Nicholson J it is not necessary to finally determine this ground.  Nonetheless I join in the concerns expressed by Nicholson J in paragraphs [84]-[98] of his Honour’s reasons.

    STANLEY J.     

  18. I would allow the appeal. I agree with the reasons of Nicholson J and with the further reasons of the Chief Justice.

    NICHOLSON J.

    Introduction

  19. On 4 September 2009, the respondent (Ottoway Engineering) and the appellant (ASC) entered into a contract pursuant to which Ottoway Engineering was to fabricate, assemble and supply to ASC various pipework (the fabrication contract).  The pipework was to be used by ASC in the construction of air warfare destroyers pursuant to its contract with the Commonwealth Government.  The fabrication contract was for a term of two years with ASC having two options to renew, each for a further two year period.  The contractual remuneration payable to Ottoway Engineering was based on fixed rates for the fabrication work and hourly rates for the assembly work.  It was anticipated that the total amount of remuneration under the fabrication contract would be some millions of dollars.
  20. Clause 25 of the fabrication contract (the arbitration agreement) provided that any dispute arising, which was not resolved at a mandatory settlement conference, was to be referred to and finally resolved by arbitration in accordance with the rules of the Institute of Arbitrators & Mediators Australia for the Conduct of Commercial Arbitrations (IAMA Rules).  A dispute did arise and was referred to arbitration.  The nature of the dispute does not need to be considered in any detail in these reasons.  It is sufficient to note that ASC claimed reimbursement for a contribution it had made to the purchase of certain capital equipment used by Ottoway Engineering, in the amount of $387,266 and Ottoway Engineering cross-claimed for additional overhead expenses, said to have been incurred in carrying out the contract works, in the amount of $1,045,469.  In November 2016, the arbitrator made an award in favour of ASC for $387,266 plus interest and dismissed Ottoway Engineering’s cross-claim.
  21. Ottoway Engineering sought, pursuant to section 34A of the Commercial Arbitration Act 2011 (SA) (the 2011 Act), leave to appeal against the award on the ground that the arbitrator erred in law by not providing reasons or sufficient reasons for key findings.  Any such appeal against an arbitrator’s decision, ordinarily, would come before a single judge of this Court.  On 12 May 2017, a judge granted leave to appeal and provided extensive reasons.  The question of whether or not the appeal, should it proceed, is to be heard by the Judge or referred directly to the Full Court has been deferred.  However, in the meantime, ASC has appealed against the Judge’s order granting leave to appeal against the arbitral award.
  22. It is sufficient for the present to identify the two critical conclusions reached by the Judge when granting the application for leave to appeal.  First, his Honour found that the parties had agreed that there was to be a statutory right of appeal against the arbitral award on a question of law.  His Honour found that this agreement was to be gleaned from an implied term in the fabrication contract.  Second, his Honour concluded that the statutory criteria for the grant of leave to appeal, as prescribed by section 34A of the 2011 Act, had been satisfied.
  23. ASC, in its notice of appeal to this Court, has raised two grounds of appeal.  First, that the Judge erred in finding that it was an implied term of the parties’ contract that there was to be a statutory right to seek leave to appeal from the arbitral award.  Second, even if Ottoway Engineering did enjoy a statutory right to seek leave to appeal, the Judge erred in finding that the mandatory criteria for leave had been satisfied.
  24. In my view, the appeal should be allowed on the first ground, that is, no statutory right to seek leave to appeal arose whether by way of implied term or otherwise.  As such, it is not necessary to form a concluded view with respect to the second ground.

    The statutory framework

  25. At the time the parties entered into the fabrication contract, which included the arbitration agreement, commercial arbitrations in this State were governed by the Commercial Arbitration and Industrial Referral Agreements Act 1986 (SA) (the 1986 Act). Section 38 prescribed the circumstances in which an appeal from an arbitral award would lie to the Supreme Court. Essentially, it conferred on a party to an arbitration agreement a right of appeal to the Supreme Court on a question of law arising out of an award subject to the parties consenting thereto or, subject to section 40 of the 1986 Act, with the permission of the Supreme Court. In the latter case, the granting of permission was regulated by section 38(5). Section 38 of the 1986 Act was in these terms.

    (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.

    (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 three months after the date of the order.

    (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 permission of the Supreme Court.

    (5)           The Supreme Court shall not grant permission 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.

    (6)          The Supreme Court may make any permission granted under subsection (4)(b) subject to the applicant complying with any conditions it considers appropriate.

    (7)          Where the award of an arbitrator or umpire is varied on an appeal under subsection (2), the award as varied shall have effect (except for the purposes of this section) as if it were the award of the arbitrator or umpire.

    Subsection 40(1) of the 1986 Act precluded the Supreme Court from granting permission if there was an agreement in writing between the parties excluding the right of appeal otherwise conferred by subsection 38(2). Subsection 40(1) was in these terms.

    40—Exclusion agreements affecting rights under sections 38 and 39

    (1)          Subject to this section and section 41—

    (a) the Supreme Court shall not, under section 38(4)(b), give permission to appeal with respect to a question of law arising out of an award; and

    (b) no application may be made under section 39(1)(a) with respect to a question of law,

    if there is in force an agreement in writing (in this section and section 41 referred to as an exclusion agreement) between the parties to the arbitration agreement which excludes the right of appeal under section 38(2) in relation to the award or, in the case falling within paragraph (b), in relation to an award to which the determination of the question of law is material.

