Codelfa Construction Pty Ltd V State Rail Authority (NSW)149 CLR 337
41 ALR 367
(Judgment by: MASON J)
Between: Codelfa Construction Pty Ltd
And: State Rail Authority (NSW)
Judgment date: 11 May 1982
I have had the advantage of reading the reasons for judgment prepared by Brennan J. in which the relevant facts and questions are comprehensively set out.
(1) Implied Term
In this ocean of litigious controversy there is one large island of agreement between the parties. It is common ground that their contract consists of the agreement dated 21 March 1972 and the various documents which it incorporates. The appellant does not suggest that dehors the agreement and the incorporated documents there is to be found a term actually agreed upon by the parties which together with the contract documents stands as the true contract or which stands in its own right as a collateral contract. Nor does the appellant suggest that there is a case for rectification arising from the existence of such a term on the footing that it was inadvertently omitted from the contract documents. The appellant's case is that a term has to be implied in the contract to give it business efficacy, to make it workable. Consequently, there is no contest as to what constitutes the contract; rather the contest is as to its meaning and effect.
When we say that the implication of a term raises an issue as to the meaning and effect of the contract we do not intend by that statement to convey that the court is embarking upon an orthodox exercise in the interpretation of the language of a contract, that is, assigning a meaning to a particular provision. Nonetheless, the implication of a term is an exercise in interpretation, though not an orthodox instance.
Of course, I am speaking of an implied term necessary to give business efficacy to a particular contract, not of the implied term which is a legal incident of a particular class of contract, of which Liverpool City Council v. Irwin  AC 239 is an example. The difference between the two categories of implied term was mentioned by Viscount Simonds in Lister v. Romford Ice and Cold Storage Co. Ltd.  AC 555 , at p 576 , where he referred to the search for the second category of implied term as being based "upon more general considerations", a comment endorsed by Lord Wilberforce in Irwin (1977) AC, at p 255.
The implication of a term is to be compared, and at the same time contrasted, with rectification of the contract. In each case the problem is caused by a deficiency in the expression of the consensual agreement. A term which should have been included has been omitted. The difference is that with rectification the term which has been omitted and should have been included was actually agreed upon; with implication the term is one which it is presumed that the parties would have agreed upon had they turned their minds to it - it is not a term that they have actually agreed upon. Thus, in the case of the implied term the deficiency in the expression of the consensual agreement is caused by the failure of the parties to direct their minds to a particular eventuality and to make explicit provision for it. Rectification ensures that the contract gives effect to the parties' actual intention; the implication of a term is designed to give effect to the parties' presumed intention.
For obvious reasons the courts are slow to imply a term. In many cases, what the parties have actually agreed upon represents the totality of their willingness to agree; each may be prepared to take his chance in relation to an eventuality for which no provision is made. The more detailed and comprehensive the contract the less ground there is for supposing that the parties have failed to address their minds to the question at issue. And then there is the difficulty of identifying with any degree of certainty the term which the parties would have settled upon had they considered the question.
Accordingly, the courts have been at pains to emphasize that it is not enough that it is reasonable to imply a term; it must be necessary to do so to give business efficacy to the contract. So in Heimann v. The Commonwealth (1938) 38 SR (NSW) 691, at p 695 Jordan C.J., citing Bell v. Lever Brothers Ltd.  AC 161 , at p 226 , stressed that in order to justify the importation of an implied term it is "not sufficient that it would be reasonable to imply the term.... It must be clearly necessary". To the same effect are the comments of Bowen L.J. in The Moorcock (1889) 14 PD 64, at p 68 ; Lord Esher M.R. in Hamlyn & Co. v. Wood & Co.  2 QB 488 , at pp 491-492 ; Lord Wilberforce in Irwin (1977) AC, at p 256 ; Scrutton L.J. in Reigate v. Union Manufacturing Co. (Ramsbottom)  1 KB 592 , at pp 605-606.
The basis on which the courts act in implying a term was expressed by MacKinnon L.J. in Shirlaw v. Southern Foundries (1926) Ltd  2 KB 206 , at p 227 in terms that have been universally accepted:
"Prima 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..."
The conditions necessary to ground the implication of a term were summarized by the majority in B.P. Refinery (Westernport) Pty. Ltd. v. Hastings Shire Council (1977) 52 ALJR 20, at p 26 :
- it must be reasonable and equitable;
- 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;
- it must be so obvious that 'it goes without saying';
- it must be capable of clear expression;
- it must not contradict any express term of the contract."
In the present case the New South Wales Court of Appeal placed much emphasis on the speeches of Lord Wilberforce in Prenn v. Simmonds (1971) 1 WLR 1381 , at pp 1383-1385; (1971) 3 A11 ER 237, at pp 239-241 , and in Reardon Smith Line v. Hansen-Tangen (1976) 1 WLR 989 , at pp 995-997; (1976) 3 A11 ER 570, at pp 574-576. Their Honours, though acknowledging that his Lordship's remarks were directed not to the implication of a term but to the application of the parol evidence rule, for in each of the two cases the issue was one of orthodox construction of a contract, thought that the remarks had significance for the implication of a term in a contract. With this I agree. But there is a question whether these two cases and other authorities support the Court of Appeal's view that it is legitimate to take into account the common beliefs of the parties as developed and manifested during their antecedent negotiations.
The broad purpose of the parol evidence rule is to exclude extrinsic evidence (except as to surrounding circumstances), including direct statements of intention (except in cases of latent ambiguity) and antecedent negotiations, to subtract from, add to, vary or contradict the language of a written instrument (Goss v. Lord Nugent (1833) 5 B & Ad 58, at pp 64-65 (110 ER 713, at p 716). Although the traditional expositions of the rule did not in terms deny resort to extrinsic evidence for the purpose of interpreting the written instrument, it has often been regarded as prohibiting the use of extrinsic evidence for this purpose. No doubt this was due to the theory which came to prevail in English legal thinking in the first half of this century that the words of a contract are ordinarily to be given their plain and ordinary meaning. Recourse to extrinsic evidence is then superfluous. At best it confirms what has been definitely established by other means; at worst it tends ineffectively to modify what has been so established.
On the other hand, it has frequently been acknowledged that there is more to the construction of the words of written instruments than merely assigning to them their plain and ordinary meaning - see, for example, the remarks of Knox C.J. in Life Insurance Co. of Australia Ltd. v. Phillips (1925) 36 CLR 60 , at p 69. This has led to a recognition that evidence of surrounding circumstances is admissible in aid of the construction of a contract. So Lord Wilberforce in L. Schuler A.G. v. Wickman Machine Tool Sales Ltd.  AC 235 , at p 261 was able to state the broad thrust of the rule in this way:
"The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the parties' intentions must be ascertained, on legal principles of construction, from the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to receive."
