TRANSAUSTRALIAN CONSTRUCTIONS PTY LTD v NORTHERN TERRITORY OF AUSTRALIA & ANOR

Supreme Court of the Northern Territory of Australia Angel J
17, 18, 19 December 1990, 16 May and 31 July 1991 at Darwin

ARBITRATION - Stay of proceedings - applicant for stay had filed summons and affidavit in proceedings - whether a step in the proceedings - s.53(2) Commercial Arbitration Act

BUILDING CONTRACT - Arbitration - stay of proceedings - standard form contract NPWC3 - whether an arbitration agreement - s.4 Commercial Arbitration Act

BUILDING CONTRACT - Arbitration - quantum meruit - whether claim for quantum meruit was a claim "arising out of the contract"

Cases Applied:
Finance Facilities Ptv Ltd v Federal Commissioner of Taxation (1971) 127 C.L.R. 106

Cases Considered:
Australian Telecommunications Commission v Bartley & Ors (1988) 84 A.L.R. 261
Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd & Ors
(1987) 71 A.L.R. 125
Bowling v General Motors Holden Ltd (1980-81) 33 A.L.R. 297 Codelfa-Cogefar (NZ) Ltd v Attorney-General [1981] 2
N.Z.L.R. 153
Codelfa Construction Ptv Ltd v State Rail Authority New South Wales (1982) 149 C.L.R. 337
Eden Constructions Pty Ltd v Euroballa Shire Council [1985]
B.C.L. 375
Government of Gibraltar v Kenney [1956] 2 Q.B. 410 Heyman & Anor v Darwins Ltd [1942] A.C. 357
Metropolitan Tunnel & Public Works v London Electric Railway Company [1926] 1 Ch 371
Minister for Main Roads for Tasmania v Leighton Contractors Pty Ltd & Anor [1985] B.C.L. 381
Pavey & Matthews Pty Ltd v Paul (1987) 162 C.L.R. 221
Pittalis v Sherefettin (1986) 2 All E.R. 227
Wilsons {NZ) Portland Cement Ltd v Gatx Fuller Australasia Pty Ltd [1985] 2 N.Z.L.R. 11

Cases Doubted:
Bliss Corporation Ltd v Kobe Steel Ltd Smart J,

29 September 1987 unreported
Rheem Australia Ltd v Federal Airports Corporation [1990]
B.C.L. 130 Cases Followed:
Commonwealth of Australia v Jennings Constructions Ltd [1985] V.R. 586
Reed Constructions Pty Ltd v State Rail Authority of New South Wales [1987] B.C.L. 384

Counsel for the plaintiff: Solicitors for the plaintiff:

Counsel for the first defendants: Solicitors for the defendants:

J. McCormack Close & Carter

Wyvill
Solicitor for the NT

transcon
IN THE SUPREME COURT
OF THE NORTHERN TERRITORY OF AUSTRALIA

No. 392/89

BETWEEN:

TRANSAUSTRALIAN CONSTRUCTIONS PTY LTD
Plaintiff
AND:

NORTHERN TERRITORY of AUSTRALIA & ANOR
Defendants

CORAM:	ANGEL J

REASONS FOR JUDGMENT
(Delivered 31 July 1991)

This is an application by the first defendant to stay the plaintiff's claims against it in these proceedings pursuant to s.53 of the Commercial Arbitration Act.	The plaintiff was engaged by the first defendant to design and construct an 18 million litre water storage tank		at Larapinta in Alice Springs.		Completion of the contract was scheduled for 8 May 1987.	The certificate of practical completion was not issued until 8 October 1987.	The plaintiff alleges, inter alia, that the delay in completion of the project was due to the first defendant's insistence upon additional work which was not included in the original

program.

On 20 November 1987, the plaintiff wrote to the first defendant advising the substance of its claims.	These were submitted to the first defendant's Superintendent of Works pursuant to paragraph (a) of clause 45 of the contract on
21 December 1987.	The plaintiff's claims were rejected by the Superintendent on 15 January 1988.	The plaintiff issued these proceedings on 26 June 1989.

