Diveva Pty Ltd v Port Macquarie-Hastings Council

Part II - Issues

1. The first issue arising in these proceedings relates to the proper construction of the option provisions in the 2011 Agreement. In particular, questions arise as to (i) the nature and the purpose of the option provisions in the Agreement; and (ii) whether the "option" was exercisable by MCRS.
2. The 2011 Agreement, as noted above, was expressed to operate for a period of two years with a further 12 months period, the latter described as "a further 12 month option available".
3. MCRS case is that the option contained in the 2011 Agreement was one that was open to MCRS to exercise. Alternatively, it was submitted that it was an option that was exercisable by either party.
4. The second issue arising relates to Council's assertion that, assuming the option was exercisable by MCRS, a term ought to be implied into the 2011 Agreement, to give the contract efficacy, to the effect that the option was not exercisable if MCRS was in breach of the Agreement.
5. A third issue concerned the amount of damages to which MCRS is entitled if it is successful in these proceedings.

Part III - Plaintiff's Evidentiary Case

1. The plaintiff relied upon the following written submissions: 1. Outline of Submissions dated 24 February 2016; 2. Outline of Opening Submissions dated 16 March 2016; 3. Closing Submissions dated 23 March 2016; and 4. Supplementary Closing Submissions on Damages dated 1 April 2016

Plaintiff's Lay Evidence

1. On the first day of the hearing, a number of affidavits contained within the Court Book (CB) were not read. These were two affidavits of Anthony Villar Haywood sworn 10 June 2015 and 14 October 2015; and two affidavits of Craig Pinson sworn 12 June 2015 and 8 October 2015. The plaintiff did tender the Exhibit to Mr Pinson's affidavit.
2. The plaintiff relied upon the following affidavit evidence: 1. Affidavit of Brendan Pinson sworn 10 June 2015; 2. Affidavit of Craig Harris sworn 11 June 2015; 3. Affidavit of Mark Pilgrim sworn 12 June 2015 and Exhibit MP-1 to that affidavit; 4. Exhibit CP-1 to the affidavit of Craig Pinson sworn 12 June 2015; and 5. Affidavit of Mark Pilgrim (in reply) sworn 28 October 2015.
3. The affidavit evidence of Brendan Pinson, Workshop and Stabilising Supervisor for the plaintiff read in these proceedings, concerned the works carried out on the 2011 and 2012 Ocean Drive Works.
4. The affidavit evidence of Craig Harris, Site Forman and Site Manager for the plaintiff between 2008 and 2013, was directed to the 2011 Ocean Drive Works.
5. The affidavit evidence of Mark Pilgrim, General Manager of the plaintiff, addressed the 2011 and 2012 Ocean Drive Works. He confirmed the evidence given by Mr Harris. Mr Pilgrim set out the relevant correspondence between MCRS and the Council following the 2012 Ocean Drive Works. He noted relevantly: 1. On 4 April 2013 Mr Pilgrim, on behalf of the plaintiff, sent a letter to the Council in which he advised that MCRS wished to take up the option of a further 12 months as stipulated in the Agreement (Exhibit MP-1: 59-60); 2. On 4 April 2013 Mr Pilgrim received from Mr Robinson of the Council an email advising him that the Council would not be extending the plaintiff's current contract with the Council (Exhibit MP-1: 58). In the email Mr Robinson identified the proposed change in specification to be a matter which made a re-tendering process appropriate. It did address any claimed breach of the Agreement by the plaintiff. In the email, Mr Robinson observed: "The option to extend a contract such as this is written into the tender to provide a mechanism by which a contract may be extended if there are no issues, changes to regulations or circumstances that may give cause to end a contract. The option to extend a contract must be by way of mutual agreement." 1. On 9 May 2013 Mr Pilgrim received a letter from Mr Randall advising that the plaintiff was no longer to implement the C-245 Specification and that instead it was to implement R116 Specification for all future works with Council (Exhibit MP-1: 62);
6. Mr Pilgrim stated that after 11 April 2013 the plaintiff was not been provided with any further works under the 2011 Agreement. The only works that the plaintiff had been contracted to perform for the Council since that date involved the provision of a roller for the Council's use in June 2015.

Plaintiff's Expert Evidence

1. The plaintiff relied upon the following expert evidence: 1. Expert report of David Mullins dated 4 June 2015; 2. Expert report of Mr Stephen Paul McElroy dated 13 June 2015; 3. Second expert report of David Mullins dated 21 October 2015 4. Second expert report of Mr McElroy dated 28 October 2015.
2. On the first day of the hearing it was announced that by consent of the parties Messrs Mullins and Andrew Ross (the Experts) would prepare and provide a joint expert report on the question of damages. A joint report dated 22 March 2016 was in due course tendered (the Joint Report). The contents of the Joint Report are discussed below.

Part IV - Defendant's Evidentiary Case

1. The defendant relied upon the following sets of written submissions: 1. Outline of Submissions (undated); 2. Submissions (undated); and 3. Submissions as to Damages (undated).
2. On the first day of the hearing, the defendant informed the Court that affidavit of Mr Craig Swift-McNair sworn 7 August 2015 would not be read.
3. The defendant relied upon the following affidavits: 1. Affidavit of Jeffrey Sharp sworn 5 August 2015; 2. Affidavit of Richard Thomas Ward sworn 6 August 2015; 3. Affidavit of Brian Lean sworn 7 August 2015; and 4. Affidavit of Gary Randall sworn 7 August 2015 and Exhibit GR-1 to that affidavit.

Affidavit evidence of Jeffery Sharp

1. Mr Jeffery Sharp, Director Infrastructure & Asset Management of the Council, in his affidavit sworn 5 August 2015, addressed two issues. The first was the agreement with MCRS and the second concerned the 2011 and 2012 Ocean Drive Works.
2. Mr Sharp referred to the need for Council to budget for capital projects undertaken from year to year and the maintenance requirements for roads. He noted that Council will sometimes prefer an option to continue acquiring services on terms agreed in a general tender to avoid the necessity for re-tendering: at [11].
3. He stated that job orders not covered by the 2011 Agreement required negotiation of different prices: at [13].
4. He said the purpose of the 2011 Agreement was to secure definite pricing for a period of time on agreed terms and conditions: at [14].

Affidavit of Richard Thomas Ward

1. Mr Richard Ward, Team Leader employed by the Council, in his affidavit sworn 6 August 2015, responded to parts of the affidavits of Messrs Harris and Brendan Pinson regarding the 2012 Ocean Drive Works. It is not necessary here to reproduce details of his account in those respects.

Affidavit of Brian Lean

1. Mr Lean, Construction Coordinator of the Council, in his affidavit sworn 7 August 2015, addressed conversations that were set out in the affidavits of Messrs Craig Pinson, Mark Pilgrim, Craig Harris and Brendan Pinson. Mr Lean briefly referred to the 2011 Ocean Drive Works at [12]-[14] and the 2012 Ocean Drive Works at [15]-[19]. It is not necessary here to reproduce detail of his accounts in those respects.

Affidavit of Gary Randall

1. Mr Gary Randall, Group Manager Infrastructure Delivery of the Council, in his affidavit sworn 7 August 2015, addressed a number of issues including the 2011 Agreement; the 2011 and 2012 Ocean Drive Works; asphalt problems; testing; discussions with the MCRS; notices of dispute; and re-tendering.
2. Following rulings on objections to Mr Randall's affidavit, he was cross-examined upon his experience and expertise.

Defendant's Expert Evidence

1. The defendant relied upon the expert report of Mr Andrew Ross, chartered accountant, dated 18 September 2015, and the Joint Report.

The Plaintiff's Written Closing Submissions dated 23 March 2016

1. On behalf of MCRS it was argued that the use of the words "with a further 12 month option available" in the 2011 Agreement presents a constructional choice between whether the option is available to be exercised by MCRS (either only MCRS or by either MCRS or the Council), or whether it was only for the Council's benefit (as the Council contended). It was submitted for MCRS that the effect of the Council's construction was that it had reserved for itself a right of veto in relation to the last 12 month period of the term. Such a construction, MCRS submitted, was inconsistent with the language used and the apparent purpose and object of the option: at [25].
2. It was also submitted on behalf of MCRS that the proper construction of the words "with a further 12 month option available" is to be determined objectively, by reference to what a reasonable businessperson would have understood those words to mean. This in turn, the argument proceeded, requires consideration of the language chosen by the parties to the contract; the surrounding circumstances known to the parties at the time the contract was entered into; and the commercial purpose or objects to be secured by the contract. The case law authorities relied upon in support of these propositions were set out: at [26].
3. First, the plaintiff commenced by examining the language used by the parties. It was submitted that the use of the word "option" demonstrates that the alternative construction advanced by the Council (in effect an agreement to agree) is wrong. Whether the proper legal characterisation of an option be an irrevocable offer or a conditional contract offered by the grantor of the option, it was submitted, it is not the case, as the Council had argued, that "the option to extend the contract must be by way of mutual agreement": at [28].
4. It was further submitted for MCRS that whatever the proper characterisation of the option provisions in the 2011 Agreement, an option is something "offered" or "granted" by one party to another. It was submitted that the problem with the Council's alternative construction was that it gave no effect to the word "option": at [28].
5. It was further submitted for MCRS that objectively, the Council was the offeror or grantor of the option. The Council had been the issuer of the tender containing the offer of the option. The fact of the option being offered or granted was said to be clear from the contractual language when one looks at who, as it were, is speaking in the documents constituting the agreement which specifically referred to the option being available. It was submitted that it is plainly the Council who was speaking in the document and it was the Council who made the option available: at [29].
6. It was further noted that the word "option" had been coupled in the 2011 Agreement with the use of the word "available" at three of the four points where the option is referred to. The conjunction of the words "option" and "available" was accordingly said to have particular relevance in relation to the construction issue: at [30].
7. The Oxford Dictionary, it was noted, defines "available" as "able to be used or obtained; at someone's disposal". The words used in the 2011 Agreement, including the word "available", it was submitted reveals an objective intention that the option be available to the person to whom the option is offered, in this case MCRS. If the option was "available" to MCRS, then it was able to be exercised by it or taken advantage of by it. In other words, it was argued the option is at MCRS' disposal and as such was one that was able to be exercised by it: at [31].
8. It was also submitted that the word "available" is, at the least, an odd word to use if the agreement effectively had the result that significant obligations could be imposed on MCRS at the Council's election. It was said that this would be an improbable term to be agreed, absent express language. If the imposition of contractual obligations was available to be effected at the election of the Council, then it would be likely that more striking and clear language would be used, as, for example, "the term is two years which the council may extend (in its sole discretion) for a further 12 months". It was contended that that was the effect of the Council's argument but it was not the apparent effect of the words that had been used in the agreement: at [33].
9. Second and in addition to examining the language of the contract, the plaintiff observed that the 2011 Agreement is to be construed as a whole and noted at [36] that the Agreement relevantly: 1. Does not otherwise refer to or expressly qualify the exercise of the option - it does not state that it can only be exercised by the Council; 2. Requires MCRS to take on various risks and accordingly it would be surprising if these obligations could be imposed on MCRS for a further 12 months without MCRS' agreement; 3. Requires MCRS to be "on call" for emergency and urgent orders 24 hours a day and that again it would be surprising if that obligation could be imposed on MCRS for a further 12 months without MCRS' agreement; 4. Provides the Council, but not MCRS, with express termination rights during the term of the Agreement and that again it would be surprising if MCRS could be required to perform for a further year with no right to terminate (presumably other than for a repudiation or breach of an essential term) while the Council retains a right of termination. The sense of the Agreement is that the term is for MCRS' benefit, which is why the Council has the ability to terminate for non-performance while MCRS does not. That is consistent with the language, the option being made "available", in effect as a sweetener; and 5. Provides for a formal review of the pricing and discounts provided by MCRS prior to the end of each 12 month term, which pricing must be adhered to by MCRS for the following 12 months except in very limited circumstances.
10. Third, the plaintiff submitted that the construction advanced by it is also consistent with the surrounding circumstances known to the parties as at 10 August 2011 for the following reasons: 1. The Council's suggestion that the objective purpose of the option was to avoid the need for it to go through the tiresome and expensive process of a further tender if it wished to extend the 2011 Agreement is inconsistent with s 55 of the Local Government Act 1993 - a provision that the Council is required to be (and expressly recorded that it was) in accordance with. Section 55 prescribes requirements for tendering to local councils and does not require that the right to exercise an option in an agreement entered into following a tender be reserved to the Council. It is not permissible to attribute an objective purpose (and thus construction) to the 2011 Agreement which is to in effect avoid the legislation governing one of the parties: at [40]; 2. The 2011 Agreement requires MCRS to arrange its affairs so that it can perform the contract. The ability for a relatively small contractor, in contrast to a government body, to arrange its affairs with certainty is a factor suggesting the option was available to MCRS: at [41]; and 3. To the extent that the Council seeks to rely on the 2005 and 2008 tenders and the exercise of those options as relevant surrounding circumstances, limited weight should be placed on those circumstances given they relate to the exercise of options under preceding contracts, the proper construction of which is not in issue and might be different. The mere fact that the Council agreed to the exercise of the option by the Council or exercised the option itself with the consent of the Council on prior occasions says nothing about the construction question presently before the Court: at [42].
11. Fourth, the plaintiff submitted that the apparent commercial object of the 2011 Agreement is given effect to by MCRS' construction: at [43]. The plaintiff noted the following: 1. The commercial object of the 2011 Agreement was for the Council to secure a service provider who was willing and able to provide certain services at competitive pricing for a period of up to three years, and for MCRS to be assured of its role as the preferred supplier with security of tenure in accordance with the Agreement's express terms; and 2. The commercial purpose of the inclusion of the option was not, as the Council suggests, to provide a mechanism by which a contract may be extended if there are no issues, changes to regulations or circumstances that may give cause to end a contract. If that had been the commercial purpose then the Agreement would have been drafted differently and there would have been an ability to terminate on those events happening;