His Lordship noted that evidence of surrounding circumstances is an exception to the rule, but he had no occasion to discuss its scope for there it was not, as it is here, a critical question.
However, as Lord Wilberforce had earlier pointed out in his speech in Prenn, a speech in which four other members of the House of Lords concurred, the English rule forbidding recourse to extrinsic evidence is not as strict as some have thought. The issue in Prenn was whether the word "profits" meant the separate profits of R.T.T., a company controlled by the appellant, or the consolidated profits of the group of companies consisting of R.T.T. and its subsidiaries. It was held that, although evidence of prior negotiations and of the parties' intentions, and a fortiori the intentions of one of the parties, ought not to be received, evidence restricted to the factual background known to the parties at or before the date of the contract, including evidence of the "genesis" and objectively of the "aim" of the transaction, was admissible. Considered in the light of this evidence "profits" meant "consolidated profits".
Lord Wilberforce said (1971) 1 WLR, at pp 1383-1384; (1971) 3 A11 ER, at pp 239-241 :
"The time has long passed when agreements, even those under seal, were isolated from the matrix of facts in which they were set and interpreted purely on internal linguistic considerations. There is no need to appeal here to any modern, antiliteral, tendencies, for Lord Blackburn's well-known judgment in River Wear Commissioners v. Adamson (1877) 2 App Cas 743, 763 provides ample warrant for a liberal approach. We must, as he said, inquire beyond the language and see what the circumstances were with reference to which the words were used, and the object, appearing from those circumstances, which the person using them had in view. Moreover, at any rate since 1859 (Macdonald v. Longbottom (1859) 1 E & E 977 (120 ER 1177) ) it has been clear enought that evidence of mutually known facts may be admitted to identify the meaning of a descriptive term."
His Lordship went on to assert that the well-known decision of Cardozo J. in Utica City National Bank v. Gunn (1918) 118 NE 607 "followed precisely the English line" (1971) 1 WLR, at p 1384; (1971) 3 A11 ER, at p 240. There extrinsic evidence of the circumstances in which a guarantee was executed and of its object was received for the purpose of giving the words "loans and discounts" the looser meaning of "renewals". Lord Wilberforce quoted with evident approval the comment of Cardozo J. (1918) 118 NE, at p 608 that surrounding circumstances may "stamp upon a contract a popular or looser meaning " than the strict legal meaning, certainly when to adopt the latter would make the transaction futile.
In Macdonald it had been held that the defendant's contract to buy "your wool" included not only wool which the plaintiffs had on their own farms, but also wool which they had bought in from other farms, one of the plaintiffs having stated before the contract in a conversation with the defendant's agent that he had wool from those two sources. This decision was followed in Bank of New Zealand v. Simpson  AC 182 . Lord Davey (1900) AC, at pp 188-189 quoted with approval the remarks of Lord Campbell in Macdonald (1859) 1 E & E, at pp 983-984 (120 ER, at p 1179) :
"I am of opinion that, when there is a contract for the sale of a specific subject-matter, oral evidence may be received, for the purpose of shewing what that subject-matter was, of every fact within the knowledge of the parties before and at the time of the contract."
Lord Campbell, after referring to the conversation relating to the sources of the plaintiffs' wool continued:
"The two together constituted his wool; and, with the knowledge of these facts, the defendant contracts to buy 'your wool.' There cannot be the slightest objection to the admission of evidence of this previous conversation, which neither alters nor adds to the written contract, but merely enables us to ascertain what was the subject-matter referred to therein."
It is apparent that the principle on which the Judicial Committee acted in Simpson is that where words in a contract are susceptible of more than one meaning extrinsic evidence is admissible to show the facts which the negotiating parties had in their mind.
Later, in Great Western Railway and Midland Railway v. Bristol Corporation (1918) 87 LJ Ch 414 , Lord Atkinson (1918) 87 LJ Ch, at pp 418-419 and Lord Shaw (1918) 87 LJ Ch, at pp 424-425 stated that evidence of surrounding circumstances was inadmissible except to resolve an ambiguity, that is, where the words are susceptible of more than one meaning, and that Lord Blackburn was dealing with just such a case in River Wear Commissioners. Their Lordships took the view that evidence of surrounding circumstances was not admissible to raise an ambiguity for in their opinion that would be to contradict or vary the words of the written document, the assumption being that in the overwhelming majority of cases the written words will have a fixed meaning. Lord Wrenbury (1918) 87 LJ Ch, at p 429 thought otherwise, stating that in every case of construction extrinsic evidence is receivable to raise and resolve an ambiguity.
Lord Wilberforce in Prenn did not discuss these competing views, perhaps because the difference between them is more apparent than real. However, I doubt whether English and United States use of extrinsic evidence for the purpose of interpretation is quite as uniform as his Lordship appeared to think.
Lord Wilberforce returned to the same theme in Reardon Smith (1976) 1 WLR 989 ; (1976) 3 A11 ER 237. In a speech concurred in by a majority of the members of the House of Lords he acknowledged that it is legitimate "to have regard to... 'the surrounding circumstances'" (1976) 1 WLR, at p 995; (1976) 3 A11 ER, at p 574. He went on to say (1976) 1 WLR, at pp 995-996; (1976) 3 A11 ER, at p 574 :
"In a commercial contract it is certainly right that the court should know the commercial purpose of the contract and this in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating."
After discussing Utica, Prenn (1971) 1 WLR 1381 ; (1971) 3 A11 ER 237 and Wickman  AC 235 , his Lordship continued (1976) 1 WLR, at p 996; (1976) 3 A11 ER, at p 574:
"It is often said that, in order to be admissible in aid of construction, these extrinsic facts must be within the knowledge of both parties to the contract, but this requirement should not be stated in too narrow a sense. When one speaks of the intention of the parties to the contract, one is speaking objectively - the parties cannot themselves give direct evidence of what their intention was - and what must be ascertained is what is to be taken as the intention which reasonable people would have had if placed in the situation of the parties. Similarly when one is speaking of aim, or object, or commercial purpose, one is speaking objectively of what reasonable persons would have in mind in the situation of the parties."