  1. In short, the position under the 1986 Act (leaving aside appeals with the consent of all parties) can be described as an “opt out” regime.  A statutory right to seek permission to appeal on any question of law arising out of an arbitral award lay to the Supreme Court unless the parties had agreed in writing to opt out, that is, to exclude a right of appeal.  Neither at the time of entering into the fabrication contract, nor at any time thereafter, did the parties enter into an agreement in writing (or at all) to opt out of the statutory right of appeal provided for by subsection 38(2) of the 1986 Act.
  2. After the parties entered into the fabrication contract, but before the dispute which was referred to arbitration arose, the relevant legislative framework changed.  On 1 January 2012, the 2011 Act came into force and repealed the 1986 Act.  Transitional provisions were provided for in Schedule 1 to the 2011 Act.  Clause 8 of Schedule 1 is to the effect (insofar as material to the present case) that the 2011 Act applied to an arbitration agreement whether made before or after the commencement of the Act and to an arbitration under such an agreement, unless the arbitration had been commenced before the commencement of the 2011 Act, in which case the law governing the arbitration and the arbitration agreement would be the law applicable if the 2011 Act had not been enacted.  In effect, and not contested by the parties, their arbitration agreement fell to be governed after 1 January 2012 by the 2011 Act.  This was because the arbitration the subject of the present dispute had not been commenced until after that date.
  3. Clause 8 of Schedule 1 is in these terms.

    8—Savings and transitional provisions

    (1)          Subject to subclause (2)—

    (a)     this Act applies to an arbitration agreement (whether made before or after the commencement of this Act) and to an arbitration under such an agreement; and

    (b)     a reference in an arbitration agreement to the Commercial Arbitration and Industrial Referral Agreements Act 1986, or a provision of that Act, is to be construed as a reference to this Act or to the corresponding provision (if any) of this Act.

    (2)          If an arbitration was commenced before the commencement of this Act, the law governing the arbitration and the arbitration agreement is to be that which would have been applicable if this Act had not been enacted.

    (3)          For the purposes of this clause, an arbitration is taken to have been commenced if—

    (a)     a dispute to which the relevant arbitration agreement applies has arisen; and

    (b)     the arbitral tribunal has been properly constituted.

  4. Importantly, the transitional provisions in the 2011 Act did not operate to preserve the right to seek permission to appeal available under the 1986 Act with respect to arbitration agreements entered into prior to the 2011 Act coming into force unless an arbitration had already commenced.
  5. Furthermore and in contrast to section 38 of the 1986 Act, section 34A of the 2011 Act provided for an “opt in” regime.  There was to be a right of appeal on a question of law arising out of an arbitral award only if the parties had agreed that such an appeal may be made and leave were to be granted by the Supreme Court, in accordance with the requirements of subsection 34A(3). In short, unless the parties were to agree in accordance with the requirements of section 34A that an appeal on a question of law arising out of the arbitral award would lie, no such appeal would be available. Section 34A of the 2011 Act is in these terms.

    34A—Appeals against awards

    (1)          An appeal lies to the Court on a question of law arising out of an award if—

    (a)     the parties agree, before the end of the appeal period referred to in subsection (6), that an appeal may be made under this section; and

    (b)     the Court grants leave.

    (2)          An appeal under this section may be brought by any of the parties to an arbitration agreement.

    (3)          The Court must not grant leave unless it is satisfied—

    (a)     that the determination of the question will substantially affect the rights of 1 or more of the parties; and

    (b)     that the question is one which the arbitral tribunal was asked to determine; and

    (c)     that, on the basis of the findings of fact in the award—

    (i)          the decision of the tribunal on the question is obviously wrong; or

    (ii)         the question is one of general public importance and the decision of the tribunal is at least open to serious doubt; and

    (d)     that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the Court to determine the question.

    (4)          An application for leave to appeal must identify the question of law to be determined and state the grounds on which it is alleged that leave to appeal should be granted.

    (5)          The Court is to determine an application for leave to appeal without a hearing unless it appears to the Court that a hearing is required.

    (6)          An appeal may not be made under this section after 3 months have elapsed from the date on which the party making the appeal received the award or, if a request had been made under section 33, from the date on which that request had been disposed of by the arbitral tribunal (in this section referred to as the appeal period).

    (7)          On the determination of an appeal under this section the Court may by order—

    (a)     confirm the award; or

    (b)     vary the award; or

    (c)     remit the award, together with the Court’s opinion on the question of law which was the subject of the appeal, to the arbitrator for reconsideration or, if a new arbitrator has been appointed, to that arbitrator for consideration; or

    (d)     set aside the award in whole or in part.

    (8)          The Court must not exercise its power to set aside an award, in whole or in part, unless it is satisfied that it would be inappropriate to remit the matters in question to the arbitral tribunal for reconsideration.

    (9)          If the award is remitted under subsection (7)(c) the arbitrator must, unless the order otherwise directs, make the award within 3 months after the date of the order.

    (10)         The Court may make any leave which it grants under subsection (3)(c) subject to the applicant complying with any conditions it considers appropriate.

    (11)         If the award of an arbitrator is varied on an appeal under this section, the award as varied has effect (except for the purposes of this section) as if it were the award of the arbitrator.

    Note—

    There is no equivalent to this section in the Model Law.