The Council's Outline of Submissions (Undated)

1. In the defendant's written outline of submissions (undated) the background to the proceedings was accepted, broadly, as stated by MRCS: at [4]. Relevantly, the following additional matters were noted: 1. The tender process undertaken by the Council made open tender requests to available contractors. Tenders were lodged in response, which were required to be capable of acceptance by the Council, at its election, if the tenders conformed to tender requirements. It was wrong to describe the calling for tenders as making an offer. Rather it was an invitation to treat; 2. The tender process is regulated by requirements of transparency in relation to local governments. The construction of the 2011 Agreement takes its context from both the commercial purpose of the Agreement and the governmental nature of the acquirer of the materials and services, in this case, the Council; and 3. The Council had previously called for tenders for substantially the same sort of materials and services and it had accepted the tender of MCRS on 16 August 2005 and 24 July 2008. The terms of those agreements it was contended were in substantially identical terms to the 2011 Agreement. On each occasion the option was exercised by Council, accepted by MCRS.
2. As to the construction of the contract, it was submitted that the particular terms of it, relied upon by MCRS in respect of the option cannot be divorced from the whole of the agreement: at [8].
3. The Council contended that the option was for its benefit. Accordingly, so the argument went, it allowed the Council to extend the period of the preferred contractor position of MCRS for a further 12 months. Alternatively, the Council contended that the option could not be exercised except by acceptance by the other party: at [9].
4. The relevant principles for the construction of contractual provisions were said to be well known and the issue in this case concerned the application of those principles to the particular matters the subject of the present dispute: at [10].
5. It was also submitted that the nature of the tender as an offer to treat, itself appears to be potentially the subject of a dispute. In this regard, it was submitted, the conduct of the parties in negotiating in the tender period and signing a formal instrument of agreement constituting the relevant contract is significant: at [11].
6. The Council noted that in the particular circumstances of this dispute, in this case, the particular context and objects of the 2011 Agreement, were identified differently by the parties: at [12]
7. As to the contention for MCRS that it had a unilateral option to require the Council to acquire materials and services from it on the terms contained in the agreement for a further 12 months, such was said to be "commercial nonsense or at least works a commercial inconvenience" at [13].
8. In the defendant's outline of submissions it was also contended: "14. First, there is no time within which the 'option' is to be exercised. Procurement and planning of the type of materials and services under consideration would require the Council to have made decisions as to the party likely to supply those services in advance, thus encouraging the Council to exercise any option in a timely manner and enabling the negotiations as to any monthly price increases contemplated by the Contract and any variation in material or services required to occur. The ability to either exercise the option itself or seek acceptance of an offer to extend the time without further tender is consistent with Council's objectives, but the ability to exercise the 'option' by MCRS is not consistent with those objectives. If a unilateral option is conferred on the terms contended, then it would have been exercised by MCRS at any time for no clear commercial benefit. 15. Secondly, any consideration for the option appears to only arise if the Council is offering to acquire further materials and services on the terms contained in the existing contract because it is the Council that is the party that makes the decision to purchase the further materials and services over the following 12 months, ie the acquisition is at the election of the Council not of MCRS. 16. Thirdly, the Agreement provides a right of termination to the Council on 30 days written notice (clause 7)11 following an unresolved dispute. There is no requirement that such dispute be resolved or determined under any other clause of the Agreement. As is apparent, there had been and continued to be an unresolved dispute at the very least relating to the 2012 Ocean Drive works. The ability to exercise an option unilaterally by MCRS in the face of such a dispute is unlikely. The right to terminate on the basis of an unresolved dispute, rather than for cause supports a view that the rights to acquire the services on the terms contained in the Agreement was intended to be at the election of Council and in so far as the option is concerned, as a result of a decision of the Council. 17. Fourthly, the construction contended for by MCRS ignores Councils rights in very broad terms to acquire the services and materials elsewhere. 18. Fifthly, the construction by MCRS places insufficient weight on the word 'available' The substantive rights that are available are those identifying the terms on which Council may acquire those goods and services it those goods and services which are made available pursuant to the option for a further 12 months. That it is the opportunity to supply which may be available for a further 12 months not an opportunity to compel Council to acquire for a further 12 months. 19. Sixthly, the provision of the Agreement appears among a clause dealing with the Councils rights in respect of the acquisition of the goods and services contemplated by the agreement, 20. Seventhly, Council has various duties at law with respect to tendering and procurement, and MCRS has agreed to be bound those same policies. Given that, and in particular, having regard to the statement of business ethics (signed by Mr Pinson) and the Code of Conduct, the Agreement cannot be interpreted as requiring Council to acquire services (without choice) as apparently contended by MCRS where its clear obligation is to : a. acquire services representing 'best value for money'; b. not act in a collusive manner; c. act in a fair manner; and d. allow all suppliers and businesses to 'compete for business on an open playing field'."
9. It was submitted that the absence of any mechanism for the option to be exercised by MCRS was inconsistent with the detailed approach taken by the Council to the other obligations contained in the 2011 Agreement: at [21].
10. It was submitted that the previous history of the operation of the exercise of the option as well as the conduct of MCRS in purporting to exercise rights when a dispute arose in relation to the 2012 Ocean Drive Works was also inconsistent with the interpretation for which MCRS contended: at [22].