His Lordship thought that this approach was supported by the speeches in Hvalfangerselskapet Polaris Aktieselskap v. Unilever Ltd. (1933) 39 Com Cas 1 and Charrington & Co. Ltd. v. Wooder  AC 71 , esp at pp 77, 80, 82. He expressed the conclusion to be drawn from them in this way (1976) 1 WLR, at p 997; (1976) 3 A11 ER, at p 575 :
"... what the court must do must be to place itself in thought in the same factual matrix as that in which the parties were. All of these opinions seem to me implicitly to recognise that, in the search for the relevant background, there may be facts which form part of the circumstances in which the parties contract in which one, or both, may take no particular interest, their minds being addressed to or concentrated on other facts so that if asked they would assert that they did not have these facts in the forefront of their mind, but that will not prevent those facts from forming part of an objective setting in which the contract is to be construed."
In D.T.R. Nominees Pty. Ltd. v. Mona Homes Pty. Ltd. (1978) 138 CLR 423 , at p 429 , Stephen and Jacobs JJ. and I, following Prenn, in a joint judgment said:
"A court may admit evidence of surrounding circumstances in the form of 'mutually known facts' 'to identify the meaning of a descriptive term' and it may admit evidence of the 'genesis' and objectively the 'aim' of a transaction to show that the attribution of a strict legal meaning would 'make the transaction futile'..."
And in Secured Income Real Estate (Australia) Ltd. v. St. Martins Investments Pty. Ltd. (1979) 144 CLR 596 , at pp 605-606 in a judgment concurred in by other members of the Court I not only accepted and applied the statement in the majority judgment in B.P. Refinery (1977) 52 ALJR 20 of the conditions necessary to support the implication of a term, but I also accepted and applied Lord Wilberforce's different treatment, for the purpose of construing a contract, of evidence of surrounding circumstances on the one hand and of the parties' intentions on the other hand. Having considered the topic in more detail on this occasion I see no reason to qualify what I then said.
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.
Consequently when the issue is which of two or more possible meanings is to be given to a contractual provision we look, not to the actual intentions, aspirations or expectations of the parties before or at the time of the contract, except in so far as they are expressed in the contract, but to the objective framework of facts within which the contract came into existence, and to the parties' presumed intention in this setting. We do not take into account the actual intentions of the parties and for the very good reason that an investigation of those matters would not only be time consuming but it would also be unrewarding as it would tend to give too much weight to these factors at the expense of the actual language of the written contract.
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 (1938) 38 SR (NSW), at p 695.
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.
There are, of course, older authorities which support a more restricted approach to the implication of a term. One example is the statement of Jordan C.J. in Heimann (1938) 38 SR (NSW), at p 695 which confines recourse to the intention manifested by the express terms of the contract. It was later approved by Latham C.J. in Scanlan's New Neon Ltd. v. Tooheys Ltd. (1943) 67 CLR 169 , at p 195. These statements reflect an unduly restrictive approach to construction, an approach which is outmoded or "antiquated", to use the expression favoured in Wigmore on Evidence, 3rd ed. (1940), vol. ix, par. 2465 (p. 214). Indeed, they do not accord with the approach taken by the majority of this Court in Scanlan's - see McTiernan J. (1943) 67 CLR, at pp 206, 209-215, esp at pp 214-215 and Williams J. (1943) 67 CLR, at pp 221-225.
The implication of the term found by the Court of Appeal rests on findings made by the Arbitrator based on circumstances surrounding the making of the contract, including evidence of the discussions between the parties which preceded entry into the contract. Thus the Arbitrator found that there was a common understanding (described as a "belief" by the Court of Appeal) that the works would be carried out on a three shift continuous basis six days per week and without restriction as to Sundays. He also found that the Authority had represented to Codelfa, and that it had accepted, that no injunction would be granted in relation to noise or other nuisance. He further found that the works could not be carried out in accordance with methods and programmes agreed between the parties unless Codelfa worked three shifts a day for six days a week.
The first question is whether, in the light of the principles as I have explained them, it was ligitimate to look to this material on the issue of implication of a term. I think it was. The discussions which generated these findings were not negotiations about the terms of the contract. The terms of the contract documents had been determined in advance by the Authority. By lodging its tender Codelfa accepted the Authority's contract documents. The relevant discussions were therefore directed to the question of price. Their object was to enable Codelfa to inform itself of what was involved in the work and to cost it so as to arrive at a price for inclusion in its tender. The consequence is that the discussions did not have the character of negotiations in the course of which the parties gradually evolved the terms of a bargain ultimately embodied in written form. Had the discussions been of that kind then, as we have seen, recourse to them would have been prohibited for the purpose of interpreting the contract by reference to the parties' actual intentions as expressed before entry into the contract. As it was, the relevant discussions reflect neither the preliminary consensus that merged into the written contract, nor statements made during the course of negotiations indicative of the unilateral intentions of each party. Instead the evidence revealed a matter which was in the common contemplation of the parties yet was not a contractual provision actually agreed upon for the simple reason that it was a matter of common assumption.
To say that the maintenance of three eight hour shifts a day for six days a week was a matter of common contemplation between the parties is not enough in itself to justify the implication of a term. Lord Atkin's example of the sale of a painting believed by both seller and buyer to be the work of an old master (Bell) (1932) AC, at p 226 is a striking illustration. It must appear that the matter of common contemplation was necessary to give the contract business efficacy and that the term sought to be implied is so obvious that it goes without saying.
In this case the problem, as I see it, lies not so much in saying that the implication of a term is necessary to give business efficacy to the contract, as in concluding that the particular term to be implied is so obvious that "it goes without saying".
However, before I examine this question in detail I should reject the Authority's invitation to apply the decision of the House of Lords in Thorn v. Mayor and Commonalty of London (1876) 1 AppCas 120. There it was held that a person calling for tenders on the basis of plans and specifications setting the work to be executed does not impliedly warrant that the work can be successfully executed according to such plans and specifications. That, so it seems to me, was a very different case. Plans and specifications required the building of Blackfriars Bridge by means of caissons designed by the defendants' engineer. The caissons as designed were not strong enough to withstand the pressure of the river with the consequence that work done was wholly lost and additional work had to be undertaken. The contractor's case based on an implied warranty failed, there being some indications in the contract inconsistent with the existence of such a warranty. Lord Cairns L.C. (1876) 1 AppCas, at p 127 acknowledged that the contractor might have a claim on a quantum meruit for the additional work performed and that he might perhaps have refused to go on with the contract on the ground that the new work was "additional or varied work, so peculiar, so unexpected, and so different from what any person reckoned or calculated upon".