    In essence, and absent any agreement by the parties to the contrary, the effect of the 2011 Act was to remove the right to seek permission to appeal on a question of law which previously had been available to these parties under the 1986 Act and to render the arbitral award final and conclusive in this respect.

  6. A fundamental issue before the Judge and the subject of the first ground of appeal is whether or not the parties had at any relevant time agreed that an appeal may be brought under section 34A of the 2011 Act, that is, had opted in to an appeal regime in circumstances where otherwise the 2011 Act provided that there was to be no such appeal. Only if that issue were to be determined in favour of Ottoway Engineering would the second fundamental issue before the Judge and that giving rise to the second ground of appeal arise, namely, whether or not the leave requirements in subsection 34A(3) had been met such that leave to appeal should be granted. The Judge found in favour of Ottoway Engineering in both respects.

    Whether the parties agreed that an appeal may be made against the arbitral award – Ground 1

  7. The effect of the 2011 Act on the appeal “rights” of parties to an arbitration agreement, entered into whilst the 1986 Act was in force, is plain according to the text of the legislation.  The legislature, in enacting the transitional provisions, clearly indicated the intention that any such (1986 Act) rights were only to enure with respect to arbitrations commenced prior to the date that the 2011 Act came into effect, that is, 1 January 2012.  If the legislature had been concerned to protect existing appeal rights of parties to an arbitration agreement in the position that the present parties found themselves in, clause 8 would have been enacted in very different terms.  I find it difficult to accept that the legislature, having turned “its mind” to transitional provisions, rather than intending to mandate the full extent of appeal rights available following the 2011 Act coming into force, intended to do so only partially, leaving the courts to complete the task by applying implied term theory under the law of contract.
  8. For this reason alone and with respect to the Judge, I find problematic a conclusion that the terms of section 34A of the 2011 Act and the transitional provisions in clause 8 of Schedule 1 to that Act should not be applied according to their terms.

    The Judge’s reasons

  9. The Judge observed that it was common ground that an agreement by the parties as provided for by subsection 34A(1)(a) may be found in the arbitration agreement itself (in this case, clause 25 of the fabrication contract) or by way of an ad hoc agreement made at any time before the arbitration, during the arbitration or until three months after receipt of the arbitration award.

  10. The Judge found, contrary to a contention put on behalf of Ottoway Engineering, that there had been no relevant agreement reached by the parties at the preliminary conference for the arbitration. There has been no challenge by Ottoway Engineering to this finding. However, the Judge did go on to find that the fabrication contract contained a term, implied in fact, that satisfied subsection 34A(1)(a). The essence of his Honour’s extensive reasons for this finding can be summarised as follows.
  11. His Honour set out the relevant statutory provisions and identified the problem for Ottoway Engineering presented by the repeal of the 1986 Act and the replacement of the opt out regime with an opt in regime by the 2011 Act, much as I have done to this point.
  12. His Honour referred to clause 25 of the fabrication contract in these terms.

    Clause 25.2 of the contract provides that “if a dispute arises it is hereby submitted to arbitration in accordance with the requirements and procedures set out in this clause 25”. Clauses 25.3 to 25.5 provide mechanisms for service of a dispute notice, service of a reply notice, a mandatory settlement conference and an entitlement in the initiating party to proceed to arbitration if the matter cannot be resolved within ten business days after the settlement conference.

    Clause 25.6 is the operative provision for arbitration and provides:

    Any [D]ispute is to be referred to and finally resolved by arbitration in accordance with the [IAMA Rules]. The seat of the arbitration will be Adelaide, South Australia. The tribunal is to consist of 1 arbitrator appointed in accordance with the Rules. The language of the arbitration shall be English and any documentation to be relied upon by a party as part of the arbitration shall be in English.

    His Honour then briefly summarised the effect of the IAMA Rules as at the date of the fabrication contract (4 September 2009) and observed as follows.

    The IAMA Rules proceeded on the premise that the rights and liabilities of the parties in and under the arbitration were governed in part by the relevant Commercial Arbitration Act. One such right was the right of appeal conferred by section 38 of the 1986 Act and its equivalents in other jurisdictions.

  13. His Honour observed, correctly with respect, that the contractual intention of the parties governs both the construction and implication of terms of their contract and that such contractual intention is to be ascertained objectively by reference to the text, context and evident purpose of the contract and the relevant surrounding circumstances known to the parties.
  14. His Honour proceeded to summarise the case law applicable in this country governing when a contractual term will be implied in fact, including the well accepted and routinely applied statement of the five conditions that must be satisfied, as found in the advice given by the majority of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.

    Their Lordships do not think it necessary to review exhaustively the authorities on the implication of a term in a contract which the parties have not thought fit to express.  In their view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.

  15. The following propositions identified by the Judge formed the substratum of his Honour’s reasoning as to the existence of an implied term preserving each party’s right to seek leave to appeal on a question of law.

    (i)          It is clear from the nature and scale of the activities referred to in the fabrication contract that ASC and Ottoway Engineering are sophisticated commercial parties and that, objectively assessed, they would not have agreed to disputes being determined by way of arbitration without being aware of the provisions of the 1986 Act which govern and affect commercial arbitrations in many significant respects.

    (ii)         Objectively assessed, commercial parties in the position of ASC and Ottoway Engineering would have been aware that the 1986 Act conferred a right of appeal against an award on an opt out basis.