Consideration

1. The 2011 Agreement, by its provisions, prescribed the terms and conditions whereby MCRS and the Council agreed that the plaintiff would "supply and deliver" to the Council and the Council would agree to the purchase from the plaintiff "goods and services".
2. Under the 2011 Agreement a two year contractual relationship arose between the parties with a possible further year period in the event of the option referred to in the Agreement being exercised. As with other ongoing commercial relationships that exist in certain industries, the Agreement envisaged that there would be individual orders lodged by the Council with MCRS for particular work or services to be performed (e.g. purchase orders under clause 13 of the 2011 Agreement) each made upon the basis and in accordance with the overarching Agreement between the parties.
3. The option clause is, of course, not to be construed in isolation from the other provisions of the Agreement. The Agreement for the two to three year period specified could be terminated by the Council in accordance with clause 7. However, during the period of the Agreement, MCRS was bound to maintain and not withdraw services as specified or in accordance with clause 7.
4. Clause 10 contained key provisions entitled "General Terms of Agreement" made up of subclauses (a) to (f). In subclauses (f), (g), (h) and (i) there are provisions that expressly favour the Council. Each of those provisions employs the phrase "Council reserves the right…"
5. Subclause (c) is of course central to the present proceedings. It provides: "(c) The period of this tender agreement of twenty four (24) months commencing on 1 August to 31 July 2013 with a further twelve (12) month option available." (Emphasis added).
6. Subclause (c) does not expressly provide that the option provided by the Agreement was intended for the benefit of the Council or conferred upon the Council any particular rights. Unlike subclauses (f), (g), (h) and (i), it does not employ the phrase "Council reserves the right" or any other form of words that confers a right to extend the agreement for 12 months upon the Council. Correspondingly, there is nothing in the terms of clause 10(c) that suggests that the option, by its terms, is not in fact an option, in particular, is not an option that could therefore be exercised by the plaintiff, MCRS.
7. The words in clause 10(c) "option available" immediately follow the specified contractual 12 month period for the Agreement. As noted above, the term "available" according to the Oxford English Dictionary includes the meaning: "able to be used or turned to account; at one's disposal, within one's reach".
8. As indicated in the discussion above, the terms of the Agreement do not qualify, directly or indirectly, the word "available". The use of the word "available" in conjunction with the word "option" (i.e. option available) conveys the sense that an option to extend the Agreement for a specified term, namely, 12 months, is able to be used or turned to account or is at one's disposal. There is no word or phrase that indicates that the option was one that was only available to the Council or indeed available to it at all. There is, as stated above, no word or contractual reference to the option not being available to the contractor, the plaintiff. In other words, though drafted by Council, there are no words indicating that the option was intended or was in fact one that was available for the benefit of the Council and not MCRS.
9. The tender documents constitute contemporaneous evidence of the intention of the Council in making provision for an option being "available". The Information for Tenderers document, [CB2: 445] employed the same concept and language in relation to an extension of the two year contractual period by its use of the phrase "…with a further 12 month option". The inclusion of the latter phrase is consistent with those words operating and intended as "a sweetener" to tenderers in the sense of creating active interest in the prospect of an added potential benefit or opportunity to extend the period of the Agreement.
10. In contractual and commercial terms, it makes little sense for the principal in a principal/contractor context to be including into invitations to tender and in the relevant contractual documentation, the conferral of an option upon itself. Amongst other things, as was submitted on behalf of the plaintiff, it would be most unlikely that a principal (in this case the Council) would, via an option, be empowered at its own election to extend an agreement and thereby unilaterally have the contractual power to bind the contractor (the plaintiff) to potentially onerous conditions at the end of the two year contract period for a further 12 months regardless of the wishes or position of the contractor at the time of extending the operation of the Agreement. Thus, for example, under clause 21 the contractor, in this case MCRS, would be bound to provide services to Council to accommodate emergencies that might arise. The ability of the contractor to negotiate price increases in accordance with clause 11 may create difficulties for a further term of 12 months.
11. In the event of any doubt or ambiguity in the option provisions and in accordance with accepted principles of construction, the Agreement should be read against the Council and not in its favour, it having drafted the Agreement.
12. Additionally, on an issue of construction of contractual terms, it is a well-accepted principle that a contract be construed as a whole: Wilkie v Gordian Runoff Limited (2005) 221 CLR 522; [2005] HCA 17 at [16]. In that case, which was concerned with a Directors & Officers/Company Reimbursement Policy, Gleeson CJ, McHugh, Gummow and Kirby JJ observed that: "…in construing the Policy, as with other instruments, preference is given to a construction supplying a congruent operation to the various components of the whole" at [16].
13. The principles referred to in the two preceding paragraphs, in my opinion, operate in favour of the construction for which MCRS contends is the correct one.
14. Adopting the above approach, as earlier indicated, it would be surprising that a provision as advertised in the tender and included in the 2011 Agreement of an "option available" to be construed as intended to favour or advance the interests of the Council. This is especially so where no words of limitation or qualification were included on what is an open-ended option provision. If it was intended by Council that the option was available to it as a unilateral power of Council to bind or impose further contractual obligations upon a contractor for a period beyond the term of the agreement, clear words would be required.
15. In this latter respect it is not to be overlooked that under the provisions of the Agreement as a whole, the Council is protected. It, inter alia, provides the Council with express termination rights. No such rights are expressly conferred upon MCRS. If the construction argument for the Council were correct, not only could the Council impose contractual obligations for a further 12 month period but it could do so without any right in the contractor to terminate in the extended period.
16. In relation to commercial considerations, it is also to be noted that the contractual provisions provide for a formal review of pricing and discounts to be provided by MCRS before the end of each 12 month term. Pricing, as reviewed, must be adhered to by MCRS for the following 12 months other than in very limited circumstances: clause 10(c).
17. I note the submissions for the plaintiff that neither the Local Government Act nor the Local Government (General) Regulation 2005 specify or require that the right to exercise an option in an agreement consequent upon a tender process should be reserved to a council. I accept the submission made for MCRS that there is no basis in the legislation for the proposition that there existed any statutory objective for an option as being a device to avoid the need to go to tender and avoid the cost of the same.
18. A further incidental point is that the question of avoidance of cost of a tender cuts both ways on the basis that there would be a cost to a contractor as well as to a council. It would be equally open to argument, it was contended, that the option could serve the purpose of protecting contractors from the additional cost of a further tender to renew the contract.
19. In seeking to establish the purpose or object of a contractual provision not expressed in terms that unambiguously favours one party (such as the Council) it is material, as a surrounding circumstance as known to the parties as at 10 August 2011, to consider whether the construction urged by the Council would impose a cost or disadvantage to the other party (the contractor). I have earlier averted to the fact that it is unlikely that the "option" was intended to provide the Council with the unilateral right to bind the contractor for a further 12 month period. As was argued on behalf of MCRS, with a commercial contract, it is reasonable to assume that a contractor, particularly a relatively small contractor, needs to arrange its affairs in advance so as to ensure that the available staff and equipment are available. This, it was agreed, would tend to favour a construction that establishes that the option was intended to be available to MCRS as the contractor rather than the council.
20. Having regard to the whole of the agreement and the surrounding circumstances, I do not consider it is permissible to proceed upon the basis that the option provision is one designed or was intended to benefit or protect the Council. Rather the Council in offering an option as part of the tender process and as a term of the contract is readily seen to have been offered by the Council as a commercial incentive for tenderers who offer a competitive price providing the successful tenderer with the prospect of a three year term.
21. In relation to the Council's argument that the option provision lacks a method for its exercise, that point operates equally whether the option is construed as available for the mutual benefit of either party as well as if the provision is intended for the benefit of the contractor alone. The contra proferentum construction would apply where the provisions and the contract as a whole and the surrounding circumstances support the proposition that the option was intended as a benefit available to be exercised by the successful tenderer: JP Morgan Australia Ltd v Consolidated Minerals Pty Ltd [2011] NSWCA 3 at [53]-[56]; and Darlington Futures Limited v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510; [1986] HCA 82.
22. Mr DeBuse of counsel argued on behalf of the defendant that it was open to the Court to rely upon extrinsic circumstances in construing the option provision and that these would include circumstances relating to the earlier contracts. In that regard reference was made to correspondence between the parties, being a letter dated 19 May 2006 written by the Council to Mr Pinson of MCRS (CB1: 231-232) and the reply from MCRS dated 9 June 2006 (CB1: 233) as well as a letter from counsel to Mr Pinson dated 16 June 2006 (CB3: 1495).
23. The correspondence was said to provide evidence of the Council's actions in exercising the option in the earlier agreements and that such may be taken as extrinsic circumstances as to what the parties intended when they entered into the agreement in 2011. It was submitted that the principle of construction that permits extrinsic circumstances to be admitted on the construction of ambiguous contractual provisions applies in this case.
24. The oral submissions on behalf of the Council on this line of argument are recorded at T 122-125. The oral reply submissions on the point made by Mr Giles SC are recorded at T 175-177.
25. In the letter of 16 June 2006, the Council's procurement manager stated that the letter was formal confirmation that the Council "…would like to extend our existing agreement based on the abovementioned tender, for the 24 month option as stated in my original letter dated 12 July 2005. …"
26. In the letter of 26 May 2010 the Council's procurement officer, in his letter to Mr Owen of MCRS in relation to the 2008 agreement stated: "After internal consultation, I am pleased to be able to inform you that council would like to exercise the twelve (12) month option. This will result in extending our current contract to 31 July 2011… In light of the above, please provide a written response stating your acceptance or otherwise of this extension of our current contract."
27. In relation to the previous exercise of the options in 2005 and 2008, I accept as submitted for MCRS that limited weight should be placed upon the circumstances in which the options were exercised in relation to the issue of the construction of the option provision given that it pertained to options under preceding contracts where there was no issue of construction and the terms may be different. Furthermore, the circumstances in 2005 and 2008 are consistent with the agreements between the Council and MCRS being entered into with the consent of MCRS on those occasions which would not advance the construction question arising in the present proceedings. It is to be borne in mind that the relationship between MCRS and the Council had under its earlier agreements been a harmonious one with evidence that the Council had regarded MCRS as a well performing entity. The fact that the parties may have, as it were, mutually acted in relation to the exercise the options in the earlier agreements, that is with MCRS agreeing to Council's earlier proposals to extend previous agreements, is not determinative on the proper construction of the provisions in question.
28. Finally, there is, in my opinion, a need for caution in seeking to use as extrinsic evidence the correspondence between the Council and MCRS to which reference was made in construing the terms of another and later contract, the 2011 Agreement.

Conclusion on the Option Question

1. The option provision in the 2011 Agreement on its proper construction in my opinion conferred an option upon MCRS to extend the Agreement for a further 12 month period. I so conclude on the basis that the words "with a further 12 month option available" are to be determined objectively and within the context of the Agreement.
2. The language employed in the option provision is, of course, fundamental in determining its meaning, object and purpose. Each reference to the "option" in the Agreement is expressed as being an option available. The concept of an "option available" also formed part of the invitation to tender. It makes little sense that the Council was making available to itself or granting to itself an option.
3. An option of its nature was consistent with an entitlement granted by Council and available to the successful tenderer.
4. An option provision, by the words in which it is expressed, carries its ordinary dictionary meaning of "available", namely, "able to be used or obtained; at someone's disposal". The words objectively construed intended that MCRS was able to exercise or take advantage of the option offered to it. Having been made available to MCRS, the company was entitled to exercise it.
5. A contrary construction, that the option was available to the Council, would be unlikely as it would give the Council the option of unilaterally imposing upon MCRS the risk and obligation to perform upon conditions determined by Council.
6. The Agreement, taken as a whole, favours the construction for which MCRS contended. It would have been open to the Council to simply have said expressly that the option could only be exercised by Council. However, it did not. The Council could have, but did not use the same formulation, as discussed above, "Council reserves the right…" (employed in other sub-clauses in the Agreement) had it wished to make clear that the Council had the right to renew the Agreement for a further 12 month period.

Part VI - Whether the Term Should Be Implied into the 2011 Agreement

Implying the term

1. At [25] of the Amended Defence dated 6 October 2015 it is pleaded: "If which is denied, the plaintiff was entitled to exercise any Option for further work, it was an implied term that the plaintiff would not at the time of exercise of the Option be in breach of the terms of the Contract to perform work. The term is implied to give efficacy to the Contract."
2. In essence, the Council alleges that a term ought to be implied that MCRS could not exercise the option if it was in breach of the terms of the 2011 Agreement. There is no express term of that kind in the Agreement and accordingly it must be implied.
3. As discussed below, the defendant did not provide detailed submissions on this issue and did not address the test stated by the Privy Council in BP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 282-3, and adopted by the High Court in Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 at 347; [1982] HCA 24 (see also Commonwealth Bank of Australia v Barker (2014) 253 CLR 169; [2014] HCA 32 at [21], [62]).

Plaintiff's Closing Submissions

1. The plaintiff submitted that in light of the nature of the contract, being a building contract in which minor breaches are to be expected, and as presumably the term would apply to any breach regardless of significance, the term could not be said to give efficacy to the Agreement. Rather, it was submitted, it is a term which diminishes the efficacy of the contract: at [58].
2. The plaintiff further submitted that "efficacy" is not a sufficient basis for the implication of the term into a formal contract as it is but one of the five criteria which must be satisfied: BP Refinery, supra, and Commonwealth Bank of Australia v Barker, supra.
3. The plaintiff submitted that there is no basis for the implication of the breach term for the following reasons: 1. It would not be reasonable or equitable to do so. Express terms of this kind are sometimes found in lease agreements and have been strictly construed as the consequences can be harsh particularly where the breach is trivial. The fact that legislation has been enacted to ameliorate the effect of such express terms, albeit in a different field, demonstrates that implication of the terms is not reasonable or equitable; 2. The alleged term is not necessary to give business efficacy to the contract as the 2011 Agreement is effective without such a term; 3. The term is not so obvious that it goes without saying; 4. Whilst the Council has sought to articulate the term in a simple way, the term is ambiguous and, unless any breach no matter how trivial or insubstantial is sufficient to destroy the option, it is not capable of clear expression; and 5. The term contradicts the express terms of the contract which provide for dispute resolution processes and termination of the Agreement by the Council in the event of breach; and enable the Council to procure services from other service providers in certain circumstances.

Consideration of whether the term should be implied

1. The reason for implying a term into the 2011 Agreement raises a question as to the need to give business efficacy to the Agreement. The onus of proving that the term should be implied into the Agreement rests on the Council as it is the party so alleging: Heimann v The Commonwealth (1938) 38 SR (NSW) 691 at 695.
2. The principles governing implied contractual terms are well established. The conditions necessary to imply a term (which may overlap) were summarised by the majority in BP Refinery, supra, at 283 and adopted by the High Court in Codelfa, supra, and Commonwealth Bank of Australia v Barker, supra are: "(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that 'it goes without saying'; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract."
3. The 2011 Agreement is expressed in a formal contract which is complete on its face. The relevant contractual provisions were not in an informal contract, such as that under consideraiton in Byrne v Australian Airlines Ltd (1995) 185 CLR 410 at 422; [1995] HCA 24, to which a less rigid approach may be appropriate.
4. As noted above, there was no reference in the defendant's submissions to any of these conditions and no submission made that any of these had been established.
5. In my view, I accept as the plaintiff has submitted, that the term for which the Council contends should not be implied into the 2011 Agreement, because it does not operate reasonably or equitably between the parties; it is not necessary to give business efficacy to the Agreement as the term is said to apply to any breach and thus diminishes the efficacy of the contract; it is not so obvious that it goes without saying; it is not capable of clear expression and reasonably certain in its operation; and it contradicts the express terms of the Agreement which provide for, inter alia, a dispute resolution process and termination rights by the Council in the event of breach.
6. However, if I am wrong in this regard and the term for which the Council contends should be implied into the contract, it would then be necessary to determine whether or not MCRS in fact breached the 2011 Agreement.

Part VII - If the Term is Implied, Did the Plaintiff Breach the 2011 Agreement?

1. There is no dispute between the parties that the required specification under the 2011 Agreement was the C245 Specification. The breach alleged by the Council is that in situ voids found in the 2012 Ocean Drive Works did not comply with C245, s 32(f) as the voids were not between 4% and 7%.
2. In alleging breach the Council principally relied upon the evidence of Mr Randall. In denial of any breach by it, MCRS relied upon the expert report of Mr McElroy dated 13 June 2015.