Lord Chelmsford (1876) 1 AppCas, at p 132 thought that "in the exercise of common prudence" the contractor before tender ought to have informed himself of "all the particulars connected with the work, and especially as to the practicability of executing every part of the work contained in the specification, according to the specified terms and conditions". As a canon of commonsense this statement cannot be faulted. But it cannot be elevated into an absolute rule of law - its value and force necessarily depends on the relationship between the parties and the arrangements which they make.
Even so, there remains an insurmountable problem in saying that "it goes without saying" that had the parties contemplated the possibility that their legal advice was incorrect and that an injunction might be granted to restrain noise or other nuisance, they would have settled upon the term implied by the Court of Appeal or that implied by the Arbitrator and by Ash J. at first instance. I doubt whether the fiction of treating the parties as reasonable and fair makes the problem any the less difficult. This is not a case in which an obvious provision was overlooked by the parties and omitted from the contract. Rather it was a case in which the parties made a common assumption which masked the need to explore what provision should be made to cover the event which occurred. In ordinary circumstances negotiation about that matter might have yielded any one of a number of alternative provisions, each being regarded as a reasonable solution.
The difficulty which I have with the implication of a term here is much the same as the difficulty that Lord Reid had in Davis Contractors Ltd. v. Fareham Urban District Council  AC 696 in accepting that the doctrine of frustration rests on an implied term (1956) AC, at pp 719-721. It is greater because in many situations it is easier to say that the parties never agreed to be bound in a fundamentally different situation which has unexpectedly emerged than it is to assert that in a like situation the parties have impliedly agreed that the contract is to remain on foot with a new provision, not adverted to by them, governing their rights and liabilities.
My reluctance to imply a term is the stronger because the contract in this case was not a negotiated contract. The terms were determined by the Authority in advance and there is some force in the argument that the Authority looked to Codelfa to shoulder the responsibility for all risks not expressly provided for in the contract. It is a factor which in my view makes it very difficult to conclude that either of the terms sought to be implied is so obvious that it goes without saying.
Accordingly, my conclusion is that, if Codelfa is entitled to any relief in respect of the changed circumstances, that relief is more appropriately founded on the doctrine of frustration than on the implication of a term. I therefore have no need to consider other arguments advanced by the Authority based on specific provisions in the contract against the implication of a term, although cl. S 8(2)(c) of the specification, a provision which I consider later in connexion with frustration, would require careful consideration before implying the term found by the Court of Appeal.
In Brisbane City Council v. Group Projects Pty. Ltd. (1979) 145 CLR 143 , at pp 159-163 , Stephen J. discussed the authorities. The more recent authorities, National Carriers Ltd. v. Panalpina (Northern) Ltd.  AC 675 and Pioneer Shipping v. B.T.P. Tioxide  AC 724 , do not call for any revision of that discussion. I agree with Stephen J.'s acceptance of the approach adopted by Lord Reid and Lord Radcliffe in Davis Contractors. Lord Reid said that the task of the court is to determine "on the true construction of the terms which are in the contract read in light of the nature of the contract and of the relevant surrounding circumstances", "whether the contract which they did make is... wide enough to apply to the new situation: if it is not, then it is at an end" (1956) AC, at pp 720-721. Later he described frustration as "the termination of the contract by operation of law on the emergence of a fundamentally different situation" (1956) AC, at p 723.
Lord Radcliffe (1956) AC, at p 729 said:
"... frustration occurs whenever the law recognizes that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract.... It was not this that I promised to do." His Lordship, noting that special importance attaches to an unexpected event, observed "There must be as well such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for".
It is implicit, if not explicit, in the judgment of Stephen J., as in the speeches of Lord Reid and Lord Radcliffe in Davis Contractors, that to express a preference for this view of frustration as against the theory of the implied condition and other suggested bases is not to cast doubt on the authority of earlier decisions. This is of critical importance because the earlier cases provide many illustrations of the proposition that a contract will be frustrated when the parties enter into it on the common assumption that some particular thing or state of affairs essential to its performance will continue to exist or be available, neither party undertaking responsibility in that regard, and that common assumption proves to be mistaken - see, for example, F.A. Tamplin Steamship Co. Ltd. v. Anlo-Mexican Petroleum Products Co. Ltd.  2 AC 397 (charter party of a vessel requisitioned in time of war); Denny, Mott & Dickson Ltd. v. James B. Fraser & Co. Ltd.  AC 265 (trading agreement between timber merchants affected by prohibition under legislative authority of continued trading in time of war). Two objections may be urged to the width of the proposition I have stated.
The first is that the common assumption must be found in the contract itself. The answer to this objection is that, granted that the assumption needs to be contractual, in the case of frustration, as with the implication of a term, it is legitimate to look to extrinsic evidence in the form of relevant surrounding circumstances to assist us in the interpretation of the contract, unless its language is so plain that recourse to surrounding circumstances would amount to no more than an attempt to contradict or vary the terms of the contract. Cases such as Krell v. Henry  2 KB 740 demonstrate the point. There the contract was for the hire of a flat for two particular days, the unexpressed common assumption being that the flat was hired for the purpose of viewing the Coronation processions. The Court of Appeal held that the taking place of the processions was the foundation of the contract and that the rent was not recoverable on the processions being cancelled due to the King's illness. The correctness of that decision was questioned by Lord Finlay L.C. in Larrinaga & Co. Ltd. v. Societe Franco-Americaine des Phosphates de Medulla, Paris (1923) 29 ComCas 1, at p 7 on the ground that the parties may have contracted in the expectation that a particular event would happen, each taking his chance, but not making the happening of the event the basis of the contract. In Maritime National Fish Ltd. v. Ocean Trawlers Ltd.  AC 524 , at pp 528-529 Lord Wright referred to Lord Finlay's comment, remarking that Krell v. Henry was an authority not "to be extended". This comment is not so much a criticism of the reception of the extrinsic evidence in that case as an adverse reflection on its capacity to negate the possibility that each party was taking his chance on the outcome.