The contract governing the construction of the tank was the standard form contract NPWC3.	I was informed it is widely used  by the first defendant for construction projects, and, indeed  it appears to be widely used elsewhere, for its terms have been before the courts on a number of occasions, see Minister for Main Roads for  Tasmania v Leighton Contractors Pty Ltd & Ors [1985] B.C.L. 381; Eden Constructions Pty Ltd v Eurobodalla Shire Council [1985] B.C.L. 375; Commonwealth of Australia v Jennings [1985] V.R. 586; Reed Constructions Pty Ltd v State Rail Authority of New South Wales [1987] B.C.L. 384; Rheem Australia Ltd v Federal Airports Corporation [1990] B.C.L.
384

The relevant part of the contract is clause 45 entitled "Settlement of Disputes".	It provides:

"Notwithstanding the succeeding provisions of this clause, the Contractor shall if the work under the Contract has not been completed, at all times

(subject as otherwise provided for in the Contract) proceed without delay to continue to execute the work under the Contract and perform his obligations under the Contract and in so doing shall comply with all directions as defined in clause 23 issued or given to or served or made upon the Contractor under or pursuant to the provisions of the Contract either by the Principal in writing or by the Superintendent in accordance with clause 23.

All disputes or differences arising out of the Contract or concerning the performance or the non­ performance by either party of his obligations under the Contract whether raised before or after the execution of the work under the Contract shall be decided as follows -

The Contractor shall, not later than fourteen days after the dispute or difference arises, submit the matter at issue in writing, specifying with detailed particulars the matter at issue, to the Superintendent for decision and the Superintendent shall, as soon as practicable thereafter, give his decision to the Contractor.

If the Contractor is dissatisfied with the decision given by the Superintendent, he may, not later than fourteen days after the decision of the Superintendent is given to him, submit the matter at issue in writing, specifying with detailed particulars the matter at issue, to the Principal for decision and the Principal shall, as soon as practicable thereafter, give his decision to the Contractor in writing.

If the Contractor is dissatisfied with the decision given by the Principal pursuant to the last preceding paragraph, he may, not later than twenty-eight days after the decision of the Principal is given to him, give notice in writing to the Principal requiring that the matter at issue be referred to arbitration and specifying with detailed particulars the matter at issue, and thereupon the matter at issue shall be determined by arbitration.	If, however, the Contractor does not, within the said period of twenty-eight days, give such a notice to the Principal requiring that the matter at issue be referred to arbitration, the decision given by the Principal pursuant to the last preceding paragraph shall not be subject to arbitration.

Where a notice is given by the Contractor to the Principal pursuant to the last preceding paragraph requiring that the matter at issue be referred to arbitration no proceedings in respect of that matter at issue shall be instituted by either the Principal or the Contractor in any court unless and until the arbitrator has made his award in respect of that matter at issue.

Arbitration shall be effected -
by an arbitrator agreed upon in writing by the parties within twenty-eight days after the said notice is received by the Principal; or

in the absence of that agreement, by one of at least three persons, none of whom shall be an employee of the Principal or of the Contractor or have had any association with the work under the Contract, whose names are submitted in writing by the Principal for selection by the Contractor within a further period of twenty-eight days after expiry of that last mentioned period, being the person whose selection as arbitrator is notified in writing by the Contractor to the Principal within twenty-eight days after the names are so submitted; or

in the absence of that selection, by an arbitrator appointed in accordance with the provisions of the laws relating to arbitration in force in the State or Territory named in the Annexure hereto.

A reference to arbitration under this clause shall be deemed to be a reference to arbitration within the meaning of the laws relating to arbitration in force in the Sate or Territory named in the Annexure hereto and the arbitration proceedings shall be conducted in that State or Territory.	The arbitrator shall have all the powers conferred  by those laws and it shall be competent for him to enter upon the reference without any further or more formal submission than is contained in this clause.

Moneys that are or become due and payable by the Principal in respect of work carried out under the Contract shall not be withheld because of arbitration proceedings but the Principal may, at his discretion, and pending the award of the arbitrator withhold payment of moneys in respect  of any matter that is the subject of arbitration proceedings."

