A J Lucas Drilling Pty Ltd v McConnell Dowell Constructors

A J Lucas Drilling Pty Ltd v McConnell Dowell Constructors - [2009] VSCA 310 - VSCA 2009 case summary — Zoe

[34]

Then in any such event, and without prejudice to any other rights and remedies including the right to treat this Sub-Contract as repudiated by the Sub-Contractor under the general law, MacDow may, by written notice to the Sub-Contractor, determine forthwith the Sub-Contractor's employment under this Sub-Contract and may expel the Sub-Contractor from the Sub-Contract Works and take over all the plant, equipment and materials provided by or on behalf of the Sub-Contractor which are on the Site of the Sub-Contract Works or are being used in connection therewith and may use the same to complete or have completed the Sub-Contract Works.

24.2 The Sub-Contractor shall pay to MacDow the amount of any and all loss, damages, costs and expense caused to MacDow by reason of such determination. Until after completion of the Sub-Contract Works MacDow shall not be bound to make further payment to the Sub-Contractor but upon such completion and within a reasonable time thereafter MacDow shall ascertain the amount of expense reasonably incurred in completing the Sub-Contract Works and the amount of loss, damages, costs and expense caused to MacDow by reason of the determination and if such amounts when added to the monies paid to the Sub-Contractor before the date of determination exceed the total amount which would have been payable on due completion in accordance with this Sub-Contract the difference shall be a debt payable to MacDow by the Sub-Contractor; and if the said amounts when added to the said monies do not exceed the said total amount then the money payable to the Sub-Contractor shall be the lesser of:

a) the difference between

(i) the said amounts when added to the said monies; and

(ii) the said total amount; or

b) the aggregate of:

(i) the value of any work actually and properly executed and not paid for at the date of such determination, such value to be calculated according to clause 14;

(ii) the value of any unfixed goods and materials which were taken over by MacDow on determination and used by MacDow and a fair payment for hire of such of the Sub-Contractor's plant as were used by MacDow, in completing or having completed the Sub-Contract Works.

Notwithstanding anything else herein, no sums shall be payable to or credited to the Sub-Contractor following determination under clause 24.1, until MacDow is in receipt from the Employer of a payment which includes such sums.

24.3 If for any reason MacDow's employment under the Head Contract is determined (whether by MacDow or the Employer and whether due to any default of MacDow or otherwise) then the employment of the Sub-Contractor under this Sub-Contract shall thereupon also de [sic] determined automatically.

24.4 Unless the determination of the Head Contract was caused or contributed to by any default or breach of contract the Sub-Contractor (in which event the Sub-Contractor shall be liable to MacDow for damages on the same basis as if the Sub-Contractor had wrongfully repudiated the Sub-Contract) or unless MacDow was entitled at time of determination of the Head Contract to exercise its right of determination under clause 24.1 (whether or not any act or default of the Sub-Contractor caused or contributed to the determination of the Head Contract, the Sub-Contractor shall be paid (after allowing for any previous payment):

[89]

Sub-clauses 24.4(a) and (b) require the determination of the value of the work completed. There are many ways at looking at value in this context. It is commonly approached on the basis of actual cost to the contractor plus a margin or margins for overheads and profit, since this represents its value to the contractor. Another approach is to receive evidence of what price the work would command in the marketplace. A third might be the value to the principal and this, too, might represent the cost to which it, the principal, might expect to pay to have it performed or the contribution of the work to the increase in the value of the principal's asset. Where the work is performed under a contract which itself values the work, this may also be brought to account. The correct approach must be to have regard to these and any other factors which are appropriate in the circumstances of the particular case and then to arrive at a fair and reasonable value. The circumstances will include the arrangements under which the work was performed and also the circumstances in which the valuation comes to be made.

These various approaches to valuation have their own potential shortcomings and difficulties and the authorities make it clear that there is no single path to be preferred. The Court must weigh up the suggested approaches and their applicability to the facts of the case before it and to the circumstances which give rise to the requirement that the valuation be made. It must make such adjustments to these approaches as seem appropriate, but always bearing in mind that the objective of the exercise is to arrive at a valuation which is fair to the parties.[18]

I have included in my description of the task which the Court must address, the circumstances which give rise to the requirement that the evaluation be made. This is not a case where the contract has been found to be illusory, where the contract is void for illegality or for some other reason, or where the contract is void ab initio.[19] The work has been performed under a valid and subsisting contract and the parties have made provision for the adjustment of their rights in an event which has been foreseen.[20] They have required that the work be valued upon termination in accordance with the terms of the contract with a direction that the contractual valuation methodology be adopted, if possible. The valuation, too, is to be undertaken in circumstances where the sub-contractor has lost the contract due to no fault of its own.[21]

[182]

Before I turn to the detail, I make mention of a credit issue raised on behalf of MacDow. The facts underlying this are not controversial. When the changes to the diameter of the umbilical casing and to the drilling methodology were made prior to 28 November, Lucas Drilling made no protest about the cost or engineering implications. Indeed, it was only when the drilling was encountering difficulties that questions were raised internally at Lucas Drilling. There were in evidence a series of emails passing in March 2003 between the various Lucas Drilling personnel in effect exploring the possibility of bringing a substantial claim for extra cost and time extension arising out of the changes to the drilling and the marine activities. The tone of these emails was suggestive of a creative attempt to retrieve the parlous commercial position in which Lucas Drilling then found itself. And, later on 18 June 2003 Lucas Drilling presented to MacDow a document setting out 10 substantial claims. It was put, with some force, that these claims were a spurious attempt to extract money from BHPB through MacDow in an effort to recover losses incurred on what had turned out to be an ill-advised contract. It was then said that the Lucas Drilling claim before the Court should be treated as yet another attempt to pursue this objective.