Krell v. Henry was strongly criticized by Latham C.J. in Scanlan's (1943) 67 CLR, at pp 188-194 , but much of his Honour's criticism appears to be founded on the outmoded view, rejected by McTiernan and Williams JJ., that it was not legitimate to take extrinsic evidence into account. Even so, his Honour was disposed to concede that Krell v. Henry could be more readily understood as a contract which was subject to a condition or as a conditional contract (1943) 67 CLR, at p 193. It is not without significance that the parol evidence rule has never been applied so as to exclude evidence of a condition, non-fulfilment of which goes to the existence or validity of the contract. In any event McTiernan and Williams JJ. took a more favourable view of Krell v. Henry, demonstrating that it was consistent with the later cases and that the views expressed by Vaughan Williams L.J. in that case conformed to the doctrine of frustration as it was subsequently elaborated (1943) 67 CLR, at pp 210-216, 220-225. Of course, we need to read the judgments in Scanlan's in the light of the more recent statements as to the theoretical basis of the doctrine. However, in my view they do not affect the point now under discussion, except to reinforce the reception of extrinsic evidence of relevant surrounding circumstances. So, Lord Radcliffe in Davis Contractors (1956) AC at p 729 quoted with approval the remarks of Lord Wright in Denny, Mott & Dickson (1944) AC, at pp 274-275 :
"The data for decision are, on the one hand, the terms and construction of the contract, read in the light of the then existing circumstances, and on the other hand the events which have occurred."
And, as we have seen, Lord Reid was of the same opinion.
The second objection is that the proposition does not sufficiently acknowledge the fact that the event which generally, if not universally, works a frustration, is an event which supervenes after the making of the contract, viz. a change in the law which makes it impossible for the parties to execute the contract. It is not surprising that the cases commonly throw up situations of supervening impossibility caused by a change in the law - they are the more common instances of the unforeseen or unexpected occur rence. But in principle there is no reason why a mutual assumption arising from a mistaken view that an activity is immune from injunctive relief should not attract the principle of frustration. No doubt it is more difficult in such a case to show that the grant of injunctive relief was not foreseen or could not reasonably have been foreseen, but if that can be shown then the doctrine of frustration should apply. The injunction is a supervening event though it does not stem from any alteration in the law.
An unusual element in the present case is that the parties appear to have received, accepted and acted on erroneous legal advice that the contract work could not be impeded by the grant of an injunction to restrain noise or other nuisance, advice which was based on an erroneous interpretation of s. 11 of the City and Suburban Electric Railways Act 1915 (NSW). One might have expected the parties and their advisers to have had reservations about the correctness of the advice and to have given consideration to the possibility that, despite the advice, an injunction might be granted. However, the findings do not reflect the existence of any reservations; indeed, they record Codelfa's acceptance of the representations made by the Authority. Codelfa is a wholly owned subsidiary of an Italian company and this may explain Codelfa's willingness to accept and act on the representation made by the Authority.
The doctrine of frustration is closely related to the concept of mutual mistake. However, in general, relief on the ground of mutual mistake is confined to mistakes of fact, not of law. If the common contractual assumption is of present fact it is a case of mutual mistake; if the assumption is of future fact it is a case of frustration (Bell (1932) AC at, pp 225-226 , per Lord Atkin), the distinction being that in one case the contract is void ab initio and in the other it is binding until the assumption is falsified. Here the mistake is not one of present fact; it is either a mistake as to future fact or a mistake of law. Even if it be a mistake of law, this is not, I think, fatal to the application of the doctrine of frustration. The unsatisfactory distinction between a mistake of fact and one of law has not so far been carried over into frustration and I see no reason to further complicate the doctrine by invoking this distinction.
The critical issue then is whether the situation resulting from the grant of the injunction is fundamentally different from the situation contemplated by the contract on its true construction in the light of the surrounding circumstances. The contract itself did not require that the work be carried out on a three shift continuous basis six days a week without restriction as to Sundays. But it required completion of the works within 130 weeks. And Codelfa with its tender had submitted a construction programme which involved a three shift continuous basis six days a week. By cl. S 6 of the specifications Codelfa was required to submit a revised programme of work to the Engineer for his determination within thirty calendar days of the issue of a notice to proceed under the contract. This Codelfa did. Again it made provision for the method of operation already mentioned. It was accepted by the Engineer.
It is in this contractual setting that the findings of the Arbitrator have special significance. The relevant findings are set out in pars. 14, 15, 16, 18 and 19 of his award.
"14. The Parties to Contract ESR 1005 each entered into such Contract on the common and mutual understanding and on the basis that:
- the works the subject of the Contract should and would be carried out by the Contractor on a 3-shift continuous basis six days per week and without restriction as to Sundays, and
- the work to be performed was inherently of a noisy and disturbing nature and the work or substantial parts thereof was to be carried out in close proximity to areas of residential neighbourhood, and
- no Injunction or other Restraining Order could or would be granted against the Contractor in relation to noise or other nuisance arising out of the carrying on of the said works on such basis.
15. The matter mentioned in paragraph 14(c) was represented by the Principal to the Contractor and was accepted as the situation by the Contractor prior to and at the time of entering into the Contract....
16. The said works could not in fact be carried out by the Contractor in accordance with methods and programmes agreed to by the parties and in accordance with the contractual stipulations as to time of performance unless the works were carried out on the basis mentioned in paragraph 14(a) hereof....
18. Restraining Orders and Injunctions were in fact issued by the Court on grounds of noise and other nuisance arising out of the carrying out of the works by the Contractor on the basis mentioned in paragraph 14(a) hereof the effect of which was (inter alia) to prohibit and preclude the works from being carried out by the Contractor on the said basis and to cause the Contractor to incur additional cost in the carrying out of the works.
19. The said works could not in fact be carried out by the Contractor in accordance with methods and programmes agreed to by the parties without substantial noise and other disturbances arising therefrom or in connection therewith by reason of the inherently noisy and disturbing nature of the work."
The submission of the proposed programme of work with the tender, its supersession by the revised programme pursuant to cl. S 6 of the specifications, together with the very provisions of cl. S 6 itself dealing with the construction programme, provide a link between the contract and the antecedent discussions so as to enable us, subject to a consideration of specific provisions in the specifications, to say that the contract contemplated that completion would be achieved within the time stipulated by the method of work already mentioned, it being assumed that it could not be disturbed by the grant of an injunction.
I reject the Authority's argument that cl. S 6 is inconsistent with the notion that the contract looked to this method of work as the mode by which the work was to be completed. Certainly cl. S 6(5) envisaged that a major change to the work diagram as determined by the Engineer might be required by "revisions to the programme". It seems that the responsibility for initiating such a change lay with Codelfa. But I do not think that this is necessarily inconsistent with Codelfa's case on frustration nor do I think that cl. G.44(7) of the contract, which provides for the grant of an extension of time in case of delays "owing to causes beyond the control or without the fault or negligence of the Contractor", covers the position. Delay due to the grant of an injunction on the ground of nuisance committed by Codelfa scarcely answers this description, even though it results from performance of the work in the only manner which will enable completion to take place within the time stipulated.