    (iii)        The existence of a right of appeal against an award is such a critical factor in the decision to include an arbitration clause in a contract that it must have been considered by the parties in deciding to include the arbitration clause.

    (iv)         Objectively assessed, the parties made a deliberate choice that there was to be a right of appeal against an award and that they would not opt out of a right of appeal.

    (v)          It follows that, objectively, it was the contractual intention of the parties that there was to be a right of appeal against any award.

    (vi)         It is quite unlikely that the parties anticipated [as at the date of entry into the fabrication contract] that the legislation would be amended to change the regime to an opt in regime.

    (vii)        The term of the contract was between two and six years and there might be an arbitration and award at any time over that period or even after the expiry of the term of the contract on the final settling of accounts and claims.

    (viii)       It is inconceivable that, objectively considered, the parties intended that there was to be a right of appeal against any award that happened to be made during the currency of the existing opt out regime but no right of appeal against any award that happened to be made after any opt in regime should be introduced.

  16. His Honour then described, by way of examples, what he characterised as the fortuitous and capricious outcome that would follow in the absence of an implied term as contended for by Ottoway Engineering.  Notwithstanding that the parties had contracted on the basis of a statutory right to appeal (subject to conditions) the continued existence of that right would depend on whether any arbitration commenced before or after any change in the legislation to bring about an opt in regime.  His Honour reasoned that, if confronted with this possibility at the time of entering into the fabrication contract, the parties would have responded:

    “of course” they did not want their appeal rights to vary during the currency of the contract or after its expiry merely because the legislation might change from an opt out to an opt in regime, especially when the date of change would be capricious and arbitrary from the perspective of the parties (depending on the legislature and not the position of the parties in the performance of the contract).  The parties would have included a provision in clause 25 that the parties were to have the statutory right of appeal against an arbitration award.

  17. His Honour concluded as follows.

    Each of the conditions identified in BP Refinery (Westernport) is satisfied in respect of an implied term that the parties were to have the statutory right of appeal against an arbitration award. It is reasonable and equitable to imply the term. It is necessary to give business efficacy to the contract because otherwise the contract would operate capriciously, unreasonably and inequitably. It goes without saying because the parties hypothetically and objectively assessed would have said “of course” that should be the position if the issue had been raised. It is capable of clear expression. It does not contradict the express terms of the contract. It is entirely consistent with the effect of the contract under the statutory opt out scheme prevailing at the time of the contract.

    His Honour then proceeded to address and reject a number of contrary contentions that had been submitted on behalf of ASC before concluding in these terms.

    [I]t was an implied term of the contract that there was to be a statutory right of appeal against an arbitration award.

    Consideration

  18. I start with the preliminary observation that it is necessary to identify with some precision the wording or at least the nature of any contractual term said to be implied in fact.  This is a necessary precursor to being able to assess whether each of the five BP Refinery conditions would be satisfied.
  19. In Ottoway Engineering’s originating application for leave to appeal against the arbitral award, the grounds of application for leave were as follows.

    1.           Section 34A(1) of the [2011] Act allows for an appeal on a question of law arising out of an award, if the parties agree … and the Court grants leave.

    2.           The [2011] Act requires the parties to an arbitration agreement to agree to allow recourse to the Court on a question of law arising out of the award.  This agreement is usually found in the arbitration agreement.

    3.           The arbitration agreement in the Contract does not record such agreement, because at the time of entry into the Contract, the [2011] Act had not been enacted.

    4.           The Court may imply a term (implied by fact) that the parties agreed to allow an appeal.

    5.           The plaintiff [Ottoway Engineering] and defendant [ASC] agreed at a preliminary conference held by the Arbitrator on 13 April 2016, that the arbitration would be determined according to law, thereby agreeing that either party could have recourse to the Court on questions of law.

  1. In Ottoway Engineering’s written submission filed in support of the application for leave to appeal, the question of an implied term as found by the Judge was not directly addressed.  Rather, the focus of the submission appears to have been on the contention that the agreement reached at the preliminary conference that the arbitration would be determined according to law gave rise to the implied term as contended for, that is, that the parties had agreed to allow an appeal.  During the oral argument before the Judge, Ottoway Engineering maintained this submission.  However, the Judge indicated that he was not attracted to it.  Rather, his Honour, arguendo, raised the possibility that a suitable implied term might be found in the original arbitration agreement which possibility counsel for Ottoway Engineering appeared, perhaps reluctantly, to embrace.
  2. Ultimately, the Judge adopted this approach.  In his reasons for judgment, his Honour referred to or identified the form of the term to be implied in a number of places.

    (i)          The Judge identified Ottoway Engineering’s contention as being that it was an implied term of the fabrication contract that:

    [E]ach party was to have a right of appeal under the governing statute against an arbitration award.

    (ii)         The Judge found that:

    [O]bjectively it was the contractual intention of the parties that there was to be a right of appeal against any award.

    (iii)        The Judge found that, if the parties had been informed of the effect that the change of legislation would have, they would have responded that:

    “[O]f course” they did not want their appeal rights to vary during the currency of the contract or after its expiry merely because the legislation might change from an opt out to an opt in regime …

    (iv)         The Judge found each of the conditions identified in BP Refinery to have been satisfied in respect of an implied term:

    [T]hat the parties were to have the statutory right of appeal against an arbitration award.

    (v)          The Judge concluded:

    [T]hat it was an implied term of the contract that there was to be a statutory right of appeal against an arbitration award.