Before considering the effect of the clause, it is convenient to examine the provisions of the Commercial Arbitration Act.	Section 53 is in the following terms:

"(1)	If a party to an arbitration agreement commences proceedings in a court against another party to the arbitration agreement in respect of a matter agreed to be referred to arbitration by the agreement, that other party may, subject to subsection (2), apply to that court to stay the proceedings and that court, if satisfied -

that there is no sufficient reason why the matter should not be referred to arbitration in accordance with the agreement; and

that the applicant was at the time when the proceedings were commenced and still remains ready and willing to do all things necessary for the proper conduct of the arbitration,

may give an order staying the proceedings and may further give such directions in relation to the future conduct of the arbitration as it thinks fit.

An application under subsection (1) shall not, except with the leave of the court in which the proceedings have been commenced, be made after the applicant has delivered pleadings or taken any other step in the proceedings other than the entry of an appearance.

Notwithstanding a rule of law to the contrary, a party to an arbitration agreement shall not be entitled to recover damages in a court from another party to the agreement by reason that that other party takes proceedings in a court in respect of the matter agreed to be referred to arbitration by the arbitration agreement."

Section 4 defines 'arbitration agreement' as follows: "'arbitration agreement' means an agreement in writing to refer present or future disputes to arbitration;".

The first matter debated before me was whether the first defendant had taken a step in these proceedings (for the purposes of s.53(2)) by the filing of a summons and affidavit.		Despite the defendant's notification to the plaintiff that the filing of the documents was without prejudice to its insistence on arbitration, I am of the opinion that the better view is that such measures did constitute a step in the proceedings for the purposes of s.53(2).	The fact the first defendant made it clear to the plaintiff that it insisted on arbitration and actively prevented the plaintiff being lulled into thinking the first defendant agreed to the litigious process is, in my view, relevant only to the discretion as to whether to grant leave to proceed for the stay, cf Metropolitan Tunnel and Public Works v London Electric Railway Company [1926] 1 Ch 371 at
384 per Lord Hanworth MR and at 393 per Scrutton LJ.

The fact that the defendant has always maintained arbitration was required, the short delay (3 months) in seeking a stay, and the lack of prejudice suffered by the plaintiff all lead me to conclude that this is an appropriate case for leave to be granted pursuant to s.53(2).

The next issue is whether clause 45 constitutes an arbitration agreement as defined by s.4 of the Commercial Arbitration Act.	This depends upon the correct construction of the clause.	It is a matter of regret that the drafting

of this widely used clause is so sloppy and that as a consequence its true construction is a question of some difficulty.

The bulk of the confusion stems from the use of the word "shall" in paragraph (a) which confers on the contractor the right to refer the matter at issue to the Superintendent, and the use of "may" in paragraph (b) which confers on the contractor the right to have the matter at issue submitted to the Principal.	The word "may" is further employed in the following paragraph which confers on the contractor the right to give notice requiring the matter at issue to be referred to Arbitration.

The leading Australian decisions upon whether "may" is to be regarded as permissive or mandatory concern the interpretation of statutes but the same considerations, it seems to me, are applicable to the construction of clauses such as this.	In Finance Facilities Pty Ltd v FCT (1971)
127 C.L.R. 106, Windeyer J said at 134-5:

"While Parliament uses the English language the word "may" in a statute means may."

This observation applies a fortiori to people who draft contracts in English. But as Windeyer J went on to say, the question does not always depend upon the abstract meaning of the word "may": the question remains

"	whether the particular context of the words and circumstances make it not only an empowering

word but indicate circumstances in which the power is to be exercised - so that in those events the "may" becomes a must." (at 134)

And see Bowling v General Motors Holden Ltd (1980-81)
33 A.L.R. 297 at 302 and Australian Telecommunications Commission v Bartley & Ors (1988) 84 A.L.R. 261 at 266. Thus while prima facie the meaning to be attributed to the word "may" is permissive, upon a construction  of the clause as a whole, it may mean 'must'.