Clause S 8(2)(c) however, poses a greater obstacle. It provides:
"The operation of all plant and construction equipment shall be such that it does not cause undue noise, pollution or nuisance. This may require the use of sound insulated compressors and air tools, silencers on ventilating fans and restrictions on the working hours of plant or such other measures as approved by the Engineer. The Contractor shall not be entitled to additional payment if the Engineer requires that measures be taken to reduce noise and pollution."
Once the injunctions were granted the Engineer gave notices reflecting the provisions of the injunctions, restricting the hours of work so as to prohibit work at night and thereby inhibited Codelfa from continuing with its three shift operation under the contract.
The first paragraph of cl. S8(2)(c) contains a promise by Codelfa that it will not operate plant and equipment so as to cause a nuisance. The second specifically looks to the possibility of a restriction on working hours of plant. And the third denies additional remuneration if the Engineer requires measures to be taken to reduce noise and pollution.
Do these provisions support the view that Codelfa was undertaking in any event to perform the contract work, even though the method contemplated by the parties might prove to be unlawful or impossible by reason of its amounting to a nuisance and its being restrained by injunction? I do not think that cl. S 8(2)(c) has such a wide-ranging effect. It involves no subtraction from the language of the provisions to say that it is quite consistent with the contemplated method of work being an essential element of the contract. Indeed, there would be no inconsistency between these provisions and an explicit provision for termination of the contract in the event that the method of work was restrained by injunction. There was plenty of scope for an exercise of the Engineer's power under the second paragraph so long as it did not displace the continuation of that method of work.
I come back then to the question whether the performance of the contract in the new situation was fundamentally different from performance in the situation contemplated by the contract. The answer must, I think, be in the affirmative. Paragraphs 14, 15, 16, 18 and 19 of the Arbitrator's award go a long way towards establishing this answer. The finding contained in par. 16 proceeds on the footing that the contract work could not be carried out as contemplated by the contract once injunctions were granted, the effect of which was to prohibit the continuous three shift a day operation six days a week. Performance by means of a two shift operation, necessitated by the grant of the injunctions, was fundamentally different from that contemplated by the contract.
There is, of course, no inconsistency between the conclusion that a term cannot be implied and the conclusion that events have occurred which have brought about a frustration of the contract. I find it impossible to imply a term because I am not satisfied that in the circumstances of this case the term sought to be implied was one which parties in that situation would necessarily have agreed upon as an appropriate provision to cover the eventuality which has arisen. On the other hand I find it much easier to come to the conclusion that the performance of the contract in the events which have occurred is radically different from performance of the contract in the circumstances which it, construed in the light of surrounding circumstances, contemplated.
It is the stated case in action No. 12577 of 1978 that presents the issues relating to frustration. In that action Codelfa sought relief against the Authority on the footing that the contract had been frustrated. The action was commenced on 23 May 1978 after Yeldham J. had ruled on 9 September 1976, following the Privy Council's decision in Hirji Mulji v. Cheong Yue Steamship Co.  AC 497 , as he was bound to do, in preference to the conflicting decision of the House of Lords in Heyman v. Darwins Ltd.  AC 356 , that the Arbitrator had no jurisdiction to entertain a claim based on frustration. The Arbitrator's award was not delivered until 15 April 1980. Shortly after Codelfa amended its statement of claim in the action so as to plead some of the findings made by the Arbitrator in his award. The stated case was subsequently filed in the action on 26 August 1980. It asks the following questions:
- Whether the Arbitrator's findings in the Award or any of them give rise to issue estoppels which can be relied upon in this action.
- Whether the Arbitrator's findings in the Award which give rise to issue estoppels establish in law that the Contract ESR 1005 was frustrated on or about 28th June 1972.
- Whether the Arbitrator's findings in the Award are capable of giving rise to issue estoppels having regard to the conclusions reached by the Court in its judgment on the Stated Case, arising for determination in this Division in proceedings numbered 11653 and 11793 of 1980.
- Whether the Plaintiff by obtaining the Award made a final election between inconsistent remedies and/or rights, and is now precluded from alleging in this action that the contract was frustrated on or about 28/6/72."
It also contains the following paragraph:
"The facts upon which the Plaintiff relies to establish frustration are contained in and limited to the pleadings and the findings of the Arbitrator under the reference to arbitration the subject of proceedings number 2933 of 1976. If any of the questions are answered adversely to the Plaintiff the Plaintiff will not rely upon its ordinary right to apply to amend the Statement of Claim in order to plead a case of frustration substantially independent of issue estoppels to support its opposition to any application by the Defendant for judgment in the action."
The problem of issue estoppel is complicated by the circumstance that the decision of Yeldham J. dictated the future course of the proceedings. In the result the total controversy between the parties became fragmented. There seems to be no reason why this Court, now that it is seized of the case, should not decide the conflict between Heyman and Hirji Mulji. Indeed, the jurisdiction of the Arbitrator and the use to which his findings can be put in relation to frustration depends upon a resolution of the conflict.
Hirji Mulji decided that an arbitrator had no jurisdiction under an arbitration clause in a charterparty when the charterparty was terminated by frustration because the arbitration clause was brought to an end with the contract of which it formed part. In Heyman the House of Lords decided that an arbitration clause, which provided that any difference or dispute which might arise "in respect of" or "with regard to" or "under the" contract should be referred to arbitration, applied to a dispute arising out of a claim by one party that liability under the contract had been discharged by reason of repudiation which had been accepted.
In Heyman their Lordships drew a distinction between a contract void ab initio , in which event there is no valid submission to arbitration, and a valid contract which is subsequently repudiated, where acceptance of the repudiation leaves the contract, including the arbitration clause, on foot for the purpose of enforcement, though performance under the contract is at an end. Viscount Simon L.C. (1942) AC, at p 367 , Lord Wright (1942) AC, at p 383 and Lord Porter (1942) AC, at p 395 thought that the effect of frustration was similar to that of repudiation which has been accepted by the innocent party, with the consequence that the arbitration clause is left on foot. Although Lord Wright and Lord Porter did not express a concluded opinion upon the question, they nevertheless expressed reasons for arriving at a result contrary to that reached in Hirji Mulji. As might be expected, emphasis was given to the need to construe the relevant arbitration clause so as to ensure that it comprehends the particular dispute or difference which has arisen between the parties. In this action the Lord Chancellor expressly left open the effect of a Scott v. Avery clause.