I must acknowledge that these documents do not reflect well on the bone fides of the Lucas Drilling claims. Nevertheless, the fact that a litigant puts forward a spurious claim does not lead to the conclusion that all of its claims are spurious. Accepting as I do that, in important respects the June 2003 claims have been shown to be misconceived and that the March emails show a readiness in Lucas Drilling to drum up claims in which they have little confidence, I will look at the present claims with more than usual caution. This particularly applies to assertions made on its behalf that a particular change has had an engineering or financial consequence which was not foreseen at the time by persons in its employ who were very experienced in the industry or was not appreciated by them soon after the event.[47]

[231]

7.1 The last of Lucas' entitlements under clause 24.4 was for loss of profit on the remaining works. Lucas based its claim here on the Subcontract margin of 46.1% on the balance of the $5 million lump sum after subtracting the pro rata lump sum determined by the trial Judge for the value of the completed works. That produced a figure of $452,661. It was a simple, mathematical approach.

7.2 The trial Judge's approach was to deduct from the Subcontract value of the remaining works, the value of the remaining off-shore diving and marine works. Earlier at the commencement of the quantum trial, McDow applied to do just that, and the trial Judge refused that application. Despite that ruling, he then went on himself to adjust the Subcontract sum downward (a negative variation).

7.3 Further, the trial Judge did so by reference to Lucas' original tender allowances for those works, again which did not reflect the true nature and extent, cost and risks of the remaining off-shore diving and marine works all of which had been reduced or eliminated through Lucas' re-engineering. The trial Judge added to those cost elements derived form the original tender breakdown the full Subcontract margin to arrive at a value for the remaining off-shore diving and marine works of $976,554. He then subtracted that from the balance of $5 million after deducting his assessment of the pro rata lump sum for the completed works, and thereby arrived at a value of the unperformed work of $467,150 (sic $460,150).

7.4 In determining the appropriate profit margin to be awarded within that value of unperformed work, the trial Judge canvassed a number of possibilities. He considered a bare profit of 1.5% (from the Subcontract margin), which produced a figure of only $4,724. He then speculated as to whether some of the risks covered by that component of the margin may or may not have come to pass. Ultimately, he concluded on a round figure of $25,000 for loss of profit on the remaining works without any relevant reasons or evidence in support.[66]

[255]

Attention: Ian Clark

Dear Ian/Mark,

Project: Minerva Field Development - HDD Shore Crossing

Sub-Contract: 1727-SC01

Subject: Termination of Head Contract (Our Ref: 1.2.1.475)

We refer to your letter dated 16th September 2003 Ref KM/1727/L/112.1/MA/00189.

We have prior to the breakdown of the relationship between MacDow and BHPB requested copies of the default and suspension notices served on MacDow by BHPB. We also request a copy of the Termination Notice served on MacDow by BHPB.

AJ Lucas [sic] rights and obligations are affected by those notices and as such AJ Lucas AJ Lucas [sic] are entitled to have copies of the Notices.

MacDows failure to respond to this request is conduct which lacks transparency and is prejudicial to AJ Lucas. Please comply with our request. If MacDow adopts the view that it refuses to provide this documentation please advise us accordingly.

In relation to the termination requirements AJ Lucas replies as follows:

a) To the extent legally possible AJ Lucas will comply.

b) AJ Lucas has previously submitted to MacDow both electronic and hard copies of drawings, specifications and other documents in connection with the HDD works. Please advise which documentation etc detailed in items (i), (ii), (iii) has not been passed onto BHPB and is required to be submitted by AJ Lucas.

c) AJ Lucas completed demobilisation from the HDD site on Friday 19th September 2003

Under clause 24.4 MacDow are obliged to make payment to AJ Lucas MacDow are required to provide indicative values under Clause 24.4 (a) & (b) for discussion. AJ Lucas will provide claims for discussion under 24.4 (c) to (f) including claims for the cost of variations to date. These claims will be provided by Friday 26th September 2003.

The termination by BHPB raises a number of complex issues. We note that MacDow adopt the view that BHPB have repudiated the contract. We again record that AJ Lucas has not been privy to the exchanges between BHPB and MacDow.

AJ Lucas considers it to be in both parties' interests to have a frank discussion about the termination process and the procedures to follow.

Yours faithfully.

AJ LUCAS DRILLING PTY LTD

At a glance

Court

Decision date

Before

Source

Judgment (352 paragraphs)

A J Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2009] VSCA 310 (18 December 2009)

Parties

Legislation Cited (7)

Cases Cited (7)