  3. Notwithstanding these slightly different formulations, I am satisfied that the term found by the Judge was in the form of that in (iv) above – the parties had agreed to having “the statutory right of appeal against an arbitration award”.  This can only be a reference to the statutory right conferred by the 2011 Act.  When his Honour came to consider whether the statutorily mandated requirements had been satisfied, his Honour implied and applied those in subsection 34A(3) of the 2011 Act.  Further, the statutory right conferred by the 1986 Act was already available to the parties as at 2009 and, as such, the implication of such a term as at 2009 could not be seen as being (in 2009) necessary to give business efficacy to the contract.
  4. In addition, any such implied term would have been unenforceable or of no effect once the 2011 Act came into force because section 34A, in expressly providing for an appeal right in the form there provided for and on an opt in basis, is to be seen as covering the field. To allow the parties to persist with a contractual right of appeal in the same terms as the repealed statutory right would deny the effect and authority of the 2011 Act in this respect. The two statutory “rights” are in materially different terms, both as to the grounds on which any appeal might lie and as to the respective permission and leave requirements.
  5. This, in my view, leads to a fundamental problem for Ottoway Engineering.  It is to be remembered that the search is for the parties’ presumed intention at the time they entered into the fabrication contract, that is, in September 2009.  As such, an implied term to the effect that the parties, in 2009, agreed that they were to have the statutory right (to be) conferred by the 2011 Act, does not readily lend itself to satisfying the BP Refinery requirements.
  6. At this stage, it will be helpful to attempt to identify the nature of the parties’ initial agreement or understanding insofar as it bore on any right to appeal against any arbitral award obtained.
  7. By not expressly including anything with reference to this topic in the clause 25 arbitration agreement (or elsewhere in the fabrication contract) these sophisticated parties should be taken to have recognised that section 38 of the 1986 Act would operate according to its terms. In other words, they can be taken to have understood that the effect of the arbitration agreement (and of the fabrication contract itself) at the time they entered into it was that there would be a right of appeal to the extent provided for by sections 38 and 40 of the 1986 Act.
  8. In accordance with sections 38 and 40, the parties by including an arbitration agreement in the fabrication contract acquired a right of appeal to the following effect. An appeal would lie to the Supreme Court on any question of law arising out of the arbitral award either with the consent of both parties or with the permission of the Supreme Court, provided that such permission could not be obtained if there were in force an agreement in writing between the parties excluding the right of appeal (referred to in section 40 as an “exclusion agreement”). An exclusion agreement does not need to have formed part of the arbitration agreement, that is, clause 25 of the fabrication contract.
  9. However, it would appear that the arbitration agreement in this case is a “domestic arbitration agreement” given the definition of that term in subsection 40(7) of the 1986 Act. If so, and by virtue of subsection 40(6), any exclusion agreement would be of no effect unless it were to be entered into after the commencement of the arbitration. In these circumstances, the statutory right to seek permission, in accordance with subsection 38(5), to appeal on any question of law arising out of the arbitral award would have subsisted unless the parties, after the commencement of the arbitration, agreed to exclude that statutory right. As it happened, the arbitration commenced after the 1986 Act had been repealed. Accordingly, and in the event that the arbitration agreement in this case was a domestic arbitration agreement, at no time did the parties have the statutory right to opt out.
  10. Whether or not it was a domestic arbitration agreement, the parties, by entering into the arbitration agreement, necessarily attracted to their arrangement the section 38 statutory right of appeal with no capacity to unilaterally vary it or opt out of it. Each had no choice in this respect once they agreed to have disputes resolved through arbitration. Nevertheless, it cannot be said that the mere entry into the arbitration agreement necessarily indicated an objective presumed intention that there was to be a right of appeal, as opposed to a common understanding or acceptance that, whilst section 38 of the 1986 Act remained in force, a right to appeal in accordance with its terms would lie.
  11. This is apparent, whether or not a domestic arbitration agreement is involved, upon a closer review of the fundamental propositions underlying the Judge’s analysis set out at (i) to (viii) in paragraph [51] above.  In my view, the proposition in (iv) does not necessarily follow from (i), (ii) and (iii) or from the circumstances surrounding and including the fact that the parties entered into the arbitration agreement.  Just as consistent is the following and materially different proposition (iv).

    (iv)         Objectively assessed the parties wanted the perceived advantages afforded by the arbitration process and were content (in 2009) to enter in the arbitration agreement notwithstanding that determinations pursuant thereto would only be final and conclusive subject to the statutory available right of appeal that could not be avoided except by later agreement.

  12. In other words, it cannot necessarily be inferred that either or both parties wanted such a right of appeal.  Rather it may well have been the case that one or other was prepared to subject themself to it as an unavoidable consequence of procuring the arbitration agreement.  If the Judge’s proposition (iv) does not stand, neither do the conclusions in (v) and (viii).
  13. If the officious bystander had asked the parties in September 2009 what is to happen if the right of appeal on a question of law as then provided for by section 38 of the 1986 Act were to be repealed, the answer would not, in my view, be so obvious as to go without saying.  The following are potential alternative responses by either party (there may well be others):

    (i)          I intend for there to be a right of appeal provided there is a right to agree to opt out, as now provided for by sections 38 and 40 of the 1986 Act.

    (ii)         Such a repeal would suit me because I have never wanted there to be any right of appeal.