Lord Macmillan (1942) AC, at p 375 , who spoke for Lord Russell of Killowen as well, in putting cases of frustration to one side, expressed doubt as to the correctness of some of the views enunciated by Lord Sumner in Hirji Mulji. Nothing in Lord Macmillan's speech is inconsistent with the proposition that frustration does not put an end to a submission to an arbitration clause so expressed as to confer jurisdiction on an arbitrator to decide a dispute relating to frustration. Indeed, the emphasis which his Lordship gave to the special nature and purpose of arbitration clauses suggests that he would have come to the same conclusion upon the point as that reached by the Lord Chancellor.
In my opinion, the reasoning of the House of Lords in Heyman is to be preferred to that of Lord Sumner in Hirji Mulji  AC 497 . In its application to an arbitration clause the distinction between a contract which is void ab initio and a contract which is valid but subsequently repudiated is well taken. Lord Sumner was in error in holding that the acceptance by an innocent party of the repudiation of a contract brings the contract, including an arbitration clause, to an end for all purposes. I agree with the House of Lords that the case of frustration is to be assimilated for relevant purposes to the determination of a contract by breach or by acceptance of repudiation. The fact that the Lord Chancellor proceeded on the implied term theory of frustration does not in my view affect the reasoning by which he arrived at his conclusion.
The relevant clause in the contract in the present case, cl. G.46, contains a Scott v. Avery (1856) 5 HLC 811; (10 ER 1121) clause. Clause G.56, so far as is relevant is in these terms:
"(1) Except as otherwise specifically provided in the Contract all disputes arising out of the Contract during the progress of the works or after completion or as to any breach or alleged breach thereof shall be decided by the Commissioner.
(4) Submission to arbitration shall be deemed to be a submission to arbitration within the meaning of the New South Wales Arbitration Act 1902 or any statutory modification thereof.
(5) No action or suit shall be brought or maintained by the Contractor or the Commissioner against the other of them to recover any money for or in respect of or arising out of any breach or alleged breach of this Contract by the Contractor of the Commissioner or for or in respect of any matter or thing arising out of this Contract unless and until the Contractor or the Commissioner shall have obtained an award of an Arbitrator appointed under this clause for the amount sued for..."
Sub-clause (1) refers to "all disputes arising out of the Contract", an expression wider than "disputes under the Contract", the expression which Lord Wright in Heyman was inclined to think sufficient to confer jurisdiction on the arbitrator with respect to frustration, had the question arisen in that case. The sub-clause was plainly wide enough to embrace a dispute arising out of a claim by Codelfa for remuneration on a quantum meruit based on frustration of the contract.
To my mind the fact that sub-cl. (5) is a Scott v. Avery clause does not diminish the jurisdiction of the Arbitrator. Indeed, once the conclusion is reached that the submission to arbitration is broad enough to include the dispute, even though it relates to frustration, sub-cl. (5) operates to condition curial jurisdiction on the existence of an award. There may be a problem with that part of the sub-clause that requires the Contractor to proceed with the work during arbitration proceedings, but we have no need to grapple with that problem.
The true position, as it seems to me, is that the Arbitrator had, and has, jurisdiction to deal with this issue and that the parties by cl. G.46(5) effectively conditioned their right to sue, whether on the contract or in quasi-contract, on the existence of an award. In this situation it is not possible to determine the rights of parties on the footing that the findings already made by the Arbitrator give rise to issue estoppels which amount to a finding of frustration. Instead we should follow the course of remitting the matter to the Arbitrator so that he can exercise the jurisdiction which has hitherto been denied him.
Earlier I expressed the view that the findings so far made by the Arbitrator go a long way towards a conclusion that the contract has been frustrated. Naturally they stop short of that because the issue was taken from him by the decision of Yeldham J. Consequently, he did not consider whether performance of the contract in the changed circumstance was fundamentally different from the performance contemplated by the contract. That is something that remains for him to consider, although, having regard to the view I have taken of his findings, I cannot think that it will cause him much difficulty.
The history of the matter does not suggest that Codelfa made a final election against frustration by obtaining an award on the basis that the contract remained on foot after 28 June 1972. At all times Codelfa has sought to maintain its claim based on frustration as an alternative to the relief sought on the footing that there was an implied term.
There may be a question, assuming frustration, as to whether the contract was frustrated on 28 June 1972. The first injunction was granted on that day. It did not restrict the hours of working; it restrained blasting of such intensity that rocks were propelled into surrounding residential areas. However, it also restrained Codelfa from detonating explosives in such a way as to cause or permit to be emitted from the site vibrations or noise to such a degree as to occasion to the plaintiff a nuisance or annoyance. The judgment expressly rejected Codelfa's claim of immunity based on s. 11 of the City and Suburban Electric Railways Act. It therefore destroyed the common belief of the parties that no injunction could be granted to restrain noise or other nuisance on the part of Codelfa in the construction of the works and it effectively resulted in a situation, confirmed by the later injunctions, where the work could not be continued on the footing of a continuous three shift operation a day for six days a week. However, the matter is for the Arbitrator to decide.
(3) Rise and Fall Clause
I am in agreement with what Aickin J. has written on this topic.
(4) Arbitrator's Power to Award Interest
The Authority's argument is that this Court's decision in Government Insurance Office of New South Wales v. Atkinson-Leighton Joint Venture (1981) 146 CLR 206 is to be distinguished on the ground that the contract here contains a Scott v. Avery (1865) 5 HLC 811; (10 ER 1121) clause - cl. G.46(5). The consequence is that no cause of action arises prior to the making of the arbitral award. It is then submitted that there is no "period between the date when the cause of action arose and the date when the judgment takes effect" within the meaning of s. 94(1) of the Supreme Court Act 1970 (NSW) which authorized the Court to order the inclusion in the sum for which judgment is given of "... interest at such rate as it thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date when the judgment takes effect."
As it happened the insurance policy in Atkinson-Leighton contained a Scott v. Avery clause, but no argument was directed to it. The decision in that case therefore does not foreclose the question now raised.
The effect of cl. G.46(5) is to prevent the bringing of an action on the contract for damages for breach of contract before an award is made by an arbitrator. The making of the award is a condition precedent to the existence of the cause of action Anderson v. G.H. Michell & Sons Ltd. (1941) 65 CLR 543 , at p 550 ; South Australian Railways Commissioner v. Egan (1973) 130 CLR 506 , at p519.
There is a well recognized difference between an ordinary submission to arbitration and a submission containing a Scott v. Avery clause. With the former, but not with the latter, the action may be brought before an arbitral award is made.