Evidence of Gary Randall

1. As earlier noted, the Council relied up the affidavit of Gary Randall sworn 7 August 2015. Mr Randall had the day to day responsibility on behalf of the Council for the 2012 Ocean Drive Works. Mr Randall deposed the following regarding the alleged problems with the Works: "27. Shortly after the laying of the asphalt by MCRS, there was a period of rain. It was initially observed by Council employees and reported to me that the asphalt appeared porous and appeared to be allowing water to soak into it rather than acting as a seal to the underlying pavement materials. I went and observed the area of Ocean Drive where MCRS had laid asphalt in July 2012 and made the same observations and particularly that the then recent asphalt looked very different to the adjoining asphalt (northbound lane) previously supplied and placed by MCRS also. It was particularly apparent that the eastern side of Ocean Drive in this area would retain the appearance of being wet from several hours following the northbound lane being fully dry. 28. As wet weather continued in the following weeks, I observed that particularly over the area where MCRS had laid asphalt over the existing Ocean Drive pavement, that small fines, very small particles of material from the pavement gravels, were being transported through capillary action to the surface of the asphalt. This was evident as staining on the surface of the asphalt. Based on my experience and observations with road works over the years, this indicated to me that the asphalt was allowing some moisture to pass through the full thickness of the 100mm asphalt layer in this area. The asphalt appeared permeable. 29. Photo 4 at page 166 of [exhibit] GR-1 is looking north from the middle of works following final asphalt placement and some rain. The right lane and the left lane were both laid by MCRS at two different times; the left on about 17 August 2011 and right on about 19 July 2012. My inspection of the southbound pavement (the right lane) identified that water appeared to be entering/passing through the asphalt rather than draining off similarly to the northbound lane, particularly in the area adjacent to the centreline of the road. 30. In my opinion, the pavement staining and apparent permeability of the asphalt had no relevant relationship to the subgrade conditions or underlying pavement performance but was probably related to the asphalt supplied, placed and compacted by MCRS. I formed this opinion in particular because the staining was occurring without any associated indication of structural pavement failure (e.g. rutting or shoving), and the porosity and fines was found particularly over the area west of the junction between the existing road and the new shoulder construction, that being a deeper area of asphalt. And further that the staining was only apparent on the eastern side of the centreline notwithstanding the existing Ocean Drive pavement was continuously for approximately 1 meter beneath the asphalt on both sides of the asphalt centreline joint." 31. …By looking at the photographs, it is evident that on one side of the white line, which is where the joint of the new asphalt and old asphalt occurs, that on one side the asphalt it appears impervious to water and on the other side it is permeable and appears to retain water also. The asphalt over the whole of the road was laid by MCRS, however it is the evident differences in the way the asphalt laid on the third occasion is behaving that lead Council to consider that the asphalt was unsuitable and required that it be rectified.
2. Following the 2012 Ocean Drive Works, the Council commissioned Boral, to undertake bulk density and air void testing of the asphalt in November 2012: at [33].
3. Mr Randall deposes that: 34. I then reviewed the compaction data as it related to air voids against the specification pursuant to which the asphalt had been laid. It appeared to me that the finished pavement constructed by MCRS did not conform with the provisions of the specification contained in C245.32(f), and the finished pavement property section of the specification which adopts the same properties as set out in Table C245.7 of that specification. 35. The specification provides that for asphalt having voids outside the limits specified in Table C245.7, the requirements includes Clause C245.39(a) should apply. The test results in the November 2012 Boral report indicated that the voids were greater than the 7% allowed for in the Table. This information corroborated with Council staff's site observations regarding the performance of the asphalt which had been conveyed to me."
4. Mr Randall was cross-examined on the contents of his affidavit and his relevant experience.
5. In respect to his experience, Mr Randall's academic qualifications, in accordance with his curriculum vitae, include a degree of Bachelor of Engineering (Mechanical) Honours Class 1.
6. In cross-examination he was asked a number of questions as to his work experience. He had been employed by the Australian Army specialising in aeronautical engineering up until 2015 (T 78-109).
7. He conceded that he had not had experience with construction works in relation to roads, involving the laying of asphalt: (T 79:25-35). Nor did he have experience with the construction of a base for a road covered by asphalt or experience with drainage in relation to asphalt-covered roads: (T 79:30-40).
8. In the period November 2005 to August 2008 he was employed by the Council as Manager, Engineering Trades Section. This was a management role in respect of mechanical, electrical and telemetry support: (T 79). He was also involved in financial management in giving mechanical, electrical and telemetry advice.
9. He agreed that he had no responsibility for the construction of a road in his work with Council: (T 80:15-25).
10. Mr Randall confirmed that he moved to a management role from July 2009 as a manager, infrastructure operations: (T 81:25- 35).
11. So far as his involvement in design work, as to rehabilitation or repairs to roads, he stated that his formal training following 2009 involved professional development courses and what he described as mechanistic pavement design: (T 82:40-50). He explained that involved a computer-based simulation that established strength, thickness of road pavement. He had no other formal training in design of roads: (T 83:35-40). He did not recall involvement in the design of roads after he took up his present position other than leadership and management services: (T 83:45-84:10). His position from 2003 also involved providing a leadership and management function: (T 84: 40-50).
12. As to his involvement in relation to road testing as required by the Specification he said that he had not been involved in such testing: (T 85:45- 50). Nor had he been involved in the application or specification found in National Specification 1144: (T 86:1- 5). Up to or before July 2005 he had not been involved in the application of asphalt compaction testing: (T 86:10-15) and see also (T 86:40-50).

Expert Evidence of Mr McElroy

1. Both the Opening and Closing Written Submissions for the plaintiff challenge the admissibility of Mr Randall's opinions regarding the operation of the C245 Specification and MCRS' compliance with the Specification.
2. In support of its denial of any breach by it in respect of the 2012 Ocean Drive Works, MCRS relied upon Mr McElroy's Expert Report dated 13 June 2015.
3. Mr McElroy had 34 years' experience as a professional civil engineer in New South Wales and Victoria: Report at 1.0.1. He had over many years been involved in the examination and application of road construction and maintenance specifications specific to the present case: Report at 1.0.5.
4. The Report addressed, inter alia, contract specifications under the 2011 Agreement and issues concerning compaction testing and other matters in respect of in situ voids.
5. Mr McElroy noted that the C245 Specification was in fact the contract specification used by the Council for asphalt supply and laying for each of the tender agreements, entered into with the plaintiff in 2005, 2008 and 2011: Report at 3.1.1.
6. He provided an explanation of the AUS-SPEC Specifications, in particular of the C245 Specification, and the type of mixes and methods of asphalt compaction testing used in road construction.
7. The report observes that voids occur in asphalt pavement and limits are provided for voids within the Specification. Voids in relation to "Production Mix % air voids" are determined from the testing of the asphalt in the production plant and just prior to being laid down: Report at 3.4.4.1.
8. Mr McElroy also dealt with what are referred to as "In-situ Voids": Report at 3.4.4.2.
9. In relation to the C245 Specification, Mr McElroy observed, inter alia, that: 1. It was contained within the tender documents for road surfacing tenders undertaken by the plaintiff between 2005 and 2013: Report at 4.01; 2. It was issued in February 1997. It was last reviewed on 4 November 1998. He stated that this indicated that the Council had not reviewed the C245 Specification in accordance with regular Bulletin Board Releases issued by the Managing Consultancy from time to time: Report at 4.02; 3. The only occurrence of the limits of voids in asphalt mix and reference to testing is in relation to the "Nominated Mix" and the "Production Mix". There is and was no requirement for in situ testing of voids within the C245 Specification: Report at 4.04; and 4. He observed that the C245 Specification, as used by the Council in the 2011 Agreement, was out of date at the time the tender was awarded to the plaintiff: Report at 4.05 5. Clause C245.15.1 specified requirements for the Nominated Mix and limits for design within Table C245.6. Those limits, he stated, are to be complied with unless approval has been sought and provided by the Superintendent. He added that there was no limit stated for in situ voids under that clause: Report 4.09.
10. Mr McElroy stated "C245 calls for Relative Compaction and Production Voids only and does not specify any limits or requirements for the testing and compliance of in-situ voids" (My emphasis). He also observed that: "There is no reference to in-situ voids either with respect to testing or in the method of calculation of in-situ voids from pavement testing within C245". (My emphasis): Report at 4.11 and 4.2.1.
11. Mr McElroy also observed that "C245 does not discuss in situ voids as a performance requirement for asphalt": Report at 4.4.3.
12. Mr McElroy set out his conclusions as follows: "5.01 C245 contains no reference to the existence, testing or compliance with % in-situ voids in an asphalt layer; 5.02 C245 does not provide a description of the statistical method from which core testing and/or nuclear denseometer testing can be used to determine in situ-voids and relative compaction; 5.03 C245 does not provide for Gyratory Compaction testing and thus there is no option to attempt to compare relate results from Gyratory Compaction % voids results and Hubbard Field test compaction and % voids results; 5.04 There is no direct correlation between Gyratory Compaction % voids results and Hubbard Field test compaction and % voids results; 5.05 The Hubbard Field testing nominated within C245 was generally not used globally after the 1940s and the Australian Standard describing its use was discontinued during 2005; 5.06 The use of an outdated specification for asphalt supply, delivery and laying down by PMHC indicates a low level of expertise in the field of asphalt construction and a reluctance or inability to keep up to standard with recent developments in an important area of Local government construction and maintenance operations; 5.07 The requirements under C245 within the tender documents detailed the limits for Relative Compaction and Production Mix voids only. These limits were complied with by Diveva in completing the Ocean Drive works under the tender. There was no compliance requirement for in-situ voids in either contract; 5.08 The design criterion for asphalt within C245 is simplistic in that is only provides for Classified Road and Unclassified Roads with no reference to traffic loadings. This can result in poorly designed asphalt mixes for specific roadways. If this occurs, it is the sole responsibility of the Principal as the Contractor can only rely on the information provided to nominate a mix design which is subsequently approved by the Superintendent; 5.09 Specification 1144 provides for a suite of road types based on traffic loading and lane type which results in a more accurate design for asphalt pavements; 5.10 Specification 1144 provides for an assessment of in-situ voids based on the application of statistical analysis of laboratory design mix relative compactions and field compaction tests and sets a target value of 4% with a characteristic value of 9% in situ voids; 5.11 The consideration of characteristic % in-situ voids as a primary factor for road pavement failure and non-compliance of contract specifications for laid asphalt is simplistic in the extreme. Many other factors must be considered when assessing the performance of an asphalt pavement with respect to contract specifications. This is highlighted by the difficulty in relating laboratory testing of mix designs to the performance of asphalt pavements immediately after laying down and over the lifetime of the pavement. This has been identified in numerous publications since the inception of asphalt as a pavement material in the 1890s."
13. The plaintiff read an affidavit of Mr McElroy sworn 28 October 2015 which annexed a further Expert Report of Mr McElroy dated 28 October 2015. The Report was prepared and provided in reply to the affidavit of Mr Randall sworn 7 August 2015.
14. Mr McElroy gave evidence on 22 March 2016 (T:66-72).
15. Mr McElroy, an expert with extensive experience, including in particular with the Specification was an impressive witness. I have no hesitation in accepting his evidence. His evidence established his significant knowledge and experience with the C245 Specification and its practical application.