The clause considered by the Full Court of the Supreme Court of Victoria in Commonwealth of Australia v Jennings [1985]
V.R. 586 was in almost identical terms to the one in the instant case, the only difference of substance being the use of the words "submitted to arbitration"  rather than "referred to arbitration".	The difference possibly reflects the enactment of the Uniform Commercial Arbitration Acts and correlative changes in definitions.

His Honour Fullagar J, with whom Beach and Kaye JJ agreed, said at 595:

"The present contract however does not expressly prohibit legal proceedings outside cl. 44 unless the final step is taken of giving a notice to the director-general requiring that the matter at issue be referred to arbitration, although legal proceedings are probably prohibited by implication from the words "shall be decided".	More importantly, the present contact does not purport to take away rights or bar conduct on a failure within time to submit the matter at issue to the director of works, or to the director-general of works, but does expressly purport to take away rights and bar conduct upon a failure within time to take the final step or requiring the director-

general to submit the matter at issue to arbitration.	This seems to me to make it clear that there is to be no loss of rights, or barring of conduct, merely because of a failure to submit the matter at issue to the director of works."

I respectfully agree with those observations.	Clause 45 of the present contract was also considered by Young Jin	Reed Constructions Pty Ltd v State Rail Authority of New South Wales [1987] B.C.L. 384.	There the plaintiff sought declarations, inter alia, that:
the contractor may approach the Court after complying with paragraph (a) alone;
that after complying with paragraph (b) and receiving the principal's decision the contractor is free to refer the matter in dispute to a court.

This latter point was conceded by the defendant.
Young J said at 385:

"Certainly the Supreme Court of Victoria appeared to be strongly of this view in The Commonwealth v Jennings [1985] V.R. 586 at 595."

However, with respect, rather than being "strongly of this view" the Full Court judgment is ambiguous on this point.	There was no utility  in making the second declaration sought as to the procedure in paragraph (b), the decision of the principal had already been notified to the plaintiff.	At 386 Young J expressed the view that there is nothing to prevent the contractor from approaching the court

at any stage, any action remaining liable to a stay pursuant to s.53 of the Commercial Arbitration Act.	It is implicit in his Honour's view that the clause constituted an arbitration agreement within s.4, that is, the clause constitutes "an agreement in writing to refer present or future disputes to arbitration".	I respectfully agree with his Honour.	In order for the contractor to have the dispute settled through arbitration he is contractually bound to complete all the steps in the clause.	It is only after the contractor is dissatisfied  with the decision of the principal  that he can give notice requiring the dispute to be referred to arbitration.	The decision of the principal can only be given after the superintendent's decision.	The contractor may litigate at any time, but is in breach of contract - and thus susceptible to a stay - if it does so.

In Minister for Main Roads for Tasmania v Leighton Contractors Pty Ltd & Anor [1985) B.C.L. 381, Underwood J, in considering this clause before the enactment of the Uniform Commercial Arbitration Act, said (at 385):

"An agreement which gives one of the parties an option to submit a dispute to arbitration does not amount to a submission."

The earlier Arbitration legislation required a "submission to Arbitration", whereas now only an agreement to refer is required.	Although an agreement which permits one party to elect to go to arbitration if it so wishes, is not encompassed by the current Commercial Arbitration Act,

or, expressing it another way, although a unilateral option to arbitrate is not an agreement to arbitrate as defined by section 4, the present clause, contractually obliging the contractor as it does to pursue the course from Superintendent to Principal to arbitration, is, in my view, within the purview of section 4.

A more recent case upon the interpretation of the clause is Rheem Australia Ltd v Federal Airports Corporation [1990] B.C.L, 130.	In that case the plaintiff sought declarations from Carter J that the time limits provided for in paragraphs (a) and (b) of the clause were not mandatory. At 134 his Honour held that the time limits were mandatory. He said:

"It follows in my view that the interdependence of one clause of cl. 45 upon the other requires a construction that the limitations of time in
cl. 45 are mandatory if the arbitration process is to become available.	As will appear, the fact that it does not does not preclude the taking of action in any court of competent jurisdiction."