  14. With respect, the term ultimately contended for by Ottoway Engineering and found by the Judge should not be seen as an available possibility.  It cannot, on any analysis, have been the objective presumed intention of the parties that there was to be a right of appeal in accordance with the terms of section 34A of the 2011 Act.

    (i)          First, the parties in 2009 had no knowledge of the form of the replacement Act even if they might be presumed to have foreseen that the governing legislation might be amended or replaced during the term of the fabrication contract or any renewals.

    (ii)         Second, the parties’ contract in 2009 incorporated a right of appeal subject to a right to agree to opt out, whereas the new section 34A right of appeal would only arise if the parties positively agreed to opt in. The nature of the 2011 right is materially different from that “agreed to” or accepted by the parties in 2009.

  15. A conceivable implied term in a form different from that found by the Judge would be something along the lines of – if the legislation were to change such that any right of appeal would be conditional on the parties consenting to it (opting in) they hereby (as at 2009) agree to do so. However, this assumes that the content or nature of the new conditional right of appeal would be known to or predicted by the parties at the time of the officious bystander’s question. Implicit in the enquiry is an assumption that the nature of the right of appeal and the circumstances in which it would be available are as provided for in the new section 34A. Of course, as at 2009, the parties had no knowledge of this. In response to the officious bystander, a more obvious response by either or both parties would be – what is the nature of the right of appeal that I am being asked to consent to in advance? In what circumstances will it arise? Will there be a requirement for leave? If so, what will be the leave requirements?
  16. The parties had no choice in 2009 but to adopt the constraints imposed by sections 38 and 40 of the 1986 Act if they wished to include the arbitration agreement.  If confronted with the possibility that the legislative regime governing appeals might be changed in the future so that they may not be bound by the 1986 Act constraints, it is not so obvious as to go without saying how they would have responded.  In my view, the third BP Refinery requirement has not been made out.
  17. I also take the view that an implied term securing a right of appeal to the parties, however formulated, is not necessary to give business efficacy to the contract.
  18. If a contract is commercially effective without the putative implied term, it will not be implied.  A recent summary of the content of the second BP Refinery requirement of business efficacy was provided by the Victorian Court of Appeal in Grocon Constructors (Vic) Pty Ltd v APN DF2 Project 2 Pty Ltd where the court said:

    The condition that an implied term “must be necessary to give business efficacy to the contract” requires consideration of whether the term is necessary for the purposes of “giving to the transaction such efficacy as both parties must have intended that at all events it should have”, making the agreement work or avoiding an unworkable situation. Where the express terms of an agreement are sufficient to give it the business efficacy the parties intended it to have, it will not become necessary to imply additional terms. However, a term may be commercially necessary, in order for the contract to be workable in a business sense, notwithstanding that it can operate without the term. In Commonwealth Bank of Australia v Barker, French CJ, Bell and Keane JJ stated that the requirement that a term implied in fact be necessary “to give business efficacy” to a contract can be regarded as a “specific application” of the criterion of necessity which also supports the implication of a term in law. They also said that “[i]mplications which might be thought reasonable are not, on that account only, necessary.”

    [citations omitted]

  19. It is arguable that recent English decisions may have relaxed or softened the business efficacy requirement a little.  In Marks and Spencer Plc v BNP Paribas Security Services Trust Co (Jersey) Ltd, Lord Neuberger observed:

    In my judgment, the judicial observations so far considered represent a clear, consistent and principled approach. It could be dangerous to reformulate the principles, but I would add six comments on the summary given by Lord Simon in the BP Refinery case … Sixthly, necessity for business efficacy involves a value judgment. It is rightly common ground on this appeal that the test is not one of “absolute necessity”, not least because the necessity is judged by reference to business efficacy. It may well be that a more helpful way of putting Lord Simon’s second requirement is … that a term can only be implied if, without the term, the contract would lack commercial or practical coherence.

    An earlier observation of Lord Hoffman in Attorney General of Belize v Belize Telecom Ltd was in these terms:

    The danger lies, however, in detaching the phrase “necessary to give business efficacy” from the basic process of construction of the instrument. It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case … when he said that in that case an implication was necessary “to give effect to the reasonable expectations of the parties”.

  20. I will confine myself to only two observations concerning the English cases to which the Court’s attention was directed during argument.  First, the arguably more relaxed approach to the second requirement there indicated cannot be divorced from the enquiry as to the nature of the presumed intention of the parties or, perhaps, to use Lord Steyn’s phrase “the reasonable expectations of the parties”.  In other words, there is a degree to which the presumed intention of the parties which underpins the third BP Refinery requirement, once identified, will inform the content of what may be required to give business efficacy to the contract.
  21. Second, whilst the expositions by Lord Neuberger and Lord Hoffman have been referred to in some Australian authorities and in New Zealand, there is no Australian authority, of which I am aware, which has endorsed these English discussions to the extent that they might be seen to have varied, to any significant extent, the requirement for business efficacy as it has been applied in the Australian cases to date.  In Principal Properties Ltd v Brisbane Broncos Leagues Club Ltd (No 2), Jackson J said this.

    The defendant sought to rely on statements made by Lord Hoffmann in Attorney-General of Belize v Belize Telecom Ltd.  However, the recent decision of the Supreme Court of the United Kingdom in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd reaffirms the stringency of the requirements for an implied term in fact and that there has been no watering down of the particular requirement that the postulated term is necessary to give business efficacy to the contract.  In any event, that is the common law of Australia.