Consideration of alleged breach

1. The sole breach alleged by the Council was that in situ voids found in the 2012 Ocean Drive Works did not comply with the C245 Specification as the voids were not between 4% and 7%. However, the fundamental difficulty which the Council faced was its contention that the C245 Specification required voids to be measured in situ. That contention, on the basis of the terms of the 2011 Agreement and Mr McElroy's evidence (which I entirely accept), is plainly wrong.
2. Importantly, it is noted that it was not pleaded or alleged that the "Production Mix" failed to meet the criteria in the table in C245.7. MCRS's case was that the Council misapplied the C245 Specification. The C245 Specification says nothing about voids in the asphalt once laid, provided the production mix met specification.
3. As earlier observed on the basis of Mr McElroy's analysis and opinion, the plaintiff's case that there was no breach in point of fact as had been assessed by the Council is well-established.
4. As noted above, the Council relied upon the evidence of Mr Randall. Mr Randall's position in Council, as earlier discussed, was in a management role. He was extensively cross-examined as to his experience and expertise in the laying of asphalt and the construction of road base. The evidence effectively established that he had no experience with the laying of asphalt or the construction of road base, prior to being covered with asphalt, or as to drainage of an asphalt covered road. His roles since he joined Council in 2005 were associated with leadership or management roles. He had had no responsibility for construction of a road, nor had he performed any engineering services in relation to the construction of a road. He had limited formal training in relation to design and construction of roads. Prior to July 2012 he had not been involved in issues of testing as required by the C245 Specification: T 85 [43]-[49]. Further, he held no personal experience or expertise in dealing with C245.
5. On the evidence, I am satisfied that Mr Randall did not have the expertise to provide support for the proposition that MCRS had been in breach of the contract specification. It was clear from the evidence in cross-examination that he had no relevant experience or qualifications for either expressing an opinion about the C245 Specification, its application in this case or the proper interpretation of any test results obtained in relation to the 2012 Ocean Drive Works.
6. MCRS also relied upon an admission by Mr Randall that a Chandler Morrison geotechnical report dated 24 April 2012 (made not long before the 2012 Ocean Drive Works were done) disclosed a wet strength of 88 kilonewtons and that this could be related to the fact of water coming up through the roadway (T 92 at [43]-[45]). He admitted that he did not consider the report at the time of forming his view that MCRS was in breach of the 2011 Agreement: (T92: 47-49; 93: 17-20).
7. In the written closing submissions for the plaintiff, it was submitted at [80] that the evidence given by Mr Randall demonstrated that his conclusions were not only inadmissible, but they were flawed. I accept that submission.
8. I accept, as I have indicated above, the contrary evidence given by Mr McElroy. He has had frequent occasion to understand the application and operation of the C245 Specification. His expertise was not challenged in any way by the plaintiff. His opinion as to the plaintiff's compliance with the C245 Specification and the possible causes of and explanations as to the road failure was effectively unchallenged. As previously stated, I have no hesitation in accepting his evidence as accurate and correct.
9. Finally, Mr McElroy's evidence confirmed that there was no contract specification requiring MCRS to undertake testing for in situ voids. The Council was in error in taking a contrary view. On the evidence, the Council erred in its contention that MCRS was in breach of the tender agreement in relation to in situ voids in the asphalt laid in the 2012 Lake Cathie Works.
10. Accordingly, I am satisfied that there is no basis for a finding of a breach of an express or implied term of the 2011 Agreement by the plaintiff. I am in particular satisfied that MCRS complied with its contractual obligations with respect to the 2012 Ocean Drive Works. The Council's assertions of breach were in my opinion without foundation.

Part VIII: Damages

1. Having determined that MCRS was entitled to exercise the option under the 2011 Agreement, it follows that the Council's failure to accept the exercise of that option was in breach of the Agreement.
2. MCRS' claim for damages is twofold: (a) it is a claim for the lost profits which MCRS would have earned in the period 1 August 2013 to 31 July 2014 had the Council not repudiated the 2011 Agreement (the Option Period); and (b) it is a claim for the lost opportunity to obtain subsequent renewals of the 2011 Agreement under further tenders (the Renewal Periods).
3. Put another way, as MCRS accepted the Council's repudiation, it is entitled to two categories of damages being expectation damages and damages for the loss of opportunity or chance given.

Joint Expert Report

1. As earlier noted, the parties relied upon the Joint Report of the Experts dated 22 March 2016. Prior to the Joint Report, and as noted above, the Experts had prepared the following reports: 1. Report of Mr Mullins dated 4 June 2015 (DM1); 2. Report of Mr Ross dated 18 September 2015 (AR1); and 3. Report of Mr Mullins dated 21 October 2015 (DM2).
2. Except where identified in the Joint Report, Mr Mullins still held the opinions set out in DM1 and DM2 (except to the extent that the opinions in DM1 were changed for the purposes of DM2); and Mr Ross still held the opinions set out in AR1.
3. The Joint Report was structured into three parts: matters agreed; matters not agreed; and expert witness declarations.

Matters Agreed

1. The Experts agreed that the following assumptions were required to be established in MCRS' case: 1. The Council was not entitled to terminate the Contract. 2. MCRS was entitled to unilaterally exercise the Option. 3. The Council was not entitled to issue the 2013 Tender or enter into the 2013 Contract. 4. The Council would have decided to grant additional contracts to MCRS after the 2011 Contract. 5. MCRS would have been successful in winning at least one - and as many as four - additional tenders.
2. A further assumption agreed upon by the Experts concerned the approach to deriving estimate of gross margin in the option and renewal periods. The Joint Report included the following statement at 12: "It is not appropriate to base an assessment of gross margin going forward and the result achieved either in a single year or by weighting the result towards a particular year unless it is reasonable to conclude on the available information that the result achieved in that year is reflective of the margin that would likely have been achieved going forward."
3. The Experts agreed to the following discount rates: 1. A rate of 33.58% is within the range of appropriate discount rates to apply to any calculation of MCRS' alleged loss in the Renewal Periods; and 2. A rate of 26.87% is within range of appropriate discount rates to apply when calculating MCRS' alleged loss in the Option Periods (given that there is data available in relation to the amounts that the Council paid to its road contractor in the Option Period).
4. The Experts noted that they had constructed an agreed model (the Agreed Model) to derive an estimate of the plaintiff's alleged loss, if any. Assuming a finding in MCRS' favour on liability was made, the Experts noted that they would be able to agree on the amount of MCRS' loss using the Agreed Model. Arriving at an agreed calculation would require that the Court make findings on the following matters: 1. The Option Period 1. The amount of revenue that MCRS would receive from the Council; 2. The appropriate gross margin percentage that MCRS would have earned on the revenue in (a) above; and 3. The appropriate allowance (in percentage terms) for variable costs. 1. The Renewal Periods 1. The likelihood (in percentage terms) that MCRS would have been successful in tendering for further contracts with the Council in the Renewal Period, with separate assessments of that likelihood being required in relation to each of (up to) four renewals; 2. In relation to each such contract period, a finding in relation to the Revenue Question; 3. In relation to each such contract period, a finding in relation to the Gross Margin Question; and 4. In relation to each such contract period, a finding in relation to the Variable Costs Question.

Matters Not Agreed

1. The Experts did not agree on nine broad issues: 1. Whether MCRS has suffered any loss and, if so, what that loss is; 2. The appropriate methodology for calculating loss and damage; 3. Revenue in the Option Period; 4. Revenue in the Renewal Periods; 5. Gross margin in the Option and Renewal Periods; 6. Variable costs in the Option Period and Renewal Periods; 7. Financial position of MCRS; 8. Subsequent sale of part of MCRS' business; and 9. Reasonableness of conclusion that additional Council work would have been loss making.

Plaintiff's Submissions

1. The plaintiff's written submissions filed on 1 April 2016 addressed a number of issues in relation to the calculation of damages.
2. It was noted that what is to be determined in an estimate of MCRS' loss, on the balance of probabilities. It was contended by reason of the Council's repudiatory conduct, the Court is necessarily required to determine damages on a hypothetical or counter-factual basis (that being the basis adopted by Mr Mullins).
3. It was acknowledged on behalf of the plaintiff that MCRS cannot adduce precise evidence of what has been lost and accordingly some degree of estimation, if not guess work, is necessary in assessing the damages to be allowed: Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 196 ALR 257; [2003] HCA 10 at [36] and [37].
4. It was accordingly argued that MCRS ought not to be penalised for such lack of precision, as certain aspects of Mr Ross' evidence suggested.
5. Regarding the Agreed Model, the submissions for MCRS noted that in relation to the Option Period, findings on three matters are required: (a) the amount of revenue that MCRS would have received from the Council (the Revenue Question); (b) the appropriate gross margin percentage that MCRS would have earned on that revenue (the Gross Margin Question); and (c) the appropriate allowance (in percentage terms) for variable costs (the Variable Costs Question). It was noted that the Revenue Question was not an issue advanced by the expert evidence and rather, the evidence is directed to the Gross Margin Question and the Variable Cost Question.
6. The submissions further noted that in relation to the Renewal Periods, findings in the following four matters are required, as extracted at [155(2) above. It was noted that the likelihood of renewals was not an issue advanced by the expert evidence.
7. The plaintiff submitted that there is no real difference between the Experts on methodology. The difference identified on page 6 of the Joint Report regarding the appropriate methodology for calculating loss and damages, it was submitted, (a) does not inform the real issues between the Experts; and (b) is more apparent than real. It is not a real difference because the differences depend on Mr Ross' suggestion that MCRS was unlikely to perform a further contract because of its financial position. The plaintiff submitted that Mr Ross is wrong in that suggestion but if he were right that in itself would be a reason the claim failed not a problem with the methodology.

(a) The Revenue Question

1. It was noted that there is no debate between the Experts that, in the Option Period, the successful tenderers for the laying and supplying of asphalt (Tropic and SRS) received some $2,563,520 in revenue from the Council.
2. It was further noted that although Mr Ross was instructed that some of the work undertaken by SRS and Tropic was outside the scope of the 2013 tender, he admitted that he did not have access to information to substantiate this instruction or to determine what quantity of work was outside the relevant tender agreement. On behalf of MCRS it was noted that it was uniquely in the Council's power to prove that fact and it chose not to do so. Instead Mr Ross proceeded on the basis that 80-87% of MCRS' work during the 2011 Tender period was within the 2011 Agreement. He criticised Mr Mullins for not in effect discounting $2,563,520 in revenue to take that into account.
3. It was argued that this was a legal not an accounting question and it was for the Court on the balance of probabilities to determine the likely revenue for the Option Period including any appropriate discount for work which was not carried out pursuant to the Tender Agreement and what had not been obtained by the incumbent.
4. MCRS contended that no discount should be applied on the following bases: 1. It is not controversial that during the 2011 Tender period MCRS performed work for the Council which went beyond the work contemplated by the 2011 Tender; 2. It was accepted in cross-examination by the Council's witnesses that it was convenient to have the incumbent tenderers perform work beyond the Tender scope of works; and 3. It was logical that MCRS (if it had been the incumbent tenderer) would perform such work, it being convenient given that it was equipped to provide the additional services and there would be likely economies of scale.
5. I consider that it was reasonable and appropriate to estimate the revenue that MCRS would have received in the Option Period as including revenue beyond the Tender works. MCRS had performed such work in the past as had its two successors, Tropic and SRS. Accordingly no discounting is necessary.