In my opinion, clause 45 does constitute an arbitration agreement within s.4.	Reading "may" as "shall" seems to me, with respect, to be the only logical interpretation of the clause; otherwise it would seem to be devoid of any real meaning or practical operation.

The cases on statutory interpretation to which I have referred earlier I believe support this interpretation.	As in Finance Facilities, the "may" here is circumscribed by

the fulfilment of the condition precedent, ie the submission of the dispute to the superintendent.	In the context, bearing in mind that the procedure set down is the only way to achieve arbitration,  meaning can only be attributed to the clause if "may" means "shall".

Various explanations have been advanced in other cases to explain why "may" should be read permissively, however I find such explanations unhelpful.

In particular I am unpersuaded by the arguments expressed by Carter Jin	Rheem at 133 where he says:

"The use of permissive "may" in c145(b) and in the following paragraph is intelligible in the light of the fact that the taking of each of the ensuing steps is premised upon the dissatisfaction of the contractor."

The conclusion that I have drawn is reinforced by the words which precede the actual procedure, ie

"All disputes or differences arising out of the Contract or concerning the performance or non­ performance by either party of his obligations under the Contract whether raised before or after the execution of the work under the contract shall be decided as follows.	(Emphasis mine.)

These words were emphasised by Fullagar Jin	Jennings, supra, as implicitly prohibiting recourse to the courts and I respectfully agree with that conclusion.

In the reported decisions the entirety of clause 45 is seldom set out.	Instead the steps required to be fulfilled

before arbitration are reproduced.	The words which commence the second last paragraph of the clause are, in my  respectful view, not without significance:

"A reference to arbitration under this clause shall be deemed to be a reference to arbitration within the meaning of the laws relating to arbitration in force in the State or Territory named in the Annexure hereto ..."

This, to me, further indicates the parties intended that the clause be an agreement to refer future disputes to arbitration, rather than an optional alternative dispute resolution mechanism.

I should perhaps make plain that I do not consider that the fact that only the contractor can initiate the arbitration process in any way detracts from a finding that this is an arbitration agreement, see Pittalis v Sherefettin (1986) 2 All E.R. 227.	I should also say that I reject the submission made by the defendant that an agreement which allows a party to elect to go to arbitration or litigate is an arbitration agreement.	In Russell on Arbitration 19th Edition, there is substantial discussion over whether a unilateral arbitration clause is an arbitration agreement.
The learned authors conclude that it is (a conclusion with which I respectfully agree) and in the course of their discussion say at 44:

"The only necessity for an agreement to constitute an arbitration agreement is that it is "a written agreement to submit the present or future disputes to arbitration".	This does not appear to demand any substantive mutualities.

This statutory definition, at least as regards future disputes, can surely mean no more than that there is provision for compulsory arbitration; it cannot mean that it is guaranteed that there will be arbitration, for under the most ordinary clause there will only be arbitration of such disputes if several contingencies are satisfied; ..."

Having decided the defendant is eligible for a stay of proceedings, should a stay be granted?	The answer depends, in part at least, on whether clause 45 encompasses all the matters in dispute in the litigation.

The approach of the courts when faced with arbitration clauses in agreements has generally been in favour of holding the parties to their bargain and thus in favour of granting a stay unless there is "sufficient reason" why the dispute should not be referred to arbitration.		The plaintiff put forward a number of matters to support its argument that arbitration was inappropriate.	These included submissions that:
the claim for quantum meruit is outside the ambit of
the clause;
the unlikelihood that arbitration will prove any quicker in resolution of the dispute;
the fact that it may be out of time invoking the arbitration clause.

The most significant submission was that as the plaintiff also claims against the second defendant, the design engineer, in negligence, the plaintiff is at risk of

"falling between two stools" in that there may be inconsistent findings of fact in each tribunal.	The undesirability of such a result is referred to in Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd & Ors (1987) 71 A.L.R. 125 at 145.	In this case however the liability of the engineers will depend at least in part on the quantum of any arbitration award.