    [footnotes omitted]

  22. In any event, and whichever “formulation” or explication of the business efficacy requirement were to be adopted, it is not satisfied in this case.
  23. Here, the “contract” that must have business efficacy can be taken to be either the fabrication contract as a whole, including the clause 25 arbitration agreement, or just the arbitration agreement itself. In either case, the contract said nothing expressly about any right of appeal. The 1986 Act contemplated that parties to an arbitration agreement might, by consent, exclude the section 38 right of appeal on a question of law, leaving the arbitrator’s decision not only final but unchallengeable (at least in this respect). The 2011 Act contemplated no right of appeal on a question of law as the default position unless the parties agreed otherwise.
  24. Under each form of the legislation it was contemplated that very significant contractual disputes might proceed to arbitration without there being any right to appeal on a question of law.  In these circumstances, it cannot be said that an implied term to the effect of giving rise to such a right of appeal was necessary to give business efficacy to either the fabrication contract or the arbitration agreement.  Both had and continue to have business efficacy whichever statutory regime were to apply and whether or not the parties agreed to opt out (1986 Act) or to opt in (2011 Act).
  25. In addition, and by way of a shorter response with respect to this requirement, there was simply no need for an implied term at the time the arbitration agreement was entered into in 2009.  If the parties might be presumed to have had a common intention on this topic (which I do not accept) it was wholly accommodated by the appeal regime provided for under the 1986 Act.  Not only was an implied term unnecessary in 2009, such would operate in the future to undermine the clear legislative intention of the 2011 Act as demonstrated by the legislature’s failure to preserve the parties’ existing 1986 Act position in the transitional arrangements provided for.
  26. In essence, the argument in support of an implied term comes down to this.  The existence of the opt out regime at the time the parties entered into the arbitration agreement and the fact that the parties did not, then or at any time before the repeal of the 1986 Act, agree to opt out, taken together, is tantamount to an agreement that there was to be a right of appeal.  However, the fact that the parties either did not or could not reach agreement to opt out does not necessarily imply the converse, that is, that they had reached agreement to have a right of appeal.  The fact that the third BP Refinery requirement (so obvious as to go without saying) has not been made out means that, even on a wider formulation of the business efficacy test, arguably discernible from the Lord Neuberger and Lord Hoffman dicta, the business efficacy requirement is not satisfied.
  1. The conclusion I have reached is consistent with that arrived at by Hammerschlag J in Ashjal Pty Ltd v Elders Toepfer Grain Pty Ltd.  The facts are materially indistinguishable from those before this Court, at least with respect to the question of an implied term.  Hammerschlag J delivered an ex tempore judgment which gave short shrift to the implied term contention.  His Honour said this.

    The plaintiff correctly accepts that there is no express agreement between the parties. It puts that there is to be implied from the terms of the contracts a term that either party may appeal on a question of law with leave of the court. It was accepted that the terms sought to be implied must meet the well known test for an implied term laid down in BP Refinery Western Port Pty Ltd v Hastings Shire Council and adopted by the High Court in Codelfa Construction Pty Ltd v State Rail Authority of NSW which are the following:

    (1)     It must be reasonable and equitable.

    (2)     It must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it.

    (3)     It must be so obvious that it goes without saying.

    (4)     It must be capable of clear expression.

    (5)     It must not contradict any express term of the agreement.

    Those tests must be met at the time that the contract is entered into. The term contended for fails to satisfy at least three of the tests.

    Firstly, as at the date of the contracts the old Act gave a right of appeal with leave or by agreement. The implied term contended for was thus not necessary to give the contract business efficacy at that time. The contracts operated and still operated without it.

    Secondly, given the state of the legislation at the time, the term contended for was not obvious. Indeed, such a term was obviously not required.

    [citations omitted]

  2. The primary Judge in the present matter was pressed with an argument that, as a matter of comity between judges of superior courts of coordinate jurisdiction and in the interests of maintaining a uniform position with respect to cognate legislation in all Australian jurisdictions, his Honour should adopt and follow the approach taken by Hammerschlag J unless shown to be plainly wrong.  It is not necessary to express a view in this respect.  This Court has been assisted by both single judge decisions, one with detailed reasoning and the other with more concise reasoning delivered ex tempore.  Given the detailed reasons provided by the Judge subject to appeal in this case and the fact that the parties provided extensive submissions, whilst I agree with the reasoning of Hammerschlag J, I have thought it appropriate to provide more extensive reasons than I otherwise might have.

    Whether the leave requirements in section 34A(3) had been met – Ground 2

  3. The 2011 Act regime for appeals is very similar to that applicable in other jurisdictions and is in terms quite different from the terms of the 1986 Act regime.  I raise the following as initial concerns only.  However, it is not necessary and I prefer not to express a final view with respect to appeal ground 2.
  4. It is convenient to set out subsection 34A(3) of the 2011 Act again.

    (3)          The Court must not grant leave unless it is satisfied—

    (a)     that the determination of the question will substantially affect the rights of 1 or more of the parties; and

    (b)     that the question is one which the arbitral tribunal was asked to determine; and

    (c)     that, on the basis of the findings of fact in the award—

    (i)          the decision of the tribunal on the question is obviously wrong; or

    (ii)         the question is one of general public importance and the decision of the tribunal is at least open to serious doubt; and

    (d)     that, despite the agreement of the parties to resolve the matter by arbitration, it is just and proper in all the circumstances for the Court to determine the question.