(b) The Gross Margin Question

1. Mr Mullins adopted a gross margin of 16.09% based on the gross margin that was achieved by MCRS in the period 1 August 2011 to 30 June 2012. The basis for doing so was that this was the average margin earned by MCRS over that portion of the 2011 Tender period that was unaffected by the dispute with the Council. It was submitted that Mr Mullins explained his reasoning in a cogent and non-argumentative way.
2. The following matters were advanced in support of Mr Mullins' approach: 1. The revenue earned in that period was broadly comparable to the revenue earned by Tropic and SRS in the Option Period. Accordingly he was comparing like with like. 2. His preference would be to average the gross margin over a longer period but did not do so in the Joint Report as he preferred to look at the relevant Tender Period (in order to compare like with like) and the August 2011 to June 2012 period was the only year available in which the gross margin was not affected by the dispute. 3. Mr Ross' suggestion that Mr Mullins should have at least taken the first six months of the period August 2012 and June 2013 overlooks the fact that the dispute between the parties arose in late 2012 and certainly by December 2012. This affected how work was awarded and the timing of the work. 4. Mr Mullins' margin was conservative. By selecting the period which he did, he has adopted the lowest gross margin figure for each of the relevant years (excluding 2012 and 2013, the year affected by the dispute).
3. It was emphasised that Mr Ross did not proffer an alternative gross margin percentage. He responded to Mr Mullins' assessment with a critique rather than undertaking an independent explanation of the approach which he considered was appropriate and why. It was said that this was not Mr Ross' fault but rather his approach reflected the instructions given to him which were restricted to a critique of Mr Mullins' views.
4. It was noted that Mr Ross' criticism of Mr Mullins' gross margin percentage was that it did not take into account what he described as "a clear downward trend in gross margin percentages". The short answer to that proposition, it was submitted, was the fact that it is not known what would have happened to MCRS' business had the Council not engaged in repudiatory conduct. The best evidence of future performance, it was contended, is past performance under the same contract in a period not affected by the wrongful conduct.
5. These formed the bases for Mr Mullins' reasoning and his approach. It was submitted that the evidence of MCRS' current financial position does not tell the "dire financial story" which the Council suggested. MCRS is still trading and accordingly this demonstrates Mr Ross' assumptions are wrong. It would be expected that MCRS would implement as necessary strategies in order to maintain profit or return MCRS to profitable trading.
6. As discussed below I accept Mr Mullins' approach to assessment of loss. It was based on the relevant period of past performance. It calculated the gross margin upon an empirical and reasoned basis. As such, in my opinion, it provides a reliable guide to the assessment of loss claimed.
7. As I have noted above, Mr Mullins proceeded upon the basis that one would apply the gross margin on the result achieved in a single year if there was evidence to suggest that the result achieved in that year was reflective of the margin that could have been achieved going forward. I consider it not unreasonable in the circumstances of the present case as explained by Mr Mullins for him to have proceeded on the basis that he adopted for the reasons given by him. Mr Ross' approach of adopting a trend analysis does not, in my opinion, preclude or invalidate the basis adopted by Mr Mullins. Mr Mullins' approach, as I have stated, was based upon actual recent performance of MCRS as to revenue and gross margin.
8. Mr Mullins accepted that there had been evidence of decline in margin as Mr Ross said. However, he considered that MCRS would not have continued indefinitely on an unprofitable basis. It is clear that MCRS had been a company that had successfully conducted its specialised business over a number of years, in particular in the years under contracts with the Council, Mr Mullins stated that it could be assumed that MCRS would adopt strategies to reduce costs.
9. Mr Ross in his oral evidence addressed the approach which he considered was appropriate in estimating future profits, revenues and costs (T 136-139). He cited as an example an entity that had a very steady margin over an extended period of time which could provide the basis for a conclusion that the margin would continue in the future: T 136 [20]-[25].
10. However, in this case, he relied upon data as shown in the chart at p 8 of the Joint Expert Report as establishing a downward trend in the margins achieved by the plaintiff. He stated that one has to come to an understanding of whether that downward trend would have continued or flattened out, or would have in some way rebounded: T 136 [35]-[40].
11. In his opinion he said that he had no information provided to him that would allow him to conclude that the downward trend would suddenly be reversed in 2014. This, he stated, was essentially where he reached his conclusion on the margin absent of any further information.
12. In response, Mr Mullins stated that the table on p 8 of the Joint Report relied upon by Mr Ross included two tender periods (the 2008 tender period and the first two years of the 2011 tender period). In those two periods there were potentially different mixes of work and different terms under the tender agreements referable to the two periods. He stated: "…I don't think it's appropriate to draw a conclusion. There's a decline in margin over time when there are two distinct contract periods that we're reviewing. Taking that going forward…the only information that we have on the margin that [the plaintiff] was earning from the Council and the work that it was awarded was the margin that was actually earned in 2012, excepting for this purpose that the 2013 [year] was affected by the dispute with the Council"": T 137 [24]-[35].
13. Mr Mullins added that he agreed with Mr Ross that "in a perfect world" you would look at margins over a period of time before concluding on an appropriate margin. However in the present case, he stated that the experts were left with a single period. He considered it was more appropriate to assume that the single period, unaffected by the dispute with the Council, is more appropriate than a period of time that either includes the affected period. Mr Mullins added: "…I think the evidence of the margin that was achieved is the best evidence of the margin that would be achieved going forward…": T 137 [40]-[45].
14. Whilst I accept, as both Experts stated, that it would be preferable to determine margin by reference to results achieved over a period of years, the intervening dispute with the Council, on the evidence, affected the plaintiff's earnings in the later part of the 2011 tender period.
15. In determining the appropriate gross margin percentage, it has been necessary to closely examine the particular matters bearing upon that issue the subject of consideration by Mr Mullins on the one hand and Mr Ross on the other.
16. As to the gross margin, which is dealt with in paragraph 16(e) of the Joint Expert Report, the factors applied and adopted by Mr Mullins in deriving the gross margin figure of 16.09% are fundamentally based on the proposition that the plaintiff managed to achieve a gross margin of approximately 16.09% in the first year of the two years under the 2011 Agreement that being a period unaffected by any between the plaintiff and the Council. Following the first 12 months the dispute between them arose and directly affected the financial performance of the plaintiff.
17. It is necessary to consider that approach in assessing the gross margin to what was said by Mr Ross to be a trend as against the actual margin achieved in the period immediately before the dispute arose.
18. The fact that MCRS was able to achieve gross margin of approximately 16.09% in the year most recent to the year in which the dispute raised between the plaintiff and the defendant is of itself of significance. In particular: 1. In the 12 month period under the 2011 Agreement adopted by Mr Mullins was the most recent unaffected year (unaffected by any dispute) to the 12 month Option Period relied upon by the plaintiff. 2. The margin achieved in that 12 months is an actual figure, that is to say measures actual performance and is not a hypothetical calculation. 3. By reason of the dispute that arose in 2012 and the sequelae concerning it, it would clearly be inappropriate to have regard to the plaintiff's performance in that 12 months. 4. Whether, as Mr Ross has stated, there was evidence of a decline in gross margin prior to the 2011 agreement, the fact remains that subsequently the plaintiff achieved a gross margin under the 2011 agreement, in the initial 12 months, of the order of 16.09%. 5. Whilst in general terms the estimation of gross margin percentage may be preferred as being approached over a number of years, that is subject to the qualifier stated in the Joint Report in the "Matters Agreed" at p 3 "…unless it is reasonable to conclude on the available information that the result achieved in that year is reflective of the margin that would likely have been achieved going forward".
19. Hence Mr Mullins' conclusion that the gross margin adopted by him was: "the best representation of the margin that would have been achieved by the business on future work it received from the Council" (T 135: 35-40).
20. The matters identified by Mr Mullins in support of his approach, I considered to be compelling. They provided a rational basis, that the gross margin of 16.09% was based upon the gross margin actually achieved by the plaintiff in the period 1 August 2011 to 30 June 2012. I note that Mr Mullins impressed me as a witness who was prepared to make concessions. He appeared to be objective and fair in his approach.

(c) The Variable Costs Question

1. Mr Mullins adopted a rate of 10.55% being the rate of costs incurred by MCRS as a percentage of revenue over the financial year to 30 June 2012 (FY 12). This was consistent with the approach that he took in relation to gross margin in the Joint Report (comparing like with like). In contrast, Mr Ross' suggested figure 13.21% was suggested by the Council as more appropriate. It was noted that both Experts agreed on the category of costs which were likely to be variable with revenue. The difference between them was whether it is appropriate to take an average of variable costs over an extended period of time or to apply the variable costs which were incurred in the FY12.
2. It was argued on behalf of the plaintiff that if the Court did accept Mr Mullins' approach on gross margin then it was logical and reasonable, for reasons stated by Mr Mullins in the Joint Report, to consider variable costs over the same period.
3. It was submitted that the evidence and logic shows that costs do not correlate strongly with revenue. The conservative (and appropriate) assumption therefore is to find, on the balance of probabilities, that additional variable costs would have been incurred in the Option Period equal to that which was incurred in the financial year to 2012. It was contended that Mr Ross' reasoning has insufficient support to depart from Mr Mullins' opinion that like should be compared with like and for these reasons the variable costs used by Mr Mullins, it was submitted, ought be accepted.
4. In oral evidence, Mr Ross explained that in the plaintiff's accounting system costs were not attributed to Council work or other work. He stated that, in the circumstances, the only approach for the experts was to look at the total business, not just Council work: T 144 [44]-[47]. He said his approach was the same as that he took in relation to gross margin, namely, he took as a starting point in trying to determine what might happen in the future, as to whether the past was relatively stable. He said when he looked across all the years for which there was data, the variable costs were relatively stable: T 145 [1]-[3].
5. He said the one exception was in 2012 which was the period Mr Mullins had chosen in which the costs were quite low relative to revenue. He said there was a good reason for that, namely, that in 2012 the plaintiff reported revenue at about $9 million, total revenue from all its operations. In the years before and after 2012 the revenue levels were around $6 million or $7 million before and after. At $6 million or $7 million, both before and after the variable cost percentage was somewhat higher, in the range of 13 to 15%: T 145 [5]-[15].
6. He said that that was relevant because we were looking at what the situation would have been in 2014, that is, in the Option Period. He said that in the Option Period, revenue was reported by the plaintiff on its other work, as it was not doing Council work, of the order of $4.2 million. Accordingly, Mr Mullins had assumed that the plaintiff would have received an additional $2.1 million. That would have taken the plaintiff's annual revenue in that year to around $6.7 million. He said that would have been very similar, in terms of total revenue, to the years 2009, 2011 and 2013 and different from the 2012 year: T 145 [20]-[25].
7. In response, Mr Mullins stated: "All I can do is reiterate my point that I think it's appropriate to match like with like and, in attempting to come up with the profits that the business would have earned going forward, I think it's appropriate to match gross margin and expense ratios, which is why I've picked the most recent year in which the business has - the most recent year in which the business has been acting under the 2011 tender": T 146 [30]-[38].
8. The latter year he confirmed was unaffected by the termination or reduction in work not the termination of the contract.
9. Finally, Mr Mullins added that, although he changed his approach as explained to that in his earlier reports, he said that his approach was a consistent one in that he had tried to match the revenues earned by the business, the gross margins earned by the business and the expenses incurred by the business over equal periods of time: T 147 [20]-[30].
10. The estimation of variable costs is essentially that, an estimate. Many of the issues discussed above in relation to the assessment of gross margin have application to the estimate of variable costs. I consider that Mr Mullins' approach provides a sound and reasonable basis for his estimation of variable costs, i.e. actual revenue achieved in the 12 month period under the 2011 Agreement which is proximate to the Option Period.
11. The assessment of variable costs by Mr Mullins, whilst allowing for the fact that it involves, to a degree, evaluation of a number of factors, in my opinion provides a reasonable basis for assessment.

Discount Applied in the Option Period

1. It was noted that both Experts agreed that a discount of 26.87% is an appropriate discount rate to apply when calculating MCRS' loss in the Option Period. The object of that discount is to account for uncertain revenue, that is, it may be less than the revenue earned by Tropic and SRS. In a real sense it was submitted by MCRS that it is an inappropriate discount to allow. That is by reason of the fact that the Court's function is to find revenue and costs and not to make a finding and then discount that finding because it might be wrong. Nevertheless, the discount it was said shows Mr Mullins' approach is conservative and likely to understate the loss.
2. Accordingly for that reason a significant degree of uncertainty in being able to calculate MCRS' loss of profits is already factored into the calculation. It was submitted the Court could have significant comfort in adopting Mr Mullins' conservative approach. Accordingly it was submitted that the Court should enter judgment for MCRS in the amount of $117,406 plus pre-judgment interest from 31 July 2014 for the loss of profits in the Option Period.
3. I consider that the Court should accept that amount as a fair and reasonable assessment for the Option Period based upon the inputs identified in Annexure A to the Joint Report.

(a) Likelihood that MCRS would have been successful in future tenders

1. The issue of Renewal Periods arises on the basis of a suggested likelihood that MCRS would have been successful in tendering for further contracts.
2. In this regard, the threshold issue is to determine that MCRS would have been successful in tendering for further contracts with the Council.
3. In reaching a decision about the percentage likelihood of each renewal, it was submitted that the Court can determine the same on a different likelihood for each of the four Renewal Periods suggested. It was accepted that the third and fourth renewal periods (2002 and onwards) are remote. Further, damages for that period will necessarily be heavily discounted for contingencies. The submission was that the Court should make a finding on the first two renewals (2014-2016, 2017-2019 respectively) and allow no or a relatively nominal prospect of loss for those subsequent periods (that is to adopt a conservative approach).
4. It was submitted that the Court would approach the assessment on the basis of a decision of a reasonable Council, that is, one with the correct understanding of the prior relationship between the parties and importantly the C245 Specification. Correspondingly, it does not take into account a council that acted "wrong-headedly". On that basis and as a result of MCRS' incumbency and the matters referred to in the 2011 Council minutes at which the recommendation of MCRS' appointment was made, it was contended that there was a high prospect that MCRS would receive the grant of a further contract. It was submitted that the evidence of the 2011 tender award is compelling evidence as to how a reasonable council would have acted. It was submitted that the chance of renewal was 70-80% on the two occasions that would accord with the evidence: at [30].