On the other hand, the defendant maintains that it is ready and willing to arbitrate, it waives compliance with the time limits in the clause (which in any event, s.48 of the Commercial Arbitration Act empowers the court to extend).	In my view, none of the factors relied upon by the plaintiff is sufficient to warrant denying a stay.	While the issues of law are not simple, they are common in works contracts disputes such as this, and experienced arbitrators with engineering and building backgrounds are just as fit as the judiciary (if in some cases not more so) to expeditiously resolve them.	In reaching my conclusion that arbitration is not inappropriate in the present case I have had particular regard to the circumstance that the plaintiff's claims call into consideration the reasonableness of the principal's conduct during the progress of the works, a matter eminently, it seems to me, suited to the expertise of a qualified arbitrator.

The plaintiff submitted that despite the words "all disputes or differences arising out of the contract", a

claim on quantum meruit was not encompassed by clause 45.	I reject this submission.	The plaintiff sought support for this in the decision of the High Court in Pavey & Matthews Pty Ltd v Paul (1987) 162 C.L.R. 221 where it was held that the right to recover on a quantum meruit did not depend upon the existence of an implied contract but rather on  principles of unjust enrichment.	This being so, it was submitted, the claim of quantum meruit could not be said to "arise" out of the contract; to the contrary,  it was said, it is a matter quite divorced from the contract and the law of contract.	In Heyman & Anor v Darwins Ltd [1942] A.C.
357, Viscount Simon LC having said that if a party to an
arbitration agreement is claiming that the contract itself is void ab initio for whatever reason, then that is not a matter which can be said to arise out of the contract, continued (at 367):

"I do not agree that an arbitration clause expressed in such terms as above ceases to have any possible application because the contract has "come to an end" as, for example, by frustration. In such cases it is the performance of the contract that has come to an end."

These views were adopted in Government of Gibraltar v Kenney [1956] 2 Q.B. 410, a decision that has been criticised:	see Bliss Corporation Ltd v Kobe Steel Ltd, Smart J, unreported, 29 September 1987.	The criticism is founded on the comments in both Gibraltar and Heyman that quantum meruit is founded upon an implied contract, the very view rejected in favour of unjust enrichment  in Pavey, supra.	However, with all due respect to Smart J, it does

not flow from this distinction that the connection I have referred to above is wrong.	In cases such as this where there was a concluded contract between the parties, and work was done pursuant to that contract, then even if the  contract has come to an end, whether by frustration or abandonment as the plaintiff  here alleges, it is difficult to see how it can be said that the claim on quantum meruit for the work done and accepted by the defendant did not "arise out of" the original contract.	In my view the plaintiff's claims on a quantum meruit plainly arises out of the contract and fall within the ambit of clause 45:
Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 C.L.R. 337 at 366, Pavey, supra at
227,228,257,263.

I have reached the conclusion that this is an appropriate case for a stay.	I should say that I have reached this conclusion bearing in mind all the matters referred to by French Jin	Bond Corporation Pty Ltd v Thiess Contractors Pty Ltd (1987) 71 A.L.R. 125 at 140 ff, which  led him to an opposite conclusion.	It has been said that given an agreement to arbitrate, the court leans in favour  of granting a stay, ie of enforcing the agreement, see Codelfa-Cogefar (NZ) Ltd v Attorney-General	[1981] 2
N.Z.L.R. 153 at 156, Wilsons (NZ) Portland Cement Ltd v
Gatx-Fuller Australasia Pty Ltd [1985] 2 N.Z.L.R. 11 at 20,
29.	Here, on balance, I think the plaintiff's claims against the first defendant should be stayed.	I am

satisfied that there is no sufficient reason why the plaintiff's claims against the first defendant should not be referred to arbitration in accordance with clause 45, the first defendant being ready and willing to do all things necessary for the proper conduct of an arbitration_and through its counsel having waived any potential contractual obstacles in the way.

I order accordingly.	I shall hear the parties as to costs and any consequential matters.

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