In Atkinson-Leighton Stephen J. said (1981) 146 CLR, at p 235:
"The principle to be extracted from this line of authority is that, subject to such qualifications as relevant statute lay may require, an arbitrator may award interest where interest would have been recoverable had the matter been determined in a court of law. What lies behind that principle is that arbitrators must determine disputes according to the law of the land. Subject to certain exceptions, principally related to forms of equitable relief which are of no present relevance and which reflect the private and necessarily evanescent status of arbitrators, a claimant should be able to obtain from arbitrators just such rights and remedies as would have been available to him were he to sue in a court of law of appropriate jurisdiction."
In a judgment with which Murphy J. agreed I said (1980) 146 CLR, at p 247:
"Although s. 94 is expressed in the form of an authority of the court, its effect is to alter the antecedent principle of law regulating the payment of interest on moneys included in judgments between the date when the cause of action arose and the date when the judgment takes effect. The parties' submission to arbitration of all their differences is to be construed in the light of the new principle of law regulating the payment of interest enshrined in s. 94. There is to be implied in the submission an authority in the arbitrator to award interest conformably with s. 94 because the Supreme Court is given by the Arbitration Act a supervisory function in relation to an arbitration and because an award of an arbitrator is enforced as if it were a judgment or order of the court (s. 14)."
Accordingly the Court of Appeal was correct in saying that s. 94 should be regarded as defining the powers of an arbitrator with such variations as the nature of the circumstances requires, subject of course to any specific provision in that behalf which may be contained in the contract constituting the submission to arbitration. The terms of s. 94 are necessarily modified when they are imported into the submission in order to take account of those characteristics which distinguish an arbitration from court proceedings. For the purpose of exercising his implied authority to award interest the Arbitrator proceeds on the footing that the arbitration and the award are to be assimilated to court proceedings and to a curial judgment respectively. The hypthesis is that his award which determines the dispute or difference is the equivalent of a judgment which determines a cause of action.
Does this mean that when the submission is pursuant to a Scott v. Avery clause the Arbitrator has no power to award interest because the making of the award coincides with the arising of a cause of action which can be sued to judgment? An affirmative answer depends on a definition of the arbitrator's power in the very terms of s. 94, allowing only for the substitution of "award" for "judgment" and for a reading of "proceedings" so that it applies to an arbitration. The point on which the affirmative answer hinges is an insistence that an implied authority of the Arbitrator to award interest relates to a period beginning with "the date when the cause of action arose", notwithstanding the need to modify the language of s. 94 in order to meet the characteristics of an arbitration. This result conforms to the policy manifested in s. 94 that the power to award interest is confined to the period which begins with the emergence of the cause of action.
The obverse of this picture is that the parties by arming the Arbitrator with implied authority to award interest have recognized that the arbitration has taken the place of court proceedings. The statutory power is therefore to be moulded so that it is expressed in terms appropriate to, and capable of being exercised in, an arbitration. It should be read accordingly as authorizing the Arbitrator to award interest for the period from the date when the dispute or difference arose to the date when the award became effective for the award settles the dispute or difference, not the cause of action.
To conclude otherwise would be to deny any power to award interest in arbitrations pursuant to a Scott v. Avery (1856) 5 HLC 811; (10 ER 1121) clause, a very common form of arbitration. Indeed, if the Authority's argument were correct, it would constitute a ground for saying that in such a case no authority to award interest should be implied, contrary to the decision in Atkinson-Leighton, rather than a ground for saying that there is an implied authority in such a case, but that there is nothing to which it can relate.
Another matter to be noted is that the object of a Scott v. Avery clause is to force the parties to arbitration, to deny them the option of suing in court before an arbitration takes place. The Arbitration Act 1902 (NSW) has largely overcome the disadvantages associated with suing on the award as a preliminary to enforcing it by enabling the award to be enforced as if it were a judgment (s. 14). In this situation there is no injustice in empowering the Arbitrator to award interest as if his award settling the dispute or difference were a judgment determining a cause of action.
(5) Power to Award Compound Interest
Codelfa submitted that the Arbitrator had power to award compound interest. The submission is quite without substance. The Court of Appeal correctly pointed out that s. 94(2)(a) provides that the section does not authorize the giving "of interest upon interest" and that compound interest necessarily involves the giving of interest on interest.
Codelfa sought to overcome this by relying on the dissenting judgment of Lord Denning M.R. in Tehno-Impex v. Gebr. Van Weelde Scheepvaartkantoor B.V.  1 QB 648 . There the claim was for compound interest on late payment by charteres for demurrage. Lord Denning expressed the view that the power of an arbitrator to award interest stems, not from statutory authority, but from a discretion which he possesses under the general law dating back at least to 1819(31). The true position, according to his Lordship, is that when a creditor has suffered real damage by being kept out of his money, and the debtor has made a gain by keeping it, the Arbitrator is able "to award damages in the shape of interest - for the period during which debt or damages has been withheld" (1982) 1 QB, at p 664.
The Master of the Rolls (1982) 1 QB, at p 667 then went one step further in saying that the Arbitrator had a discretion to award interest with yearly or half-yearly rests, the statutory limitation in s. 3(1)(a) of the Law Reform (Miscellaneous Provisions) Act 1934 (UK), the counterpart of s. 94(2)(a) of the New South Wales Act, having no application because the power of the Arbitrator had its origin, not in the statute, but in the general law as it applied to arbitrators.
However, the members of the majority were of a different mind. Oliver L.J. thought that neither s. 3(1)(a), the common law nor the admiralty jurisdiction conferred or enjoyed power to award interest in the circumstances of the case. Watkins L.J., though of opinion that neither s. 3(1)(a) nor the common law conferred such power, considered that the Arbitrator could exercise the equitable power which the Admiralty Court possessed to award interest on principal already paid and interest upon interest by way of damages (1982) 1 QB, at p 681 . The majority decision denied any common law power in the Arbitrator to award interest on interest. It acknowledged the existence of such a power in admiralty cases. That, of course, is of no relevance here where no element of admiralty jurisdiction intrudes.
The Arbitrator's power to award interest in the present case, as Atkinson-Leighton (1981) 146 CLR 206 decided, is referable to s. 94. As such it is circumscribed by s. 94(2) (a) and it does not extend to the making of an award for compound interest.
In the result in appeal No. 71 of 1981 I would allow the appeal in part, and the cross-appeal in part and otherwise dismiss the appeal and the cross-appeal. I would set aside the order of the Court of Appeal and the order of Ash J. and in lieu thereof I would answer the questions in the stated case in the manner set out in the formal order of this Court. In appeal No. 72 of 1981 I would set aside the order of Ash J. and that of the Court of Appeal; I would strike out the action for want of jurisdiction.