(b) The Revenue, Gross Margin and Variable Costs Questions

1. It was noted that Mr Mullins adopts a revenue figure of $1,332,000 per annum for each year in the Renewal Periods and that the only criticism raised by Mr Ross in the Joint Report is that Mr Mullins has not discounted that revenue to accommodate the fact that some of that estimated revenue is derived from work done outside the tender works. It further noted that Mr Ross made the same complaint about the revenue in the Option Period and for the reasons explained above, the submission was that no discount is necessary or appropriate.
2. I consider that for the same reasons given above, see [167] and [168], as to the revenue in the Option Period, the revenue figures for each year in the Renewal Periods proffered by Mr Mullins should be accepted.
3. Mr Ross admitted that he did not have access to information that would assist him in determining what quantity of work was outside the relevant tender agreement: Joint Report, p 7. As submitted on behalf of MCRS, it was uniquely in the Council's power to prove that fact and it chose not to do so. It was accepted that in the 2011 Tender period MCRS performed work for the Council which went beyond the work contemplated by the 2011 Tender. For other reasons earlier discussed, including the convenience of having the incumbent tenderer performing the work beyond the tender works, the evidence establishes that it is likely that such work would be performed by MCRS when required by Council. No discount should be made in relation to such additional work.
4. In assessing the claim for the renewal periods, it is open to the Court to make findings as to the percentage likelihood of each renewal at the same or different levels of likelihood. In the assessment of damages in respect of the first two annual periods, I have evaluated and determined that the percentage likelihood of a First Renewal Period is 80% and, the likelihood of a Second Renewal Period at 60%.
5. In making a determination of the percentage likelihood of each renewal, I proceed upon the basis that in evaluating the same the assessment proceeds upon the basis of a future decision of the Council would be that made by a reasonable council and one that had an understanding of the prior relationship between the parties. Those factors in my assessment point in favour of a high prospect of MCRS benefiting from further contracts with the Council.
6. As indicated above, however, the percentage chance in relation to the First and Second Renewal Periods should be upon a differential basis (80% and 60%) to reflect the assessed variation in likelihood of each renewal.
7. It was noted that the Experts adopt the same opinions in relation to the Gross Margin Question and the Variable Costs Question in relation to the Renewal Periods as they do in relation to the Option Period. I again consider that for the reasons set out above, Mr Mullins' calculation in relation to Gross Margin and Variable Costs for the Renewal Periods ought to be accepted.
8. It was further noted that the Experts have also agreed that a discount factor of 33.58% is within range of appropriate discount rates to any calculation of loss for the Renewal Periods. I accept that that discount is appropriately conservative in a forward looking calculation of loss (that is, loss not yet suffered) as it allows for the future value of money and contingencies.
9. Accordingly, I make the following findings for the first two Renewal Periods: 1. Percentage likelihood: 70-80% 2. Revenue per annum: $1,332,000 3. Gross Margin: 16.09% 4. Allowance for Variable Costs: 10.55%

Defendant's Submissions on Damages

1. The defendant addressed the question of damages in its undated Outline of Written Submissions and Submissions as to Damages.
2. It was submitted for the Council that the damages claimed are at best nominal. It was contended that on analysis the margin made by MCRS, even in the months unaffected by any of the adjusting factors that Mr Mullins used to "inflate" the margins in his Report in reply, remain so low for it to be uneconomic to continue the business.
3. Reference in support was made to the existence of what was said to be an increasingly very large debt (subsequently compromised) to its asphalt supplier.
4. It was submitted on behalf of the defendant that the expectations claim of MCRS was "fanciful".
5. It was contended that it was clear that MCRS was unwilling to do the work and had chosen not to resubmit to tender on the conditions imposed by Council. Further, the existence of an entitlement to terminate on 30 days written notice in the event of an unresolved dispute was sufficient to demonstrate that it was open to Council to terminate and could have done so in the most beneficial way.
6. It was submitted that having regard to the Council's express desire to put the contract work to re-tender and the inability to resolve the dispute with MCRS over the terms of the specification, it should be concluded that if it had been bound by the option under the Agreement, there is a strong possibility that Council would have exercised the right to terminate. It was further submitted that having regard to the materials and services the subject of the Agreement, no attempt was made to tie those to the revenue actually lost. Additionally, it was submitted a substantial part of the business had been sold so it could not make revenue from that portion of the business in any event.
7. It was also submitted that MCRS "chose not to tender for work" and appeared to maintain the position that it will not tender for with for Council.
8. As noted above, undated submissions as to the question of damages were provided to the Court after the final day of the hearing. Set out below is a summary of the matters raised in support of the Defendant's Written Submissions as to Damages (undated) including in particular its submission at [16], namely, that the plaintiff suffered no loss. In summarising the submissions on damages I will make observations upon a number of the matters raised on behalf of the Council.
9. In those submissions, it was noted that the calculation of figures expounded in the Joint Report was based upon the Experts analysing past performance and focusing on this particular contract to achieve a hypothetical projection. It was submitted that that approach might unfairly benefit MCRS as it does not account for any profit achieved elsewhere from the no longer utilised resources, bearing in mind MCRS' business extended substantially beyond that of the Council, save for the fact that, the relevant work if given to MCRS would have been unprofitable in any event.
10. The defendant submits that the analysis undertaken by Mr Ross shows a business that was in decline so far as it concerned profitability from the relevant contracts over time to perform the relevant work and prospectively showed no prospect of recovery such that the loss of the opportunity to perform the work occasioned no loss of profit.
11. However, this submission is to be considered with the analysis undertaken by Mr Mullins and the conclusions reached by him as stated in the Joint Report.
12. At page 9 of the Joint Report, Mr Mullins stated that he considered that whilst there is evidence of decline in margin there was no reason to suggest that such decline would continue or that performing work for the Council would be unprofitable in perpetuity, whereas in prior years the work had in fact been profitable.
13. Further, Mr Mullins considered it a reasonable proposition to assume that the plaintiff would implement strategies to reduce costs so that it would return to profitable trading. He noted that it was further reasonable to assume that the plaintiff's operating performance on work with the Council would "revert to mean" this represented by the actual financial performance achieved by the plaintiff in FY12.
14. The evidence as to sales revenue earned in the financial years FY12, FY13 and FY14 was set out in DM1 at [3.38]. In relation to the submissions made on behalf of the Council, it is noted that the analysis made by Mr Mullins does not support the proposition in relation to "profit achieved elsewhere".
15. Table 7 of the 4 June 2015 report records the following total sales revenue for the abovementioned years: FY12 FY13 FY14 TOTAL SALES REVENUE 9,116,694 6,692,932 4,215,424

1. In relation to his analysis of sales revenue and of expenses in respect of each of the above years, Mr Mullins noted at [3.31]: 1. That total sales revenue declined by $2,423,762 (a decline of 27%) between FY12 and FY13 of which $1,715,196 related to the decline in sales revenue from the Council. 2. Mr Mullins further noted at [3.39] that total sales revenue declined by a further $2,477,508 in FY14 (a decline of 37%) of which $537,290 related to the Council. 3. At [3.39.3] he noted the variation in expenses did not correlate with decline in revenue.
2. The margin of 16.09% adopted by Mr Mullins was equal to the margin that was actually earned by the plaintiff in the period 1 August 2011 to 30 June 2012. He noted that during the 2011 Tender, MCRS undertook a similar volume of work to that which is assumed would be undertaken in the Option Period: Joint Report at p 9.
3. The defendant submitted at [4] that the analysis of Mr Ross is to be preferred to Mr Mullins for the following reasons: 1. Mr Ross' choice of periods and times in calculation more accurately reflects the direction and circumstances of the business. 2. The relevant projections of Mr Mullins artificially draw distinctions between past and present contracts without providing a basis for that distinction and making assumptions unsupported by any evidence. 3. The insufficiently explained or justified disparity between the identification of relevant data by Mr Mullins over his three reports and the consistency in comparison of Mr Ross. 4. Mr Mullins fails to explain why it is appropriate for his analysis in the joint report of Gross Margin to be based solely on a 11 month period between 1 August 2011 - 30 June 2012 in circumstances where it was open to him to take into account the whole of the period prior to the dispute. 5. Mr Mullins makes assumptions in relation to the plaintiff's future performance which should have been supported by evidence rather than conjecture. More specifically, there is no evidence to suggest that: 1. MCRS had identified any trend in its performance and was taking steps to correct it; 2. MCRS was going to implement any changes to its work practices to reduce its variable costs; and 3. The financial position MCRS found itself in 2013 was otherwise than a result of issues of its own creation. 1. No evidence was proffered to Mr Mullins that any changes were being made by MCRS to justify a conclusion that the downward trend in gross margin would suddenly reverse. 2. No evidence was made available to Mr Mullins to form the basis for MCRS to have priced its materials and services to achieve a 16.09% gross margin going forward, not just in the period 1 August 2013 to 31 July 2014, but for the period 1 August 2014 to 31 July 2026. 3. The choice of variable costs in respect of the year in which they were lowest as a percentage but without examination of a basis of overall comparability.
4. The following matters may be noted in relation to specific matters raised in the defendant's submissions in relation to Mr Ross' analysis: 1. Mr Mullins' choice of the 2011 year establishes the actual performance of MCRS, pre-termination, in the period 1 August 2011 to 30 June 2012. Mr Mullins identified the basis upon which he considered that that period was the best evidence in respect of or as a guide to future performance. 2. Mr Mullins' analysis was put forward as one based on relevant past performance under the same contract in a period that was not affected by Council's conduct said to have been "wrongful" conduct. 3. The reference to the allegedly insufficiently explained or justified disparity between the identification of relevant data by Mr Mullins over his three reports does not in itself provide a cogent basis for not accepting Mr Mullins' evidence, including in particular that in the Joint Expert Report. The matters agreed and the basis for Mr Mullins' determination as to revenue in the Option Period and the Renewal Periods, the Gross Margin and the Variable Costs in both the Option Period and the Renewal Periods, have been sourced and based upon material clearly identified in the analysis and the opinion expressed by Mr Mullins in the Joint Report. 4. In relation to the alleged failure to explain Mr Mullins' analysis in the Joint Report of Gross Margin based on the period 1 August 2011 to 30 June 2012, Mr Mullins gave explanatory evidence both in oral evidence and in the Joint Report. The reason and basis for his calculation of gross margin was explained, although challenged by Mr Ross. 5. As to assumptions made by Mr Mullins in relation to the MCRS' future performance, which it was stated should have been supported by evidence reference may be made to the basis for and the explanation given by Mr Mullins concerning his analysis in the Joint Report. Further, Mr Mullins explained that, in the particular circumstances of the case, including the dispute that arose due to the Council's conduct, that past performance by MCRS in the circumstances, on the basis identified, was the appropriate method for calculating losses in respect of the Option Period and the Renewal Periods. The nature and expressed basis for Mr Mullins' approach to the assessment of loss remain valid despite issues related to "trend" advanced by Mr Ross. The actual gross margin achieved by MCRS in the period 1 August 2011 to 30 June 2012 was 16.09%.
5. The defendant's submission at [5] asserted that the only person who gave evidence and who held a position of responsibility for the MCRS was Mr Pilgrim, but who is no longer employed by the MCRS. A submission was made as to the failure to call the managing director, Mr Craig Pinson. It was submitted that Mr Pinson could have explained "…many issues relevant to damages" referred to in subparagraphs (a) to (j) of the submissions.
6. In relation to the reasons for decline in profitability; the absence of any change to pricing and attempts to reverse the decline in gross margin; and differential in profits in the different years with escalating debt (subparagraphs (a) to (c)), all assume that Mr Ross' approach based on trend should be accepted and are determinative.
7. The difficulty in this respect is that whilst Mr Ross in several respects criticised Mr Mullins' assessment of loss, he did not himself undertake any exercise of potential loss of profits by the plaintiff.
8. As to the plaintiff's reasons for not re-tendering (subparagraph (g)) that issue has been addressed above.
9. As to the actual revenue received by the plaintiff's two successors (subparagraph (h)), for reasons identified by Mr Mullins and as discussed above, this provides a valid basis for revenue estimation purposes in undertaking an assessment of loss. These aspects are also discussed above.
10. As to the reasonableness of MCRS' decline to work (subparagraph (i)) there was no insistence by the plaintiff (through Mr Pinson) on a right to decline work offered by the Council. The emails at CB 3, p 195 confirm that MCRS' position was in fact correct. MCRS in the email of 19 April 2013 stated that it would provide relative compaction and production voids as it had in the past but it could not guarantee in situ voids under the C245 Specification. As discussed above, the C245 Specification did not address in situ voids. The Council had taken an incorrect approach as to MCRS' responsibilities arising under the applicable specification as discussed above.
11. I note that the submissions for MCRS dated 1 April 2016, it was submitted that it is not appropriate to draw a Jones v Dunkel inference in relation to the fact that MCRS did not call Mr Pinson to give evidence because his evidence was not necessary to elucidate a matter relevant to MCRS' case.
12. In paragraph [6] of the defendant's submissions reference was made to Mr Ross' opinion that there should be a discount of the revenue of the subsequent supplier, unrelated to the supply of asphalt and paving. It was acknowledged that the discount was small. Mr Ross did not claim expertise in relation to the nature of, or the terms and conditions upon which Council work was required to be undertaken. MCRS did, of course, actually perform work outside of the work required by the Tender Agreement, as indeed did its successors.
13. In paragraph [7] of the defendant's written submission, reference is made to a scenario in which expected variable costs exceed future gross margins for the projected work and that therefore no loss would arise. However, that submission is premised upon acceptance of Mr Ross' evidence as determinative. Mr Ross did not actually undertake, as discussed above, any form of analysis, such as that undertaken by Mr Mullins as an alternative basis upon which estimated loss may be calculated.
14. The absence of any loss as calculated by Mr Ross was based upon his "trend" analysis. As stated above, Mr Ross did not attempt any assessment of loss based upon an approach such as that undertaken by Mr Mullins or on any other basis.
15. In paragraph [8] of the defendant's submissions it was submitted that MCRS claims the loss of a chance, for the lost opportunity to tender for work. It was contended that it is ridiculous to conjecture about the loss of a chance in respect of an opportunity that has not arisen, i.e. what will happen on the next occasion the Council seeks tender for work of this kind and that MCRS still has the opportunity to tender if and when the occasion arises.
16. The assessment of a loss of chance or loss of opportunity for tendering for work in the present case brings into account the fact that the Council renewed its contract with MCRS on multiple occasions with evidence that the Council had been satisfied with its contractual performance over approximately 9 years.
17. The dispute that arose in 2012, as earlier discussed, was based upon the incorrect stance taken by the Council as to specification requirements in relation to in situ voids.
18. Absent the dispute, there was a strong factual foundation, including past performance under earlier contracts, which favoured the probability of Council once again looking to MCRS to renew its contract from time to time, the Council having repeatedly over a fairly lengthy period of time turned to MCRS to perform work for it under the Tender Agreements and also additional work outside the scope of such agreements. There is no evidence of complaint by Council, other than that associated with the 2012 Ocean Drive Works dispute, in relation to the quality or standard of MCRS' work, its reliability and competence.
19. In relation to paragraphs [8], [9], [10] and [11] of the defendant's submissions, it was submitted that the loss of a chance was not to have the tendered submission accepted by Council, but rather an opportunity to make a tender offer that might be accepted.
20. In evaluating the loss of a chance, the fact that the Council was the incumbent for the supply and laying of asphalt, and had been so since 2005, provides, as stated above, a foundation for estimating such loss. The loss was the loss of a chance of having the contract renewed for up to four Renewal Periods. By reason of the factors established in evidence there is a basis for the conclusion that the chance was a significant one (including the abovementioned past history of contractual relationships between the parties). Whilst a discount for the value of the chance is to be applied, MCRS' past performance supports, in my opinion, the existence of a real loss of chance.