  5. Ottoway Engineering has sought leave to appeal on one ground only and that is that the arbitrator erred in law by not providing reasons or sufficient reasons for key findings.  The question of law that would be determined on any such appeal would be whether or not the reasons provided by the arbitrator were sufficient in material respects.
  6. It would seem that the only issue seriously agitated before the primary Judge was whether paragraph (c) of subsection 34A(3) had been satisfied.  His Honour proceeded to examine at some length the nature and extent of the obligation to state reasons on which an arbitral award is based, whether or not the arbitrator’s reasons were sufficient, and whether or not the decision of the arbitrator was obviously wrong or whether or not “the question” is one of general importance and the arbitrator’s decision on “the question” was “at least open to doubt”. It is not necessary to express a view on his Honour’s treatment of these matters. His Honour found the criteria in paragraph (c) of subsection 34A(3) to have been satisfied.
  7. After dealing at length with the paragraph (c) criteria, the Judge dealt, very briefly, with the additional criteria for leave in paragraphs (a) and (b).  His Honour had earlier observed.

    The decision of the High Court in Westport Insurance Corporation v Gordian Runoff Limited conclusively establishes that it is an error of law within the meaning of section 38(5)(b) of the 1986 Act for an arbitrator not to provide reasons in accordance with the obligation imposed by section 29(1)(c). ASC does not contend that the position is materially different under the Act. It is common ground on the application for leave to appeal that it is a question of law within the meaning of section 34A of the Act whether the reasons of an arbitrator comply with the obligation imposed by subsection 31(3) and that on appeal (if leave is granted) an award is liable to be set aside (in the discretion of the Court) if the reasons do not so comply.

    (footnotes omitted and emphasis supplied)

  8. As far as paragraph (b) is concerned, his Honour said this.

    The second criterion is satisfied because the arbitrator was asked, and indeed required, to state the reasons on which the award was based …

  9. With respect, I am in some doubt that the issue of whether or not an arbitrator has provided sufficient reasons is of a nature that readily lends itself to the criteria for leave prescribed bysubsection 34A(3). A failure to give sufficient reasons can be an error of law and, in that sense, gives rise to or invokes a question of law. However, it is not readily to be seen as a question of law which the arbitral tribunal was asked to determine in the sense envisaged by paragraph (b).
  10. Further, it is not one about which it could be said that, on the basis of the findings of fact in the award, the decision of the tribunal “on the question” is obviously wrong as envisaged by paragraph (c)(i).  In this respect, the issue of law in contemplation is whether or not sufficient reasons have been provided.  This is not the type of question of law the answer to which or determination of which can be characterised as “obviously wrong”.  Paragraph (c)(i) would seem to envisage a situation where, upon certain findings of fact having been made, a legal question is to be determined on the basis thereof.  It is in this sense that a specific legal proposition or application thereof to the facts, might be seen as obviously wrong.  In the present case, the only issue of law arising is whether or not sufficient reasons have been provided as part of such a process.
  11. Similarly, the question of law in this case, being whether or not sufficient reasons have been provided in the context of the particular matter, is unlikely to be one that can be said to be “of general public importance” (paragraph (c)(ii)).
  12. As far as paragraphs (c)(i) and (ii) are concerned, I recognise that these operate as alternatives.  However, it may well be that neither is satisfied with respect to the question of law sought to be agitated in this matter.
  13. A comparison of the language used for permission requirements under the 1986 Act with that employed under the 2011 Act lends support to the contention that a challenge to the sufficiency of reasons may not give rise to a question of law with respect to which leave to appeal under the 2011 Act can be obtained.
  14. In this respect, it is plain that the issue of whether or not an arbitrator had provided sufficient reasons could be agitated on appeal under the 1986 Act regime, as illustrated by Oil Basins Ltd v BHP Billiton Ltd and Gordian Runoff Ltd v Westport Insurance Corporation.  These cases dealt with provisions in the Victorian and New South Wales legislation in materially the same terms as the 1986 Act provisions.

  15. However, the central issue before the courts in these cases was whether there had been a failure to provide sufficient reasons so as to constitute a manifest error on the face of the record or strong evidence of an error of law the determination of which may add substantially to the certainty of commercial law.  Section 38 of the 1986 Act has been set out earlier.  However, it is convenient to set out subsections (1), (2) and (5) again.

    (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.

    (5)           The Supreme Court shall not grant permission 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.

  16. Section 38 permits an appeal to lie “on any question of law arising out of an award” provided, inter alia, the criterion in either paragraph (i) or paragraph (ii) of subsection 38(5)(b) is met. In Oil Basins and Gordian Runoff a failure to provide sufficient reasons met the criterion in subsection 38(5)(b)(i).
  17. The leave criteria in subsection 34A(3) of the 2011 Act are expressed in quite different and arguably more restrictive terms.  As posited earlier, a challenge to sufficiency of reasons does not readily fall within those leave criteria in contrast to the 1986 Act permission criteria.

    Conclusion

  18. I would allow the appeal.  I would vacate the Judge’s order granting the respondent, Ottoway Engineering, leave to appeal against the arbitration award and, in lieu thereof, dismiss the respondent’s application for leave to appeal against the arbitration award.  I would hear the parties on the question of costs.