Defendant's Submissions

1. It was submitted for the defendant that if MCRS had tendered for the work in 2013, it can be reasonably inferred, it would have suffered no loss: at [12].
2. The defendant's submissions were made in response to those advanced on behalf of MCRS in the Plaintiff's Written Submissions on Damages. The issue was also addressed on behalf of the plaintiff in its Closing Submissions at [98] and [100].
3. The defendant submitted that MCRS has an obligation to mitigate and that this may take the form of seeking the opportunity to do the work notwithstanding the breach of contract relied upon by the Council: at [13].
4. It was noted in the defendant's submissions that MCRS' response to re-tendering appeared to be that it regarded itself as having no chance on such a re-tender. However, it was submitted that that could not be correct or reasonable and was based only upon an assertion made. Further, reliance was placed upon the evidence of Mr Randall and Mr Sharp, who denied that they would have refused to consider MCRS.

Plaintiff's Submissions

1. The defendant's submissions on mitigation are to be considered in light of the matters raised by MCRS. MCRS submitted that it ought not to be limited by the fact that it did not participate in the 2013 tender for the supply, delivery and laying of asphalt to the Council. In this respect, reference was made to the fact that for MCRS to have tendered it would have required it to engage in a costly tender process when realistically its prospects were non-existent or limited due to the erroneous position that had been taken up by Council officers as to the MCRS' performance of the 2011 Agreement.
2. Factors which are said to have rendered it not reasonable to have expected MCRS to have participated in a further tender process included the fact that the relationship between the plaintiff and the Council was clearly strained by reason of the dispute as to the 2012 Ocean Drive Works. Further it was submitted that it is apparent from the evidence that the Council had formed the (erroneous) view that MCRS could not and would not perform the 2011 Agreement.
3. In those circumstances, to have engaged in a tender process, it was submitted on behalf of the plaintiff, it would be a potentially costly and futile exercise of tendering again.
4. Reliance for the latter proposition was placed upon the cross-examination of Mr Randall who admitted that he had formed the view that the 2012 Ocean Drive Works were non-compliant with the C245 Specification; that MCRS was responsible for fines in the road; and that he was disappointed with the way MCRS had responded to the dispute about the 2012 Ocean Drive Works.
5. It was noted that when Mr Randall was asked whether he wanted to engage MCRS to do any future work, his answers at times were equivocal. Similarly, it was submitted for the plaintiff that Mr Sharp admitted that he was aware that there were a number of issues arising with the asphalt laid by MCRS at Ocean Drive. He did not believe that MCRS was willing to fix works which he considered were defective, even though it was able to do so.
6. In relation to the defence of mitigation, all relevant circumstances need to be considered in determining whether the evidence of Mr Randall and Mr Sharp establishes that, notwithstanding the views plainly held by them, they would still favour MCRS being appointed as a tenderer.
7. The submission on behalf of MCRS was that this would defy logic, and that the evidence of Mr Randall and Mr Sharp would not be accepted.
8. It was further noted on behalf of MCRS that the Council had written to it and advised of concerns regarding the work performed by MCRS. The Council wrote to MCRS and advised that staff were being directed to confirm quotes from alternative suppliers for asphalt works currently pending commencement.
9. The Council advised MCRS that it was not prepared to accept MCRS' exercise of the option of the 2011 Agreement and that a new tender would be advertised with updated specifications. That position was maintained, notwithstanding the Council subsequently making a request of MCRS to alter the specifications. That alteration was to apply to work performed under the 2011 Agreement.
10. It was submitted that the fact that Council officers had formed an erroneous view about MCRS' compliance with the 2011 agreement and that they were the personnel involved in the Tender Evaluation Panel and/or the recommendation to Council for the appointment of tenderers should be taken into account in the assessment of the mitigation defence.

Consideration on the Question of Failure to Mitigate

1. The Council, as submitted for MCRS, bears the onus of proving that MCRS failed to mitigate its loss by unreasonably refusing to participate in the tender: Watts v Rake (1960) 108 CLR 158; [1960] HCA 58 at [159].
2. Upon consideration of the evidence and the submissions of the parties I take into account and conclude: 1. That the Council had, wrongly, taken a strong adverse view of MCRS both as to its performance of the 2012 Ocean Drive Works and in its insistence upon the proposition that the C245 Specification placed no responsibility upon it in relation to in situ voids. 2. The evidence that, in my assessment, establishes that it would have been a futile exercise for MCRS to have again tendered then knowing the extremely strong and adverse views held by the Council against MCRS (and which were still current). 3. I accept that it was not reasonable to have expected MCRS to have participated in the tender, having regard in particular to the matters set out in subparagraphs (a) to (f) in paragraph [99] of the Plaintiff's Closing Submissions.

Part X: Conclusions

1. On the evidence, over a period of some nine years, MCRS and the Council had a satisfactory and indeed harmonious relationship prior to the dispute arising in respect of the 2012 Ocean Drive Works. It is clear on the evidence that up to that time there had been no suggestion that Council was considering altering or terminating the commercial relationship that it had enjoyed with MCRS. In those circumstances, I consider that on the probabilities, but for the 2012 dispute, there was a strong likelihood that the Council would have entered into a further contract with MCRS upon the exercise of the Option provision and that the plaintiff is accordingly entitled to damages in respect of the Option Period, 1 August 2013 to 31 July 2014 as calculated by Mr Mullins.
2. I accept, for the reasons earlier stated, the assessment of the MCRS' loss in respect of the Option Period.
3. I have concluded that the evidence supports the conclusion that there was a strong likelihood that the Council would have entered into a further agreement with the plaintiff for the First Renewal Period, which I assess as an 80% chance.
4. In respect of the Second Renewal Period, I consider that the chance of a renewal of the Agreement is attendant with an increased level of risk or uncertainty. However, given the evidence of the prior relationship of the parties to which I have earlier referred, the chance of a second renewal should not be dismissed as so low as to be non-existent. I consider that an appropriate basis for an award of damages in respect of a second renewal period is a 60% chance of renewal.
5. I do not consider that the evidence is capable of supporting an award of damages for a loss of a chance in respect of the Third and Fourth Renewal Periods.
6. Accordingly I assess damages upon the following bases:
7. The plaintiff's assessed loss (prior to pre-judgment interest) in respect of the Option Period 1 August 2013 to 31 July 2014: $ 117,406 Damages in respect of one Renewal Periods:
8. (i) Loss of the chance for the first Renewal Period subsequent to the Option Period in 1 above estimated as an 80% chance: (ii) Loss of the chance for a second Renewal Period subsequent to the Option Period in 1 above estimated as a 60% chance:

Damages

1. The plaintiff is entitled to an award of damages upon the bases set out in the preceding paragraph.
2. In the Joint Report at [13] it was stated: "The Experts have constructed an agreed model ("the Agreed Model") to derive an estimate of Diveva's alleged loss, if any. Should the Court make findings in favour of Diveva on all liability issues…they will be able to agree on the amount of Diveva's loss using that Agreed Model…"
3. The parties are directed to bring in Short Minutes of Order to give effect to their reasons with calculations in relation to both the Renewal Periods as referred in [272] above and pre-judgment interest.
4. On the question of costs, in accordance with the provisions of s 98 of the Civil Procedure Act 2005 and r 42.1 of the Uniform Civil Procedure Rules 2005, costs follow the event. Accordingly, I make an order that the defendant pay the plaintiff's costs of the proceedings subject to any submission in relation to costs made following delivery of judgment, or upon a re-listing of the proceedings at 12:00pm on Wednesday 14 December 2016.
5. Proceedings will be relisted at 12.00pm on Wednesday 14 December 2016 for the making of final orders.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 13 December 2016